The holding of the expanded BRICS forum summit in Johannesburg in 2023, in the aftermath of the war in Ukraine and sanctions against Russia, crystallized the desire of some major emerging countries to break free from the dominance of the dollar in their external trade. Does this geopolitical and economic context bring the reform of the international monetary system back to the center of discussions? Is the prospect of a shift in this system, which is still dominated by the dollar today, realistic? Moreover, what are the stakes of such a shift in light of the institutional framework of global economic and financial governance?
In what ways do the current geopolitical and economic contexts place the reform of the international monetary system (IMS) at the heart of discussions?
The term “transformation” seems more appropriate here than “reform,” which implies a cooperative process, whereas we are witnessing a modification in the balance of international power that challenges the quasi-hegemonic role of the dollar. Furthermore, this transformation concerns the broader international monetary and financial system (IMFS). In this regard, while some leaders, like President Lula, may have suggested the possibility of a “common currency” at the Johannesburg BRICS summit, the declaration released after the summit merely advocates for the use of local currencies in international trade and financial transactions and the interconnection of cross-border payment systems. In fact, while the adoption of a common currency by the disparate BRICS group seems illusory given their sizes, economic structures, and divergences in economic policy—there’s no need to invoke the theory of optimal currency areas—the development of alternative interbank payment systems, such as the China International Payments System (CIPS), already allows for a departure from reliance on the SWIFT network and the dollar. The war in Ukraine, the sanctions against Russia, and its exclusion from SWIFT naturally accelerate the dedollarization process. Countries not applying these sanctions are resorting to other billing currencies—primarily the yuan—in their bilateral transactions, including in their exchanges of commodities and oil that had previously been denominated in dollars (see recent agreements between Saudi Arabia and China). It should be noted that, well before the war in Ukraine, the impetus to move away from the dollar was fueled by the tightening of US sanctions against Iran in 2018, exposing its partners to the legal and financial risks associated with the extraterritorial 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—traditionally serves three functions: as a unit of account, accepted as the denomination of commercial and financial transactions; as a medium of exchange facilitating these transactions; and lastly, as a store of value for savers and investors. These functions are closely interconnected. The dollar dominates the current IMS (60% of foreign exchange reserves, 70% of debt issuances, and nearly 50% of invoicing) because it remains most adept at effectively fulfilling these three functions. This dominance 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 international private and public investors and for recycling the surplus savings of major exporting countries, particularly oil producers (this is also one reason for the limitation of the euro’s international role, as its capital markets remain fragmented). From this perspective, the yuan’s weight still appears marginal (just under 4% of global reserves) compared to the dollar or even the euro (20%). It is observed that nearly 60% of China’s foreign assets are still dollar-denominated, while its financial market remains tightly controlled and not very open to international investors.
However, an analysis confined to conventional international statistics on currency weight is misleading. In a broader and forward-looking vision, several elements converge to suggest a faster shift in the center of gravity of the IMFS than previously anticipated:
- The rise of the Asian Infrastructure Investment Bank (AIIB) created by China in 2014, which has 60 member countries and operates in competition with the World Bank and the Asian Development Bank (ADB).
- The entry of new members, including Saudi Arabia and the United Arab Emirates, into the New Development Bank (NDB, also known as the “BRICS Bank”), which brings significant financial clout.
- The rise of credit to emerging countries, primarily China, from low-income countries, often in exchange for economic and trade cooperation agreements (their share has risen from 20% to 50% in 10 years).
- Lastly, the expansion of the network of swap lines under the auspices of the People’s Bank of China, a tight network involving 41 central banks, often linked to the Belt and Road Initiative.
Thus, alongside the “official” IMFS dominated by the dollar and secondarily by the euro, a competing pole centered on the Asia-Pacific region is emerging, outlining a bipolar IMFS whose implications for the global economy and international financial stability remain difficult to predict at this stage (the academic literature is also inconclusive on this subject); however, it logically tends to erode the “exorbitant privilege of the dollar” that the United States has leveraged since World War II to bolster its leadership in global financial intermediation (and, incidentally, to finance its external imbalances at lower costs).
What could be the implications for the institutional framework of global economic governance?
The expansion of the BRICS group illustrates the frustration of some emerging countries with a global economic governance system still largely locked down by “advanced” countries, whose weight in the global economy has substantially declined without an adjustment in their influence in multilateral institutions. The critique of the G7 no longer seems relevant, as this closed club reflects the economic and financial power dynamics that prevailed half a century ago. Notably, however, in their declaration of August 23, the BRICS, while demanding increased representation in international institutions, take care to engage with 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 a well-established organization and some achievements, such as its decisive contribution during the global financial crisis of 2008-2009 or more recently during the COVID-19 pandemic. However, resisting competition from the extended BRICS forum, which about forty emerging countries wish to join, requires the G20 to open itself more, particularly to the African continent, represented since the beginning only by South Africa. The decision made at the New Delhi summit on September 8-9, 2023, to welcome the African Union (AU) as a permanent member goes in this direction. It should not close the door to some larger African nations (Nigeria, Egypt, etc.). The question also arises of updating the European Union, which counts no less than five members out of twenty, a situation poorly received by the main members and raising the issue of the “European chair,” a topic still taboo in Berlin, Paris, or Rome.
In reality, it is mainly the Bretton Woods institutions, the IMF and World Bank, that are in the sights of the BRICS. The G7 countries still hold 45% of the IMF quotas, while the expanded BRICS group holds only 20%. China’s share, as 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 veto power, and these institutions are systematically led by Americans or Europeans…
It is perhaps unwise to overstate the significance of the highly publicized BRICS summit on August 23, a heterogeneous forum dominated 70% by China in terms of GDP, but the event serves as a wake-up call that Western powers would be mistaken to ignore in the pursuit of more effective global economic governance in the face of systemic challenges, particularly the climate transition that the entire planet is confronting.