Adopt measures to help improve global financial governance

Intense challenges and transformations characterize the global situation today. Among them are the rejection of peaceful measures by some countries to resolve conflicts, the lack of objectivity in actions, and the significant impact of technology on products and services. In this context, groupings such as BRICS should adapt to the changing global situation.

The world economy continues to suffer the effects of the COVID-19 pandemic, with the US Federal Reserve's policy of constantly hiking interest rates having a negative impact on the US' sovereign debt and creating budget ceiling problems.

While many countries in Europe and other regions are still struggling to boost their economies, the unipolar world, centered on the United States, is fast transforming into a multipolar world. An example of this change can be seen by comparing the economic performance of the G7 member states and BRICS(Brazil, Russia, India, China and South Africa). In 2002, the G7 countries accounted for 42 percent of global GDP, but 20 years later, they account for just 30 percent of global GDP. During the same period, BRICS members' share of global GDP increased from 19 percent to 31 percent.

This significant change calls for major structural reformulations in the global economy and institutions.

One of the most contentious issues is the US dollar's hegemony as global reserve currency. No one doubts the importance of the dollar, because it still accounts for about 88 percent of all international transactions and 59 percent of global foreign exchange reserves.

But that does not mean other countries have to become hostages to the US' domestic economic policy or face political sanctions such as being barred from using the network of the Society for Worldwide Interbank Financial Telecommunication to send or receive information on financial transactions. It is because of the dollar's hegemony that the US is using the SWIFT as a coercive political tool against some countries.

For these reasons, the international monetary system needs to be improved. In fact, some large economies want to use other currencies as an alternative to the dollar to conduct foreign trade. The BRICS Summit in South Africa will likely discuss proposals for finding a currency or a basket of currencies to reduce the dependence on the dollar.

However, for creating a store of value, it is necessary that the asset has liquidity and does not deteriorate over time. Only if it has these attributes can it have credibility as a medium of exchange and be used to conduct regional and global trade.

The establishment of a new monetary standard to end the dollar's hegemony, nevertheless, will be complex and have positive and negative effects on the market.

At present, replacing the dollar as a global reserve currency with another currency may not be feasible, because in addition to the unwanted macroeconomic effects of the new currency on different economies, there is a need for economies to reach a broad consensus on its credibility.

The US dollar may be replaced by another currency or a basket of currencies in the future, but the world economy needs something more than just the replacement of the dollar with another currency. Experts have given several suggestions in this regard, including replacing the dollar as global reserve currency with the gold standard, a basket of currencies or a BRICS digital currency.

Also, the process to introduce the new currency in the global trade is critical. To begin with, it should be introduced gradually and for some specific objectives. Initially, it must be used in an integrated payment system for international transactions. And if it is in the interest of BRICS, the member countries could try to introduce a currency like the euro. Although this is possible, success will not be easy to come by due to BRICS members' geopolitical characteristics and economic heterogeneity. In the case of BRICS, it would be better for the members to keep conducting trade in their own currencies for now.

Creating a new currency for BRICS will allow even non-BRICS countries to use it to conduct trade if its use is more advantageous than the dollar.

There is also a need to adopt new measures to help improve countries' governance. In this context, creating a new trade currency for BRICS will be very useful, not least because it will minimize the use of the dollar, both as a means of payment and an alternative reserve currency for countries.

It is essential, however, to create a mechanism that will allow minimum political interference and contribute to developing countries' economic development.

The views don't necessarily reflect those of China Daily.

The author is director of the China-Brazil Center for Research and Business.

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