De-dollarization: Is it possible in this Globalized Economy?
Let’s address the elephant in the room.
The USA has enjoyed unmatched hegemony over the world’s economy for over 70 years now. If you include the World Wars, then it’s more than 100 years. This dominance has not only shaped global economics but has also deeply influenced geopolitical strategies and alignments. However, as the 21st century progresses, a noticeable undercurrent of change is emerging. The Global South, a collective term representing developing nations, is increasingly seeking avenues to detach from this dollar-centric world order, striving to carve out a more autonomous economic path. The question arises: In the complex web of today’s globalized economy, how feasible is this endeavour to step away from dollar supremacy?
How $$ become “The Currency” of the world?
Federal Reserve Bank, aka the Fed, was established in 1913, and the official US Dollar was first printed in 1914. Back in the 1900s, the Sterling used to be the international currency of the world because, as you all know, Britain was ruling almost half the world. Then the World Wars happened. By the 1940s, even with all of its colonies, Britain had to borrow so much money from the USA to fund its war against the Axis powers. Although the Allies emerged victorious after WW, it crippled the economy of all the major European powers. By this time, the USA emerged as the largest economy due to its sheer manufacturing prowess and tactical participation in both wars. Then the oil was discovered, and this turned the world upside down.
You can watch this beautiful and insightful video made by Think School on How US Dollars became the World currency. You should also give “Confessions of an Economic Hitman” by John Perkins a read to know more about the USA’s tactics to become the superpower
Post-Cold War & Emergence of other currencies
In 1971, a significant economic upheaval cast doubt over the previously unchallenged supremacy of the U.S. dollar. This was primarily instigated by the Nixon Shock, which involved the U.S. unilaterally cancelling the direct international convertibility of the U.S. dollar to gold. This event fundamentally redefined the architecture of the global monetary system, leading many to question the intrinsic value and stability of the dollar. As the Cold War era receded, the world saw the rise of formidable economic powers, each with their potent currencies.
The Japanese Yen and the Chinese Renminbi, in particular, began to gather momentum, presenting themselves as credible contenders to the dollar’s dominance. These currencies represented not just economic growth but also symbolized the shifting geopolitical power dynamics. However, despite these emerging challengers, the U.S. dollar retained its unparalleled status in global finance.
As of today, approximately 70% of international transactions are still conducted in dollars, a testament to its entrenched position. A significant driving force behind this sustained dominance is the dollar’s role in the oil trade, as it remains the primary currency for purchasing this crucial global commodity. The intersection of historical precedence, global politics, and practical economics ensures the dollar’s relevance, even amidst a multi-polar currency landscape.
Push to De-dollarization in the 21st Century
Towards the turn of the 21st century, the voices of diversifying reserves emerged strongly from many countries such as China, Russia, and the EU Union. In August 2007, two scholars affiliated with the government of the People’s Republic of China threatened to sell its substantial reserves in American dollars in response to an American legislative discussion of trade sanctions designed to revalue the Chinese yuan. After the euro’s share of global official foreign exchange reserves approached 25% as of year-end 2006, former Federal Reserve Chairman Alan Greenspan said in September 2007 that it is “absolutely conceivable that the euro will replace the dollar as the reserve currency, or will be traded as an equally important reserve currency”. Yet, none of the claims became true.
The Global Economic Crisis of 2008 broke the back of many emerging countries, and the reliance on Dollars increased further. However, by the second decade of the 21st century, a new contestant emerged to challenge the hegemony of the USA.
Rise of China
After the economic reforms in 1978, China opened up its doors to foreign investments. China followed the footsteps of the USA and became the manufacturing hub so that every other country would come to them for trading. I’ve covered how China became the superpower in a series titled the same in previous posts. This resulted in many major countries offloading their manufacturing units to them, and by the start of the 21st century, China became the factory of the world.
China started enjoying surplus trade with almost all of the countries in the world by restricting imports. In simple terms, other countries are allowed to buy Chinese goods, but they are not allowed to trade within China without the government's approval. China was officially crowned as the second-largest economy by 2010, overtaking Japan which held that title for two decades. Besides, with all the money they gained due to the unfair advantage they enjoyed due to their favourable trade, they started lending billions of $$ to many emerging economies. A study says over 150 countries are now indebted to China in one way or another.
Did Chinese yuvan replace US dollars?
With almost all the countries trading with China, the Chinese took a very ambitious step in becoming a global currency. With a stable GDP growth of 10% and above, the Chinese government bonds seemed to be attractive, just like the USA back in the early 20th century. In 2013, China unveiled its One Belt One Road Initiative, its most ambitious project ever. In this initiative, China is set to re-build the old silk route making it the centre of world trade once again. China invested close to $1 trillion for this initiative and gave multi-million dollar loans to countries that took part in this initiative.
However, the growth story saw a great drop around 2015, when the real estate boom burst in China. Since the last 8 years, China has been registering a slower growth rate than it enjoyed a decade back. The yuan was devalued once in 2015 to further make exports lucrative and imports costly.
Yet, with all the manoeuvres, and despite 150+ countries owing the Chinese government, the yuan is yet to replace the US dollar as the world reserve currency.
India joins the race
The second decade of the 21st century saw India catching up to its rival, China, in development and soft power front. With an average growth of 6%, India has been the fastest developing country in the world for the past 10 years.
With its roaring success in UPI payments, India is set to expand this network beyond the Indian borders. Right now, countries like France, UAE, Saudi Arabia, Bahrain, Singapore, Maldives, Bhutan, and Oman. Apart from that, India is poised to make the Indian rupee global. The central bank, RBI, has allowed 18 countries which include Germany, Kenya, Sri Lanka, Singapore, UK and many other countries, to transact in Rupee.
However, the cracks started to appear when the Russian government felt they were storing too much of Indian rupees and could not trade them anywhere else. India has a very long way to go to be even considered as a global currency, let alone as a reserve currency.
Who can replace the $?
Over the years, the world’s reserve currency had always gravitated to the country or empire that dominated its neighbours. In the 16–18th century, it was Spanish silver dollars, then came sterling, and then the US dollars. Earlier, the world currency was always pegged against gold since it was a precious element everyone wanted. However, after 1976, the trend changed to black gold i.e. Oils. Even after the economic crisis in the USA in ’71. the subsequent rise of the emergence of other economic powerhouses, the US dollar remains the reserve currency, mainly because the OPEC countries only trade their oil in dollars.
If any country wants to dethrone the US dollar, it should not only become the economic powerhouse, stable economy, and steady growth but also control the oil wealth.
So, can Saudi dinar become the next world currency?
That’s where the current trend plays a role. The world is increasingly moving towards alternate fuels like Li-ion batteries, solar and hydro power. Any country that produces these energy sources and also matches the criteria I mentioned above will have the command to control the reserve currency of the world.
Keeping this in mind, the only country that again comes to my mind is
Yes, China!
