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The Lost World of Sovereign Bankruptcy and the Future of Government Default

Pari passu clauses were deliberately crafted to gain an upper hand in sovereign bankruptcy disputes brought to the London stock exchange’s jurisdiction

Few persons, even legal scholars, realize that sovereign bankruptcy has a long history. Far from a pie-in-the-sky scheme conceived in the 1980s by international lawyers such as Christopher Oeschli and economists such as Jeffrey Sachs that later inspired the failed IMF Krueger proposal for a sovereign debt restructuring mechanism, the concept of sovereign debt bankruptcy and discharge (write-off) has an ancient and little known history. My new INET working paper sets out this history for the first time.

“Pari Passu Lost and Found: The Origins of Sovereign Bankruptcy, 1798-1873” uses the modern debate on pari passu clauses in sovereign debt contracts as the entry point to reconstruct the historical origins of sovereign bankruptcy. Pari passu literally means “in equal steps” and pari passu clauses which are ubiquitous in modern sovereign debt contracts pledge equitable treatment to creditors holding bonds exhibiting such provisions. But the precise meaning of “equal steps” is unclear and has been hotly contested in disputes among creditors in the midst of debt restructurings.

In the past 20 years, so-called vulture funds have successfully promoted a reading of pari passu clauses that prevents defaulting countries from going ahead with payments to bond holders who accept their terms while others reject them. This interpretation, which gives the holdout creditors great power in the negotiations, was most famously upheld in the influential Griesa ruling in a 2014 dispute that pitted the Argentine Republic against Elliott, a hedge fund. The verdict promoted what came to be known as the ratable interpretation of pari passu clauses: That under the penalty of being intercepted by a court or justice, payments to creditors have always to be ratable or proportional to all creditors whether or not they accepted the defaulting government’s terms.

Because no one likes vulture funds and their actions were perceived as threats to the very precarious balance upon which IMF-supported debt restructuring rested, there was a general outcry against the Elliott verdict and more generally against the ratable interpretation of pari passu clauses. In particular, a group of critical scholars styling themselves as “contract originalists” suggested on the basis of a series of historical forays that pari passu clauses in sovereign debt covenants were initially (in the late 19^th century) a misguided transplant from corporate law where equal treatment is warranted with respect to collateral or security. The language was then introduced to the sphere of sovereign debt, where it is a problematic concept because under sovereign immunity attachment of assets is difficult.

A variant of this line of thought asserts that pari passu clauses emerged in sovereign debt contracts either randomly or in anticipation of gunboat enforcement. In yet another incarnation of the argument, actual contracts, such as a Bolivian loan contract dating to 1872, which was at one point considered to be patient zero, were examined, with originalists concluding that they could not make sense of the clauses. On the basis of such historical evidence, originalists have attacked the broad ratable interpretation of pari passu clauses. In the language of one supporter of this view: “[The idea that pari passu clauses grant] each bondholder a unilateral right to block payments to bondholders who assent to a government’s restructuring proposal [would] have no historical precedent whatsoever.”

My research shows that this is not true. On the basis of novel archival work, I show that the interpretation of pari passu clauses as giving obstruction rights in debt restructurings has very precise historical precedents. In the early Victorian era, a full-fledged sovereign bankruptcy regime evolved, supported by a court of arbitration which developed its own jurisprudence. This court consisted of the Committee of the London Stock Exchange, then by far the most important market for sovereign debt. The Stock Exchange Committee developed initially as a tribunal dedicated to stockbroker bankruptcies because stockbrokers who dealt extensively in illegal derivative products sought to avoid getting the Lord Chancellor’s court of bankruptcy involved in their failures. And in 1827, on the heels of what has been described as the first international sovereign debt crisis, the Stock Exchange Committee took advantage of the bankruptcy expertise it had accumulated and became a venue to adjudicate sovereign default and sanction debt discharges.

This finding is in itself important because in conventional interpretations, as for example, in the recent series of articles by the New York Times on Haïti’s debt to France, the 19^th century is conventionally seen as an age of imperial violence, with debt enforcement secured by dispatching a man-of-war. But my research shows that until very late in the nineteenth century, mainly lesser powers – France in the first half of the 19^th century, or the United States in the age of the so-called “dollar diplomacy” – cloaked their imperial desires behind the letter of Vattel’s Law of Nations which indeed gave a blank check to the sovereign of the creditor’s power to shell the ports of defaulting borrowers. By contrast, Britain made less extensive use of violence and coercion to secure debt enforcement, usually intervening because it saw another power (France) taking action and was compelled to tag along (as in the case of Mexico) or act pre-emptively (as in the case of Egypt).

The reason for Britain’s more limited use of gunboats, I argue, is that sovereign debt contracted under the laws of the London stock exchange could rely on a full-fledged debt restructuring mechanism. What is more, to secure creditor cooperation, the law of the stock exchange ensured it would deliver fair debt write-offs, i.e. governed by pari passu logic. In fact, pari passu treatment of creditors was a pre-condition for any discharge: A creditor who failed to receive a ratable payment could litigate the country’s discharge and have the stock exchange pronounce it a defaulter. At bottom, this was an early form of what is known today as Fair and Equitable Treatment (FET) clauses. They were implicit in any sovereign loan issued under the law of the London stock exchange.

In practice, creditors in a default were ranked according to the rights set down in the respective covenants and these rights were then mapped proportionately into payments. Against this backdrop, a departure from proportional payment gave the right to individual bondholders to litigate: In case a bankruptcy workout would not result in ratable distributions, aggrieved creditors could ask the court to strike down the discharge. In other words, the ratable interpretation of creditor equality of treatment was the cornerstone and foundation of sovereign bankruptcy and in turn, of the London sovereign debt market. Indeed, loans issued in this market gave creditors convenient instruments to address distress: I suggest that this was one reason why the London stock exchange was such a successful market. To creditors, it ensured that they would be fairly treated in a debt restructuring. To debtors, it ensured that they would have a way to negotiate a proper write-off, and what is more, they would be protected afterward. But this also means that, sadly for contract originalists, pari passu verdicts have very ancient and high-profile roots. They were the cornerstone of a system that enabled proper discharges to be extended.

To deliver this message, the working paper first discusses the reasons why the modern literature has overlooked the existence of the stock exchange tribunal as a court of sovereign bankruptcy. The oversight is traced to interwar American scholars. These scholars noted that under the rules of the stock exchange, a defaulter could not borrow. But they failed to grasp that, first, this mechanism ensured the equitable treatment of creditors, and second, that it provided countries with the attractive prospect of a debt write-off. Superficial research and. as I show, theoretical hostility to the concept of sovereign bankruptcy, which these interwar scholars inherited from 19^th century British Law Officers, did lead them to erase from the record the role of the London stock exchange tribunal.

Next, drawing extensively on unexploited archives, the paper details the rise of the stock exchange sovereign bankruptcy tribunal from its roots in Early Modern Lex Mercatoria. The Stock Exchange Committee was a sui generis merchant court created in 1798 to deal with “illegal” stockbroker bankruptcy. Remarkably, the first verdict it ever returned, consisted in interpreting creditor equitability as ratable payment. The jurisprudence was later encapsulated in the statutes – or Rules and Regulations – of the stock exchange. When, in the aftermath of the 1825-6 sovereign debt crash, the committee of the London stock exchange was turned into a sovereign bankruptcy tribunal and equipped with the authority to govern debt discharges, it inherited the logic.

The article then unpacks the mechanics of discharge litigation and illuminates, in so doing, the “real” function fulfilled by the equal treatment assumption. By providing grounds for individual creditors to litigate non-ratable payments, the clauses served to strike down exploitive discharges. In so doing, they secured creditor cooperation. A striking finding is that because of its promotion of creditor cooperation, sovereign bankruptcy became, in English law, a field of bankruptcy experimentation, in fact, an avant-garde movement of then conservative corporate bankruptcy: Modern economists and lawyers may believe that causality runs from corporate to sovereign, but historical research suggests that in reality, the opposite occurred.

Finally, the paper studies closely the first instances of pari passu provisions found in actual sovereign debt contracts of the 19^th century. It shows that they emerged as lenders and borrowers and the lawyers who assisted them availed themselves of the law of the stock exchange in clever ways. Far from being inspired by a misguided transplant from corporate debt law, as contract originalists suggest, pari passu clauses were deliberately crafted to gain an upper hand in sovereign bankruptcy disputes brought to the London stock exchange’s jurisdiction. Drafters – the ancestors and sometimes actual predecessors of modern English law firms – admitted the agency of the stock exchange tribunal and harbored a keen sense of the possibilities afforded by the stock exchange’s sovereign bankruptcy court. Examining the way they crafted the clauses speaks volumes about their warranted expectation that the stock exchange tribunal would enforce the clauses as it did.

