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Geographical Significance and Natural Reserves in the South China Sea

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South China Sea has vital significance in the region as well as indo-pacific geopolitics. South China Sea is one of the world largest and semi enclosed sea. It stretches around 3.5 million square kilometers (1.4 million square miles) (Jennings, 2017). The average depth of sea is 4,000 feet with its continental shelf. This is a warm sea with high salt content. It is full of living and non-living resources with one of world busiest trade route, linking Pacific Ocean to India Ocean (Kaplan, 2016).  South China Sea is widened from Singapore Strait to Taiwan Strait with a group of countries like Indonesia, Malaysia, Philippine, Brunei, Thailand, Cambodia, Singapore, Vietnam, the People’s Republic of China and the Republic of China (Taiwan) (Perkins, 2013).  The SCS is the combinations of the thousands of the islands, reef, islets, corals, shoals and atolls spread 900 km from east to west and 1800 km from north to south and covering geo-political and geo-strategic interests of the region (Nair, 2012). There are many rivers which fall in SCS, those are, Mekong River (It flows from China, Vietnam, Laos, Myanmar, Cambodia and Thailand), Pahang River (West Malaysia), Kiulong River (Myanmar), Pasig River (Philippine), Rajang River (Malaysia), Min River (China), Red River (China and Vietnam), Pearl River (China and Vietnam) etc. (Mustajib, 2016). All the four disputed islands (the Paracel Island, the Spratly Island, the Macclesfield bank and the Pratas islands) are the part of this sea. China has sovereignty claims over all these described archipelagos (Storey & Cheng Yi, 2016).

The Spratly archipelago is the biggest group of islands in this sea and the most controversial among all the claimants. It consist of islands, reef, banks and shoals with area about 409,000 sq. km. It is located between Vietnam and Philippines near Malaysia (Pletcher, 2016). The Spratly archipelago is known in Chinese as Nansha islands, Truong Sa islands in Vietnam and Kalaya’an archipelago in Philippine. This place is full of sea birds, fish and turtles (Muir, 2012). These archipelagoes are 560 miles wide from east to west and 500 miles from north to south. These islands consist of 14 sandy islands, 21 shoals, 113 reefs and 6 bank and 113 submerged banks. According to a western researcher Spratly Islands enclosed 170 features and only 36 islands of tiny quantity are above sea level (Keyuan, 2011).

Paracel Island is important group of the islands because of its important geo-strategic location and natural resources. It is disputed between China and Vietnam. China got possession of these archipelagoes in 1974 during a conflict with South Vietnam (Ngo, 2017). Paracel Island stretch 122,648,000 square nautical miles and second largest group after Spratly Island. These archipelagoes situated in South China Sea with 165 km away from south and eastward of Chinese Hainan island and 185 east side of Vietnamese coasts (Bouchat, 2014). Paracel Island consist of 30 islands, islet and reef stretch 16,000 square kilo meters (Nguyen, 2012).

Pratas islands (Dongsha Quandao) consist in one island and two banks. These are North Vereker and South Vereker Bank and Dongsha. Only Dongsha above from sea level and North and South Vereker are entirely submerged. This archipelago is situated south east of the Hong Kong. These are under the sovereignty of the Taiwan and China has claim over it (Guo, 2007, p. 99).

The Macclesfield bank is disputed between China and Philippine. It consist of 25 reefs and considered as the biggest atoll in the world and the Scarborough Shoal is located in the west of Philippines and disputed between China and Philippine. Both archipelagoes are now under the control of China (Lee B. , 2014).

Wu Shicun (2013) describes the importance of the SCS in his book “Solving Disputes for Regional Cooperation and Development on the South China Sea: A Chinese Perspective” with the reference of France navigation officer. He writes that the Vice Chairman of the France Navigation Committee described the importance of the Spratly and the Paracel Island in 1930s in these words that it is impossible to ignore importance of both islands and the occupation of both islands by powerful foreign country would cause a great threat to the security of the Indo-China during war. These words show the importance of the SCS and its important geostrategic position. Due to this importance, the US and China are involved in getting strong position in the SCS region. It is reality that if any country gets control over SCS, it can control the whole East Asia region as a regional hegemon. This is the reason that this area got attention of regional stack holders as well as world super power, the US. According to the president of the China’s National Institute for South China Sea studies Wu Shicun, there are four major stack holders who were involved in this dispute, these are China, Vietnam, Philippines and the US. The importance of this sea can be described in two ways. First as full of natural resources, second, economic activities and passage of trade, third, it’s geo-strategic position.

