Globalization has given more advantages to developed and richer countries and created inequality. In developing and undeveloped countries with old or traditional industries, many lost their jobs and earning sources as they had fewer opportunities for education, training, and skills. On the contrary, powerful and rich countries started to exert a great influence on the policies and politics of these countries due to globalization. But as this economic cycle is ending, the trade and economic pattern of the past decade may not be repeated. The world is becoming more protectionist now.
Recent developments have urged a new kind of globalization that requires improved rules for firms and input chains. Thus, a new regime in market behavior and policies has been considered where social and climate policy issues are raised rigorously. It is now believed that only rich countries should not dominate international courts. It increases free riding on social and climate issues, and poorer countries face major losses due to the irresponsible approach of richer ones. This new approach is the ‘end of fast-track globalization.’ It is also called ‘responsible globalization’.
The urge to shift the geopolitical power balance has created a new world order that may drive a new global investment cycle. Many believe that a new world order is more likely to happen since governments have started to respond to the perceived threat of military war due to greater defense spending. And there is also the acceleration of the energy transition and the reorganization of global value chains (GVCs) visible.
Some economies may achieve benefits due to the elimination of the old world order. There are some concerns regarding the probable new order. If only economic efficiency is considered while ignoring all the security concerns, the new world order will shift the global economy in a more stagflationary direction. Consequently, it may create frequent price rises and supply-side shortages.
Nowadays, it is debated whether the new world order is possible. If yes, who would lead, or how would it affect the global economy? Several reasons behind the concept of an emerging new world order include the Russia-Ukraine war, the COVID-19 pandemic, the acceleration of responses to climate changes, de-dollarisation, etc. Let’s discuss the prospects and perils of these issues that have sparked the debate of an emerging new world order.
Russia-Ukraine war, changes in geopolitical power, and an emerging new world order
The old world order broke down when the Soviet Union collapsed. Other countries neither accepted the United States (US) nor was it even successful as a leader. The main reason was that the US was not considerate of the preferences of other countries, which had different problems and demands. Even in the case of China, it has always considered what was best for itself. After the reopening of economies after the COVID-19 pandemic, the debate of a new world order has again opened up. Mainly, as other countries rely too much on China, the late deliveries and overall weak far-flung supply chains due to China’s zero-COVID policy worsened the global economy.
On the contrary, the Russia-Ukraine war has altered geopolitics and supply chains that may lead to future changes in investment and trade flows. Though only 2% of global trade is owned by Russia and a relatively minor part in global value chains (GVCs) and international investment is played by Russia, the country accounts for 12% of oil exports and 3.6% of gas exports globally before the invasion of Ukraine.
Immediately after the war, the over-reliance of Europe on energy imports from Russia was visible. The price of such energy imports increased so much that the Eurozone almost slipped into a deep recession. Since a mistrust of Western institutions unites both Russia and China, they have formed an alliance. They are economically complementary. Russia has sophisticated technology, whereas China is a commodity-dependent country. When two-thirds of the NATO member countries agreed that Russia was the aggressor in the war and should be expelled, China was one of those few countries who supported Russia. However, many nations chose to remain neutral or absent in voting, including India, Indonesia, Saudi Arabia, South Africa, Brazil, etc.
The Russia-Ukraine war can be seen as a game changer. Europe has played a much stronger role in these war-related issues that were not observed before. It has opened its borders to refugees from Ukraine and facilitated childcare, workforce, and schools for them. Europe also plays a strong role in broadening welfare measures, ecological sustainability, and life expectancy. Though the US had a chance to play a central role, it has gone back way before from its advantages in climate policies and military roles where needed. And, as mentioned before, China did not criticize Russia’s invasion for its benefit. In this scenario, geopolitical power shifting is much needed, and a new world order is the demand of time, to which Europe has much to contribute.
Acceleration of responses to climate change
Until now, climate change policies have not been at the center of attention, though it has been recognized as an important problem. Developed countries contribute to carbon emissions and pollution way more than developing countries. However, they do not want to actively participate in reducing carbon emissions and other climate issues as it may hamper their vast industrial outputs.
On the contrary, developing countries could not control emissions due to a lack of knowledge, technologies, and resources. However, climate change is a threat to supply chains and production facilities that are often ignored by rich and powerful countries. With the ‘no limit alliance’ of Russia and China, these countries are now more reluctant about climate change issues.
On the contrary, the US has dropped out of the line of making climate change policies. However, European countries have been encouraging the decarbonization of the global economy. Multilateral efforts regarding climate change are getting attention now. For instance, the EU Carbon Border Adjustment Mechanism (CBAM) may work as a stimulant for a new world order as it is expected to be an important one to accelerate responses to climate change.
De-dollarization and a search for a reliable global currency
When the Soviet Union collapsed, the US announced a new world order. It declared a series of wars against different countries, making the petrodollar the world order. Note that the petrodollar system refers to the global practice of selling and buying oil only in US dollars. It immensely affected those countries that were at war with the US. Using dollars as a sadistic economic weapon, the US devastated countries, especially Iraq. Due to this, the petrodollar is also called the ‘Weapon dollar.’
However, many believe that the power of the petro-weapon dollar will decrease or be eliminated soon. There are many reasons behind it. The United States is no longer the dominant manufacturer in the global economy, and China is outperforming in trade, science, and technology. Even the development model of the US is not a lucrative option for South Asian countries or other developing countries. Rather, China’s Belt and Road Initiative deals seem attractive to Africa and other developing countries.
