The currency of a country is as individualistic and unique a symbol of its economy as its national flag, which marks its independence and sovereignty. On account of the fact that different countries have their own geopolitical, religious and demographic background, the contours and nuances of their economy are likely to vary from one another, depending upon the needs, requirements, priorities and preferences of the government and people of those countries. For instance, a landlocked country with a sea nowhere around its geographical location may not be in need of a Navy, at least not as big and powerful as that of a seaborne nation like Britain. A small Navy may still be needed by such a country, as in the case of Switzerland, to perform tasks in its lakes and rivers. Similarly, a small nation like Nepal or Bhutan, hemmed in by bigger countries would rather be inclined to build bridges with its powerful neighbouring nations rather than match in vain the expenditures of the latter on a mighty Army of its own. Citing once again the example of Switzerland, that country has a unique foreign policy of adopting a neutral stance on world issues and therefore goes easy on its defence policy in relative terms while education, health, hygiene, social welfare, infrastructure development, tourism, etc are quite likely its priority areas of expenditure.
On the other hand, a country like China, which has hegemonic ambitions in its neighbourhood, has no pretensions about investing heavily on its defence outlay. Likewise, countries that have longstanding feuds on account of religious schism within their own society, a sham democracy for governance or feigned differences with its neighbouring states, are quite likely to funnel their resources on building a war machine at the cost of the social development of their people. Pakistan is a case in point. The very existence of Israel as a modern nation-state has been dependent on its defence preparedness, being surrounded by hostile neighbours bent upon its obliteration. On another level, in keeping with its Superpower status, the US is expected to go ahead with its space and defence research programs at astronomical costs. While commonalities would be several, no two economies could be termed identical twins. Suffice it to say that economies of no two countries are likely to be more identical than two freshly fallen snowflakes!
The Euro Model and Dollarization
Having stated the above, one cannot duck or prevaricate the question of the desirability or feasibility of having an ideal world economy where all global transactions are managed by a supranational currency in terms of expediency and transparency of the transactions rather than through a maze of several national currencies. Notwithstanding their peculiarities, the economies of nations are irrefutably interlinked and interdependent. Hence, this proposition of a world currency is worth considering and implementing. The European Union, for example, has a single common currency (Euro), which is as strong a contender as the other hard currencies that go into the making of a reserve currency adopted by the Bretton Woods Institutions. All the same, Britain, which has recently voted in favour of exiting the EU, retained its own currency concomitant to its full-fledged membership of the Union. This was partly on account of the fact that Britain was feeling upbeat about the strengths of its own economy and wary about hitching it to the new currency of the nascent Union, which had in its fold fledgling economies of smaller member-states susceptible to market turbulence and inflationary trends.
In fact, only 19 out of the total 28 member-states of EU have adopted the Euro although most of the other member-states, which chose to remain out of the Eurozone and have been using their own national currencies, are obliged to adopt the Euro at some point of time in future according to a timetable. Quite a few Central European and East European countries, the transition economies of which were in flux, went for the hard pegging of their national economies to Euro. There were some other countries like Ecuador and El Salvador, which dollarized their economies by taking their national currencies out of circulation and replacing them with dollar. But the more widely prevalent practice has been the acceptance of the US Dollar by countries for usage in addition to their national currencies for financial transactions.
We are Asia, No Euro Model Please
It is noteworthy that unlike the European Union, other regional groupings like BRIC, ASEAN or SAARC have not been able to come up with a program of economic integration among the member countries or a common currency on the lines of Euro. This could be on account of varied reasons and factors such as overlapping of political interests among the constituent units, the absence of a common economic agenda or a simple lack of will to coalesce the national economies for the common good of the grouping. The bursting onto the centre stage by international terrorism in the recent past has vitiated the overall atmosphere on the economic front in the case of countries with common porous borders and shared cultural milieus like India, Pakistan and Bangladesh. These countries are perforce required to spread their resources ever so thinly on the strengthening of their defence and security mechanism to fight the spectre of terrorism in preference to considering proposals for the integration of their national economies into a regional common currency zone on the lines of the euro zone.
The religious and political slant of Pakistan in selectively addressing the phenomenon of terrorism (in keeping with its position on the issue to align with its contention of “good terrorists” and “bad terrorists”) makes the complexity of the issue much more confounded for anybody’s comfort. In such a biased and vitiated atmosphere, it would be too tall an order for regional groupings to consider the integration of their national economies and consolidation of the system. Resultantly, a common currency which can make the trade and financial transactions among member-countries of the regional groupings so much more smooth flowing and easier, remains a veritable chimera. So is any idea of a political-cum-economic federation of the countries of the Indian sub-continent, no matter how loose or flexible, despite the amazing commonalities such as language, culture, religion, etc to be found among the people of these countries. National economies of the affected countries sorely lose out in the bargain, having to reckon on their own with their own market turbulence, and run-away inflationary trends, on top of the political uncertainties peculiar to the region.
