Ending US dollar dominance alone will not end monetary imperialism. Only much better multilateral arrangements to clear international payments can meet the Global South’s aspirations for sustainable development.

Ndongo Samba Sylla

Valéry Giscard d’Estaing, his Minister of Finance and Economic Affairs between 1962 and 1966, coined the phrase ‘exorbitant privilege’ to complain of US dollar dominance.

With the dollar’s status as the global reserve currency, the US can buy foreign goods, services, and assets on credit. It also enables the US to spend much more on foreign military bases and wars.

The privilege allows such extravagance with limited adverse effects on its balance of payments and the US dollar’s exchange rate. French economist Jacques Rueff noted the US could thus maintain external deficits “without tears”.

De Gaulle demanded the US Federal Reserve Bank convert France’s surplus ‘Eurodollars’ into monetary gold. The French challenge called the US bluff, forcing it to end dollar-gold convertibility at the heart of the 1944 Bretton Woods arrangement in 1971.

To gain some economic advantage in a system otherwise dominated by the dollar, post-war France imposed a monetary arrangement on most of its former African colonies, giving it a neocolonial privilege similar to the US’s worldwide.

Jomo Kwame Sundaram

Replacing the French franc with the euro in 1999 did not end this monetary imperialism. Now, 14 Sub-Saharan African countries with over 200 million people still use the CFA franc.

Created in 1945, this currency arrangement helped rebuild and use its colonies to accelerate post-war reconstruction of the French economy. It remains under the legal custodianship of the French Treasury.

France benefiting from its currency relations with its former colonies imply that the US’s rivals can also benefit from monetary hegemony if they succeed in displacing dollar dominance without subverting monetary imperialism.

De-dollarization
The term de-dollarization currently refers to the development of alternative bilateral and plurilateral payments initiatives reducing the role of the dollar and dollar-based financial arrangements in settling international economic obligations and managing foreign exchange transactions.

This has been growing. In 2022, international trade worldwide was estimated at $46 trillion, with over half invoiced in currencies other than the US dollar. More countries are trading with one another and settling in currencies other than the greenback.

Although this trend has eroded the dollar’s share of total official foreign currency reserves, this is not about to dethrone the dollar’s status as the global reserve currency.

Indeed, international trade is only the tip of the iceberg of international financial transactions, which are still mainly denominated in US dollars.

The current challenge to dollar hegemony has much to do with the unilateral financial sanctions by the US and its mainly European allies on several nations, including Russia, Iran and Venezuela.

These countries have been expelled from the SWIFT messaging system and/or have seen their assets abroad, especially dollar, euro, or gold reserves, unilaterally confiscated on various pretexts.

Facing such sanctions, more countries want to develop alternative payment systems, reduce their dollar and euro reserves, and find more secure ways to store their external surpluses.

A recent report by the Russian government for the BRICS criticised the West’s weaponisation of international payments arrangements. It called for an international monetary and financial system consistent with the principles of security, independence, inclusion, and sustainability.

Resource-rich countries with significant foreign exchange surpluses are understandably concerned with this threat. But the report did not address the problems and needs of deficit countries constituting much of the Global South.

International clearing union
A fundamental problem of the existing international monetary and financial system is that a national currency – the US dollar – functions as a reserve asset for the rest of the world.

This obliges most nations, especially in the Global South, to accumulate US dollars to meet their external obligations. Struggling to secure enough US dollars, such countries are especially vulnerable to external debt crises.

Their problems will not be addressed if US dollar dominance is no longer unrivalled, and its privilege has to be shared with other international reserve currencies.

A fair international monetary and financial system supportive of sustainable development should eliminate the obligation to accumulate foreign exchange reserves, e.g., if every country can pay for imports with its currency, which is technically possible.

With an International Clearing Union, Ernst Friedrich Schumacher noted “every national currency is made into a world currency, whereby the creation of a new world currency becomes unnecessary”.

Such arrangements would address the Global South’s financial, debt, and climate crises. However, there have not been renewed efforts since 1944 to secure the multilateral consensus necessary for such a transformation.

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Developing country governments are being blamed for irresponsibly borrowing too much. The resulting debt stress has blocked investments and growth in this unequal and unfair world economic order.

Money as debt
Myths about public debt are legion. The most pernicious see governments as households. Hence, a ‘responsible’ government must try to run a surplus like an exemplary household head or balance its budget.

Ndongo Samba Sylla

As currency is widely used for economic transactions, government debt and liabilities influence households’ and businesses’ earnings and wealth accumulation.

The standard analogy also ignores principles of double-entry bookkeeping, as one entity’s expenditure is another’s income, one entity’s debit is another’s credit, and so on. The government deficit equals the surplus of the non-government sector, which includes households, businesses, and the ‘rest of the world’.

