JOSE ANTONIO OCAMPO, Editor REGIONAL FINANCIAL COOPERATION 10101-00_FM.qxd 10/13/06 5:49 PM Page i REGIONAL FINANCIAL COOPERATION 10101-00_FM.qxd 10/13/06 5:49 PM Page ii 10101-00_FM.qxd 10/13/06 5:49 PM Page iii REGIONAL FINANCIAL COOPERATION JOSÉ ANTONIO OCAMPO Editor UNITED NATIONS Economic Commission for Latin America and the Caribbean BROOKINGS INSTITUTION PRESS Washington, D.C. 10101-00_FM.qxd 10/13/06 5:49 PM Page iv ABOUT BROOKINGS The Brookings Institution is a private nonprofit organization devoted to research, education, and publication on important issues of domestic and foreign policy. Its principal purpose is to bring the highest quality independent research and analysis to bear on current and emerging policy problems. Interpretations or conclusions in Brookings publications should be understood to be solely those of the authors. Copyright © 2006 United Nations Economic Commission for Latin America and the Caribbean Regional Financial Cooperation may be ordered from: Brookings Institution Press c/o HFS, P.O. Box 50370, Baltimore, MD 21211-4370 Tel.: 800/537-5487; 410/516-6956; Fax: 410/516-6998 Internet: www.brookings.edu All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without permission in writing from the Brookings Institution Press. Library of Congress Cataloging-in-Publication data Regional financial cooperation / José Antonio Ocampo, editor. p. cm. Summary: “Assesses how regional financial institutions can help developing countries, often at a disadvantage within the global financial framework, finance their investment needs, counteract the volatility of private capital flows, and make their voices heard”— Provided by publisher. Includes bibliographical references and index. ISBN-13: 978-0-8157-6419-9 (pbk. : alk. paper) ISBN-10: 0-8157-6419-7 (pbk. : alk. paper) 1. Developing countries—Economic integration. 2. Regionalism—Developing countries. 3. Developing countries—Foreign economic relations. 4. International economic relations. I. Ocampo, José Antonio. II. Title. HC59.7.R369 2006 332'.042—dc22 2006027658 9 8 7 6 5 4 3 2 1 The paper used in this publication meets minimum requirements of the American National Standard for Information Sciences—Permanence of Paper for Printed Library Materials: ANSI Z39.48-1992. Typeset in Adobe Garamond Composition by Circle Graphics Columbia, Maryland Printed by R. R. Donnelley Harrisonburg, Virginia 10101-00_FM.qxd 10/13/06 5:49 PM Page v Contents Foreword vii 1 Regional Financial Cooperation: Experiences and Challenges 1 José Antonio Ocampo 2 Reforming the Global Financial Architecture: The Potential of Regional Institutions 40 Roy Culpeper 3 Regional Development Banks: A Comparative Perspective 68 Francisco Sagasti and Fernando Prada 4 Regional Exchange Rate Arrangements: The European Experience 107 Charles Wyplosz v 10101-00_FM.qxd 10/13/06 5:49 PM Page vi vi contents 5 European Financial Institutions: A Useful Inspiration for Developing Countries? 136 Stephany Griffith-Jones, Alfred Steinherr, and Ana Teresa Fuzzo de Lima 6 Macroeconomic Coordination in Latin America: Does It Have a Future? 164 José Luis Machinea and Guillermo Rozenwurcel 7 Subregional Financial Cooperation: The Experiences of Latin America and the Caribbean 200 Daniel Titelman 8 Regional Financial Integration in East Asia: Challenges and Prospects 227 Yung Chul Park 9 Asian Bond Market Development: Rationale and Strategies 264 Yung Chul Park, Jae Ha Park, Julia Leung, and Kanit Sangsubhan 10 The Arab Experience 291 Georges Corm 11 An Analysis of Financial and Monetary Cooperation in Africa 329 Ernest Aryeetey Contributors 357 Index 359 10101-00_FM.qxd 10/13/06 5:49 PM Page vii Foreword he Monterrey Consensus, adopted by the 2002 International Confer- Tence on Financing for Development, highlighted in its paragraph 45 “the vital role that multilateral and regional development banks continue to play in serving the development needs of developing countries and countries with economies in transition.” It went on to note, “They should contribute to providing an adequate supply of finance to countries that are challenged by poverty, follow sound economic policies and may lack adequate access to capital markets. They should also mitigate the impact of excessive volatility of financial markets. Strengthened regional development banks and sub- regional financial institutions add flexible financial support to national and regional development efforts, enhancing ownership and overall efficiency. They also serve as a vital source of knowledge and expertise on economic growth and development for their developing member countries.” Despite this call, however, relatively little progress has been made since Monterrey in enhancing the role that regional financial