In the light of history, therefore, it does not appear absurd at all to say that modern pari passu clauses were introduced with an eye to secure ratable distributions as the vulture funds have charged. Under the early regime where they first appeared, pari passu provisions were introduced indeed precisely with this intention – in anticipation that departure from ratable distributions would be punished under the discharge statute of the London stock exchange. Of course, modern contract drafters could not have had in mind the precise machinery of the now-deceased London stock exchange’s jurisdiction as I unpack it here, since until this paper was written, its substance was unknown – as the good faith errors committed by contract originalists demonstrate. But the early drafters had in view the possibility that some court, someday, would hear them and perhaps an understanding of the role which equitable treatment can play, under the right circumstances, in promoting creditor cooperation. They may also have had in mind that, if sovereign bankruptcy is ever to be implemented, then it will have to begin with ratable distributions. Against this backdrop, and considering that many sovereign debts are long-term instruments, the clauses became a way to secure protection preemptively, “just in case;” a barnacle expecting to find its whale. Maybe, in their own opportunistic and mercurial way, the vultures are clamoring for the creation of a sovereign bankruptcy court?

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Pari Passu Lost and Found: The Origins of Sovereign Bankruptcy 1798-1873

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Why The Ukraine Crisis Will Make Little Difference to Dollar Supremacy

The depth of the U.S. securities market helps ensure dollar hegemony

1. The Ukraine Crisis and Dollar Supremacy

Since the collapse of communism in the early 1990s and the subsequent rise of the world economy as a single market-based operational totality, its monetary counterpart has been a unipolar currency system centered on the US dollar as the premier vehicle currency in the private sector, as well as the premier reserve currency in the official sector. The hegemony of the dollar has survived several global economic shocks, including that of the financial crisis of 2007-9. Whether the system can survive the seismic shocks stemming from Russia’s invasion of Ukraine in February 2022 is now under active debate.

Many prominent commentators argue that it will not, noting the ongoing attempts by Russia and her trading allies to circumvent the US-led imposed financial sanctions. Barry Eichengreen, for instance, observed that because of the Russian and other central banks’ increased diversification of their reserve holdings away from the dollar “we are seeing movement towards a more multipolar international monetary system."[1] James Galbraith sees a dual currency system in the making, as Russia and her trading allies “carve out… a significant non-dollar, non-euro” rival financial system.[2] In a wider context of innovations in technology and finance, the IMF also noted the possibility of a scenario where “the greenback could be felled not by the dollar’s main rivals but by a group of alternative currencies,” including crypto and digital currencies.[3]

This is not the first time that a geopolitical crisis has prompted musings, at various levels of the academia and the commentariat, about the coming end of dollar hegemony. Invariably, they turned out to be wrong. Given the rather long history of failed forecasts, current predictions about the dollar’s future tend to be given with more caution and hedged with various caveats and qualifications. Indeed, to be fair to Barry Eichengreen, he is careful to emphasize that dollar dominance will not end soon, even while the Ukraine crisis may have accelerated the ‘stealth erosion’ of that dominance. A more general qualifying refrain is that a multipolar currency system, while not yet here, is nevertheless in the cards.

Is it, though? Can the ongoing attempts to establish a non-dollar alternative amount to a serious challenge to the hegemony of the dollar? The contrasting answers to this question reflect two alternative visions of capitalism. The declinist school of thought on the dollar supremacy stems, as Susan Strange noted some 30 years ago, from academic traditions that have historically overlooked the importance of the financial system in shaping the balance of power. It was a result of a methodological choice: at best, they have proxied it with currency regimes that serve international trade relations. As such, the declinist school of US power (and hence the dollar) originates in the productionist vision of capitalism, where trade reflects the structure of production, and where monetary regimes of individual states reflect the position of a country in international trade flows.

An alternative approach, known as the money view of capitalism,[4] or capitalism of futurity, places the tradability of debt[5] as the core institutional setting that defines political economy generally, and, more specifically, the force that anchors major decisions and developments in production, trade, and investment. From the latter perspective, we see no end to dollar supremacy, whether rapid or gradual. As Susan Strange wrote in her seminal critique of a realist school of international relations:

“the error of the declinist school of American scholars lies in assuming that if the US has lost power, some other state must have gained it… The facts suggest that this zero-sum idea is far too simple. The US government has lost power mainly to the market.”[6]

Today, we can add, the financial market. Focusing on the trade flows and currency reserve tactics of the central banks, the declinist perspective on the global role of the dollar overlooks the central force that underpins not only the hegemony of the dollar but lies behind global financialized capitalism in general. That force is the gravitational pull of the dollar-denominated securities markets.

2. The Gravitational Pull of the Dollar

"As recent crises make clear, up to now the dollar-based order has been supported mainly by instability elsewhere and the lack of a credible alternative or compelling reason to create one, or where such reasons are felt, the ability to do so... The system has been held up, in short, by confidence in itself, and not, so far as one can see, by much of anything else."[7]

Galbraith is correct about the importance of the lack of alternatives to the dollar, yet the problem with his argument is his reading of the cause. He sees the confidence in the dollar as something highly fragile because it apparently lacks any material substance to back it. A lack that, presumably, comes down to the gap between the US share of world production on the one hand, and its share of world securities supplies, on the other.

Between 1986 and 2019, daily forex turnover had risen from about $0.4 trillion to $6.6 trillion.[8] During this period, the dollar’s share of this turnover has averaged about 44%.[9] In today’s terms, this percentage is roughly on a par with the US’s respective percentage contributions to the world’s equity stocks (40% of the $95 trillion outstanding in 2019) and to the world’s bond stocks (39% of the $106 trillion outstanding in 2019).[10] However, it is also far above the US’s percentage share of nominal world output (23% of the 2019 world GDP figure of $88 trillion). These numbers, taken in combination with the trend increase in the US trade deficits, underpin the widely held view, shared by Galbraith, that there will soon come a time when foreign investors will lose confidence in the dollar and thus abandon it due to mounting concerns about the US ability to meet its financial obligations in the face of its deteriorating macroeconomic fundamentals.

This scenario is realistic only if one assumes that there has been no structural change in the relationship between the financial sector and the macroeconomy. Yet, citing Strange again, the addition of credit has altered the balance of power in the world economy. But not in the way that Galbraith and others envisage it.

The expansion of financial markets, the explosion of debt and asset values, are typically associated with the phenomenon of financialization. Over the past few decades, financialization has evolved at an accelerated pace; the financial sector now completely dominates the real productive economic sector on which it rests. In 1980 the combined nominal value of the world’s equity and bond stocks stood at about $11 trillion, a figure on a par with that of nominal world GDP in that year. By 2020 the combined value of those securities stocks had grown over twenty-fold to $234 trillion, while world GDP had only registered an eight-fold increase to $84 trillion in that same period.[11] The growing scale disparity between the financial sector and the underlying real sector is what ultimately fuels narratives of an impending collapse, and the declinist school on the power of the dollar forms one of those narratives.

But financializaton is not a one-dimensional force. Its depth is just as important as an indicator of its historical significance, as is its speed of development because it reflects the structural role of finance in economic transformation. To be specific, the recent scale growth of the world’s equity and debt securities markets is an outcome of fundamental changes in both their supply and demand sides.

From a supply-side standpoint, this growth manifests the radical change in corporate and government dependence on financial security issuance. Previously that dependence may have been small, or, if large, always temporary (e.g., bond issuance to finance a large-scale project or to meet the costs of an emergency). Today, it has become both large and permanent, because of the new financial pressures on corporations and governments that are rising in tandem with the increasing size and complexity of modern economies. For increasing volumes of security issuance to be possible, there obviously must be investors with a correspondingly large enough demand capacity. Chief amongst those investors are the institutional asset managers, the pension and mutual funds, and insurance companies.

Once a small cottage industry catering to the wealthy, over the past four decades asset management has in many countries become a mass industry catering to the retirement and other welfare arrangements of large sections of the population. Along with this growth in asset management scale has come a corresponding growth in the need for investable assets - most notably, for equities and bonds. Although there are other types of assets that serve as stores of value for asset managers, the exigencies of their role as financial intermediaries mean that it is financial securities that necessarily comprise the majority proportion of their asset holdings. What sets these securities apart from other asset classes is their ability to combine a value storage capacity with a relatively high degree of liquidity. “In most countries, bonds and equities are the two main asset classes in which pension assets were invested at the end of 2018, accounting for more than half of all investments in 32 out of 36 OECD countries, and 39 out of 46 other reporting jurisdictions.”[12]

The new structural presence of the asset management sector has important implications for the financial system as a whole. The large absorption capacities of asset managers represent ample opportunities for corporate and government borrowers in having these investors on the buy side of the securities markets. However, at the same time, the industry is operating under new tight constraints regarding the disbursements of cash. As securities have no intrinsic value, their ability to serve as investables with a determinate value storage capacity depends entirely on the degree to which their prices are held firm and thus made tangible, a condition which, in turn, depends on the rate and regularity with which cash is returned.

