China’s CBDC-as-a-standard?

Written by Alexander van Wijnen
September 20, 2021

An August 2021 report by the Carnegie Endowment for International Peace (CEIP) shows that China is far ahead of other countries in the development of a “central bank digital currency” (CBDC). Whereas most countries are still researching the possibility of a CBDC, China has been running different types of pilots since 2019. In effect, a CBDC, by eliminating the role of intermediary entities in the financial system, allows for more efficient financial transactions. Based on such efficiency, it is expected that China’s CBDC will boost the share of the yuan in the global financial system. Yet, turning the yuan into the global reserve currency is not China’s primary goal here.

Instead, China primarily seeks to protect its companies against American sanctions by building a financial infrastructure that parallels the US dollar system. The report highlights several reasons as to why China’s CBDC is likely to become a standard. China’s pilots are far ahead of other countries and its government is willing to boost adoption aggressively (e.g. discounts for consumers, incentives for trade). Also, China has already set standards for a new global financial infrastructure through “m-CBDC” (a cross-border payment project between China, Hong Kong, Thailand and the UAE), the Blockchain Service Network, and the inter-bank payment system of CIPS. Finally, China already has large international payment platforms which are accessible through government intervention (UnionPay, Alipay, WeChat Pay).

Burning questions:

  • What are the consequences of a Chinese parallel (to the U.S. dollar) financial system for trade and capital flows?
  • To what extent will the CBDC be able to boost the dominance of Chinese firms in other regions (e.g. Southeast Asia)?

India’s rise as a digital superpower

Written by Pim Korsten
July 23, 2021

New data shows that Indian start-ups raised a record amount of $7.2 billion in the first half of 2021 and the country is closing the gap with China in terms of creating new unicorns. Significantly, Chinese investors have been cut out of the Indian tech market due to regulation that was drafted after rising India-China tensions last year. As such, most foreign capital now comes from European and American investors, from countries that see India as a geopolitical partner in the bid to contain China. Furthermore, an “Indian Stack” is taking shape, driven by large public investments in India’s digital infrastructure, based on its already strong position in the IT sector, and rapid adoption of digital tools by younger generations. Add to this its strong socio-demographics (e.g. soon to be the world’s largest population that is still growing and young) and cultural fundamentals (e.g. its culture and companies having a high willingness to adopt digital tools) and India has all the ingredients to become a digital superpower. As such, the next wave of digital innovation, companies and consumer practices could come from India.

Burning questions:

  • Could the geopolitical fundamentals of India’s digital power imply that it will further the splintering of the Internet, as interoperability with – at least – Chinese applications and ecosystems could be in jeopardy?
  • Does India have a cosmology that fits the demands and technics of digital technology, a digital “cosmotechnics”? (We believe it does.)
  • What could be the organizing and governance principles of the Indian Stack? And how would this relate to other Stacks, such as the American, Chinese or European Stack?

The G7 tax deal is all about American geo-economics

Written by Alexander van Wijnen
June 16, 2021

The G7 reached a historic agreement for a global corporate tax rate of a minimum of 15% in which corporations must also pay taxes in nations where they sell (and not just where they’re headquartered). If we take the deal at face value, it seems that power is shifting from corporations to states. After all, since the 1980s, the global corporate tax rate had been dropping from 50% to 24%, as developing countries built growth models by attracting foreign investors with lower taxes and some developed countries also took part in the ‘race to the bottom’ (e.g. Ireland, the Netherlands, Singapore).

However, behind the deal of the G7, more forces are at play. Although it is a multilateral deal, hailed by many as the return of responsible U.S. leadership, it is primarily the U.S. that will benefit. First, it is expected that the biggest share of taxes will be paid by U.S. big tech companies to the U.S. itself. Second, in exchange for its concessions in the deal, the U.S. has demanded the removal of the Digital Services Taxes of European countries. It shows that American multilateralism is still a ‘geo-economic’ instrument to wield power across the globe.

Burning questions:

  • How will the EU adjust to U.S. demands to drop digital services taxes?
  • Will there be a G20 tax deal in July?

