Structural conditions for currency internationalization: international finance and the survival constraint

Abstract

This paper examines the relationship between currency internationalization and economic structure. It argues that the hierarchical and asymmetric architecture of the international monetary system imposes a ‘survival constraint’ upon non-center countries that obliges them to generate net inflows of the international center currency to finance their payment commitments. It outlines why management of this constraint has historically been associated with a development approach that prioritizes exports and investment over domestic consumption and illustrates how this development approach creates economic structure subject to path dependence and network effects, which perpetuates the role of non-center countries as users of the international currency and the role of the center country as supplier of the international currency. On this basis, it is argued that currency internationalization cannot be pursued in isolation from broader economic policy, but rather requires economic structural change, political mediation and accommodative balance of payments management. Specifically, raising the international profile of the Chinese renminbi would require rebalancing of the Chinese economy towards domestic demand, whereas the status of the US dollar is intimately intertwined with the international openness of the US economy.