Here lies the crucial significance of the transformation of asset management from a subsector of finance serving individuals, into an industry of wealth management populated by large institutional players. When households were the representative type of investor in the securities markets, borrowers had far more room for maneuver over cash disbursements. This was partly because households, as small investors, were less able to constrain security issuing organizations, but also because they had less motivation to do so, given that they themselves were under no obligation to invest any part of their savings in financial securities.

By contrast, institutional asset managers are always obliged to keep a substantial proportion of the portfolios that are marketed to the public in the form of liquid securities. It is this obligation that explains why these investors have been instrumental in the establishment of a whole new type of transparency and governance infrastructure in the financial markets that can help guarantee the regularity with which borrowers return cash.

In the final analysis, all understanding of what sustains the dollar’s supremacy in the contemporary era comes down to an insight into the remarkable transformation that securities have undergone in line with the new governance rules and constraints that are now binding on security issuers. Without these constraints, promises of returning cash are always in danger of remaining fictitious: promises filled with empty air. With the new regulatory and governance constraints, securities have been transformed from mere promissory notes into genuinely solid stores of value; from being particles without matter, they become particles filled with matter. What this means is that when all the securities of a country’s organizations are aggregated together, this aggregation endows that country’s financial markets with mass and a corresponding power of attraction for asset managers and other institutional investors: the greater the mass, the greater the power of attraction.

No facet of this power is greater than that exerted by the US securities markets.

Foreign investors currently have trust in the US and in its legal and governance infrastructure of tradability debt, or futurity. Far from there not being "much of anything else" underpinning this trust, there is, on the contrary, much of everything underpinning it. What the US offers, and what no other region can do at present, is a huge and varied abundance of securities (not only equities but also bonds, including corporate, financial, Treasury, agency, and municipal bonds) in which foreign investors can store large amounts of funds and across which they can also move these large amounts relatively easily according to any change in circumstances.

Given the need for dollars as a means of accessing the US securities markets, it follows that just as it is the sheer depth and liquidity of these markets that attracts foreign institutional investors in droves, this attraction serves, in turn, to further amplify the depth and liquidity of the market for dollars itself. This development helps to explain why the dollar remains the most widely used currency in the execution of various cross-currency transactions. For example, the dollar is the funding currency of choice in foreign exchange swap transactions that currently account for nearly a half of the $6.6 trillion daily forex turnover and that are mostly used by banks to hedge exchange rate risks and meet short-term liquidity needs. Similarly, the sheer depth and liquidity of the dollar market means that even when those institutional investors holding globally diversified portfolios transfer funds from one set of non-dollar securities to another non-dollar set of securities, they usually do so indirectly, via the dollar, to contain the costs of these fund transfers.

How will the financial sanctions currently imposed on Russia impact this situation? The answer is, hardly at all. Of course, these measures will see an increase in the amount of pairwise emerging market economy (EME) currency transactions. Yet to put this increase into perspective, there needs to be an estimate of the percentage share of the $6.6 trillion daily forex turnover that these transactions had prior to the Ukraine crisis. Even a cursory look at the figures makes it clear that this share was negligible.

In the first place, EME cross-currency transactions relate primarily to trades in goods and services, and these trades, taken in conjunction with all other real-sector-related currency transactions, account for no more than 8% of total daily forex turnover.[13] Once one strips out the real-sector-related transactions conducted between the advanced market economies (AMEs) themselves and those between the latter and the EMEs, it turns out that the remaining inter-EME currency transactions barely register as a meaningful percentage ratio.

The combined share of all EME currencies in daily forex turnover is just 13%. Even then, in most cases the counter currency was not another EME currency but an AME currency such as the euro, the yen, the Australian dollar but most notably the US dollar. China’s yuan, although the highest-ranked EME currency in 2019 at 8^th place in daily forex transactions, accounted for just 2% of these transactions and no less than 45% of these in turn had the dollar as the counter currency.

In sum, the Ukraine crisis will certainly lead to an increase in "non-dollar, non-euro" currency transactions, just as James Galbraith has argued. But the pre-crisis volume of these transactions was so vanishingly small as to invalidate any suggestion that this increase portends a multipolar currency system in the making.

3. An emergent multi-polar reserve currency system?

The same conclusion holds regarding predictions about the dollar’s primacy as a reserve currency. When Barry Eichengreen recently argued[14] that the Ukraine crisis will accelerate the movement towards a more multipolar international monetary system, his line of reasoning was as follows:

1. the share of dollars in globally identified foreign exchange reserves has been trending down so that they now account for 59% of these reserves as opposed to the 70% figure of 20 years ago;
2. the principal cause of this downward trend has been central banks’ diversification away from dollars towards the currencies of smaller economies such as Australia, Canada, Sweden, South Korea, and Singapore;
3. this diversification into smaller currencies has been facilitated by the liquidity of these markets and hence the low costs of transacting in them, developments that have been made possible by the advent of electronic trading platforms and other financial innovations; and
4. the principal motivation for this reserve diversification has been the central banks’ attraction to the higher yields that the smaller currencies offer in contrast to those offered by the large currencies.

There is nothing wrong with this explanation as to why central banks are diversifying their reserve portfolios to include more smaller currencies. Nor is there anything wrong with the IMF’s observation that these reserve portfolios may now include alternative currencies such as cryptocurrencies and digital currencies. What is wrong is that these narratives are presented in entirely self-enclosed terms rather than in the broader context of what any increased diversification signifies for the overall composition of central bank reserve portfolios.

As with all institutionally managed asset portfolios, foreign exchange reserve portfolios are organized according to a core-satellite structure, where the core segment in this case typically comprises US treasuries and the satellite segments comprise the higher-yielding securities of other governments.

A key question, therefore, is whether dollar reserves in central bank allocations will fall far enough below 59% to warrant the claim about an emergent multipolar reserve system? The answer to this question, in turn, boils down to the question of whether the dollar core segment in reserve portfolios will shrink to a size comparable with the non-dollar satellite segments. The expectations are that it will not.

Recall that the reason why institutional asset managers must hold a significant, if not majority, proportion of their portfolios in the form of financial securities, is that these best combine liquidity with a value storage capacity. Now, while the huge growth of the stock of securities in recent years has provided these institutional investors with abundant supplies of safe and portable value containers, the flip side of this growth in financial value storage capacity is that it has also provided hedge funds and other speculative vehicles with massive financial firepower when targeting national currencies that are perceived to be vulnerable. As was pointed out in a Group of Ten report back in 1993:

"the growth in the size, integration and agility of international financial markets has greatly increased the scale of pressure that can be exerted against an exchange rate when market sentiment shifts."[15]

The European currencies felt the scale of that pressure in the EMS crisis of the summer of 1992, while all the Asian currencies (bar the yen) felt the scale of that pressure in the summer of 1997. Indeed, it was largely because of the unnerving experiences of these crises that there was a subsequent sharp increase in central bank foreign exchange reserves. From barely $0.5 trillion in 1995, the total amount of allocated reserves held by central banks had risen to $5.4 trillion by 2010, an amount that was more than doubled again to $11.8 trillion by 2020.[16]

In 2020, the dollar’s share of allocated reserves was indeed 59% as compared with its share of 70% in 2000. However, to say that there was a “trend decline” in the dollar’s share over this twenty-year period is misleading because it gives the impression of a continuous, year-on-year decline. Rather, while there was an initial downward adjustment of the dollar’s share to about 60% that occurred in the first few years following the introduction of the euro, from 2005 to 2020 that 60% share then remained stable, as did the euro’s share of 20%, and as did the remaining 20% collective share of several other smaller currencies.[17] The fundamental reason why the dollar has continued to maintain this 60% share of foreign exchange reserves even as these continue to grow exponentially in absolute terms comes down to the large mass of US Treasuries.

In today’s era, when the world’s capital markets are deep and highly integrated and when cross-currency capital movements accordingly combine huge scale with high mobility, central banks that are concerned to minimize the impact of these movements on their domestic currencies need to have in reserve financial securities that: (i) have a large and safe value storage capacity, (ii) are available in abundance, and thus (iii) are highly liquid. No other financial securities, and no other financial instruments including crypto and digital currencies, can match US Treasuries as regards these criteria.

