Is the hegemony of dollar waning I Syed Kamran Ali

Since its inception, BRICS has positioned itself as a group to challenge Western hegemony and present a viable alternative to the existing international order. This has led to a great deal of appreciation from the developing world, largely because the developing world has long complained that the international system, which is dominated by the Western world, has been unfair to them.

The international financial system is one of the areas, where this Western-led order receives the most criticism from the developing countries. It is worth mentioning that because of the dominance of the dollar in the global financial system, the Western world, especially the US, has established unchallenged dominance in the international financial system.

Additionally, the working style of the key institutions of the global financial system, such as the World Bank and IMF, doesn’t suit the developing nations, much. For instance, poor and war-torn nations frequently request loans from these institutions in order to provide their populations with essential amenities. But these organisations act arbitrarily when it comes to deciding who to lend money to or not, and if poor countries are fortunate enough to get past these obstacles, they are often forced to accept loan terms that are detrimental to their citizen’s growth.

The prerequisites for receiving loans are more liberalisation and privatization of the economy, as well as reduced government spending and subsidies for the populace, a large portion of whom also happen to live below the poverty line. Under the pressure of large financial institutions, poor countries frequently accept these conditions and leave the vast majority of their citizens to suffer. Studies have demonstrated a direct connection between a country’s adoption of the World Bank and IMF conditions and its citizens’ worsening economic situation (Biglaiser & McGauvran, 07 June 2022).

Moreover, developing nations are worried about the dominance of the dollar because there is consensus among them that the US has turned the dollar into a weapon in order to serve its own interest and advance foreign policy objectives. And the poor world suffers unnecessarily as a result of this.

For instance, the developing world suffered greatly when the US Federal Reserve recently increased interest rates in order to reduce US inflation. Because a high dollar makes their local currency less valuable, their import costs went up, also they are compelled to pay more interest on their loans (Ismail, 2023). Developing countries are frequently subjected to exogenous economic shock for no domestic reason due to the dominance of the dollar.

Apart from that, the US is charged with weaponing sanction regime as per its convenience. To take one example, when Russia invaded Ukraine, Western sanction came overnight freezing almost half of Russian foreign currency reserve, and removed major Russian banks from SWIFT, a messaging network bank used to facilitate global payment (Ismail, 2023) . However, when the US itself invades nations or when its allies do so, as Saudi Arabia did with Yemen, and Israel frequently does with Syria, Lebanon, and Palestine. The US never gets bothered to put financial sanctions even for name sake on these nations let alone the tough sanctions it has placed on Russia, and Iran.

Additionally, this selective application of sanctions destroys the poor nation’s economy and subjects its citizens to tremendous hardship, which results in a decline in human development, and hardly impacting the regime at place.

These reasons have led to constant calls from developing nations to abolish or alter the operation of these financial institutions and to achieve that it is necessary to challenge the monopoly of US dollar over the international monetary order and establish an alternative financial system.

Thus, in light of this discussion, the push by developing nations against the dollar gained new momentum when, at the 15th BRICS summit in Johannesburg, Brazilian President Lula Da Silva proposed to establish a common currency for trade and investment among BRICS members as a way to lessen their sensitivity to changes in the value of the dollar (Savage, 2023).

While no other leaders of the BRICS countries talked about the common currency during the summit, but countries like China and Russia are known for talking about the need of having an alternative currency to dollar, it is needless to mention that the other member of the BRICS namely India and South Africa would not be very averse to the idea, given their past complaints against the international financial system.

But before talking about common currency of BRICS let’s first evaluate how practical this idea is.

The combined GDP of the BRICS countries exceeds that of the G-7 as a whole (Business Standard, 2023), and it represents 41% of world population and 18% of global exports in 2021 (United Nations Conference on Trade and Development, 2023) (This doesn’t include the recently added 6 members). With the addition of six new members, it now includes the top oil and gas producing countries as well. Needless to mention that that oil prices are determined in dollars is, one of the primary factors contributing to the dollar’s dominance in the world.

