ISSUE 38:
SEPTEMBER-OCTOBER 2005
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COMMENT
Gold mine that could help Africa's poor
By Gary Sampson
The 103.4m ounces of gold on the books of the International Monetary Fund is an anomaly. Under the Bretton Woods system of fixed currency rates, IMF members contributed 25 per cent of their IMF quotas in gold that was valued at $40 per ounce. Today, the gold stock has a book value of about $9 billion and a market value of around $45 billion.
With the Group of Eight summit approaching and new enthusiasm for addressing the desperate situation in many African countries,
First, when agreement was formalised in 1978 to abolish the official price of gold, central bank holdings were concentrated in a small number of countries. Of the one billion ounces of gold held by central banks in 1979, three-quarters were held by seven countries: the US, Germany, France, Italy, Switzerland, the Netherlands and Belgium. The least developed African countries held just 0.2 per cent. As central banks were free to revalue their reserve asset gold at market prices, the gains to these seven countries was a staggering $358 billion. For the least developed African countries, the corresponding figure was $800 million.
The distribution was also distorted not only because large countries held more assets but because some converted their dollars into gold. Between 1950 and 1970, 67 per cent of the growth in reserve assets of five of the seven countries was due to the accumulation of gold. In fact, in 1950, the gold holdings of these countries were about the same as that of all the non-oil exporting countries combined. In 1970, it was six times higher.
One problem was that developing countries were discouraged from holding gold; they were assured not only that dollars were as good as gold but that they should hold interest-bearing assets. Treasury bills returned on average 2 per cent in the 1950s and 4 per cent in the 1960s. How wrong can you be? Had the non-oil exporting developing countries chosen to hold gold as the same proportion of their reserves as the five gold accumulating countries (66 per cent), they would have been $100 billion better off at the end of the 1970s.
The second reason relates to the IMF's decision to generate new liquidity via the distribution of special drawing rights, a reserve asset created as an alternative to gold and the US dollar. Attempts by developing countries to link SDRs to their development needs were rebutted. Ironically, it was argued that the creation of new liquidity must be neutral. But had world liquidity been created via SDRs as envisaged, non-oil exporting developing country reserves would have been 103 billion SDRs higher at the end of the 1970s. The least developed African countries would have been 8.6 billion SDRs better off.
These figures come from research by David Brodsky and myself published around 1980. We proposed a means of redressing the inequity, whereby developing countries would buy back their gold (28 per cent of the total) at its book value. The remaining 72 per cent would be used as a "gold account for development" that could then be drawn on to make loans to the least developed countries at better than market rates. How much better could depend on good governance or other such criteria.
As things stand, any plan to use IMF gold for development purposes will not fly. An April press release from the Joint Economic Committee of the US Congress stated: "Any movement by the IMF towards gold sales will be stopped by Congress and the Bush administrationâ...the potential profits on IMF gold sales rightfully belong to the original donor countries and their taxpayers." What is proposed by the JEC is restitution of the gold at its book value. The US would receive 23 per cent of the gold, pay just $1.1 billion and receive an asset worth $9.2 billion.
When Vladimir Putin, Russia's president, takes on the G8 chairmanship after the UK, perhaps he can alert the world that there is a $45 billion untapped gold mine that should be earmarked for development purposes. The rationale goes beyond merely improving the condition of the world's poor to correcting past injustices.
Gary Sampson is a professor at Melbourne Business School and United Nations University. This commentary first appeared in The Financial Times on July 3. These are his personal views.
© 2005 United Nations University