South—South Regional Financial Arrangements

Latin America has created some of the most innovative and novel responses to the problem facing many developing countries—namely that of high costs and risks associated with foreign exchange transactions, and the need to promote more regional trade and integration in the face of external constraints and the absence of structural change. This chapter explores three payment systems—the Reciprocal Payments and Credits Agreement (ALADI, created in 1965), the Local Currency Payment System (SML created in 2008), and the Unified System for Reginal Compensation (SUCRE) created in 2010 on the basis of Keynes’ post-WWII clearing union. All were created as the first step toward eventual monetary and financial integration; however, the empirical evidence shows that with few exceptional periods, these mechanisms have not delivered their promise. While they have somewhat reduced transaction costs, they did not promote intra-regional trade or become an important mechanism for channeling foreign trade transactions. The factors that account for this fact are both specific to the particular transnational payment system taken into consideration, and common to the three types of mechanisms analyzed in this chapter. Among the various lessons learned, one important one remains that regional payment systems need to be accompanied with better credit risk management, more flexibility, and above all structural policies to foster diversification at the basic level of productive structures, employment, and value added.

In a rapidly changing environment in which the majority of countries in the Economic Community of West African States (WAEMU) zone have put the wheels in motion to lay the foundations of emergence, it is a matter of urgency that the zone’s monetary policy undergo therapy. The aim of this study is to revisit monetary policies in developed countries, emerging countries and developing countries, more specifically the countries of the West African sub-region, in order to learn the appropriate lessons. The various lessons of monetary policy relate as much to the objective and mission of the central bank as to operationalization of the policy. Four avenues should be explored: (i) an imperative objective of growth for Central Bank for West African States (BCEAO), (ii) a need to revise the inflation target, (iii) the obligation to achieve a dynamic, active and proactive monetary policy, (iv) a requirement for inward reflection on the level of flexibility of the region’s currency.

This chapter highlights key shortcomings and failures of Europe’s Economic and Monetary Union—essentially the most advanced case of regional integration in the world, inspiring numerous other initiatives including among developing countries, but fatally flawed and limited. The European experience offers important and timely lessons for other regions that are already integrating and planning to go still further, in particular with respect to the plans for the most extensive widening and deepening of integration in West and Central Africa. In particular, the dangers for West and Central Africa to avoid include following the Euro area’s single-minded focus on price stability and the lack of a central fiscal authority. The chapter shows that market integration must be paralleled by policy integration; the persistent divergences in competitiveness among member nations must be prevented; and that monetary union without fiscal union is not viable.

This chapter examines in a systematic way how different forms of regional monetary cooperation may contribute to reducing macroeconomic volatility and buffer exogenous shocks for developing countries and emerging markets. It divides mechanisms into three categories of regional financial and monetary cooperation: (a) regional liquidity pooling to address short-term balance of payments imbalances; (b) payment systems to reduce exposure to exchange rate volatility and promoting inter-regional trade; and (c) regional macroeconomic coordination mechanisms. The chapter sweeps across the globe, describing individual mechanisms such as the payment systems the Unified System for Regional Compensation (or SUCRE) and bilateral Argentina-Brazil arrangements as well as regional poolings, the Chiang Mai Initiative, Eurasian anti-crisis, and Arab monetary funds; and finally regional macroeconomic arrangements such as the Gulf Cooperation Council, Caribbean Single Market, West African Monetary Zone, and South African Development Community. Each level has a different role to play, and indeed the diversity of various initiatives within each level is testament to different contexts and development goals. The highest level of integration is challenged in most regions by a reluctance to share policy sovereignty at a regional level because of uncertainty about the potential gains for individual nations. National economic, monetary, and exchange rate policies stand in the way of further and deeper integration. In some cases, violent conflicts and war continue to setback plans for further cooperation. In others, the ambivalence of colonial roots stands alongside the motivation of shielding against international volatility.

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.

The burst of new Sovereign Wealth Funds is one of the major trends in international finance over the last decade and, as with the other mechanisms described elsewhere in this volume, it has the South at its core. However, while SWFs may be primarily Southern owned they are not particularly Southern-oriented, and hence the South is missing out on a major developmental opportunity. 

This chapter traces the political economic environment in which the East Asian regional financial architecture emerged, from its beginnings in the roots of the Asian financial crisis of the late 1990s to today’s Chiang Mai Initiative and other formal and informal mechanisms. A series of overlapping elements were initiated through meetings at the ministerial level, leading to the creation of formal mechanisms for crisis prevention, management, and resolution including establishing regional forums and networks, economic surveillance and early warning systems, peer review and pressure to maintain healthy fundamentals. Frequent and regular meetings by central bank officials and finance ministries helped to make progress, leading to visible and significant achievements including the Chiang Mai Initiative Multilateralization (CMIM) fund and the ASEAN+3 Macroeconomic Research Organization. These successes notwithstanding, the chapter argues that the focus has been too much on defensive elements in the financial architecture, at the expense of other more developmental pillars. Moreover, reliance on local currency regional capital markets does not reduce risk as much as some believe because today’s highly liberalized financial markets mean that domestic bonds may have international owners so countries are still exposed to large swings in capital flows and exchange rates, that reproduce old forms of vulnerability.

This chapter presents a comparative analysis of the background, governance and economic impacts of two existing short-term liquidity mechanisms, the Chiang Mai Initiative Multilateralization (CMIM) and the Latin American Reserve Fund (referred to by its better-known Spanish acronym, FLAR—Fondo Latinoamericano de Reservas). We find that the structures of regional financial institutions as well as the amount of resources available to member countries are contingent on regional dynamics, the economic characteristics of members and members’ reluctance to approach the IMF for short-term balance-of-payments support. This study offers an up-to-date assessment of the two RFAs, based primarily on on-site interviews with their respective staff members, regional government and central bank officials, and scholars. Those interviews, conducted in 2016, revealed how, in the wake of the 2008 financial crisis, RFAs advanced efforts to improve their internal research capacity, develop strategic alliances and increase the resources available to their members.

The chapters in this volume have described some of the extraordinary trends in south–south financial cooperation of the last decade, with a particular focus on what could be called defensive mechanisms aimed to deal with liquidity crises and foreign exchange stresses.