2023-09-12 08:33:41
Interview
September 12, 2023
The recent summit of the expanded BRICS forum in Johannesburg, in the wake of the war in Ukraine and sanctions once morest Russia, crystallized the desire of certain large emerging countries to escape the domination of the dollar in their foreign trade. Does this geopolitical and economic context place the reform of the international monetary system at the center of the debates? Is the prospect of a change in this system, still dominated today by the dollar, realistic? Beyond that, what are the challenges of such a change with regard to the institutional framework of international economic and financial governance? An update with Pierre Jaillet, associate researcher at IRIS and the Jacques Delors Institute and professor at IRIS Sup’.
How do the current geopolitical and economic contexts place the reform of the international monetary system (IMS) at the heart of the debates?
The term mutation seems more relevant here than that of “reform”, which suggests a cooperative process, while we are witnessing a modification of the international balance of power challenging the quasi-hegemonic role of the dollar. In addition, this change concerns the international monetary and financial system (IMFS) more generally. In this regard, if certain leaders, such as President Lula, were able to raise the possibility of a “common currency” on the occasion of the summit of the enlarged BRICS group in Johannesburg, the declaration issued at the end of this summit was bound to advocate the use of local currencies in international commercial and financial transactions and the interconnection of cross-border payment systems. In fact, if the adoption of a common currency by the disparate set of BRICS seems illusory in view of their sizes, the structure of their economies, their divergences in economic policy – there is no need to invoke the theory of zones here optimal monetary conditions – the development of alternative interbank payment systems such as the CIPS network (China International Payments System) already makes it possible to escape dependence on the SWIFT network (Society for Worldwide Interbank Financial Telecommunication) and the dollar. The war in Ukraine, the sanctions once morest Russia and its exclusion from SWIFT are naturally accelerating the dedollarization process. Countries not applying these sanctions use other billing currencies – mainly the yuan – in their bilateral transactions, including in their exchanges of raw materials and oil until now denominated in dollars (see the agreements recent relations between Saudi Arabia and China). Note that, well before the war in Ukraine, the incentive to emancipate itself from the dollar was fueled by the strengthening of American sanctions once morest Iran in 2018, exposing its partners to the legal and financial risks linked to the extraterritoriality rules imposed by the United States.
Is the prospect of a multipolar international monetary system realistic? What would be the economic and financial consequences of a potential dedollarization of the world?
A currency – whether local, national or international – must classically fulfill three functions: unit of account, accepted as the denomination of commercial and financial transactions, means of exchange serving as a vehicle for these transactions and finally a store of value for savers and investors. These functions are closely intertwined. The dollar dominates the current SMI (60% of foreign exchange reserves, 70% of debt issues and nearly 50% of invoicing) because it remains the most capable of efficiently fulfilling these three functions. This domination is explained not only by its weight in transactions, including those of multinational firms, but also by the size and liquidity of its financial market, a crucial criterion for private and public international investors and the recycling of excess savings of major exporting countries, particularly oil ones (this is also one of the reasons for the capping of the international role of the euro, whose capital markets remain fragmented). From this angle, the weight of the yuan still seems marginal (a little less than 4% of world reserves) compared to the dollar or even the euro (20%). We observe that nearly 60% of China’s external assets are still denominated in dollars today, while its financial market remains tightly controlled and not very open to international investors.
However, an analysis restricted to usual international statistics on the weight of currencies is misleading. In a broader and prospective vision, several elements converge to suggest a shift in the center of gravity of the SMFI faster than anticipated:
The rise of the Asian Infrastructure Investment Bank (AAIB) created by China in 2014, with 60 member countries and operating in fact in competition with the World Bank and the ADB;
The entry into the New Development Bank (NBD known as the “BRICS bank”) of new members, notably Saudi Arabia and the United Arab Emirates, bringing their financial strength;
The rise of credits to emerging countries, primarily China, to low-income countries, most often in return for economic and commercial cooperation agreements (their share has increased from 20% to 50% in 10 years);
Finally, the expansion of the network of lines swaps under the aegis of the People Bank of China, a tight network of 41 central banks, most often in connection with the New Silk Road initiative.
Thus, alongside the “official” SMFI dominated by the dollar and subsidiarily the euro, a competing pole centered on the Asia-Pacific zone is emerging, outlining a bipolar SMFI whose impact on the economy is difficult to predict at this stage. global economy and international financial stability (the academic literature is also inconclusive on this subject); except that it logically tends to erode “the exorbitant privilege of the dollar” taken advantage of by the United States since the Second World War to consolidate its leadership in global financial intermediation (and incidentally finance its external imbalances at lower cost) .
What might be the implications for the institutional framework of global economic governance?
The enlargement of the BRICS group illustrates the frustration of certain emerging countries with regard to global economic governance that is still largely blocked by “advanced” countries whose weight in the world economy has nevertheless declined significantly, without any adjustment being made. their influence in multilateral forums. Criticism of the G7 no longer seems relevant, as this closed club reflects the image of the economic and financial balance of power prevailing half a century ago. A notable point, however, is that, in their declaration of August 23, the BRICS, while claiming increased representation in international bodies, take care to spare the G20 and validate its economic and financial leadership: “ […] We reaffirm the importance of the G20 to continue playing the role of the premier multilateral forum in the field of international economic and financial cooperation […] ».
The G20 can boast of a well-established organization and some achievements, such as its decisive contribution during the great financial crisis of 2008-2009 or more recently during the Covid-19 pandemic. But resisting competition from the enlarged BRICS forum, to which around forty emerging countries wish to join, implies that it itself opens up more, in particular to the African continent, represented since the beginning by South Africa alone. The decision taken at the New Delhi summit on September 8 and 9, 2023 to welcome the African Union (AU) as a permanent member goes in this direction. It should not close the door to some large African nations (Nigeria, Egypt, etc.). The question also arises of a update of the European Union, which has no less than five members out of twenty, a situation badly experienced by the main members and which raises the question of the European “chair”, a subject still taboo in Berlin, Paris or Rome.
In reality, it is mainly the Bretton Woods institutions, IMF and World Bank, which are in the crosshairs of the BRICS. The G7 countries still account for 45% of the IMF’s quotas, while the enlarged BRICS group only holds 20%. The share of China, the world’s second largest economy, is limited to 6.4%, half that of Germany, France and Italy combined. The United States retains its exclusive privilege of the right of veto and these institutions are systematically led by Americans or Europeans…
We should undoubtedly not overestimate the scope of the highly publicized BRICS summit of August 23, a heterogeneous forum dominated to the tune of 70% by China in terms of GDP, but the event constitutes a sort of wake-up call which the great Western powers would be wrong to ignore with a view to more effective global economic governance in the face of systemic issues and more particularly the climate transition, which the entire planet is facing.
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