Financial Regionalism

• Author: Masahiro Kawai and Domenico Lombardi
• Position: Dean of the Asian Development Bank Institute. is President of The Oxford Institute for Economic Policy and Senior Fellow at the Brookings Institution. They are co-editors of the forthcoming book Financial Regionalism and the International Monetary System.

Regionalism has become an important feature of the global trading system. More than 500 notifications of bilateral and plurilateral free trade agreements were made between the end of World War II and early 2012, most of them in the past two decades.

Financial regionalism has also increasingly gained prominence, albeit only more recently. In June this year, for example, leaders of the Group of Twenty advanced and developing economies (G20) meeting in Los Cabos, Mexico, underscored “the importance of effective global and regional [financial] safety nets” and, along the same lines, the main policy committee of the IMF has regularly stated the importance for the IMF “to cooperate . . . with regional financial arrangements.”

While there is a substantial stream of academic contributions on trade regionalism, our understanding of financial regionalism is quite limited, despite its potentially far-ranging implications in shaping the international financial architecture. This is true in Europe—where the recently proposed European Stability Mechanism is intended to be a currency union lending arrangement to provide direct assistance to sovereigns—and elsewhere.

In Latin America, the Andean countries successfully established the Latin American Reserve Fund (FLAR), which has been very active in providing balance of payments financing to its members for more than three decades. And, of course, in Asia, the Association of Southeast Asian Nations (ASEAN) + 3—that is, the 10 ASEAN countries plus China, Korea, and Japan—created the Chiang Mai Initiative in the aftermath of the 1997–98 Asian financial crisis. The Chiang Mai Initiative was multilateralized by consolidating a network of bilateral swap agreements into a single swap contract in March 2010, and a regional surveillance unit, called the ASEAN + 3 Macroeconomic Research Office, has been operating in Singapore since 2011.

Complementing broader integration

These regional financial arrangements are somewhat different and range from government financing and foreign exchange reserve pooling to currency swap arrangements. What is common to all these initiatives, despite their intrinsic diversity, is that they were all born of broader efforts to promote regional integration as well as macroeconomic and financial stability.

The most obvious case is Europe where, soon after World War II, the interdependence of that region’s economies led to the establishment of the European Payments Union, a precursor of the more advanced regional framework that culminated with the introduction of the currency union in 1999.

Latin America boasts the oldest, although less well-known, tradition of regional integration efforts among the developing economies, which also date as far back as the 1950s. Aiming to create a regional...