The alleged threats to the role of the dollar in the global financial system are not new; they have been a frequent phenomenon since the 1980s. Until potential contenders find a credible alternative to the dollar, the dominance of the ‘greenback’ will not really be in question.
Russia’s war in Ukraine, Vladimir Putin and Xi Jinping’s meeting in Moscow last March, and China’s apparent success in brokering a diplomatic rapprochement between Iran and Saudi Arabia have fueled the debate over threats to world primacy. of the United States, and in particular to that of the US dollar.
I found comments of this type in the responses to my recent article in which he evaluated the future of the BRICS (Brazil, Russia, India, China and South Africa). The group is now considering a extension that would incorporate countries such as Iran and Saudi Arabia, which raises questions about its accession criteria and the role of its New Development Bank. But would a bigger and more influential “BRICS-Plus” really create risks for the dollar?
Threats to the role of the hegemonic currency in the global financial system are nothing new; they have been a frequent phenomenon since I began my career in the eighties. Obviously, if there comes a time when the US is no longer the largest economy in the world, the status of the dollar will be called into question. The same was true of the pound sterling in the first half of the 20th century (although the pound was not knocked out of its global position until long after the UK had been overtaken economically).
The eclipse of the dollar would not necessarily be a bad thing for Washington, given the added responsibilities that come with issuing the world’s main reserve currency. In a global economy in which the US is no longer as dominant as it once was, it would not be optimal for everyone else to be so dependent on the US monetary system and the internal priorities of the Federal Reserve. Other economies would prefer that their national currencies, monetary policies, and trade patterns were not tied to those of the Americans.
But the fact that a group of emerging powers exclusive of the US have higher aspirations does not necessarily mean anything to the global financial system. After all, the BRICS and potential “BRICS-Plus” countries face many major challenges on their own, and it is unclear what they hope to achieve together beyond issuing token statements. Crucially, the biggest economies in the group are China and India, bitter adversaries who rarely cooperate on anything. Until that changes, it is delusional to think that the BRICS or even a broader grouping could pose any serious challenge to the dollar.
I often despair at the lack of cooperation between Beijing and New Delhi, the capitals of by far the most populous countries in the world. If they could overcome their historical animosity and develop an ambitious shared agenda to expand trade and address issues such as health threats and climate change, the idea of a BRICS-driven challenge to the financial and monetary status quo would become not only plausible , but imminent.
In this spirit, China should take the first step by inviting India to help design elements of its flagship Belt and Road Initiative (BRI). The realization of the BRI’s ambitious transnational infrastructure investment agenda in cooperation with India would make a much more powerful and lasting contribution to Asia and beyond. Otherwise, the BRI will remain a narrowly Chinese initiative, mainly dedicated to imposing its national preferences on others.
The possible addition of Saudi Arabia and Iran comes with similar caveats. Yes, adding two major oil producers (in addition to Russia) increases the likelihood that some of the oil will be priced in currencies other than the dollar. But unless outperforming the dollar is an explicit, genuinely shared and deeply entrenched goal, such billing shifts will only be exciting for financial writers. I have lost count of the arguments for why oil could soon be priced in a new currency. First it was going to be the deutsche mark, then the yen, then the euro. It’s still the dollar.
Lastly, and most importantly, for any BRICS (or “BRICS-Plus”) member to pose a strategic challenge to the dollar, it would have to allow – indeed, encourage – foreign and domestic savers and investors to decide for themselves when to buy or sell assets denominated in their currency. That means there will be no capital controls the kind that China has routinely deployed. Until the BRICS can find a credible alternative to the dollar for their savings, the dominance of the greenback will not really be in question.
© Project Syndicate, 2023. www.project-syndicate.org
