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?

New Approaches Urgently Needed to Tackle Resurgent Social Crises

By Jomo Kwame Sundaram

KUALA LUMPUR, Malaysia, Dec 5 2024 (IPS) - Despite uneven economic recovery since the pandemic, poverty, inequality, and food insecurity continue to worsen, including in the Asia-Pacific region, which used to fare better than the rest of the Global South.

Food matters

These trends are not new but have been around for some time. Food security has deteriorated worldwide for a decade and will likely worsen.

Food security measures are more indicative of well-being than traditional poverty measures, which reflect cash incomes subject to inflation and spatial variations. After all, over half of the poor’s incomes worldwide are spent on food.

Due to global heating and rising sea levels, seawater is entering rice fields in Vietnam, Bangladesh, and other countries. Over ten Vietnamese provinces are affected, and less rice production will raise prices, worsening food insecurity.

There have been uneven and modest improvements in health indicators for the Asia-Pacific region, home to three-fifths of the world population. More is needed for preventive health instead of the typical focus on curative services.

In this connection, governments should realise that revenue-financed health systems are more equitable and efficient than either private or social insurance systems touted by all too many consultants.

Grim trends

Today’s macroeconomic situation differs from the Great Stagnation of the 1980s, which especially set back Latin America and Sub-Saharan Africa.

Unlike then, recent downturns have also hit many Asian economies. Recent ostensibly counter-inflationary measures have deepened stagnation in much of the world.

Geopolitics increasingly redirects trade and investments as economic measures are increasingly weaponised. The most vulnerable are most likely to suffer.

The Sri Lankan and Pakistani economies have been in crisis recently as others struggle to avoid similar fates. Debt distress demands attention, but international cooperation is crucial.

After two and a half years of unnecessarily raised interest rates, the US Federal Reserve recently started lowering them at the end of the Northern Hemisphere summer.

Why were those interest rates raised in the first place? Ostensibly due to inflation. But higher prices in recent years have been mainly due to supply-side disruptions, not ‘excessive’ demand.

Raising interest rates has not helped much, as demand-side contraction cannot address supply-side disruptions but only worsens macroeconomic stresses.

Exceptions

Higher interest rates have adversely affected the whole world, including Europe. But unlike other central banks, only the US Fed is committed to achieving full employment.

Such US exceptionalism is part of the problem. However, most economies worldwide have suffered from higher interest rates, which have deepened economic stagnation.

The US has maintained full employment through fiscal policy and has borrowed cheaply from the rest of the world due to its ‘exorbitant privilege’, which is denied to others.

However, Japan’s and China’s central banks have refused to follow the West in raising interest rates. Hence, the pain in economies following their lead has been less severe.

Many governments’ fiscal and debt problems have constrained social expenditures, typically the first victims of budget austerity measures.

Financialization

In recent decades, the Bretton Woods institutions have promoted financialization, often by invoking UN Sustainable Development Goals (SDGs) and climate financing slogans.

With the West’s ‘quantitative easing’ after the 2008 global financial crisis, slogans like ‘from billions to trillions’ encouraged more government borrowing on commercial terms.

Rising interest rates from early 2022 have hit developing countries, forcing macroeconomic authorities to increase debt servicing.

Many countries struggle to service debt worldwide by cutting social spending. This has hit nations facing debt crises and governments trying to avoid more debt distress.

New lessons

During the pandemic, some macroeconomic authorities resorted to policies previously eschewed. Two Southeast Asian nations turned to ‘monetary financing’ of pandemic spending: central banks lent directly to finance ministries, bypassing markets.

The International Monetary Fund also issued special drawing rights (SDRs). Such extraordinary measures are necessary to meet the SDGs and keep temperatures from rising over 1.5oC above pre-industrial levels.

The Banks of Canada and England former Governor Mark Carney, now UN Special Envoy for Climate Finance and Action, has warned that the 1.5oC threshold will likely be exceeded in under a decade.

The world cannot count on some miraculous future invention to reverse irreversible planetary heating processes and their many ramifications.

New realism

Pragmatism demands addressing realities faced. Many such problems are beyond the scope of the ministries responsible for social spending, policy and protection.

Due to ‘reshoring’ and digitalisation, new investment fads will not create enough jobs. New types of socially valuable employment are needed, with many touting the commercialisation of care work.

However, most of our society’s less well-off will be unable to afford commercial care work unless their incomes rise dramatically, which seems unlikely soon.

An ‘all-of-government’ approach remains relevant for developing countries to better cope with and reverse some of the worst social trends.

Trying to do better with the limited resources available for social spending will only be adequate if the ministries responsible for macroeconomic policy, finance, and other related matters cooperate much better than ever.

Improved all-of-government cooperation and coordination work much better with a ‘whole-of-society’ approach to better tackle the social challenges of our times.

Related IPS Articles:

• Western Finance Ruining Economies of the Rest

• PPPs Fiscal Hoax Is a Blank Financial Silver Bullet

• More Progressive Taxation Needed for Social Progress

• Social Protection Necessary to Quickly End Poverty, Hunger

• Transforming Society, Financialization Destroys Social Solidarity

  
  

Available online here: New Approaches Urgently Needed to Tackle Resurgent Social Crises

Western Finance Ruining Economies of the Rest

By Jomo Kwame Sundaram

KUALA LUMPUR, Malaysia, Nov 19 2024 (IPS) - Western financial policies have been squeezing economies worldwide. After being urged to borrow commercial finance heavily, developing countries now struggle with contractionary Western monetary policies.

