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Regional payment systems: A comparative perspective on Europe and the developing world



The current global financial non-system is marked by instability. In the absence of global solutions, a series of regional arrangements of monetary cooperation have been emerging to cope with such instability. The paper focuses on regional payment systems as an initial step of regional monetary cooperation. In order to evaluate their potential contribution to increase macroeconomic stability of the member countries, we develop a typology of payments systems and systematically compare historic and present initiatives in Europe, Asia and Latin America with reference to the original Keynes Plan. We show that regional payment systems entail beneficial effects by reducing transaction costs of intraregional trade, and by creating incentives for further macroeconomic cooperation. Their contribution to macroeconomic stabilization however depends on the specific design of the respective regional arrangement. --
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Fritz, Barbara; Biancareli, André; Mühlich, Laurissa
Working Paper
Regional payment systems: A comparative
perspective on Europe and the developing world
School of Business & Economics, Discussion Paper: Economics, No. 2012/10
Provided in Cooperation with:
Free University Berlin, School of Business & Economics
Suggested Citation: Fritz, Barbara; Biancareli, André; Mühlich, Laurissa (2012) : Regional
payment systems: A comparative perspective on Europe and the developing world, School of
Business & Economics, Discussion Paper: Economics, No. 2012/10
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Regional Payment Systems: A Comparative Perspective
on Europe and the Developing World
Barbara Fritz
André Biancareli
Laurissa Mühlich
School of Business & Economics
Discussion Paper
Barbara Fritz, André Biancareli, Laurissa Mühlichii
The current global financial “non-system” is marked by instability. In the absence of global
solutions, a series of regional arrangements of monetary cooperation have been emerging to cope with
such instability. The paper focuses on regional payment systems as an initial step of regional monetary
cooperation. In order to evaluate their potential contribution to increase macroeconomic stability of the
member countries, we develop a typology of payments systems and systematically compare historic
and present initiatives in Europe, Asia and Latin America with reference to the original Keynes Plan.
We show that regional payment systems entail beneficial effects by reducing transaction costs of intra-
regional trade, and by creating incentives for further macroeconomic cooperation. Their contribution
to macroeconomic stabilization however depends on the specific design of the respective regional
I. Introduction
The current global crisis has resurrected deep-rooted concerns about the functioning of the
current international monetary “non-system”. (Mateos y Lago et al., 2009). Not least in response to
inherent global financial volatility, monetary and economic relations increasingly regionalised
especially since the end of the Bretton Woods system. In this vein, south-south cooperation has
increased significantly during the last decade, not only via increasing south-south tradeiii but also in
monetary and financial terms: Developing countries and emerging markets increasingly consider
regional monetary cooperation as an alternative monetary policy option to cope with the vicissitudes
of the volatile global economy.
Among the various dimensions of regional integration, efforts for monetary and financial
cooperation can be observed in different parts of the world. They range from liquidity sharing
mechanisms within the Chiang Mai initiative in South East Asia to nascent initiatives in Latin
America that aim to establish new regional payments systems. While a growing literature on specific
cases or comparative analysis exists, especially with regards to the European experience, as to the best
of our knowledge, there is a lack of systemised literature on south-south regional monetary
Within the small body of literature, some alternative ways to classify the highly diverse
arrangements of regional monetary and financial cooperation can be mentioned: Ocampo (2006)
proposes a simple division into: i) development financing, and ii) macroeconomic cooperation and
connected financial mechanisms. UNCTAD (2007, chapter V) uses a three-level approach: i) regional
cooperation for payment facilities and short-term financing; ii) regional cooperation for development
financing (or long-term financing); and iii) exchange-rate arrangements and monetary unions.
Edwards (1985) offers a classification of three groups of regional arrangements: regional payments
agreements, agreements for balance of payments financing, and monetary unions. We follow this latter
systematisation of Edwards (1985), who – as one of a few authors – explicitly includes regional
payment systems in order to analyse regional payments agreements as one form of regional monetary
cooperation and integration in contrast to balance of payments financing and monetary unions. We
divide regional monetary cooperation schemes into regional payments systems, regional foreign
exchange pooling, regional financial development initiatives and exchange rate coordination. When
analysing their effectiveness in terms of smoothening volatility and sustaining growth, we link the four
forms to specific effects: i) increased self-insurance against exogenous shocks through increased
regional trade in regional payments systems; ii) increased provision of balance of payment finance in
regional foreign exchange pooling; iii) the creation of a regional financial market as a public good that
may add to increase investment financing in domestic currencies in order to prevent the destabilising
effects of external capital inflows in regional financial market development initiatives; and iv) the
avoidance of beggar-thy-neighbour policies by preventing competitive intra-regional exchange rate
devaluations with their deflationary consequences for the economies of the whole region in regional
exchange rate arrangements (see also UNCTAD 2011). In the following, we concentrate on regional
payments systems as an initial form of regional monetary cooperation that aims at immunising a
region against exogenous shocks by fostering intra-regional trade.
At the same time, the theoretical issues related to this subject are broader than the regional
cooperation debate. Explicitly or not, regional payment systems are designed with reference to the so-
called Keynes Plan. Keynes (1980) proposed the creation of an International Clearing Union (ICU) for
the re-organisation of international trade and finance that was discussed in the negotiations previous to
the Bretton Woods Conference in 1944 (see Keynes, 1980, Davidson, 1992/93 and 2002, and IMF,
In detail, the clearing union proposed by Keynes included registering and settling all
international payments by using a virtual common unit of account – the bancor – for invoicing all
these operations. The most important feature of this international currency was its uniquely fiduciary
nature: it was not related to the quantity of gold or another good. Moreover, it was to be used only in
international transactions among central banks. The most relevant part of the proposal was a
mechanism for both deficit and surplus countries to adjust in order to prevent global imbalances. The
idea was to share the burden of adjustment by taxing countries who had earned bancors in excess (i.e.
in the form of reduced interest earnings for the bancor claims, which would result in reduced interest
on the credit lines to deficit countries). If a country accumulated surpluses with the ICU, thereby
accumulating bancors, and refused to adjust to greater import demand, it would be penalised.
As is well known, from this wide ranging approach, only the coordination of exchange rates
was addressed by the Bretton Woods system, but not the equilibration of imbalances between surplus
and deficit countries. Even so, the Keynes Plan still is subject to vivid academic debatesv and, as
emphasised here, some of its main ideas were (and are) applied on a regional level in different areas of
the world, with rather distinctive results.
Our analysis shows that, more than mitigating trade imbalances, regional payment systems can
have a positive but small beneficial effect on intra-regional trade volumes by reducing transactions
costs related to the use of foreign currencies in regional trade. In order to directly address regional
trade disequilibria, however, regional clearing mechanisms require a broader and long-term oriented
regional macroeconomic cooperation as well as carefully designed adjustment mechanisms. In order to
understand the logics and relevance of different kinds of regional payment systems of which only
some include trade balancing mechanisms and other features, we provide a comparative analysis of
different initiatives in different stages with diverse objectives.
The paper is organised in three sections following this introduction: Section II proposes a
systematisation of common aspects and differences between regional payments systems by presenting
a typology of such mechanisms. Section III revises the experience of five past and present cases of
payments systems: the European Payments Union (EPU) of the post war period, the Latin American
Integration Associations’ Agreement on Reciprocal Payments and Credits (CPCR), the Asian Clearing
Union (ACU), and finally two recently founded arrangements in Latin America, the System of
Payments in Local Currency between Argentina and Brazil (SML), and the Unified System for
Regional Compensation among ALBA members (SUCRE). Section IV concludes.
II. Regional payment systems: definitions and typology
Regional payment systems are international mechanisms designed to facilitate payments
between residents of the participating countries. The advantage of this kind of mechanism is not
difficult to understand: if a resident of a country, say Bolivia, wishes to buy a good produced in
another country, say Nicaragua, the Bolivian resident has to find a way to pay for this good with a
currency that is accepted by the Nicaraguan resident. This may be the Nicaraguan córdoba, or a major
international reserve currency like the US dollar. In either case, the Bolivian importer has to assume
the cost of obtaining a currency different from his/her own currency in order to pay for the Nicaraguan
good. While costs for the individual importer may be small (especially for large enterprises), they
increase at the aggregate level, depending on the specific funding conditions at the international
financial market for the respective country at a certain moment.