Lifestyle politics in the planetary age

Written by Sebastiaan Crul
June 3, 2021

Lifestyle politics refers to the politicization of everyday life choices and is closely tied to our self-actualization in late modernity. This form of political participation has become a strong political weapon in these times of complexity, uncertainty and pressing global issues. In late modernity, various new forms of extra-parliamentary politics are arising to mitigate the (perceived) weakening of state-oriented politics.

On the one hand, lifestyle politics fit the ideal of subsidiarity in our planetary age. To battle planetary challenges such as rising sea levels and pandemics effectively, we have to delegate governance to the lowest level possible. The individual becomes the first “governing institution” of the globalized world. At the same time, if everyday life choices become so central to politics, this dependence on lifestyle could further alleviate the polarization and fragmentation of societies within nation-states. Furthermore, contrary to the expectations of some advocates of lifestyle politics, the pandemic has made us realize that state-oriented politics is anything but obsolete. The inward orientation of lifestyle politics combined with strong nation-states might lead to what the philosopher Tocqueville calls “soft despotism”, meaning that the will and freedom of man are “not shattered but softened, bent and guided”. Individuals are not oppressed, but are subject to the tutelary power of expanding national bureaucratic states and institutions.

Burning questions:

  • How do we align global lifestyle politics with the representative institutions of the political systems of nation-states?
  • Is the tutelary power of the bureaucratic welfare state a serious threat to our post-coronavirus world?
  • How do we prevent lifestyle politics from degenerating into trivial forms of lifestyle consumerism?

Biden’s America on the world stage

Written by Alexander van Wijnen
January 14, 2021

Looking back on the period of 2000-2020 conjures up a gloomy picture of U.S. global leadership: from the unilateral war of Bush and the failed multilateralism of Obama to the unilateral sanctions of Trump. In 2021, Biden will become president of the U.S. What does this mean for the future of U.S. global leadership?

Our observations

  • Biden will attempt to counter China by building new alliances. After the signing of the RCEP trade deal in Asia, Biden suggested that the U.S. has to find other (democratic) allies for a new trade deal (similar to the Trans-Pacific Partnership quit by Trump).
  • Both the European Commission and Biden are supportive of a new EU-US agenda for global change.
  • Biden will return to the 2015 Paris climate agreement. He has also vowed to cooperate internationally to reduce fossil fuel subsidies.
  • Biden will rejoin the World Health Organization and has pledged to cooperate more closely with the United Nations.
  • Biden promises he will call for a global summit to pressure tech companies to reform their practices around privacy and surveillance.
  • Biden has called NATO the “single most important military alliance in the history of the world”.
  • Biden wants to convene all democratic countries in a “Summit for Democracy” to discuss three major themes: corruption, authoritarianism, human rights.

Connecting the dots

If we look back to the period of 2000-2020, we can identify different types of U.S. global leadership. From 2000 to 2008, the global leadership of Bush may be characterized as “unilateral destabilization”. The “Bush Doctrine” refers to his principle of unilateralism (i.e. going it alone). Bush withdrew from the Anti-Ballistic Missile Treaty and did not seek United Nations legitimization for the invasion of Iraq. From 2008 to 2016, the global leadership of Obama may be characterized as “sabotaged multilateralism”. Obama struck a deal with Iran about its nuclear program and was close to signing the historic Trans-Pacific Partnership trade deal. However, Trump withdrew from both of them. From 2016 to 2020, the global leadership of Trump may be characterized as “unilateral sanctions”. Trump’s unilateral threats, sanctions and trade wars affected both adversaries (China, Iran) and allies (EU, Japan).

How should we characterize the global leadership of Biden? It depends on how likely Biden’s strategy of multilateralism (see observations) is to succeed. If Biden, for instance, strikes a deal with the EU on China or devises an alternative global trade deal, he may succeed where Obama failed. However, it is more likely that Biden’s multilateralism will reap even fewer rewards than Obama’s. Most importantly, the EU is unlikely to agree to U.S. demands to counter China, whereas a global trade deal at the scale of RCEP is unlikely given Biden’s electoral promises around trade. Such “strategic impasses” could render Biden a mere caretaker when it comes to U.S. global leadership, although smaller “multilateral wins” are likely (e.g. the Paris Agreement, WHO).