Central banks

‘Unconventional monetary measures’ in the West helped offset the world economic slowdown after the 2008 global financial crisis.

Higher interest rates have worsened contractions, debt distress, and inequalities due to cost-push inflation triggered by ‘geopolitical’ supply disruptions.

Western central bank efforts have tried to check inflation by curbing demand and raising interest rates. Higher interest rates have worsened contractionary tendencies, exacerbating world stagnation.

Despite major supply-side disruptions and inappropriate policy responses since 2022, energy and food prices have not risen correspondingly. But interest rates have remained high, ostensibly to achieve the 2% inflation target.

Although it has no rigorous basis in either theory or experience, this 2% inflation target – arbitrarily set by the New Zealand Finance Minister in 1989 to realise his “2[%] by ’92” slogan – is still embraced by most rich nations’ monetary authorities!

For over three decades, ‘independent’ central banks have dogmatically pursued this monetary policy target. Once raised, Western central banks have not lowered interest rates, ostensibly because the inflation target has not been achieved.

Independent fiscal boards and other pressures for budgetary austerity in many countries have further reduced fiscal policy space, suppressing demand, investments, growth, jobs, and incomes in vicious cycles.

Debt crises

Before 2022, contractionary tendencies were mitigated by unconventional monetary policies. ‘Quantitative easing’ (QE) provided easy credit, leading to more financialization and indebtedness.

QE also made finance more readily available to the South until interest rates were increased in 2022. As interest rates rose, pressures for fiscal austerity mounted, ostensibly to improve public finances.

Policy space and options have declined, including efforts to undertake developmental and expansionary interventions. Less government spending capacity to act counter-cyclically has worsened economic stagnation.

Comparing the current situation with the 1980s is instructive. The eighties began with fiscal and debt crises, which caused Latin America to lose at least a decade of growth, while Africa was set back for almost a quarter century.

The situation is more dire now, as debt volumes are much higher, while government debt is increasingly from commercial sources. Debt resolution is also much more difficult due to the variety of creditors and loan conditions involved.

Different concerns

With full employment largely achieved with fiscal policy after the global financial crisis, US policymakers are less preoccupied with creating employment.

Meanwhile, the US’s ‘exorbitant privilege’ enables its Treasury to borrow from the rest of the world by selling bonds. Hence, the US Fed’s higher interest rates from 2022 have had contractionary effects worldwide.

As the European Central Bank (ECB) followed the Fed’s lead, concerted increases in Western interest rates attracted funds worldwide.

Western interest rates remained high until they turned around in August 2024. Developing countries have long paid huge premiums well above interest rates in the West.

However, higher interest rates due to US Fed and ECB policies caused funds to flow West, mainly fleeing low-income countries since 2022.

However, growth and job creation remain policy priorities worldwide, especially for governments in the Global South.

Protracted stagnation

Why has world stagnation been so protracted? Although urgently needed, multilateral cooperation is declining.

Meanwhile, international conflicts have been increasingly exacerbated by geopolitical considerations. Increased unilateral sanctions driven by geopolitics have also disrupted international economic relations.

Barack Obama’s ‘pivot to Asia’ started the new Cold War to isolate and surround China. National responses to the COVID-19 pandemic worsened supply-side disruptions.

Meanwhile, the weaponisation of economic policy against geopolitical enemies has been increasingly normalised, often contravening international treaties and agreements.

Such new forms of economic warfare include denying market access despite commitments made with the 1995 establishment of the World Trade Organization.

Trade liberalisation has been in reverse gear since rich nations’ protectionist responses to the 2008 global financial crisis. Globalisation’s promise that trade integration would ensure peace among economic partners was thus betrayed.

Since the first Trump presidency, geopolitical considerations have increasingly influenced foreign direct investments and international trade.

US and Japanese investors were urged to ‘reshore’ from China with limited success, but appeals to ‘friend-shore’ outside China have been more successful.

Property and contractual rights were long deemed almost sacred. However, geopolitically driven asset confiscations have spread quickly.

Financial warfare has also ended Russian access to SWIFT financial transaction facilities and the confiscation of Russian assets by NATO allies.

The Biden administration has extended such efforts by weaponizing US industrial policy to limit ‘enemy’ access to strategic technologies.

It forcibly relocated some Taiwan Semiconductor Manufacturing Corporation operations to the US, albeit with little success.

Canada’s protracted detention of 5G pioneer Huawei founder’s daughter – at US behest – highlighted the West’s growing technology war against China.

Unsurprisingly, inequalities – both intranational and international – continue to deepen. Two-thirds of overall income inequality is international, exacerbating the North-South divide.

Related IPS Articles

• US Fed- Induced World Stagnation Deepens Debt Distress

• Government Debt Is Symptom, Not Cause

• South Suffering Due to Powerful Nations’ Policies

• Chronicle of a Catastrophe Foretold

• Developing Countries’ Government Debt Crises Loom Larger

• Global South Stagnating under Heavier Debt Burden

• North Ignores ‘Perfect Storm’ in Global South

• Onerous Debt Making Poorest Poorer

• Rich Nations, IMF Deepen World Stagnation

• Inflation Phobia Hastens Recessions, Debt Crises

• 1980s’ Redux? New context, Old Threats

  
  

Available online here: Western Finance Ruining Economies of the Rest