Alternatives for the Americas: Regional Finance in the Foreign Policies of

the United States, Venezuela, and Brazil

Leslie Elliott ArmijoVisiting Scholar, Mark O. Hatfield School of Government, Portland State University

Leslie.armijo@cal.berkeley.edu

Draft of October 31, 2010 – Please contact author for latest version.

Paper presented at Annual Congress of the Latin American Studies Association, Toronto, Canada, Oct 6-9, 2010

Abstract

The paper characterizes three competing financial visions for the Western Hemisphere in the early twenty-first century, as expressed through the explicit and implicit foreign economic policies of three would-be leading states. The United States favors market-based and hemisphere-wide integration. If realized, the U.S.’ financial project would promote open regionalism in the economic sphere but without close political collaboration or increased unity of peoples. Venezuela’s ambitious plans for a redistributive and powerful New Regional Financial Architecture (NRFA) encompass all of Latin America and the Caribbean, but exclude the U.S. and Canada. Venezuelan preferences are for closed regionalism with close political and social ties among the participating countries. Meanwhile, Brazil’s preferences, like those of the U.S., are for market-based financial integration within a framework of open regionalism, though focused within South America rather than the entire hemisphere. At the same time, and like the Venezuelan vision, Brazil’s regional financial project foresees a substantial on-going role for the state. Moreover, it is as much a project for the creation of closer future political and social links within the continent as it is for greater economic integration.

Alternatives for the Americas: Regional Finance in the Foreign Policies of

the United States, Venezuela, and Brazil

Which governments, and their supportive interest groups, have the most compelling regional financial projects for Western Hemisphere development? What are the characteristics, and the political contexts, of alternative contemporary visions for a regional financial architecture? Finally, what role do such alternative financial visions play in the overall foreign policy goals of key states in the Western Hemisphere? A “regional financial project” as defined in this paper may--but does not necessarily--mean the creation of formal multilateral institutions to provide credit, currency swap lines, macroeconomic coordination, or collaborative design of common bank or stock market regulatory standards. Rather, a regional finance as a subject for foreign policy implies only that the governments of interest have reasonably clear preferences for how they would like the financial architectures of neighboring states, and of the region as a whole, to look.

We explore three regional financial visions. The United States government hopes to make the Western Hemisphere a safe, predictable, and profitable venue for its multinational banks to expand abroad. Venezuela’s President Hugo Chávez dreams of ending the ability of the International Monetary Fund, World Bank, and Inter-American Development Bank to impose policy conditionality on Latin American governments—and would like to do this without having to rely for financing on private capital markets either. The Brazilian authorities are keen to showcase to their neighbors their home country’s example of apparently successful collaboration between private financial institutions and strong public sector banks in order to fortify their country’s new-found recognition as a major global as well as regional player. Leaders in each of these three countries see clear benefits in proselytizing their neighbors and getting them to enact national financial regulatory agendas similar to the missionary state’s own financial architectures.

This paper forms part of a larger book-length study, co-authored with Sybil Rhodes, and on the basis of a framework earlier developed in collaboration with Christine A. Gustafson, on the policy history of three competing versions of Western Hemispheric regionalism, each vision promoted by a would-be regional leading state: the United States, Venezuela, and Brazil.1 Advocates of each of the three regional visions have made particular efforts to recruit allies among the South American nations, who may be conceived of as the hemispheric “swing states,” empowered to cast the deciding votes among the alternative projects. The present paper is one of four issue-focused public policy case studies, covering hemispheric cooperation and competition in energy, finance, immigration, and national security. Below we examine some of the reasons that

1 See Gustafson and Armijo forthcoming 2011 and Armijo and Rhodes work in progress.

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national and hemispheric financial architectures have become an important topic in debates among alternative regionalisms.

The paper begins with a brief overview of the three competing regional integration projects in the Americas. Section two lays out our comparative methodology, defining the components of a leader state’s regional financial project and proposing a continuum for assessing the ways in which regional financial cooperation contributes to overall economic integration. The paper’s third section first summarizes the progress of world financial globalization (that is, international financial integration) since 1990. It then briefly assesses the current degree of global and intra-regional financial integration in Latin America, the main lines of national financial architectures in nine key states in the hemisphere, and these states’ systemic financial significance. Sections four through six describe the hemispheric financial policy preferences and actions of the U.S., Venezuela, and Brazil, respectively. A seventh section compares the competing regional financial projects in terms of the analytical framework proposed in section two, while the paper’s conclusions evaluate the ways in which these alternative financial regionalisms do or don’t push forward the larger agendas of the three competing regional projects within the Western Hemisphere.

