Financial Crisis, Productive Incoherence, and the Evolution of Southern Financial Architectures

Ilene Grabel

What is most notable about the global crisis of 2008-? is the way in which it is proving productive for institutional experimentation in the realm of financial architectures in the global South. As with the Asian crisis, the current crisis has promoted interest in alternative modes of financial governance. Indeed, in a new study—“Financial architectures and development:  Resilience, policy space, and human development in the global South”– I find that the current crisis has stimulated the expansion of existing institutions and arrangements and the emergence of new ones in the global South.

Collectively these innovations suggest the emergence of a multi-nodal, dense, and heterogeneous financial arena.  This may be true even if, as we expect, some of the new arrangements prove to be untenable in the long run. I conclude that the current crisis has been far more productive than the Asian crisis in terms of propelling institutional innovations that may ultimately lead to more decentralized, pluralist, inclusive, and developmental financial architectures that can respond to the myriad, diverse challenges facing developing countries.

Changes in patterns of global economic growth and reserve accumulation since the Asian crisis have provided the resources necessary to scale up some older Southern and South-South institutional arrangements and to provide funding for newer ones.  These changes in the financial architecture of the global South both substitute for and complement the Bretton Woods institutions, while also having the potential to create pressure on them to change in ways that can increase their legitimacy, efficacy, and inclusiveness.

In some policy and institutional innovations we see the emergence of financial architecture that is far less US- and IMF-centric than has been the norm over the past several decades.  Moreover, the growing economic might, self-confidence, and assertiveness on the part of policymakers in some developing countries (and, at the same time, the attendant uncertainties surrounding the economies of the USA and Europe) are disrupting the traditional modes of financial governance and dispersing power across the global financial system.

It is too early, of course, to be certain whether the crisis will yield lasting, radical changes in the global financial architecture.  Moreover, not all regions of the developing world enjoy the opportunity or means to participate in the process of reshaping the global financial architecture.  Nevertheless, I am persuaded that there are now real opportunities for policy and institutional experimentation, and there are clear signs that these opportunities are being exploited in a variety of distinct ways.

As compared to any other moment over the last several decades, we see evidence of fissures, realignments, and institutional changes in the structures of financial governance across the global South.  I have elsewhere characterized this current state of affairs as one of “productive incoherence.”  I use this term to capture the proliferation of institutional innovations and policy responses that have been given impetus by the ways in which the current crisis has started to erode the stifling consensus that secured and deepened neo-liberalism across the developing world over the past several decades.

Productive incoherence is apparent in the emergence of a denser, multi-layered, and more heterogeneous Southern financial architecture.  In the new study, I examine some South-South initiatives, while also looking taking account of key institutions and arrangements in Latin America, Asia, East Africa, and in the Arab world.  I find that the current crisis has induced a broadening of the mission and reach of some existing regional, sub-regional, bilateral, and national financial institutions and arrangements, and has stimulated discussions of entirely new arrangements.  (Indeed, as an example of the dynamism of the current environment, I note that in the last week ASEAN+3 policymakers—i.e.,  policymakers whose countries are part of the Association for Southeast Asian Nations, plus China, Japan, and South Korea—moved closer to an agreement to double the size of their regional reserve pooling arrangements and to reduce the role of the IMF.)

In some limited cases these institutions and arrangements substitute for the Bretton Woods institutions.  This substitution is most pronounced in cases when the Bretton Woods institutions have failed or have been slow to respond to calls for support, or when they have responded to such requests with conditionality that has been overly constraining of national policy space.  But in most cases, the institutions and arrangements that I discuss in this new study complement the global financial architecture.

It is of critical importance that this moment of opportunity not be wasted.  The current environment poses many risks for developing economies.  Both the IMF and the World Bank have recently projected growth slowdowns in the developing world and wealthy nations.  Many analysts suggest—quite reasonably—that emerging markets are due for a correction, triggered by the safe-haven effect that is bringing capital back to the USA, the overheating of developing country commodity exporters, the decline in commodity prices, inflationary pressures and bubbles caused by speculation in some developing country financial and real estate markets, the decline of remittance inflows, and the weakening of markets for exports.

In this context, some have even begun to speculate openly about a possible hard landing for China triggered by the deflation of real estate bubbles and the bad debt problems of its banking system.  Indeed, capital flows to the developing world have already started to reverse.  All of this portends difficult times ahead for the developing world.

Unlike in the past, any new economic difficulties across the developing world are likely to be met with a wide range of new initiatives and institutional innovations that mark a further break with the crisis responses of the neo-liberal era.  Just as the Asian crisis laid the groundwork for institutional developments that have deepened only in the current crisis, so might this crisis catalyze further innovation along the lines already in place, and in directions not yet imagined, when the next period of instability emerges.  To the degree that this happens, we might come to recognize the present conjuncture as one marking a fundamental turn in the developing world–a turn toward resiliency to crisis and increased policy space that permits genuine and sustainable human development.

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