Rogue Forces and Shifting Wealth

 

Jörg Lau (a foreign affairs correspondent for DIE ZEIT) has a much-admired article in Internationale Politik[i], which claims: “Like Russia's attack on Ukraine, the escalation in the Middle East is part of a global geopolitical transformation for which there is not yet a term.” Well, at the OECD Development Centre that transformation has been documented under the term Shifting Wealth in a periodic OECD publication called Perspectives on Global Development.[ii] A German translation of the term was established before, also in Internationale Politik [iii] Weltneuvermessung. [iv]

To be sure, the Shifting Wealth narrative, with hindsight, was politically naïve. We liked to ignore warnings that the BRICS group was more than about economic convergence of the poorer Southern nations. But then, we were not alone. Famously, Francis Fukuyama had proclaimed the End of History in 1989. The fall of the Soviet Union and of the Berlin Wall suggested liberal democracy to be a fundamentally better system, ethically, politically and economically, than any of the alternatives[v]. Table 1 suggests that it turned out very differently.

Table 1: Political Freedom & Civil Liberties in Selected Emerging Countries, 2013-22

Country	2013	2022	Trend
Brazil*	81	72	↘
China*	17	09	↘
Egypt	41	18	↓
India*	76	66	↓
Indonesia	65	58	↘
Nigeria	46	43	→
Russia*	27	16	↓
Turkey	61	32	↓
South Africa*	81	79	→
* = original BRICS
Memo: USA	93	83	↘

Source: https://freedomhouse.org/reports/freedom-world/freedom-world-research-methodology

The BRICS are a convenient label for authoritarian regimes that turned rogue, notably China and Russia. It was held together by the desire of their leaders to end US hegemony, to revise global governance and to strictly respect noninterference in internal affairs. What could go wrong with a “multipolar world”, which would replace a not so benevolent US hegemon?

Well, the recent massacers of Russia in Ukraine and of Iran-sponsored Hamas in Israel have desillusioned brutally our multipolar dreams. These massacers have been encouraged by an internal and external weakening of the United States, as exemplified by the Trump trauma and threat, by unresoved budget issues and by the US leaving Afghanistan, with former support staff cynically exposed to the Taliban. The erosion of Western dominance in the international economic and norm-setting sphere and the absence of a “Western policeman” (Lau, op.cit.) has emboldened the most radical actors to take greater risks across the world. USSR-Ukraine; Iran-Hamas-Israel; China-Taiwan; Azerbaijan-Armenia; the list is getting longer, and it includes the Sahel zone, too. Note in passing that conflict-induced migration seems to weaken the Western polity, too, as it turns voters toward the Hard Right, as in France, Germany or Italy. Many observers assume Putin´s mastermind behind mass immigration.

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[i] English version: “The Israel-Hamas War and the New World Order”; German version: “Am Nullpunkt”, November/December 2023.

[ii] The first, entitled Shifting Wealth, was published in June 2010: https://www.oecd-ilibrary.org/development/perspectives-on-global-development-2010_9789264084728-en

[iii] Helmut Reisen, „Die Neuvermessung der Welt“, Internationale Politik, July 2008.

[iv] That term has given rise to a blog, now entertained by Thomas Bonschab and Robert Kappel: https://weltneuvermessung.wordpress.com/

[v] Ben Zissimos (2022), “The End of the End of History: A Political-Economy Perspective”, Intereconomics.

The West & South in a Dark Age of System Rivalry

 

Shortly after Putin´s Russia had invaded Ukraine, I observed that global governance was disintegrating into an American-dominated bloc and a Chinese-dominated bloc, with Russia and the EU countries as junior partners. The link between geopolitical and economic division would not only be calibrated by sanctions, to the extent they are effective. China containment, protectionism, and friend-shoring next to sanctions are offsetting development friendly Shifting  Wealth, as defined by the OECD Development Centre in 2010[1]. To be sure, the concept of Shifting Wealth has entirely ignored that the rise of the BRICS has been shaping the world to suit autocracy. True, the multipolar world has been leveraged by totalitarians, whence the notion of system rivalry. Yet, I will argue here that it is the West that will shoulder most of the economic cost of a dark age of “systemic rivalry”.

The BRICS and much of the “Global South”, a risk first overlooked (and denied) by Western observers, might opt for the China-dominated bloc. With a prolonged division between the west and a bloc centred on China and Russia, economic divisions will deepen. As lucidly summed up by Pascal Lamy (ex WTO): “Putin pushes us into the arms of the Americans and we push Putin into the arms of the Chinese. This world benefits Beijing, Moscow and even Washington, but can it satisfy us the EU?”[2]. Former UK Foreign Secretary David Miliband notes “Few governments endorse the brazen Russian invasion, yet many remain unpersuaded by the West’s insistence that the struggle for freedom and democracy in Ukraine is also theirs. …The concerted Western response to the Russian invasion of Ukraine has thrown into sharp relief the occasions when the West violated its own rules or when it was conspicuously missing in action in tackling global problems”[3].

