Währungsunion; Internationale Währungspolitik; Welt; Southern Common Market; Association of Southeast Asian Nations;

Nunnenkamp, Peter

English

Research Papers in Economics

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Nunnenkamp, Peter
Research Report
Comments on: Chances and Limits of
South-South Monetary Coordination
Provided in cooperation with:
Institut für Weltwirtschaft (IfW)
Suggested citation: Nunnenkamp, Peter (2006) : Comments on: Chances and Limits of South-
South Monetary Coordination, http://hdl.handle.net/10419/18040Peter Nunnenkamp 
Comments on: Chances and Limits of South-South Monetary Coordination 
by Jan Kregel 
 
The paper is quite surprising in several respects. The first half of the paper provides short 
summaries of existing mechanisms of South-South monetary cooperation. But the author goes 
rarely beyond describing what the objectives of these mechanisms are and what instruments 
are applied. Kregel  is fairly reluctant to critically assess and evaluate the reasonability of 
objectives and the appropriateness of instruments. For example, he simply notes that a 
common currency has been proposed by some authors for MERCOSUR, without taking clear 
position. The same applies to initiatives such as the Roadmap for the Integration of ASEAN 
in Finance and possible exchange-rate arrangements for this group of countries. 
 
By contrast, the second half of the paper offers some unconventional arguments, instead of 
dealing with more familiar OCA criteria. Possibly, I am so obsessed with the standard line of 
reasoning that I find it sometimes difficult to grasp Kregel’s approach. For instance, the 
section on “Coordination and the Problem of Monetary Sovereignty” starts with the assertion 
that “the basic difficulty hindering coordination is the lack of domestic monetary 
sovereignty”. This appears to be in conflict with the traditional line of reasoning according to 
which coordination comes at the cost of national sovereignty.  However, what follows is a 
discussion of how governments make the public accept the money they issue, which does not 
seem to be specific to the South. It remains open to question why many countries face 
external financing constraints and suffer from “original sin”, whereas some countries such as 
Australia successfully escaped this uncomfortable situation. 
 
The paper is more or less silent on conventional issues, including the symmetry or asymmetry 
of shocks, trade intensity among participating countries, factor mobility within the group of 
countries under consideration, structural similarities or divergence. Likewise, the question of 
whether these OCA criteria are endogenous, an issue which figures prominently in the 
contribution of Fritz and Metzger to this volume, is hardly addressed in Kregel’s paper. I am 
not sure whether Kregel considers all this to be irrelevant. In any case, it is mildly surprising 
to me that a paper on South-South monetary cooperation can do without any reference to 
Mundell, Eichengreen, Hausmann, John Williamson, Frankel and Rose, and other celebrities 
in the field.  
 
It would be interesting to learn whether the presenters we have heard so far  would agree on 
what they perceive to be the major problem of the South. From Fritz and Metzger I got the 
message that net external debt in foreign currency is the key problem of the South, as it 
involves serious mismatches and “original sin” increases volatility. Kregel seems to agree in 
the first part of his paper where he considers South-South cooperation schemes as a means to 
reduce dependence on external borrowing. In subsequent sections of the paper, however, 
external financing constraints are said to be the major impediment to economic development 
of the South. Both aspects of external financing of the South may well have common roots, 
namely institutional deficiencies at both the international and national level which many 
development economists consider to be the fundamental reason for persistent 
underdevelopment. Yet, the notion of external financing constraints seems to imply that “too 
little” is the major problem related to foreign capital imports of the South, whereas the notion 
of “original sin”, by stressing the risk involved for the South, suggests that the problem is “too 
much” or “too volatile” (see Nunnenkamp 2001). 
   2
The next issue that may deserve some more attention concerns the various types of South-
South monetary cooperation and the different objectives underlying these types of 
cooperation. In a recent paper on regional monetary arrangements for developing countries, 
Chang (2000) draws on Sebastian Edwards in separating three broad types of arrangements: 
regional agreements for the settlement of payments, agreements for balance of payments 
support, and monetary unions: 
 