South China Sea is full of natural resources like Gas, Oil, Coral Lime, high Silicate, Sand, quality Gem, natural pearls, fish, birds and sea slugs. For cultivation, there were many trees in the Spratly Islands like bread fruit, coconut and tung-oil trees (Hao, 2013). Analysts declared South China Sea is the hub of the resources (Fabinyi, 2015). There are many other mineral for industrial use placed in SCS, those are Zircon, Ilmenite, Cassiterite, Arenaceous quartz, Monazite etc. There are many salt mines in South China Sea. It is estimated that the SCS gives 604,000 ton annual output of the salt (Mustajib, 2016). These natural resources increased the importance of South China Sea. These resources are the big reason of the stimulation of the neighboring countries for the occupation of South China Sea. Basically dispute over the South China Sea and its islands initiated during 1970s. Due to oil shortage, world realize the importance of the oil and every country started effort for oil. This was the time when first time Philippines claimed for the Spratly Islands due to the oil reservoirs. It is possibility of existence of large hydrocarbon resources with other minerals like tin, copper and manganese. Surveys in the 1960s and 1970s strongly indicated the presence of these resources in islands of the SCS (Dosch, 2015).

Oil and gas resources have special attraction for the claimants of the Paracel and Spratly Island. Geo-physical surveys which were conducted by Philippine, Malaysia and Brunei during 1960s and 1970s broadly got the attention of the whole world to this region. These surveys showed the oil and gas resources in SCS. Oil rising prices increased the importance of the Spratly Island. Philippines initiated the first commercial field in Palawan Island at Reed Bank with Swedish and Philippines companies on March 1976. Chinese and Vietnamese interests increased in Spratly Islands due to the oil exploration and the Philippine’s initiative (Buszynski, 2015, p, 10). Due to precious resources many experts say the SCS as “second Persian Gulf” (Amry, 2015). Chinese agency, the Ministry of Geological Resources and Mining estimated that there is more than seventeen billion barrels crude oil in South China Sea which can be compared with Kuwait crude oil of 13 billion tons (Shaohua, 2006).

Natural Resources in SCS (Lee B. , 2014)

According to the US energy information agency, the SCS contains eleven billion barrel oil which is equal to total oil resources of Mexico. The SCS also contains 190 trillion cubic feet natural gas resources (Miller, 2017). An Indian navy captain reported that South China Sea has 7 billion barrel oil reserves and 900 trillion cubic feet natural gas reserves (Nair, 2012, p. 65). The US geological survey gave a report in which they estimated that there is additional 12 billion barrel oil and 160 trillion cubic feet oil in South China Sea which is still undiscovered (Metelitsa & Kupfer, 2014). Paracel Island is a home of natural resources and minerals. The US Energy Information Administration (USEIA) published a report in 2013 and estimated that Paracel Island contains 1 trillion cubic feet natural gas (Bouchat, 2014).

Fish is an important part of human nutrition. It provides healthy and hygienic proteins. South China Sea region is very rich in fishing resources. Twelve per cent fishing of the globe is produced annually in this region (Murray, 2016). The Spratly Islands is one of the world’s dense and richest fishing grounds with up to 7.5 ton of fish per sq. km (Shicun, 2013). Role of fish in surrounding countries like China, Vietnam and Philippines boost the fishing industry of these countries and participate its role in the economy of these countries (Mustajib, 2016). Paracel Island provide China and Vietnam closest point of fishing. Paracel Island are the hub of fishing and world’s fourth productive fishing zones in earth. It contributes world’s 10 percent fishing on annual basis. Fishes of Paracel Island made China as world’s largest consumer and exporter country and Vietnam achieved second foreign exchange and earned 7 percent of its GDP (Bouchat, 2014, p. 6). In this way fishing contributes a vital role in the economy of China and Vietnam.

