US retreat from global stage may hurt the dollar’s dominance

Mumbai: The dollar’s global dominance is partly because of the US’s role as a guarantor of security for allied nations, according to a new research paper from the National Bureau of Economic Research (NBER) by Barry Eichengreen, professor of economics at UC Berkeley, and co-authors.

Using data on foreign reserves of 19 countries before World War I (1890 to 1913)—for which data on currency composition of reserves and the nature of security alliances are available—the economists show that military alliances boosted the share of a currency in the partner’s foreign reserve holdings by 30 percentage points. The paper argues that the choice of currency for trade and reserves is driven by both economic factors (such as size of economy, credibility of currency issuers, liquidity of currency, etc) as well as geopolitical factors such as strategic military alliances. The authors warn that if the US turns inward, it could lead to the liquidation of $750 billion worth of official US-dollar denominated assets, raising long-term US interest rates by as much as 80 basis points.

Also read: Mars or Mercury? The Geopolitics of International Currency Choice

Writing in the Economic and Political Weekly, Jayadev M., a professor at the Indian Institute of Management, Bangalore, argues for a statutory framework to regulate student loans and make them more effective and equitable. Only 10% of students enrolled in higher education in India have access to student loans, with most loan disbursements concentrated in Tamil Nadu and Kerala. At a time when a large section of students fail to pursue higher education owing to financial hardships, and those taking educational loans are unable to repay them, leading to a rising share of non-performing assets in the education loan segment, the author calls for a unified system to provide scholarships and loan subvention to avoid multiple claims from the same candidate, and the introduction of an income-contingent loans scheme instead of the current fixed repayment system.

Also read: An Analysis of Educational Loans

An International Monetary Fund (IMF) working paper by Yibin Mu and co-authors suggests that Sub-Saharan African countries would do well to diversify their economies and reduce their dependence on China. China’s influence on these economies grew significantly after it joined the World Trade Organisation in 2001. Since then, China has become the region’s second-largest exporting partner, leading to greater dependence. Exporters from the region have benefited most from China’s investment growth. The authors warn that as China rebalances its economy from one led by investments to one led by consumption, Sub-Saharan economies will also need to adapt, and diversify their exports.

Also read: China’s Impacts on SSA through the Lens of Growth and Exports

More Americans than Europeans oppose redistribution and government intervention in areas such as healthcare, gun control, and pollution control. A new NBER paper by Samuel Bazzi of the University of Boston and co-authors argues that the origin of this American culture of ‘rugged individualism’ may be rooted in the history of the frontier. Until the late 19th century, US territory contained vast tracts of open land. The frontier that divided settled and unsettled locations strongly influenced American culture, fostering the development of rugged individualism—a combination of individualism and opposition to government intervention—according to the researchers. The effects persist to this day. Even accounting for individual-level support for the Republican Party, areas in the US with greater historical frontier experience still exhibit greater opposition to redistribution and government regulation today, the researchers point out.

Also read: Frontier Culture: The Roots and Persistence of Rugged Individualism in the United States

According to an article in the Harvard Business Review by Ozgun Atasoy of the University of Basel and Carey K. Morewedge of Boston University, customers are more likely to pay for physical goods than their digital counterparts as the former generate a sense of ownership among them. The authors ran several experiments and found that the tendency to place a higher premium on physical goods extended across categories, from movies to novels to photographs, and even in instances when the physical item had no resale value. The findings may offer clues to the persistence of piracy, and the difficulties of internet firms in raising revenues.

Also read: Customers Won’t Pay as Much for Digital Goods — and Research Explains Why

Economics Digest runs weekly, and features interesting reads from the world of economics.