A Study On The Strategic Reform Of International Monetary System

World economy is in crises since last many years. A lot of focus of the mainstreameconomists is on the reform of international monetary system (IMS) because of its centralrole in world economy. IMS is part of a broader international economic environment(IEE). In order to be effective, IMS must adjust itself according to the changes in IEE.The drawback of the most reform suggestions of IMS is that they only focused on thecurrent problems, and did not give attention to the future problems. The forecasting of thefuture IEE is essential to suggest changes to IMS reform. This study is going to forecastthe future IEE by two ways:1) by analyzing relationship between ECWCE and economicglobalization, and2) by scenario planning of the economic competitiveness of threemajor economies of the world.Robert Mundell (2011) discussed that core of world economy is US and Europe.This core was coordinated till1999and was supporting the IMS. The IMS startedproblems after1999as this core was divided into two parts, with the inception of Euro.Critical review of literature (including Mundell’s suggestion) reveals that IMS is stronglyaffected by economic competitiveness of the world’s central economy (ECWCE). Hence,understanding of ECWCE is very important. Studies reveal that Economic globalizationis one important factor that affects the central economy. Understanding the relationshipbetween ECWCE and economic globalization is essential to suggest changes for IMSreform.Forecasting of future IEE is essential to suggest changes for IMS reform. Variouseconomists (e.g., Yeh,2012; Salvatore,2011; Fratianni,2012etc) are forecasting thefuture IMS. The most important aspects of environment are leader and competitors.Forecasting of the ECWCE and those of its competitors, and their comparison can give usinsight into the future IEE. We must compare ECWCE and those of its competitors inorder to forecast the future scenario for IEE. This future scenario of IEE will help us topropose changes for IMS reform.The aim of this study is “to reform the IMS for present as well as future, in mostefficient and effective way”. This study answers following three questions:1) does competitive strength of central economy affects economic globalization?,2) doeseconomic globalization affects competitive strength of central economy?, and3) whetherUS will continue its IMS leadership in the future?ECWCE was measured by growth competitiveness index (GCI). The variables ofGCI are: public debt (UPD), budget deficit (UBD), inflation (UI), interest rates spread(UIR), and national savings rate (UNS). Economic globalization was measured by actualflows section of macroeconomics sub index of KOF index of globalization. The variablesare global trade (GT), global FDI stock (GF), and global income transfers (GI). Annualdata from1981to2010was used. Auto regressive distributed lag (ARDL) model wasused to forecast long run and short run estimatesFor scenario planning, more variables were added into Growth competitivenessindex (GCI) to get a comprehensive picture of the future. Various future scenarios werebuilt by comparing economic competitiveness of three major economies of the world (i.e.US, Euro Zone, and China) including debt and liquidity scenario, GDP scenario, budgetscenario, international trade scenario, population and labor force scenario, productivityscenario etc. Data was taken from1999to2016(as world economy has entered into newphase from1999, and forecasted data for Euro Zone is available till2016).Results show that ECWCE is highly negatively affecting economic globalization.Economic globalization is also moderately negatively affecting ECWCE. Economiccompetitiveness of US economy will decrease in the future. Economic competitiveness ofEuro Zone will slightly increase in the future, and economic competitiveness of Chineseeconomy will highly increase in the future.The study concludes that strong two way relationship exists between ECWCE (i.e.US economy) and economic globalization. Decrease in ECWCE (i.e. US economy)increases economic globalization. As a rebound effect, this increase in economicglobalization further decreases the ECWCE (i.e. US economy). The US is the currentworld’s central economy. This cycle is continuing and US economy is losing itseconomic competitiveness with the rise in economic globalization. According to the model based on this analysis, US economy will become weaker and weaker in the futurewith the increase in economic globalization.This decrease in ECWCE will give birth to regionalization and regional economicand monetary unions (REMUs). This phase has already started with the inception of EuroZone and its currency Euro in1999. In future more REMUs will be operationalized withtheir regional currencies. With the passage of time, one of the economies (US, China orother economy) will become very strong, and will shift the world towards economicglobalization again. With the change of world’s central economy, this model willcontinue again, until the new world’s central economy gets weaker.Regionalized international monetary system (RIMS) will emerge in the future as aresult of competitive scenario among three major economies of the world, and forecastedshift of power from world’s central economy to its competitor. Chinese role in the IMSwill continue to increase in the future. Conflicts between US and China for IMSleadership will also rise in the future.The dissertation consists of six chapters. The introduction of the chapters is asfollows:Chapter1is the introduction chapter. The chapter consists of four sections.Background, statement of the problem, and significance of the problem has beendiscussed in the first section. A brief literature review has been discussed in the secondsection. Plan and methodology of the study has been discussed in the third