An ‘Exorbitant Privilege’ for All?

By Ndongo Samba Sylla and Jomo Kwame Sundaram

DAKAR, Senegal / KUALA LUMPUR, Malaysia, Jan 29 2025 (IPS) - Ending US dollar dominance alone will not end monetary imperialism. Only much better multilateral arrangements to clear international payments can meet the Global South’s aspirations for sustainable development.

De Gaulle v US dollar

Challenges to US dollar hegemony did not begin with the BRICS. French President Charles de Gaulle famously dissented in the 1960s.

Valéry Giscard d’Estaing, his Minister of Finance and Economic Affairs between 1962 and 1966, coined the phrase ‘exorbitant privilege’ to complain of US dollar dominance.

With the dollar’s status as the global reserve currency, the US can buy foreign goods, services, and assets on credit. It also enables the US to spend much more on foreign military bases and wars.

The privilege allows such extravagance with limited adverse effects on its balance of payments and the US dollar’s exchange rate. French economist Jacques Rueff noted the US could thus maintain external deficits “without tears”.

De Gaulle demanded the US Federal Reserve Bank convert France’s surplus ‘Eurodollars’ into monetary gold. The French challenge called the US bluff, forcing it to end dollar-gold convertibility at the heart of the 1944 Bretton Woods arrangement in 1971.

To gain some economic advantage in a system otherwise dominated by the dollar, post-war France imposed a monetary arrangement on most of its former African colonies, giving it a neocolonial privilege similar to the US’s worldwide.

With the CFA franc zone, France gained two advantages. First, it did not need to hold dollars to buy goods and services from territories it dominated. Second, it had complete discretionary control over the zone’s dollar earnings.

Replacing the French franc with the euro in 1999 did not end this monetary imperialism. Now, 14 Sub-Saharan African countries with over 200 million people still use the CFA franc.

Created in 1945, this currency arrangement helped rebuild and use its colonies to accelerate post-war reconstruction of the French economy. It remains under the legal custodianship of the French Treasury.

France benefiting from its currency relations with its former colonies imply that the US’s rivals can also benefit from monetary hegemony if they succeed in displacing dollar dominance without subverting monetary imperialism.

De-dollarization

The term de-dollarization currently refers to the development of alternative bilateral and plurilateral payments initiatives reducing the role of the dollar and dollar-based financial arrangements in settling international economic obligations and managing foreign exchange transactions.

This has been growing. In 2022, international trade worldwide was estimated at $46 trillion, with over half invoiced in currencies other than the US dollar. More countries are trading with one another and settling in currencies other than the greenback.

Although this trend has eroded the dollar’s share of total official foreign currency reserves, this is not about to dethrone the dollar’s status as the global reserve currency.

Indeed, international trade is only the tip of the iceberg of international financial transactions, which are still mainly denominated in US dollars.

The current challenge to dollar hegemony has much to do with the unilateral financial sanctions by the US and its mainly European allies on several nations, including Russia, Iran and Venezuela.

These countries have been expelled from the SWIFT messaging system and/or have seen their assets abroad, especially dollar, euro, or gold reserves, unilaterally confiscated on various pretexts.

Facing such sanctions, more countries want to develop alternative payment systems, reduce their dollar and euro reserves, and find more secure ways to store their external surpluses.

A recent report by the Russian government for the BRICS criticised the West’s weaponisation of international payments arrangements. It called for an international monetary and financial system consistent with the principles of security, independence, inclusion, and sustainability.

Resource-rich countries with significant foreign exchange surpluses are understandably concerned with this threat. But the report did not address the problems and needs of deficit countries constituting much of the Global South.

International clearing union

A fundamental problem of the existing international monetary and financial system is that a national currency – the US dollar – functions as a reserve asset for the rest of the world.

This obliges most nations, especially in the Global South, to accumulate US dollars to meet their external obligations. Struggling to secure enough US dollars, such countries are especially vulnerable to external debt crises.

Their problems will not be addressed if US dollar dominance is no longer unrivalled, and its privilege has to be shared with other international reserve currencies.

