After World War II, one of the US’ most successful strategies was the use of international organizations to consolidate allies and project influence. To combat communism, the US created a network of defense and economic treaties that encircled the Soviet Union. The beauty in this was communism could never threaten western financial institutions, meaning the Soviet Union could never match the US by creating an alternative to the dollar. In the end, it was capitalism that defeated communism.
But now, the communist foes of old are capitalist “frenemies,” as Stephen Colbert calls them. These countries now have the ability to provide an alternative to western institutions, and therefore, at some point, an alternative to the dollar. Increased engagement internationally between these countries indicates the extent to which this is occurring. In particular, this means increased cooperation among emerging economies within their own institutions.
This is evident in the greater role of the Shanghai Cooperation Organization, meeting today. It is also evident in Russia’s withdrawn application to the WTO in favor for a trade bloc with Belarus and Kazakhstan. Perhaps the most interesting example is the first full-fledged meeting of BRIC (Brazil, India, Russia, China) this week.
The BRIC countries are unique emerging economies, not only because they are the largest with the most potential, but they each have individual strengths and interests. They account for 40% of the world’s population and 25% of its land, and Goldman Sachs expects their economies to eclipse the G8 by 2050. Their meeting is significant because it adds a geopolitical aspect to their economic potential. BRIC was a creation of Goldman Sachs’ Jim O’Neil in 2001 to describe the future economic landscape. The fact that this has evolved to a new organization is a tectonic shift. It is a sign of the increased self-confidence of emerging economies after the western financial crisis.
But now, the communist foes of old are capitalist “frenemies,” as Stephen Colbert calls them. These countries now have the ability to provide an alternative to western institutions, and therefore, at some point, an alternative to the dollar. Increased engagement internationally between these countries indicates the extent to which this is occurring. In particular, this means increased cooperation among emerging economies within their own institutions.
This is evident in the greater role of the Shanghai Cooperation Organization, meeting today. It is also evident in Russia’s withdrawn application to the WTO in favor for a trade bloc with Belarus and Kazakhstan. Perhaps the most interesting example is the first full-fledged meeting of BRIC (Brazil, India, Russia, China) this week.
The BRIC countries are unique emerging economies, not only because they are the largest with the most potential, but they each have individual strengths and interests. They account for 40% of the world’s population and 25% of its land, and Goldman Sachs expects their economies to eclipse the G8 by 2050. Their meeting is significant because it adds a geopolitical aspect to their economic potential. BRIC was a creation of Goldman Sachs’ Jim O’Neil in 2001 to describe the future economic landscape. The fact that this has evolved to a new organization is a tectonic shift. It is a sign of the increased self-confidence of emerging economies after the western financial crisis.
So now that the BRIC countries have found their voice, what will they say? Early on, a large part of their rhetoric will be about economic and political development. Though this may sound unsubstantial, this “development” has real implications. The power of a currency is derived from how widely it is used. As BRIC economies grow and interact among themselves, more trade will be denominated in other currencies. Using the dollar isn’t voluntary, it is a necessity because of its liquidity. BRIC countries cannot stop using the dollar, as much as they might want to. This was evident recently in trade negotiations between Brazil and China. These talks concluded with Brazil promising oil in exchange for financing from China. Before these talks started, Brazil’s president, Lula da Silva, suggested using domestic currencies for trade between the two countries as China had surpassed the US as Brazil’s biggest trading partner. Da Silva said afterward on the failure to accomplish this, “It is not a political issue, it’s much more of a technical issue.”
In the near term, BRIC is unlikely to accomplish anything significant. But eventually BRIC will announce currency swaps and new trade partnerships, reducing the technical issues of not using the dollar. And from then on, it will seem as if every time BRIC makes a new announcement, it weakens the dollar as the global reserve currency.
