The BRICS countries, Brazil, Russia, India, China, and South Africa, are emerging economies that have shown remarkable growth and development over the past few decades. Together, they represent over 40% of the world’s population and a combined GDP of over $16 trillion. However, despite their impressive economic growth, the BRICS countries remain heavily dependent on the US dollar for international trade and finance.
In recent years, the BRICS nations have been pushing for de-dollarization. In other words, de-dollarization is the process of reducing their dependence on the US dollar and increasing their economic autonomy. This blog post will explore the reasons behind this push, the potential impact on the global economy, the challenges to de-dollarization, and the BRICS nations’ efforts towards the development of a new currency.
What are the BRICS Countries?
The BRICS countries are a group of five emerging economies that have shown significant economic growth and development over the past few decades. The term was first coined in 2001 by economist Jim O’Neill to describe these nations that he believed would become some of the world’s largest economies by the year 2050. Initially, only Brazil, Russia, India, and China were part of it, as “BRIC”, but in 2010 South Africa was added, creating the BRICS known as nowadays.
Brazil, Russia, India, China, and South Africa represent a significant portion of the world’s population, resources, and economic potential. These countries are characterised by their large domestic markets, abundant natural resources, and increasing integration into the global economy.
Although the good signs set at the beginning, the most recent economic progress made by the BRICS countries, seems to stray from the original ideals on which the group was established. Out of the five member states, only China has been able to attain consistent and significant expansion since the beginning. While China’s gross domestic product soared from $6 trillion in 2010 to about $18 trillion in 2021, the economies of Brazil, South Africa, and Russia displayed lacklustre growth. Although India’s GDP also increased from $1.7 trillion to $3.1 trillion, it was eclipsed by China’s immense growth.
Why do the BRICS Countries Want to De-Dollarize?
The BRICS countries want to reduce their dependence on the US dollar and increase their economic autonomy for several reasons. First, the US dollar’s dominance in international trade and finance gives the US significant power and influence over the global economy. This has led to concerns that the US could use its position to impose economic sanctions or other measures that could harm the BRICS countries’ economies.
BRICS_Countries_and_The_Push_for_De-Dollarization 1512 words Second, the US dollar’s role as the world’s reserve currency means that the BRICS countries must hold large amounts of US dollars to facilitate international trade and finance. This has led to significant dollar-denominated debt for some of the BRICS nations, which could pose a risk to their economies if the value of the dollar were to decline sharply.
Finally, the BRICS countries believe that reducing their dependence on the US dollar could increase their economic autonomy and strengthen their position in the global economy. By reducing the role of the US dollar in international trade and finance, the BRICS nations could create more opportunities for their own currencies to be used and accepted globally.
How Would De-Dollarization Affect the Global Economy?
The push towards de-dollarization by the BRICS countries could have significant implications for the global economy. One potential impact is the reduced role of the US dollar in international trade and finance. This could lead to a shift towards a more multipolar international monetary system, with multiple currencies playing a larger role in global trade and finance.
Another potential impact is the increased use and acceptance of the BRICS countries’ currencies in international trade and finance. This could lead to a more diversified global economy, with more opportunities for emerging markets to participate in global trade and finance.
However, there could also be challenges associated with de-dollarization. For example, the BRICS countries may face difficulty in developing and promoting their own currencies as viable alternatives to the US dollar or even a new currency. There may also be geopolitical tensions and conflicts between the BRICS countries and the US and other Western countries that could impact their efforts towards economic autonomy.
What are the Challenges to De-Dollarization?
There are several challenges that the BRICS countries must overcome to achieve their goal of de-dollarization. One significant challenge is political and economic instability. Several of the BRICS nations have experienced significant political turmoil and economic instability in recent years, which could impact their efforts towards economic autonomy.
Another challenge is corruption and the unequal distribution of wealth. These issues could hinder the development and promotion of the BRICS countries’ own currencies and limit their potential to participate in global trade and finance.
Finally, there is the challenge of developing a viable alternative to the US dollar. While the BRICS countries have made some progress in this area, like trading in their own currencies, there is still a long way to go before they can create viable alternatives like that of a new currency. This would require significant investment in infrastructure, technology, and financial institutions.
BRICS Nations and the Development of a “New Currency”
One potential solution to the challenges of de-dollarization is the development of a new currency that could serve as an alternative to the US dollar and the BRICS nations are already moving ahead with plans. According to an announcement made by a Russian official last week, this development is yet another indication that the dominance of the US dollar in global trade is diminishing. Alexander Babakov, who serves as the deputy chairman of Russia’s legislative assembly, the State Duma, has stated that the shift towards using national currencies for settlements is just the first step. In recent times, we have already witnessed examples of this approach being employed in oil deals between India and Russia that were settled using currencies other than the US dollar.
The idea behind a new currency is to create an alternative that is not tied to the US dollar or any other existing currency. This could reduce the BRICS nations’ dependence on the US dollar and increase their economic autonomy. reduce costs, promote more significant bilateral trade and facilitate investments.
However, developing a new currency would require significant investment, infrastructure, and institutional support. It remains to be seen whether the BRICS countries will be able to overcome these challenges and successfully develop a new currency or even opt for a digital currency. The summit for the discussion is scheduled for August 2023.
China and Brazil Trades Eliminated the US Dollar
As per the new agreement recently announced, Brazil and China will conduct trade by directly exchanging their currencies, the yuan and reais, respectively, without the need for converting them into US dollars.
This denotes another minor deviation from the prevalent control of the US dollar and is aimed to reduce costs and promote even greater bilateral trade and facilitating investment.
In the past few years, multiple nations have endeavoured to reduce their reliance on the US dollar. Due to the reckless borrowing, expenditure, and monetary creation carried out by the US government, trust in the American currency has been consistently declining. Additionally, America’s deployment of the US dollar as a tool of foreign policy has instilled misgivings among several countries, prompting them to be cautious about relying solely on the dollar.
Creating a New World Bank Model
In 2014, the BRICS countries established the New Development Bank with a seed capital of $50 billion (around €46 billion). The purpose of the bank was to provide an alternative to the World Bank and the International Monetary Fund, which many developing and emerging economies had criticised for their structural adjustment programs and austerity measures. Along with the bank, the BRICS nations created the Contingent Reserve Arrangement, a liquidity mechanism designed to provide financial support to members facing payment difficulties.
The establishment of the BRICS bank and the Contingent Reserve Arrangement was a significant development that attracted many countries beyond the BRICS nations. These countries were interested in joining the group as they saw the bank as a viable alternative to the World Bank and the IMF. The bank is open to new members, and in 2021, Egypt, the United Arab Emirates, Uruguay, and Bangladesh took up shares. However, these countries’ investment amounts were significantly lower than the founding members’ $10 billion investment.
The BRICS countries’ push towards de-dollarization is a significant development in the global economy. The shift towards a more multipolar monetary system could have far-reaching implications for global trade and finance. However, there are significant challenges to overcome, including developing a viable alternative to the US dollar and addressing political and economic instability.
Ultimately, the success of the BRICS countries’ efforts towards de-dollarization will depend on their ability to work together and invest in infrastructure, technology, and institutions that can support their economic autonomy. The BRICS nations’ future will be shaped by their ability to adapt to these challenges and harness their economic potential to promote sustainable and inclusive growth.