Understanding De-dollarization: Goals, Impact, and Organizations at the Forefront
In the wake of the 2008 global financial crisis, de-dollarization has become a topic of increasing interest among economists, policymakers, and investors. De-dollarization refers to the process by which countries reduce their dependence on the US dollar in international transactions, particularly in the areas of trade and investment. In this blog post, we will discuss what de-dollarization is, its purposes, and its impact on the international market, as well as some of the active organizations working on it.
What is De-dollarization?
De-dollarization is a process by which countries move away from the US dollar as the primary currency for international transactions. This can take several forms, including the use of alternative currencies, the creation of regional currencies, or the use of barter systems. The primary driver of de-dollarization is a desire to reduce exposure to the US economy, which can be vulnerable to economic and political shocks.
Purposes of De-dollarization
The primary purpose of de-dollarization is to reduce a country’s dependence on the US dollar as the primary currency for international transactions. This can help to insulate a country’s economy from economic and political shocks that may affect the US economy, such as changes in interest rates, trade policies, or political instability. Additionally, de-dollarization can help to promote economic growth by reducing the cost of borrowing and increasing access to credit.
Another purpose of de-dollarization is to reduce the influence of the US on the global economy. The US dollar is currently the world’s primary reserve currency, meaning that many countries hold large amounts of US dollars as a way of insulating themselves from economic shocks. However, this gives the US significant economic and political power, as it can use its control over the dollar to influence the global economy. De-dollarization can help to reduce this power imbalance by diversifying the currencies used in international transactions.
Impact of De-dollarization on the International Market
The impact of de-dollarization on the international market is complex and multifaceted. On the one hand, de-dollarization can reduce the influence of the US on the global economy, promoting greater economic diversity and reducing the risk of economic shocks. Additionally, de-dollarization can promote economic growth by reducing the cost of borrowing and increasing access to credit.
However, de-dollarization can also create new challenges for international trade and investment. The US dollar is currently the most widely accepted currency for international transactions, meaning that de-dollarization can create new barriers to trade and investment. Additionally, de-dollarization can create uncertainty and volatility in financial markets, as investors adjust to new currency regimes.
Organizations Working on De-dollarization
Several organizations are actively working on de-dollarization, including regional organizations and international financial institutions. Some of the most prominent organizations include:
The name BRICS stands for Brazil, Russia, India, China, and South Africa, the five largest emerging economies. The BRICS countries have been working to promote de-dollarization by increasing the use of their own currencies in international transactions. This includes the creation of a BRICS currency swap fund, which allows member countries to lend each other money in their own currencies.
The BRICS countries have also been promoting the use of the Chinese yuan as an alternative to the US dollar. China, in particular, has been working to promote the internationalization of the yuan and has established several offshore yuan centers around the world.
In addition, the BRICS countries have been working to promote greater cooperation among themselves, including in the areas of trade and investment. For example, they have established the New Development Bank (NDB) to provide financing for infrastructure projects in developing countries. The NDB is funded by the BRICS countries and is seen as an alternative to traditional Western-dominated financial institutions like the World Bank and the IMF.
Shanghai Cooperation Organization
The Shanghai Cooperation Organization (SCO) is an intergovernmental organization founded in Shanghai on 15 June 2001. The SCO currently comprises eight Member States (China, India, Kazakhstan, Kyrgyzstan, Russia, Pakistan, Tajikistan and Uzbekistan), four Observer States interested in acceding to full membership (Afghanistan, Belarus, Iran, and Mongolia) and six “Dialogue Partners” (Armenia, Azerbaijan, Cambodia, Nepal, Sri Lanka and Turkey). In 2021, the decision was made to start the accession process of Iran to the SCO as a full member, and Egypt, Qatar, as well as Saudi Arabia, became dialogue partners. The SCO has been working to promote de-dollarization by increasing the use of the Chinese yuan and the Russian ruble in international transactions.
One of the key initiatives of the SCO is the establishment of a joint payment system to facilitate trade among member countries. This system is designed to reduce the dependence on the US dollar and promote the use of alternative currencies.
The SCO is also working to promote greater cooperation among member countries in the areas of energy and infrastructure. For example, China’s Belt and Road Initiative (BRI) aims to build infrastructure projects across Asia, Europe, and Africa and is seen as a way of promoting economic integration and reducing dependence on the US.
International Monetary Fund
The International Monetary Fund (IMF) is an international financial institution that was established in 1944 to promote international monetary cooperation and exchange rate stability. While the IMF has historically been closely associated with the US, in recent years, it has been working to promote greater currency diversity in the international monetary system.
One of the key initiatives of the IMF is the promotion of the use of Special Drawing Rights (SDRs) as an alternative to the US dollar. SDRs are an international reserve asset that is used by the IMF and its member countries to settle international payments. While the use of SDRs has been limited in the past, there has been renewed interest in their use as a way of reducing dependence on the US dollar.
The European Union (EU) is a political and economic union comprising 27 member states located primarily in Europe. While the EU does not have a formal de-dollarization policy, it has been working to promote the use of the euro as an alternative to the US dollar in international transactions.
The EU has been promoting the use of the euro in energy markets, particularly with respect to the purchase of oil and gas from Russia. The EU has also been working to promote the use of the euro in trade with other countries, particularly in the Middle East and Africa. The EU has also been working to establish euro-denominated payment systems, such as the Target2 system, which allows for cross-border euro transactions.
In addition, the EU has been working to promote greater economic integration among member countries, including the establishment of a common currency, the euro. While the euro has faced challenges in recent years, it remains an important alternative to the US dollar in international transactions.
De-dollarization is a complex and multifaceted process that can have significant impacts on the global economy. While de-dollarization can help to promote economic diversity and reduce the influence of the US on the global economy, it can also create new challenges for international trade and investment. Nevertheless, many regional organizations and international financial institutions are actively working to promote de-dollarization and increase the use of alternative currencies in international transactions.
As the global economy continues to evolve, it is likely that de-dollarization will continue to be an important topic of discussion among economists, policymakers, and investors. While there are challenges and risks associated with de-dollarization, there are also significant potential benefits, particularly for countries seeking to reduce their dependence on the US dollar and promote greater economic diversity.