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‘Global Events Could Challenge Hegemony Of Dollar’

Will the ongoing Russia-Ukraine war change the idea of globalisation and sovereignty? Will the hegemony of the US dollar and its might be challenged? K.V. Subramanian, former chief economic advisor, weighs in. Edited excerpts:

Photograph: Suresh K. Pandey

Will the US move to look inward in terms of manufacturing alter the current idea of globalisation, the world order and free-market capitalism?

There are many dimensions to capitalism. Trade and globalisation are some aspects, not the only aspects. Secondly, it is not just happening now. Donald Trump’s entire regime was a response to the fact that China benefited so much during [Barack] Obama’s regime and that, effectively, US trade policies empowered China to grow. There was a backlash that domestic jobs, especially manufacturing sector jobs, in the US were lost.

I think this crisis [in Ukraine] might possibly lead to more changes in the financial sector, because of the sanctions [on Russia] and the efforts by China, Eurasia and others to try and create a parallel international financial system. I feel that there could be events that might bring a significant change to the financial system with the dollar hegemony possibly being challenged.

What could be the outcome of this challenge to dollar’s hegemony?

Right now, it is hard to predict exactly what might happen. I will use the parallel of the euro. Apart from the dollar, the euro was used as a reserve currency and even international trade was done with it. In the 1970s and ’80s, when the Japanese economy grew very fast, the yen came to prominence. In a similar way, the yuan, given that it is being led by China, may actually emerge as another international currency. In that case, I think the dominance of the dollar may decrease in international trade flows. There will be some substitutes for the dollar in this parallel financial system that is being created.

It is also possible that there may be some reconfiguration of the foreign exchange reserves that central banks hold. One thing I will especially watch very carefully is the way the Chinese central bank changes its reserves going forward from here. What this crisis has definitely highlighted is that Russia made itself vulnerable by having a lot of its reserves in the US and the UK and was not able to access them to defend its currency. Given that a lot of the Chinese reserves are in the US Treasury, I think the Chinese will definitely look at this as an important signal. Going forward, they will reconsider it. I am quite confident about that.

Even when you look at the steps taken by the US—the sanctions that are set—they certainly are being done keeping in mind the current situation with respect to Russia, but they also have a larger implication for China. I am sure China is not going to miss that. My sense is that it will move to more physical assets like gold that it may hold domestically.

Are democracies pitted against oligarchies in today’s world?

Post Doklam, I had mentioned that there is a cleavage that is happening in the international order between rule-based democracies—all of them are not necessarily capitalistic—and opaque oligarchies. The [Russia-Ukraine] war, sanctions and some of the related steps thereafter are accelerating the process. But, the process was on even before that.

How will the Ukraine war and the changing global equations impact Europe?

It is part of a larger trend in Europe, which has an aging population. It is too much of a welfare state and, therefore, the incentives for work, for instance, have really reduced. These are some fundamental fault lines in Europe.

The present set of events has both positives and negatives for Europe. The positive is that this crisis has taken Sweden out of its neutrality and Germany out of its slumber. In that sense, I think it is a positive that the US and the European nations have been able to come together in a synchronous manner in imposing sanctions.

The negative is that Europe, western Europe in particular, will have to start weaning from its dependence on things like Russian oil and Chinese trade. That change is not going to be an easy one. It will be a painful change.

Even before these events, I was not sold on Europe’s prospects and these events only underline that there are real structural problems going forward. I do not think Europe, especially western Europe, is going to be a harbinger of hope in terms of growth for the world economy. I would be very surprised if Europe, just on average, grows at 2% per annum—that would be fabulous growth. That anemic growth rate itself relates to the structural fault lines.

Is the idea of sovereignty under stress?

When you think about sovereignty, there are many dimensions to it. One is what we saw after the Covid-19 crisis. The role of the state in taking care of its citizens has gotten enhanced and as a result, fiscal policy has assumed a significant role as compared to monetary policy. There is a chance that there will be a change in the role of the sovereign in degree.

Another role of the sovereign that is now coming in, especially during this war, is to function as a protector. That is another dimension coming to light.

Against the backdrop of the Russia-Ukraine war and the shifting international dynamics, what is the future of globalisation?

There may be some changes in the concept of globalisation and these changes are in its degree. There is some reduction, for instance, on manufacturing sites, but I do not think it is going to be drastic only because of the current situation.

The trend started since the global financial crisis itself and these events have accelerated that. In India, a lot of narratives tend to take these polar positions of socialism versus a free market. I think the real world is far more nuanced than that.