A fair international monetary and financial system supportive of sustainable development should eliminate the obligation to accumulate foreign exchange reserves, e.g., if every country can pay for imports with its currency, which is technically possible.

With an International Clearing Union, Ernst Friedrich Schumacher noted “every national currency is made into a world currency, whereby the creation of a new world currency becomes unnecessary”.

Such arrangements would address the Global South’s financial, debt, and climate crises. However, there have not been renewed efforts since 1944 to secure the multilateral consensus necessary for such a transformation.

Related IPS Articles

• Government Debt Is Symptom, Not Cause

• Developing Countries’ Government Debt Crises Loom Larger

• Open Veins of Africa Bleeding Heavily

• Developing Countries Need Monetary Financing

• How France Underdevelops Africa

Available online here: An 'Exorbitant Privilege' For All?

Financing for Development Priorities Today

By Jomo Kwame Sundaram

KUALA LUMPUR, Malaysia, Jan 7 2025 (IPS) - The forthcoming fourth United Nations Financing for Development conference must address developing countries’ major financial challenges. Recent setbacks to sustainable development and climate action make FfD4 all the more critical.

FfD4

The FfD4 conference, months away, will mainly be due to efforts led by the G77, the caucus of developing countries in the UN system. The G77 started with 77 UN member states and has since expanded to over 130.

The 1944 Bretton Woods conference outcome was primarily a compromise between the US and the UK. In 1971, when its Bretton Woods obligations threatened to undermine its privileges, President Richard Nixon refused to honour the US pledge to deliver an ounce of gold for US$35.

Over two decades later, President Bill Clinton promised a new international financial architecture. It rejected Professor Robert Triffin’s characterisation of international monetary arrangements after the early 1970s as an incoherent ‘non-system’.

Foreign aid

Several issues are emerging as G77 priorities for FfD4. In 1970, wealthy nations at the UN agreed to provide 0.7% of their national income annually as official development assistance (ODA).

This was much lower than the 2% initially proposed by the World Council of Churches and others. Only 0.3% has been delivered in recent years, or less than half the promise.

Most ODA conditions reflect the priorities of donors, not recipient countries. New aid definitions, conditions, and practices undermine ‘aid effectiveness’, reducing what developing nations receive.

Despite breaking its ODA promises, the new European Parliament voted overwhelmingly to contribute 0.25% of national income to Ukraine. By early December 2024, Europe had provided well over half the USD260 billion in aid to Ukraine!

Some European nations now insist that only mitigation qualifies as climate finance. Although most developing countries are tropical and struggling to cope with planetary heating, little assistance is available for adaptation.

Debt

More recently, developing countries’ new debt has been more commercial and conditional but less concessional. With the transition to the Sustainable Development Goals (SDGs) in 2015, the World Bank encouraged much more commercial borrowing with its new slogan, ‘from billions to trillions’.

Following the 2008 global financial crisis, Western countries adopted unconventional monetary policies, eschewing fiscal efforts. Quantitative easing enabled much more borrowing, which grew until 2022.

However, most Western governments did not borrow much. Some private interests borrowed heavily, often for unproductive purposes, with some using cheap funds to finance shareholder buyouts to get more wealth.

Meanwhile, many developing countries went on borrowing binges as creditors pushed debt in developing countries in various ways. Rapidly mounting government debt would soon become problematic.

From early 2022 until mid-2024, interest rates rose sharply, ostensibly to counter inflation. The US Fed and European Central Bank raised interest rates in concert, triggering massive capital outflows from developing countries with the poorest worst affected.

Taxation

The Global South has long wanted the UN to lead negotiations on international taxation arrangements to provide more financial resources for development. However, the Organization for Economic Cooperation and Development (OECD) rich nations’ club has long undermined developing countries’ interests.

The OECD achieved this by misleading finance ministries in developing countries. It bypassed foreign ministries that had long worked well together on contentious Global South issues. With the OECD making up new rules for the world, developing country finance ministries signed on to a biased tax proposal on which they were nominally consulted.