In 2022, BRICS ran a trade surplus of $387 billion (Sullivan, 2023). Obviously, China is a major contributor to this trade surplus. However, if an alternative currency system is proposed as a means of undermining the dominance of the dollar, China would not hesitate in going overboard to make it successful. Additionally, the $387 billion trade surplus gives the bloc a strong financial position on which to fund its import bills.

Moreover, BRICS has quite a diverse range of members with different geographical location so it would be easy for these members to produce variety of goods that can make the BRICS more self sufficient unlike the European Union which is located on the same continent and is not very diverse geographically (Sullivan, 2023).

BRICS nations are heavyweights in a number of fields, such as manufacturing for China, natural resources for Russia. India is a global leader in the services industry. Thus nations outside of the BRICS would be compelled to do business with them as a result the demand for BRICS currency will increase.
The other major factor in the unchallenged dominance of the dollar on the global financial system is the military might of the US.

The United States has the strongest military force in the world and for decades it has been the biggest spender on defense. In 2022, it spent 877 billion dollars on defence. But ironically, China, Russia, and India—the next three countries that spend the most on defence after the US—are all members of the BRICS alliance (Statista Research Department, 2023). Together with the BRICS’ newest members, these nations have the potential to pose a serious threat to the US military’s hegemonic position in the world.

The US has a quite stable economic system, independent financial institutions, and a stable internal political environment. These elements boost its credibility with investors. However, if you compare the BRICS nations based on these metrics, they are also not performing badly, either. All of the BRICS nations are politically and economically stable, with the exception of Russia, which is having difficulties following its invasion of Ukraine. The majority of the BRICS nations—India, South Africa, and Brazil—also have robust financial institutions.

What Critics Argue

BRICS doesn’t have much intra-group trade. And if you take China out then the trade is very minimal among them, China happen to be the biggest economy of the grouping as it accounts for over 70% of entire BRICS GDP (United Nations Conference on Trade and Development, 2023). Thus, it would not be wrong to mention that due to the size of its huge economy, it has strong control over BRICS, and through BRICS, it will try to replace the role of the US in any alternative financial system. There is no guarantee that the economic system dominated by China wouldn’t act in a manner akin to that of the existing one. Another question is why a nation like India would be interested in the BRICS’s financial system if China were its main leader.

An example of this with India. India and Russia had a deal in place for the payment of Russian oil in rupees. However, Russia eventually demonstrated a reluctance to accept more Indian currency because it didn’t import enough goods from India, and didn’t know what to do with a great amount of Indian rupees already sitting in its banks. Therefore, India was compelled to make a payment to Russia in renminbi despite Indo-China relations being at the lowest point (Garg, 2023).

A shared currency plan may also be difficult because of the intense intra-BRICS rivalry, which ranges from India-China to Egypt-Ethiopia to Saudi-Iran. It is unclear how this process might work in the midst of this intra-group rivalry.

Even if the BRICS is successful in de-dollarizing itself given the comfort the dollar brings, it will still be used by a sizable portion of the world.

Furthermore, even countries that use alternative currencies will still use the greenback to determine the worth of their purchases and sales (Ismail, 2023).

The establishment of a common currency will provide a number of major challenges, including where to establish the central bank and how to discipline a nation that deviate from the rules.

In light of these arguments, many analysts have noted that the idea of establishing a BRICS currency may suffer the same fate as the Euro, which provides a viable alternative to the dollar but accounts for just a fraction of world trade.

Conclusion

The dollar still accounts for over 84 percent of all global trade (Sullivan, 2023), thus there is a long road to travel before any other currency can replace it. Also, the trade among BRICS country is too small to sustain a common currency. However, the concept of having a common currency among BRICS members for trade is stunning and appeals to the developing world, which accounts for 83% of the global population (UNCTAD, 2022). But for this to happen, the BRICS countries must first demonstrate this by trading in their common currency successfully among them. However, at this time, this looks to be fraught with difficulties given the complexity of the BRICS.

(Author: Syed Kamran Ali is an independent researcher based in New Delhi. He has done his Masters in Conflict Analysis And Peace Building from Jamia Millia Islamia. He has previously worked as a Junior Research Fellow at Centre for Vietnam Studies, New Delhi)