UN General Assembly resolution that demands #Russia leave #Ukraine, 23.2.2023.

Source: UNGA. https://news.un.org/en/story/2023/02/1133847

 

The claim that much of the Global South is on Ukraine’s side became first questionable at the United Nations General Assembly in March 2022, with BRIC members abstaining a vote for Russia to leave Ukraine. A year later, the 136 countries of the Global South embraced a range of positions. By number of countries, almost 62% of Southern countries were classified by Nicolas Vernon at Bruegel as pro-Ukraine. However, with abstentions by both China and India, the pro-Ukraine share shrinks to a third by aggregate population[4]. Much will depend on Brazil´s and India´s soft power where the Global South will stand in international diplomacy.

The cost of rival blocks might now be higher for the West than for the South. The rise in South-South linkages has led to a new world less dependent on the West. From the perspective of poor countries, the most important consequence of China and India’s entry into the global economy operated through both global and direct linkages The second phase of shifting wealth from 2000 to the 2008 great financial crisis GFC (after the first of initial opening during the 1980-2000 period), saw pervasive convergence of poor countries largely due to increasingly China-centric growth[5]. Since the GFC, Chinese imports have been the driving force for South-South trade. The percentage share of China’s imports in world imports has surged since China’s WTO accession in 2001. A new geography of South-South development finance allowed governments to tap a bigger pool of transformative infrastructure finance and to choose from more financing options[6]. The China’s Belt and Road Initiative (BRI) deepened South-South integration in the postGFC period.

 In 1979 already (after the 2^nd oil price shock), Arthus Lewis imagined the new world in his Nobel lecture. He hoped that sustained Southern growth would become fired by South-South trade and less constrained by balance of payment problems and by slower Western growth[7]: “If a sufficient number of LDCs has reached self-sustaining growth we are into a new world. For this means that instead of trade determining the rate of growth of LDC production, it will be the growth of LDC production thatdetermines LDC trade, and internal forces that will determine the rate of growth of production.”

 

FX Turnover by Major Currencies 

Source: John Authers, Bloomberg

 

In 2009, I had raised the question whether the US dollar empire was falling. I ventured the Chinese yuan would soon overtake the US dollar. If history of the last switch in reserve currency (from pound sterling to the US dollar) was any guide, the yuan could be expected to replace the US dollar as a reserve currency by around 2050. But I cautioned that the renminbi wasn´t ready for reserve currency status. China that does not respect property rights nor other democratic freedoms such as full currency convertibility. Thus, the yuan sits on shallow capital markets and frightens as a mousetrap currency (a term coined by Wilhelm Röpke). If anything, the perspectives for the yuan to serve as reserve currency have worsened under Xi´s increasingly dictatorial rule. So it was premature to talk about the greenback’s demise, as was rightly pointed out by  John Authers at Bloomberg. BIS triennial surveys of foreign-exchange markets show that the dollar is not yet losing market share, unlike the euro, until 2022.

In 2025 however, those numbers may reflect the fallout of Russia’s invasion, with the Yuan share rising. Economic sanctions imposed on Russia and other countries by the United States put the dollar’s dominance at risk as targeted nations seek out an alternative, US Treasury Secretary Janet Yellen has warned. Already, China and Brazil are working on a deal to settle trades in their own currencies rather than dollars. Quite recently, as the US’ rivalry with China and Russia intensified in an increasingly polarized world, Saudi Arabia and other Middle Eastern nations were choosing to diversify their global partnerships, removing important oil resources from Western control. Oil transactions between Saudi Arabia and China could be denominated in the Chinese yuan, a significant development in the evolving international economic and geopolitical landscape. If this move happens, it could have far-reaching implications for the US dollar’s status as the dominant global currency, as well as for US-Saudi relations and broader regional dynamics in the Middle East[8].

 

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[1] OECD, Perspectives on Global Development 2010: Shifting Wealth, OECD 2010.

[2] Pascal Lamy, “L’Union européenne est-elle toujours pertinente?, Le Grand Continent, 12. April 2023

[3] David Miliband, “The World Beyond Ukraine: The Survival of the West and the Demands of the Rest”, Foreign Affairs, May/June 2023.

[4] Nicolas Vernon, Much of the Global South is on Ukraine´s side, Bruegel, 13. March 2023.

[5] OECD, Perspectives on Global Development 2019: Rethinking Development Strategies, OECD 2019.

[6] A vivid account of China´s footprint in Africa has been given by Deborah Brautigam, The Dragon´s Gift: The Real Story of China in Africa, OUP 2009.

[7] Arthur Lewis, The Slowing Down of the Engine of Growth, https://www.nobelprize.org/prizes/economic-sciences/1979/lewis/lecture/, 1979.

[8] Habib al-Badawi, “Can Saudi Arabia switch from the US dollar to the Chinese yuan?”, SpecialEurasia, 13. April 2023.