The financial crises of the late 1990s may have marked a watershed for the global economy. Although neither the United States nor the European Union or Japan were severely affected by the crises in Asia, Latin America and Russia, they have changed our understanding of the most appropriate economic policies in particular for developing countries. After the crises, the emphasis is different: Before 1997, the concepts of deregulation and reduced influence of governments seemed to enjoy majority support not only in the G 7-countries, but also in the developing world. Achieving high growth rates was the single most important aim of economic policy. Today, policy makers have to meet other goals of equal importance: In particular in the developing world, economic policy has to provide mechanisms against severe financial crises.
In this paper, I will argue that at the beginning of the 21 st century monetary regionalism provides a plausible and potentially beneficial option for economic policy in some regions of the world, particularly for East Asia and Latin America. Monetary regionalism offers solutions that conventional regionalism has not been able to provide: Conventional regionalism is based on trade integration and does not increase the monetary and financial linkages between participating economies until they reach quite a high level of integration. It has taken the European Union more than 40 years until such a level was reached and a common currency could have been created. In the meantime, the countries participating in a conventional integration project do not enjoy additional protection against financial crises: Neither with regard to the stabilisation of the exchange rate of their currencies nor with regard to the stabilisation of capital flows do conventional integration schemes strengthen the economies of their member states. Furthermore, the creation of a traditional integration scheme can make countries politically more vulnerable. This is particularly so in East Asia: The creation of a free trade area, customs union or common market would provide ammunition for American Senators in the event of a recession in the US. Asian countries could be accused of closing their own markets, but simultaneously benefiting from the open American market. Needless to say that this cannot be a tempting prospect for policy makers in East Asia or Latin America.
The improvement of the existing multilateral institutions, in particular of the International Monetary Fund, would certainly be a better choice. But today this is not a plausible option: The IMF continues to be an institution whose policies have frequently resulted in disaster, in particular in East Asia and Russia, and which suffers from too much influence of the American Treasury and Wall Street. It is a creditor cartel, not an institution primarily concerned with the needs of its clients, i.e. the member states. After the IMF was heavily criticised by observers from East Asia, now the IMF’s performance is questioned by insiders: The former Chief Economist of the World Bank, Joseph Stiglitz, has in April 2000 provided a fierce critique of the IMF’s policies during the crisis in Asia as well as in the process of Russia’s transformation, accusing the Fund of implementing the wrong policies and being an institution that lacks both democratic structures and able economists (cf. Stiglitz 2000).
The developments in early 2000 have underlined that the US administration is not willing to give up any influence on the IMF. The rejection of the first European candidate, Caio Koch-Weser, was not based on a lack of qualification of the candidate, but rather on the assumption that Koch-Weser would have represented a political position that the American government, in particular Finance Minister Larry Summers, could not share. Summers has provided us with his own vision for reform: The IMF shall, according to a proposal he made in late 1999, nor longer be concerned with the financing of economic development. Rather, the IMF shall concentrate on the prevention of financial crises and on the provision of liquidity in the event of a crisis.
Although this does not seem to be a radical proposal, in fact it is. The main point is that emergency funds shall no longer be available to all members of the Fund. Instead, only those countries which have observed the IMF-blueprint for financial liberalisation will be given access to credits of the Fund. The centrepiece of this proposition is the by and large complete liberalisation of national financial markets. If the Summers’ proposal would be implemented, American and other banks would have many new opportunities, but the developing world would suffer, for at least two reasons. Firstly, the complete opening of financial markets prior to the development of an own competitive financial system would deprive the affected countries of the opportunity to develop. The dominance of banks and institutional investors from G 7-countries would continue. Secondly, the policies suggested by Larry Summers are risky because the complete liberalisation of financial markets, as we have seen in particular in the Asian crisis, frequently results in the inflow of “hot money”. In the absence of measures to regulate financial inflows and outflows, monetary policy becomes very difficult.
In this paper, I will first look at the weak performance of existing regional integration projects in East Asia and Latin America during the recent financial crises. Surprisingly, neither APEC nor ASEAN provided any help. The trade regime in the Mercosur even caused a further spread of the crisis from Brazil into neighbouring Argentina. After a brief discussion of the deficiencies of traditional, trade-based regional integration I will introduce some elements that constitute monetary regionalism. Although the practicality of this concept will yet have to be proven, we can already witness today the introduction of some measures that may eventually result in regional integration without formal trade agreements. In East Asia and Latin America, small steps have already been taken. Finally, I will try to assess the prospects for monetary regionalism in East Asia as well as the consequences for existing multilateral institutions, namely the IMF.
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