The World Bank’s Multi-Polar Disorder Prescription

The World Bank, under the auspices of its chief economist well-known in Chinese policymaking circles, published the first in a coming series of long-range Development Horizons studies predicting multi-currency use in 2025 based on emerging market-led commercial and financial “poles” guided by the BRICs. Developing countries now account for half of international trade and one-third of their FDI is “South-South.” Two-thirds of official foreign exchange reserves are outside the industrial world, and related sovereign wealth funds are among the largest institutional investor sources. Borrowers such as Chile, Turkey, and Brazil command lower spreads than European counterparts, yet since the collapse of the Bretton Woods system 40 years ago no reserve currency from these jurisdictions has entered the mix with the dollar, euro, yen, and pound, and the IMF-created SDR likewise lacks such a component. Over the next decade and a half emerging economies’ GDP growth over an average 4.5 percent will be double the advanced country norm, and the half dozen biggest ones will power the majority of global output. They have moved to the faster trajectory initially through total factor productivity — in land, labor and capital — gains that may soon join with innovation strides, as “rebalancing” occurs through switches from external to domestic demand. In China consumption will rise to over 50 percent of GDP during the period, with Latin America’s share already at 65 percent. Cross-border M&A from emerging market firms was one-third the world figure in 2010, and many active acquirers are able to tap billions of dollars through international bank loans and debt and equity financing, as well as access comparable sums in local capital markets. The net creditor position of major EMs will exceed $15 trillion under the study’s baseline scenario, setting the stage for a multi-polar monetary system to accompany trade and investment flows.

The renimbi will likely feature at the forefront of new entrants, according to the authors, as convertibility restrictions are progressively removed. Commercial trade settlement and bilateral and multilateral central bank arrangements have proliferated under incremental liberalization, and the currency could first be adopted as an Asian standard before receiving more widespread acceptance. The yuan could join with other emerging market units in a redefined SDR with the endorsement of G-20 Fund shareholders, who could also encourage private circulation of the synthetic denomination as an alternative to national and regional offerings. In this more diverse future, however, the preponderance of developing countries with their small heft will remain at risk of foreign currency mismatches and vulnerabilities even as the “fortress dollar” cedes impregnability.