Earlier this month, I had the privilege of participating in the conversations held in the various lounges and side events connected to the annual meeting of the World Economic Forum in Davos, Switzerland. One topic was on everyone’s lips, from the official sessions at the Congress Center to the late-hour conversations at Hotel Europe’s Piano Bar: decoupling between the United States and China. This decoupling can be described using the metaphor of Charles Dickens’ A Tale of Two Cities. In the classic book, the two cities of Paris and London are depicted as vastly different from one another, yet connected through the tumultuous events of the French Revolution. Similarly, the United States and China, closely interconnected through trade and investment only several years ago, are now moving in separate directions as tensions rise and their relationship becomes increasingly fraught. Chinese vice premier Liu He warned against the “Cold War mindset” at Davos, but he failed to convince the world that Beijing is back. Just the title of this year’s gathering, “Cooperation in a fragmented world,” spoke volumes about the state of play in global affairs.
Just as the French Revolution in 1789 created a divide between Paris and London, trade tensions and geopolitical disputes between the United States and China are resulting in the decoupling of the two of the world’s largest economies. This global divide is defined by a growing sense of mistrust between the two economic engines of global trade.
The Bretton Woods system, established in the ruins of a world left devastated by World War II, was a set of international monetary arrangements that aimed to promote economic stability and growth by linking national currencies to the U.S. dollar and fixing exchange rates. In a multipolar world, the Bretton Woods system faces several challenges, including
U.S. dollar dependency: The system is heavily dependent on the stability of the U.S. dollar, and fluctuations or disorderly devaluations in its value could have major impacts on other currencies and the global economy.
Limited adaptability: The fixed exchange rate regime can’t easily adjust to changes in the global economy and will often lead to imbalances and trade conflicts.
Unequal economic growth: The Bretton Woods system was designed for a world dominated by two major powers, the United States and the Soviet Union. In a multipolar world with multiple centers of power, such a system will struggle to accommodate diverse levels and systems of economic growth and development.
Increased monetary competition: The rise of China and Russia’s pullout from the global financial system, together with increased monetary competition, has made it more difficult for the United States to maintain its dominant position in the global monetary system.
Inadequate response to crises: The system has been criticized for its inability to respond effectively to economic shocks and crises, such as the oil crisis of the 1970s.
The systemic challenges faced by the Bretton Woods institutions in a multipolar world have contributed to its gradual decline and calls for a shift toward a new diverse and inclusive global monetary system, in which the various regions can come together to agree on a common playbook and rules of engagement. With the old order on the retreat, the new order is yet to take its final form, but we are beginning to see signs of the shape of things to come.
The reluctance of developing countries to accept the “Washington consensus” can be seen as a rejection of the old system and its shortcomings. The economic paradigms that have dominated the post-World War II era are no longer seen as relevant or effective in a rapidly changing and highly volatile multipolar world, and developing countries are seeking new ways to promote stability and growth that take into account their unique challenges and needs.
Where the World Islands Come Into Play
The notorious Russian political analyst Alexander Dugin has coined a theory of world geography known as the theory of World Islands. It is based on the idea that the world can be divided into several distinct cultural and political spheres, or "islands," each with its own unique characteristics and history. According to Dugin, these islands have distinct cultural and political identities and are defined by the way they relate to each other and to the world at large.
Dugin, sometimes described as the ideological mastermind behind Putin’s Russia, has argued that these islands will be organized into a hierarchy, with the West at the top and other regions, such as Russia, China, and the Islamic world, lower down. Dugin argues that the world is undergoing a profound transformation, with the rise of new powers and the decline of the West, and that this shift will have major implications for the future of the world. He believes that the world is moving away from a unipolar order dominated by the West and toward a multipolar order in which the various world islands will have greater autonomy and influence.
Currently, we are seeing several world islands appearing, with the United States leading the united West, although occasional cracks in the transatlantic bond are emerging over trade issues and protectionist policies on both sides of the Atlantic. Russia was kicked out of the Western financial system and has been forced to develop its own system or integrate its payment systems with China’s. Africa remains largely a question mark, with one of the panelists at the Davos Africa House reminding the audience that it is still more difficult for most Africans to visit neighboring countries than it is for foreigners. We see similar islands, or varying standards, emerging in the sphere of digital technologies.
The Future Is Both Digital and Backed by Real Assets
Fintech, or financial technology, may play a significant role in shaping the form and structure of the future global monetary system. The innovative use of technology through collaborative investment and finance platforms has the potential to reach populations that have been excluded from traditional financial services and to increase access to financial services for areas that haven’t benefited from being part of the Washington Consensus. Fintech solutions often use digital infrastructure and low-cost operating models to provide financial services at lower costs, making them accessible to a wider range of customers. Fintech has also opened up new forms of finance, such as crowdfunding and peer-to-peer lending, allowing everyone to become their own banker. The recent crash of cryptocurrencies has revealed the weakness of fintech solutions that aren’t backed by real assets.
Thus, it is crucial that the new global monetary system be backed by real assets, as such a system can provide greater stability and build confidence in high-volatility environments. Stability has become the new alpha that investors are seeking. Real assets are tangible items such as gold or real estate that have intrinsic value and are not subject to the same fluctuations and uncertainties as other forms of currency. Currencies backed by real assets are seen as more trustworthy and reliable, as their value is directly linked to the value of the underlying assets. Digital assets backed by real assets can also provide a powerful hedge against inflation. As the global economy is looking for more real asset-based solutions, the question then becomes: how do we bring the fragmented world together to discuss the common rules of the game, and where should such a meeting take place?
Will Bretton Woods 2.0 Be Based In the Gulf?
The Gulf Cooperation Council (GCC) countries are a natural choice to bring nations together in a multipolar world to discuss the future of the global monetary system. This is due to their role as bridge builders and their diplomatic efforts to become platforms for conversation around the future direction of global development and leadership, signified by the recent Dubai Expo 2020 and the 2022 FIFA World Cup held in Qatar, together with the United Arab Emirates’ upcoming chairmanship of the COP28 climate conference.
The GCC countries have a long history of serving as intermediaries between nations and have established the region as a hub for economic, political, and cultural exchange. Strategically located at the crossroads of Europe, Asia, and Africa, the GCC states have significant geopolitical influence in the wider region, making the Gulf well-suited to serve as a future platform for international collaboration and cooperation. The GCC countries have strong diplomatic ties with nations around the world and have a reputation for serving as neutral intermediaries in conflicts and disputes. While Ukrainian president Volodymyr Zelenskyy has called neutrality ‘immoral’ in the light of the war in Ukraine, the reality of our world is that when the war ends—and all wars eventually end—there will be a Ukraine and there will be a Russia, and they will have to learn to live with each other again.
Even the fragmented world needs its meeting places. During World War II, there was the Bank for International Settlements, where the warring parties could still come together to discuss both outstanding commercial issues and the future of the global order after the war. Similarly, the Gulf is uniquely positioned to bring the parts of the world that are not talking to each other back together and map out the architecture of the future global monetary system.