The epicentre of financial regionalism is Asia. Emerging East Asian economies, scarred by the IMF’s policy conditionalities during the 1997-98 regional financial crisis, are busily building national reserves and regional financial arrangements so as to wean themselves off the Fund’s influence. During the global crisis of 2008 and 2009, East Asians expanded the regional Chiang Mai swap initiative to $120 billion and multilateralised it into a regional pool.
Chiang Mai has a link to the IMF. Borrowers can draw up to 20% of the loan allocation from it, but need to agree on an IMF programme, including the Fund’s policy prescriptions, to access the remaining 80%. But calls in Asia are intensifying for severing the link, and ambitions are growing for a full-fledged Asian Monetary Fund.
There are a number of other, even if not as widely discussed, regional funds in Europe, the Americas, and the Middle East (MacKay et al. 2010). The European Union has used the Medium-Term Financial Assistance as a balance-of-payments facility for members that have yet to adopt the euro. Anguished by the southern European debt crisis in the spring of 2010, the German finance minister floated the idea of a European Monetary Fund. However, Europe eventually opted for cooperation with the Fund. In order to rescue Greece, the Eurozone nations provided €500 billion and IMF another €250 billion. Europeans also created a €440 billion European Financial Stability Fund among the 16 Eurozone nations that can be activated by the member nations’ finance ministers and a memorandum of understanding with the affected country. Experts assigned to devising a programme came from the European Commission, European Central Bank, and the IMF.
The US has used the Treasury’s Exchange Stabilization Fund mostly within the Western Hemisphere. Among the NAFTA partners Mexico and Canada, Washington also has a system of bilateral swaps that can be activated by the North American Financial Group composed of the three countries’ central bank and treasury officials (Henning 2009). Latin American finance ministers have recently launched discussions on deeper regional financial cooperation. In the Middle East, the 22-member Arab Monetary Fund dates back to the 1970s.
In addition to regional schemes, the global crisis saw a record number – some two dozen – of ad hoc, bilateral swap lines among central banks. The Federal Reserve provided 14 bilateral swaps to alleviate their dollar liquidity shortfalls (for an analysis, see Aizenman et al. 2010). The ECB extended swaps in Europe, while the Bank of Japan and People’s Bank of China did so in Asia.
Lessons from trade
Whether financial regionalism is driven by politics – the backlash against the IMF – or by the expansion of intra-regional trade linkages, it will likely play a growing role in the 21st century. In trade, such speculations are over, regionalism has become a prominent and consequential part of the global economy. The 400 or so bi- and plurilateral regional trade agreements (RTAs) now cover more than half of world trade.
Regional trade agreements have proliferated in the past two decades in an ad hoc fashion alongside, yet uncoordinated by, the GATT/WTO system. Two parallel systems are now in place. Granted, GATT Article XXIV stipulates that members notify their RTAs to what is now the WTO, and that the RTAs liberalise “substantially all trade” among the members and do not introduce restrictive rules on commerce. The article also demands open regionalism – that RTA members do not raise barriers to third parties.
Despite this, countless RTAs – especially among developing countries – have never been notified, and WTO members’ interpretations of Article XXIV vary widely (Estevadeordal and Suominen 2009). And despite the WTO’s robust dispute settlement mechanism, the fact that all WTO members belong to at least one RTA renders any one member reluctant to challenge the RTAs of other members as discriminatory, for instance due to restrictive rules of origin. Furthermore, the WTO’s efforts to analyse the various RTAs have been limited and constrained by political concerns and simply overwhelmed by the complexity of the RTA universe. Mappings and economic analyses of RTAs have been crafted mostly by outside experts (see for example, Suominen 2004, Estevadeordal and Suominen 2009, Estevadeordal et al. 2009, Low and Baldwin 2009, and Kawai and Wignaraja 2009).
In trade, the regionalism horse is out of the barn, and the WTO is lagging far behind. The nascent efforts to somehow multilateralise the countless RTAs, such as to transpose their so-called “WTO+” features to the GATT and WTO agreements, or even to “converge” them into broader regional and continental integration zones, are proving extraordinarily thorny, both technically and politically.
Financial regionalism is more nascent – the horse is at the gates. Taking the reins now, the G20 and the IMF have an opportunity to avert the rise of parallel and separate regional and global systems in global finance by systematising and institutionalising the relationship between the IMF and regional and bilateral financial arrangements. True, the properties of trade and finance are distinct – for instance, there will never be 400 discrete financial arrangements. But bridging regional and global arrangements is arguably even more urgent in finance than it is in trade, given that the negative externalities – such global contagion of crises – of failed responses are enormous in finance (Brookings Workshop 2010).
At the 11-12 November G20 Summit, the host nation Korea is seeking to gain support for the idea of a “global financial safety net” as a system of faster responses to crises, such as through improved coherence among the various lending sources. A divorce between the IMF and regional schemes would risk conflicts and gaps between the various instances’ responses to crises. Completely regionalising the global financial architecture would also mean relinquishing the Fund’s technical expertise and global experience, and the scale economies that the Fund’s global insurance pool confers (Henning 2006; Suominen 2010a). Further, regional or bilateral rescues not predicated on similarly rigorous conditions for good macroeconomic governance as demanded by the Fund could perpetuate unsound policies and moral hazard.
