Archive for category: #Imperialism #Multipolar

Chinese President Xi Jinping, Russian President Vladimir Putin, then-Brazilian President Jair Bolsonaro, Indian Prime Minister Narendra Modi, and South African President Cyril Ramaphosa in 2019.

Sputnik/Alexey Nikolsky/Kremlin via Reuters

• A BRICS currency would be a serious threat to the dollar, a former White House adviser said.
• As members are geographically diverse and large, others would be willing to use the currency.
• “The BRICS would also be poised to achieve a level of self-sufficiency in international trade that has eluded the world’s other currency unions.”

De-dollarization could become a reality as a BRICS alternative to the dollar could enjoy high prospects for success, a former White House adviser said.

Joseph Sullivan, who served as a staff economist at the White House Council of Economic Advisers during the Trump administration, wrote in Foreign Policy that a currency issued by Brazil, Russia, India, China and South Africa would pose a unique threat to the dollar’s dominance.

“It’d be like a new union of up-and-coming discontents who, on the scale of GDP, now collectively outweigh not only the reigning hegemon, the United States, but the entire G-7 weight class put together,” he said in a column published on Monday.

In recent months, discourse about de-dollarization has flourished. That’s as sanctions against Russia have exposed the danger of overdependence on the dollar, paired with growing efforts to bolster other currencies, especially the Chinese yuan.

And Brazil’s president recently reminded the world about plans for a BRICS currency based on a basket of member currencies.

A notional BRICS currency would carry key advantages over existing alternatives like bilateral deals that still result in proceeds being parked in dollar assets and have limited use with other countries, Sullivan said.

“The BRICS would also be poised to achieve a level of self-sufficiency in international trade that has eluded the world’s other currency unions,” he said. “Because a BRICS currency union—unlike any before it—would not be among countries united by shared territorial borders, its members would likely be able to produce a wider range of goods than any existing monetary union.”

Non-member countries would also have reason to use a BRICS currency because each member’s economy is large enough in their respective regions to make them sought-after partners, Sullivan said.

In addition to eroding dollar dominance in trade, a BRICS currency could weaken the greenback’s status as a reserve currency.

BRICS governments could induce their own households and companies to buy assets in the new currency with their savings and “effectively coerce and subsidize the market into existence,” he added.

Sullivan also noted that it would not spell the end to the dollar’s reign — which still accounts for 84.3% of cross-border transactions — but possibly contribute to a multi-polar regime.

In fact, some decline in the dollar’s strength could be a good thing, he writes. At the moment, the greenback’s high price costs the US jobs and lowers exports.

“Either way, the dollar’s reign isn’t likely to end overnight—but a [BRICS currency] would begin the slow erosion of its dominance,” he said.

Policymakers in the Global North have mostly responded to rising inflation by raising interest rates. That’s bad for their own workers — and it’s creating a debt crisis for many countries in the Global South.

---

Vendors sell products in a busy street in Accra, Ghana, on March 21, 2022. (Seth / Xinhua via Getty Images)

At the end of last year, Ghana defaulted on its debt as the government suspended payments on most debts owed to foreign creditors. Earlier in 2022, Sri Lanka also entered default as inflation sent the country’s currency tumbling, exacerbating the cost-of-living crisis as imports of essential goods like food and medicine became more expensive.

This year, Pakistan finds itself on the brink of default as the combination of high inflation and climate breakdown fueled environmental disasters devastated its economy. Pakistan’s situation is particularly worrying given the fact that the country is the world’s fifth largest by population. Other countries like Zambia and Lebanon have been in default for much longer.

High inflation and slow global growth have wracked many poor economies at the same time as rising interest rates have made debt servicing more expensive. Fifteen percent of poor countries are already in debt distress — when a country is unable to fullfil its financial obligations and debt restructuring is required — while half are in danger of entering it.

In short, the world economy is already in the midst of a sovereign debt crisis. The United Nations Conference on Trade and Development (UNCTAD) has warned that the developing world faces a “lost decade” as a result of the debt crisis, estimating that debt servicing alone will cost these states at least $800 billion.

There are, of course, notable differences in the economic and political situations of the countries currently in, or on the brink of, default. Ghana’s situation is unique in that much of its debt is owed to domestic rather than international creditors. Its default, therefore, risks creating a deep shock to the domestic financial sector, which would likely reverberate throughout the rest of its economy.