Aiming at reducing transaction costs at the level of individual transactions, a regional payment
system by definition allows firms in each of the participating countries to settle their transactions with
firms in other member countries in their domestic
According to Chang (2000: 3 p.), a reduction of foreign currency flows and associated
transactions costs can be obtained mainly in two ways. First, the number of transactions is reduced to
net final settlement at the end of the period, while transactions of equal value cancel out. Second,
temporary liquidity is provided to the deficit countries’ central banks by the surplus countries’
counterparts, as they allow each other to cancel mutual obligations not immediately, but only at the
end of a clearing period. In effect, an efficiently run regional payment system in this simple version
may slightly improve the terms of trade for intra-regional trade transactions.
A closer look at past and present regional payment systems shows that a variety of
arrangements exist which address the problem of transaction costs in regional trade with a range of
different instruments. Thus, the effects of such systems in terms of reducing transaction costs have to
be differentiated further since economic literature so far lacks a systematic definition and discussion of
regional payment systems, in the following we propose a typology of such systems. This will then be
applied to past and present regional payments systems in different regions of the world.
At the bank and importing/exporting firm level, the amount of cost reduction depends mainly
on the costs of the currency exchange transactions in the foreign exchange market. These vary during
time, depending on the country’s credit conditions at the international market. Additionally, these
costs vary for firms and banks depending on their size, their share in international trade and other
criteria. The primary function of reducing transaction costs in intra-regional trade transactions requires
the establishment of a clearing mechanism among the central banks of the participating countries,
where trade-related payments are registered. Therefore, at the core of a regional trade-related payment
system is the agreement between the member countries’ central banks to temporarily extend credit to
each other by settling the accumulated net differences periodically.
The degree to which regional payments systems can contribute to reducing transaction costs of
intra-regional trade transactions at the aggregate level thus depends on three main criteria and the
institutionalised mechanisms established between the involved central banks:
(a) The difference between the gross and net values of trade transactions, and the length of the
clearance period: As a general rule, the greater the difference between the number and volume of
gross and net transactions, and the longer the clearance period for net surpluses and deficits, the
more effective a regional payment system can be in terms of reducing transactions costs in intra-
regional trade (Chang, 2000). Additionally, temporary liquidity may rise through the provision of
credit by central banks throughout the agreed clearance period.
(b) The currency denomination of the final clearance, and settlement of surpluses and deficits
between the central banks: When final clearance and settlement between the central banks are
conducted not only in international currencies but also (at least partially) in national currencies of
the member countries, transaction costs diminish, because central banks do not need to obtain the
equivalent volume of foreign currencies for this purpose.
(c) Provision of credit beyond the clearance period: Additional credit can be provided to deficit
member countries through credit lines or swap arrangements on terms agreed between the member
countries’ central banks. Depending on the interest rate charged for these mutual credit lines, this
can be more advantageous than financing conditions in financial markets.
Beyond the specific features of clearance, regional payment systems may also incorporate
mechanisms for adjustment among deficit and surplus countries at the regional level. Strongly
unbalanced intra-regional trade within a regional payment system rewards debtor countries with
greater gains in terms of reduced transaction costs, especially when final net clearance in domestic
currencies is allowed and/or the provision of credit beyond the clearance period is provided. The
higher the intra-regional cumulative deficits, the smaller are the incentives for surplus countries to
continue trading within the system. Regional payment systems, to be attractive to both surplus and
deficit countries alike, require mechanisms to balance trade among its members. The main benefit
expected from such regional adjustment mechanisms is the prevention of beggar-thy-neighbour
policies, especially in periods of balance-of-payments stress of individual member countries. Further to
this, deeper macroeconomic cooperation is required to effectively prevent unsustainable imbalances at
the regional level, as the ongoing crisis of an even deeper monetary regional integration arrangement -
the euro zone - shows.vii
Regional payment systems additionally can introduce a unit of account, which has two main
(a) A unit of account reduces transactions costs in multilateral clearing at the macroeconomic
level, as it reduces the number of intra-regional exchange rates to the bilateral exchange rates of
each of the currencies towards the regional unit of account. The unit of account is usually fixed to
an external key or reference currency. Nominal changes in the exchange rate of individual
members’ currencies need to be reflected precisely in the adjustment towards the unit of account
in order to prevent misalignments against market-based intra-regional exchange rates and avoid
trade distortion.
(b) In a more sophisticated arrangement, the unit of account may emerge as an instrument for
intra-regional exchange rate cooperation, as it may provide a point of reference for regional
coordination of exchange rates. It already delivers a common denominator against external
currencies that can be used as a target for increasing harmonisation of real exchange rate
fluctuations against an external currency or currency basket. Here, more significant gains in terms
of increased intra-regional trade may be expected as a result of shielding intra-regional exchange
rates from global currency instability through coordinated adjustment. Moreover, it may thus
prepare grounds for deeper regional monetary cooperation (see also UNCTAD 2011, chapter II).
In conclusion, beyond the common and basic goal of transactions cost reduction of every
payments system (by means of settling the external trade operations in domestic currencies), there
is a range of additional tools and objectives that can also be attached to these schemes. The most
common ones are temporary liquidity provision, final settlement in national currency, credit lines
beyond the clearance period (all aiming at saving foreign reserves), or even some mechanisms to
reduce the trade imbalances and create a unit of account (that could turn into a vehicle for
exchange rate coordination). The extension of these “advanced” features of a payment system
reveals the ambition level of each initiative. The first two columns in table 1 (see below)
summarise the different objectives and tools of a regional payment system. The remaining
columns apply this typology to the four cases analysed in the next section.
--- insert table 1 ----
III. Lessons from past and present experiences
The four examples selected, in chronological order, are: the European Payments Union (EPU),
the Agreement on Reciprocal Payments and Credits of the Latin American Integration Association
(CPCR-LAIA/ALADI), the Asian Clearing Union (ACU), the System of Payment in Local Currency
(SML) between Argentina and Brazil, and the initiative to establish a Unified System for Regional
Compensation (SUCRE) among some of the ALBA (the Bolivarian Alliance for the Peoples of Our
America) member countries in Latin America.
A comparative analysis of these schemes shows that, beyond their specific context, due to
regional differences and varying conditions, they represent different degrees of sophistication in their
objectives and related instruments (Table 1). Since the benchmark of a “complete” payment system is
the Keynes Plan, it is included as a point of reference here. The following comparative analysis
highlights the contrast between regional initiatives and an international clearing union. Table 1 shows
that the Keynes Plan incorporated the fullest range of instruments available to address imbalances and
enhance trade. Subsequently set up arrangements on the regional level do not include all such
instruments, partly because regional payment systems are confronted with different challenges than a
global one. For example, creating a regional accounting unit in a multipolar monetary system incurs
additional adjustment requirements compared to an international accounting unit since the currencies
within the region still have to be adjusted to changing extra-regional exchange rates which would not
be the case in an international arrangement. As such, none of the regionally implemented units of
account is so far incorporated as a means of exchange rate coordination.
In the following sections, these schemes are presented based on the typology explained in the
last section and presented in the Table 1. Each analysis also includes a brief assessment of the use of
the schemes in intra-regional trade transactions in comparison with regional trade conducted outside
each scheme, depending on availability of data.
III.1. The European Payments Union (EPU)
The European Payments Union (EPU), which was created in 1950 and was replaced by the
European Monetary Agreement in 1958, is regarded as a role model for fostering regional trade. In this
context, the EPU’s objectives were to develop convertibility of the European currencies at the regional
level, liberalise intra-European trade, and multi-lateralise existing bilateral trade arrangements. The
founding members were Austria, Belgium, Denmark, France, Germany, Greece, Iceland, Ireland, Italy,
Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, and the United
EPU performed almost the full range of functions of regional payment systems. This included
a reduction of transaction costs in regional trade by enabling trade payments to be settled in domestic
currency (item 1 in Table 1). Hence, foreign exchange requirements were limited to the minimum
amount necessary due to multilateral clearing. EPU included a short-term liquidity provision (2a)
during the settlement period of one month (2b) and additional longer term credit provision exceeding
the payment system’s internal clearance periods (2c). In addition, it had strong trade adjustment
incentives through gold quotas (3) and a regional unit of account that was used for accounting
purposes only (4a). Though explicitly not designed to provide a common European currency, this unit
of account can be regarded as the first stage of what 30 years later became the European Currency
Unit (ECU) in 1981 (4b).