If any EME-based central banks needed any reminder of this crucial fact, the events of early March 2020, provided it. By that time, the covid-19 pandemic’s negative impact on the global economy became clear to the world's institutional investors, and they quickly withdrew funds amounting to over $100 billion from the EMEs in the space of days. That withdrawal was catastrophic for many of these countries, but its impact would have been even more devastating had their central banks not quickly intervened in their domestic currency markets with huge sales of the US Treasuries kept in their reserves.

Central banks around the world may well add the higher-yielding securities of other smaller currencies to their reserve portfolios. But can we seriously believe that, at a time when the world’s financial markets continue to grow in scale and become ever more closely integrated, and the threats posed by sudden surges of cross-border portfolio investments grow accordingly, that these central banks will risk substantially shrinking their core holdings of US Treasuries in the search for higher returns? Of course not.

4. The Primacy of the Dollar as an International Currency

On April 1^st, 2022, the Bank of International Settlements launched its 13^th Triennial Central Bank Survey of Foreign Exchange Transactions and OTC Derivatives Markets, the full results of which are due to be published in November. In the two full years between the 2019 survey and the current one, the world economy suffered its biggest shock since the great depression of the 1930s with the outbreak of the covid pandemic. In 2020, nominal world GDP fell from its 2019 figure of $87.4 trillion to $84.9 trillion, while the world’s combined bond and equity stocks increased by more than 15% from $200.9 trillion in 2019 to $234.3 trillion, an increase principally driven by the steep increase in government bond issuance on the one hand, and the increase in security prices fueled by monetary policy easing, on the other.

The story in 2021 appeared somewhat better, as nominal world GDP rose above its pre-pandemic level to $94.9 trillion, but the world’s combined equity and bond stocks again rose substantially, to reach over $241 trillion.[18] In both these Covid-impacted years, the US share of the world’s supplies of equities and bonds remained stable at around 40%. Thus, going by the observation that forex turnover volume is overwhelmingly driven by financial sector interests as distinct from those of the real sector, we can safely predict that the dollar’s share of the new 2022 figure for daily forex turnover will remain around 44%, while, at the other end of the spectrum, the combined percentage shares of all the EME currencies will stay around 13%, with China's yuan share at 2%. In other words, our prediction is that the Ukraine crisis that broke out just after the commencement of the latest BIS triennial survey of forex turnover will have had no discernible impact on the currency breakdown of that turnover.

As to the longer term, we also predict that there will be no serious challenge to dollar supremacy in the foreseeable future because there will be no other regional or national currency that will have a sufficient backing mass of equity and debt securities to enable it to mount such a challenge over that time span. To support this prediction, we need only invoke the experience of the euro.

When this currency was launched in 1999, it was widely assumed that, as the currency of the world’s largest single market and trading bloc, it would soon overtake the dollar as the world’s premier international vehicle currency. Chinn and Frankel, for example, argued that the dollar would relinquish that position by 2015 not only because ‘the euro now exists as a more serious potential rival than the mark or yen were’ but also because ‘the United States by now has a 25-year history of chronic current account deficits and the dollar has a 35-year history of trend depreciation.’[19]

This argument could not have been more wrong, because while the euro’s share of daily forex turnover hovered around an average of 19% between 2001 and 2010, it subsequently fell to an average of 16% between that year and 2019, the principal reason for this reverse movement being the eurozone's failure to supply the world's large institutional investors with sufficient amounts of euro-denominated securities in which to park their funds.

This insufficiency is even starker in the case of the world’s EMEs that today collectively account for about 20% of world equity stocks and about 15% of world bonds stocks.[20] Many EMEs have too small a domestic real economic base to support securities markets of any appreciable size. Those EMEs that do have large production bases nevertheless continue to have relatively small financial markets principally, if not exclusively, because of continuing weaknesses in their domestic legal and governance infrastructures.

China’s situation illustrates the point. Although China’s equity and bond markets are by far the largest of any EME, these are still small by comparison with those of the US, largely because its governance standards are currently of uneven quality, high in some sub-categories (e.g. law and order, crime prevention) and low in others (e.g. protection of minority shareholders). As for the period ahead, China, which is still a middle-income developing country, will find it difficult to move all its legal and governance institutions rapidly in the required direction.

5. Conclusion

Nothing that has been said above should be taken to mean that we favor a dollar-centered international monetary system. Far from it, for we believe that there are many sound reasons, ranging from the political to the economic, why a multipolar system is desirable.

Desire, however, is not enough. Nor is it enough to hope that the foundations of dollar supremacy are so fragile that it is only a question of time and of another shock or two to the world political and economic order for those foundations to come tumbling down. On the contrary, those foundations are strong, which means that any attempts to elevate rival currencies to a position where they can challenge dollar supremacy must start by recognizing the reason why its foundations do remain strong. That reason comes down to the hard stuff of the financial securities markets, their constituent solid matter. The chief purpose of this short contribution has been to explain the nature of that matter.

References

Arslanalp, Serkan, Eichengreen, Barry and Simpson-Bell, Chima, 2022, “Dollar Dominance and the Rise of Nontraditional Reserve Currencies”, IMF Blog, 1 June 2022, https://blogs.imf.org/2022/06/01/dollar-dominance-and-the-rise-of-nontraditional-reserve-currencies/

BIS, 2019a, “12th Triennial Central Bank Survey of Foreign Exchange Transactions and OTC Derivatives Markets”, November.

BIS, 2019b, Quarterly Review, December.

Chinn, M. & Frankel, J. 2008, “Why the euro will rival the dollar”, International Finance, 11(1), 49–73.

Commons, John, 2017, Institutional Economics. Its Place in Political Economy, London, New York: Routledge.

Eichengreen, Barry, 2022, “Ukraine war accelerates the stealth erosion of dollar dominance”, Financial Times, 28 March 2022.

Galbraith, James, 2022, "A multipolar financial world is here", INET, May 5^th 2022; https://www.ineteconomics.org/perspectives/blog/the-dollar-system-in-a-multi-polar-world

Georgieva, Katarina, 2022, “The Future of Central Bank Money”, 2 February 2022, https://www.imf.org/en/News/Articles/2022/02/09/sp020922-the-future-of-money-gearing-up-for-central-bank-digital-currency

Group of Ten. (1993). International capital movements and foreign exchange markets: Report to the Ministers and Governors by the Group of Deputies. Basel, Switzerland: Bank for International Settlements.

IMF, 2017, Composition of Foreign Exchange Reserves, March.

IMF, 2021, Composition of Foreign Exchange Reserves, March.

Mehrling, Perry, 2010, The New Lombard Street, Princeton: Princeton University Press.

OECD, 2019, Pension Markets in Focus, p.29.

SIFMA, 2020, US Capital Markets Fact Book.

SIFMA, 2021, US Capital Markets Fact Book.

SIFMA, 2022, US Capital Markets Fact Book.

Strange, Susan, 1994, “Wake Up, Krasner! The World Has Changed”, Review of International Political Economy, 1:1.

UNCTAD, 2019, “Financing a Global Green New Deal”, Trade and Development Report.

https://unctad.org/webflyer/tr...

UNCTAD, 2022, “Tapering in a Time of Conflict”, TDR Update, March. https://unctad.org/webflyer/ta...

Notes

[1] Eichengreen, Barry, 2022, “Ukraine war accelerates the stealth erosion of dollar dominance”, Financial Times, 28 March 2022.

[2] Galbraith, James, 2022, "A multipolar financial world is here", INET, 5 May; https://www.ineteconomics.org/perspectives/blog/the-dollar-system-in-a-multi-polar-world

[3] Arslanalp, Serkan, Eichengreen, Barry and Simpson-Bell, Chima, 2022, “Dollar Dominance and the Rise of Nontraditional Reserve Currencies”, IMF Blog, 1 June 2022, https://blogs.imf.org/2022/06/01/dollar-dominance-and-the-rise-of-nontraditional-reserve-currencies/

[4] Mehrling, Perry, 2010, The New Lombard Street, Princeton: Princeton University Press.

[5] Commons, John, 2017, Institutional Economics. Its Place in Political Economy, London, New York: Routledge.

[6] Strange, Susan, 1994, “Wake Up, Krasner! The World Has Changed”, Review of International Political Economy, 1:1.

[7] Galbraith, James, 2022, "A multipolar financial world is here", INET, May 5^th 2022.

[8] BIS, 2019a, 12^th Triennial Central Bank Survey of Foreign Exchange Transactions and OTC Derivatives Markets, November.

