MASSIMO AMATO AND LUCIO GOBBI: The dollar’s star is fading — an alternative is already under construction

Last Saturday the US Congress passed a foreign aid package that would permit the Biden administration to confiscate Russian assets in US banks and transfer the proceeds to Ukraine. This decision follows the 2022 freezing of half of Russia’s central bank gold and foreign exchange reserves and the decision to disconnect Russian banks from the Belgian-based Society for Worldwide Interbank Financial Telecommunication (SWIFT).

Those actions drew angry responses from the leaders of Brics bloc countries and led SA’s President Cyril Ramaphosa to protest that “global financial and payment systems are increasingly being used as instruments of geopolitical contestation”. Other leaders of the Brics group began calling for alternatives to the dollar-based system.

At the April 2023 Brics summit, where Argentina, Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates (UAE) were invited to join the bloc, Brazilian President Luiz Inácio Lula da Silva asked (to thunderous applause): “Why can’t we do trade based on our own currencies? Who was it that decided that the dollar was the currency after the disappearance of the gold standard?”

Whatever the answer to this legitimate question, we must recognise that despite appearances, the hegemony of the dollar has already begun to weaken. The fading of the dollar’s star brings to mind Thomas Mann’s comment in Buddenbrooks: “The outward signs, the visible, tangible ones, of fortune and ascent only manifest themselves when the downward parabola has actually begun. Those outward signs need time to come to us, like the light of one of the stars up there, of which we do not know whether it is about to go out or whether it is already extinguished when it shines at its brightest.”

In its (understandable) anti-hegemonic stance, the Brics de-dollarisation discourse risks remaining a purely negative movement. An alternative reserve currency will not free governments from a different, unilateral hegemon. Moreover, the Brics’ search for a single alternative currency and payment system reflects a top-down approach to the monetary system that risks proving economically irrational. In the absence of full engagement and consultation, a new currency would be imposed on firms and individuals. 

Our multipolar world does not require a hegemon. The objective should be to build harmony between groupings of states and their trading relationships and instruments. The good news is that such a collaborative alternative is already in the process of construction at a regional level and is both technically and politically feasible. If we are to progress, we must open a window of dialogue with all the actors involved and work together to develop the alternative further. It’s a process that will take time to build and become fully operational.

So let’s get started. We can begin by building on regional, multilateral arrangements or platforms that are already ongoing thanks to technological advances. One such arrangement is M-Bridge, a payments infrastructure using blockchain technology and sponsored by the Bank for International Settlements. Then there is the model of the Pan African Payments System (Paps) — launched in 2022 — in which the SA Reserve Bank participates. The explicit goal of Paps is to enhance commercial integration between African states along the lines of the African Continental Free Trade Area. 

Compared with inter-European trade, inter-African trade is well below its economic potential and the politically desirable level. If facilitated by the right political and economic aims, Paps could help ensure inter-African trade becomes the trigger for a shift from low value-added sectors, towards a manufacture-based economy — just as happened in Europe when, under the regional European Payments Union, the continent recovered from the devastation of World War 2.

By their very functioning these systems achieve three important goals for firms and states. They are, first, payment platforms; second, liquidity -saving mechanisms (in the sense that they reduce the need for dollars and euros); and third, financing tools for regional traders — individuals, firms, banks and states. Even nonbankable individuals could use the system to make cross-border payments.

Paps’ strength is that it is a bottom-up infrastructure and network for the building of monetary, financial and physical highways. Furthermore, it is already under development. But such a promising monetary system is not bound by the laws of physics. The new system will only fly with public support and belief in the system. Unlike aviation, where planes take off even if their passengers do not believe in the laws of physics, the Brics leaders must create public confidence that a new alternative payment system can fly.

There was a time when the global monetary system based on the dollar seemed eternal and unchanging. And sure enough, despite recurring crises the dollar system, like a bright shining star, still illuminates global financial markets. But we must not allow ourselves to be blinded by a light that no longer corresponds to the harmony of the world. We must start to build viable and visible alternatives.

• Amato is co-director: monetary innovation, new technologies & society at the Baffi-Carefin Centre of Bocconi University in Malan. Gobbi is assistant professor of economics at the University of Trento.