Allocative Inefficiency of Special Drawing Rights (SDRs): Issues and Challenges of International Political Economy

Abstract

When the global monetary system faced the problem of inadequate supply of gold reserves, it led to the emergence of new paper gold in the form of Special Drawing Rights (SDRs). SDRs are used by member nations of IMF for a wide variety of transactions on IMF’s Operations Division and Administered Accounts in proportion to their quotas. Lately, the IMF has been subjected to extensive criticism on issues of recent allocation of SDRs and the related weighted voting rights. At present, the SDRs measurement is based on weighted average and a significant size of SDRs quota is allocated to developed countries due to their higher weight ratio. The SDRs quota allocated to developing and least developed countries is insufficient because they possess low weight ratio and low value. Further, the IMF does not follow the universal membership in which one country get one vote right; these allocated SDRs reflect the voting power of member nations. If a few countries with high SDRs collude with one another, it can lead to a decision favouring these countries due to a high percentage of voting rights with them. This could also result in these countries having their own representatives in the highest decision-making body, i.e. Board of Governors. This paper argues that the method of quota allocation needs to be reworked for better allocative efficiency purpose, to achieve a progressive and inclusive international economic order.