Countries that fail to follow through on their commitments to international economic policies should be levied penalties tied to Special Drawing Rights, Eswar Prasad of the Brookings Institute suggests. Prasad explains that such sanctions on countries with bad economic policies could prevent global macroeconomic imbalances, which are among the reasons for the current downturn.
In the scheme Prasad is proposing, a country would post a commitment bond of at least 25 percent of its SDR holdings in the International Monetary Fund as collateral to its commitment to pursue economic policies that safeguard against global imbalances. The bonds of countries that fail to meet their targets would be forfeited. Prasad explains that while the actual cost of the forfeiture would not be significantly large, the symbolic effect would be huge.
Prasad also suggests that by redistributing forfeited SDR bonds to low-income countries that meet minimum macropolicy standards, IMF could reward poor countries for good economic policies.
