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The New Regionalization of Global Finance

JoJo Jacob writes on new issues in global finance in this guest web log. In February Venezuelan president Hugo Chávez and Argentine president Nestor Kirchner announced the launching of the Bank of the South (Banco del Sur) –a “socialist? alternative in Latin America to the International Monetary Fund (IMF) and the World Bank. Is this development a rational response of sovereign states to the realities of global finance or is it motivated solely by ideology and anti-Americanism?

The Bank of the South is quickly gaining acceptance. Among the founding members will be Brazil, Bolivia, Ecuador and Paraguay, with Nicaragua, several Caribbean countries and even some Asian countries reportedly expressing an interest. The formation of the Bank of the South reflects the region’s deep sense of disenchantment with the lending practices of the International Financial Institutions (IFIs). The IFIs, from the IMF to the Inter-American Development Bank (IDB), have for long been blamed for the region’s lackluster economic performance, indebtedness, and growing levels of poverty and income inequality during the last two decades.

In recent years, however, many countries in the region have experienced an economic turn-around. This new-found financial muscle, coupled with the region’s tilt toward the left (left-wing candidates won in six of the twelve Latin American countries where presidential elections were held last year), has many countries on the verge of ending ties with their multilateral donors. The opening salvo was fired by Venezuela when president Chávez declared in April that his country was withdrawing its membership in the World Bank and the IMF. Earlier that month Venezuela had announced that it was paying off all its outstanding debt with the World Bank (totaling $3.3 billion) five years ahead of schedule. Argentina, Brazil and Ecuador have paid off their debts too and others are expected to follow suit.

Although the emerging regional financial alliance in Latin America may have taken on an anti-American flavor, similar developments are taking place in Asia, sans rhetoric. In response to the East Asian financial crisis of 1997, a regional financial cooperation initiative, known as the Chiang Mai Initiative (CMI), was launched in May, 2000, by the ten members of the Association of South East Nations (ASEAN) along with Japan, South Korea and China (the so called ASEAN +3). The CMI consists of a number of Bilateral Swap Agreements (BSA) aimed at supporting member countries that encounter short run balance of payment deficits. In the event of a country experiencing a rapid and massive outflow of short term capital, the country’s CMI credit line would help it avert any extreme devaluation of its currency and its debilitating consequences. Lacking a surveillance/monitoring system and an institutional framework for policy dialogue, the CMI requires countries drawing more than ten percent of the maximum drawable amount to accept an IMF program of macroeconomic and structural adjustments. While no country has utilized BSA yet, many countries, in particular Malaysia, resent the IMF control over the CMI.

Earlier this month, the CMI reached a milestone when finance ministers of ASEAN+3 agreed to pool their foreign reserves. This would transform the bilateral swap arrangements of the seven-year old body into a multilateral scheme, based on a “self-managed reserve pooling arrangement governed by a single contractual agreement?. The principle of self-managed pooling arrangement would mean that external agencies, such as the IMF or the Asian Development Bank (ADB), would play little role in managing the reserves. With a combined foreign exchange reserve of around $ 1.3 trillion, the region accounts for about two-thirds of the world’s total. Pooling reserves will also help the countries release more funds for investment in social and economic development. The agreement further envisages the strengthening of local bond markets; strong local bond markets can raise more funds in local currencies and keep Asia’s savings in the region.

Such regional arrangements are capable of undermining the existence of the IMF and the World Bank—at some point, few counties in Asia and Latin America will require financial assistance from these agencies. The governance issues with the IFIs, from the asymmetry in the distribution of the voting power across member countries to the conditionality on loans, have made them few friends in the developing world. Command over development issues or experience working in developing countries is seldom a criterion in choosing the heads of the IFIs, as headships are split among the major shareholding countries. Thus, “traditionally? the United States chooses the president of the World Bank, Europe the Managing Director of the IMF, and Japan the president of the ADB. The rise of the new regional blocks in the global financial landscape, then, is a good omen to those hoping to see greater transparency, accountability and democratization within the world of international finance.

Comments

The monopoly of IMF and World Bank has reduced to an extent due to present day financial alignment among regional countries. It has succeeded in bringing transparency, accountability and democratization in global financial arena.

It completely shows the realities of global finance. Since last two decades International Monetary Fund has long been blamed for its poor performance, indebtedness, income inequality and growing level of poverty. In these days other banks and financial institutions have come forward due to there excellent performance and it gives a clear picture of the new regionalization of global finance.