[9] BIS calculates currency percentage shares out of 200%, to allow for the double counting of each currency pair. For simplicity, in what follows we halved the shares to give figures out of 100%.

[10] SIFMA, 2020, US Capital Markets Fact Book.

[11] SIFMA, 2021, US Capital Markets Fact Book.

[12] OECD, 2019, Pension Markets in Focus, p.29.

[13] BIS, 2019b, Quarterly Review, December.

[14] Eichengreen, Barry, 2022, “Ukraine war accelerates the stealth erosion of dollar dominance,” Financial Times, 28 March 2022.

[15] Group of Ten, 1993, p.33.

[16] IMF, 2017, Composition of Foreign Exchange Reserves, March. IMF, 2021, Composition of Foreign Exchange Reserves, March.

[17] UNCTAD, 2019, “Financing a Global Green New Deal”, Trade and Development Report.

[18] SIFMA, 2022, US Capital Markets Fact Book.

[19] Chinn, M. & Frankel, J. 2008, “Why the euro will rival the dollar”, International Finance, 11(1), p.51.

[20] UNCTAD, 2022, “Tapering in a Time of Conflict”, March. https://unctad.org/webflyer/ta...

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A Comment on Lysandrou and Nesvetailova

James K. Galbraith responds on the U.S. dollar system

I thank Philos Lysandrou and Anastasia Nesvetailova for their response to my essay on the dollar in a multi-polar world. Our conclusions are broadly similar, though a reader of the Lysandrou/Nesvetailova essay alone might be forgiven for thinking that sharp differences exist.

For instance, L/N characterize my view in these words: “He sees the confidence in the dollar as something highly fragile because it apparently lacks any material substance to back it.” I searched my text for the words “fragile” and “fragility.” They were not to be found. On the contrary, L/N quote the following passage but omit both a crucial intermediate sentence and also the conclusion, which are included in bold below:

“So, as recent crises make clear, today the dollar-based order is supported mainly by instability elsewhere and the lack of a credible alternative or compelling reason to create one, or where such reasons are felt, the ability to do so. With a large and liquid market for debt, the US Treasury bond remains the refuge of first resort even when a financial upheaval originates within the United States, as was the case with the sub-prime debacles of the 2000s and even today. The system is supported, in short, by confidence in itself, and not, so far as one can see, by much of anything else. This however does not necessarily mean that it will collapse on its own in the immediate or even foreseeable future.”

A full rendering of that passage would, I think, have almost eliminated dispute. L/N themselves describe the basis of the dollar system thus: “Foreign investors currently have trust in the US and in its legal and governance infrastructure...” If there is a distinction between their use of the word “trust” and mine of the word “confidence,” I'm not sure what it is.

My essay went on to discuss at length why neither Russia, China, nor the larger group forming around them are likely to be able to fill the world's need for a “large and liquid market for debt” in the near future. So my conclusion is precisely the one that L/N judge correct, namely that a “non-dollar/non-euro” zone is coming into existence, for a certain fraction of world payments and capital flows – thanks to Western sanctions that threaten the liquidity, security, and trustworthiness of US and European assets. That is what happens when you seize another country's holdings of Treasury bonds. Whatever comes next, this is a remarkable own-goal by Western financial powers. It is a sign, to be blunt, of reckless incompetence in strategic leadership in the United States.

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Trading Fear for Hope

Frank McCourt discusses his work to reinspire hope in the American experiment, and to build the framework necessary for that better tomorrow.

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The World Trade Organization After the 12th Ministerial Conference

New mandates must beget new organizing

Last week’s WTO 12^th Ministerial Conference (MC12) in Geneva concluded with pro-corporate, anti-worker, and anti-development outcomes on all major issues of access to medicines, agriculture, digital trade, and the future of the WTO itself. The spin of “unprecedented outcomes” of MC12 is a cynical ploy to paper over major differences to bolster the institution’s flailing reputation.

The agreements should herald a warning to all: rich country governments professing new commitments to sustainable and worker-centered trade are just as likely to push anti-development outcomes and cosmetic window-dressing when it comes to protecting Big Business profits above the public interest. Their version of WTO “reform” will facilitate the further deterioration of multilateralism and cement-in discredited pro-corporate rules on globalization.

MC12: Setting the Scenario

Developing countries made several key demands in advance of MC12: to put flexibility to address the global health crisis ahead of excessive protection of intellectual property rights for Big Pharma and deal with the ongoing food security crisis by adopting new flexibilities on harmful agricultural rules. Most of their interests were defensive, trying to deal with problems in existing WTO rules, as detailed in “Looking towards WTO MC12: What’s on the table for developing countries and LDCs [Least Developed Countries]?”

In advance of MC12, global union federations published a united statement: the WTO Reform “should focus on inclusion: put workers’ interests first, bring corporate power under democratic control, and deliver on the development mandate agreed upon in Doha.” (It failed on all accounts.)

Leading into MC12, the Our World Is Not for Sale (OWINFS) global network of civil society organizations (CSOs) held a press briefing to help journalists understand the real issues on agriculture and fish subsidies to access to medicines, development, and WTO reform that were being glossed over in the WTO’s official statements.

On the opening day of MC12, CSOs received a rude shock with the unprecedented act of being banned from the premises during a ministerial. Fortunately, they had organized a press conference including a dozen activists from around the world to testify to the importance of the broad range of issues on the table. The briefing garnered some of the only press coverage for little-known issues like WTO reform during the ministerial meeting.

Civil society participants in Geneva for the MC12 later held a demonstration at the Place des Nations. Some activists were then harassed by the police for holding banners or wearing t-shirts that called for a genuine response to Covid-19 and action to stop big fishing fleets from decimating fish stocks, even when they were standing outside of the 200-meter perimeter around the WTO.

Anticipating a hard week of talks and few potential benefits for workers, farmers, or the public interest in any country, activists with the global Our World Is Not for Sale network staged a lively “mic check” protest the first day they were allowed inside. Using a “call and response” format they called for positive outcomes on development, access to medicines, agriculture, and fisheries, while denouncing the corporate agenda of continuing Big Pharma monopolies, fake WTO reform, and other issues.

Waiver or Non-Waiver

The most devastating outcome of MC12 for the world is the failure of WTO members to remove obstacles created by the WTO to help resolve the pandemic by adopting a comprehensive waiver of intellectual property (IP) restrictions on vaccines, treatments, and tests related to Covid-19 within the WTO’s Trade-Related Aspects of Intellectual Property (TRIPS) agreement.

The WTO’s IP rules are the opposite of free trade – they restrict trade by protecting monopolies, eliminating competition, and driving up prices. South Africa and India, along with 60 co-sponsors and supported by over 100 developing countries, proposed a waiver on these invented protections so that countries in the global South can manufacture their own vaccines, treatments, and tests. Groups across developing and developed countries like the People’s Vaccine Alliance have mobilized a massive campaign on this issue for nearly two years.

The EU, Switzerland, and the UK worked diligently throughout the Ministerial to include even more restrictions and limitations in the agreement. They violently oppose any recognition that IP rules have posed any challenges during the pandemic, even though only a fraction of people in poor countries have access to Covid-19 vaccines, let alone treatments or tests.

Civil society organizations denounced the (in)action of the EU, UK, US, and Switzerland for stalling any effective action in the WTO during the entire Covid-19 pandemic by staging a first-ever “die-in” in the WTO. One by one, activists symbolically “died” as they explained how these four members prioritized patents over vaccines, leading to millions of deaths around the world. CSOs in countries like South Africa and Indonesia lobbied their governments heavily to stay strong while those in countries like the UK, Switzerland, Australia, the US, and across Europe pressured governments to put lives over profit.

Other geopolitical factors complicated the issue. Negotiations were extended into the night so the U.S. and China could find a landing zone on eligibility to use any IP flexibilities, as the US demanded clear language that excluded China.

What was agreed was not a real waiver, due to EU, US, UK, and Swiss determination to protect Big Pharma’s profits. The agreement only grants a limited flexibility on one provision; excludes all forms of IP except patents; excludes treatments and tests; and requires far more intrusive monitoring and reporting than the existing rules (among other excessive restrictions), resulting in a “TRIPS-plus” agreement rather than a real waiver. The final text on this issue even states that “developing countries with existing capacity to manufacture Covid-19 vaccines are encouraged to make a binding commitment not to avail themselves of this agreement.” So, any country with the capacity to manufacture is supposed to agree not to use the agreement?

The Medicines sans Frontières (MSF) headline best summarized the outcome: “Inability to agree a real pandemic intellectual property Waiver at WTO is a devastating global failure for people the world over.” The agreement “does not adequately waive intellectual rights on all essential COVID-19 medical tools, and it does not apply to all countries. The measures outlined in the decision will not address pharmaceutical monopolies or ensure affordable access to lifesaving medical tools and will set a negative precedent for future global health crises and pandemics,” according to MSF.

