Sunday, May 29, 2011

US Dollar Will No Longer Be A Dominant International Currency By 2025

FT: World Bank Sees End to Dollar’s Hegemony;
World Bank: Emerging Market Growth Poles are Redefining Global Economic Structure, Says World Bank Report

According to a recent World Bank report, the US dollar will no longer be a single, dominant international currency by 2025 as the economic power shifts to emerging market economies. Instead, the euro and the renminbi will likely emerge as the international currencies along with the US dollar in a “multi-currency” system. The report, “Global Development Horizons 2011-Multipolarity: The New Global Economy,” expects that by 2025, six emerging market economies (Brazil, China, India, Indonesia, South Korea, and Russia) will account for over half of overall global growth. The report also expects that the average GDP growth rate of emerging market economies will be 4.7 percent between 2011 and 2025 while the average GDP growth rate in advanced countries will be 2.3 percent in the same time frame.

As the power of global growth shifts to the emerging market economies, this will bring several changes. For example, robust economic growth and strong domestic demand in emerging market countries will benefit low income countries through increased foreign investments and trade. There will be much more cross-border merger and acquisition deals and “South-South FDI,” said Mansoor Dailami, lead author of the report and manager of emerging trends at the World Bank. Also, the multipolar world economy will no longer be dominated by “established multinationals,” and emerging market corporations will become more active and influential as well, having better access to global bond and equity markets. Justin Yifu, the World Bank’s chief economist, emphasized that to keep up with these changes, international financial institutions would have to change fast.

The report also pointed out several challenges emerging market economies would face to sustain high growth rate. Emerging market economies need to grow by enhancing productivity and strengthening domestic demand rather than depending on exports and technological transfers. Also, emerging market economies, especially, China, Indonesia, India and Russia, need to reform their domestic institutions while Brazil, India, and Indonesia face challenges of developing human capital and providing quality education.

Lastly, the report emphasizes that multilateral institutions need to provide assistance to developing countries and low income countries as the international monetary system moves to a multi-currency system. Multilateral institutions can provide technological assistance, aid, and policy advice so that those countries can adequately respond to new challenges and opportunities.

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