•  It would be interesting to learn whether Kregel would agree with Chang (2000) 
who argues that the popularity of regional payments agreements (such as the one 
operated by ALADI in Latin America) is likely to decline. This may be because 
the rapid development of financial technology and the increased integration of 
international financial markets have as a consequence that regional cooperation of 
this type has less to offer in terms of reduced transaction costs. 
•  By contrast, regional agreements for balance of payments support are on the rise, 
mainly because of recent developments in the ASEAN+3 group. Yet, earlier 
agreements such as the Latin American Reserve Fund as well as the original 
ASEAN Swap Arrangement may indicate the limits of this approach, unless the 
potential “war chest” is as large as in the case of ASEAN+3. It is interesting to 
note that the symmetry of shocks, which is typically considered a “plus” when a 
regional group aims at monetary union, may turn out to be a “minus” when a group 
subject to contagion aims at self-protection against financial crises. Hence, 
depending on the characteristics of shocks, a regional group may be well suited for 
a common currency, but badly suited to ward off financial crises, or vice versa. At 
the same time, it may be open to question to which extent monetary cooperation 
can really reduce the cost of the accumulation of reserves observed by Kregel. 
UNCTAD (2001: 111) may be quite right in stating that “regional arrangements 
among developing countries may need to involve major reserve-currency countries 
… in order to achieve stability and avoid costly crises”. 
•  As concerns monetary unions between developing countries, the question is 
whether exchange-rate risk within the regional group represents the major problem. 
According to Levy-Yeyati (2002), the – flawed – logic in part of the literature runs 
as follows: (i) nominal volatility has negative real effects; (ii) monetary union 
reduces nominal volatility; hence, (iii) monetary union has positive real effects. 
However, if it is mainly volatility of the local currency vis-à-vis the US$ which 
harms developing countries, the positive real effects of a monetary union among 
developing countries will probably remain marginal. This reasoning also invites 
the question of whether the European model is of much use for South-South 
cooperation. Developing countries regarding the European experience as a model 
should not forget the EMS crisis of the early 1990s, which, according to UNCTAD 
(2001), was similar in many respects to emerging-market crises, even though 
supporting institutions were fairly advanced at that time already. Furthermore, 
Eichengreen (1998: 22 f.) posits that “no EMS-style arrangement will be viable 
elsewhere in today’s world of high capital mobility.” In any case, the road to 
monetary union has many traps. Transitional issues include technical challenges 
such as finding optimal weights for a common currency basket (Dobson 2002; 
Schweickert 2000). More importantly, a common basket peg may well lead to 
higher intra-regional volatility in real, effective terms when, as in Southeast Asia, 
the geographical structure of trade and the structure of foreign debt differ 
considerably within the region. 
   3
Against this backdrop, I am curious about what we can reasonably expect from South-South 
monetary cooperation. Kregel raises a similar question on the first page of his paper about the 
degree of South-South coordination that is possible without cooperation from the North. As 
indicated before, the general message of the paper is not completely clear to me. But it does 
not seem quite as simple as the UN Under-Secretary-General for Economic and Social 
Affairs, J.E. Ocampo (2003), would like to have it; he noted recently: “The small size of 
existing financial arrangements among developing countries indicates that there is ample 
room for aggressive South-South cooperation”. Alternatively, the small size of existing 
arrangements may indicate that there is less to gain than we might wish, because otherwise 
governments would not have missed the opportunities of South-South cooperation in the first 
place. 
 
My reading is that much of the relevant literature invites the conclusion that monetary union 
is neither necessary nor sufficient for developing countries to achieve closer integration in 
terms of trade, FDI, etc. The experience of the West African Economic and Monetary Union, 
even though not a pure South-South scheme, illustrates that monetary union is not sufficient. 
It may not even be necessary if, as Bayoumi and Mauro (2001) as well as Schweickert (2000) 
observed for the de facto US$ orientation of large parts of Southeast Asia, the individual 
optimisation of currency baskets implies fairly stable intra-regional exchange rates. 
Schweickert (2000) argues that it is difficult to conceive suboptimal intra-regional exchange 
rates as long as all countries optimise their exchange-rate relations vis-à-vis a few anchor 
currencies. 
 