Global and regional assets and policies need to be aligned. There are at least four measures financial policymakers can take to avert the mistakes in the trade arena:
Craft a “Global Code on Financial Regionalism”. The G20 should fashion a clear set of principles to define the relationship among the IMF, regional financial facilities, and bilateral arrangements, akin to the principles laid out in GATT Article XXIV. The principles should address both money and policy, or the sequencing of the allocation of the funds from the different instances as well as potential cost-sharing among them; and cooperation between the Fund and regional authorities in designing country programmes and enforcing policy conditionalities (Suominen 2010b). Such principles should be nuanced enough to account for the diversity among current and new regional funds and bilateral initiatives.1
While forging such a code will come up against emerging markets still sceptical of the IMF, all nations should have an interest in stability and developments in other regions. Precisely such concerns have sparked mass demand among governments for empirical analyses of RTAs.
Monitor. The IMF or, politically more feasible, an outside, independent entity, should start performing regular, informal multilateral reviews of the various regional financial schemes that both map out the dimensions of the regional funds, examine their compliance with the global code, and assess their economic prowess and significance.
Multilateralise. The Fund or an outside entity should convene authorities of the regional funds to share best practices in such areas as surveillance, technical assistance, financial operations, and relationship with the private sector. Regional schemes can serve as useful laboratories and incubators of new practices that could be multilateralised in the IMF.
Tie fates together. The G20 should recommend the IMF study and make recommendations on a range of further, less formal mechanisms to foster synergies between Fund and regional financial mechanisms, and enhance a sense of ownership among regional economies of Fund policies. For example, members of a regional fund could be given committee status to set the agenda or pre-approve IMF packages for their region. Or, they could gain voting shares in proportion to their contributions to the regional fund in IMF decisions concerning their region (Lipscy 2009). The Fund and regional funds could partner for Article IV missions, bank stress tests, and early warning exercises.
The IMF and regional financial authorities should also develop formal channels of communication on surveillance and economic analysis. There could though be some division of labour, with the Fund handling the fiscal issues and analysis, and regions focusing on specific issues pertinent to them. For example, in Asia, regional efforts could focus on asset bubbles, exchange rates, and liquidity concerns (Brookings Workshop 2010). Yet duplication of efforts should not be completely averted, as some overlap helps ensure a diversity of opinions.
Regional funds can be a force of good. They can serve as the first line of defence against crises and complement IMF resources, and their surveillance can supplement the Fund’s analyses and alleviate its propensity for group-think. They can also reduce the political heat for IMF rescues incurred by one administration after the next in Washington.
Reforms to Fund governance can help enhance emerging markets’ buy-in for a complementary relationship between the IMF and regional funds. But crises afford little time to define what such a relationship exactly should be. Ex ante specification is needed. The IMF must seize the moment before the wave of regionalism gushes in.
Aizenman, Joshua, Yothin Jinjarak and Donghyun Park (2010), “International reserves and swap lines: substitutes or complements?”, VoxEU.org, 3 April.
Brookings Workshop (2010), “Financial Regionalism: Lessons and Next Steps”, Brookings Institute, Washington, DC, 13-14 October.
Estevadeordal, Antoni and Kati Suominen (2009), The Sovereign Remedy: Trade Agreements in the Globalising World, Oxford University Press.
Estevadeordal, Antoni, Kati Suominen, and Robert Teh (2009), Regional Rules in the Global Trading System, Cambridge University Press.
Henning, Randall C (2009), “US Interests and the International Monetary Fund”, Peterson Institute Policy Brief 09-12.
________ (2006), “Regional arrangements and the International Monetary Fund,” in: Edwin M. Truman, ed, Reforming the IMF for the 21st Century: special report 19, Washington, DC: Peterson Institute for International Economics, 171–184.
Kawai, Masahiro and Ganesh Wignaraja (2009), “The Asian Noodle Bowl: Is it Serious for Business?”, ADBI Working Paper 136, April.
Lipscy, Phillip Y (2009), “Asian Regional Cooperation and Global Reform after the Financial Crisis”, CSIS Policy Brief 8, October.
Low, Patrick and Richard Baldwin (eds.) (2009), Multilateralizing Regionalism, Cambridge University Press.
McKay, Julie, Ulrich Volz, and Regine Wölfinger (2010), “Regional Financing Arrangements and the Stability of the International Monetary System”, German Development Institute Discussion Paper 13/2010.
Suominen, Kati (2010a), “In the European Monetary Fund proposal, a chance to get the IMF right”, VoxEU.org, 17 March.
Suominen, Kati (2010b), “Policies to Bridge Regional and Global Financial Arrangements”, in Ulrich Volz and Aldo Caliari, eds. Regional and Global Liquidity Arrangements. Draft prepared for the Bonn: German Development Institute’s e-book for the Seoul G20 Summit (November).
Suominen, Kati (2004), Rules of Origin in Global Commerce, PhD Dissertation, University of California, San Diego.
1 The IMF board is considering a staff-proposed Global Stabilisation Mechanism (GSM), a staff-proposed merger of bilateral swap lines supported by Korea, as a tool of lending on short notice to multiple nations at once.