Thus, when a government budget is in deficit – spending exceeds revenue – the government has created net financial wealth for the non-government sector. Government deficits, therefore, increase private savings and the money supply.

Since only the government issues the national currency, its spending does not ‘crowd out’ private-sector spending but complements it. As the currency is debt issued by the state, no money would be left in an economy if the government paid off all its debt!

Hence, media hysteria about public debt is unjustified. Instead, attention should be paid to the macroeconomic and distributive impacts of public spending. For example, will it generate inflation or negatively impact the balance of payments? Who would benefit or lose?

Jomo Kwame Sundaram

Mimicking eurozone criteria, many West African governments have set policy targets, including public deficits of less than 3% of GDP and debt-to-GDP ratios of less than 70%.

The debt-to-GDP ratio undoubtedly shows relative levels of indebtedness. But otherwise, this ratio has no analytical utility. After all, public debt is a ‘stock’, whereas GDP or output is a ‘flow’.

Suppose a country has an annual income of $100 and zero debt. Suppose its government issues debt of $50 over 25 years, with annual repayments of $2. Its public debt-to-GDP ratio will suddenly increase by 50%.

This poses no problem as GDP will likely increase thanks to increased investments while repaying the $50 debt. With an annual economic growth rate averaging 3%, GDP will more than double over this period.

Second, public debt is always sustainable when issued and held in domestic currency, and the central bank controls interest rates.

With a debt-to-GDP ratio of 254%, the Japanese government will never lack the means to pay off its debt. Unlike developing countries that take on foreign currency debt at rates they do not control, it will always be solvent. Thus, Peru defaulted in 2022 with a debt-to-GDP ratio of 33.9%!

Monetary ‘Berlin Wall’
Thus, there is a significant difference between the governments of the North – mainly indebted in their own currencies – and those in the South, whose debt is at least partly denominated in foreign currencies.

But governments in the South are not indebted in foreign currencies due to inadequate savings.

They can always finance any spending requiring local resources, including labour, land, equipment, etc. Objectively, no country issuing currency can lack ‘financing’ for what it has the technical and material capacity to do.

The chronic indebtedness of most developing countries and the ensuing crises are thus manifestations of the international economic and financial system’s unequal and unfair nature.

Global South countries have been required to accumulate ‘hard currencies’ – typically dollars – to transact internationally. This monetary ‘Berlin Wall’ separates two types of developing countries.

First, net exporting countries that accumulate ‘enough’ dollars usually invest in low-yielding US Treasury bonds, allowing the US to import goods and services virtually free.

Second, those which do not earn ‘enough’ hard currencies resort to transnational finance, typically increasing their foreign indebtedness. Most eventually have to turn to the IMF for emergency relief, inadvertently deepening their predicament.

However, as they have to cope with prohibitive terms and conditions for access to emergency foreign financing, it is difficult to escape these external debt traps.

Paradoxically, countries of the South with chronic dollar deficits are often rich in natural resources. Bretton Woods institutions typically demand protracted fiscal austerity and economic denationalisation, undermining developing countries’ chances of getting fair returns for their resources and labour.

Abuses and mismanagement may aggravate Global South governments’ indebtedness in foreign currencies, but these should always be understood in the context of the unequal world economic and financial order.

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Developing countries are being blamed for having borrowed and spent irresponsibly. But they have only been doing what foreign powers and financial interests have urged them to do.

Ndongo Samba Sylla

With progress towards sustainable development often in reverse, servicing external debt now blocks progress. Many governments have cut back spending in line with conditions or advice from powerful foreign economic agencies.

Current account tales
Many still believe all national economies should have trade or current account surpluses with others – typically citing Germany’s and Japan’s post-war booms. But of course, not all countries can have surpluses simultaneously.

If a country’s trade and current account balances remain in deficit for long, its currency’s purchasing power will often be under pressure to fall. Such is the case for developing countries, at least. The situation differs for countries such as the US, UK and Japan.

The 1944 Bretton Woods agreement created an ‘exorbitant privilege’ for the US by making the dollar the world reserve currency. This privilege survived the US refusal from August 1971 to honour its Bretton Woods obligations.

The US sells Treasury dollar bonds to the world but does not face the pressures others face to repay debts denominated in other currencies. Dollar liquidity thus meets international demand for USD. Federal government expenditure supplements private spending, with both eventually finding their way into private bank accounts.

Jomo Kwame Sundaram

Central banks of creditor nations have long bought low-risk US Treasury bonds. Indeed, current account surpluses make them net exporters of capital: they pay off external liabilities and make other payments abroad without incurring foreign debt.

By contrast, developing nations with chronic current account deficits are often obliged to go into debt, bearing the higher costs of accessing foreign-denominated finance.