Sri Lanka, previously a golden child of international financial markets owing to its strong record of debt repayments, mismanaged its negotiations with creditors when the economic crisis became particularly acute. And countries like Pakistan and Lebanon, which is also on the verge of default, have suffered from decades of corruption and political mismanagement.

But while it is important not to insulate domestic elites from responsibility for the role they have played in exacerbating their countries’ debt crisis, it is also critical to recognize the global factors that are driving debt distress across the developing world — one of the most important being the way in which the rich word is dealing with its own economic crisis.

The inflationary crisis that began to tear through the world economy from last year is being driven by three main factors: the uneven recovery from the pandemic, the war in Ukraine, and — often forgotten — climate breakdown. These are not issues that can be solved by fiddling around with the cost of borrowing. And yet this has been policymakers’ central response.

By raising interest rates, central bankers hope to slow growth and investment, increasing unemployment and disciplining workers into accepting less pay. The idea is that, even though workers did not cause the crisis, they can be made to pay for it.

Yet across most of the rich world, real wages are failing to keep pace with inflation, meaning that most workers are facing pay cuts. If policymakers really wanted to curb inflation, they would focus on profits, which in many sectors have soared even as input costs have risen. As the political economist Isabella Weber has forcefully argued, many large companies have taken advantage of inflation to raise prices higher than their costs, pocketing the difference.

So, interest rate hikes won’t solve the inflationary crisis in the rich world. They will, however, make it much more expensive for poor countries to finance their debts. The monetary policy currently being pursued in the rich world has been designed to impoverish workers domestically, with the added bonus of impoverishing poor countries globally.

We have been here before. In the 1980s, when the then chair of the Federal Reserve, Paul Volcker, sent US interest rates through the roof to discipline US workers, it led to dozens of defaults in the Global South. The so-called Volcker shock laid the foundations for neoliberalism in the United States and, conveniently, it also provided the perfect pretext for imposing neoliberal policies on the Global South.

When poor countries were forced to appeal to international financial institutions for emergency lending, they received this assistance in exchange for introducing policies like privatization, deregulation, and tax cuts. The terms of these loans — referred to as structural adjustment programs — decimated many economies and permanently increased inequality in others.

Yet no lessons appear to have been learned from the debt crisis of the 1980s. As countries like Ghana and Sri Lanka have appealed to international financial institutions for assistance, they have been forced to introduce austerity policies that are likely to constrain growth for years to come.

If austerity hasn’t worked in the rich world, it’s certainly not going to work in the poor world, where significant investment in infrastructure and public services is necessary for sustainable development. In fact, forcing poor countries to cut spending at a time when vast sums of money are needed for decarbonization and climate change mitigation is likely to exacerbate both the climate crisis and global inequality.

Debt cancellation is urgently needed to deal with both the global debt crisis and the climate crisis. Rather than forcing countries to implement regressive and self-defeating austerity measures in exchange for emergency lending, new lending could be directed into investment in green infrastructure and climate mitigation — as well as protecting important carbon sinks like rainforests and tundra.

But over the long run, even debt cancellation will not be enough to close the gap between the rich and poor worlds. The reason that poor countries have been forced to take on so much new debt is that they have been kept in a position of dependence in a global economy structured to enrich the wealthy and impoverish the poor.

An extractive international financial system, regressive intellectual property rules, and enforced neoliberal policies have denied many poor countries the resources required for sustainable development.

China is, of course, the major exception to this rule. It has achieved development by ignoring the rules laid down by the Global North, protecting industry and prioritizing investment. In fact, China is now the single largest lender to many poor countries, and its attitude toward debt restructuring — influenced more by geopolitical than economic considerations — will significantly impact how this crisis is resolved.

In an optimistic scenario, poor countries would be able to take advantage of the cooling of relations between China and the West to access lending on more favorable terms. As they once did through the Non-Aligned Movement, poor states could work together to resist imperialism and achieve real debt cancellation.

In a pessimistic scenario, these countries will be caught in the middle of the new Cold War. Western lenders may refuse to negotiate with Chinese ones over how to write down the debts of poor countries, leaving these states stuck in limbo. This is exactly the situation currently faced by countries like Zambia, whose creditors have failed to come to an agreement about its debt for several years now.