The withdrawal of the United States troops from Afghanistan and the regime change in Syria have brought the US down from its supreme position as a global military power. Due to these issues, some countries are now looking for a new global currency for international trade. They want to reduce the over-reliance on dollars. And that may be the currency of the new world order.
However, the process will be complex as it may lead to volatility in the exchange rates of currencies, and the question is which currency can be the new global currency. Euro, Pound, and Yen may be the potential contenders. However, the UK and Japan are quite linked to the US regarding economics and politics. Chinese Yuan may also be a potential contender. However, the problem is limited convertibility and capital controls. Thus, it should be important to consider all the potential risks and benefits before a new currency is considered.
New world order or a new dimension in the existing global system?
There are many debates regarding the new world order. Industry Insider talked with Dr. Selim Raihan, Professor, Department of Economics, University of Dhaka, to know his perspective regarding the debates over the new world order. Here is his detailed view on the topic:
This is not the appropriate time to confirm that the world order is about to change. However, there are indeed many new dimensions in the existing global system or equilibrium. There are some recent issues responsible for starting the debate of a new world order again—for instance, the incident of the COVID-19 pandemic, which was unprecedented.
During the last 100 years, the world has never faced such a global outbreak of any infectious disease, resulting in new development perspectives. It has raised questions on the global development process and whether it is secure or strong enough to deal with any unprecedented issue in the future. We need global cooperation and understanding for that. But I do not think it significantly impacts a new world order.
Meanwhile, there are many changes in the geopolitical context. The conflict between the US and China has increased more than before. It is not only about trade anymore but also about geopolitical power. The US and China’s allied countries are now involved in this conflict. The impact on the global economy will depend on how this conflict is directed in the future.
The Russia-Ukraine war is the third issue that has affected the global system significantly. It has changed the dynamics of Europe and the global economy, too. Supply chains, food prices, and oil prices have been affected worldwide. South Asia was no exception. After the Russia-Ukraine war, it became difficult for South Asian countries to know whom to support. The US and India supported Ukraine, and China supported Russia in the war.
Also, the US and India have an undeclared alignment to stand together against the power of China, as China and India have had a conflict over economic power and political differences for years. However, they still work together in associations like BRICS and Asian Infrastructure Investment Bank (AIIB). Now, the future of the global economy will also depend on how the relationship between these countries alters.
For South Asian countries, the dilemma is if they should support China, the major trading partner, or India, the largest neighboring country. Furthermore, the major export destination for most South Asian countries is North America. Maintaining a balanced relationship with the US, India, and China is important but tricky. Bangladesh has somehow maintained a balanced relationship till now. However, it is quite unclear how the political dynamics will play a role during the forthcoming election and after the election and how it will affect our economy.
Overall, these issues, such as the pandemic, changes in geopolitical power, and the Russia-Ukraine war, have created new dimensions that will affect the equilibrium of the South Asian and global economies, but it may not be a new world order.
Now, let’s talk about the debates over the de-dollarization and a search for a reliable global currency. In the case of choosing an alternative currency, I do not think that Bangladesh has much scope to go for alternative currencies, even if Russia or other countries consider it. The dollar is used widely for obvious reasons.
The US imports from many countries, providing these countries with enough opportunities to earn in dollars. Thus, it is even easier for them to trade with other countries in dollars than other currencies. Even though the pound is also widely used, many countries still prefer dollars to pounds as they can use it to pay other countries.
On the contrary, the emergence of the euro was to challenge the demand for the dollar. The euro has indeed occupied some marketplace, but it is still not an alternative to the dollar. And about the concern of the dollar’s volatility, it is not a new case. During any crisis, there has been dollar volatility. However, the policymakers and government of the US have always tried to keep it in check so that no extreme incident happens. Therefore, there are fewer chances to observe extreme volatility in dollars, which can force many countries to shift from dollars entirely in the near future. In the context of Bangladesh, it is not in a position to choose any other currency entirely as the major earning of Bangladesh is in dollars, and a small portion is in euro.
On the other hand, we export goods worth less than a billion dollars to China. Even if we consider the Chinese currency, the Yuan, we can only utilize the equivalent amount of this export. If there were more opportunities to export in China, we could have considered Yuan an alternative currency. Otherwise, there is no logic to convert Yuan to Dollar and vice versa unnecessarily.
However, Bangladesh should consider using other currencies, such as the rupee and Yuan, on a limited scale to trade to decrease the pressure on the reserve of dollars. Approximately, it will cover 10% of our total trade. For example, Bangladesh exports goods worth two billion dollars to India. We can ask them to pay us in rupees rather than dollars for this export. On the contrary, we import goods worth around 10-12 billion dollars from India. Bangladesh can pay them with the rupees they get from those exports and the rest in dollars or as per the agreement. There has already been an agreement between Bangladesh and India to trade in rupees this year.
However, we need to take some more steps to avoid further issues while trading. For instance, we need a proper agreement among banks and a reserve of rupees on standby. Actually, with China, we already have such an agreement. However, the trade in the Yuan is not significantly larger, showing the need for more trade opportunities. Such agreements can be a way to deal with the dollar’s volatility. The second way is to take necessary steps to increase exports and remittances in dollars rather than avoiding dollars. And the third way is to increase foreign investment, which will increase the inflow of dollars and decrease the pressure on reserves.
Again, I believe that the new world order is yet to come. But, there are many new dynamics in the global economy. While Bangladesh cannot control many global issues, it can be a good observer and take policies accordingly. There also should be trade and regional integrity among South Asian countries to avoid different risk factors and keep the South Asian economy stable.