When a “strategic impasse” turns Biden into a caretaker, we should draw on what the previous decades of U.S. global leadership have taught us. The U.S. chose to unilaterally destabilize a region, then failed to reach its goals through multilateralism, then chose to unilaterally pressure both its adversaries and its allies, and then, in our scenario, again failed to realize its goals through multilateralism. To be sure, there is also an ideological force at play –both Republican presidents opted for unilateralism and both Democratic presidents opted or will opt for multilateralism.

However, there is a deeper force at play as well. It is the decline of U.S. global leadership: from unilateral destabilization, to failed multilateralism, to unilateral sanctions, back to failed multilateralism. The main question is how other powers will react. In different elements of the global order (e.g. trade, human rights, environment), different powers (e.g. China, Europe) will attempt to lead in this new world.

Implications

  • The domestic political situation will dampen Biden’s ability to fulfill his ambitions. The U.S. is not merely “polarized” between two camps. Instead, there is a four-way struggle (that resembles European politics with multiparty parliaments) between progressive/far-leftist Democrats, moderate Democrats, nationalist/far-right Republicans and moderate Republicans. It will make governing the U.S. much more difficult, as its political system is, contrarily to European countries, not built for such a struggle.

  • China could stand to benefit from Biden’s America. However, if Biden succeeds in bringing about a grand multilateral program aimed at countering Chinese influence (e.g. Transatlantic policy, a global trade deal), the odds of a Western front against China will grow significantly.

Our image of Chinese power

Written by Alexander van Wijnen
December 4, 2020

In the past years, a dominant narrative has emerged about the power of China: China poses a threat to the “global rules-based order”, the BRI is a “geopolitical strategy” and Chinese investments are part of China’s “debt-trap diplomacy”. But this image is misleading. In order to better understand the power of China, we present two figures of thought: the multiplicity of the world order and the relational nature of power.

Our observations

  • In the West, China is often seen as a country that poses a threat to the current “world order”. The Chinese Belt and Road Initiative (BRI) is seen as a “geopolitical strategy” with which China aims to build a new world order. Furthermore, Chinese funding of development is often seen as “debt-trap diplomacy”, a way for China to obtain strategic assets such as ports or railways.
  • In his article China In a World of Orders, Alastair Ian Johnston shows that in various world orders, China is more supportive of international norms than the U.S. The concept of the “rules-based order” (which China threatens to overthrow, according to many) is an idea by American policy-makers that once referred to the future of Asia and has only in the past few years come to apply to a “global rules-based order” in the twentieth century.
  • In their article Debunking the Myth of ‘Debt-trap Diplomacy, Lee Jones and Shahar Hameiri show that the BRI is not a geostrategic plan of the central Chinese government to gain strategic assets, but in fact a national-economic program in which the profit motive of Chinese state-owned companies and Chinese banks is dominant. The backlash against Chinese funding of infrastructure, of which we wrote in 2018 that it’s not structural, has yet to occur. Most developing countries actually want Chinese aid in building infrastructure. Jones and Hameiri show that the problems around the BRI are actually the result of weak state capacity (e.g. corruption, lack of transparence, structural economic problems), of developing countries (e.g. Sri Lanka, Malaysia), which causes many projects to fail. The idea of “debt-trap diplomacy” originates from an Indian thinktank, in the context of Hambantota, one of the 4,300 Chinese investment projects, in which Xi Jinping actually declined to take over the port.

Connecting the dots

The Western image of China lacks perspectivism. That’s why we fixate on the Chinese threat to the “rules-based order”, the “geopolitical plan” of the BRI and the Chinese “debt-trap diplomacy”. We’re inclined to reduce reality to an image in which the world order is under pressure because China is gaining power. But what actually is “the world order”? And how does “Chinese power” manifest itself? To better understand China, we introduce two figures of thought: 1) the multiplicity of the world order and 2) the relational nature of power.

