Global Financial Architectures: A Decoupling

posted by Karim Pakravan on January 9, 2024 - 2:28pm

This is the first in a series of articles about global financial developments analyzing the changing Global Financial Architecture in the age of confrontation between the West and the Global South.  In the first article, we present the  presents the background of the emergence of challenges to the Western-dominated Global Financial Architecture.  Other articles will analyze the GFA 2.0 institutions.

COVID and its aftermath have accelerated the deglobalization and decoupling trends that were set off by the global financial crisis of 2008.  Geopolitical rivalries, economic nationalism and the reversal of decades of economic and financial integration have led to the emergence of new global rivals to the Western-centric global financial architecture (aka the Bretton Woods framework , or GFA 1.0) that had reigned supreme since its inception from the ashes of the second World War.

What is the GFA? By GFA, we mean the set of rules and institutions that govern international trade and finance. The Bretton-Woods (GFA 1.0) system was centered around three institutions: the International Monetary Fund (IMF), the World Bank and the General Agreement on Tariffs and Trade (GATT, later becoming the World Trade Organization, WTO). The system was anchored on the US dollar and was the main driver of decades of trade liberalization and economic and financial integration post World War Two.   While efforts were made in the 1990s to give a bigger voice to major emerging markets such as China, Brazil and South Africa, the GFA remained firmly Western-centric. Furthermore, despite challenges from China and rising resentment about the supremacy of the US dollar, the greenback has remained by and large the major international currency.  

Many countries in the Global South (China, India, and Brazil to name a few) have enjoyed a period of unprecedented growth and prosperity as a result of three decades of globalization anchored by the GFA. Nevertheless, challenges to the current GFA were inevitable, given the rise of the economic and financial power of the so-called Global South, led by countries like China, India, Brazil,  Saudi Arabia and South Africa. 

In addition, other forces were at play. First, there was a largely justified resentment of the  increased and widespread use of economic and financial sanctions by the United States and its control over the dollar payments flows.  Second, emerging markets chafed under the conditionality of Western bilateral and multilateral financial assistance.  Third, the 2008 global financial crisis, which called in question the neo-liberal economic model ad led to calls for alternatives to the globalized/neo-liberal economic model.  The so-called “decoupling” accelerated during and in the aftermath of the COVID pandemic, fueled by the US-China rivalry and the broader schism between the Global North and the Global South.

These developments reflect the deepening chasm between the United States and China, but more broadly the increased disaffection of the so-called Global South from the Global North and the Western-dominated set of rules and institutions, institutions that seem to have failed to respond to the financial needs of the heavily indebted emerging market countries. 

The development of an alternative and rival global financial architecture (GFA 2.0) has naturally evolved around China, the number two global economy and the global superpower, as yet another instrument to challenge the primacy of the United States.  The building blocs of the GFA 2.0 have been a set of bilateral and multilateral financial and economic cooperation institutions set up in the past two decades.  In addition, the GFA 2.0 is feeding on the internationalization of the Chinese yuan (or RMB).  The main elements of the GFA 2.0 are as follows: China’s Belt and Road Initiative (BRI), the BRICS Framework, and the new multilateral development banks.

Yet, the emergence of the GFA 2.0 is in its early stages and its institutions have a yet to evolve into meaningful global players, for two main reasons.  First, many of the players (including China) are deeply integrated in the global economy, in particular with the United States and the European Union (EU),  and are important players in the GFA 1.0.  Second, the new financial institutions are ultimately bound by the same economic and financial constraints, and are far from being the magical instruments to free the Global South from Western domination. Furthermore, the major players represent widely different economic and political systems, with little in common beyond trade and investment. Finally, the commanding role played by China in these new institutions and financial flows can create the justified perception that they serve as instruments for Chinese domination in a bi-polar world.

Where will these trends lead us? In the best case, as mentioned before, GFA 2.0 can go beyond being a vehicle for challenging the  Global North. Cooperation between the two and become a vehicle for facing the major challenges facing the world, including climate change, emerging market financial burdens and financial and monetary policies. In the worst case,  it can exacerbate the North-South divisions and accelerate the global decoupling process.