The design of the EPU was strongly linked to the unique conditions of the Bretton Woods
system at the time of its foundation. It was set up in a world of fixed exchange rates, non-convertibility
of all currencies other than the dollar and strictly limited private capital flows and is therefore
probably the only regional payment system that did not need to create adjustment mechanisms for
extra-regional exchange rate adjustments. In addition, it is important to note that EPU was not
established without difficulties: negotiations to reach agreement on the incentive structure to reduce
intra-regional trade imbalances took a long time, and the EPU underwent a series of modifications
during its existence.viii
The main benefit of the EPU was that it ended bilateralism in intra-regional trade by
introducing a multilateral clearing system: a regional unit of account was set up at par to 1/35 ounces
of gold (equal to the gold conversion rate of the dollar but independent of it). The EPU’s unit of
account was used only for multilateral clearance of regional transactions, and each country set a parity
of its own currency with this unit of account.
The EPU’s accounts were held at the Bank for International Settlement (BIS), which acted as
its financial agent and also its clearing house. The settlement period was one month, after which the
participating countries reported their balances with each of the other countries to the BIS.
The EPU had a limited mechanism to balance trade.ix Following its inception, each country
received a quota of 15 per cent of its total trade with the EPU. As long as a country’s net debt was less
than 20 per cent of its quota, it was financed by credit, so that the country did not need to pay. If a
country’s debt reached 20 per cent of the quota, that country had to settle 20 per cent of the quota in
gold. Debts amounting to 40, 60 and 80 per cent of quota were required to settle in an equal
percentage of shares in gold or dollars. If a country exceeded its entire quota, it was required to make
its payments entirely in gold.x Cumulative surpluses were settled in a similar way as deficits but at
different percentage shares. Until its quota was exceeded, a surplus country would receive gold, but
amounting to only a maximum of 50 per cent of its cumulative net surplus position. In addition, claims
were converted into commodities or hard currency only partially and with a delay.
Despite inherent incentives to avoid excessively large surpluses, countries with a net export
surplus to the region benefited from the EPU in three ways (De Macedo and Eichengreen, 2001). First,
surplus countries had access to gold, rather than having to use internationally unconvertible neighbour
countries’ currencies in return for their exports. Creditors were given more gold than debtor countries
from a pool of $350 million, which was initially financed by the Marshall Plan. Second, financial
assistance was provided, conditional upon economic adjustment by the debtor countries, thus limiting
any potential misuse of the system. Third, trade liberalisation was a requirement for EPU membership.
Reducing trade barriers by up to 75 per cent was required over the course of EPU’s existence, which
resulted in trade gains, particularly for the internationally more competitive surplus countries.
The strong orientation towards trade liberalisation within Europe was a crucial additional
element of the EPU's success in increasing trade, as it prevented the countries from reverting to trade-
related beggar-thy-neighbour policies in order to enhance economic growth.
The volume of European trade increased considerably during the existence of the EPU, partly
as a result of trade liberalisation agreements. According to De Macedo and Eichengreen, 2001,
“although both intra-European trade and trade with the rest of the world expanded more quickly than
European production in the EPU years, the spurt in European trade was coincident with the
inauguration of the EPU.” xi
Apart from increasing intra-European trade, the EPU contributed significantly to improving
Europe’s terms of trade. It functioned like a common external tariff scheme: demand for extra-regional
goods declined as the prices of intra-European goods became more favourable due to the intra-regional
convertibility scheme and the credits provided. While this rapid expansion of intra-European trade
fuelled productivity and rising income levels, it was crucial for the economic development of Europe
to be able to build on several elements for economic growth. At the national level, the EPU counted on
a strong commitment to an agreement on income distribution. Labour and management in the member
countries bargained real wages below or at the level of productivity increases in return for productive
reinvestment of profits (Eichengreen, 1993: 121).
Ultimately, the EPU's exit barriers were too high to not commit strongly to the intra-European
payment system. However, it is important to note that during its existence, the EPU had to contend
with a number of challenging crisis periods (for details, see Bührer, 1997: 206; and Eichengreen,
2006: 83).xii which was only possible due to its highly favourable incentive structure. “What helped to
overcome these was the fact that the EPU proved to be very useful to its members as it not only
provided credits for importing but in this way also allowed members to export.” (Dickmann, 1997:
III.2. The Latin American Agreement on Reciprocal Payments and Credits (CPCR- LAIA)
The Agreement on Reciprocal Payments and Credits (CPCR – Convenio de Pagos y Créditos
Recíprocos), which was established in 1966, was the first mechanism of its kind in Latin America. It
was the result of a long process of negotiations and studies, at least since the 1950s, under the aegis of
the Economic Commission for Latin America and Caribbean (ECLAC).xiii This agreement, under the
auspices of the Latin American Integration Association (LAIA/ALADI – Asociación Latinoamericana
de Integración),xiv has 12 of LAIA’s 13 member countries as signatories: Argentina, the Bolivarian
Republic of Venezuela, Bolivia, Brazil, Chile, Colombia, the Dominican Republic, Ecuador, Mexico,
Paraguay, Peru and Uruguay.
This payment system serves to reduce transaction costs (item 1 in Table 1) and provides
temporary liquidity during a clearance period of four months (2a). The central banks agree on the
amounts and conditions of the temporarily provided credit lines, register the operations and assume the
risks of delayed payments during the clearance period (see below). At the end of that period, the net
amount of all credits is settled multilaterally in dollars. The CPCR does not provide credit mechanisms
beyond this period, maintains the hard currency for final clearing among central banks, and does not
include a common unit of account.
Even without replacing the dollar as the currency for final clearance (2b), the CPCR
mechanism has been able to reduce transaction costs in intra-regional trade. In particular, it was able to
help overcome the obstacles to trade expansion resulting from the high costs of financing in dollars
during the so-called debt crisis in Latin America in the 1980s.
However, since the 1990s the use and effectiveness of the CPCR has declined significantly, in
a two-folded process (Figure 1). First, the CPCR has not been able to keep up with the expansion of
intra-regional trade since the mid-1990s. For example, intra-regional trade within the free trade
agreement of MERCOSUR was conducted without making use of the CPCR. Since then, the value of
operations channelled through the CPCR has steadily declined, reaching its lowest level in 2003, at
$700 million. While the share of intra-regional trade channelled through this mechanism amounted to
an average of almost 90 per cent of total regional trade transactions in the 1980s, it has remained
below 10 per cent since the mid-1990s. Second, there has been a significant increase in pre-payments
(i.e. voluntary settlement of claims before the maturity date of four months). These operations rose
from less than 10 per cent of the total at the end of the 1980s to more than 90 per cent in the mid-
1990s, with only a short reduction in the period 2001–2004.
As a consequence of these developments, the CPCR’s usefulness and its contribution to intra-
regional trade creation by reduction of trade-related transaction costs, has continuously declined.
Based on the LAIA’s calculations of the benefits derived from CPCR (i.e. the percentage difference
between the total value of operations channelled in each year and the amount of dollars effectively
disbursed), the high values of the 1980s (of 70–80 per cent) fell to around 25 per cent in 2003. Since
2006, this share has been lower than 5 per cent.
The underlying reasons for the declining use of the CPCR relate to a series of rather specific
problems within the system which also are currently debated within the institution (LAIA, 2009) and
should be taken into account in an eventual design of a new payment system in Latin America.
The first reason involves the possibilities and conditions for choosing the mechanism to
channel payments. During the 1980s, faced with severe balance-of-payments problems, the majority of
CPCR-member central banks made it mandatory to channel payments for intra-regional trade
transactions through the CPCR, until 1992. Since then, however, while still in accordance with the
general rules of the Agreement, the countries started to bypass the CPCR through their own domestic
regulations. Among the motivations for this increasingly cautious stance, was the reluctance of the
central banks to assume risks associated with intra-regional trade transactions arising from the set of
guarantees assumed under the Agreement by the central banks for convertibility, transferability and
reimbursement for transactions provided by the system.xv
Another reason was that the increase in pre-payments caused a steady decline in the
comparative advantage of the CPCR in the settlement of intra-regional trade transactions in terms of
its providing temporary liquidity by central banks. A claim is settled in advance only if there are no
better alternatives available for one or both sides of the contract. The interest rate on the bilateral
credits of the agreement is fixed as the average of the four-month London inter-bank offer rate
(LIBOR) settled during the first three months and half of each compensation period plus one
percentage point. If this rate is lower than what a creditor country may profit in alternative investments
of its foreign exchange reserves, it is interested in receiving payment in advance, thus creating a
potential disincentive for net exporting countries. If, at the same time, this interest rate is higher than
that offered by other financing sources, it too provides a greater incentive for pre-payment by a debtor
Thus advance payments within the CPCR started to rise at the beginning of the 1990s, when
Latin America once again became an increasingly attractive destination for private capital inflows
(Figure 1). Later, between 1999 and 2003, when external financing conditions deteriorated once more,
the percentage of pre-payments fell slightly, but increased again with the resurgence of capital flows
during the global boom period. These trends suggest a correlation between the attractiveness of
payments through the CPCR and the absence of private external financing.