China has commenced bundle of oil explorations in South China Sea to fulfill its energy needs. Following are the details about the Chinese oil exploration adventures which certainly cause the displeasures of the other stack holders especially Vietnam and Philippine. China signed an agreement with the US oil-gas exploration company on May 1992 for exploration of oil and gas. In 1994 China and Vietnam engaged foreign companies in Spratly Islands and Gulf of Tonkin (Shicun, 2013, p. 112-113). The People’s Republic of China announced its oil exploration in deep sea near the Spratly Islands on 3 May 2014 and Chinese state owned China National Off Shore Oil Corporation begun its work in the deep sea. This was the disputed territory between China and Vietnam. Vietnam protested in this Chinese act (Dicke & Holbig, 2014).

Chinese national oil company China National Offshore Oil Corporation (CNOOC) has increased the relations with international companies for oil exploration in SCS. China as the second largest economy and first largest energy consumer needs to exploit the energy resource. This is the reason that China National Offshore Oil Corporation (CNOOC) is working with coordination of British Petroleum BP, Petro-Canada, Australian BHP Billiton, Brazil’s Petrobras, and Hong Kong-owned and Canada-based Husky Energy (Bouchat, 2014).

Oil, gas and other natural resources are the part of interests of Vietnam to maintain its claim and control in SCS. These resources and geo-strategic importance of the SCS has made Vietnam an imperative country of the region. There are many exploration activities of Vietnam performed for tapping gas and natural resources in SCS.

Vietnam entered a contract with Norwegian company for a seismic survey in 1992. In 1994 China and Vietnam engaged foreign companies in Spratly Islands and Gulf of Tonkin. A dispute started between China and Vietnam due to petro-Vietnam contract with the US Company for explorations. During 2007 to 2008, Vietnam started to make deal with international oil companies like Exxon Mobile and BP Conoco to work in Spratly Island. This deal triggered the anger of China and strongly protested over it. Vietnam’s exploration of resources near Vanguard Bank in 2011 again triggered the tension between the two countries (Shicun, 2013, p. 112-113).

The SCS has vital importance for Philippines due to its strategic locations and its natural resources. These natural resources are the bone of the Philippines economy and a huge number of populations are engaged in fishing and getting benefits from natural resources like oil, gas and other sea and land resources. Spratly Islands is the most important group of islands near Philippines Palawan province. Philippines is the nearest country closer to the Spratly Islands then China and Vietnam. Government engaged the foreign oil companies for the exploration of the oil in this group of islands. Spratly Islands and its surrounding water are full of fishing resources. Due to dense area of the Spratly Islands for fishing, it involved the big population of the fishermen in this area. Almost 1.61 million Philippine’s are involved in fishing which is 15 percent of the Philippines population. Fishing is the focal point of Philippines economy and contributes 4.3 per cent of its GDP (Shicun, 2013, p. 127).   

South China Sea is one of the busiest trade routes in the world. It links the Pacific Ocean with the Indian Ocean. The SCS has great importance in the world trade routes. It joins the Pacific Ocean to Indian Ocean. The SCS partakes the 50% of the global trade shipping and marine passage (Dosch, 2015). The SCS is the passage of five trillion dollars trade every year (Murray, 2016). There are two major ports in this area; Singapore port in the south of the South China Sea and Hong Kong port in its north (McKinnon, 2011). South China Sea links the Asia, America and Europe through these ports. Spratly Islands stretches about 1,000 km and all shipping and air traffic in SCS, passes near these islands (Shicun, 2013). Only 270 merchant ships had been passing from Spratly Islands during 1980s but the strength has increased magically with the passage of time (General Assembly Fourth Committee, 2016).

It is estimated that approximately 5 trillion dollars commercial goods pass through this route. Big industrial powers of this region like the People’s Republic of China, South Korea and Japan rely upon the Middle East’s oil which is 25% of the South China Sea Traffic. East Asian countries, exporting finished goods from West, also rely on this route. The oil which is imported from Middle East reached Malacca strait through Indian Ocean and entered the South China Sea. This is the reason; the passes of the SCS have great importance in this sea route. In comparison to sea traffic, the SCS routes have three times heavy sea traffic rout than Suez Canal and five times than Panama Canal. South China Sea is the passage of energy, finished goods and raw material. It is the passage of two third energy supply of South Korea, 80 per cent of crude oil of China and 60 per cent energy of Taiwan and Japan (Kaplan, 2016). In this way, South China Sea has vital importance for the regional economic powers. South China Sea is also the one of the biggest maritime route of the Liquefied Natural Gas (LNG).