1) The Chinese position in the world order is different than we often think, because the international system comprises several policy areas. Johnston explains that there can never be only one world order. There are different domains in which international rules, norms and institutions play a role. The question should be in which domains China is attempting to challenge the international norms. The answer is that China actually supports many international norms (e.g. sovereignty, arms control, free trade, freedom of navigation, currency internationalization, liberalization of trade and investments, multilateral development funding, fighting climate change). So in many respects, China greatly supports the world order. Then why is the dominant image that of China opposing the world order? In areas where liberal ideas are dominant, such as the development of political institutions and internet governance, China is attempting to change the norms. For example, China defends its own political system (in which socioeconomic rights trump political rights) and presents alternative internet structures to the United Nations. However, this does not constitute a negation of international norms but an attempt to reform them.

2) China’s power will manifest itself in different ways. Korean philosopher Byung-Chul Han explains that power always constitutes a continuation of “the self” into its surroundings. “The power of China”, without the context of a relationship with a specific power domain, is thus meaningless. Byung-Chul Han shows that power manifests itself in several different ways. Because China is building relationships with the rest of the world in an increasing number of areas, Chinese forms of power will continue to grow. The problem is that many news reports about and analyses of China are mainly concerned with the traditional forms of power, such as the size of the economy, the role of the yuan and innovation capacity. But there are new, less highlighted or important forms of power. Examples of these are technical standards, infrastructure, digital governance models, mutual economic dependence or cosmotechnics. What if China increasingly sets technical standards with regard to AI? What if the traditional Chinese way of thinking about technology becomes dominant? These could become important forms of Chinese power.
Why does this matter? If our image of China is formed by misleading concepts such as the “global rules-based order” and “debt-trap diplomacy”, we will create an unlikely projection of China’s future. Moreover, all sorts of opportunities and risks will be incorrectly assessed. The country is much less hostile towards international norms than we think, and China’s power is actually growing in places we don’t give enough regard to.

Implications

  • Europe and the Netherlands could become close partners with China in many domains.

  • Because of the Chinese cosmotechnics, it’s entirely possible that China’s adoption of technology in many areas will become the fastest in the world.

  • It’s probable that China will remain the most important financier of developing countries in the post-corona era. Chinese investments through the Chinese Development Bank already surmount those of the World Bank.

The new power of technical standards

Written by Alexander van Wijnen, september 25 2020

Behind the global “interoperability” between technical systems, the shadow of Western dominance still lurks. This will change, however, now that China is playing an increasingly important role in the development of standards for 5G, blockchain, facial recognition, AI and network protocols. Technical standards are thus becoming the new battlefield of the economic and cosmotechnical power struggle between countries.

Our observations

  • A number of international organizations set global technical standards, such as the International Organization for Standards (ISO), the International Electrotechnical Commission (IEC), the International Telecommunication Union (ITU) and the 3rd Generation Partnership Project (3GPP).
  • A recent paper shows that China’s influence in the most important organizations for technical standards has increased rapidly. A clear sign of this is the number of Chinese in leadership positions. Zhao Houlin is secretary-general of the ITU. Shu Yinbiao is president of the IEC. From 2015 to 2018, Zhang Xiaogang was president of the ISO.
  • Last year, China submitted 830 technical proposals to the ITU – more than the following three countries, South-Korea, the U.S. and Japan, combined. Since 2014, 16 out of the 65 proposals in the ISO and the IEC have come from China.
  • Huawei is working on new internet protocols for the ITU. The Chinese company is proposing a “New IP” model in which the state has more influence on digital infrastructure compared to the TCP/IP network protocols developed in the U.S.
  • Chinese companies such as ZTE, Dahua and China Telecom have introduced standards for facial recognition and other forms of surveillance to the ITU.
  • This month, he ITU approved blockchain standards developed by Huawei, the People’s Bank of China and the China Academy of Information and Communications Technology.
  • Since 2017, SC 42 (subcommission 42), a collaboration between the ISO and the IEC, has been the most important subcommission for AI standards. At its first meeting, which took place in Beijing, the China Electronic Standards Institute presented a white paper.
  • In the book The New Global Rulers: The Privatization of Regulation in the World Economy (2011), the authors note that the decision-making process of the large organizations (e.g. ISO, IEC, ITU) is more political than we think. Oftentimes, there is no optimal technical solution. According to the authors, the key to successfully setting technical standards is to speak with one national voice (companies and governments that are on the same page in their thinking), which might work to China’s advantage.

