Dollar Diplomacy in the Modern World: Prospects and Challenges

 

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Adil Javed

Dollar diplomacy is taken as the foreign policy strategy that undertake economic means, such as loans and investments, to promote American interests in other countries. 

The strategy was developed in the early 20th century, but it is still used by the United States today, albeit in a more subtle way. 

The policy was developed by President William Howard Taft and his Secretary of State Philander C. Knox, and it was seen as a way to avoid the use of military force while still protecting American economic interests. 

The prospects and challenges of dollar diplomacy in the modern world are complex and uncertain. 

On the one hand, the United States remains the world's leading economic power, and its dollar is the world's reserve currency. This gives the United States a lot of influence over the global economy, and it can use this influence to promote its interests. 

On the other hand, the rise of the BRICS countries (Brazil, Russia, India, China, and South Africa) is challenging the US dollar's dominance. 

These countries are growing rapidly and becoming increasingly influential in the global economy. They are also working to reduce their dependence on the US dollar, which could make it more difficult for the United States to use dollar diplomacy. 

The future of dollar diplomacy is likely to be shaped by the ongoing rivalry between the United States and the BRICS countries. If the BRICS countries are able to reduce their dependence on the US dollar, it will be more difficult for the United States to use dollar diplomacy to influence their policies. 

However, if the United States is able to maintain its economic dominance, it will be able to continue to use dollar diplomacy to promote its interests. 

The article endeavors to highlight some of the specific prospects and challenges of dollar diplomacy in the modern world:

What are the Prospects of Dollar Diplomacy? 

The United States remains the world's leading economic power. While having the world's largest economy, it is the largest trading partner of many countries. This gives the United States a lot of economic significance and influence, which could be use to promote its interests across the globe.

According to the World Bank, the United States' GDP in 2022 was $25.3 trillion, which is more than the GDP of the next 10 countries combined.

The United States is also the world's largest exporter and importer. In 2022, the United States exported goods and services worth $3.5 trillion and imported goods and services worth $2.9 trillion. While the figures in 2023 are indicating more progress as compared to the previous years. 

The US dollar is the basically the world's reserve currency. It is used by central banks around the world to hold their foreign exchange reserves. This gives the US dollar a lot of stability and makes it a desirable currency for trade and investment.

According to the International Monetary Fund, the dollar accounted for 58.8% of global foreign exchange reserves in 2022.

The United States has a strong network of allies and partners. The country has military alliances with over 50 countries, and it is a member of many international organizations. 

Like it is member of the North Atlantic Treaty Organization (NATO), the United Nations, and the World Trade Organization established in 2002.

The United States has the world's most powerful military, and it is capable of projecting power around the world. This gives the US a lot of leverage in international relations, which it can use to promote its interests.

What are the Challenges Facing Dollar Economy? 

The Rise of the BRICS Countries: 

The BRICS countries (Brazil, Russia, India, China, and South Africa) are growing rapidly and becoming increasingly influential in the global economy. These countries are also working to reduce their dependence on the US dollar, which could make it more difficult for the United States to use dollar diplomacy.

The combined GDP of BRICS Nations is now larger than the GDP of the G7 countries.

The BRICS countries are also working to develop their own financial institutions that are not dependent on the US dollar.

The decline of the US dollar's dominance: 

The US dollar's dominance as the world's reserve currency is declining. 

The share of global foreign exchange reserves held in US dollars has declined from 71.2% in 2000 to 58.8% in 2022.

The increasing use of alternative currencies. Some countries are increasingly using alternative currencies, such as the euro and the yuan, to trade and invest. 

This is due to a number of factors, including the decline of the US dollar's dominance and the desire to reduce their dependence on the United States.

In 2022, the euro accounted for 20.6% of global foreign exchange reserves, and the yuan accounted for 2.7%.

The growing anti-American sentiment in some countries: 

There is growing anti-American sentiment in some countries, which could make it more difficult for the United States to use dollar diplomacy. This sentiment is due to a number of factors, including the US military interventions in the Middle East, Central Asia and the US trade policies.

A 2022 poll by the Pew Research Center found that only 34% of people in the world have a favorable view of the United States.

Overall, the prospects and challenges of dollar diplomacy in the modern world are complex and uncertain. The future of this strategy will likely depend on the outcome of the ongoing rivalry between the United States and the BRICS countries, as well as the changing global economic landscape.

How BRICS can impact dollar diplomacy? 

In 2022, the BRICS countries agreed to create a new reserve currency called the Contingent Reserve Arrangement (CRA). 

The CRA is designed to provide financial assistance to BRICS countries that are facing a balance of payments crisis. This could reduce the need for these countries to rely on the US dollar for financial assistance.

The BRICS countries are also working to develop their own payment system called the BRICS Interbank Payment System (BIPS). 

The BIPS is designed to facilitate payments between BRICS countries without using the US dollar. This could reduce the US's control over the global financial system.

The BRICS countries are also increasing their cooperation on economic issues. 

In 2022, the BRICS countries agreed to establish a new BRICS Development Bank. This bank is designed to provide financing for infrastructure projects in BRICS countries. 

This could reduce the need for these countries to borrow money from the US or other Western countries.

These are just some of the ways that BRICS can impact dollar diplomacy. The BRICS countries are still emerging economies, and they are not yet as powerful as the United States. 

However, they are growing rapidly, and they are becoming increasingly influential in the global economy. As the BRICS countries continue to grow, they are likely to have a greater impact on dollar diplomacy. 

The writer teaches at Higher Education Department and has done MS in Politics and International Relations