Defying the Economic Odds: The World Melts Down, China Grows

By Dilip Hiro, Tomdispatch.com. Posted May 4, 2009.

A glance at the past decade and a half shows that, between 1994 and 2000 alone, there were economic crises in nine major countries which impacted the global economy: Mexico (1994), Thailand-Indonesia-Malaysia-South Korea-the Philippines (1997-98), Russia and Brazil (1998), and Argentina (2000).

According to Zhou, financial crises resulted when the domestic needs of the country issuing a reserve currency clashed with international fiscal requirements. For instance, responding to the demoralization caused by the 9/11 attacks, the U.S. Federal Reserve Board drastically reduced interest rates to an almost-record low of 1% to boost domestic consumption at a time when rapidly expanding economies outside the United States needed higher interest rates to cool their growth rates.

"The [present] crisis called again for creative reform of the existing international reserve currency," Zhou wrote. "A super-sovereign reserve currency managed by a global institution could be used to both create and control global liquidity. This will significantly reduce the risks of a future crisis and enhance crisis management capability."

He then alluded to the Special Drawing Rights (SDR) of the International Monetary Fund. The SDR is a virtual currency whose value is set by a currency "basket" made up of the U.S. dollar, the European euro, the British pound, and the Japanese yen, all of which qualify as reserve currencies, with the greenback being the leader. Ever since the SDR was devised in 1969, the IMF has maintained its accounts in that currency.

Zhou noted that the SDR has not yet been allowed to play its full role. If its role was enhanced, he argued, it might someday become the global reserve currency.

Zhou's idea received a positive response from the Kremlin, which suggested adding gold to the IMF's currency basket as a stabilizing element. Its own currency, the ruble, is already pegged to a basket that is 55% the euro and 45% the dollar. Within a decade of its launch, the euro has become the second most held reserve currency in the world, garnering nearly 30% of the total compared to the dollar's 67%.

Treasury Secretary Timothy Geithner's immediate reaction to Zhou's article was: "China's suggestion deserves some consideration." Nervous financial markets in the U.S. took this as a sign from the Treasury Secretary that the dollar was losing its primacy. Geithner retreated post-haste. And President Obama quickly joined the fray, saying: "I don't think there is need for a global currency. The dollar is extraordinarily strong right now."

Actually, maintaining the customary Chinese discretion, Zhou never mentioned the state of the U.S. dollar in his article, nor did he even imply that the yuan should be included in the super-sovereign currency he proposed. Yet it was clear to all that at a crucial moment -- with world leaders about to meet in London to devise a way to defuse the most severe fiscal crisis since the Great Depression -- that a China which had bided its time, even though it had the third largest economy on the planet, was now showing its strong hand.

All signs are that Washington will be unable to restore the status quo ante after the present "great recession" has finally given way to recovery. In the coming years, its leaders will have to face reality and concede, however reluctantly, that the economic tectonic plates are shifting -- and that it is losing financial power to the thriving regions of the Earth, the foremost of which is China.

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Dilip Hiro is the author, most recently, of Blood of the Earth: The Battle for the World's Vanishing Oil Resources (Nation Books). His upcoming book After Empire: The Rise of a Multipolar World will be published by Nation Books this year.

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