Current Affairs for Civil Service
Original Hindu Text
Contesting the hegemony of the dollar
The fact that the multipolar international system is fast unfolding is reinforced by clear trends in polycentric global geoeconomics. There is significant trade within the Global South; currency swap agreements; trade in national currencies bypassing the dollar; steps towards trading oil and gas in national currencies; the promotion of such arrangements by regional organisations; the setting up of special accounts for internationalising national currencies; and the setting up of financial communications systems. Is this multipolarity irreversible? Can the dollar hegemony be challenged?
Before the 1990’s, the world was bipolar. One pole was the western group of nations such as the U.S., the U.K, Western European countries, and Japan. The other pole was the second pole consisting of countries like the Soviet Union, China, East European communist countries etc. The two poles were arch rivals of one another.
The Soviet Union collapsed in the period 1988 to 1991. The second block also collapsed. The world was left with one pole, led by the U.S. and some leading west European nations. The world became unipolar with the U.S. as the boss.
With the passage of time, many other countries made their economies stronger through industrialization and adoption of reforms. Countries like Mexico, Brazil, South Africa, Nigeria, India, South Korea, and Indonesia emerged as powerful industrial and trading powers. As their economy grew, these counties began to have stronger sy in world affairs. These countries began to trade with one another more vigorously. They entered into trade agreements with one another enabling to import to and export from their partner countries freely, indirectly ignoring the U.S. Thus, the world moved from unipolar to multipolar mode.
What is Global South
In economic and industrialization terms, the world is broadly divided into two parts – Global North, and Global South. The countries in the Global North such the U.S. Canada, Mexico, Europe, Japan etc. are economically stronger and considered more advanced. On the other hand, countries in the Global South such as the whole of Africa, Latin America, large parts of Asia including India are comparatively less wealthy and less advanced. India aspires to be the leader of the Global South.
Sometimes, countries find that their national currencies are losing value dangerously. It’s a very uncomfortable situation because the country has to spend a lot of its own currency to get the Dollar required by the seller country. However, such slide in the exchange value of the national currencies soon gets over as countries adopt corrective measures.
In the intervening period, the affected country might approach a friendly rich country to exchange some of its own currencies with that of the friendly country with stronger currency. When the situation improves, the weaker country brings back its currencies from its friend by giving it payment in Dollars.
A few years ago, India entered into a similar arrangement with Japan. Japan gave its currency Yen in exchange of India’s Rupee. Japan was the giver and India is the taker.
Recently, Sri Lanka has requested India for a currency swap. Here, India will be giver and Sri Lanka will be the taker.
Trade in national currencies bypassing the Dollar
During the time of the Soviet Union, India imported arms and ammunitions from that country by paying in Rupees. Soviet Union imported commodities like Tea, Medicines, Jute etc. from India by making payment in rupees that it had ccumulated through its exports to India. Thus, the need for the Dollar was not felt.
In recent times, India and a few other European countries are trading with Iran by making payment in each other’s currencies. This is because Iran is under U.S. sanctions and no country can accept or give Dollars to Iran. Thus bilateral trade goes on keeping the Dollar out.
This trend of bypassing the Dollar is gaining strength in other areas of the world.
Trading Crude Oil and Gas in national currencies
After the start of the Russia-Ukraine war, western nations have put many restrictions on countries importing gas and oil from Dollar payment to Russia has been restricted. Being very anxious to sell its oil and gas, Russia does ot want to lose customers. It has agreed to accept payments for its exports in the domestic currencies of the buyer countries. Already, Sri Lanka, Bangladesh and Pakistan have been offered this facility. (To be continued)
What are Financial Communications Systems?