Beyond this, the incentives to use the CPCR developed asymmetrically among the members,
since more and more diverging creditor and debtor positions developed between the largest member
countries. The bulk of the operations currently is composed by Venezuelan imports and Brazilian
exports of engineering services associated with large infrastructure projects, thus involving only a
small number of transactions. This too has had the effect of diminishing the CPCR’s role in reducing
transactions costs, beyond unequal distribution of its use by members. Thus there seems to be room to
improve the incentive mechanisms and institutional arrangement within this LAIA payment system.
Certainly a payment system better suited to the regional context could have helped the expansion of
intra-regional trade since the 1990s.xvi
III.3. The Asian Clearing Union (ACU)
The Asian Clearing Union (ACU), founded in 1974, offers a clearance period with provision
of short-term liquidity (Table 1, item 2a) and the provision of swap lines for deficit countries beyond
clearance (2c). It also provides a unit of account for the factoring of transactions channelled through
the system (3a).
ACU was the outcome of an initiative of the United Nations Economic and Social
Commission for Asia and the Pacific (ESCAP) in order to foster regional cooperation between the
countries concerned, namely Bangladesh, Bhutan (since 1999), India, the Islamic Republic of Iran,
Maldives (since 2009), Myanmar, Nepal, Pakistan and Sri Lanka. ACU itself describes its objectives
as follows: “To facilitate settlement, on a multilateral basis, of payments for current international
transactions; to promote the use of participants' currencies in current transactions; to promote
monetary cooperation among the participants and closer relations among the banking systems so as to
expand trade and economic activity among the countries of the ESCAP region; and to provide for
currency swap arrangement among the participants.”xvii Since 1985, the use of the ACU clearing
facility by member countries is optional.
A regional unit of account, the Asian Monetary Unit (AMU), has been created for the
settlement of ACU transactions. For many years market participants invoiced and settled intra-regional
payments in local currencies, but since the beginning of 1996, ACU is implemented as a multi-
currency settlement system through which participants may also settle their accounts in dollars or
euros, and AMU is referred to as ACU dollar or ACU euro. As the main purpose of the ACU is to
provide a common unit of account, the term ACU dollar is specifically used to identify the use of
ACU transactions as distinct from transactions in dollars. Otherwise there is no distinction value-wise
between the ACU dollar and the dollar. The same applies to the ACU euro. AMU is kept equivalent to
one dollar and one euro respectively. Intra-regional exchange rates with the ACU dollar/ACU euro are
calculated based on daily SDR cross rates as published by the IMF.
Provision of liquidity by mutual central bank credits during the settlement period is realised in
ACU. The settlement period is two months, after which interest payments and debtor and creditor
positions are netted out. Within that period, trade between ACU member countries does not require
any payment and there are no restrictions on volumes, or kinds of goods and services traded. The basis
of the ACU operating mechanism is the ACU dollar and ACU euro accounts of the participating
countries’ banks with the correspondent banks in other participating countries (ACU, 2009: 6). Out of
these accounts, only the net surpluses and deficits are required to be settled by the central banks in the
countries concerned. Authorised banks settle commercial and other eligible transactions similar to
usual foreign exchange transactions.
The mechanism for inducing timely payments is through penalty fees or the threat of possible
expulsion from the ACU. Delayed payments are subject to fines amounting to the higher of either the
interest of 1 per cent per annum above the rate for the relevant settlement period(s) or 1 per cent per
annum over the rate applicable on the day of default. In case a participant fails to pay within 15 days
upon notification and no agreement can be reached between the partners involved in the pending
transaction within seven days, the respective country is expelled from ACU until payments have been
made. According to the ACU, no partner country has ever defaulted so far, probably due to its strong
enforcement mechanism.
The ACU contains a swap facility for debtor countries beyond the clearing period: any
participant in net deficit at the end of a settlement period is eligible for this swap facility. An eligible
participant is entitled to the swap facility from every other participant up to 20 per cent of the average
gross payments made by it through ACU to other participants during the three previous calendar years.
The interest rate charged on drawing on the swap facility is derived from the dollar or euro two-month
LIBOR declared by the British Bankers' Association.
According to ACU, the regional payment and clearing system has contributed to a rapid
expansion of trade, particularly in recent years: In 2007, transactions amounted to $15,830.5 million,
31.4 percent more than the preceding year. On a monthly basis, the average transactions stood at
$1,319.2 million compared to USD 1,004.2 million in the preceding year. India, I.R. of Iran, Sri
Lanka, Bangladesh and Pakistan account for the bulk of transactions.xviii Payment of a large share of
intra-regional trade is being channelled through ACU, also in previous years (see also Tripathi, 2010:
106 ff., 150 f.).
III.4. The payments system in local currencies between Argentina and Brazil (SML)
The System of Payments in Local Currencies (SML – Sistema de Pagos en Moneda Local) between
Argentina and Brazil started its operations in October 2008. With reference to the typology here used,
this is a simple payment system which uses the national currency for trade factorising and clearing of
bilateral trade operations between an importer, an exporter and commercial banks (item 1 in Table 1).
Any of the additional and more sophisticated features of a regional payments system is present (so far)
and, hence, it is designed to overcome only the transactions costs associated with international trade
operations. Use of the SML is voluntary in both member countries.
Despite the modest ambition, an explicit goal of the mechanism is to develop the foreign
exchange market between these two countries. Thus, the exchange rate between the Argentinean peso
and the Brazilian real is determined on a daily basis, triangulated through the respective dollar
exchange rates. Based on this daily rate, the values of export and import transactions in the two
countries are converted into national currencies, to be paid by importers to their central banks and
received by exporters from their central banks. These payments are made like any other international
transactions, by local banks previously authorised to transfer the operations, which means that credits
can be granted in local currencies. Each operation between the central banks via the SML is cleared
through the international banking system in New York. The maximum period for this clearing is three
days, but it usually takes just 24 hours. Thus there is no clearing period which would enable a saving
of foreign exchange reserves by accumulating and final clearing of net positions between the monetary
As the mechanism has been established too recently, an evaluation of its use and effectiveness
can only be very preliminary. The mechanism started operating with a limited number of operations
and trade volume. In the 33 months up to June 2011, a total of 7,069 transactions were channelled
through the SML, of which 98 per cent were Brazilian exports. The amount channelled was equivalent
to 3 per cent of bilateral trade: 2.54 billion reais (of which 99 per cent were Brazilian sales). The SML
is being used more and more, with a continuous increase in the number of operations and share in
bilateral trade (even if concentrated on one side of the balancexix). From 2010 on, monthly records
show that more than 4 per cent of total trade between the two countries was channelled through the
SML, reaching an apex of 5.6% in June of that year (figure 2). In addition, satisfaction with the use of
the system seems to be high: 65 per cent of companies have used it more than once, and the number of
complaints seems to be low.xx
Another aspect of the SML is related to the kind of enterprises using the mechanism. Being
voluntary, by definition it should offer advantages over traditional payment settlement in international
transactions. The SML is specially designed to cater to the specific needs of small and medium-sized
enterprises (SMEs), for which access to the foreign exchange market is restricted due to high
transactions costs relative to their small size. Unlike the larger companies in both countries, for these
smaller firms the option to pay and receive in local currency represents significant cost reductions.
At the same time, the SML could gain importance by expanding regionally, especially to
include other members of MERCOSUR. Indeed, Uruguay is expected to enter into a test phase with
the mechanism, at least for bilateral trade operations with Brazil. Regarding Paraguay, some technical
challenges persist, mainly involving computerisation of the domestic payment system. Once the
difficulties of initial implementation between Argentina and Brazil are overcome, extending the SML
to other economies should become easier.
In terms of lessons in the design of payment systems, probably the main contribution of this
new initiative is its effectiveness in addressing specific transaction costs in foreign exchange for
smaller firms. The system has a simple and transparent structure with a clear set of rules and
incentives. In its short period of implementation, SML has shown that a step-by-step approach may be
beneficial as long as it is continuously and transparently adapted to international financial conditions
and addresses specific problems linked to the transaction costs inherent to accessing non-domestic
currency for intra-regional trade.
