African governments are tethered to the world’s reserve currency, the U.S. dollar, and to a volatile system of global financial markets in money and currencies. The poorest African countries are dependent on global markets for liquidity, mostly in the form of hard currency loans: financial institutions based in wealthy countries—particularly members of the Organisation for Economic Co-operation and Development (OECD)—provide private and public savings or finance at high real rates of interest.
African countries are obliged to acquire and include a large share of U.S. dollar assets in their allocated foreign reserves and to use dollars for the purchase of essential goods, including oil and pharmaceuticals. These ties—or chains, as some call them—to the international financial system mean that African governments and their citizens are both beneficiaries and victims of the global financial architecture, the U.S. dollar’s role as reserve currency, and the Federal Reserve’s monetary policy.
That dependency stretches to the Fed’s fixing of interest rates and to its policies for both quantitative easing and quantitative tightening. When OECD central banks tighten monetary policy, liquidity tends to dry up and only becomes available at high rates of interest (returns).
When crises occur, or the Fed raises rates, the U.S. dollar strengthens, and African currencies generally weaken. The cost of servicing Africa’s foreign debt rises, as do the prices of essential imported commodities such as grains, medicines, and energy, purchased with U.S. dollars. The rising cost of essential, imported foreign goods fuels inflation.
When the U.S. dollar weakens, the reverse happens. African currencies strengthen, the value of exports rise, and the cost of foreign debt service falls, as does inflation. When the Fed and other Western central banks ease policy, liquidity becomes more available.
These conditions are not conducive to stability or development and have resulted in the worst-ever African debt crisis. A new database by Development Finance International lays bare the impacts: “Debt service is absorbing 42% of [government] spending in all countries, and 55% in Africa. It equals combined total spending on education, health, social protection and climate across all countries, and exceeds it by two thirds in Africa.”
These harsh consequences make it nigh impossible for governments to deliver necessary levels of investment, employment, and growth at a time of social and political instability and at a time when financing is urgently needed to transition away from fossil fuels.
Although there are ongoing international debates around changing the global financial system, Africa must not wait for them to be settled. As an interim step, to escape their predicament and gain more control over their economic fortunes, African governments should form a continent-wide payments union, modelled on the European Payments Union of the early post–World War II era.
The changing global financial order
Added to this economic instability, there is growing political unease in non-Western countries about the way in which the United States and its allies (notably the United Kingdom and the European Union) use their power to punish out-of-favor countries—such as Afghanistan, Iran, Russia, and Venezuela—by violating international sovereign immunity rights and confiscating financial assets deposited in good faith in U.S., UK, and EU central banks.
Whereas Afghanistan’s $7 billion in reserves frozen in American institutions caused concern, the immobilizing of Russia’s $300 billion in reserves “represented a whole new category of economic combat,” writes investigative journalist Stephanie Baker. Chen Qi, a professor at Tsinghua University in Beijing, notes that non-Western emerging countries “like China, Russia, India or even Saudi Arabia, have the same kind of concerns about possibly one day being ousted by the United States from the Swift (payments) system.”
The fear is entirely rational, adds Creon Butler, an expert on global economic policy, as governments have no “practical alternative to the U.S. dollar and other fully convertible Western currencies as a location for the bulk of the world’s $12 trillion in foreign exchange reserves.”
These Western manipulations of the current global financial order were a prominent topic at the October 2024 meeting of the BRICS countries—a coalition that has recently expanded beyond Brazil, Russia, India, China and South Africa to include Egypt, Ethiopia, Iran, and the United Arab Emirates. At their 2023 summit, the host South African government had introduced a proposal for a BRICS currency.
In December 2024, as South Africa assumed the year-long presidency of the G20, President Cyril Ramaphosa emphasized that “reform of the global financial architecture in particular must be the rising tide that lifts the fortunes of the most needy and vulnerable.”
Money, currencies, and the global financial architecture
In considering proposals for reform of the existing system, it helps to begin at the beginning, by focusing on financial markets, money and currencies, and their impact on trade. Markets in both money and currencies are largely deregulated and volatile. The cause of the instability can be explained by a defect at the heart of “monetarist” economic theory: namely, the mistaken notion that money and currencies can safely be traded as commodities in both national and global markets.