A second Covid-related declaration on the “WTO response to the Covid-19 pandemic and preparedness for future pandemics” was designed as a fig leaf for the utter failure of the WTO to remove its own obstacles to resolving the pandemic and will not save one human life from Covid-19.

Instead of addressing WTO constraints to the pandemic, the declaration presents a false narrative that current WTO rules supported rather than hindered the response to the pandemic. It actually promotes further liberalization as a “solution” to pandemics and suggests that unilateral liberalization and regulations should be locked at a standstill as a way to address pandemics; fortunately, the false solutions indicated do not appear to be enforceable.

That’s why already around 300 labor, health, and other organizations have condemned the lack of a real waiver at the WTO, criticized those responsible, and urged governments to take action outside of the WTO, whether they promise not to endorse IP rules (in developed countries) or for all countries to work harder to save lives, including by using existing flexibilities, circumventing rules or defying them when needed. CSOs in South Africa have already put forward a clear path of how this can be implemented on the national level.

Exclusionary Processes

The final package of deals this week was only possible because the majority of WTO members were excluded from the decision-making process. Rather than conduct the negotiations according to the rules and procedures of the WTO, the Director-General (DG) convened exclusive “Green Rooms” in which certain delegations were invited to negotiate, with the majority excluded. In these green rooms, developed countries are present individually whereas the vast majority of developing countries are only present through group coordinators, such as the Africa-Caribbean-Pacific (ACP) group or the LDC group. This configuration leaves out the majority of Latin American and Asian countries, and consigns nearly 50 members to one voice, with only a few other developing countries in the room to face off to an often-unified front of rich country obstinance. At some points even entire groups were excluded: the LDC coordinator was not in the negotiations on the Ministerial Outcome Declaration; India was excluded from some of the green room talks on fisheries negotiations.

Civil society representatives at the ministerial also heard delegations repeatedly complain about the WTO Director General’s extensive bullying and intimidation tactics. In the case of at least one African country resisting on a particular issue, the DG actually called the president of his country! In another, the DG came off the podium (where she was not supposed to be presiding) and verbally dressed down a delegate representing his country’s position in front of the entire room. There have been many complaints about bullying at previous WTO ministerial conferences, but the number of complaints heard by CSOs from developing countries that the DG had harassed their delegation into conforming was totally without precedent.

Civil society groups highlighted the exclusion issue in their action on the second day by creating a visual representation of the Green Room with developed countries inside negotiating. Those representing excluded developing countries chanted “Let us in! Let us in!” to which rich countries retorted “you are not invited,” repeated by security guards.

The DG and other Chairs of negotiations orchestrating the ministerial used several other exclusion tactics. Members received four of the texts that had been negotiated by small groups in “Green Rooms” only in English, at 1:30 in the morning. After multiple postponements, the Heads of Delegations (HODs) meeting, with all members, was convened but postponed again at 3:22 AM for another half hour. After many delays, by 4:59 AM messages were sent that everything had been agreed upon. Delegates received the other three texts (the TRIPS non-waiver, fisheries subsidies, and the e-commerce moratorium) only hours later, after they had been gaveled through by the Chair in front of ministers representing perhaps half of the membership.

There are good reasons to doubt the legality of these procedures under the WTO’s rules. The “exclusionary unrepresentative processes behind the celebrated MC12 ‘Package’ should be taken up at the WTO by members. Unfortunately, the new DG is now celebrating her machinations as effective deal-making. Evidently, if breaking the rules and procedures of the institution is required for its expansion, she is ready and able to take on that role.

Fisheries Subsidies

WTO members were mandated in the Sustainable Development Goals (SDGs) to agree to reduce fishing subsidies that have resulted in a collapse of fish stocks worldwide. This mandate also includes an affirmation that developing countries need flexibilities, called special and differential treatment in the WTO, to continue fishing for sustenance and livelihoods.

Unfortunately, the draft agreement that Ministers considered for the Ministerial was short on both counts. The Pacific Network on Globalization and TWN provided extensive research on the negative impacts of the potential fishing subsidies disciplines for small fisherfolk and developing countries. They revealed how the draft Ministerial text let the biggest subsidizers responsible for the collapse in fish stocks globally off the hook regarding subsidy reductions. At the same time, the draft agreement would have jeopardized small-scale fishers’ access to tiny subsidies that are critical for their livelihoods, and harm developing countries’ rights under international law to develop this sector for sustenance and livelihoods.

Over 80 civil society groups wrote a letter “calling on Ministers to make sure that any outcome on fisheries subsidies negotiations targets those who have the greatest historical responsibility for overfishing and stock depletion, excludes all small-scale fishers from any subsidy prohibitions, prevents the WTO from ruling on the validity of conservation and management measures of members, and upholds the sovereign rights of countries under UNCLOS [the UN Convention on the Law of the Sea].”

Indonesian CSOs also wrote a letter to their government urging them “not to approve the current fisheries subsidy text as it will jeopardize the livelihoods and food security of fisherfolks and the fisheries sector as a whole.” The Indian National Fishworkers’ Forum sent a similar letter calling on the government to reject the text on the table.

The US had introduced a provision on forced labor in the fishing industry, focused on China. Workers in seafood processing on ships are some of the most exploited in the world, according to the International Union of Foodworkers, which has long advocated in the International Labor Organization (ILO) for their protection against horrendous violations of their rights and lives.

Some developing countries do not agree with the introduction of labor rules in the WTO, as developed countries often use these as protectionist measures. In this case, it is particularly striking that the US has not signed the ILO convention on forced labor, because of the extensive use of forced labor in prisons, which is also a corporate subsidy. In the end, the issue was dropped, likely for some other trade-off.

Under what was agreed at MC12, there are new disciplines on subsidies for boats on the high seas in areas of common jurisdiction. But the final text is unbalanced overall, and major areas of the proposed agreement were set aside.

The fundamental flaw in the agreement is that large subsidizers, responsible for the collapse of stocks, are allowed to maintain subsidies provided the fishing is within the waters of any country’s jurisdiction. They are also able to subsidize fishing overfished stocks provided they can demonstrate that there are “sustainable” measures in place. Those countries with the most responsibility for overfishing that is causing the collapse in fish stocks will be let “off the hook,” as they not only have the financial resources to continue subsidizing but also have extensive monitoring and measurement capacities.

Most flexibilities for developing countries were removed, as explained in “Special and Differential Treatment takes a beating in the new Draft Fisheries Text submitted to Ministers for WTO MC12.” The provisions disciplining subsidies for Illegal, Unreported and Unregulated (IUU) fishing extend the flexibility for developing countries to 200 nautical miles (from the previous proposal of an insufficient 12) but only for a paltry two years. This is far less than needed for developing countries to build capacity for extensive burdensome monitoring requirements, especially when these subsidies do not contribute to collapsed stocks.

A strange new provision will keep the talks going: WTO members must continue to negotiate these aspects towards a comprehensive agreement in four years, otherwise the partial agreement ceases to be in force.

As PANG concluded in, “What does the WTO Fisheries Subsidies Agreement mean for sustainability and development? “The agreement remains fundamentally flawed and in favor of those countries with large capacity for subsidizing and reporting. Its failure to target those most historically responsible for overfishing is ensuring that the burdens of the agreement are being carried by those least responsible. The minimalist SDT only offers a brief peace clause, which fails the mandate of the SDG. Finally, the lack of commitments on technical assistance and capacity building represents a failure to ensure that developing countries and LDCs are able to meet the burdens of this text, instead, we will see resources being diverted from elsewhere. This text fails the mandate.”

Sustainability and fisherfolk advocates will need to ramp up their campaigning to improve the outcome in the coming negotiations.

Agriculture

Along with the TRIPS waiver, developing countries’ second key demand was to be able to invest more in their own domestic production to promote food security, for which they need flexibility from harmful WTO rules which place handcuffs on their ability to subsidize food production for the poor. Years ago, a coalition of developing countries won a conditional, temporary reprieve on public stockholding programs – and were promised a permanent solution by this Ministerial. OWINFS members in India provide further details: Agriculture and food security negotiations text at WTO MC12: Implications for developing countries.

A unified push by around 80 developing countries in advance of the ministerial should have resulted in a positive outcome for a permanent solution to allow them the freedom to engage in public stockholding practices, so these countries can increase production and feed their own poor.

Again, rich countries – who subsidize their farmers hundreds of times more per farmer than developing countries subsidize – blocked this outcome. There is no affirmation of the importance of resolving this mandated life or death issue in the outcome texts.