Keynes for Supranational Currency
An international currency acceptable to the major trading partners of the world that are set on the course of ensuring a global economy involving production and exchange, pursuant to globalization and privatization in the bastions of the government-controlled national economies, seems to be in the order of things. It would appear to be both a logical and pragmatic step towards facilitation of the process. However, it is by no means a recent phenomenon. On the contrary, its concept and desirability were first felt quite some time ago. The idea of a world currency was thought of and presented at an international forum as early as 1944. At an international conference held that year in New Hampshire, legendary economist John Maynard Keynes who headed the British delegation came up with the idea and even named the currency ‘Bancor’. It was at that conference that the establishment of the Bretton Woods Institutions saw the light of the day.
The proposal, however, lost out to the US Dollar in the face of the resurgence of the US, flush with its successful bombing of Japanese cities. The proposal envisaged the setting up of an ‘International Clearing Union’ or a Central Bank of all central banks to ensure the stability and integrity of the international payments system. The envisaged Central Bank would issue a new monetary unit to be called ‘Bancor’. If it had come through, the proposal would have likely helped alleviate the problems faced by the trade deficit countries. The emergence of the US Dollar as the currency for international trade and financial transactions rendered the national currencies of smaller economies float against the Dollar or attach themselves to other stable currencies like Euro or float on their own. The extensive usage of the Euro and the US Dollar across several countries either on the merits of their own strength or in concomitance with the national currencies has given cause to a fresh round of debate on the viability of a supranational currency as enunciated by J M Keynes.
For and Against a Supranational Currency
There have been arguments for and against a world currency. In the words of Robert Mundell (1995), ‘‘The missing ingredient [in present international monetary arrangements] is a world currency, and until such a facility is created, the existing arrangements, while likely to continue, will be, at best, second best.” Former Fed Chairman Paul Volcker summed it up succinctly as follows: “The global economy needs a global currency.” The prospect of a single world currency was, however, viewed by Milton Friedman as a ‘‘monstrosity’’ based on his expectation that control over it would be vested in ‘‘a small group of unelected ofﬁcials … who are not accountable in any meaningful way at the ballot box.’’
US Dollar versus Renminbi
How strong or unchallenged is the US Dollar as an international currency? It is only one of the dominant world currencies that go into the formulation of Special Drawing Rights (SDR), a weighted index of the International Monetary Fund (IMF), the other currencies doing the honours being the Euro, Britain’s Pound Sterling and the Japanese Yen. There is already a move afoot to float the Chinese currency against the US Dollar. In geopolitical terms, China has, of late, been unabashedly making aggressive postures in the troubled waters of the South China Sea. Now, it is feeling upbeat about the aggressive way in which its bullish economy has panned out in the international arena. China’s Central Bank announced earlier this year that it had released data regarding its forex reserves by valuing it in terms of SDR, apart from the usual practice of doing so in US Dollar and Renminbi terms. On its part, the IMF has declared that October 2016 onward SDR would also consist of China’s Renminbi, as it believes it would help bolster the role of SDR as a unit of account. With the recent announcement of the IMF, Renminbi has been anointed for joining the hallowed club of the dominant world currencies – not a mean feat for the growing global economic power that China represents. Now, has China consciously set out in the course to shift the world currency order from being unipolar or bipolar to multipolar? Alternatively, could it be a case of overestimation of the strength of the Chinese currency by international experts?
The hegemony of USD in the reserve currency order accords it multiple benefits that include the easy sale of US sovereign securities to foreigners, thus lowering the cost of borrowing for the country and the risk-off investments flowing to the world’s largest economy as it is being professed as a safe haven during times of global turmoil. Comparatively, how sound is Renminbi? With the shifting goal posts of its economy, which is the second largest in the world, China is set to become a consumption-driven economy from being an investment-driven economy, in a few years time. When investment inflows start making their mark, how would China cope up with the situation with the overburden of funds, which has necessitated the act of the rebalancing of its economy? Apart from Renminbi, the national currency of no other economic power seems to be in the reckoning for consideration as a reserve currency. Should Renminbi, however, be recognized as a world currency, the way would be paved for the review of other national currencies, the intrinsic worth of which in the face of local market tremors or international turmoil is questionable. It has rightly been said by the Chief of the Central Bank of China that not every national currency is cut out for the role of a global reserve currency since the nation’s central bank would need to simultaneously balance the problematic domestic monetary goals as well as international demand for the currency.
Long Wait for a World Currency
In the prevailing circumstances, the prospect of the emergence of a single world currency for the smooth conduct of international trade and financial affairs appears feasible only in the long run and not in the near future. This will remain so until the major international trading partners and stakeholders in global financial transactions come together to give the proposal of Keynes a nod, which is not an immediate priority on any country’s scheme of things. Until the time a single world currency makes an appearance on the horizon of the international economy, SDR would have to do its best to serve the purpose of integrating global economy, involving production and exchange. In any case, the world economy deserves a single robust and dynamic global currency, no matter how far away. But how long it will take to become a reality is anyone’s guess.