Are the Bretton Woods institutions – chiefly the International Monetary Fund and the World Bank – and the international economic system established by the US and its allies just before the end of the Second World War still fit for purpose? Many countries in the Global South appear not to think so.
This week, Malaysian Prime Minister Anwar Ibrahim said that China was open to talks about setting up an Asian Monetary Fund, and that President Xi Jinping had told him he welcomed discussions on the subject during their recent meeting. This is not a completely new idea. Japan had suggested forming such a network in 1997 during the Asian financial crisis, and indeed so had Mr Anwar in his earlier stint as finance minister in the 1990s; but nothing had come of it. “At that time, it did not gain much attention in Asia because the US dollar was considered very strong,” Mr Anwar said on Tuesday. “But now, with the economic strength of China, Japan, and others, I think it should be discussed.”
There are many reasons an AMF, as opposed to the IMF, would appeal to the region. Few politicians over a certain age will ever forget the photograph from 1998 of IMF managing director Michel Camdessus standing, arms folded, over Indonesian president Suharto as he signed a bailout agreement that demanded painful cuts and radical reforms. The transformation required by the IMF was so harsh that it led to the riots and economic collapse that brought Mr Suharto’s long rule to an end. “We created the conditions that obliged President Suharto to leave his job,” Mr Camdessus conceded later. No wonder one former head of the IMF’s China division, Eswar Prasad, said “the fund still remains politically toxic for leaders in Asia”.
The IMF’s history of imposing neoliberal solutions that, in a number of cases, have choked off growth and impoverished countries it is supposedly trying to help is widely known. But equally important is the other part of what Mr Anwar had to say. “There is no reason for Malaysia to continue depending on the dollar,” he said, adding that the country’s central bank is working on ways for the two countries to do trade deals using the Malaysian ringgit and the Chinese yuan.
In this, they are part of a growing wave of dissatisfaction with the whole US dollar-denominated global financial system. More and more, countries are trying to opt out. Brazil and China have recently agreed to transact directly in each other’s currencies when paying for trade goods, rather than in dollars. The yuan has also replaced the dollar as the highest traded currency in Russia. “We are in favour of using the Chinese yuan for settlements between Russia and the countries of Asia, Africa and Latin America,” Russian President Vladimir Putin said after Mr Xi’s visit.
The Brics countries – Brazil, Russia, India, China and South Africa – have also been exploring their own joint reserve currency, thereby cutting out the dollar and the euro. They already launched their own New Development Bank as an alternative to the IMF and World Bank in 2014, and as South African Foreign Minister Naledi Pandor has said 12 other countries are interested in joining the group, this potential new reserve currency could be used by a substantial percentage of the global population.
Why the rush to “de-dollarise”? The South China Morning Post’s columnist Alex Lo claims it is to escape what he calls “the clutches of the gangsterism of US foreign policy”, which he says has “weaponised its global dollar dominance with increasing abandon. Forget international law and trade rules; the US now slaps sanctions on individuals, companies and countries at will, and freezes them out of the global financial system at the drop of a hat”.
There is definitely something in that. Why should it be up to the US and its allies to decide to freeze hundreds of billions of Russian dollar assets held abroad, and kick Russian banks out of the international Swift system? If that was justified by the invasion of Ukraine, would it then have been fair for Asian and African states to freeze US assets held in their countries after the illegal American-led invasion of Iraq? The question is rhetorical: the power that holding the world’s reserve currency gives to the US would make reprisals too catastrophic to risk incurring.
Even George Yeo, the much-admired former Singaporean foreign minister, recently described the dollar as “a hex on us all”. “If you weaponise the international financial system, alternatives will grow to replace it,” he said at a conference in January.
The dollar is clearly not about to lose its status any time soon. But the trend is equally observable. The greenback made up 69 per cent of global currency reserve holdings in 2007; by 2022, that was down to 55 per cent. Nor is the yuan about to displace it; it makes up less than 5 per cent of currency holdings, and there are other reasons why it is not currently suitable as a reserve. But its use is growing, and could continue to increase in the many countries in which China’s Belt and Road Initiative is really the only infrastructure facilitator in town. Other countries, too, are keen to trade using solely their own currencies.
Will “King dollar” eventually be toppled? “When this will happen, no one knows,” Mr Yeo said in January. “But financial markets must watch it very closely.” If it is, it will not be out of a spasm of anti-Americanism. As the revival of the idea of an Asian Monetary Fund shows, it is about declaring that the post-war settlement is out of date.
Global institutions need to reflect today’s multipolar world, and a state of affairs in which the World Bank is always run by an American, the IMF by a European, and the dollar reigns supreme, belongs to the 20th century, not the 21st.