Global Policy Forum

'Sweeping' Changes in Global Economy Could Challenge Dollar's Role - World Bank

The dollar’s role as the international reserve currency has been called into question by economists and policy makers as a result of the 2008 financial crisis which pushed the world into recession. This World Bank report believes that by 2015 emerging markets will account for half of global economic growth. The international economic order will necessitate a shift away from the dollar and towards other currencies for the purposes of international trade and commodities pricing.

By Michael R. Crittenden

Wall Street Journal
May 17, 2011

"Sweeping" changes in the global economy will see key emerging markets account for more than half of global growth midway through the next decade, the World Bank said in a report, a shift that could see the U.S. dollar lose its prominence as the world's currency of choice.

The bank said in its "Global Development Horizons 2011" report that global growth over the next 15 years is likely to mirror the current recovery, with emerging and developing countries growing faster than more advanced counterparts. The bank projects emerging economies to grow an average of 4.7% a year through 2025, more than double the 2.3% forecast for advanced economies.

"The distribution of global growth will become more diffuse, with no single country dominating the global economic scene," the report said. By 2025, the economies of Brazil, China, India, Indonesia, South Korea and Russia will represent more than half of all global growth, the bank forecasts.

The growing clout of emerging economies could foster significant changes to the international monetary system, the report said, most notably in which currency nations and multinational corporations use to do business. The bank noted that currency use remains dominated by the dollar despite the growing importance of emerging markets, a situation that could begin to see change over the next 15 years.

"The dollar now faces several potential rivals for the role of international currency," the report said.

In the near term, the bank said the euro remains the biggest challenger to the dollar. The single currency of a host of European countries is "poised to expand" its status as a currency of choice, though the appetite for the euro will depend in large part on whether officials can successfully navigate the sovereign debt and banking crises the region currently faces.

Longer term, the report said that China's yuan could taken on an ever-increasing role in the international monetary system. This could help resolve massive imbalances that have Beijing holding the largest stock of foreign exchange reserves while the country also serves as the world's largest exporter. Changes undertaken by Chinese officials to modernize their country's financial systems "are beginning to have an effect in laying the foundation for the renminbi taking on a more important global role."

Still, any change is unlikely to happen overnight even if bank officials do see the international monetary system become more diverse.

"I think it is still quite possible that this will only be a very gradual process ... it's very likely that the dollar will still be very dominant," Hans Timmer, director of development prospects at the bank, said during a conference call with reporters.

The new landscape will require significant changes at the international level, as policy makers seek to respond to a more multi-polar system. The report suggests that the Group of 20 meetings between industrialized and emerging nations needs to permanently replace the Group of 8 meetings, and that G-20 leaders should consider a "move to a more rules-based system in anticipation of trends towards multipolarity."

Read full report here.


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