Hence, developing countries are seen as ‘creditors of safe assets’ (US Treasury bonds) offering low returns but ‘debtors of risky assets’ promising higher returns.

Foreign capital’s Pandora’s box
Foreign capital is usually seen as necessary to supplement inadequate domestic investments. For example, much higher interest rates in developing countries may encourage borrowing and investment from abroad. However, heavy reliance on foreign finance is more problematic.

Servicing external debt drains foreign exchange resources, eventually causing national currencies to depreciate. Meeting foreign liabilities – including returns to foreign investments and external debt servicing – may require more foreign borrowings.

Reducing external debt by selling domestic assets to foreigners further denationalises post-colonial economies and diminishes national wealth. External liabilities over the medium-to-long term are likely to increase, with the repatriation of returns to foreign investments, both direct and portfolio.

If exchange rates are undervalued but stable – which is rarely the case – they can discourage imports and promote exports if rapid economic transformation is feasible. But some imports – e.g., food and medicines – are necessities, not easily replaced by domestically-made substitutes.

Macroeconomic stabiliser?
Credit to households and government deficits increase purchasing power, enabling spending, at least temporarily. When domestic productive capacities respond to such demand, national economic output grows.

When private credit and spending fell during the 2008 global financial crisis, government deficits revived many rich economies – averting more rapid economic contraction and allowing output to recover. Thus, more government and private spending and investment – using debt and earnings – spur growth.

Recessions have become less frequent and deep as fiscal deficits have increased in recent decades. Consistently counter-cyclical fiscal policy can thus reduce business cycles and stabilise growth and employment in rich nations.

With public debt and expenditure, economies would flourish more often. Government debt is less of an issue in rich countries: unlike developing economies, government debt is typically in the national currency, while interest rates are under central bank control.

Interest rate yoyo
Interest rates for government securities issued by prosperous economies were lowered after 2008. ‘Unconventional monetary policies’ – especially ‘quantitative easing’ – were widely adopted, defying orthodox monetary theory.

Such rates remained low until early 2022, when the Fed acted against the tight US labour market after three consecutive presidents – Obama, Trump and Biden – sustained full employment after the 2008 global financial crisis and the ensuing Great Recession.

For two years, the US Fed and the European Central Bank have pushed up interest rates, fully aware that developing country governments have to borrow heavily on much more onerous terms.

While the US Fed has stopped raising interest rates, it refuses to lower them, while the ECB remains adamant about not doing so. Meanwhile, developing countries’ central banks maintain high rates, fearing further haemorrhage abroad.

Fiscal austerity is increasingly demanded by developing countries close to government debt distress. Yet, fiscal austerity cannot possibly address external liabilities, debt or otherwise. In other words, there is no analytical basis for the typical policy prescriptions for developing country governments facing external debt stress.

Dr Ndongo Samba Sylla is Africa Research and Policy Director for IDEAS, which organised an international conference on the African debt crisis in Accra, Ghana, on 27-29 March 2024.

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The ongoing plunder of Africa’s natural resources drained by capital flight is holding it back yet again. More African nations face protracted recessions amid mounting debt distress, rubbing salt into deep wounds from the past.

With much less foreign exchange, tax revenue, and policy space to face external shocks, many African governments believe they have little choice but to spend less, or borrow more in foreign currencies.

Ndongo Samba Sylla

Economic haemorrhage
After ‘lost decades’ from the late 1970s, Africa became one of the world’s fastest growing regions early in the 21st century. Debt relief, a commodity boom and other factors seemed to support the deceptive ‘Africa rising’ narrative.

But instead of long overdue economic transformation, Africa has seen jobless growth, rising economic inequalities and more resource transfers abroad. Capital flight – involving looted resources laundered via foreign banks – has been bleeding the continent.

According to the High Level Panel on Illicit Financial Flows from Africa, the continent was losing over $50 billion annually. This was mainly due to ‘trade mis-invoicing’ – under-invoicing exports and over-invoicing imports – and fraudulent commercial arrangements.

Transnational corporations (TNCs) and criminal networks account for much of this African economic surplus drain. Resource-rich countries are more vulnerable to plunder, especially where capital accounts have been liberalized.

Jomo Kwame Sundaram

Leonce Ndikumana and his colleagues estimate over 55% of capital flight – defined as illegally acquired or transferred assets – from Africa is from oil-rich nations, with Nigeria alone losing $467 billion during 1970-2018.

Over the same period, Angola lost $103 billion. Its poverty rate rose from 34% to 52% over the past decade, as the poor more than doubled from 7.5 to 16 million.

Oil proceeds have been embezzled by TNCs and Angola’s elite. Abusing her influence, the former president’s daughter, Isabel dos Santos acquired massive wealth. A report found over 400 companies in her business empire, including many in tax havens.

