Thursday, December 06, 2007

Which will be the world's reserve currency in 2035?

In view of the current decline of the dollar, one of the most respected international commentators on financial matters has recently gone on record with the following statements: "By the time the dollar has lost its (reserve currency) status, somewhere around 2035, the Chinese renminbi or even the Indian rupee - not the euro - will be best placed to take over its mantle. ...The biggest risk to a RMB-standard by the mid-21st century is that between 2007 and 2035, there is likely to be major political change in China. This may be as smooth as the "velvet revolution" in the former Czechoslovakia in 1989 or it may be as tumultuous as China's own cultural revolution of the 1960s. However, if China is delayed or diverted by politics, it is not clear that this provides an opportunity for Euroland in 2035. India's economic and political path, by contrast, appears well set. China's one-child policy makes it all the more likely that India will end up with the largest population and, one day, the largest economy in the world".

Being Indian, I am naturally flattered by such views. It is also true that China's population is set to decline before India's, and that India will in all probability be the most populous country in the world, from something like 2035. However, the world's most populous country has not always had the largest economy - think China from about 1875 to a few years ago. By contrast, think of a rather small country (France) having one of the largest economies in the world from approximately 1625 - 1825; or think of another small country (the UK) having one of the largest economies in the world from about 1825 - 1950; or indeed think of one of the smallest countries in the world by population (Sweden) which had the world's second largest economy between 1775 - 1800. In other words, size of population has often had relatively little to do with size of economy.

Regretfully, therefore, I must decline to agree with the basis of my colleague's prognostication about the world's currency in 2035 - though, as I say, being Indian, I hope that he is right on other grounds nevertheless :)

My own sober view is that there will be no single reserve currency within the current global system as the system is multipolar and unstable, and will continue to be so till any country (possibly Russia? - unpalatable thought! - but possibly in alliance with Europe, which may make this more palatable!) establishes military superiority. Which explains why the world's arms sales are soaring, as every country is now rushing to arm itself in order to expand its reach and/ or in order to defend itself. China may collapse in the future, but it won't be because the Chinese are stupid. It will be because they have an inappropriate system which will make it very difficult for them to negotiate the future. India has an appropriate system (democracy) but it is as yet unclear whether the secularists will win the culture war currently underway or whether the Hindu fascists will win; the latter would like to take the country back to the middle ages - if not earlier! Russia has an inappropriate system (at present Putin's de facto dictatorship) but, with its relatively sparse population, it will have plenty of gas on which to base its growth - though it will also face the danger of collapse because of its inappropriate political system. Europe has both the right system and the right culture, so my bet is on Europe, possibly in alliance with Russia - or possibly Russia will be a part of a reconstructed Europe by then. Sphere: Related Content

1 comment:

Joe Chakra said...

The other problems with India are:
Corruption and
slow legal system

They go together. Corruption is a problem as Indian culture does not prohibit it explicitly. Loyalty to the king is one thing. Loyalty to a state governed by politicians who are not too honest is yet another thing.
The legal system can be improved but there are too many vested interests. Again there are too many unfair laws like Rent Control.