But the current food price crisis since the Russian invasion of Ukraine necessitated some response from the WTO. Instead of loosening WTO rules to promote more production, rich countries called for more restrictions on the domestic mechanism of export bans that some countries use during food crises. Export bans can be harmful, but are necessary in some countries to keep critical domestic food stocks from flowing out to the highest bidder.

In the end, the two decisions taken at MC12 – framed as addressing the crisis of food insecurity – fail to address the core issue, instead exhorting countries not to ban food exports. They ignore the fundamental problems driving price spirals in food trade due to speculation in food trading, and the over-use of grains for fuel and animal feed, both of which originate in rich countries and are problems they could solve without resorting to the WTO.

Farmers and workers in all countries are harmed by existing WTO rules, which must be transformed for the farmers and workers of tomorrow to grow up adequately nourished and with hopes of decent nutrition and livelihoods.

E-commerce duties moratorium

Early in the internet age, a few rich countries got a deal that normal customs duties on trade would not apply to the barely understood “electronic transmissions”. This agreement represents a loss of potential revenue of $48 billion USD for developing countries and $8 billion USD in Least Developed Countries (LDCs), roughly, since the last time it was extended in 2017. This is according to a recent study, “WTO moratorium on customs duties on electronic transmissions: How much tariff revenue have developing countries lost?” by an economist at the UN Conference on Trade and Development (UNCTAD). To put this in context, with a combined population of around one billion, LDCs needed approximately $4 billion USD to finance two shots of the cheapest Oxford-AstraZeneca vaccine.

“With no clarity on the definition of electronic transmissions, the continuation of the moratorium is not only depriving developing countries of their precious financial resources but is also taking away their regulatory power as unchecked imports of luxury items like video games, movies, and music are rising rapidly leading to an exponential rise in the profits of digital giants like the Apple and Amazon,” according to the author of the study.

But why should Netflix, Apple, and Amazon enjoy duty-free exports to Uganda or Bolivia or Indonesia, while most countries’ non-digitalized film, music, and booksellers have to pay normal import duties, which help fund public infrastructure and services to a far greater extent in developing countries? That’s why many developing countries, including Pakistan, South Africa, and Indonesia especially, fought to end the tax-free holiday for Big Tech. Countries hosting Big Tech firms are now attempting to stave off this resistance by redefining these transactions as 'digital services' which don’t attract tariffs in the way that goods do, as a backdoor way to expand the coverage of the moratorium manifold.

Big Tech yanked the chain of the EU (and likely the US) during MC12, conjuring up rich fantasies about e-commerce collapsing if it had to compete on a level playing field. In the end, it got its way, and the moratorium was extended. Developing countries including Pakistan, Sri Lanka, and Indonesia were able to secure expiration date of the next Ministerial or March 2024, unless it is extended. There is likely to be even more momentum towards its expiration next time.

U.S. Ambassador Tai’s tweet celebrating this outcome was striking. Why would an administration that is supposedly focused on reining in Big Tech toss them such a huge bone at the expense of workers? The administration did nothing at the Ministerial to concretely advance workers’ interests – but maintained strong stances on agriculture, fisheries, and development that consign millions of poor around the world to ignominious impoverishment.

WTO Reform

In their respective pre-Ministerial Briefings, both the DG and the EU stated that Paragraph 3 of the Ministerial Outcome Document, on WTO reform, was their primary goal for MC12. They achieved it. The subtext of their agenda is a clear plan to weaken the structure of multilateral and consensus decision-making at the WTO in favor of increasing corporate participation and debilitating developing countries’ limited power.

When the WTO was founded in 1995, developing countries never would have agreed to allow its formation without flexibilities and promises to address many of its harmful rules which obviously favored rich countries and their corporations at the expense of their development. These flexibilities are called Special and Differential Treatment (SDT) in the WTO. Within the first few years, it became obvious that the flexibilities were inadequate and the promises were unfulfilled. After developing countries resisted a WTO-expansion at Seattle in 1999, members agreed in Doha in 2021 to include a development agenda to address these inequities and strengthen and operationalize SDT.

Even that Doha “development” agenda was a compromise. But it offered the possibility for developing countries to weaken WTO rules that constrain their ability to build domestic manufacturing or agricultural production, and to regulate and support local services. In more than 20 years since then, the US and the EU have blocked conclusion of these reform demands, and now even refuse to recognize the agenda.

At the same time, Big Business has complained that the WTO’s rules on consensus and SDT have blocked the WTO’s development of disciplines on public interest regulation of investment and new services and digital sectors, among others. They tried to finesse the WTO’s processes with a Trade in Services Agreement and failed. At the last ministerial conference, a group of hyper-neoliberal countries launched so-called “Joint Statement Initiatives,” then set about negotiating new plurilateral agreements among themselves that they plan to globalize through the WTO. Developing countries that are convinced to participate have no influence in this process. The first agreement, to handcuff public interest regulation of services, aims to set a precedent for many more to come.

Other parts of the WTO have been deliberately collapsed, notably the US-enforced paralysis of the dispute settlement system.

Into this scenario, rich countries created new demands for “WTO reform.” Their intention was to legitimize non-consensus and non-multilateral methods of concluding agreements in the WTO to erode the possibility of developing countries resisting WTO expansion. This author previously argued that WTO "reform" was the most dangerous, and yet unknown, potential outcome of MC12. Developing countries, including the entire Africa Group, as well as India, Pakistan, and others, tried to include safeguards in paragraph 3, at least insisting that the work be carried out under the auspices of the General Council. At the same time, rich countries sought to legitimize formal corporate influence inside the WTO by creating official channels for “stakeholders.”

In the end, members agreed to launch a new process on WTO reform. The mandate does not abolish consensus and multilateralism per se but does not include enough of the safeguards demanded by developing countries to prevent against the erosion of these fundamental principles in the WTO.

And the agreement states that the work must “address the issues of all Members, including development issues.” But many rich countries slap the development moniker on any liberalization agenda they push. The “WTO reform” mandate fails to incorporate the development agenda, and instead merely instructs officials to continue working on it to “report on progress” (rather than conclude it) by the next ministerial conference, MC13.

This is a huge loss for developing countries, which will find the negotiating scenario even more difficult under this new mandate.

Conclusion

Throughout the ministerial, developed countries worked to create a media narrative to place the blame for the lack of consensus outcomes on developing countries, particularly India. But in reality, as one headline put it, it was the EU, “UK, Swiss and US positions likely to stymie WTO negotiations”.

After the Ministerial was extended for another day, activists dramatized the “blame game” by asking, “Who blocked a real TRIPS waiver? Who’s blocking fisherfolk protections? Who blocked REAL food security? Who blocked WTO transformation? EU, US, UK, Switzerland! Give them the blame award!” and handing over an award that those countries appeared to celebrate. Another CSO statement urged developing countries to stand firm in the face of unfair blame.

The key win for the outcome of MC12 for the WTO is the avalanche of corporate media coverage extolling the WTO’s renewed relevance and lauding the results of the DG’s bullying and rich country obstructionism towards pro-human, pro-development outcomes.

Don’t believe the hype. This was not multilateralism – countries working together to address common problems. The outcomes were the result of extreme bias of the DG in favor of developed countries, and bullying by rich countries and the DG of developing countries and their agendas. The conclusion opens the door to “WTO reform” through even more biased processes in the future, whether by undemocratic secretive “green rooms” that exclude the vast majority of countries, a pressure-cooker environment to accept whatever is on the table, or breakaway groups of developed countries launching negotiations on their wish-list and leaving development priorities behind.

Disgracefully, the outcome on vaccines will probably not save a single life from Covid, and the agriculture outcomes will not address the fundamental problems causing food insecurity. On each of the issues – flexibilities from harmful WTO rules on IP and agriculture – developing countries did not achieve their main outcome, and instead were left trying to mitigate the damage of developed countries’ demands to extend the free rides for Big Tech and Big Fish. The WTO failed to deliver what the world needed in each and every arena.

Now there is talk of setting the next Ministerial Conference, MC13, for the accelerated date of March of 2023. The United Arab Emirates has offered to host, in Abu Dhabi.

The struggle to transform the current trade system into one that serves people and the planet was set back last week in Geneva. In the aftermath, civil society must regroup and strengthen its resources to continue resisting WTO pro-corporate expansion, including expanding outreach to and participation of more affected communities. In the global North and South, public interest advocates must accelerate calls for a new system of rules, such as is detailed in the Turnaround: New Multilateral Trade Rules for People-Centered Shared Prosperity and Sustainable Development, to deliver food, jobs, access to medicines, and sustainable development.

