Human Development Report 2013 - UNDP

FIGURE 2.6Emerging market economies have amassed large foreign exchange reservessince 1995ChinaJapanUnited StatesRussianFederationSaudi ArabiaIndiaKorea, Rep.BrazilSwitzerlandHong Kong,China (SAR)SingaporeGermanyThailandAlgeriaFranceItalyMexicoMalaysiaLibyaIndonesiaNote: Includes holdings of gold.Source: World Bank 2012a.0 500 1,000 1,500 2,000 2,500 3,000Foreign exchange reserves ($ billions)19952010final products, which are higher than those onNorth–South trade. 75In the aftermath of the 1997 Asian financialcrisis, several countries of the South developednew monetary arrangements, which are transformingthe financial architecture and creatingspace for countries to craft homegrownpolicies. The new lending arrangementsemphasize pragmatism over ideology andconditionality.In addition, the global financial architectureis being shaped by the rising South’s vastfinancial reserves. A number of countries,not just Brazil, China and India, but alsoIndonesia, the Republic of Korea, Malaysia,Mexico, Thailand and others have amassedpools of foreign exchange reserves as self-insuranceagainst future financial downturnsand crises (figure 2.6). Between 2000 and thethird quarter of 2011, global foreign exchangereserves rose from $1.9 trillion to $10.1 trillion,with a dominant share of the increaseaccumulated by emerging and developingcountries, whose reserves totalled $6.8 trillion.76 Some of these countries used theirreserves to stimulate growth in the aftermathof the 2008 global financial crisis. In a reversalof roles, these funds have been sought by theInternational Monetary Fund for assistancewith the financial crisis in Europe.Developing countries with large reserveholdings generally transfer part of these tosovereign wealth funds. According to data bythe Sovereign Wealth Fund Institute, thesefunds had an estimated $4.3 trillion in assetsat the end of 2010, with $3.5 trillion heldby developing and emerging economies and$800 billion in East Asia alone. 77 As of March2011, developing and emerging economiesheld 41 sovereign wealth funds, 10 with assetsof $100–$627 billion.Large foreign exchange reserves and sovereignwealth funds are not the most efficientinsurance against financial shocks. This unprecedentedaccumulation of foreign exchangehas opportunity costs both for the countriesholding the reserves and for other developingcountries. 78 The resources could be deployedin more productive ways to support the provisionof public goods, to provide capital toprojects that enhance productive capacitiesand economic and human development and58 | HUMAN DEVELOPMENT REPORT 2013