Connecting the dots

Where does geopolitical power come from? The term “geopolitics” especially connotes armies, capital or energy. These are important, but every age will also create new forms of power. Our age included. The technical standard is such a new form of power, which does not receive much attention. The forcefield around technical standards is changing rapidly and China is already playing an important role. Besides being of economic value, the Chinese technical standard will give China more influence by spreading the Chinese perspective on technology around the world.

In the current system, technical standards are determined by international organizations such as the ISO, IEC and ITU. Many countries participate in these organizations through associations between governments and businesses, and standards are developed in committees with engineer workgroups. One theme has long been central to this system: the worldwide interoperability of technical standards (to improve efficiency, scalability and innovation). At the same time, however, this system has been used by Western countries to exert power. The ISO was established in 1947 and the ITU joined the UN in 1949. In the post-war period, the U.S. and Europe dominated the world and the development of technical standards was part of this. That has begun to change. China has taken great strides in the fields of 5G, facial recognition, blockchain and AI. Moreover, China has created a strong position for itself within the most important organizations.

The question is what the impact this greater role of China will have. Two types of impact are already noticeable. First, China will economically profit from setting technical standards. This became clear, for example, when the U.S. government recently gave American companies permission to continue to collaborate with Huawei in the standard organizations, for fear of being excluded from the international process. In the coming years, Chinese companies will increasingly profit from their current role in setting fundamental standards. Because, for instance, their existing products and competencies meet these standards, which gives them a lead on international competitors. Second, the Chinese cosmotechnics (the Chinese way of thinking about technology) will become more influential – and incur more resistance because of it. Technology is always connected to culture, and this holds even more true in our time of digital technology, in which, for instance, SC 42 is attempting to determine how we should regard transparence and the explainability of AI systems. Modern technology (more so than railroads or electricity networks in the past) is programmed in advance, according to certain rules that derive from cultural values. This has become apparent in the development of facial recognition, which more and more American companies are pulling out of, and Chinese companies have seized the opportunity to set the global standard.

Technical standards are geo-economic (countries become dependent on each other, which can create political pressure) and cosmotechnical (shaped by “foreign” cultural values). There is thus much at stake, especially to a hegemon (the U.S.) witnessing the decline of its influence. This means that the battle over technical standards might harden in the coming years, putting companies in a vulnerable position.

Implications

  • Through the Belt and Road Initiative, Chinese companies will increasingly use technical standards to create lock-in effects in rising countries in Asia and Africa. This applies not only to digital technology but also to industries such as the railway industry and the energy industry.

  • In the battle over technical standards, momentum for open-source platforms could increase. Recently, the open-source chip design platform RISC-V chose to move from the U.S. to Switzerland to protect its appeal in a geopolitical world becoming increasingly strict where technology is concerned.

American soft power is under pressure

Written by Sjoerd Bakker, september 9 2020

The American Dream is showing severe cracks and the U.S. has long ceased to be the country the rest of the world looks up to. The increasing unrest in the United States will inevitably lead to a loss of American soft power. As a result, U.S. hegemony is becoming more dependent on military and economic power display. The Trump presidency seems to be largely responsible for this loss of soft power and a reelection of Trump could have serious consequences for the U.S.’ place in the world order.

Our observations

  • A soft power index from early this year (pre-corona, pre-George Floyd) still put the U.S. in first place, but also indicated that this was mostly owing to the entertainment industry, sports and science and that matters such as (failing) public administration, reliability and international cooperation (on which the U.S. ranks 44th worldwide) are in fact weakening American soft power.
  • Historically, Hollywood and the American music industry have always contributed to American soft power. At the same time, American (pop) culture also expresses frequent criticism of the state of the nation and this denunciation seems to be growing more forceful and more widely shared, e.g. in films such as The Florida Project, American Honey and series like House of Cards. Movies that disparage the American Dream and the utopian image of the suburbs have been around for some time; consider American Beauty (1999) and Blue Velvet (1986).
  • Asian countries now also successfully wield soft power worldwide through their cultural sector. We’ve written before about the role of (Korean) K-Pop and the Chinese TikTok. Moreover, Hollywood is no longer able to make movies solely from an American point of view, simply because it has become too economically dependent on the Chinese market (and censorship).
  • Fukuyama’s thesis of the end of history contained (implicitly at least) the thought that deep down, there is an “American” in each world citizen, who would prefer to live in a democratic, free and economically liberal society. Presently it’s becoming clear that this prototypical American doesn’t exist and that there is a lot of discontent among Americans.
  • The current degree of polarization and corresponding political rhetoric in the U.S. are not associated with a modern and civilized democracy. A president who publicly refers to a conspiracy theory such as the Deep State or congressmen adhering to a conspiracy theory of the likes of QAnon further degrade the country’s reputation.
  • The Black Lives Matter protests, and the responses to them, have painfully revealed how divided America still is. Moreover, the footage of riots and the strongly militarized police forces don’t give the appearance of a civilized state, but rather of an authoritarian-led developing country.