III.5. The unified system for regional compensation SUCRE between ALBA members
Most recently, in April 2009, the member countries of the Bolivarian Alliance for the Peoples
of Our America (ALBA) discussed the idea of creating a virtual currency to be used among central
banks as an invoice currency for intra-regional trade transactions. The final outcome was the so-called
Unified System for Regional Compensation (Sistema Único de Compensación Regional) – or SUCRE
initiative – which was approved in April 2009xxi.
In its initial stages, the SUCRE initiative aims at reducing transaction costs in intra-regional
trade (item 1 in Table 1), and is linked to the saving of foreign exchange by allowing delayed
settlement of trade transactions (2a). The mechanism offers the option of settling final net payments of
net trade surpluses and deficits in a domestic or international currency (2b as option). The
establishment of a regional credit fund (2c) and adjustment mechanisms to balance intra-regional trade
channelled through the system (3) are envisaged, but not yet operational.
A key feature of the SUCRE proposal is that it involves the creation of a regional unit of
account, the sucre, to replace the dollar for invoicing regional transactions.xxii Its use does not involve
physical emission of sucres, and is restricted to invoicing operations relative to intra-regional trade
payments only at the central bank level. The sucre is designed to be a common unit with its value
derived from a basket of currencies of the member countries weighted according to their relative
economic size. As in the ACU and the SML, the sucre is a voluntary payment system. Central banks
can decide whether to use the sucre mechanism and unit of account for invoicing trade transactions, or
channel invoicing of exports and imports in another currency, usually the US dollar in international
trade transactions.
An additional feature of the system, rather atypical for payment systems, is that, in its
preliminary form, countries can select which products will be traded using this system of payments.
This is owed to the fact that a primary objective of the SUCRE initiative is to diversify the export
structure of the countries by direct policy intervention, reducing their strong dependency on
commodity exports.
If a country decides to use the sucre as a unit of account for a certain product in intra-regional
trade, the Central Unit of Compensation (CCC – Cámara Central de Compensación) assigns an initial
amount of sucres to it. The CCC is also the entity responsible for the periodic compensation and
liquidation of payments in sucres between the central banks of the member countries.
Up to today, the system seems to remain in its initial steps, having realised during 2010 and
2011 a small number of bilateral operations involving foodstuff among Cuba, Ecuador and
As it is still in its very initial steps of foundation and use, the SUCRE initiative exemplifies
how important a clear regional understanding of the objective of the creation of a regional currency
unit is (see section II): following the typology of Table 1, the sucre can either remain a virtual unit of
account (4.a) or a currency basket that aims at more ambitious regional currency cooperation (4.c), as
foreseen by at least part of the participating actors (see Páez Pérez, 2010). If the aim is to remain a unit
of account, the only relevant mechanism would be the precise reflection of current nominal exchange
rates of the participating currencies towards other key currencies, i.e. the US dollar, in the daily
definitions of the exchange rate towards the regional unit of account, in order to maintain the incentive
for all participants to invoice their mutual trade in sucres. Yet, if the aim would be to gradually
progress towards a regional currency in the long term in the sense of (4.b) in Table 1, a carefully
designed mechanism of real intra-regional exchange rate adjustment would be required, together with
increasingly coordinated macroeconomic policies in order to stabilise intra-regional nominal and real
exchange rates. This would involve a broadening range of policies, regarding monetary, fiscal and
wage policies, which in the best case would build up to a harmonisation of the regional
macroeconomic framework towards an economic policy setting supportive of domestic and regional
investment and growth.
IV. Conclusions
The comparative analysis of past and present trade-related regional payment systems presented
in this paper shows a variety of schemes in different parts of the world. The general reference model
for most of the initiatives is the International Clearing Union, proposed by Keynes during the
negotiations leading up to the Bretton Woods system. Yet, the latter addressed the international level
of monetary cooperation: Keynes’ proposal sought to overcome a number of problems with the
international monetary system at that time, which again are of great relevance today, such as the
prevention of global imbalances due to asymmetric adjustment costs assigned to debtor economies,
and the problems for international trade associated with misaligned exchange rates.
In contrast, payment systems established at the regional level can only address a very small
part of these problems, as they do not include a reform of the global monetary system. As such, past
and present regional payment systems in Europe, Asia and Latin America focus on stabilising and
enhancing intra-regional trade through regional clearance of intra-regional trade transactions. A
comparison of these regional arrangements shows that two elements are common to most of them:
first, they offer the possibility of making transactions in local instead of international currencies
between importers and exporters and correspondent banks; and second, they provide temporary
liquidity during a determined clearance period whereby the participating central banks mutually offer
credit by delaying final settlement of net deficits and net surpluses to the end of that period.
The European Payments Union (EPU) is an example of a system that puts great emphasis on
reducing transactions costs in intra-regional trade by saving foreign exchange reserves. During the
1950s, EPU was a response to the specific circumstances of stiff financing conditions prevailing in the
post-war period when it was founded. There was no intention of creating a regional currency in this
period. Rather, the idea was to provide an accounting mechanism. The system was created in the
context of globally fixed exchange rates, where additional intra-regional fixing of currencies was not
needed. However, the EPU served as the first step in a process that ultimately led to the creation of the
euro and to European monetary integration after the breakdown of the Bretton Woods system of fixed
exchange rates.
In Latin America, the reciprocal payments agreement of the Latin American Integration
Association (CPCR-LAIA) witnessed its most active period during the so-called debt crisis in the
1980s, when it became imperative for countries to save foreign exchange reserves due to dramatically
increased borrowing costs. Indeed it was very effective in terms of channelling most of the intra-
regional trade-related payments during that period. Yet, due to intense competition among the member
countries that were all net debtors vis-à-vis the rest of the world, even intra-regional surplus
economies faced payment pressures from international creditors. Thus, within the CPCR mechanism
no solution for additional provision of credits beyond the clearing period, or final settlement in local
instead of international currencies, could be developed. In the following decades, when the absence of
international capital flows – including trade financing flows – was no longer a problem in the region,
the mechanism lost momentum.
In contrast, the long standing Asian Clearing Union (ACU) which basically involves India and
its neighbouring countries, adapted to changes in its member countries' stocks of foreign exchange
reserves and international trade with the introduction of a multi-currency standard and by offering
members the possibility to invoice and settle payments in domestic or international currency. This
seems to have increased the effectiveness of the mechanism in terms of the volume of transactions
channeled through it over the past few years. At the same time, there is no sign that the ACU
mechanism is intended to serve as a basis for further monetary cooperation within the region.
The recently founded payment system in local currency established between Argentina and
Brazil (SML) is focused on addressing trade facilitation on a small scale and with a low level of
ambition. It focuses just on the transactions costs reduction; covers (so far) a very small share of
bilateral trade between Brazil and Argentina and does not involve liquidity creation. Even on this
small scale, the system seems to be an important tool for trade facilitation of small and medium
enterprises and tries to foster an incipient exchange market for the currencies of the countries
involved. Even without dealing with more structural questions, the effectiveness of SML in addressing
specific transaction costs in foreign exchange signs a more productive path for a regional payment
system in the current circumstances – especially the lack of macroeconomic policy coordination – of
Latin American economies.
In contrast, the also recently founded system for regional compensation (SUCRE) with Cuba,
Ecuador and Venezuela as core members aims at creating a currency unit which use goes beyond
intra-regional trade transactions. It aims at decoupling from the US dollar as the invoicing currency for
intra-regional trade as the member countries perceive the US dollar to be a destabilizing force in the
region. Yet, for the time being, its mechanism provides a simple unit of account for intra-regional
trade transactions of a subset of products between two of the countries. Its ultimate objective remains
opaque. It is unclear if the major aim of the initiative is to create a regional unit of account for
increasing trade volumes, reducing transaction costs in intra-regional trade and diversifying intra-
regional trade by giving preference to certain products like food products, or if it is to build up a
common regional currency. In the case of the latter, we conclude from our analysis that the more a
region seeks to move into the direction of regional monetary cooperation the more required would be
adjustment mechanisms in the unit of account in order to progress towards this goal. This would
include first an adequate adjustment mechanism for the regional unit of account, second a regional
mechanism to balance intra-regional trade, and third and most importantly, regional macroeconomic
cooperation. The case of the current euro crisis shows that even a common currency cannot
circumvent the necessity of intensive and broad ranging political cooperation to ensure a beneficial
regional cooperation arrangement.