section.Advantages and limitations of the study have been discussed in the final section.Chapter2is the chapter of theoretical framework, variables construction andmethodology. The chapter consists of two sections. First section discusses the relevanttheories. Three research questions have been deducted from theoretical framework. Firstresearch question is “does competitive strength of central economy affects economicglobalization?” Second research question is “does economic globalization affectscompetitive strength of central economy?”, and third research question is “whether USwill continue its leadership of international monetary system (IMS) in the future? These research questions have been transformed into three alternate hypotheses. Firsthypothesis is “increase in economic competitiveness of world’s central economy(ECWCE) leads to increase in economic globalization”. Second hypothesis is “increase ineconomic globalization leads to the increase in economic competitiveness of world’scentral economy (ECWCE)”, and third hypothesis is “US economic competitiveness willdecrease in future compared to its competitors”. Second section of this chapter discussesthe construction of relevant variables, and research methodology to test these hypotheses.The variables of global competitiveness index (GCI) have been selected as proxy ofeconomic competitiveness of world’s central economy (ECWCE). The variables ofmacroeconomic sub index of KOF index of globalization have been selected as proxy ofeconomic globalization. Auto regressive distributed lag (ARDL) model has been selectedto test hypothesis1and hypothesis2. Scenario planning has been selected to testhypothesis3. The yearly data from1981to2010has been decided to use in autoregressive distributed lag (ARDL) model. The yearly data from1999to2016has beendecided to use in the scenario planning.Chapter3discusses the components and debate of IMS reform. Chapter3consists ofsix sections. In the first section, various phases of IMS have been discussed from bartersystem to the current floating exchange rate IMS. In the second section, functions of IMShave been discussed. Third section discusses the problems of current IMS. In the fourthsection, institutions of IMS reform have been discussed. Reserve currencies andeconomies of IMS have been discussed in the fifth section. The debate of IMS reform hasbeen given in the final section. Various theories of IMS reform have been grouped on thebases of similarity in this section. Mostly theories favor globalized international monetarysystem (GIMS) while few theories and governments measures favor regionalizedinternational monetary system (RIMS).Chapter4forecasts the future’s international economic environment (IEE) byanalyzing the relationship between economic competitiveness of world’s centraleconomy (ECWCE) and economic globalization. The chapter consists of three sections.In the first section, H1(i.e., competitive strength of world’s central economy (ECWCE)causes economic globalization) has been tested using auto regressive distributed lag (ARDL) model. In the second section, H2(i.e., economic globalization causescompetitive strength of world’s central economy (ECWCE)) has been tested using ARDLmodel. In the third section, overall discussion of the results of H1and H2has beenconducted to draw the final conclusion.Chapter5forecasts the future’s international economic environment (IEE) byscenario planning of economic competitiveness of world’s central economy (ECWCE)and those of its competitors. The analysis of economic competitiveness of three majoreconomies of the world (i.e. US, Euro Zone, and China) has been taken from IMSleadership viewpoint.The chapter consists of two sections. In the first section, scenario planning ofeconomic competitiveness of three major economies of the world (i.e. US, Euro Zone,and China) has been conducted. This section consists of eight sub sections. In the firstsub section, debt and liquidity scenario has been planned. In the second sub section, GDPscenario has been planned. In the third sub section, budget scenario has been planned. Inthe fourth sub section, international trade scenario has been planned. In the fifth subsection, population and labor force scenario has been planned. In the sixth sub section,productivity scenario has been planned. Employment, inflation, interest rates, andnational savings scenario has been planned in the seventh sub section.The overallscenario (based on these seven scenarios) has been planned in the eighth sub section. Inthe second section of this chapter, qualitative overall analysis of competitive economicposition of two major economies of the world (i.e. US and China) has been conducted.Chapter6concludes the study and offers few policy recommendations. This chapterconsists of three sections. In the first section, the study has been concluded. The mainfindings of this section are:1) economic competitiveness of US economy will highlydecrease in the future,2) economic competitiveness of Euro Zone will slightly increase inthe future, and3) economic competitiveness of China will highly increase in the future.Inthe second section of this chapter, four policy recommendations have been offered. Thetheme of these policy recommendations is that ever changing international economicenvironment (IEE) is the guiding force of IMS reform, and IMS should always try toadjust according to it. The first policy recommendation is “encouraging innovative suggestions for the reform of IMS”. The second policy recommendation is “designing ofIMS in consideration of present as well as future requirements”. The third policyrecommendation is “designing of IMS without political involvement”. The fourth policyrecommendation is “redesigning global infrastructure to make global decisions”. In thethird section of this chapter, suggestion has been offered for further study.