A debate has emerged recently about dollar dominance, accelerating dedollarisation and initiatives to create common currencies in the Global South.
The history of money tells us that it does not need to be diversified by any specific combination of commodities (or other currencies) for it to function effectively as such. The Brics bloc of emerging economies could guarantee the value of a common currency and compute it as a combination of the rand, real, rupee, renminbi and rouble.
The common currency could also be pegged to reserves of a range of commodities, such as gold. This happened during the 1944-1971 era of the gold standard, when the dollar was pegged to gold and first took up its role as world currency, when most countries had both fixed exchange rates and capital controls.
Narratives that countries growing at different rates is a reason for a common currency to fail are simply misleading. If this were true the euro would not exist. Trade can be a vital driver for economic growth — the entire raison d’être for a common currency for foreign trade.
Between 2014 and 2020 the Brics countries’ total export share to one another increased 23%. The volume of trade between the countries and the political weight behind establishing states’ legitimate backing of a tradable currency are the variables we should pay attention to when considering the viability of a currency zone. Both of these have increased in recent years.
There is a clear political process under way to create Global South alliances that have already proven to bear fruit, for example in development finance through the establishment of the New Development Bank (NDB). In its first five years between 2016 and 2020 alone, the NDB disbursed $20bn to Brazil, India, China and SA. Comparably, the World Bank disbursed $30bn.
On a recent visit to the NDB in Shanghai, Brazilian President Luiz Inácio Lula da Silva called on Brics countries to come up with an alternative to replace the dollar in foreign trade. This is a call to action that will hold weight with the newly elected NDB president, Dilma Rousseff, herself a former president of Brazil and close ally of Lula.
The view that creating an alternative common currency is simply the result of factions choosing sides — between the US in the West, or Russia and China in the East — does a disservice to the intention behind a common currency. Developing countries such as Brazil, India and SA are less interested in the conflicts among global powers than forging the economic conditions for development.
The Brics’ move towards a common currency is not a story of submission to Chinese or Russian aspirations. It is a strategic move towards their own unit of exchange for international trade that is not constrained by high levels of dollar-denominated debt and balance of payment constraints.
If you are asking yourself why a common currency is important now, you need not look further than the most recent increase in SA’s repo rate to 7.7%, which has pushed the prime lending rate up to 11.25%. This lending rate makes it hard to believe that the macroeconomic framework will allow for local businesses to borrow the necessary capital to make the growth-enhancing investments the country needs.
The rate hike by the Reserve Bank was justified largely by a fear of inflation — partly linked to the foreign exchange risks the SA rand is exposed to, a risk that could be partly attenuated if dollar reserves were not so important for a large portion of exchange. This approach is not new to most countries, which have adopted a range of strategies in response, such as discarding currency pegs, diversifying investment funds and adopting central bank digital currencies.
The dollar dominance debate is routinely reinvigorated after global economic crises, informed by a long-standing analysis of the structural impediment that developing countries face. Financial deregulation, floating exchange rates and open capital accounts have been the mark of the dollar’s position as the hegemonic currency of the international monetary system.
This system has placed a heavy burden on developing countries that often struggle to finance reserve accumulation and service dollar-denominated debt. If this context is the starting point of our analysis, then the question should not be whether the dollar will face a decline, but rather how an alternative currency could favour developmental interests.
• Ramburuth is a researcher at the Institute for Economic Justice in Johannesburg. He writes in his personal capacity.
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