This is an interconnected, globalized world. Capital, personnel, investments, and businesses flow from one country to another continuously in search of profit, technology, and higher profits. In such a scenario, investors insist upon transparency and accuracy of financial data pertaining to companies, banks and even governments. To achieve transparency and credibility, final results must be reported truthfully in specified formats for any investor to see in any corner of the world. For example, a French investor wanting to invest capital in Paradeep Phosphates, Ltd. in Odisha would like to know minute tidbits about the business of the company, so that they can decide if Paradeep Phosphate is a profit-making company, and if its future is bright. To arrive at such a conclusion, the French investor, obviously, can’t come to Paradeep to inspect the plant and examine its books of accounts.
To remove such difficulties, and facilitate ease and transparency of financial reporting, leading countries like those in Europe, and the U.S. have devised well-designed reporting formats which have to contain the desired information in an easily readable and understandable manner. An investor can rely on such statements to buy shares in new unknown companies, or sell off their shares in it.
These formats vary slightly from the U.S. system to the European system to the Chinese systems. Such existence of parallel systems of financial reporting reduces the dependence on the U.S. system significantly. This is what is meant by having an alternate Financial reporting system.
The world thus moves towards multi-polarity. Can this trend sustain? Can the dominance of the Dollar last forever?
Other international developments affecting Dollar
The squabble between the U.S. and China over trade issues got worse IN 1918 during President Trump’s time. The bilateral relations have not improved under President Biden as the concern over a possible Chinese invasion against Taiwan looks so real today. The U.S. sees China as a trade threat as well as a military threat. This continuing mistrust has forced China to make its national currency Yuan a global currency at par with the Dollar, Euro, Yen, and the British Pound. To some extent, China has succeeded in this regard. China has also drawn up its own financial reporting system.
The U.S. has put severe financial sanctions against Iran on nuclear weapons issue. Iran is facing great hardship due to the sanctions and is trying hard to bypass the American Dollar in its trade with other countries.
After the invasion of Ukraine, the U.S. openly sided with Ukraine and imposed sanctions on Russia to cripple its energy exports. Although not very successful in this regard, Russis does feel the pain of U.S. sanctions and is trying hard to bypass the Dollar and the U.S.-led financial system through various means.
Thus the effort to curb the power and clout of Dollar is being seen in different parts of the world, but the might Dollar has managed to stay strong so far.
The emergence of rising economies of countries like Brazil, Russia, China, Indonesia and South Africa has resulted in a situation where the combined GDP of these non-U.S. countries exceeed the GDP total of the G7 countries led by America.
The growth of Asian economies has boosted the trade among these nations quite visibly. China and India are now witnessing steady ncrease in their export-import with countries like the UAE, Some of these countries have dopted the currency-swap route to pay for their import-export. The total currency swap has reached a whopping 380 billion Dollars. Similar trend is also being seen among Latin American group of countries. The rising value of the Dollar has added urgency for switch to local currencies by the poorer countries.
India has taken some concrete steps to aid the efforts to break free of the Dollar. The Reserve Bank of India (RBI) has unveiled a rupee settlement system for facilitating international tade i by allowing special vostro accounts through some of its nationalized banks.
China developed the Renminbi (another name of Yuan) in 2015 and offers payments facilities for trade. This is outside the Dollar-dominated system.
Effort to counter the SWIFT system
Almost 95% of international banking transactions are done through a system called SWIFT. Millions of funds transfers are done each second by banks located in different countries. The SWIFT is so efficient that transfer on money from ne bank India to another in Nigeria gets completed in seconds. The U.S. has both direct and indirect control over access to SWIFT. To punish Russia and Iran, the U.S. has blocked their access to SWIFT.
As a counter-measure, China has started a clone of SWIFT that offers similar facilities for international funds transfers. Now, Russia uses it frequently for receiving payments for its energy exports.
Role of BRICS
The BRICS (a club where Brazil, Russia, China and India are members) has made some progress to bring into effect a payment system independent of the Dollar. New Development Bank is a bank operating under BRICS. This bank gives half of its loans in local currencies, and the other half in Dollars. Thus, a global trend to curb the dominance of the Dollar is gaining strength. Time will tell if and when such an effort will succeed.