Most of the East Asian countries export LNG form Qatar, Australia, Malaysia and Indonesia. It is estimated that about 6 trillion cubic feet LNG which is the half of the global LNG passed through SCS. LNG is exported by regional countries like Japan, South Korea, China, Taiwan and rest of the Asian countries. The growing demands of the LNG in East Asia are making this region much important for LNG export. China’s increasing demand for LNG is bringing China towards Middle East and Africa for the export of the LNG and the quantity of the LNG passing through South China Sea will increase during coming year (Metelitsa & Kupfer, 2014, p. 6). China is the second largest economy of the world and it has trade relations with every country of the world. China is the first and second largest trading partner of the 78 countries of the world. It is estimated that China is the first, second and third largest trading partner of every country on the Earth (Auslin, 2017). 80% of the oil is transported to Japan, South Korea and Taiwan via this rout (Dosch, 2015). Chinese trade goods are almost dependent in this sea. On the other hand, Japan as the third largest economy is heavily dependent in South China Sea (Cronin & Lee, March 2017).

Wu Shicun (2013) says that it is presumed that the control of the Spratly Islands is basically direct or indirect control of the transits from Singapore to Hong Kong and from Japan to straits of Malacca and from Guangzhou to Manila. He says that the SCS covers half of the world trade passage. Approximately, a grand quantity of oil is transported from Middle East and Africa to China, South Korea and Japan from the SCS passage. The SCS also links China with world. China’s 90 % trade and 50% transaction accrued through the SCS. Vietnamese and Philippines exports and imports depend upon SCS.

South China Sea has geo-strategic, geo-politic and geo-economic importance due to half of the world trade passage and presence of precious resources of oil and gas. The SCS is passage of half of the world trade. Almost all the East Asian countries are dependent on this sea. The SCS is also the home of precious natural resources like oil and natural gas. These reasons enhance the importance of this place. This is the reason that China, Vietnam, Philippines and other regional and extra-regional countries are interested to control it. China is taking interest in the place and involved in constructing military bases and building artificial islands in the SCS. On the other hand, the US is providing its assistance to Philippines and Vietnam in every respect. The US has also initiated the patrolling in South China Sea with the name of Freedom of Navigation in international sea. Philippines has numerous military agreements with the US and gave its military bases to the US. The US has lifted the arm embargo in Vietnam for empowering Vietnam against China in SCS (Glaser & Vitello, 2014, p. 2).

Expansion of China in the South China Sea

South China Sea is important for China on the basis of its geo-strategic, geo-economic, geo-politics. Sovereignty over the whole South China means the establishment of Chinese hegemony in this region and China will have upper hand in this region. This region will also serve China to secure its trade route and provide China natural resources like oil and gas etc. One of Chinese agency has estimated that there is more than seventeen billion barrels crude oil available at South China Sea (Shaohua, 2006). Tom Miller (2017) wrote in his book “China’s Asia Dream” that the US energy information agency presented its survey reports which described that the SCS contains eleven billion barrel oil and 190 trillion cubic feet natural gas resources. These resources stimulate China to control this place.

Chinese control of the South China Sea is the biggest threat for Japan and the US. Chinese control over South China Sea means that China can occupy the oil lifeline of the South Korea and Japan. It will provide strong position of China over the US and other regional countries. Chinese administration announced to build new infrastructure in Woody islands and created new Sansha administrative district which would cover Chinese claimed territories (Sutter & Huang, 2013). Woody Island is the largest military Chinese Liberation Army Air Force first time launched H-6K strategic bomber on Woody Island in order increase its power in South China Sea (Panda, 2018). China can use the SCS as a proactive Bastian for its JL-2 missile carrying submarine and can target the US bases in East Asia. Chinese control over the SCS can also bring in danger the American oil companies working in the SCS (Buszynski, 2015, p. 16).  China is developing military bases in South China Sea with manmade islands on Spratly Island. These islands contain full military bases and launching pads. The basic purpose of developing the artificial islands is to enhance military power in South China Sea and in case of emergency bring more troops through rapid air services (BBC, 2017). In this way, China is establishing its hegemony in South China Sea region. A power game has commenced among the countries of the region and other stack-holders. The U.S has interests in the region and it is also vital for its hegemony. This is the reason that U.S wants to contain China to preserve its hegemony in the region.