arrangements play in the interna- tional financial system. The failure to devote attention to this issue is attested to by the absence of any book or report providing a comparative evaluation of the experience vii 10101-00_FM.qxd 10/13/06 5:49 PM Page viii viii foreword with regional financial cooperation in different parts of the world. This book seeks to fill this serious gap in the existing literature. Experiences in this area can be clustered into two groups: development financing; and mechanisms for macroeconomic cooperation and related financial arrangements (liquid- ity financing during balance-of-payments crises). Although our central aim is to explore the ways in which regional cooperation can promote the interests of developing countries, we will use Western Europe’s experiences with regional financial cooperation as a benchmark for that exploration. The experiences reviewed in this book indicate that regional cooperation can be a very effective means of surmounting the difficulties posed by the shortfall in the financial services provided by the current international finan- cial architecture. Nonetheless, the scope of these institutions’ operations is still limited and they have yet to be recognized as central elements in the international financial architecture. We hope that this book will spark a broader interest in initiatives in this area and indeed bring them to the cen- ter of the current discussion on South-South cooperation. We are deeply grateful to the Ford Foundation for providing the United Nations Economic Commission for Latin America and the Caribbean with the support it needed to undertake this project. José Luis Machinea José Antonio Ocampo Executive Secretary Under-Secretary-General for Economic Commission for Economic and Social Affairs Latin America and the Caribbean of the United Nations 10101-01_Ch01_Redo.qxd 10/5/06 3:05 PM Page 1 1 Regional Financial Cooperation: Experiences and Challenges josé antonio ocampo he period following the 1997 Asian crisis generated an extensive discussion Ton the international financial architecture. The debate made clear that there is an undersupply of services by international financial institutions that has become more glaring as a result of the growing economic linkages created by the current globalization process. The associated “global public goods” that are being undersupplied include adequate mechanisms for preventing and managing financial crises, as well as for guaranteeing global macroeconomic and financial stability. The debate also underscored the fact that private international capital markets provide finance to developing countries in a highly procyclical way, effectively reducing the room for maneuver of developing countries to undertake countercyclical macroeconomic policies. Finally, the debate emphasized that international capital markets squeeze out many developing countries, particu- larly the poorest among them, from private global capital markets. The possible role of regional institutions in providing these services was underestimated in the debate on how to improve global financial arrangements. I would like to thank Roy Culpeper, Stephany Griffith-Jones, Jomo K. S., Ann Orr, José Luis Machinea, Ejeviome Otobo, María Angela Parra, Esteban Pérez, Francisco Sagasti, and Lance Taylor for their comments on a prior version of this chapter. 1 10101-01_Ch01_Redo.qxd 10/5/06 3:05 PM Page 2 2 josé antonio ocampo It was, indeed, absent in major northern reports1 and from the views of inter- national financial reform coming from the Bretton Woods institutions (for exam- ple, in the reports on international reform presented by the International Monetary Fund [IMF] to the Interim Committee and its successor, the Inter- national Monetary and Financial Committee). It was also given at best a passing reference in major academic analyses of reforms of the international financial architecture.2 There was even open opposition to regional arrangements, par- ticularly to the 1997 Japanese proposal to create an Asian Monetary Fund, although this idea was revived in 2000 in the form of the Chiang Mai Initiative among the Association of Southeast Asian Nations (ASEAN) countries, plus China, Japan, and the Republic of Korea. There were obviously exceptions to this rule. Among the many reports, that of the United Nations stands out for its defense of the potential role of regional financial arrangements in an improved international financial architecture.3 Strong defenses of regional financial arrangements were also made by Percy Mistry, José Antonio Ocampo, and the Emerging Markets Eminent Persons Group con- vened by the Ford Foundation.4 Regional and subregional development banks have been given greater attention.5 As already