On Linking Special Drawing Rights and Development Assistance

The issuance of international fiat money, as in the case of domestic fiduciary issues, involves three things: (a) the new money adds to the quantity of liquid assets, (b) the receivers gain extra capital, and (c) the monopoly issuer has seigniorage gain equal to the difference between the cost of producing the asset and its face value. The manner in which new money is distributed directly affects how efficiently the extra capital is used as well as how fairly the receivers share in the seigniorage sav? ings; any effect on liquidity is rather minimal. When fiat money is issued domestically, the efficiency and the fairness criteria of distribution are generally satisfied. The new money goes to the highest bidder through the capital market and thus presumably is most efficiently used. The seigniorage savings accrue to the government and presumably are used to maximize perceived national welfare. The economy having ade? quate liquidity (given that the money supply was of optimum size) achieves its potential resource use. It is the contention of this paper that at the international level, the distribution of the Special Drawing Rights (SDR's) according to the 1969 Rio method does not satisfy the efficiency and the fairness criteria. An alternative method for distributing the SDR's, namely the link proposal seems to satisfy these criteria. The purpose of this paper is to evaluate these two methods in terms of the efficiency of capital use and the fairness of seigniorage sharing. The paper is in three sections. First, the salient characteristics of the two methods are outlined focussing on the respective mechanisms for transferring real resources from the devel? oped to the developing countries. Second, the efficiency aspect of the two schemes are evaluated in the light of the actual experience with the SDR facility in the three years of existence. In the concluding section the two methods will be evaluated in terms of how fairly they distribute the seigniorage savings between the developed and the developing countries. I