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The Crippled Economy

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Lack of money is the root of all evils. Facts do not seize to exist because they’re ignored.

Lack of money is what Pakistan is experiencing and dealing with every now and then for the major part, since it came into existence either due to incompetence of our political leaders, their corruption, fighting wars of someone else or due to lack of long-term vision. Pakistan is currently in the middle of a turmoil trying to recover from devastating floods of 2022, facing the after effects of the withdrawal of USA from Afghanistan in the form of resurgence of terrorism, dealing with the political chaos created by the politicians who claim to be leaders of the state. Another yet most important, severe and devastating challenge that Pakistan is facing is its economic downfall. In one sense the lack of money is the root cause of all the problems mentioned above except the political chaos.

The economy of Pakistan, like a battle-hardened warrior has built resilience battling several challenges over the course of seventy years and is trained to survive but the recent political turmoil and the difficulty caused by nature (Floods), the burden of debts repayment, the threat of resurgence of terrorism and international indicators pointing towards an economic recession in 2023 has almost crushed the backbone of Pakistan’s economy.  

World bank has recently released its latest report forecasting Pakistan’s Gross domestic product (GDP) to grow at only 1.7% for the fiscal year (FY) 2023 that is less than the half of what it predicted to during last June (4%). It has also predicted a near to recession economic situation of the world economy characterized with high inflation, increasing interest rates and the circumstances caused by the Russian Invasion of Ukraine.

Pakistan must reportedly payback 73$ Billion in the next three years till the end of FY2025 and central bank of the country also known as State Bank of Pakistan currently has Foreign exchange reserves of about only 5.6$ billion. This debt repayment is the key challenge for Pakistan’s economic survival and other challenges such as ever-increasing inflation, high interest rate, the growing unemployment, the decrease in imports are all byproducts of the main challenge. The threat of a possible default is becoming evident and is looming over fiscal horizon.

Monsoon on Steroids, a phenomenon directly linked with climate change played havoc with Pakistan. These floods added a profound risk to the country’s economic outlook. The country lost infrastructure worth of billions of dollars and floods effected 33$ million people and 1700 people lost their lives. According to Ministry of Planning and development of Pakistan, Pakistan has faed the loses of more than an estimation of 10$ billion. The catastrophe of floods also played with agroeconomics as crops were destroyed causing destruction of agriculture sector which makes up to 24% of country’s GDP. A comprehensive recovery policy is needed and with the helped promised by international community at Geneva, government has passed one hurdle but to make the sustainable recovery abundance of resources, capacity and transparency is needed.

The policy uncertainty has been a major cause in creating a mistrust among investors and has almost ceased foreign direct investment in Pakistan. This policy uncertainty is due to lack of will of national leaders to take tough decisions. For Example, former prime minister of Pakistan rolled out of International Monetary Fund’s (IMF) program fearing his ousting and to gain public support he reduced prices of commodities such as Petrol & Gas and took country almost on the verge of default.

The policy uncertainty is caused by Political uncertainty which in turn lead towards economic uncertainty. Economic stability can only be achieved by political stability and there’s no other way around. Political stability can be achieved through free and fair elections and elimination of the role of establishment in political process of Pakistan. And if a government takes long-term policy goals into account while formulating a policy rather than short-term goals to gain public support and trying to keep hold on the reins of Government. The selfish politicians have to play selfless and put Pakistan’s benefit before their own benefit to get Pakistan out of this political and economic turmoil.

The only solution in sight for Pakistan is to carry on with the 6$ billion IMF program and to try for rescheduling of depts repayment as it owes more than 70$ billion to be paid by the end of 2025 that is currently not possible. Another step from international community can also help Pakistan that is if a country makes an investment of 10-20$ billion directly rather than in the form of loans as happened in CPEC. Moreover, help from rich friendly Muslim countries can also provide an array of hope for Pakistan.