From 1970 to 2018, Côte d’Ivoire lost $55 billion to capital flight. Growing 40% of the world’s cocoa, it gets only 5–7% of global cocoa profits, with farmers getting little. Most cocoa income goes to TNCs, politicians and their collaborators.

Mining giant South Africa (SA) has lost $329 billion to capital flight over the last five decades. Mis-invoicing, other modes of embezzling public resources, and tax evasion augment private wealth hidden in offshore financial centres and tax havens.

Fiscal austerity has slowed job growth and poverty reduction in ‘the most unequal country in the world’. In SA, the richest 10% own over half the nation’s wealth, while the poorest 10% have under 1%!

Resource theft and debt
With this pattern of plunder, resource-rich African countries – that could have accelerated development during the commodity boom – now face debt distress, depreciating currencies and imported inflation, as interest rates are pushed up.

Zambia’s default on its foreign debt obligations in late 2020 has made headlines. But foreign capture of most Zambian copper export proceeds is not acknowledged.

During 2000-2020, total foreign direct investment income from Zambia was twice total debt servicing for external government and government-guaranteed loans. In 2021, the deficit in the ‘primary income’ account (mainly returns to capital) of Zambia’s balance of payments was 12.5% of GDP.

As interest payments on public external debt came to ‘only’ 3.5% of GDP, most of this deficit (9% of GDP) was due to profit and dividend remittances, as well as interest payments on private external debt.

For the IMF, World Bank and ‘creditor nations’, debt ‘restructuring’ is conditional on continuing such plunder! African countries’ worsening foreign indebtedness is partly due to lack of control over export earnings controlled by TNCs, with African elite support.

Resource pillage, involving capital flight, inevitably leads to external debt distress. Invariably, the IMF demands government austerity and opening African economies to TNC interests. Thus, we come full circle, and indeed, it is vicious!

Africa’s wealth plunder dates back to colonial times, and even before, with the Atlantic trade of enslaved Africans. Now, this is enabled by transnational interests crafting international rules, loopholes and all.

Such enablers include various bankers, accountants, lawyers, investment managers, auditors and other wheeler dealers. Thus, the origins of the wealth of ‘high net-worth individuals’, corporations and politicians are disguised, and its transfer abroad ‘laundered’.

What can be done?
Capital flight is not mainly due to ‘normal’ portfolio choices by African investors. Hence, raising returns to investment, e.g., with higher interest rates, is unlikely to stem it. Worse, such policy measures discourage needed domestic investments.

Besides enforcing efficient capital controls, strengthening the capabilities of specialized national agencies – such as customs, financial supervision and anti-corruption bodies – is important.

African governments need stronger rules, legal frameworks and institutions to curb corruption and ensure more effective natural resource management, e.g., by revising bilateral investment treaties and investment codes, besides renegotiating oil, gas, mining and infrastructure contracts.

Records of all investments in extractive industries, tax payments by all involved, and public prosecution should be open, transparent and accountable. Punishment of economic crimes should be strictly enforced with deterrent penalties.

The broader public – especially civil society organizations, local authorities and impacted communities – must also know who and what are involved in extractive industries.

Only an informed public who knows how much is extracted and exported, by whom, what revenue governments get, and their social and environmental effects, can keep corporations and governments in check.

Improving international trade and finance transparency is essential. This requires ending banking secrecy and better regulation of TNCs to curb trade mis-invoicing and transfer pricing, still enabling resource theft and pillage.

OECD rhetoric has long blamed capital flight on offshore tax havens on remote tropical islands. But those in rich countries – such as the UK, US, Switzerland, Netherlands, Singapore and others – are the biggest culprits.

Stopping haemorrhage of African resource plunder by denying refuge for illicit transfers should be a rich country obligation. Automatic exchange of tax-related information should become truly universal to stop trade mis-invoicing, transfer pricing abuses and hiding stolen wealth abroad.

Unitary taxation of transnational corporations can help end tax abuses, including evasion and avoidance. But the OECD’s Inclusive Framework proposals favour their own governments and corporate interests.

Africa is not inherently ‘poor’. Rather, it has been impoverished by fraud and pillage leading to resource transfers abroad. An earnest effort to end this requires recognizing all responsibilities and culpabilities, national and international.

Africa’s veins have been slit open. The centuries-long bleeding must stop.

Dr Ndongo Samba Sylla is a Senegalese development economist working at the Rosa Luxemburg Foundation in Dakar. He authored The Fair Trade Scandal. Marketing Poverty to Benefit the Rich and co-authored Africa’s Last Colonial Currency: The CFA Franc Story. He also edited Economic and Monetary Sovereignty for 21st century Africa, Revolutionary Movements in Africa and Imperialism and the Political Economy of Global South’s Debt. He tweets at @nssylla

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