Connecting the dots

Countries’ soft power consists of their ability to persuade or entice other countries to follow a certain course. This as opposed to “hard power”: military and economic means of exerting pressure. In most cases, the degree of soft power is determined by the question to what extent a country is perceived as alluring; act as we do, and experience the same freedom and prosperity.

*Besides this, there is a more explicitly moral aspect; act as we do, and you will be doing what’s Right. The U.S.’ soft power of roughly the past century coincided with its military and economic hard power and was largely generated by the globally visible, often predominant, American (pop) culture that reflected the American consumer lifestyle and “way of life”. Additionally, American brands such as Coca-Cola and Nike, and later big tech corporations and platforms like Apple, have always been important vectors of soft power. Alongside sporting achievements (Team USA), they comprised the most important building blocks of the American Dream; the country where everyone has equal opportunity to become successful and happy.

Today, the rest of the world has gained more insight into the less pleasant aspects of American society. This has gone hand in hand with the decline of American soft power, which rapidly accelerated with the election of Trump, and especially with his battle against Obamacare and his inadequate handling of the coronavirus crisis (and before that, of the hurricane in Puerto Rico).

In addition, and most importantly at present, the world is witnessing the collapse of American society along racial, economic and ideological dividing lines. The antagonizing language of both political camps and the footage of American cities are strengthening this image. Where the anti-racism protests (and earlier, the #metoo protests) are concerned, this could also be explained as a positive step, and “enhancement” of the American project. From its founding on, the U.S. has always presented itself as an “unfinished project”. In that sense, the Black Lives Matter movement could also positively affect the international reputation of America (“the country is working towards equality for all its citizens”). In practice, however, it seems closer to the truth that the BLM movement is showing the world how much structural inequality there still is in society, something we don’t associate with a highly developed and “civilized” country. After all, Fukuyama also posited that equality and freedom are the most important qualities of “post-historic” countries; values that America formally appears to uphold but fails to put into practice.

The decline of American soft power cannot be separated from the relative loss of military and (based on the dominant dollar) economic power since the nineties. First, this loss of hard power means that the rest of the world looks up to America less and the country is losing some of its natural appeal (“when you win, you have friends”). Second, the division in American society can also be understood to derive from the loss of American dominance and, linked to that, a loss of self-confidence. Since the 9/11 attacks and the ensuing protracted wars in Iraq and Afghanistan, and of course the rise of China, the average American doesn’t feel as if they’re living in an unassailable country anymore. The idea of “American decline” has thus become more widespread and forms, along with considerable socioeconomic inequality, a breeding ground for (right-wing and left-wing) populism and is causing a high degree of polarization and societal unrest. The fierce counterreaction of part of (white, male) America to the BLM movement (and before that, to #metoo) could possibly also be understood from this loss of American self-confidence; both abroad and within the U.S., the old image of America is under pressure and people feel as if their culture and values have become unimportant (or even banned in the perceived “cancel culture”). It seems in President Trump’s best interest to stir up these tensions, and to deepen the fear and uncertainty among his voters. Although this might increase his chances of being reelected, it won’t help the U.S. to once again become a paragon to the rest of the world.

Implications

  • The (relative) waning of American soft power is enabling the worldwide emergence of other ideas about the Good Life, citizenship, public administration and international relations. Europe now has the opportunity to take on moral leadership, but there will also be more room for “the Chinese story” and Chinese ideas about democracy.