But these steps won’t address the clear underlying malaise of the economy and the fact that something fundamentally will need to change, in terms of how much the economy produces versus how much it spends, to avoid default down the road. But none of Pakistan’s political parties seem to have the political will or ability to bring about such change. Priorities needs to be shifted from personal interest of political elite to national interest. They must be ready to sacrifice their political image and interest for the greater good and to save the country from default down the road.

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From unidimensional to 3D: the contours of the post-Bretton Woods world

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The start of the year 2023 was marked by a series of statements coming from representatives of BRICS countries concerning plans to create new currencies. In particular, Brazil’s President Lula called for the creation of common currencies among BRICS and MERCOSUR countries, while Russia’s Foreign Minister Sergey Lavrov stated that the creation of the BRICS common currency would feature in the discussions at the BRICS summit to be held in South Africa this year. And even as a lot of these changes in the international monetary system will take time, the vector of this transformation is becoming increasingly clear. The new international monetary system will be increasingly geared towards the creation of new regional currencies that will aspire to take on a global reserve status alongside the current pantheon of the select currencies of advanced economies. A multi-regional international monetary system in which the key regions of the developing world form their regional currencies may offer greater optionality to the global financial markets and will reduce the dependency on the few select reserve currencies.

A fragmented global financial system consisting almost exclusively of national currencies leaves scope for excessive dependency on the currency of the dominant economy. This in turn creates sizeable vulnerabilities in the form of a “moral hazard” and “too big to fail” considerations – the debt ceiling in the US is duly elevated to avoid default, while the “exorbitant privilege” of the US dollar as the global reserve currency is feeding “moral hazard” patterns in the form of greater fiscal profligacy and the emergence of related theories such as MMT.

As stated in the recent IMF report, “despite the weaknesses of the current reserve system (the “New Triffin dilemma”) any significant shifts away from the status quo are only possible if and when there are viable alternatives to the dominant currencies.”[1] . This recognition by the Fund of the fundamental weakness of the current monetary system (while conditional on the emergence of alternatives) is an important testament to the rising doubts regarding the “infallibility” of the current monetary system. One way to look at some these deficiencies is to realize that high inflation in advanced economies is currently undermining the value of these countries’ state debt – the ratio of US state debt to GDP by the end of 2022 declined by nearly 9% of GDP compared to Q1 2021 on the back of an inflated (due to price growth) nominal GDP. This depreciation in the value of US public debt is adversely affecting the reserve holdings of those countries that have opted to invest heavily in US dollar-denominated assets. At the same time, along with the inflation-related reduction in the debt-to-GDP ratio the nominal stock of US debt continued to grow and forced repetitive increases in the US debt ceiling over the past years. This time around in 2023 the risk of a US default due to the fragilities in the balance of power in US legislature came as yet another scare to emerging markets and a reminder of the perils of high dependency on one sole center of “gravity” in the global economy.

To overcome this high dependency and the fragmentation of the currency space in the Global South developing countries can form larger currency blocks – whether regional (as in the case of the proposed currency for MERCOSUR economies) or transregional (as is the case with the proposed R5 BRICS currency basket). This process of aggregation in currency unions across the Global South if continued may lead eventually to the formation of currencies with sufficient economic weight in terms of the underlying GDP and reserve size of members to merit their inclusion into the group of global reserve currencies.

The international monetary system formed on the basis of macro-regional currency unions will present greater opportunities for advancing new candidates for the position of global reserve currencies. Across the Global South there may be at least three regional currencies with sufficient economic weight to be potentially included into the set of global reserve currencies:

  • A Latin America common reserve currency
  • An African common reserve currency
  • An Asian common reserve currency

The Latin American track has already been promulgated by Lula da Silva in Brazil. In Africa the formation of the AfCFTA as well as the rising global prominence of the African Union (likely to become a full-fledged member of the G20 in the coming years) bode well for gradually moving towards greater coordination in the economic policies of not only the national economies of the African continent, but also its regional integration and currency arrangements. In Asia, several proposals have already been unveiled in the past several years, including the possible creation of a Pan-Asian single currency as well as a common currency for the members of the Shanghai Cooperation Organization.