At the FfD3 conference in mid-2015, the OECD blocked Global South efforts to advance international tax cooperation. An independent international commission proposed a minimum international corporate income tax rate of 25%.

Treasury Secretary Janet Yellen counter-proposed a 21% rate, the US minimum rate. However, at the G7 meeting he was hosting, Boris Johnson pushed this down to 15% while adding exemptions, reducing likely revenue.

Instead of distributing revenue as with a corporate income tax on profits from production, the OECD proposed revenue sharing according to consumption spending, much like a sales tax.

Poor countries would receive little as their population can afford to spend much less, even if they produce much at low wages. Rather than progressively redistribute, OECD international corporate income tax revenue distribution would be regressive.

Dollar

The US dollar remains the world’s principal currency for international transactions. US Treasury bond sales enable this, subsidising the world’s largest economy. Trump recently threatened the BRICS and others considering de-dollarization.

The leading BRICS proponents of de-dollarisation, Brazil and South Africa, have failed to persuade the other BRICS to de-dollarize. Instead, China’s central bank has issued dollar-denominated bonds for Saudi Arabia.

Special Drawing Rights (SDRs) should be issued regularly to augment discretionary IMF financial resources. This can be done without Congressional approval, as happened after the 2008 global financial crisis and the COVID-19 outbreak.

Such resources can be committed to the SDGs and climate finance.

But this cannot happen without collective action by the Global South seriously mobilising behind pacifist, developmental non-alignment. Inclusive and sustainable development is impossible in a world at war.

Available online here: Financing for Development Priorities Today

Finance Covid-19 Relief and Recovery, Not Debt Buybacks

Anis Chowdhury and Jomo Kwame Sundaram

SYDNEY and KUALA LUMPUR: In July, the UN Secretary-General warned that a “series of countries in insolvency might trigger a global depression”. Earlier, the United Nations Conference on Trade and Development (UNCTAD) and the International Monetary Fund (IMF) had called for a US$2.5 trillion coronavirus crisis package for developing countries.

Debt distraction

In the face of the world’s worst economic contraction since the Great Depression, a sense of urgency has now spread to most national capitals and the Washington-based Bretton Woods institutions. Unless urgently addressed, the massive economic contractions due to the COVID-19 pandemic and policy responses to contain contagion threaten to become depressions.

Nevertheless, many long preoccupied with developing countries’ debt burdens and excessive debt insist on using scarce fiscal resources, including donor assistance, to reduce government debt, instead of strengthening fiscal measures for adequate and appropriate relief and recovery measures.

Most debt restructuring measures do not address countries’ currently more urgent need to finance adequate and appropriate relief and recovery packages. In the new circumstances, the debt preoccupation, perhaps appropriate previously, has become a problematic distraction, diminishing the ‘fiscal space’ for addressing contagion and its consequences.

Buybacks no solution

One problematic debt distraction is the renewed call for debt buybacks from private creditors, through an IMF-managed Brady Plan-like multilateral bond buyback facility funded by a global consortium of countries. The historical evidence is clear that bond buybacks are no panacea and neither an equitable nor efficient way to reduce sovereign debt.

The contemporary situation is quite different from the one three decades ago when US Treasury Secretary Brady’s plan successfully cut losses for the US commercial banks responsible for most debt to Latin American and other developing country governments. Hence, prospects for a comprehensive arrangement involving all creditors are far more remote now. Unsurprisingly, debt buybacks have been rare since the mid-1990s.

Furthermore, private bond markets have changed significantly from what they were during the Brady era when there was last a comparable effort involving many debtor countries. Importantly, the new creditors largely consist of pension and mutual funds, insurance companies, investment firms and sophisticated individual investors. Also, today’s creditors have less incentive to participate in sovereign debt restructurings.

Many of today’s creditors are now represented by powerful lobbies, most significantly, the International Institute of Finance (IIF). Unlike before, when their efforts focused on OECD developed economies, the IIF now actively works directly with developing country finance ministers and central bank governors.

