International Order and International Monetary Politics

Liao and McDowell’s article (2016) represents a true step forward in the field of the political economy of national security. This is important. For far too long theorists of international political economy have ignored the security implications of market activities. While international relations has had a long and rich history of scholarship on the topic of the interaction of security and economics, over the past few decades scholarship has run on two separate tracks—security, and international political economy—rather than interacting the two.

The article asked why some central banks invest in the Chinese currency while others do not. The authors argue that it is a state’s preference for an international order based on China that determines the likelihood of their central bank holding RMBs. In this, they powerfully demonstrates the words of Robert Gilpin that ”every monetary order rests on an underlying political order”. Gilpin’s insight does not only apply to China and the RMB, of course, but can be used also to assess the potential for the euro to replace the American dollar as the international reserve currency of choice. In a 2008 piece, I used Gilpin as my starting point as well, to argue that the European Union was simply not sufficiently developed or constructed as a single actor to project the power needed to attract other countries to hold euros. Partly, this was the result of a structural condition, namely, the lack of a European wide euro bond. However, just as important in my view was the shortcomings of the EU’s political union, which was too shallow to project power internationally in the manner needed for the euro to become a true focal point for international monetary order.   Simply put, the EU’s networked, fragmented political form could not stand up to the demands of the international system for a strong nation-state to anchor the international reserve currency.

China now presents us with the green shoots of a possible alternative to the dollar. We are at the very beginning of the emergence of a new alternative Chinese order, and this article points the way forward in studying China’s potential as a rising power. In particular the authors marshal unique empirical information about reserve holdings, information that is normally kept secret. Building on the theoretical literature on international order, balance of power, and the rise of potential hegemons, they do a superlative job in reminding us of the intimate connections between money and power on a global scale.

Some caveats are in order however. First as Liao and McDowell themselves say, the RMD at the moment constitutes only a ”tiny fraction” of the global reserves, somewhere in the ascendancy of 1% versus the US’s roughly 60% and far lower than even the euro’s over 20% share. Nonetheless, the variation across states in their holdings of the Chinese currency provides useful information about the link between China’s economic and geopolitical rise.  Second, the data was compiled before the recent collapse of the Chinese stock market. Just as Jay-Z and Giselle were promoting euros the Eurozone crisis hit and euros have cooled in pop cultural references.  Might the interest in the RMB dissipate now that everyone has been reminded of China’s precarious situation? In times of uncertainty, financial markets always have a “flight to quality”, which certainly would not suggest investment in China given the shakiness of its regulatory structures and the fragility of its domestic political economy. Finally, the authors stress the need to examine the initial conditions that drive the adoption of new, rival reserve currencies but their account leaves out some potential important elements. In my own work, I stress the importance of focal points and inertia, in addition to Gilpin’s emphasis on political order. Surely, the US dollar will be propped up for years to come in part because of the value of focal points in international monetary affairs. Just as the British pound far outlasted British geopolitical power, it is likely that the US dollar will persist as the key currency of the international system, even as American geopolitical dominance fades.

In sum, this article provides a major contribution to the field of international political economy by reminding us of the enduring role for geopolitics-- but the authors still leave room for further analysis. I hope to see that analysis take hold across other studies that bring the big picture of international relations to the study of currencies as effectively as Liao and Daniel McDowell.


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