A slow, gradual dedollarisation is expected
While China approaches its alliances in a wholly pragmatic manner, the United States has become increasingly moralistic, points out macroeconomist Philip Pilkington. We spoke to the host of the Multipolarity podcast about the changing role of the dollar and the emerging multipolar world.
A slow, gradual dedollarisation is expected
The Economics of Geography

A slow, gradual dedollarisation is expected

Photo: AFP/Saul Loeb
Mariann Őry 21/06/2023 07:50

While China approaches its alliances in a wholly pragmatic manner, the United States has become increasingly moralistic, points out macroeconomist Philip Pilkington. We spoke to the host of the Multipolarity podcast about the changing role of the dollar and the emerging multipolar world.

- How do you see the tendency of dedollarisation? 

- The tendency started on February 26th 2022 when the United States and its close allies issued a joint statement pledging to freeze the reserve assets of the Russian central bank. The moment this happened, people working in financial markets – where I spent ten years of my career – immediately started speculating that this could be the end of the dollar’s hegemony. The asset seizure, which was unprecedented in terms of scale, signalled to the world that their US dollar reserve assets were only safe insofar as the US State Department approved of their foreign policy. This has led many countries to start to shift away from the dollar. The shift away from the dollar is already happening and the pace at which it occurs only seems to be accelerating. That said, I do not expect the dollar to decline dramatically. Rather, it will be a gradual process. 

- Is the end of the dollar's extraterritoriality a realistic scenario in the near future? 

- I think that this will be a slow, gradual shift away from the dollar over the next five to ten years. This scenario is not only realistic, I think that it is the most likely outcome. There is no fundamental reason for countries to use the US dollar in global trade. The financial architecture around the dollar is impressive, but it can easily replicated – as Russia and China have shown. Countries used the dollar mainly due to custom and habit. This was never going to last forever, but the seizure of reserves after Russia invaded Ukraine appears to have been a sufficient catalyst to speed up this process.

- Malaysia's prime minister recently revived the idea of an Asian monetary fund. Can renminbi dethrone the dollar? Do you think it can accelerate the building of a multipolar world? 

- Right now, the most likely outcome looks like the emergence of a multipolar monetary system. That is, different regions will use different currencies. I do not think that the US dollar will cease to be one among many reserve currencies – unless, of course, America mismanage the transition to multipolarity dramatically, which cannot be ruled out – but it may be eclipsed by other currencies. It is not clear to me that the yuan will become one of these reserves. There is a desire amongst the BRICS+ to try to build a true multilateral currency system – something envisioned by the economist John Maynard Keynes after WWII but shot down by the Americans – and there are good reasons to think that such a multilateral system would be more stable than simply replacing dollar transactions with yuan transactions. As this new regime emerges though, I would not be surprised if we see greater usage of the renminbi in the interim.

- According to a recent Bloomberg article, former Treasury Secretary Lawrence Summers said he sees "troubling" signs that the US is losing influence as the pace of globalization fades. Why is the US-led bloc losing its attractiveness? 

- There are two components as to why this is occurring, and these are interrelated. The first is simply that the American economy has been hollowed out to a great extent by decades of unfettered globalisation. America simply does not make as much stuff as they did in the past. In 1950, manufacturing made up around 30 per cent of employment in the United States; today it makes up less than 10 per cent. America’s economic power in the past three or four decades has increasingly been its financial power. But that power was tied to the global use of the dollar. This was never sustainable and as we have just discussed, this power is now waning. The second component is that the Americans are mismanaging the transition. American policymakers seem confused about the strength of the United States as an economic power. They appear to think that they possess the most important economy in the world. But they do not. China’s economy is larger than America’s on a PPP-adjusted basis, and the combined BRICS+ economy is vastly more important than the American economy not just in terms of size but also in terms of access to the key commodities that are required for economic growth to take place. Unless the Americans realise this more balanced perspective, I fear that they will continue to mismanage the transition and vastly diminish their own power and influence as a result. 

- Meanwhile, BRI, BRICS, and SCO are increasingly popular prospects for countries worldwide. Why are they becoming more attractive? 

- As I just said, when combined this is an incredibly important economic bloc. Not only does this bloc provide the world with much of its manufacturing output, thanks to the rise of China. But this bloc also possesses much of the raw materials that the world economy relies upon. Some will point out that many of the BRICS+ countries remain much poorer than the Western countries. This is true but it actually makes the BRICS+ bloc more attractive in many ways as this bloc has much more potential to grow. Take China as an example. Chinese GDP per capita is currently around USD 12,500 while American GDP per capita is around USD 72,000. Chinese living standards will almost certainly catch up with American living standards in the coming years and this would imply an almost sixfold increase in Chinese GDP. Chinese GDP currently stands at  USD 17.7trn, so this would imply a GDP of almost USD 102trn. For the record, American GDP is currently  USD 23.3trn. In the future it is not unthinkable that China will have an economy that is roughly five times the size of the American economy.

 - How is China's approach to its alliances different from the US's? 

- China approaches its alliances in a wholly pragmatic manner. The Chinese do not care much about the internal governance of a country, so long as this does not impede China’s interests. The United States, on the other hand, has become increasingly moralistic about its alliances. America seems to expect that its allies adhere to American values. This would be problematic in and of itself, but it is made vastly worse by the fact that, frankly, American values appear to be in a constant state of flux and become more unusual and exotic every year. In my interactions with Americans I do not think the majority of those in positions of power and influence understand how much damage these trends have done to America’s standing in the world. The United States would be far better off taking a more pragmatic approach to their alliances if they want to compete for influence with China.

 - What disciplines and ideas can be the fundamentals of a truly multipolar world? 

- I am primarily a macroeconomist, and I am sad to say that the quality of macroeconomics has diminished drastically in recent decades. Much of this is due to the discipline becoming overly technical, focused on highly abstract mathematical modelling with no real world applications. For this reason, it tends to attract people with an engineering mindset. Good macroeconomics should be as much an historical discipline as it is a technical discipline. These days much of the good macroeconomic debate comes out of the finance industry, often from people with limited formal macroeconomic training. This is unfortunate. I hope that macroeconomic – real macroeconomics – will make a comeback as the world shifts towards multipolarity. And I hope that those engaged in geopolitical pay more attention to macroeconomics, because if they don’t I fear they will just misunderstand the world entirely and mismanage the transition that is occurring.


The author is editor of Eurasia Magazine

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