Voluntary scheme problematic

But the debt buyback proposal, to be underwritten by a multilateral donor consortium, can inadvertently encourage hard bargaining by powerful creditors who know that money is available, while retaining the option of threatening litigation. Hence, resulting buybacks are likely to cost more. The evidence shows that a country’s secondary market debt price is higher when it has a buyback programme than otherwise.

Such an approach can also encourage trading in risky sovereign bonds promising higher returns, inadvertently sowing the seeds for another debt crisis. Private investment funds are more likely to buy such bonds if there is a higher likelihood of selling them off, while still making money from the high interest rates, even when the bonds are sold at large discounts.

The proposal’s voluntary feature also creates incentives for creditors to ‘free-ride’ by ‘holding-out’, thus undermining the likelihood of success. If the scheme is expected to effectively restore creditworthiness, then each existing creditor would hold on to the original claims, expecting market value to rise as new creditors provide relief.

Maintaining a good credit rating undoubtedly enables access to international funds at relatively lower interest rates. But low-income countries typically have poor access to international capital markets, and only get access by paying high risk premia, due to poor credit ratings.

Compared to near zero interest rates in major OECD economies, African governments pay 5~16% on 10-year bonds, while Kenya, Zambia and others pay more. Borrowing costs for developing countries issuing Eurobonds more than doubled due to high interest rates.

Also, many, if not most contemporary creditors are not primarily involved in lending money. They are therefore unlikely to respond to government requests for new loans needed to grow out of a debt crisis.

New obstacles include the greater variety of powerful creditors, the unintended incentives for free-riding inherent in voluntary debt reduction, problematic precedents as well as perverse incentives for both governments and bondholders. Perhaps most importantly, debt reduction by purely ‘voluntary’ means -- like buybacks, exit bonds, and debt-equity swaps – is unlikely to be adequate to the enormity of the problem.

Successful buybacks?

Only banks definitely gained from the Brady deals. Benefits were unclear for most debtors other than Mexico and Argentina, and particularly ineffective for Uruguay and the Philippines, where gains were paltry, if not negative.

Positive effects for economic growth were very small, as most buybacks failed to improve either market confidence in or the creditworthiness of debtor countries. Hence, even if private creditors participate, there is no guarantee that debtor countries will benefit significantly at the end of the long and complicated processes envisaged.

The 2012 Greek bond buybacks, backed by the European Commission, the European Central Bank and the IMF ‘troika’, effectively bailed out the mostly French and German banks owed money by Greece. Celebrated as a success, it neither restored Greece’s growth nor reduced its debt burden.

While bond buybacks can always be a debt restructuring option for consideration, Ecuador’s in 2008-2009 are probably the only one regarded as favourable to the debtor country. Wall Street observers suggest that Argentina’s recent initiative may also have a positive outcome.

Also, after successfully restructuring its commercial debt, the country is now better able to negotiate with its official creditors, particularly the IMF. These ‘successes’ have been exceptional, led by the countries themselves and ultimately settled on their terms, taking advantage of opportunities presented by global crises for comprehensive national debt restructuring.

Importantly, neither creditor consortia nor multilateral financial institutions were involved in coordinating or underwriting both restructurings, and hence could not impose onerous policy conditionalities. Thus, when able to take advantage of favourable conditions for negotiating strategic buybacks, debtor countries may be better able to benefit from them.

Urgent financing needed

Despite her earlier reputation as a ‘debt hawk’, new World Bank Chief Economist Carmen Reinhart recognizes the gravity of the situation and recently advised countries to borrow more: “First fight the war, then figure out how to pay for it.” Hence, in these COVID-19 times, donor money would be better utilized to finance relief and recovery, rather than debt buybacks.

Multilateral development finance institutions should resume their traditional role of mobilizing funds at minimal cost to finance development, or currently, relief and recovery, by efficiently intermediating on behalf of developing countries. They can borrow at the best available market rates to lend to developing countries which, otherwise, would have to borrow on their own at more onerous rates.