The next question is which type of cooperation, and in which policy area regional cooperation 
is most likely to deliver. In Asia, for example, monetary and exchange-rate cooperation may 
be inferior (the wrong project, according to Eichengreen 2002), at the present time at least, to 
regional projects focusing on the deepening and strengthening of regional financial and 
capital markets. In that regard, the final section in Kregel’s paper may come fairly close to 
suggestions made by Eichengreen and others on how ASEAN should proceed. Eichengreen 
(2002) suggests that the Chiang Mai Initiative should be clearly defined as fostering financial 
stability, not stabilizing exchange rates. 
 
More generally, it is probably for good reasons that UNCTAD (2001: 127) notes that 
“regional arrangements could fail in the absence of sound domestic institutions and policies”. 
Dobson (2002) goes one step further: She regards domestic reforms as the most important line 
of defence; her concern is that the current focus on monetary cooperation, notably in East 
Asia, may divert attention and resources from reforms of domestic financial institutions, even 
though financial systems in this region still trail best international practice. Hopefully, she is 
wrong and her concern will prove unfounded! 
 
 
References: 
 
Bayoumi, T., and P. Mauro (2001). The Suitability of ASEAN for a Regional Currency 
Arrangement. The World Economy 24 (7): 933-954. 
 
Chang, R. (2000). Regional Monetary Arrangements for Developing Countries. Rutgers 
University, mimeo (http://www.g24.org/chang.pdf). 
 
Dobson, W. (2002). East Asian Financial Reform and Integration: Systemic Issues. University 
of Toronto, Rotman School of Management. Toronto, mimeo.   4
 
Eichengreen, B. (1998). Does Mercosur Need a Common Currency? National Bureau of 
Economic Research, NBER Working Papers 6821, Cambridge, MA. 
 
Eichengreen, B. (2002). Whither Monetary and Financial Integration in Asia? Paper presented 
at the PECC Finance Forum Conference “Issues and Prospects for Regional Cooperation for 
Financial Stability and Development.” Honolulu, mimeo. 
 
Levy-Yeyati, E. (2002). Comments on: Monetary Integration in the Southern Cone: Mercosur 
is Not Like the EU? Oesterreichische Nationalbank, Working Paper 72. Vienna. 
 
Nunnenkamp, P. (2001). Too Much, Too Little, or Too Volatile? International Capital Flows 
to Developing Countries in the 1990s. Journal of International Economic Studies 5 (1): 119-
147. 
 
Ocampo, J. A. (2003). Statement at the High Level Conference on South-South Cooperation 
in Marrakesh (http://www.un.esa/20031216.html). 
 
Schweickert, R. (2000). Chancen und Risiken eines regionalen Währungsverbundes in 
Südostasien. List Forum 26 (3): 272-286. 
 
UNCTAD (2001). Trade and Development Report 2001. United Nations, New York. 
 
. 
 
 

Chancen und Risiken eines regionalen Währungsverbundes in Südostasien.

Comments on: Monetary Integration in the Southern Cone: Mercosur is Not Like the EU? Oesterreichische Nationalbank, Working Paper 72.

East Asian Financial Reform and Integration: Systemic Issues.

Regional Monetary Arrangements for Developing Countries. Rutgers University,

The Suitability of ASEAN for a Regional Currency Arrangement. The World

Too Much, Too Little, or Too Volatile? International Capital Flows to Developing Countries in the 1990s.

Trade and Development Report

Whither Monetary and Financial Integration in Asia? Paper presented at the PECC Finance Forum Conference “Issues and Prospects for Regional Cooperation for Financial Stability and Development.”

Comments on: Chances and Limits of South-South Monetary Coordination.

http://www.econstor.eu/bitstream/10419/18040/1/Nu-_Kregel_monetary_coord.pdf

Comments on: Chances and Limits of South-South Monetary Coordination.

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