  • A victory for Biden would likely benefit the U.S.’ reputation in the liberal and multilateral world order and may lead to less domestic unrest due to Biden’s more conciliatory tone. However, it will not change the fact that American society is under pressure and “culture wars” between progressive and conservative Americans will endure.

  • In a world where multiple nuclear powers compete, but “mutually assured destruction” makes armed conflict unlikely, the U.S. will have to continue to actively advertise the American Dream. To do this credibly, enormous domestic investments may be necessary to reinforce the social-moral infrastructure and make the U.S. alluring to other countries again. It can also be expected that the entertainment industry and big tech will be heavily involved in such a project.

The long hegemony of currency

Written by Alexander van Wijnen, september 9 2020

What happened?

As the U.S. dollar has fallen to a two-year low against the euro, there is more and more speculation about the future of the dollar as the global reserve currency. Currently, the discussion is largely based on financial and economic calculations. However, when taking a historical perspective, a clearer picture emerges. The history of hegemony points to the likely future dominance of the U.S. dollar, but leaves room for the emergence of alternative financial ecosystems.

What does this mean?

Financial dominance is the final phase of hegemony, but it lasts for decades. By comparing several elements of hegemony (e.g. military, trade, innovation), Ray Dalio has shown that the power of the global reserve currency is something that outlasts all the other elements of hegemony by a multitude of decades. We have also noted how the Hegemonic Cycle has repeatedly shifted from a phase of “material expansion” to a phase of “financial expansion” of the global economy. Hegemony ends when the hegemonic currency loses its status as the global reserve currency, but such a shift takes a very long time.

What’s next?

Although the dollar is highly likely to remain the global reserve currency for the foreseeable future, other countries, led by China, will build an alternative financial ecosystem. For instance, China’s alternative to SWIFT (the dominant interbank system controlled by the U.S.) is gaining significant momentum. Meanwhile, Chinese financial ecosystems are going global by spreading across Asia and Africa and the Chinese central bank is experimenting with a digital currency. In the long-term, the emerging Chinese financial ecosystem may undermine the position of the dollar in global trade and flows.

The evolutionary impact of the crisis

Many ascribe revolutionary qualities to the corona crisis and think, or hope, that it will lead to entirely new ideas, rules or structures. It is, however, more realistic and useful to understand the crisis from the point of view of a continuously evolving world. In this world, the crisis is the cause of mutation, thus of new variations, and induces (temporary) changes in the selection environment. But there will be no sudden radical changes either on the variation or the selection side. This implies that changes resulting from the crisis may be significant, but not revolutionary, and that they will be restricted to matters directly related to the crisis itself and the way we respond to it.

Our observations

  • From the first weeks of the corona crisis, we’ve been flooded with predictions and ideas about a different, and often “better” world, that would emerge from this period of misery. Of course, many thinkers mainly expounded their wishes or their own hobbyhorses, regarding themes such as sustainability, societal inequality, or our view on technology.
  • Historically, we see that a(n) (economic) crisis rarely leads to a completely different world or radically different outlooks. Inasmuch as a crisis can lead to any significant change in direction, this is a slow process which builds on a motion already initiated before the crisis. In that sense, we must understand a crisis mainly as an event that could potentially, and to a certain extent, contribute to a process already underway, because more actors are supporting it or have stopped resisting it.
  • Tensions between China and the U.S. are rising because of the crisis, but the crisis as such is unlikely to lead to entirely new conflicts. In Europe too, the crisis has resulted in increased tensions between North and South as well as East and West, but none of these tensions are new or solely caused by the crisis.
  • Digital means are taking flight (though that will prove partly temporary as well) and in healthcare, for instance, we’re seeing a considerable increase in the use of telehealth After the pandemic, the immediate need for these applications will be gone, but chances are that doctors and patients will become accustomed to them and come to see their value, leading to rapid improvements in these apps and regulators and insurers taking these solutions more seriously as well (e.g. as a way to keep care affordable in the long-term).
  • The corona crisis has boosted the (hoped-for) decrease in car use. Our car use, historically low at the moment, will almost certainly increase again after the crisis, and it is plausible that the effect of the crisis will ultimately amount to no more than a few percent. Even if this seems puny, such a shift would be enormous compared to the minimal reduction we’ve seen in the past decades. Moreover, a single percent decrease would reduce traffic congestion by three percent and the effect on traffic flows would thus be even bigger.

