Decentralizing Global Finance

The Triple Crisis Blog is pleased to welcome Diana Tussie as a regular contributor. She heads the Department of International Relations at FLACSO/Argentina and is the founding director of the Latin American Trade Network (LATN).

Diana Tussie

Every economic crisis buries some practices and gives rise to new ones. What we see today is a move away from what Robert Wade called the “High Command “of global finance and the rise of less formalized institutions. The G-20 may be one of these.

So far the G-20 summit agenda focused heavily on the question of the regulation of international financial markets. In addition, the G-20 leaders made a commitment at their first summit in November 2008 to press on with the reform of the Bretton Woods institutions in order to give greater voice and representation to emerging and developing economies. Two years later the Toronto summit closed on a dull tone.

The G-20 resolved to have all of its members halve their deficits by 2013 and to stabilize overall debt by 2016. Brazil and Argentina along with India and China were strongly against cutting back spending at this early point in the global economic recovery. It was Brazil’s Finance Minister, Guido Mantega, who warned the G-20 not to balance budgets on the backs of the world’s poor.  Other agendas remain mostly ignored. As these initiatives move with extreme paucity, it may be that other mechanisms, particularly those at a regional level, gain momentum.

After the East Asian crisis countries in the region made efforts to expand financial cooperation through the Chiang Mai Initiative. With the largest worldwide reserves, these countries have the capacity to create a quite-significant pooling arrangement.  In Latin America, after the Argentine meltdown, steps to expand the regional provision of development finance have gained momentum. The Andean Development Corporation has become a major project lender throughout South America while the newly inaugurated Bank of the South with an initial capital of $20 bn is also expected to start operations promptly. (See Vernengo, “Public Banks and Development.”)

Regional development banks have for a long time enabled the existence of alternative windows for access o finance. Many argue that the case for more pluralism may even be stronger in the area of balance of payments support given the controversy over the IMF’s hold and its conditionality.

Western Europe provides a prime example of regional financial cooperation in the post-war period. The U.S, through the Marshall Plan, catalyzed the initial phases of this process, which underwent step by step deepening until the emergence of the European Payments Union (EPU), eventually leading to the current monetary union. In its day the EPU played a reserve-sharing role. Today some supporters of regional institutions  have even suggested that the IMF could emerge in the future “as the apex of a network of regional reserve funds – that is, a system closer in design to the European Central Bank or the Federal Reserve System than to the unique global institution it currently is … A denser network of institutions seems better adapted to a heterogeneous international community, and it is likely to provide better services and give stronger voice to smaller countries”.

Hand in hand with the sprucing up of project lending, regional reliance on the IMF has dropped dramatically.  In 2005, Latin America made up 80% of the IMF’s lending portfolio, a share which had dropped to 1% by 2008.  While IMF loans to Latin America stood at $48 billion in 2003 they dropped to less than $1 billion before the crisis. With the onset of the crisis, three Central American countries, Mexico and Colombia have applied for loans. But the crisis has not changed the long term trend, which has been favored by booming commodity markets.  While most countries paid off their debts, Argentina is also refusing to follow precedent and go back to the IMF  in order to renew negotiations with the Paris Club. Reversing the trend from borrowers to lenders, in June 2009 Brazil, Russia and China announced that they would buy IMF bonds in order to reduce their dependence on the dollar and diversify foreign currency reserves.

Regional payments clearinghouses are also making progress towards decoupling trade operations from the US dollar. In October 2008, Argentina and Brazil agreed on a local currency payments system.  In Brazil, exporters may now operate in the real, while Argentines may operate in pesos.  With elimination of the need to go through a third currency exporter can set prices in their home currency, and hence thus being insulated from exchange risk. The system now covers about 20% of trade.  In a similar line, in October 2009, the SUCRE, or Unitary System for the Regional Compensation of Payments, was set up among Venezuela, Cuba, Bolivia, Ecuador, Nicaragua, Honduras, the Dominican Republic, Antigua and Barbados, as well as San Vicente and Granada.

If meaningful IMF reform continues to prove politically difficult, the relevance of these arrangements might grow. Not only would they allow for decentralization and greater pluralism in international financial governance. They can also contribute to global stability by reducing the US burden to provide liquidity to the world economy, much in the same way the EPU did in its time. But they might also throw some useful sand into an entirely free-flowing regime of finance.