All these regional currencies have the potential to carry enough economic weight and scale in the form of their respective integrated regional blocks to enable them to attain the global reserve currency status. The potential for regional currencies to become integral parts of the global financial system is expanded by the optionality in the modalities of regional currencies/regional agreements in the monetary sphere that may include:

  • Regional baskets
  • Regional currencies that replace existing national currencies
  • Regional swap lines
  • Digital regional currencies/currency baskets
  • Regional accounting units 

The new currencies, whether regional or trans-regional, will need an anchor or a reference point, a role that has thus far been primarily filled by the US dollar and the euro. The rise of China as the main trading partner of the economies of the Global South implies that it may be time for the developing economies to change the reference point away from the dollar and the euro towards the yuan and/or the BRICS reserve currency (in which the yuan would likely take a sizeable share). In particular, those developing economies with fixed/pegged exchange rate regimes could consider the possibility to shift towards pegging their currencies to the BRICS basket and/or employing this new currency increasingly as an accounting unit. This would accord well with the trends of the past decade characterized by growing importance of South-South trade; it would also provide more favourable conditions for further expediting the diversification of foreign trade and investment towards the South-South track after decades of under-trading among the developing economies (including among the regional partners in the developing world).

The latter point may need some elaboration – for decades the trading patterns of the developing economies were largely characterized by high shares of trade with the leading advanced economies such as the US and the EU and lower-than-potential trade shares accorded to the regional neighbours of these economies. The indications of the gravity model that traces trade intensity to distance among countries and their economic weight (as measures by GDP) suggest that there is tremendous potential to boosting regional trade given the lower gravity of distance. Regional economic integration and the creation of regional currencies, like the planned launching of the regional currency SUR in Latin America, would serve to realize this potential for South-South regional trade for the benefit of global economic growth. 

The three key pillars of a revitalized international monetary system will need to include the following Post-Bretton Woods principles, or 3D principles as per below:

  • Demonopolization (Poly-centricity): a system that is predicated on a set of reserve currencies that include a number of regional currencies as well as possibly trans-regional baskets of currencies – the resulting pattern is that of a co-existence of reserve currencies from EM and DM without a “core-periphery” pattern setting in the global monetary system
  • Depoliticization: the new international monetary system will also need to contain a “de-politicization clause” as one of its key foundations – the reserve currencies will need to carry a legal affirmation of the non-use of these currencies in imposing sanctions and other restrictions
  • Dis-inflation: with the “exorbitant privileges” of the DM currencies dissipating, inflationary fragilities in the global monetary system may be attenuated; at the same time the competitive edge in the global monetary system will start to gravitate towards those currencies that are credibly backed up with reserves/resources.

Compared to the unidimensional paradigm of the current monetary system, these 3D principles are meant to render the vision of the international monetary system more objective and real – the new system needs to reflect the changing realities and dynamics in the world economy, including the emergence of new regional economic centers; it also needs to address the growing demand on the part of the international community for currencies to be real, i.e. duly supported by countries’/regions’ reserves/resources.

Another way to picture the 3D vision for the international monetary system is to introduce a regional layer into the monetary system that is represented by the regional integration blocks, their currencies and development institutions. This regional layer would complement the layers of national economies at the bottom and the global economic institutions (such as the IMF and the World Bank) at the top. The main ingredients for the regional layer of the international monetary system are largely in place and consist of the following three key elements:

  • Regional financing arrangements (RFAs)
  • Regional development banks (RDBs)
  • Regional currency mechanisms

For the financial markets an international monetary system characterized by the emergence of regional economic and currency blocks may result in a decoupling of emerging markets (EM) from developed economies (DM) – contrary to the current paradigm whereby the dominance of US and EU financial markets determine to a large degree the overall direction of market dynamics in the developing world.

In the end, the international monetary system is not out of the woods just yet – the fragilities that resulted in the rising frequency of global downturns throughout the past several decades are yet to be addressed. One of the key pathways out of the limitations of the current Bretton Woods setup is to expand the array of reserve currencies with the new regional currencies that could emerge in the Global South. The evolving international monetary system cannot be disassociated from the future progression of the global economy, including its trade structure and patterns of investment flows. In this respect the regionalization of the global economy and the rise in the prominence of trading blocks and their regional development institutions (regional development banks and regional financing arrangements) will increasingly call for greater regionalization of the international monetary system.  


