Retiring the American dollar

Off into history’s sunset, like the cowboy. This image (modified) is called ‘Dollar Green’ by the artist mancaalberto (http://mancaalberto.deviantart.com/)

Seventy years ago, to the very month, a man named Henry Morganthau celebrated the creation of a “dynamic world community in which the peoples of every nation will be able to realise their potentialities in peace”. It was the founding of what came to be called the Bretton Woods institutions (named after the venue for the meeting, in the USA) and these were the International Bank for Reconstruction and Development – better known as the World Bank – and the International Monetary Fund.

None of the lofty aims that seemed so apposite in the shattering aftermath of the Second World War have been achieved, although what has been written are libraries of counter-factual history that claim such achievements (and more besides) commissioned by both these institutions and their web of supporting establishments, financial, academic, political and otherwise. Instead, for the last two generations of victims of ‘structural adjustment’, and of ‘reform and austerity’ all that has become worthwhile in the poorer societies of the world has been achieved despite the Bretton Woods institutions, not because of them.

Now, seventy years after Morganthau (the then Treasury Secretary of the USA) and British economist John Maynard Keynes unveiled with a grey flourish a multi-lateral framework for international economic order, the Bretton Woods institutions are faced with a challenge, and the view from East and South Asia, from Latin America and from southern Africa is that this is a challenge that has been overdue for too long.

Let’s get the de-dollarisation of the world started.

It has come in the form of the agreement between the leaders of five countries to form a development bank. Russia’s President Vladimir Putin, China’s President Xi Jinping, India’s Prime Minister Narendra Modi, Brazilian President Dilma Rousseff and South Africa’s President Jacob Zuma made formal their intention during the sixth summit of their countries – together called ‘BRICS’, after the first letters of their countries’ names – held this month in Brazil.

What has been set in motion is the BRICS Development Bank and the BRICS Contingency Reserves Arrangement. Both the new institution and the new mechanism will counter the influence of Western-based lending institutions and the American dollar, which is the principal reserve currency used internationally and which is the currency that the IMF and the World Bank conduct their ruthless business in (and which formulate their policies around, policies that are too often designed to impoverish the working class and to cripple labour).

At one time or another, and not always at inter-governmental fora, the BRICS have objected to the American dollar continuing to be the world’s principal reserve currency, a position which amplifies the impact of policy decisions by the US Federal Reserve – the American central bank – on all countries that trade using dollars, and which seek capital denominated in dollars. These impacts are, not surprisingly, ignored by the Federal Reserve which looks after the interests of the American government of the day and US business (particularly Wall Street).

In the last two years particularly, non-dollar bilateral agreements have become more common as countries have looked for ways to free themselves from the crushing Bretton Woods yoke. Only this June, Russia’s finance minister said the central banks of Russia and China would discuss currency swaps for export payments in their respective national currencies, a direction that followed Putin’s visit to China the previous month to finalise the gigantic US$400 billion deal between Gazprom and China National Petroleum Corporation (CNPC). It is still early, and the BRICS will favour caution over hyperbole, but when their bank opens for business, the sun will begin to set on the US dollar.

A renminbi world

Passengers carrying their luggages prepare to get on the train in the railway station of Hangzhou, capital of east China's Zhejiang Province. Photo: Xinhua/Ju Huanzong

The finding that China has loaned more money to developing countries than the World Bank in the past two years is being widely reported worldwide. Using phrases like “the economic might of the world’s most populous country will only grow stronger in the years to come” the daily news media has reported on the new reach of the yuan in two distinct tones.

One, from China itself, by its news agencies and news media, is a pragmatic tone which discusses the use of loans and financial aid as a primary tool of international relations. Two, from the West, is a simultaneously fascinated and worried tone, which does not hide an alarm over the growing influence of China on the developing South, and which bemoans the helplessness of western governments and financial systems to counter Beijing’s effortless reach.

Hu Jintao: General Secretary of the CPC Central Committee, President of the People's Republic of China, Chairman of the CPC Central Military Commission and Chairman of the Central Military Commission of PRC

The BBC The BBC has a news video on the subject, and news blogs such as 24/7 Wall St have discussed it in as much detail as possible based on the data available.

What is the data? The China Development Bank and China Export-Import Bank agreed to lend at least US$110 billion to governments and companies in developing countries in 2009 and 2010, according to an AFP story citing research from the Financial Times. From 2008 to 2010, the World Bank handed out US$100.3 billiion in response  to the global economic crisis.

The brief FT report says: “The volume of overseas loans by the two banks indicates how Beijing is forging new patterns of China-led globalisation, as part of a broader push to scale back its economic dependency on western export markets. The financial crisis allowed Beijing to push the commercial interests of its energy companies by offering loans to producer countries at a time when financing was hard to come by. The agreements include large loan-for-oil deals with Russia, Venezuela and Brazil, as well as loans for an Indian company to buy power equipment and for infrastructure projects in Ghana and railways in Argentina.”

“The statistics were collected by examining public announcements by the banks, the borrowers or the Chinese government. An adviser to CDB said the volume of lending suggested by public statements understated the real level of the bank’s new loan commitments to developing countries. CDB and EximBank provide more preferential terms than the World Bank and other lenders for certain deals that are strongly supported by Beijing, but offer terms that are closer to international standards for less politically sensitive deals. They also tend to impose less onerous transparency conditions.”

A passenger walks in front of the Harbin Railway Station in Harbin, capital of northeast China's Heilongjiang Province. Photo: Xinhua/Wang Jianwei

There has been evidence enough over the last five years that Chinese investors turn into bargains everything from distressed US real estate to African and Brazilian oil fields to European debt. China’s foreign exchange reserves stand at US$2.85 trillion (more than double that of the country with the second largest reserves, which is Japan).