One thing is for certain: the world economy can’t fully recover until the Global South debt crisis is resolved. But when it comes to debt, politics always trumps economics. What happens next will be determined by what politicians and policymakers in China and the West consider to be in their interests, rather than what is most likely to promote sustainable development.

---

Christine Lagarde, the head of the European Central bank (ECB), made an important ‘keynote’ speech last week to the US Council of Foreign Relations in New York.

It was important because she analysed recent developments in global trade and investment and assessed the implications of the apparent move away from the hegemonic dominance of the US economy and the dollar in the world economy and the move towards a ‘fragmented’, ‘multipolar’ world economy – where no one economic power or even the current imperialist bloc of the G7-plus will dominate global trade, investment and currencies.

Lagarde explained: “The global economy has been undergoing a period of transformative change. Following the pandemic, Russia’s unjustified war against Ukraine, the weaponisation of energy, the sudden acceleration of inflation, as well as a growing rivalry between the United States and China, the tectonic plates of geopolitics are shifting faster.”

You may not agree with the causes that Lagarde offers, but she concluded that “We are witnessing a fragmentation of the global economy into competing blocs, with each bloc trying to pull as much of the rest of the world closer to its respective strategic interests and shared values. And this fragmentation may well coalesce around two blocs led respectively by the two largest economies in the world.”

So it’s fragmentation and a coalescence into a battle between a US-led bloc and a China-led bloc.  This is the worry for Lagarde and the US-led imperialist bloc – a loss of global control and a fragmentation of global economic power not seen since the inter-war period of the 1920s and 1930s.

Lagarde talked nostalgically of the post-1990 period after the collapse of the Soviet Union, supposedly heralding a period of global dominance by the US and its ‘alliance of the willing’. “In the time after the Cold War, the world benefited from a remarkably favourable geopolitical environment. Under the hegemonic leadership of the United States, rules-based international institutions flourished and global trade expanded. This led to a deepening of global value chains and, as China joined the world economy, a massive increase in the global labour supply.”

Yes, these were the days of the globalization wave of rising trade and capital flows; the domination of Bretton Woods institutions like the IMF and the World Bank dictating the terms of credit; and above all, the expectation that China would be brought under the imperialist bloc after it joined the World Trade Organisation (WTO) in 2001. 

However, it did not work out as expected.  The globalization wave came to an abrupt end after the Great Recession and China did not play ball in opening up its economy to the West’s multi-nationals. That forced the US to switch its policy on China from ‘engagement’ to ‘containment’ – and with increasing intensity in the last few years.  And then came the Russian invasion of Ukraine and the renewed determination of the US and its European satellites to expand its control eastwards and so ensure that Russia fails in its attempt to exert control over its border countries and permanently weaken Russia as an opposition force to the imperialist bloc.

Lagarde comments on the economic implications of this: “But that period of relative stability may now be giving way to one of lasting instability resulting in lower growth, higher costs and more uncertain trade partnerships. Instead of more elastic global supply, we could face the risk of repeated supply shocks.” In other words, globalization and the easy movement of supply, trade and capital flows that benefited the imperialist bloc so much (see our paper The economics of modern imperialism) had come to an end. 

The response has been an intensification of protectionist measures (rising tariffs etc); control of trade, particularly in technology and attempts to reverse globalization into ‘reshoring’ or ‘friendshoring’ capital that previously went to all parts of the globe.

As Lagarde put it: “governments are legislating to increase supply security, notably through the Inflation Reduction Act in the United States and the strategic autonomy agenda in Europe. But that could, in turn, accelerate fragmentation as firms also adjust in anticipation. Indeed, in the wake of the Russian invasion of Ukraine, the share of global firms planning to regionalise their supply chain almost doubled – to around 45% – compared with a year earlier.”

Do these developments mean that the imperialist bloc is losing control of the extraction of surplus value from the working people of the world?  In particular, is the US dollar’s role as the emperor of currencies under threat from other currencies in trade and investment? Lagarde commented: “Anecdotal evidence, including official statements, suggests that some countries intend to increase their use of alternatives to major traditional currencies for invoicing international trade, such as the Chinese renminbi or the Indian rupee. We are also seeing increased accumulation of gold as an alternative reserve asset, possibly driven by countries with closer geopolitical ties to China and Russia.”