It would have astonished the great monetary theorists of the past (among them John Law, John Maynard Keynes, Joseph Schumpeter, and John Kenneth Galbraith) to find that modern capitalism regards money not as a social construct or social technology, but as “merchandise.” Recurrent financial crises since then U.S. president Richard Nixon’s Shock of 1971 and the resulting endemic financial instability are proof that this monetary theory has had disastrous consequences. Credit, money, and currencies are not commodities but inherently social relationships, dependent on mutual trust and shared responsibility.
The establishment of markets in social relationships leads to exploitation that is antithetical to these values, which are shared by societies across the world throughout history. If society is to make advances (loans) and agree to settlements (debt), then in any arrangements for money (credit, debt) there must be trust, cooperation, and responsibility—and these arrangements must be enforced by laws and regulations.
As economists Massimo Amato and Luca Fantacci argue, “The idea that money is wealth and that the mere lending of it merits a reward is the root of an endemic evil that is both social and human. . . . Until a couple of centuries ago, it was called usury. Then the classical economists called it rent and criticized it harshly. Today it’s called the rate of interest. In any case it is income earned without working or running entrepreneurial risks.”
Global markets care little for these values. Money is bought and sold in markets characterized by deregulation, distrust, and speculation: in other words, by irresponsibility. Those countries active in global financial markets have developed what can only be described as a fixation, or fetish, for liquidity (the buildup and availability of money—cash or savings). They operate on the assumption that money (cash) must generate interest when lent and that ruthless competition is necessary to place or withdraw or extract liquidity from different institutions.
It is these assumptions and the existence of global, and largely unregulated, markets in money and currencies that lie at the heart of today’s financial imbalances and turbulence—made even more uneven and unstable by the dominance of the U.S. dollar, as the world’s hegemonic reserve currency.
Are proposed alternatives to the U.S. dollar viable?
Because of the economic and political costs of the current system, debates at recent BRICS and G20 summits have focused on proposals for alternatives to the U.S. dollar as the leading global reserve currency. Because the Chinese renminbi (RMB) is growing in importance, more and more central banks have added the currency to central bank reserves.
But inevitably, politicians in low-income countries have faced the realpolitik implications of this shift: choosing the RMB as an alternative reserve currency would simply mean accepting global governance by another hegemon, China. At the October 2024 BRICS summit in Kazan, Russia, President Vladimir Putin “touted a new international payments framework (known as BRICS Bridge) to world leaders . . . eager to show how he is shrugging off western sanctions and challenging the US-dominated global financial order,” reported the Financial Times.
Putin’s proposed system would use blockchain, token, and digital currencies as an alternative to Swift, the secure messaging system used to handle trillions of dollars in bank payments around the world, which is vulnerable to U.S. and Western pressure. BRICS finance ministers showed little interest in the proposal, however.
A global clearing union
Given that debates on alternatives appear to have stalled, it might be wise to revive a modified version of Keynes’s 1944 Bretton Woods proposal for an international clearing union (ICU) as a basic structure for a new global payments system.
Keynes’s proposal for international cooperation and coordination in constructing an ICU was, according to his own judgment, an “ideal scheme . . . complicated and novel and perhaps Utopian.” If it was utopian then, it is undoubtedly so now. However, a modified version of the ICU—the European Payments Union (EPU)—was introduced after World War II and could serve as a model for an African Payments Union (APU).
The European payments union, 1950–1958
After the devastation of World War II, Western Europe became dependent on liquidity in the form of aid provided through the United States’ Marshall Plan. While the plan ensured American imports could be paid for, liquidity in the form of U.S. dollars did little to stimulate the recovery of European economies. To remedy that situation, and on the advice of economist Robert Triffin, eighteen members of the Organisation for European Economic Co-operation (OEEC) created the EPU, which came into force on July 1, 1950. The EPU functioned as a multilateral clearinghouse for the payment of commercial transactions between European countries.
