The US dollar based financial system is the greatest tax haven of them all and it is favoured parking place for the money privileged World Majority elites wish to hide and/or use for speculation or predatory lending abroad rather than productive investment domestically, writes Radhika Desai.
Adversity concentrates the mind. It is no wonder that Russia – the most sanctioned country in the world, whose sequestered foreign exchange reserves make the headlines as various western powers vie to come up with ideas of how to dispose of them to aid Ukraine, and which is expelled from the dominant international payments system – even more than the rest of the BRICS, has been in the forefront of thinking about the limitations of the dollar system and the need to replace it. What has been the fruit of this endeavour, the advances and the limitations, if any?
If two major reports, the Russian Ministry of Finance and Bank of Russia’s Improvement of the International Monetary and Financial System (hereafter the official report) published on the eve of the Kazan BRICS Summit and recent the Valdai Club Report, Beyond the Dollar: BRICS Initiatives for a Multipolar Financial System
by Paulo Nogueira Batista Jr, are anything to go by, the advances are considerable. However, there are also limitations.
Both reports recognise many ills of the existing IMFS. The Batista report concentrates on the recent weaponization of the dollar-based financial system and the ructions caused in it by President Trump’s erratic policies. The official report contains an extensive analysis of the limitations of the dollar system:
The existing IMFS has been characterized by frequent crises, persistent trade and current account imbalances, elevated and rising public debt levels, and destabilizing volatility of capital flows and exchange rates. The current IMFS is primarily serving interests of AEs underpinned by collective reliance on legacy mechanisms that have failed to adjust and ultimately resulting in a growing economic imbalance between AEs (Advanced Economies) and EMDEs (Emerging Market and Developing Countries), lagging SDG (Sustainable Development Goals) progress, and fragmenting GFSN (Global Financial Safety Net).
And both also propose similar solutions: cross border payments systems based on existing currencies or a basket of them to facilitate trade and investment independent of the dollar based system.
However, both reports also suffer from a major certain limitations. Both tend to focus on recent difficulties of the dollar system, its weaponization and the Trump-induced turbulence, entirely ignoring its long-standing structural problems that lie at the root of some of the most important ills of the IMFS. According to the official report, for example, until recently, all was fine with the dollar system. Recent decades were characterized by globalization – liberalization of trade, flexible exchange rates and increased capital mobility. The US government securities market became the largest single-asset capital market in the world, coupled with gradual deregulation that started in the 1980s, and has been fueled with capital inflows at an enormous scale. At the same time, the global economy has witnessed explosive growth especially with regards to the emerging markets, which, as of 2023, account for 50.1% of global GDP, and 66% of global GDP growth over the past 10 years. BRICS countries have grown from representing 22% of global GDP (in terms of PPP) in 2006, to 32% as of beginning of 2024 (and 36,2% including the new joiners).’
The Batista report, for its part, seems to naturalise the dollar system with its references to ‘US hegemony’ and statements like ‘Confidence in a currency depends on confidence in the fiscal, monetary and financial arrangements of the issuing country’. It also insists that while the US economy may be weakened, ‘it is still the major superpower … [with] the undoubted capacity to inflict considerable damage to any country’ including through ‘its links, sometimes very strong, to powerful domestic constituencies in other nations’ with whose use ‘Governments can be toppled or intimidated into compliance’, including governments of all BRICS countries, even China.’
From the point of view of the analysis of the dollar system I have developed since my 2013 book, Geopolitical Economy: After US Hegemony, Globalization and Empire and further elaborated and updated in a 2020 Valdai Paper, ‘Beyond the Dollar Creditocracy: A Geopolitical Economy and a 2023 book, Capitalism, Coronavirus and War: A Geopolitical Economy, there are at least five things wrong with the reports’ assumption that the dollar system worked well in the past or even that it was stably anchored to the strength of the US economy.
First, they fail to investigate the dollar system’s real political economy. Secondly, therefore, they either, like the Batista report, fail to discuss its long-standing ills of the dollar system or, like the official report with its impressively comprehensive analysis of these ills, fails to explain how such a system could have worked so well and beneficently and then suddenly become subject to these ills. Thirdly, therefore they end up locating the dollar system’s foundations in US miliary power or economic health, missing its real, volatile financial, foundations. Fourthly, they misidentify the obstacles to replacing it. Finally, they miss the real reasons why it is urgent to replace it. Let us take each of these in turn.
First, there is absolutely nothing natural in the currency of any country being the currency of the world, even the most powerful country. Keynes had recognised this when at Bretton Woods, he proposed bancor, a multilateral currency, the currency of no nation, which would be used exclusively to settle accounts between central banks while national currencies remained in place, and an international clearing union to issue and operate it. He knew, better than most, having worked at the India Office in his youth and been member of commissions on the Indian currency, that the sterling system worked because it was not a national currency but an imperial one, able to transform colonial surpluses into the famous capital exports on which the sterling system operated.
The Valdai Discussion Club was established in 2004. It is named after Lake Valdai, which is located close to Veliky Novgorod, where the Club’s first meeting took place.
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