It’s undoubtedly true that the imposition of economic sanctions on Russia employed by the imperialist governments – banning of energy imports; seizing FX reserves; closing international banking settlement systems – has accelerated the move away from holding the dollar and euro.  However, Lagarde added the caveat that this trend is still way short of dramatically changing the global financial order.  “These developments do not point to any imminent loss of dominance for the US dollar or the euro. So far, the data do not show substantial changes in the use of international currencies. But they do suggest that international currency status should no longer be taken for granted.”

Lagarde is right.  As I have shown in previous posts, that although the US and the EU have lost ground in the share of world production, trade and even currency transactions and reserves, there is still a long way to go before declaring a ‘fragmented’ world economy in that sense.

The US dollar (and to a lesser extent the euro) remains dominant in international payments. The US dollar is not being gradually replaced by the euro, or the yen, or even the Chinese renminbi, but by a batch of minor currencies. 

According to the IMF, the share of reserves held in US dollars by central banks has dropped by 12 percentage points since the turn of the century, from 71 percent in 1999 to 59 percent in 2021.  But this fall has been matched by a rise in the share of what the IMF calls ‘non-traditional reserve currencies’, defined as currencies other than the ‘big four’ of the US dollar, euro, Japanese yen and British pound sterling, namely such as the Australian dollar, Canadian dollar, Chinese renminbi, Korean won, Singapore dollar, and Swedish krona. All this suggests is that the shift in international currency strength after the Ukraine war will not be into some West-East bloc, as most argue, but instead towards a fragmentation of currency reserves.

This fragmentation worries Lagarde, as a key representative of the US-EU global hegemony.  She proposed: “insofar as geopolitics leads to a fragmentation of the global economy into competing blocs, this calls for greater policy cohesion. Not compromising independence, but recognizing interdependence between policies, and how each can best achieve their objective if aligned behind a strategic goal.” What does she mean?  She means that the major powers must work together with similar fiscal and monetary measures to ensure that ‘fragmentation’ fails and the existing order is sustained.  But that is going to be very difficult in a world economy that is slowing in real GDP and investment growth, and above all, where the profitability of capital remains around all-time lows.

The US dollar and its hegemony is not under threat yet because “50-60% of foreign-held US short-term assets are in the hands of governments with strong ties to the United States – meaning they are unlikely to be divested for geopolitical reasons.”  (Lagarde). And it’s even the case that ‘anti-US’ China remains heavily committed in its FX reserves to the US dollar.  China publicly reported that it reduced the dollar share of its reserves from 79% to 58% between 2005 and 2014.  But China doesn’t appear to have changed the dollar share of its reserves in the last ten years.

Moreover, multilateral institutions that could be an alternative to the existing IMF and World Bank (controlled by the imperialist economies) are still tiny and weak.  For example, there is the New Development Bank set up in 2015 by the so-called BRICS (Brazil, Russia, India, China and South Africa).  The NDB has now appointed Brazil’s former leftist President Dilma Roussef as head, based in Shanghai. 

There is much noise that the NDB can provide an opposite pole of credit to the imperialist institutions of the IMF and World Bank.  But there is a long way to go in doing that.  One ex-official of South African Reserve bank (SARB) commented: “the idea that Brics initiatives, of which the most prominent thus far has been the NDB, will supplant Western-dominated multilateral financial institutions is a pipe dream.” For a start, the BRICS are very diverse in population, GDP per head, geographically and in trade composition.  And the ruling elites in these countries are often at loggerheads (China v India; Brazil v Russia).

As Patrick Bond put it recently: “The “talk left, walk right” of BRICS’ role in global finance is seen not only in its vigorous financial support for the International Monetary Fund during the 2010s, but more recently in the decision by the BRICS New Development Bank – supposedly an alternative to the World Bank – to declare a freeze on its Russian portfolio in early March, since otherwise it would not have retained its Western credit rating of AA+. ” And Russia is a 20% equity holder in NDB.

But back to Lagarde: “the single most important factor influencing international currency usage is the “strength of fundamentals.” In other words, on the one hand, the trend of weakening economies in the imperialist bloc facing very slow growth and slumps during the rest of his decade; and on the other, continued expansion of China and even India.  This means that the heavy military and financial dominance of the US and its allies stands on the chicken legs of relatively poor productivity, investment and profitability.  That’s a recipe for global fragmentation and conflict.

A “de-dollarization” mania is gripping Washington and Wall Street.