As Amato and Fantacci explain, “thanks to the EPU, the needy countries of Europe could import from other countries with no restrictions save the capacity to export after having imported, while the European able to export could do so without the liquidity shortages of their potential clients stopping the latter from purchasing. Under only one condition: the creditor countries must spend their credits within the clearing circuit.”
The EPU transformed and revived the economy of Western Europe. In the initial postwar years, European countries had signed more than 400 bilateral trade agreements with each other, creating a veritable “spaghetti bowl” of bilaterals. While these agreements improved on mere barter arrangements, they did little to expand European trade.
They also impeded fulfilment of the major condition that the United States had placed on Marshall Plan aid: namely, that beneficiaries coordinate their planning for the allocation of U.S. assistance. By 1950, awareness dawned that the revival of European trade depended on the creation of a payments union.
As described by Amato and Fantacci, “essentially, the Union made provision for each country to have, rather than as many bilateral accounts as it had trading partners . . . one single account held at a ‘clearing centre’ in which the position was recorded as a net position in relation to the clearing centre itself, and thus as a multilateral position in relation to all the other countries. With this set of provisions the European Payments Union succeeded where every previous plan had failed. It provided for a multilateral, intertemporal clearing for European trade, an extraordinary export-driven growth in production, in Germany and Italy in particular and the liberalization of trade not only with the countries of Europe but well beyond.“
What helped Europe recover from a devastating world war could help Africa recover from the turbulence of recent decades. Africa cannot afford to wait any longer for the rest of the world to wake up to the urgent need for systemic transformation in the form of a global clearing union. The continent should instead move forward with an entirely feasible interim step: the establishment of an APU.
An African payments union as a clearing house for continental trade
To imagine an African Payments (or Clearing) Union, picture it as a bank, but without capital, deposits, or reserves. Each participating African country would have an account with the clearing union, much as a commercial bank may have with a central bank; and each account would have an initial balance of zero. The “currency” used by the APU would be analogous to commercial bank “reserves” held by central banks: resources that can only be used within the clearing union to balance the system.
The proposed APU would include the option, or potentially even the obligation, for countries to adjust exchange rates between national currencies. To participate in the union, deficit countries would devalue their currencies, and surplus economies would revalue theirs. Each country would be granted the possibility of building up an “overdraft” within set limits, thereby financing a temporary deficit in external accounts. On the other hand, countries in surplus would show a positive balance.
Each cross-border transaction made by a government would involve double-entry accounting: the same sum would be entered as debt for the buyer (importer) and credit for the seller (exporter). Thanks to this accounting system, the overall clearing house balances would always be set at zero, which is why no reserves would be needed.
A distinctive feature of the proposed payments union is that it would treat both debtors and creditors symmetrically. The debtor pays interest on its overdraft, but the creditor (exporter) does not benefit from its surplus. Instead, the creditor country is disciplined and pays a commission on its positive balances, as incentive to lower its surplus by buying from debtor countries. The commission charged is justified by the fact that creditors have deposited nothing in the “bank” or union, and yet benefit from its services, just like debtors.
Moreover, these symmetrical costs constitute an incentive for creditors and debtors to restore balance in their external accounts. The strength of the payments union model is that it allows the debtor country (importer) to buy what they could not have afforded and allows the exporter (creditor) to sell what otherwise they would have found no market for.
Such a clearing system would enable African governments to finance transactions across the continent, without building up imbalances—deficits and surpluses. Most importantly, they could do so without resorting to fickle international financial markets (or sovereign governments) for expensive liquidity.
We know it can be done, because it has been done before.
Author
Ann Pettifor is a political economist, author, and public speaker. Her latest book, The Case for the Green New Deal, was published in hardback by Verso in 2019. Known for her work on sovereign debt and the international financial architecture, she led a campaign, Jubilee 2000, which resulted in the cancellation of approximately $100 billion of debt owed by the poorest countries. She is Director of PRIME (Policy Research in Macroeconomics) a network of economists that promote Keynes’s monetary theory and policies, and that focus on the role of the finance sector in the economy.
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