Solidarity among developing countries will be even more crucial going forward. Developing countries have varied interests, sizes, and influence – as they always have – but it is clear that rich countries will divide and conquer if developing countries do not engage in a unified front.

The world surely needs a new Bretton Woods on trade. But we cannot possibly get there without stopping the expansion of corporate globalization in the WTO first.

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What Does Capitalism Repress? A Jungian Perspective.

Billions living in insecurity and injustice is hardly a rational system.

Economics presents itself as a rational science dealing with objective measures and quantitative approaches, but astute observers have long recognized its suffusion with magical, fantastic, irrational, and unconscious elements. That makes it fertile ground for those who study human psychology.

Contemporary discussions of economics and psychology focus mostly on behavioral economics, while psychoanalysis, the branch ostensibly dedicated to heightening awareness of the unconscious, has made far fewer appearances in the conversation. More than half a century ago, thinkers like Norman O. Brown and Herbert Marcuse gained wide appeal with their dives into the hidden recesses and unconscious motivations of economics, but as Sigmund Freud began to fall out of favor with academics in the 1960s, psychoanalytic approaches have been pushed aside or rebranded – despite the fact that a great deal of recent scientific research supports Freud’s concept of the unconscious.

As we grapple today with economic systems that seem ever more destructive to human wellbeing, might it be time to reconsider whether psychoanalysis has something useful to say about the dismal science?

The name of Swiss psychiatrist Carl Jung, redolent of mystical and esoteric concerns, would probably sound particularly out of place at an economic conference. But in his book For Love of the Imagination: Interdisciplinary Applications of Jungian Psychoanalysis, psychoanalyst and psychology professor Michael Vannoy Adams shows how Jung’s special attention to images -- to making them conscious and understanding their meaning and influence -- can help us glean what lies in the shadow of contemporary capitalism.

Adams’ starting point is Adam Smith’s image of the invisible hand, that legendary representation of the unseen force that arranges the economically self-serving actions of individuals into collective benefits. In Adams’ view, the invisible hand is not only a key idea in economics, but “the most important image of the last 250 years” -- as paramount to capitalism as the hammer and sickle image is to communism. In Jungian terms, it is archetypal. “No other image so pervades, so dominates, the modern world,” asserts Adams.

He points out that as images go, the invisible hand is an odd one. You can’t really visualize it. Nevertheless, as Adams reminds us, the invisible hand image was circulating long before Smith used it in works ranging from Homer to Voltaire to indicate ghostly or divine forces that intervene in human affairs. Literary scholars note that around the time of Smith’s usage, invisible hands were popping up in gothic novels to slam doors and otherwise move the human plot along. Adams points to an especially evocative version of the hand cited in A.O. Hirschman’s The Passions and the Interests – the reproduced illustration of a celestial, immaterial hand squeezing a human heart beneath the motto, “Affectus Comprime” or, in Hirschman’s translation, “Repress the Passions!” A psychoanalytic image if there ever was one.

As Adams indicates, when Smith first mentions the hand in a treatise on astronomy (in an essay unpublished during his lifetime but probably written before 1758), it was a mythological image -- the hand of Jupiter moving celestial bodies in the heavens. Later, this hand becomes an economic hand, mentioned first in the Theory of Moral Sentiments in 1759 and then again in The Wealth of Nations in 1776.

Smith construes the economic invisible hand as the influence that leads individuals who pursue a private interest to promote the public good without realizing it. In the Theory of Moral Sentiments, in outlining a case in which a rich landowner ends up employing laborers through his spending on luxury, Smith illustrates that the hand helps the wealthy, in spite of their “insatiable desires,” to share some of their wealth with the poor. Later, in The Wealth of Nations, he describes the hand in a section on trade, suggesting that it guides merchants and manufacturers acting in their own interest for profit to unintentionally produce positive outcomes for all.

Thus, by some audacious magic, the touch of the invisible hand transmutes selfishness into a virtue. This, as Adams puts it, constitutes a “moral inversion” – a turning upside down of a long tradition of viewing selfishness as one of the least desirable human traits. As Adams sees it, the effects of this inversion on human affairs have been profound.

Through Adams’ Jungian analytical lens, the invisible hand can be seen wiping away guilt. Under its influence, a person can feel innocent while acting greedily and indulging in what was previously known as one of the seven deadly sins. In Jungian terms, what happens when we do not recognize our guilt is that we tend to project it onto others as a shadow, the emblem of our unresolved moral conflicts. In free-market systems, the poor are made culpable, blamed for their situation and failure to act in ways that increase their wealth. The poor are assigned guilt for the self-interested actions of the rich.

Adams notes that the hand serves a religious function, too, namely in its representation of the god of the market, the god long worshipped by economists. He views this god as deus absconditus – one that, like the form of the Biblical Yahweh, is hidden and concealed. In another sense, deus absconditus is a god who is absent when people are in extreme trouble. Or a god that is unknowable or incomprehensible. Why, for example, is an invisible hand even necessary if selfish behavior naturally produces beneficial social results?

Adams notes that like Yahweh, the image of the invisible hand privileges the unseen over the seen, the abstract over the embodied, and the intellect over the senses. This function seems to pervade economics, where practitioners have often fallen in love with abstract models that have blinded them to what can be readily seen in reality, particularly the poverty and suffering of actual embodied, living beings. The hand as market god also becomes a deus ex machina like the one lowered onto the stage in ancient dramas to decide the final result of the play, or, more broadly, the mechanism that brings about a solution to a seemingly insoluble problem. In this way, the invisible hand manipulates the economy both divinely and mechanistically. Whatever the economic problem, however thorny, the invisible hand is the only solution: TINA – There Is No Alternative. To speak out against the god of the market is to have your credibility questioned, to commit heresy. For worshippers of the hand, the market has infinite wisdom to behave the way it does.

The market god, observes Adams, is a jealous god, and like Yahweh, will have no other gods before him. If the government seeks to intervene in the divine and benevolent market, then it must be a devil. This image of the market god, according to Adams, allows economists to repress the actual experience of economic crises by summoning the mantra that governmental intervention is never necessary. Market imperfections are thus consigned to the oblivion of what Adams calls the “economic unconscious.” The monopoly of the market god crowds out other images, warns Adams, images that might help orient us towards values like selflessness.

Adams points out that in obviating the necessity of government regulation, the hand dispenses with any human accountability for the economy. Eventually, in the extreme vision of neoliberalism, every inch of human society is in the grip of the hand, with the privatization of everything from medicine to education. The market renders governments unnecessary except to protect the interests of the capitalists, which leads to vast infusions of money from corporations and rich individuals to control the state and enhance their power. The invisible hand in unregulated markets seems to do the opposite of what Smith described – guiding activity that tends to benefit only a few.

Like the Global Financial Crisis of 2007-8, the coronavirus pandemic has discredited the ideology of the invisible hand, illustrating how relentlessly selfish activity produces not social benefits, but social destruction. The Covid crisis revealed how the degeneration of public services renders capitalist societies more vulnerable to disruption and less resilient. The visible hand of the government has returned through fiscal stimulus, benefits to unemployed workers, and monetary policy. There is apostasy afoot, but that does not mean the market god is defeated. Witness the current flurry of arguments coming from many Republicans and, recently, Jeff Bezos, blaming high inflation on Biden's American Rescue Plan and government stimulus checks, as if supply chain problems and monopolistic practices have nothing to do with it. As if belief in the unquestioned wisdom of the market god doesn’t result in billions of people suffering a mean and miserable existence.

There is plenty of talk in the air about the possibility of recession – perhaps we should also be concerned about ongoing repression. In 1957, Jung issued this warning about the failure to recognize the shadow and understand the operations of the unconscious:

“One can regard one’s stomach or heart as unimportant and worthy of contempt, but that does not prevent overeating or overexertion from having consequences that affect the whole man. Yet we think that psychic mistakes and their consequences can be got rid of with mere words, for “psychic” means less than air to most people. All the same, nobody can deny that without the psyche there would be no world at all and still less a human world. Virtually everything depends on the human soul and its functions. It should be worthy of all the attention we can give it, especially today, when everyone admits that the weal or woe of the future will be decided neither by the attacks of wild animals nor by natural catastrophes nor by the danger of worldwide epidemics but simply by the psychic changes in man.”

Early psychoanalyst Otto Gross, a close associate and influencer of Jung, argued that investigations of the unconscious are the necessary groundwork for any kind of revolution or moral restoration. He points us to the project of liberating the repressed values of mutual aid and cooperation that human beings are born with. Only then can we wave goodbye to the invisible hand.

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