I was asked recently to comment on the diminishing flow of foreign currencies to African countries. I think it went well; it’s hard to tell with broadcast media.
There are, of course, any number of explanations, the most obvious being insufficient foreign trade, declining tourism, high inflation and dwindling remittances. An explanation that requires greater depth, scope and span, especially attention to history and the rise and fall of matters that are decisive, is subjective. With heavy caveats, you either believe the US, as global hegemon, has been good for the world, or you don’t.
As trite as it may be to repeat, we are in the middle of a drawn-out transition in this regard that arguably began at the end of the 1990s. It was at the turn of the century when optimism about liberal capitalist globalisation was gradually replaced by pessimism, ill-conceived notions of “deglobalisation”, “decoupling and “degrowth”, and when China and India asserted themselves more forcefully as putative leaders in the global political economy.
The problem for Africa is that the continent fell between stools during the Cold War and emerged only briefly in the 1990s, to the extent that the World Bank ventured in about 2000 to ask whether the continent would claim the 21st century. Within a year or so, Africa’s priorities and expectations had dissolved into the background of the global war on terror.
They have remained in the background due to the increasing rivalry between China and the US — the global crisis of 2008 did little to help the continent — and today African countries sit in the difficult space where they are expected to pick a side in the latest European war, in Ukraine. The ambitions and imaginaries of “civilisational states” — notably China, India and Russia — do little to embolden African countries from being rule takers to becoming rule makers.
One strand I pulled from the question about low foreign currency flows to the continent is a type of liminal space where the dollar is on its way out, as it were, and a new global reserve currency is not quite ready to take its place. This issue is part of the historical transition from West to East, but it is more easily said than done.
The US will fight back (I would like to say the dollar fights back, but people make policies and fight battles; pieces of paper do not), and the dollar may remain the dominant global reserve currency for at least the next couple of decades. Even beyond that, it’s difficult to imagine a world in which the dollar is not the go-to currency.
Consider that sterling remained the reserve currency well into the 20th century, a few decades after Britain ceased to dominate international financial and commodity markets. The dollar remained unchallenged until the early 1990s, when the euro brought great expectations of an integrated monetary and financial area larger than the US. There was a belief that the euro would at best overtake, or at least rival, the dollar as the leading reserve asset in central bank portfolios. Those prospects failed to materialise, though the euro remains strong.
The dollar will probably remain dominant partly because it is dominant, it has the “advantage of incumbency”, but also because the US remains the wealthiest and most prosperous country in the world and has the military power to back up its position of hegemonic control. I will explain this military dimension below.
Drawing on a recent report in The Economist, it is clear that the US “remains the world’s richest, most productive and most innovative big economy”, and in many ways “is leaving its peers ever further in the dust”. The data supports this claim. In 1990, at market exchange rates, the US accounted for about 25% of the world’s output. More than three decades later that share remains fairly intact, notwithstanding China’s growth.
US dominance of the rich world is striking, accounting for 58% of the Group of Seven countries’ total GDP, compared with 40% in 1990. Adjusted for purchasing power, only those in superrich petrostates and financial hubs enjoy a higher income per person. The Economist found that average incomes in the US have grown far faster than in Western Europe or Japan. Adjusted for purchasing power, they exceed $50,000 in Mississippi, America’s poorest state, higher than the average for France.
About that military dimension ... a simple explanation for the success of the US (and this can be applied to the history of British, Dutch or Portuguese dominance and control) is that the world needs an economically prosperous country with the willingness to lead, be the lender of last resort and have the military power to directly enforce or be seen to enforce the “rules” of the order.
While I don’t share the pessimism over and fear of Chinese hegemony, it is clear that the US remains committed to providing stability, making the world safe for capitalism, to offer liquidity management and periodic lender-of-last-resort services through central banks.
All things considered, it is clear that we are nowhere near the end of the dollar as global reserve currency.
• Lagardien, an external examiner at the Nelson Mandela School of Public Governance, has worked in the office of the chief economist of the World Bank as well as the secretariat of the National Planning Commission.
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