6. The Clearing Union Principle as the Basis for Regional Financial Arrangements in Developing Countries

Reviewing the birth of the modern international financial system since its Bretton Woods roots, Professor Jan Kregel shows that the roots of today’s problems and imbalances were already present from the outset. In “The Clearing Union Principle as the Basis for Regional Financial Arrangements in Developing Countries”, he describes how the move to a system of convertible currencies may have been appropriate for some developed economies but was an impediment from the outset for developing countries. Taking a broad sweep of modern history beginning from the end of the Second World War, the chapter sketches the intellectual and institutional history of clearing unions, starting from Keynes’ Clearing Union proposal. This was based on the argument that financial stability relies on a balance between imports and exports, and any divergence would be automatically financed by the creditor countries via a global clearing house or settlement system for trade and payments on current account. This eliminated national currency payments for imports and exports; countries received credits or debits in a notional unit of account fixed to national currency. Kregel then examines regional variations of this concept including the European Payments Union, the Marshall Plan and the return to multilateral settlement in Europe, the Central American Payments System and the proposal for regional financial payment schemes for developing countries put forward in 1964 by the United Nations Conference on Trade and Development. In the concluding part of the paper, the chapter examines current debate about RFAs in the light of the original objectives of the clearing union principle – namely the elimination of the role of dollar balances and dollar financing of regional trade. Emphasising the symmetrical nature of the adjustment process and the fact this is not necessarily possible in a region, the chapter examines trade patterns within regional groupings in Asia and Latin America and the BRICS grouping. Kregel concludes by highlighting the ongoing challenges posed by a volatile US Dollar and the potential role of Special Drawing Rights as an alternative.