The Dollar Cycle of International Development, 1973–2017

Abstract: Since the 1970s, developing countries across the world have collectively experienced a series of economic upswings and downturns. Existing theories of international development, which mostly focus on country-specific factors that facilitate or hinder growth, cannot explain this across-the-board cycle. We argue that the cycle is driven by changes in the global supply of the US dollar, the default currency of transaction and foreign exchange reserves in the world economy. Based on a time-series—cross-section analysis with fixed effects on 170 developing countries from 1973 to 2017, we find that an increase in the global dollar supply brings lower borrowing costs and greater availability of external financial resources, enabling higher growth rates in the developing world. Conversely, a contraction in the global dollar supply increases borrowing costs and dries up financial resources, slowing down growth in developing countries. The vagaries of the dollar supply, determined largely by the domestic political economy of the USA, have formed the context for international development contributing to the “golden age of development” in the 1970s, the international debt crisis of the 1980s, the Asian Financial Crisis of 1997–1998, and the beginning and end of rapid growth in the 2000s, among others.