Source:
SELA
Fri Oct 30 2009
The Permanent Secretariat of the Latin American and Caribbean Economic System (SELA) has recently launched the report “Experiences of monetary and financial cooperation in Latin America and the Caribbean. Critical appraisal and proposal for action at regional level.” This paper aims to examine the experiences of monetary and financial cooperation at regional level and to identify international and regional conditions to advance cooperation in this area in order to move towards the establishment of a regional financial architecture in Latin America and the Caribbean.
Based on the issues identified in the report, SELA proposes three main areas of monetary and financial cooperation, which include: a Regional Development Bank, a Regional Contingency Fund and a Regional Monetary Area. For each one of them SELA puts forward a set of proposals concerning its objectives and performance criteria, placing them as areas of consolidation of existing financial cooperation, in particular, the deployment of such cooperation to new heights and into new spheres.
The Regional Development Bank’s operations would be based on the principles of regional autonomy, sustainability, disparity relief mechanisms and No conditionalities, which means that lending by the Development Bank would rest on financial rather than political criteria, thereby eliminating conditionality measures which at different times and by various multilateral institutions have been present in loans to Latin American and Caribbean countries, particularly in crisis situations.
The need for the establishment of a Regional Contingency Fund stems directly from the serious shortcomings of the current international financial order, and therefore, the impacts that these shortcomings have on the economies of the region. Its basic function would be to act as support for countries that face international financial crises and speculative attacks on their national currencies, although its scope could be extended to other temporary liquidity requirements, derived for example from severe reductions of export earnings or sudden interest increases on their foreign debt.
The Regional Monetary Area would allow the use of payment schemes in local currencies, thus obtaining a broader deployment of monetary and financial cooperation already existing in the region for the consolidation of a true regional financial architecture. This approach is especially relevant in light of the financial earthquake that has shaken the structure of the international monetary system and that has again exposed the ineffectiveness of continuing to use the U.S. dollar as the system’s currency.
With the prospect of creating a regional financial architecture, these proposals provide for the gradual convergence of the various initiatives currently in place, incorporating the largest possible number of countries in Latin America and the Caribbean.
This would include not only the access to adequate amounts and financing terms, but also the generation of other instruments that together would reduce the vulnerability of the region to the challenges and vicissitudes of the current international financial-monetary order. In addition, it would generate the degree of autonomy the region needs to adequately confront the short- and medium-term obstacles that the global environment raises against its development.
The study identifies some major problems that characterize the current international monetary and financial order in the context of the ongoing global economic crisis and, in particular, the role that issues relating to the possible redefinition of that order are taking in discussions and actions taken to confront the crisis.
It briefly mentions two monetary and financial cooperation strategies, which are being developed in other regions (ASEAN+3 and the Gulf Cooperation Council), through which participating countries seek greater degrees of autonomy from the problems that have plagued the international arena for quite some time now. In this way, these strategies bear some resemblance to some of the initiatives being proposed in Latin America.
The paper also reviews the main characteristics and the experiences of financial and monetary cooperation institutions that have been active in Latin America and particularly in subregional integration processes, in some cases for decades, and assesses the implementation level of their objectives and purposes, as well as their overall performance in the process of consolidating and deepening regional integration.
It also evaluates initiatives of monetary and financial cooperation that have been proposed in Latin America and the Caribbean in recent years or months, which have been launched or are close to doing so. It identifies the main contents of these initiatives and reviews actions taken so far in cases where initiatives are already operating.
The review of these initiatives starts with the Local Currency Payment System, which has been operating between Argentina and Brazil since October 2008 and has already produced some initial results, and continues with monetary and financial cooperation in the current Bolivarian Alliance for the Peoples of Our America – Peoples’ Trade Agreement (ALBA-TCP), thus identifying the main characteristics of three cooperation instruments.
Two of them were geared to be implemented within the Alliance, although it is expected they will be expanded to other countries in the region: the Bank of the ALBA, whose Founding Charter was signed in January 2008, and the Single System for Regional Payments Compensation (Sucre), with components of a Regional Monetary Council, a Common Account Unit (Sucre), a Central Clearing House and a Reserve and Business Convergence Fund. The third instrument, created in Venezuela as part of its energy cooperation with the Caribbean and agreed simultaneously to the creation of Petrocaribe, is the ALBA-Caribe Fund.
The document also reviews the Bank of the South, whose activities are about to begin, and is the most relevant initiative developed in the recent period in the field of regional financial institutions in Latin America, if we consider its objectives and modalities of operation defined at the time of its creation, and the number of participating countries and allocated resources.
The study concludes with an assessment of the overall situation of the old and new initiatives of monetary and financial cooperation in Latin America and the Caribbean, identifying commonalities and major differences in their respective orientations.
On this basis, the document identifies conditions for the advancement of monetary and financial cooperation at regional and international level and supports the proposal to move towards creating a regional financial architecture.
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