Unfolding Geopolitics | Episode 7, De-dollarisation: economic or political?

Note: This episode was originally recorded on 29 February, 2024.

Transcript:

Manjeet Kripalani: Hello, and welcome to the Gateway House podcast, Unfolding Geopolitics. This week, we will discuss the very hot question of de-dollarization. With us, we have the fine economist, Surjit Bhalla, who has been on the Prime Minister’s Economic Committee and has just returned from Washington as India’s representative at the IMF.

Surjit, what exactly is de-dollarisation?

Surjit Bhalla: It is something that is political, and does not, I believe, have an economic life beyond the political life, which is provided by merely by geopolitics today, and the geopolitics today have to do with China. And maybe now because of the increased friendship with Russia, it is both China and Russia, but primarily China.

MK: So the talk of de-dollarisation is being promoted by countries like Russia and China. Is that what you’re saying?

SB: Russia is a very much a second player. China is now the second largest economy. In dollar terms, I think it is only about $4 trillion behind the U.S. That’s a big, big size. And of course, the U.S. is a big, big size.

And, it is an interesting question, which I haven’t explored much, but to what extent does China want de-dollarisation? Because of the large unpaid debt to it in Yuan. So there may be an economic reason from their [Chinese] side to try and see if they can de-dollarise. But I think the primary goal is to establish itself as a hegemon, as a competitor to the current hegemon, as an economic alternative to the U.S.

I don’t think, as a political alternative, there will be too many takers. But even economically, there are not that many who are interested. If you look at the latest data, after much trial and convincing, and with geopolitical tensions at their peak, China’s share in global trade is about 4.61 percent. Now, the British pound, which has steadily gone down in terms of trade, and Britain was a regional hegemon before the U.S. came to occupy that place — we from India are more than familiar with the pound. Their share in world trade is about 7 percent, and after a history of 200 years of them being the big colonial power and the leading economy in the world. So the data just doesn’t support de-dollarisation, we can go into why.

But, you know, and I’m diverging a bit here, I think a more interesting question is what happens to Bitcoin? That’s also an alternative currency. I’m not a big fan. It hit a record high just a few days back and goes up and down, it’s mostly up with political tensions. I think in some fundamental sense that Bitcoin is more of a competitor to the dollar than the yuan. And the reason it’s more of a competitor is because institutions or firms, etc. love the anonymity that Bitcoin has, and there must be some relationship to evasion, etc. So there are no advantages that you clearly have with the yuan or any other currencies.

MK: Surjit, you’ve answered many questions in one. But you’ve also, in our past discussions, mentioned that in some areas and regions there is a re-dollarisation effort being made.

SB: Dollarisation is very, very old. Hong Kong is dollar-based in the sense that the exchange rate is completely tied to the dollar. And then the dollarisation that now Argentina has undergone. The reason for dollarisation is primarily, when you’re having very, very high inflation, hyperinflation, you then go ahead and dollarise. Ecuador did it and a few other Latin American countries have been very successful in doing this. That opens up the question: Why should a small country like Ecuador have independent monetary policy? It doesn’t affect the price of tomatoes as it were. It may affect it in pesos. But it’s for large countries and that’s why they moved to dollarization sometime back. They’ve had hyperinflation for a very long time. So I think now Argentinians will see the fruits of dollarization.

But all of this is really important for maybe five to seven countries in the world. India’s going to emerge — is emerging — as a major player in the world, as far as the total output is concerned, the value in GDP in dollars, but per capita income is not the same as having a very, very large GDP, because it’s linked to the population size.

So, you know, I have been partly amused as to the rise of the articles and the demands by political leaders in even Singapore, Malaysia, etc. I haven’t seen an urging to get de-dollarised, anywhere in Latin America that I know of, anywhere in Europe that I know of. So it’s basically Asia. And within Asia, it’s China.

MK: What constitutes the threshold beyond which de-dollarisation will symbolically have begun? Because right now, 88 percent of the world’s trade is run through dollars, China consists of maybe 5 percent, and the Euro and others are the rest. What is that threshold, when you can see de-dollarisation has already happened? U.S. hegemony is grating on people right now, and particularly after the sanctions, etc. Countries see that they could be next to be sanctioned if the U.S. doesn’t like you.

SB: That’s an important point you raise. But still, that comes under the rubric of politics, not economics. Now, while the official share of the U.S.— and this statistic is the most telling of all — U.S. in world trade is 47 percent, really, in terms of transactions — and this is done by experts at the IMF — it’s upwards of 80 percent. So even if you’re transacting in yuan, you look at the U.S. dollar to yuan rate. If you’re transacting in rupees with Russia, you look at the U.S. dollar to rupee rate, that’s how you get currency. These currencies are all traded on international markets. I think it’s a fig leaf that we are pricing it in yuan or rupees.

MK: Would you say that if this number, 88 percent, drops to 50 percent? Will that be indication of de-dollarisation?

SB: Yes, and it’s at 80 to 80-plus, I think it may be as high as 90. Look, my reading, and there are many more experts who know this much better than me, is I think we’re looking at maybe 100 years from now, before we get to 50 percent. This is going to pass. And it’ll be a plaything for politicians of countries and all. I don’t think countries outside of China or Russia are really that bothered with the sanctions any other after effects.

Remember, in 1950 there was a gold standard, and the gold standard went out in 1971. That was supposedly a big, big thing, but it really didn’t affect trade or the importance of the dollar, even as late as 1971. But gold is a currency that has been there since time immemorial. And if gold could not survive as an alternative to the dollar, I don’t see how any other currency can.

If the transactions of the dollar go below 60 percent, then, there’s a new player in town, a new kid in town. But not until it gets there, and there’s nothing in the data to suggest that will happen.

Countries are dissatisfied. Remember how dissatisfied we all were with the U.S. when the Vietnam War was going on? It didn’t really affect confidence in the dollar and trading in the dollar. It’s a matter of confidence: do you have confidence in any other currency? I don’t think so. And the order of magnitude is really enormous of the confidence you have in the U.S. So the U.S. gets an advantage, right?

When I started this conversation, I said it is China. China has an ambition, very clearly stated, to displace the U.S. as the hegemon. That’s a more interesting question. Ten years ago, it looked like China would displace the U.S. imminently. Now, that’s before, we all realized — and maybe some of us did realise it before — that the demographics of China really, really stink to be a hegemon or to be a major player and mover and shaker. Other than size, if your demographics are going down — and we now see that the growth rate is in the low 2 percent or 3 percent levels. Many experts believe that the average GDP growth rate of China over the next decade will be somewhere around 3 percent.

MK: And at 3 percent, the yuan can’t rule.

SB: Yeah, no way. Now, the U.S. is going to go less than 3 percent. Okay, maybe two and a half to three but it’s not that China is growing at 3 percent but that its size of other competitors to it, India being the major one. Some Indians are talking about the rupee being affected by sanctions and how we found a very great way out of it with the oil with Russia. So those kinds of things will happen when you mention sanctions and continue to happen and that’s a very positive thing, to tell the U.S. that you cannot dictate what countries should do on a wide variety of things. But using the currency other than right now with the oil — this will also pass. So no.

MK: So, till everything changes, keep using your dollars.

SB: Yeah, it’s wise. As James Carville might have said, “It’s the dollar, stupid.”

MK: Thank you, Surjit, very much. We look forward to another conversation with you, perhaps on the same subject, a little later.

Surjit Bhalla is former Executive Director for India, International Monetary Fund

Manjeet Kripalani is the Executive Director, Gateway House.

Podcast produced by Charuta Ghadyalpatil and Lyman Ortkiese.

This podcast was exclusively recorded for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

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