Between two extremes: the political economy of dedollarisation

Global businesses will need to learn to operate in a multipolar global financial order with different regulations and politics.

Last February, discussing dedollarisation in public would have caused trouble. It was seen as a farfetched and unlikely idea, only countries like Iran would ever mull. A year after Russia's war in Ukraine, dedollarisation rose on the agenda and became a leading topic of conversation, speculation, and polarisation. The discussions around dedollarisation became entrapped in two camps. The first claims dedollarisation is inevitable and an evidence of the demise of the dollar and the US by extension. Hence, other countries will see economic development increase. The second dismisses dedollarisation as insignificant and inconsequential and asserts the dollar hegemony in the future and the US by extension.

While both views have merit, both unlikely to be right and the reality will be somewhere in between. Hence, the understanding of dedollarisation needs broadening .

The aim of dedollarisation is not to kill the dollar. This is unlikely to happen. Rather, it aims to restrict Washington's ability to use financial warfare as means of advancing its foreign policy objectives and externalising the cost of domestic financial crises. By creating a more balanced global financial system, the US will be less able to use sanctions or quantitative easing as policy instruments. In that sense, dedollarisation is plausible as less reliance on the dollar will force the US to be more careful in using finance as a policy tool domestically and internationally. Nonetheless, the dollar will still be widely used as the legacy global currency, but will lose 30-50% of its appeal.

The world problems are not all financial. Just by dedollarising, countries will not suddenly experience improvements in their economic growth. Issues like corruption, rent-seeking and bad economic planning will remain pertinent. Social and religious strife will still undermine development. Geopolitics will still play a key role in a country’s position in the global economy. Dedollarisation will enable countries to have more options, but they will be bounded by factors such as the ones mentioned above. Nonetheless, by falling out of the dollar pressure, countries can pursue more favourable investment deals. New terms will become possible and the global financial system will be more competitive and diverse. As digitisation of currencies expand so will the avenues of developing new financial relations.

Dedollarisation will be with the world for few decades. The US can use dedollarisation as an opportunity to re-industrialise and become more competitive in exports. Other countries need to stop fetishising dedollarisation and work on addressing more deeply rooted causes for their de-development. Global businesses will need to learn to operate in a multipolar global financial order with different regulations and politics.