A general lesson to be drawn from our typology of regional payment systems together with the
comparative analysis of past and current regional payments schemes is that the likeliest outcome of a
well-functioning regional payment system is the reduction of transaction costs associated with the use
of foreign (read extra-regional) currency in regional trade transactions. This reduction however
depends first on the volume of regional trade flows, the difference between gross and net values of
regional trade transactions, the length of the clearance period, the currency that is used for final
clearance (local or foreign currency), the implementation of additional elements, such as credit
provision between the member countries beyond the clearance period, and it needs to account for the
costs of acquiring and holding foreign exchange for trade transactions for the respective country, and
the trading firms.
Second, regional trade imbalances seem to play an important role which, in order to be more
effective in terms of increasing intra-regional trade volumes, should be addressed within the scope of a
regional payment system. Such a coordinated adjustment between deficit and surplus countries
requires a careful design of incentives for both surplus and deficit countries to use the regional
payment system. Otherwise, disincentives for surplus countries to participate may have the potential to
easily endanger the survival of the system as a whole.
Third, a regional currency unit seems to facilitate the reduction of transaction costs by providing
a unit of account for clearance purposes. Introducing a unit of account with a regional payment system
may further serve a more long-term oriented goal of establishing an instrument for regional exchange
rate cooperation. Yet, especially in the context of an internationally uncoordinated exchange rate
system, immediate and smooth adjustment of nominal and real exchange rate changes of individual
member currencies have to be reflected in relation to the regional unit of account. This relates to
changes regarding the intra-regional, as much as extra-regional currencies – depending on the final
objective of the payments systems’ usage of its unit of account.
In view also of the analysis of these five cases of regional payments systems in Europe, Asia
and Latin America, we conclude that payments systems have the potential to be an initial step on the
long and sometimes winding road towards deeper monetary and overall macroeconomic coordination
and a common macroeconomic regime oriented towards economic growth and employment. Yet, to
indeed serve as a beneficial step towards a more stable macroeconomic development, the proposed
systematisation of regional payment systems presented in this paper shows that first, such
arrangements need to adapt to changing circumstances and preferences over; second, they need to
provide adjustment mechanisms that provide for incentives for surplus countries, too; and third, they
require regional macroeconomic policy cooperation that goes beyond regional monetary policy
considerations to prevent regional imbalances from disrupting the arrangement. Despite being rather
small steps of regional trade enhancement, regional payment systems – depending on the context
conditions summarised above – may provide a step towards a regionally coordinated growth-
enhancing economic environment. At the very least, the member countries are provided with the
possibility of acquiring experience of regional macroeconomic policy cooperation.
The current euro crisis clearly shows that, in order to be beneficial in terms of macroeconomic
stability and growth for all member countries, economic policy coordination and harmonisation should
go far beyond fiscal coordination, including mechanisms for coordinated wage setting and prevention
of large intra-regional imbalances, which requires very close political cooperation. Yet, this does not
mean in our view that other areas of the world should refrain from regional cooperation mechanisms.
Rather, our analysis shows that in consequence of clearly defined goals and properly established
mechanisms, such regional cooperation schemes may provide economic gains and a learning field in a
globally unstable context for future and deeper cooperation at the regional level.
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i This paper is based on a chapter of the UNCTAD study on “Regional Monetary Cooperation and Growth-
Enhancing policies: The New Challenges For Latin America and the Caribbean”, forthcoming 2011, which was
elaborated together with Sonia Boffa and Heiner Flassbeck from UNCTAD to whom we address our special
thanks for their valuable contributions and comments on this topic.
ii Barbara Fritz, Freie Universität Berlin,; André Biancareli, University of Campinas,; Laurissa Mühlich, Freie Universität Berlin,
iii South-south trade has been growing constantly, from 11 per cent of world trade in 1995 to 15 per cent in 2007
(UNCTAD 2009).
iv See for systematised approaches to regional monetary cooperation and integration between developing
countries and emerging markets for example Cohen 2004, Chap. 7; Bénassy-Quéré/Coeuré 2005; Ocampo 2006;
Fritz/Metzger 2006; Fritz/Mühlich 2010.
v Due to the striking parallels to the current economic situation of global imbalances and the problem of
unilateral adjustment costs for debtor economies, the Keynes Plan is currently experiencing a prominent revival
by authors like Paul Davidson 2009. For a critical analysis of additional elements of extended credit lines within
the proposed arrangement with regards to increasing rather than reducing imbalances between surplus and deficit
countries, see also Ponsot, 2010.
vi The transaction is realised as follows: when there is agreement between the central bank or the exporter in
country A and the central bank or the importer in country B to channel a trade transaction through a payment
system, the importer in country B will pay in currency B to central bank B while the exporter in country A will
be paid in currency A by central bank A. These payments are frequently made through commercial banks, at the
time of the goods’ boarding, and the buyer and producer pay and are paid, respectively, in their own currencies,
using their own domestic banking systems.
vii Here, we refer to the fact that even if a lack of fiscal soundness may play a role in some EU member countries,
the key problem is the lack of coordination of real wage levels and, subsequently, increasing external deficits and
surpluses within the euro region due to differing levels of competitiveness (see Flassbeck/Spiecker, 2010).
viii For an extensive overview of regional negotiations of the EPU and its reforms, see, for example, Bührer,
1997: 189.
ix For a detailed description, see de Macedo and Eichengreen, 2001; Bührer, 1997: 195; and Eichengreen, 1993.
x Additional credits were also approved by EPU's Managing Board. If a country exceeded its quota, the
Managing Board met to advise that country on adopting corrective policies. The Board comprised a group of
financial experts who advised EPU and reported to the Council of the Organisation for Economic Co-operation.
xi This is evident from the fact that intra-European trade increased from $10 billion in 1950 to $23
billion in 1959, while imports from North America grew more slowly, from $4 billion to $6 billion. At
the same time, credit expansion under the EPU fuelled intra-regional trade by reducing specific trade-
related transaction costs through the use of extra-regional currencies in intra-regional trade (ibid.):
“Participating countries had $46 billion of surpluses and deficits against one another during the EPU
years. Nearly half ($20 billion) was cancelled multilaterally. Another quarter ($12.6 billion) was
cancelled inter-temporally, as countries ran deficits in one month, financing them wholly or partially
with credit, and ran offsetting surpluses in subsequent months, cancelling their previous position.
Settlement in gold and dollars was limited to most of the remaining quarter ($10.7 billion). Thus, EPU
reduced settlement in gold and dollars by more than 75 per cent compared to what would have been
required under strict bilateralism.”
xii Such crises gave rise to the first steps towards full convertibility of the European currencies that was finally
achieved with the creation of the European Monetary Agreement (EMA) in 1958, including a European Fund.
EMA was designed to foster multilateral trade and currency convertibility as the first step in mutual consultation
and regional cooperation. Its core institution was the European Fund, which provided non-automatic short-term
liquidity to member countries in times of balance-of-payments crises in order to prevent them from
implementing trade-distorting measures. The European fund led to the creation of the European Monetary
System and finally to the euro.
xiii Probably the first reference to this subject was the report entitled ‘Compensación Multilateral de Pagos
Internationales’ en America Latina (CEPAL, 1949), prepared by the IMF. On these debates and the funding
Agreement, see also Aragão, 1984; and Ocampo, 1984.
xiv For the official source of data and documents, see: (access February 2010).
xv As the LAIA secretariat itself has stated: “… the fact that the Central Banks assume the credit risks involved in
intra-regional trade transactions by granting a reimbursement guarantee to each transaction greatly stimulated the
use of the system by exporters and by commercial banks since its initiation in 1968. From the 1990s onwards,
institutional changes with respect to objectives and aims of the members’ central banks turned out to be
‘problematic’ for the majority of the Central Banks, due to their duty to provide reimbursement guarantees”
(LAIA, 2009: 11).
xvi Recently, a series of studies and discussions have been undertaken by the LAIA in order to “relaunch” the
CPCR, including a meeting in Montevideo in April 2009 for this purpose. Documents and presentations are
available at: (access February 2010).
xvii See official website of the ACU at http:// (access February 2010).
xviii See official website of the ACU at http:// (access February 2010).
xix Total trade channelled through the SML system since its start is equal to 5 per cent of total shipments from
Brazil to Argentina and less than 0.05 per cent of transactions in the opposite direction. There is no information
available to explain the concentration of the movement in one direction. One reason may be the strong
appreciation of the Brazilian real (against the dollar) during this period, which increased incentives for Brazilian
exporters to accept export earnings in domestic currency.
