Yves here. This provocative interview with Jomo Kwame Sundaram illustrates the way the war in Ukraine is deepening the split between the US and Europe versus the rest of the world and accelerating the shift to a multi-polar order.
Nevertheless, I have to quibble with a couple of points in this piece. First, Jomo takes the perspective of smaller, typically open economies. Even if they have their own currency and have managed not to dollarize their economies, they are constrained in operating like a sovereign currency issuer. Unless they impose capital controls (as Malaysia did in 1997 Asian crisis, which enabled it to avoid an IMF bailout) they are very much subject to the destablizing influence of hot money flows, usually driven by Fed actions. In addition, they have to be very mindful of FX rates, since they are often food and/or fuel importers and cannot risk mass upheaval if a sharp drop in the value of their currency suddenly impoverishes broad swathes of the public.
Second, Jomo sadly repeats the petrodollar myth. State Department histories show that the Saudis agreed in 1973 to keep only half their proceeds from oil sales, and that deal was good for only six months.
So why did the Saudis continue to park their dough in dollar? The answer is simple: lack of better alternatives.
The US, at a GDP of $1.4 trillion then was 1/3 of world GDP. I can’t find a figure for the USSR for 1973, but its GDP in the early 1970s was estimated at 2/3 that of the US. Europe had no Euro then, so putting assets in any European country meant a comparatively small currency market and even smaller securities markets (debt financing was dominated by banks, while the US had comparatively bigger public bond markets).
Consider this completely unironic take from Amar Bhide in his 1994 (yes, 1994) Harvard Business Review article, Efficient Markets, Deficient Governance:
Without a doubt, U.S. stock markets are the envy of the world. In contrast to markets in countries such as Germany, Japan, and Switzerland, which are fragmented, illiquid, and vulnerable to manipulation, U.S. equity markets are widely respected as being the broadest, most active, and fairest anywhere. The Securities and Exchange Commission strives mightily to keep them that way. Thanks to the SEC’s efforts, trading costs in the United States are half those of any other market. In the twinkling of an eye, Wall Street’s professionals buy and sell blocks of millions of shares. The average American, too, can trade with little fear of rigged markets or insider dealings.
1994 was just when financial deregulation was starting to get a head of steam. Even then, the US maintained a relative advantage, since advanced economies were deregulating from their respective baselines.
The point is, incredible as it may seem now, the US had the best investor protections of any major economy and also had very deep markets. Those made the dollar and dollar instrument an attractive destination for foreigners. We threw that all away with the Russia sanctions asset grab. The US has gone from fair, or at least least bad broker, to unapologetic thief.
🇪🇺💰🇺🇦🇷🇺The leaders of the EU countries instructed lawyers to work out legal ways to use the frozen assets of the Central Bank of Russia to restore Ukraine,It is planned to transfer to Ukraine part of the finances of the $ 300 billion frozen in the EU and in the US
— AZ 🛰🌏🌍🌎 (@AZgeopolitics) November 4, 2022
Mind you, despite the keen desire of the EU, as flatly stated by Ursula von der Leyen, to “seize not freeze” Russian assets, the first response by an EU lawyer, heavily coded so as not to sound like he was crossing von der Leyen, amounted to a no, but with bafflegab about trusts. Civil law, unlike US/UK case law, is rigid, so von der Leyen may not get her way as easily or fully as she likes. Stay tuned.
Interview with Jomo Kwame Sundaram, Emeritus Professor, University of Malaya.
Jomo Kwame Sundaram is Senior Adviser, Khazanah Research Institute; Fellow, Academy of Science, Malaysia; and Emeritus Professor, University of Malaya. He was UN Assistant Secretary General for Economic Development; Assistant Director General, Food and Agriculture Organization; Founder-Chair, International Development Economics Associates; and President, Malaysian Social Science Association. He has authored and edited over a hundred books, written many academic papers, research reports, and media articles. He received the 2007 Wassily Leontief Prize for Advancing the Frontiers of Economic Thought. In an interview to Frontline, he spoke about the impact of the Ukraine conflict on the global south. Excerpts.
Is the impact of the Ukraine conflict on the global economy a temporary situation or is it a crisis with deeper roots and longer term implications?
Many things can change, sometimes unexpectedly, but we may well be witnessing the beginnings of a protracted new Cold War after the US hegemony of the last three decades. Mikhail Gorbachev’s efforts to create the conditions for greater peace and international cooperation were based on a certain implicit trust. But this was betrayed with the ascendance in the 1990s of US unipolarism following the collapse of the Soviet Union and NATO expansionism despite the disappearance of its original rationale, the Soviet threat.
Multilateralism and its various post-Second World War institutions, mainly associated with the UN, continue to be undermined except when they serve US and NATO interests. Meanwhile, the sanctions against Russia and its allies have further disrupted international trade and cooperation in various ways. We live in times of militarised stagflation.
Trade liberalisation largely ended as real wages declined in rich countries at the end of the 20th century. Financial globalisation has nonetheless continued, with mixed consequences. Many Asian developing countries have grown even as inequalities rise in the global south. Opportunistic politicians all over have embraced ethno-populist politics, often invoking jingoist nationalist rhetoric, displacing the more progressive anti-imperialist multi-class popular fronts, or the old populism.
