Current issues related to economy, (responsible) investment, pension and income: every week an APG expert gives a clear answer to the question of the week. This time: chief economist Thijs Knaap on how long the dollar will remain dominant.
Before we zoom in on the role of the dollar, let’s take a look at Johannesburg. The so-called BRICS countries (Brazil, Russia, India, China and South Africa) are meeting there this week. The alliance between emerging economies in the “Global South” is sometimes seen as the counterpart to the G7, the alliance between the seven biggest Western industries. The term BRICS was originally coined by a Goldman Sachs economist to highlight the growth potential of these five economies. Since 1997, those economies - measured in dollars - indeed grew 10 times, compared to 2.5 times for the G7 economies.
If that growth continues, the BRICS bloc will overtake the G7 countries economically at some point, Knaap said. “The question is what exactly that means, but at least it says something about their economic clout. And that’s where the shoe pinches. Because China’s economy constitutes 70 percent of the BRICS’ total GDP, but its economic growth has been very disappointing lately. In contrast, the U.S., which accounts for 63 percent of the G7’s total GDP, is now doing well economically.”
Then there is the question of how close cooperation is among the BRICS. “There is some talk that they have the future and may one day have a common currency, like the euro countries. But that’s never going to happen, if only because Beijing doesn’t want it.” What does bind the five countries is their distaste for institutions such as the IMF, the World Bank and the World Trade Organization (WTO). “These are basically international organizations, but many countries feel they are dominated by the West. In recent years, therefore, China in particular has established more or less competing organizations, such as the China Development Bank and the Asian Infrastructure Investment Bank. As a result, poorer countries no longer depend solely on the West for loans.”
To what extent do these developments now threaten the major role of the dollar? The Bretton Woods system established in 1944 included pegging the values of all national currencies to the dollar, which was the only currency exchangeable for a fixed amount of gold. Even when that system stalled in 1971, the dollar retained its dominant role. “The U.S. was the most powerful capitalist country by all accounts at that time, and so it was also assigned the most important currency. Once you hold that position, it is difficult for other countries to knock you off the throne, partly because of network effects. For example, there is a good chance that a plantation owner in Colombia and a fruit trader in Indonesia will use the U.S. dollar to settle a shipment of bananas.”