Can BRICS offer an alternative global monetary order?

Wong Chin Yoong

Brazilian President Lula de Silva has called for the creation of a common currency for trade and investment among the BRICS nations during the bloc’s recent summit in South Africa. – AFP pic, August 31, 2023.

THE call for de-dollarisation has been discussed for decades by the likes of former French president Charles de Gaulle in the 1960s and in more recent times Brazil President Lula da Silva.

“US imperialism leaves no field unoccupied. It takes every form, but the dollar is the most insidious”, said de Gaulle, expressing his discontent with the US dollar as a reserve currency.

“Why do all countries have to base their trade on the dollar?” Lula is said to ask himself every night.

The answer to Lula’s conundrum is very simple: it is because there is no reliable and functional alternative available.

It’s often easier to mock dollar dominance than to offer a viable solution to achieve both domestic and global stability.

de Gaulle, for instance, clung on to gold and argued “we pay the US to purchase us. So each time we have dollars, we will convert them into gold. Everyone should do the same.”

But gold, or any other gold-like commodity, which have an inelastic supply, is not the kind of global public good the world needs.

Gold, with its fixed supply, simply cannot satisfy the constantly increasing liquidity demand in a growing economy to facilitate the ever-expanding market transactions.

The imbalance between liquidity demand and supply inevitably results in painful deflation.

Even worse is the unavailability of the world lender of last resort – the International Monetary Fund – in a gold-based monetary order, should the shortage of gold occur during times of extreme duress.

Unlike the current dollar-based system, where the US Federal Reserve can ease the strain on global dollar funding markets by arranging currency swap lines and repository facilities with central banks around the world to supply dollars to the world elastically, there won’t be any authority ready to supply gold to central banks whenever there is a panic capital flight to safety.

Financial chaos is like wildfire moving at a shocking speed, consuming everything in its path if left unfought.

In either scenario, we’re shooting ourselves in the foot simply for thumbing our noses at dollar dominance.

Then came BRICS.

Lula has called for the creation of a common currency for trade and investment among the BRICS nations (Brazil, Russia, India, China, South Africa), while others wanted to push their national currencies.

India’s foreign minister S. Jaishankar wanted to put national currency-denominated trade on the table. Russian President Vladmir Putin said de-dollarisation for national currencies is an irreversible process.

And China’s Xi Jinping argued for reform in the global monetary system, indicating a greater role of the renminbi as a international currency.

The fundamentals of a viable common currency is a common business cycle among the participating nations of a bloc, so that they can survive a single monetary policy. But sharing a common business cycle is a mountainous task (ask the European Union).

In this context, it is simply beyond imagination how countries from different continents with different levels of economic development, political regimes and calculus, languages, and cultural backgrounds can put together all the ingredients for a common currency to compete against the dollar.

Fact of the matter is, BRICS members do not even conduct much trade among themselves.

However, they are right about two things: the Global South will in time increase national currency-denominated trade and reform.

Exchange rate flexibility works towards the interest of the Global South only when cross-border trade is denominated in the producer’s currency.

Here’s the intuition. Depreciation can reduce export prices, incentivising world demand for a country’s exports and creating more jobs only if exports are invoiced in exporters’ currencies, not dollars.

For dollar-invoiced exports, where export prices are fixed in dollars, the depreciation doesn’t have a quantity effect. It only puts more money in the exporters’ pockets.

And to work towards a world of international trade invoiced in national currencies, reform is a must, just not in the international monetary order but domestic reform as well.

By invoicing and settling cross-border trade in national currencies, non-residents must have access to domestic financial markets, and at the same time, residents are granted access to national currencies in the offshore market.

In other words, domestic financial market reform and capital account openness are the prerequisites for dialogues to be taken seriously.

For BRICS members who are ambitious and want to emerge as contenders to the dollar, an economic transition towards a consumption-oriented economy like the US to absorb world production in exchange for liquidity to the rest of the world is the path to be taken.

This all depends on whether BRICS is ready to reform and bear the responsibility as the global public good provider, which I’m afraid is highly doubtful. – August 31, 2023.

* Wong Chin Yoong is a professor of economics at Universiti Tunku Abdul Rahman, Kampar campus.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.

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