The bottom-line is that China has lent more money to other developing countries over the past two years than the World Bank, as the FT is reporting, a fact that underlines the scale of Beijing’s economic reach and how it is forging new patterns of global trade and development. China Development Bank and China Export-Import Bank gave loans of at least US$110bn to other developing countries in 2009 and 2010. The equivalent arms of the World Bank made loan commitments of US$100bn from mid-2008 to mid-2010.

How does this activity fit in with the news, usually filtered and sometimes misunderstood, that China will progressively make its currency convertible on the capital account in the next five years amid its push for the deeper internationalization of the yuan? “The overall strategy for the reform of China’s foreign exchange management system is to achieve the convertibility of the yuan on the capital account progressively, as this will make trade and investment more convenient and boost the development of the foreign exchange market,” said Yi Gang, head of the State Administration of Foreign Exchanges (SAFE), in a signed article published on the SAFE website.

An example of China’s yuan reach is the reporting, from Angola in November 2010, of vice-president Xi Jinping’s visit there. The China Development Bank is to follow the official visit and “further strengthen cooperation” with Angola in mineral prospecting, staff training and municipal planning. “In addition, CDB will unleash its leading role in developmental finance to step up fostering and development of Angolan markets and finance for the country’s post-war rehabilitation, rendering substantial financing support in the process”, as Xinhua News Agency reported on 21 November 2010. During the Angola visit the CDB entered into a US$400 million loan agreement with the Ministry of Finance of Angola to address food security issues and promote urban infrastructure construction in the country. Moreover, the CDB and Angola’s African Investment Bank signed a US$100 million SME loan agreement.

Spring fiction by the Bank-Fund troll

"Bank? Fund? Do they have a clue about livelihood?"

Pay no attention to the announcements coming from the World Bank and the International Monetary Fund during what the troublesome twins call their ‘spring meetings’ of 2010 (an annual, very expensive, exercise in financial fiction, but an exercise which has disastrous consequences for many in developing countries). The global big media were inertly supportive, as usual, and had this to say:

Business Week: “The World Bank, created after World War II to eradicate poverty, received shareholder backing for two separate capital increases that will provide a combined $5.1 billion. The 186 member countries agreed to pay $3.5 billion for the bank’s unit that lends to governments, the first general increase in 22 years, the International Monetary Fund’s development committee said in a statement today.”

The New York Times provided a clue about the machinations behind the scenes to maintain US control over the World Bank: “Under the changes, China will become the bank’s third-largest shareholder, ahead of Germany, after the United States and Japan. Countries like Brazil, India, Indonesia and Vietnam will also have greater representation. Mr. Zoellick carefully devised the capital increase and voting changes to be adopted together. The $5.1 billion in so-called paid-in capital, which the bank can use for day-to-day operations, will bring the bank’s cash on hand to about $40 billion. Of the $5.1 billion, developing countries will contribute $1.6 billion in connection with a shift in representation that will give them 47.19 percent of voting power, up from 44.06 percent. The actions fulfill a pledge the bank’s members made in Istanbul in October.”

The Financial Times: “A package put to ministers at the World Bank’s meetings in Washington yesterday increased the bank’s $11bn (€8.2bn, £7.1bn) paid-in capital by $5.1bn in return for reforms to voting rights, which would mainly see a transfer of votes from smaller European countries to emerging markets such as China, India and Brazil. Robert Zoellick, the bank’s president, last year began campaigning to increase its capital in response to the global financial crisis. The bank increased lending by $100bn to combat the effects of the crisis on poor countries, helping to overcome the scepticism of countries such as France and the US. “This is a once-in-a-generation request to address the impact of a once-in-a-generation crisis,” Mr Zoellick said.”

Rhubarb, rhubarb

As predicted just before the ‘spring meetings’ by the Bretton Woods Project, the capital increase and voting rights hogged most of the headlines. “The G20 group of the world’s biggest economies promised a 3 per cent shift in voting share towards ‘developing and transition countries’,” the Project had commented. “The Bank will proclaim success in achieving this, despite the fact that it fudged the definition of what is a ‘developing country’ so that the category included many countries that have achieved high-income status. With further reform being delayed until 2015, rich countries seem to have stemmed the surge of demands from the large emerging markets for deeper reform.”

The World Bank has asked its members to put up more money, as it had stretched itself to its limits to lend more during the financial and economic crisis in 2009. After a big debate over the size of the capital increase, the Bank has secured a US$60 billion nominal boost to its capital, which means it will receive about US$5 billion in actual cash (the rest is ‘callable capital’ that members would provide if ever asked by the Bank). Said the Bretton Woods Project: “This is a relatively small boost that will only allow the Bank to return to lending the same amount it did before the crisis. It also means that rich countries again rebuffed the large emerging markets who wanted a much larger capital boost and offered to pay for it entirely out of their own coffers.”

The point is that all these reforms and discussions have been kept completely out of the public eye until now. There have been no consultations with stakeholders and little discussion with most of the Bank’s members. That the rich countries won’t budge on governance issues was highlighted in a March report by a US Senate committee. The US is the largest shareholder, with an effective veto over any changes to the Bank’s governance. The committee called on the Obama administration to maintain “United States voting shares and veto rights at the international financial institutions” and questioned existing reforms to the selection of the World Bank president by demanding preservation of “United States leadership of the World Bank and senior level positions at the other IFIs.”