Valdai Club

The dollar system requires the lifting of capital controls to free capital flows which transfer of even more wealth from World Majority countries to the core capitalist countries as the rich transfer wealth to evade taxes at home and to participate in the speculative activity that abounds in the dollar denominated international financial system. The system has diverted investment from production to speculation, weakening development efforts, writes Radhika Desai.

Today’s search for alternatives to the dollar based IMFS is prompted chiefly by its weaponization through illegal and unilateral sanctions.

However, as this search advances, awareness is growing that the system has never served the world well. For example, the report commissioned by the Russian government in advance of the 2024 BRICS summit in Kazan, entitled Improvement of the International Monetary and Financial System, notes that the dollar based International Monetary and Financial System has been characterised by ‘frequent crises, persistent trade and current account imbalances, elevated and rising public debt levels, and destabilizing volatility of capital flows and exchange rates’ and that it ‘primarily serv[s the] interests of AEs.

It might have added that it is arguably the single most important cause of inequality in the world, within and between societies.

In contrast to liberal views that attribute international conflict to deviations from liberal principles, including the dollar-based IMFS, or realism which attributes it to ‘political’ and ‘geopolitical’ factors, this panel takes the view that it is rooted in international inequality. Thus, it lines up with critical perspectives on capitalism and the imperialism it has historically required, such as those of Marx and Lenin, Polanyi and Hobson, on which my own approach, geopolitical economy, rests. These perspectives explain how imperialism has historically denied development and equality and how effective anti-imperialism has involved achieving them.

The dollar system is today arguably the powerful generator of inequality ever known. It is the apparatus that permits productively enfeebled core capitalist countries to maintain their prosperity by sucking up value produced in other countries. As estimated by UNCTAD and Jason Hickel, such value flows peaked at between 1 trillion and 3 trillion dollars, between 10 and 15 percent of investment world wide, with bulk of the recent reduction attributable to China escaping this drain, thanks, of course, to its development, which means, inter alia, the ability to deny imperialist countries this unearned income.

Let me explain.

There is a huge literature on the dollar based IMFS, most of it based in the US and committed, contrary to all evidence, to celebrating its effective ‘public service’ to the world and to predicting its longevity.

There is also a huge literature on financialization, and its harms.

However, until my Geopolitical Economy of 2013, no one spoke of their intimate connection.

I argued there, and in other publications including Capitalism, Coronavirus and War, since, that after 1971 the dollar system rested on the volatile foundations of successive financializations, in the plural – a series of expansions of dollar denominated financial activity, each involving different assets, actors, flows and regulations. Each was, of course, unsustainable. Each ended, of course, in financial crises. Each had to be replaced by another. By increasing purely financial demand for the dollar, they counteracted the downward pressure on the currency that US fiscal, current account and trade deficits exerted on the dollar, pressure that would have ejected it from its world role, as Robert Triffin had predicted back in the 1950s.

This financialized dollar system has increased international inequality massively. Here is an incomplete list of the ways it has:

• It systematically undervalues World Majority currencies, allowing dollar holders to buy World Majority products and services dirt cheap.

• It rests on persistent imbalances. They spell underdevelopment as no systemic imperative either imposes self-sufficiency or addresses un-competitiveness.

• It offers World Majority governments and firms credit, at usurious interest rates, not when they need it but only when dollar creditors need to lend, usually not counter-cyclically but pro-cyclically.

They have induced debt crises when western monetary authorities have increased interest rates, as in the 1980s and again today.

In the debt restructurings that follow, the principle of creditor responsibility is erased by the IMF and the World Bank who act exclusively as bailiffs for western financial institutions, resulting in the nefarious reverse capital flows through which poor countries have repaid many times the debt they originally contracted, imposing economic retardation on millions.

The dollar system requires the lifting of capital controls to free capital flows which transfer of even more wealth from World Majority countries to the core capitalist countries as the rich transfer wealth to evade taxes at home and to participate in the speculative activity that abounds in the dollar denominated international financial system. The aforementioned report noted World Majority country investment flows to advanced countries as a major problem.

It has systematically inflated asset bubbles – most recently the dot-com bubble, the housing and credit bubbles, today’s ‘everything bubble’.

A good number of these asset bubbles occur in commodity markets, which raise the prices of the most traded commodities for World Majority countries.

Their bursting causes painful financial crises in which the poor – people and countries – suffer the most while the rich – countries and people – get golden parachutes

These, supplied by governments as subsidies and central banks as easy money, only lay the foundation for the next financialization.

Above all, they have required the regulation of financial sectors, including permitting free capital flows, not to promote production and development but speculation, not for an economy of makers but for an economy of takers, not for employment generation but for the preservation of the value of idle stores of wealth.

Not only is this list of the ways in which this system generates inequality between countries incomplete, it excludes the ways in which it generates inequality within countries, which also contributes to international inequality not least by shrinking the world market and making development harder. In the US, the inequality generated by this system is responsible for the social division, political polarization and cultural confrontation from which the country suffers and which has brought it close to civil war. This should be a signal to any country that thinks it can replace the dollar with its own currency

Remember, the system has also promoted wars against countries -like Iraq and Libya – simply because they sought to exit the system.