Reactions to the 2008-2009 global financial crisis quickly abandoned early fiscal efforts in favour of unconventional monetary policies, especially ‘quantitative easing’, an option mainly available to the US with its ‘exorbitant privilege’ of indefinitely lending by selling treasury bonds to the rest of the world, as it has done for more than half a century when Nixon ended the Bretton Woods system. Other rich economies have less policy space, leaving developing countries with even less. Much, of course, depends on developing countries’ own capacity for capital account and sovereign debt management.
Not just Europe but the global south is also affected by the conflict’s immediate consequences on the economy.
We have seen oil and gas prices rise sharply the world over following NATO’s imposition of sanctions, mainly hurting European economies, particularly those importing oil and gas from Russia. Russia has managed to get around this by offering huge discounts on its exports and increasing its reliance on the markets of China and other friendly countries. Thus, China’s alliance with Russia has been greatly strengthened. But most dangerously, we have seen the abandonment and postponement of long-promised transitions to cleaner, especially renewable, energy, thus accelerating global warming. Just months after last year’s Glasgow promises to stop using coal, Europeans are already leading the rush back to coal as they struggle to cope with energy shortages and prices as winter approaches. Both Russia and Ukraine are major wheat suppliers. Exports have been hit, not only by sanctions but also by the mines laid in the Black Sea ports. Cereal and other food prices have also risen.
If this conflict is to eventually be a catalyst for undoing globalisation, as some commentators have suggested, would that be something the global south would welcome because it could weaken the structures of global inequality? Or, should it be feared because of the disruptive economic effects that would follow?
Trade liberalisation has slowed since the WTO was created in 1995. Although there is still a lot of talk about free trade agreements (FTAs), these mostly involve bilateral and plurilateral FTAs, which even free trade guru Jagdish Bhagwati has denounced as termites, undermining freer multilateral trade.
Most of FTAs today involve non-trade issues, such as investor rights and intellectual property, as in the case of the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). Worse, the TPP was originally pushed by Obama as a means to surround and isolate China, but Trump withdrew, citing the danger of its investor-state dispute settlement provisions. The closest US allies nonetheless went ahead with it, so we have the irony of the 6,350-page TPP, mainly drafted by US corporate advisers, which the US is no longer party to. Nonetheless, it poses a danger to developing country participants as powerful corporate interests have ways and means of taking advantage of it.
Overcoming Western dominance will not be easy because we have an inter-state system largely shaped by neocolonial arrangements negotiated among the big powers, especially after the Second World War. Then, there is private power. Over time, new modes of accumulating wealth have emerged, with some of it deployed to enable further capital accumulation. This happens at both national and international levels.
Western rejection at the WTO Council of the developing country-supported Indian-South African request for a TRIPS waiver during the COVID-19 pandemic reminds us of the actual exercise of such power. Collective action by the global South is unfortunately easier said than done. Hence, the choice is not really between globalisation and deglobalisation. In any case, this binary is not really the actual choice the world faces.
Is a new global financial architecture not based on the hegemony of the dollar a possible fallout?
Such an alternative monetary system is not only feasible, but also desirable. For instance, non-US participants at Bretton Woods in 1944 offered different proposals, of which we now know the most about Keynes’. Another possibility for change came up after President Nixon withdrew from the US’ 1944 commitments in August 1971 after the Eurodollar market undermined the greenback. With the end of the Bretton Woods system, what followed was a “non-system”.
The dollar’s position was somewhat secured after the US agreed with Saudi Arabia’s King Faisal bin Abdulaziz Al Saud’s collusion with OPEC partners to raise the petrol price on condition that oil and gas transactions be in dollars, giving rise to the term “petrodollars” and the belief that oil was the “new gold”. The dollar’s hegemony has since endowed the US with an ‘exorbitant privilege’, enabling it to borrow by selling bonds to the world, with buyers having little expectation of full redemption.
US and NATO sanctions against Russia, following the Ukraine invasion, have had some rather unexpected consequences. US-led efforts to exclude Russia and others from the international payments systems have forced them to consolidate alternative arrangements. They may well erode the dollar’s position as more and more economic transactions bypass the dollar, but this is unlikely to happen immediately. Already, US Fed interest rate hikes have served to strengthen the dollar.
What can developing countries do to ensure that in any emerging new world order their scope for autonomous action is enlarged?
Developing countries have had various historic opportunities to become a coherent third force, both during the Cold War and again now. From 1961, the non-aligned movement (NAM) embodied that possibility, and it became closely aligned with the G77 caucus of developing countries in the UN system. But the G77 has not been well organised, let alone institutionalised, beyond the UN segment of multilateral arrangements. And NAM has not been able to build upon or extend the Afro-Asian solidarity initiated at Bandung.
The variety of economic conditions in the global south continues to pose challenges to cooperation and solidarity. But these have not stood in the way of G77 cooperation, which has been especially clear with the G77 in New York, perhaps more than in Geneva and other UN hubs. The creation of the WTO outside the UN system, with its own unique governance and other arrangements, has exacerbated these problems. The creation of the South Centre following the South Commission’s report was expected to play a proactive role in providing analytical and policy coherence for advancing a shared vision of the global south. Sadly, this has not materialised.
If solidarity can be rebuilt and consolidated through the idea of ‘non-alignment’, it is possible for a third force to emerge and stay out of both NATO and the ‘Others’ camp, currently organised as the Shanghai Cooperation Organisation. Only by consistently staying clear of both camps can the global south become a force to reckon with, importantly, a force for peace.
Of course, it is easier said than done, especially at a time when leadership seems wanting.