[1] Aiyar, Shekhar, Ilyina, Anna, and others (2023). Geoeconomic Fragmentation and the Future of Multilateralism. Staff Discussion Note SDN/2023/001. International Monetary Fund, Washington, DC.

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Friend-shoring: India’s rising attractiveness for an emerging partnership

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There are numerous forces currently affecting investment flows in the global climate for foreign investment. Investor concern has been caused by the many geopolitical issues, which had repercussions even as countries were recovering from the pandemic. Businesses are being forced to re-evaluate the global business environment and potential fault lines as a result of these disruptions. India has constantly improved the business environment (EoDB). It may now advance by utilising the advantages to strengthen its place in the global economy and fulfil the ambitions of its sizable, primarily young population. The country’s business and investment climate has significantly improved as a result of the fast and steady pace at which reforms have been implemented.

Apart from the fact that India is one of the largest economies in the world with the quickest rate of growth, the government’s emphasis on infrastructure and manufacturing, strong consumption patterns, digitization, and a burgeoning services sector all contribute to this optimism. The persistent efforts of the Indian government to lower regulatory hurdles are also fuelling MNCs’ favourable opinion of India. However, India’s expanding domestic consumer base and digital economy are the greater draws. After the US and China, the estimated actual growth in consumption is the third-highest. Given that all of these markets are sizable but relatively saturated and growing at a slower rate, India presents a particularly good opportunity for MNCs seeking growth opportunities in the ensuing ten years.This has acquired more traction in the US context as it has become clear that the nation cannot overcome all production issues on its own and that cooperation with friendly or ally nations is essential for all-around development. The term “friend-shoring,” a hybrid of the terms “onshoring” and “near shoring,” refers to forming business alliances with people who have similar principles and interests.

In a world driven extensively by globalisation, it is inevitable to not just make ally’s or create partnerships that are not only strategic and synergistic, but also facilitate a purpose driven iterative connection between two nations. A strategy used by the US to persuade companies to relocate their sourcing and manufacturing operations to friendly shores—often back to the same shores in the case of the US—is known as friend-shoring or ally-shoring. And the goal is to protect their supply networks against countries with less compatible policies, like China. But is it the best course of action? Global supply chains have changed production by enabling businesses to produce things wherever it is most affordable, thanks to decreased tariffs, lower transportation, and communication costs. This typically means that low-end production shifts to emerging markets and developing countries, while high-value-added inputs (such as research and development, design, advertising, and finance) are provided from established economies.

A commitment to cooperate with nations that “have a strong adherence to a set of norms and values about how to function in the global economy and about how to govern the global economic system” was described as “friend-shoring” in Secretary Yellen’s statements of April 13, 2022. But is it the best course of action? Any type of protectionism will worsen the already shaky global supply chain after the years-long Covid-19 shutdown has had an impact on the world economy. Despite its political unrest, China has been devoting its resources to manufacturing since the 1990s, and many businesses have already established manufacturing operations there since their suppliers are all nearby.

Even though Vietnam, India, and Thailand are also known for their low-cost manufacturing, moving the manufacturing sites could be expensive and risky for businesses because they would need to reorganise their entire supply chain for all materials required. In addition, other Asian countries might not have the full infrastructure needed to support manufacturing in some sectors. The world of today is at its best because of international cooperation. Each country’s disadvantage is made up for by having it use its greatest asset to boost global economic growth. Although there are many differences and even disagreements between nations and we are still far from full globalisation, offshoring does not seem like a good answer for a better future for the global supply.

USA is believed to pursue the “friend-shoring” strategy of deepening economic integration with dependable trading partners like India to diversify away from nations that pose geopolitical and security risks to supply chains. This is in response to an “extremely challenging” global economic outlook and geopolitical instability. She claimed that some economies’ debt loads were becoming unmanageable due to the Russia-Ukraine war-related spike in food and energy costs, and that steps to reduce these debt loads would need to be explored. Countries that already have well-established production and business service networks are those that are seen as friendly partners in the US context. India is attempting to draw MNCs that are moving their subsidiary supply chain networks and activities in this wave of supply chain restructuring and diversification of their specialised ecosystems.

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