Connecting the dots

Each crisis entices people to succumb to wishful thinking and parading around their hobbyhorses, but ultimately, changes caused by the crisis won’t be revolutionary and will be limited to matters directly related to the crisis and the challenge of tackling it. The consequences will thus be found mainly in the direct, and largely unavoidable, measures taken in response to the economic problems, changing geopolitical relations and the adoption of new technology during the lockdown. Other forms of change, purposely brought about after reflections on (the causes of) the crisis, are much more unlikely or will only gradually arise in the long-term. It’s therefore best to understand the crisis from an evolutionary perspective; as an event that influences continuous processes of cultural, economic, (geo)political and technological evolution, but that is at the same time rooted in these very processes, which is why it will fail to lead to radical, revolutionary change.

Evolutionary processes are characterized by a continuous dynamic of processes of mutation leading to new variations (e.g. technological innovations, new revenue models, political movements) that may or may not fit into a dynamic selection environment. This environment is made up by the conditions under which something can continue to exist, grow or die. In a societal (i.e. non-biological) context, the process of variation and selection is far from blind or random; actors expressly anticipate possible changes in the selection environment when they develop a new innovation or idea (i.e. quasi-evolution). And selection criteria only adapt when presented with the right variations (e.g. emission norms for cars follow the pace of technological innovation in the industry). This mutual adjustment between processes of mutation and selection limits the possibilities for radical change and leads to path dependence; choices made in the past reduce the number of possible choices for the future.

From this perspective, we may wonder how the corona crisis could be of influence. As stated, this influence will remain largely restricted to the direct effects of the crisis itself and the path-dependent way we’re responding to it. Partly, this will be visible in new (incremental) variations in terms of new technology or new practices. But what’s more important is the way it’s leading to other and new selection criteria that determine which of these new (and existing) variations will be permanent or at least have more momentum temporarily. This of course applies most clearly to working from home and, very specifically, remote doctor’s visits are now suddenly deemed adequate. And yet, these types of changes in the selection environment aren’t radical or stand-alone; they add momentum to existing trends. On the international stage, we see that the crisis is leading to a heightening of the Chinese-American conflict and that neither country really has any other choice, they can’t suddenly view the matter in a different light. After all, this conflict is part of a larger and longer-lasting hegemonic battle and the path dependence within that meta-conflict is much stronger than the corona crisis as such.

The kind of large and virtuous societal change that is widely discussed and written about but that holds no direct relation to the crisis itself, is more difficult to imagine from a (quasi-)evolutionary framework. Ideas about this have, after all, been around far longer and the crisis will not directly result in new, more promising variations on these ideas, because there is no immediate reason that it should. More importantly, the selection environment for these kinds of ideas will not immediately change as a result of this crisis. Like any other crisis, the corona crisis is open to several interpretations and its nature, size and cause will remain hotly debated (politically) for a while to come. Without any clear consensus about this, different groups in society will project their own ideas and interests onto the crisis and it will fail to lead to any radical shifts in (political) ideals or convictions.

Implications

  • Lasting change as a consequence of the corona crisis will derive from a changing selection environment in which new practices (from high-technology to diplomacy) are better able to thrive. First and foremost, this selection environment, and the applied criteria, will be shaped and reshaped by the crisis in all its manifestations. Only in the longer term will our reflections on the crisis (e.g. concerning its causes) actually affect the selection environment.

  • Even temporary changes in the selection environment (e.g. temporary lockdowns) can lead to lasting change. Various solutions (i.e. variations) are given the opportunity to be developed further, thanks to extra means, attention and goodwill, and will in time also be able to survive when temporary selection criteria don’t apply (as much) anymore. For instance, the direct restrictions on working at the office will probably cease, but the ongoing development of applications for working and having meetings from home will eventually lead to working from home being considered a full equivalent to working at the office.