xx Information provided by experts involved in the operation of the SML.
xxi It has been approved by ALBA member States, but ratification is still not completed. So far, the Bolivarian
Republic of Venezuela, Cuba, Ecuador and Bolivia have ratified the initiative.
xxii The sucre is intended to be used only by selected ALBA member countries (the Bolivarian Republic of
Venezuela, Bolivia, Cuba, Ecuador, Honduras and Nicaragua), with the exception of three CARICOM-ALBA
member countries: Antigua and Barbuda, Dominica and Saint Vincent and the Grenadines. For these latter
economies, the use of the sucre for the moment is not foreseen, as they are already members of the Eastern
Caribbean Currency Union (ECCU) which uses the East Caribbean dollar.
xxiii According to the official website of the SUCRE initiative, “… the negotiated amount is at 47 million sucres,
further operations are pending for 97 million.” URL:
des Fachbereichs Wirtschaftswissenschaft
der Freien Universität Berlin
2012/1 SCHULARICK, Moritz
Public Debt and Financial Crisis in the Twentieth Century
2012/2 NEHER, Frank
Preferences for Redistribution around the World
2012/3 BOCHOVE, Christiaan van / Lars BOERNER / Daniel QUINT
Anglo-Dutch Premium Auctions in Eighteenth-Century Amsterdam
2012/4 FOSSEN, Frank / Martin SIMMLER
Differential taxation and firms’ financial leverage Evidence from the introduction
of a flat tax on interest income
2012/5 KÖNIG, Jan / Christoph SKUPNIK
Labor market integration of migrants: Hidden costs and benefits in two-tier welfare
2012/6 CLUDIUS, Johanna / Martin BEZNOSKA / Viktor STEINER
Distributional Effects of the European Emissions Trading System and the Role of
Revenue Recycling
2012/7 BRANDT, Thiemo / Rudi K. F. BRESSER
Gaining Insight into Membership Strategy: Competitive Advantage by Shaping
Strategic Management
2012/8 AMBROSIUS, Christian
Are Remittances a ‘Catalyst’ for Financial Access? Evidence from Mexican Household
2012/9 AMBROSIUS, Christian
Are Remittances a Substitute for Credit? Carrying the Financial Burden of Health
Shocks in National and Transnational Households
2012/10 FRITZ, Barbara / André BIANCARELI / Laurissa MÜHLICH
Regional Payment Systems: A Comparative Perspective on Europe and the
Developing World
... Song and Xia (2020) and Bahaj and Reis (2020) show that, since 2009, the Chinese central bank has used similar methods and also improved conditions for RMB use in international trade payments by offering swap agreements to central banks around the globe (39 agreements by 2020). Finally, Fritz et al. (2012) show that institutional building has also been used as a collective strategy to encourage local currency cross-border use, as cases of regional payment arrangements provide evidence. ...
Full-text available
We explore how China's geographically targeted policies impact RMB overseas use individually or in combination. The policies include swap agreements, clearing banks, investment quotas, and direct trading between Chinese renminbi (RMB) and non‐USD currencies. Adopting a fuzzy‐set qualitative comparative analysis and using Bank of International Settlements cross‐country data on foreign exchange markets, we find that institution building has lowered the barriers to international adoption of the RMB. Specifically, for countries economically close to China, high RMB trading is explained by either (i) having a clearing bank in the host market and direct quotations between the RMB and the local currency, or (ii) being a financial center and having access to the Chinese capital market. This combination of policies is explained by the creation of (i) “trading posts” that provide RMB liquidity abroad, and (ii) channels that allow actors to “recycle” offshore RMB funds. We triangulate our results with interviews conducted with senior People's Bank of China officials.
Subject. This article explores the issues related to institutional and financial relations within the integration of financial markets in the EAEU countries on the basis of a single payment area. Objectives. The article aims to develop proposals to arrange a single payment area in the regional integration association of the EAEU. Methods. For the study, I used the general scientific knowledge techniques and examined financial and foreign trade statistics and reviews of the Eurasian Economic Commission, and statistical databases of the World Bank and International Monetary Fund. Results. The article presents proposals to include a new mechanism for building a single payment area in the system of cooperation within the framework of harmonization of financial markets in the EAEU, which is to unite the processes of target setting and building a common format of activities in the field of financial regulation and a single payment infrastructure arrangement. Conclusions. The proposed organizational mechanism for the integration of financial markets in the EAEU can help prepare the financial systems of the EAEU countries for integration and implement it in the most effective way.
Can regional monetary cooperation shield developing regions from global volatility? The article argues that the main contribution of regional monetary cooperation to enhancing the shock-buffering ability of its member countries is to provide short-term liquidity and to increase regional trade and financial links. In contrast, traditional optimum currency area (OCA) theories formulate the advantages of regional monetary cooperation in terms of allocative efficiency gains and aim at a full currency union as final stage. As such, traditional theory widely ignores the shock-buffering capacity of regional monetary cooperation as well as their varieties. In contrast, the article argues that intermediate stages of regional monetary cooperation have their own rationales related to such shock-buffering capacity. This paper systematically examines the variety of regional cooperation arrangements in the developing world that range from regional payments systems over the pooling of reserves to exchange rate coordination. We propose that the potential for shock buffering is dependent on the chosen form of cooperation. Furthermore, in contrast to full monetary integration, which is highly demanding in terms of policy coordination, the requirements for regional policy coordination are significantly lower, depending on the form and aim of the arrangement.
Full-text available
In policy discussions, it has frequently been claimed that migrants' remittances could function as a catalyst for financial access among receiving households. This paper provides empirical evidence on this hypothesis from Mexico, a major receiver of remittances worldwide. Using the Mexican Family Life Survey panel (MxFLS) for 2002 and 2005, the results from the fixed effects logit model show that receiving remittances is strongly correlated with the ownership of savings accounts and, to some degree, with the availability of borrowing options. These effects are more important for rural households than for urban households and are more important for microfinance institutions, than for traditional banks. --
Optimum Currency Area (OCA) theory proves inadequate in the analysis of the new regional monetary integration schemes that have sprung up among developing and emerging market economies since the 1990s. Building on the concept of ‘original sin’ developed by Eichengreen et al. (2006), we argue that a different conceptual framework is needed as these regional monetary South-South integration (SSI) schemes differ fundamentally from North-South arrangements because they involve none of the international reserve currencies. In-sights from the cases of monetary south-south cooperation in Southern Africa, East Asia and Latin America suggest that SSI can have beneficial effects on macroeconomic stability. This paper sketches a first set of hypotheses on the necessary conditions for these stability gains to materialise.
The current international payments system does not serve the emerging global economy well. The Financial Times and The Economist, both previously strong advocates of the existing floating rate system, have acknowledged that the system is a failure and was sold to the public and the politicians under false advertising claims.1 Can we not do better?
The current international monetary system is commonly characterized as divided into three great currency blocs, with one key currency (the US dollar, the euro and the yen) playing the crucial role in each region. If these currency blocs are defined as regions with lower exchange-rate variability within each of the groups than across groups,1 this doubtlessly applies most particularly to Euroland, where the creation of the euro simply did away with intra-regional exchange rates. The western hemisphere, however, clearly does not meet this criterion. Exchange-rate variability between countries of North and South America is very high, dramatically highlighted by frequent exchange-rate crises of the Latin American economies.2
Monetary coordination currently is en vogue in Africa. With the transformation of the OAU to the African Union and the launching of the initiative of the New Partnership for African Development (NEPAD; both in 2001) the old idea of a common African currency seems to be within reach. A common African currency and a common central bank for all AU member countries is set for 2021 (Masson and Milkewicz, 2003; Masson and Pattillo, 2004). According to NEPAD, the transition process to monetary union in Africa is to be marked by the establishment of regional monetary unions for already existing integration projects. One of the prime candidates among existing integration schemes is the Common Monetary Area (CMA) in Southern Africa, which is regarded as an unusually longstanding and successful monetary coordination project. It is based on a tripartite arrangement between South Africa, Lesotho and Swaziland that came into effect in 1974, at which time these countries were known as the Rand Monetary Area. From our point of view, to understand the functioning of the CMA and the outstanding role of the Republic of South Africa, we need to take into account the political and historical framework in which the Common Monetary Area has been set from the very beginning. Therefore, we will give a brief overview of what relations were like in the region of Southern Africa pre-1990.
The large currency crises of the past decade have been regional in nature.1 This feature of financial crises suggests that neighboring countries have a strong incentive to engage in mutual surveillance and to extend financial assistance to one another in the face of potentially contagious threats to stability. Regardless of whether the sudden shifts in market expectations and confidence were the primary source of the Asian financial crisis, foreign lenders were so alarmed by the Thai crisis that they abruptly pulled their investments out of the other countries in the region, making the crisis contagious. The geographic proximity and economic similarities (or similar structural problems) of these Asian countries prompted a blanket withdrawal of foreign lending and portfolio investment, with differences in economic fundamentals often being overlooked. If the channels of contagion cannot be blocked off through multilateral cooperation at an early stage in a crisis, countries without their own extensive foreign reserves will not be able to survive independently. Hence, neighbors have an interest in helping put out a fire (a financial crisis) before it spreads to them. But as long as a crisis remains confined to a specific country or region, there is no urgent political need for unaffected countries to pay the significant costs associated with playing the role of firefighter. The formation of a regional financial arrangement in East Asia reflects in part frustration with the slow reform of the international financial system.3 The sense of urgency concerning reform of the international financial architecture has receded considerably in the G-7 countries. The slow progress has been further complicated by the perception that the current international architecture is defective. The lack of global governance, including a global lender of last resort and international financial regulation, is not likely to be remedied anytime soon.4 As long as there continue to be structural problems on the supply side of international capital-such as volatile capital movements and exchange rate gyrations of the U.S. dollar, the euro, and the yen-The East Asian countries will remain as vulnerable as ever to future crises. It is thus in the interest of East Asians to work together to create their own self-help arrangements. The Chiang Mai Initiative (CMI) of the Association of Southeast Asian Nations plus Japan, China, and the Republic of Korea (ASEAN?3) is one such available option. However, it is equally important that individual East Asian countries continue to undertake financial sector restructuring and development. Without sound financial institutions and adequate regulatory regimes, Asian financial markets will remain vulnerable to external shocks. Regional policy dialogue should also contribute to strengthening the efforts to restructure and advance the development of financial markets in East Asia. The CMI has emerged as a regional forum for policy dialogue and also for concerted regional efforts at financial reform in the region. Three pillars-liquidity assistance, monitoring and surveillance, and exchange rate coordination-Are essential for regional financial and monetary cooperation. However, the development of this cooperation and its related institutions will follow an evolutionary path, as was the case with European monetary integration. A shallow form of financial cooperation may comprise no more than a common foreign reserve pooling or mutual credit arrangements such as bilateral swaps. In other words, some kinds of shallow financial cooperation are conceivable without any commitment to exchange rate coordination, under which the exchange rates of participating countries would be pegged to each other or would vanish through the adoption of a common currency. The East Asian countries presently appear to be pursuing this form of financial cooperation. Although a full-fledged form of monetary integration is not viable at this stage, East Asia may begin to examine the feasibility and desirability of cooperation and coordination in exchange rate policies.6 Evidently, there is a rising sense of East Asian identity today. After the proposal to create an Asian monetary fund was aborted, the leaders of ASEAN responded by inviting China, Japan, and the Republic of Korea to join in an effort to build a regional mechanism for economic cooperation in East Asia. The ASEAN+3 summit in November 1999 released a Joint Statement on East Asian Cooperation that covers a wide range of possible areas for regional cooperation. Recognizing the need to establish regional financial arrangements to supplement the existing international facilities, the finance ministers of ASEAN+3 at their meeting in Chiang Mai, Thailand, in May 2000 then agreed to strengthen the existing cooperative frameworks in the region through the Chiang Mai Initiative. The purpose of this chapter is to examine the current process and future prospects for regional financial and monetary cooperation in East Asia. More specifically, it sketches an institutional design for a regional financial architecture encompassing the three major pillars (liquidity assistance arrangements, policy dialogue and surveillance, and exchange rate coordination). Through an evolutionary process of enlargement and consolidation of the CMI, this study envisions the creation of an Asian monetary fund that is fully equipped with liquidity support facilities and a monitoring and surveillance mechanism. The chapter does not, however, contemplate any manifest collective exchange rate coordination under the ASEAN+3 framework. The chapter is organized as follows: The following sections successively discuss the economic rationale for a regional financial arrangement in East Asia; developments in the Chiang Mai Initiative; and major barriers to financial cooperation and integration in East Asia. © 2006 United Nations Economic Commission for Latin America and the Caribbean.
The period following the 1997 Asian crisis generated an extensive discussion on 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, particularly 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. It was, indeed, absent in major northern reports1 and from the views of international financial reform coming from the Bretton Woods institutions (for example, in the reports on international reform presented by the International Monetary Fund [IMF] to the Interim Committee and its successor, the International 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, particularly 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 convened by the Ford Foundation.4 Regional and subregional development banks have been given greater attention.5 As already pointed out, after the crisis Asia took the most important steps forward,6 while the Economic Commission for Latin America and the Caribbean (ECLAC) provided a strong defense of the role of regional financial arrangements in Latin America and the Caribbean.7 The lack of adequate attention to regional financial arrangements was surprising in at least three ways. First, it is evident to all observers that the new wave of globalization is also one of "open regionalism." Second, postwar Western Europe is widely recognized as a successful example of regional financial cooperation, which in the financial area encompasses a history that extends from the creation of the European Payments Union and the European Investment Bank (EIB) in the 1950s to a series of arrangements for macroeconomic coordination and cooperation that eventually led to the current monetary union among most members of the European Union. Third, regional development banks have been recognized as an important part of the world institutional land- scape since the 1960s. In the developing world, there are also several experiences with "developing-country-owned" multilateral development banks,8 regional payments agreements, at least one successful reserve fund, and a few monetary unions. These experiences coincide in several ways with those of regional and subregional trade agreements, with undoubtedly a mixed history in both cases.9 Reflecting the lack of adequate attention to this issue, there is no book or report that makes a comparative evaluation of experience with regional financial arrangements. This book aims to fill this important gap. The different forms of financial cooperation are clustered into two groups: (1) development financing, the area where there is more extensive experience, including novel ideas, such as the Asian initiatives to strengthen regional bond markets, and (2) mechanisms for macroeconomic and related financial cooperation (liquidity financing during balance-of-payments crises), which include mechanisms of policy dialogue and peer review, and more elaborate systems of macroeconomic surveillance and policy consultation or coordination; reserve funds and swap arrangements among central banks; and, in the most developed form, monetary unions. Two additional forms of cooperation that belong to the second cluster are regional payments agreements and cooperation in the area of prudential regulation and supervision of domestic financial systems. This study makes only passing reference to them. It should be emphasized that, although our central aim is to explore the potential service that regional financial cooperation can make to developing countries, the experience with such cooperation in Western Europe is used as a benchmark. This chapter provides an overview of a set of relevant experiences with both forms of regional cooperation and links the comparative evaluation of these experiences with the broader debate on international financial reform. In this regard, it looks not only at the advantages of regional financial cooperation in comparison with global arrangements, but also at its revealed shortfalls and, equally important, at the possible complementarities between regional and global institutions. The chapter is organized into six sections, the first of which is this introduction. The next two sections provide the case for regional financial arrangements and analyze some of the challenges they face. The fourth and fifth sections look at major experiences with regional cooperation in the areas of development financing and macroeconomic cooperation respectively. The last draws some conclusions. © 2006 United Nations Economic Commission for Latin America and the Caribbean.
This book seeks to explain the financial crisis of the 1990s, explores its consequences, and considers the possibility of worse in the future. The book emphasizes the central role of domestic and international markets in determining the economic growth rate, unemployment levels, and the international payments position of capitalist economies. It then identifies the creation of liquid markets as a major tendency of these domestic and international markets, and as a key obstacle to efficiency and prosperity. Statistical evidence and theoretical analysis support the arguments against liberalizing markets.
Institutions matter greatly in the development of competitive advantage. Different institutional strategies to manipulate and shape institutions are discussed in the literature. This paper aims at extending the existing conceptual model of membership strategy. Despite being referenced frequently, the concept of membership strategy is not well developed. This is surprising because what is referred to as membership strategy has become very popular in various industries. We propose and develop a theoretical model that explains a firm's opportunity to protect itself against dominant institutional pressures and, additionally, to create competitive advantage by implementing a consumer centric membership strategy. Practical examples are discussed to clarify theoretical interrelationships. The main illustrative case focuses on Blizzard Entertainment, an American developer and publisher of video games. --