I. The larger research project: Alternative regionalisms in the Americas

Three countries in the Western Hemisphere—the United States, Venezuela, and Brazil--have during the past ten to twenty years made clear their governments’ goals of leading or provoking a transformation of political or economic links in the region, resulting in new ties that are in some fashion closer or more interdependent. One obvious difference among three alternative visions lies in their geographic scope, and another in the broad lines of economic ideology pursued.

The policy initiatives of the United States seem intended, wherever possible, to promote hemispheric integration around pro-market and business-friendly regulatory frameworks and cross-border investments. Even under presidents or legislators from the Democratic Party, the U.S.’ vision is essentially neoliberal. It represents a form of economic ideology known as open regionalism, which means that market ties within the region are encouraged, but without overt discrimination against extra-regional firms or countries, whether via trade barriers, capital controls, or other preferences for local or regional capital. In the Western Hemisphere the U.S. open regionalism is universalistic in rhetoric, though less so in practice, Cuba having been steadfastly excluded since 1962, although almost no country but the U.S. today favors this exclusion. The U.S.’ major allies have been in North and Central America, especially the members of the North American Free Trade Agreement (NAFTA), which came into force in early 1994, and most of the Spanish-speaking Central American and Caribbean states, prominently excepting Cuba and Nicaragua.2 The major foreign thorns in the side of the U.S. foreign policy establishment pursuing this vision have been Venezuela and Brazil, each of which has an alternative program for regional political and economic cooperation.

2 On the politics of NAFTA see Fox 2004.

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Venezuelan policies since the election of President Hugo Chávez in 1998 have favored construction of a Latin American and circum-Caribbean hemispheric grouping of mutually-supportive and politically left-leaning states.3 The vision, institutionalized with the creation of the Bolivarian Alliance for the Americas (ALBA) in 2004, is explicitly and robustly directed toward discrediting U.S. and Canada capitalist economic dominance in the hemisphere, and constructing a Latin and Caribbean alternative to North American dominance. “Bolivarian” regionalism--after Simón Bolívar, hero of South American wars of independence—emphasizes popular sovereignty, collective (state) ownership of natural resource wealth and public utilities, and regional mutual aid. Core members of ALBA include Venezuela, Cuba, Bolivia, Ecuador, Nicaragua, and several small Anglophone Caribbean states. The largest obstacle to achieving Bolivarian cooperation has been the unwavering disinterest of several of South America’s larger countries: Colombia, Chile, and Peru. Argentina and Brazil, on the other hand, as well as smaller South American and Caribbean countries, have been willing to discuss most of the Bolivarian schemes and to join several.

The Brazilian vision of regional integration builds on the Common Market of the South (Mercosur), established in 1991 with Argentina, Uruguay, and Paraguay. Since 2000, Brazilian leaders have been working with the nations of the Andean Community (CAN) on regional cooperation throughout South America, to which end the continent’s presidents and prime ministers created the Union of South American Nations (Unasur) in 2004. Brazil’s regional foreign policy preferences manage to appear moderate and even modest much of the time, mainly due to the implicit comparison with the alternative regional organization schemes being promoted by the United States and Venezuela. Although Brazil willingly has joined the hemispheric and Latin/Caribbean cooperative bodies being promoted by the U.S. and Venezuela, respectively, its focus has been on the South American continent. Brazil’s national economic ideology is clearly pro-capitalist, yet unaplogetic about the need for state planning and public ownership and promotion of priority economic sectors. Within South America, Brazil tries to act as a bridge between left and right.

3 Burges 2007.

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Table 1.The ideologies and scope of alternative regionalisms in the Americas

Economic ideology

Scope Key partners Problem countries

United States Neoliberal, open regionalism

Western Hemisphere

CanadaMexico

BrazilVenezuela

Venezuela PopularSocialism

Latin America & Caribbean

CubaBoliviaEcuador

ColombiaPeruChile

Brazil Capitalist developmentalism

South America (sometimes Latin America)

Argentina None?

II. The analytical framework: How to compare regional financial projects

In this paper, we want to consider what each vision of Western Hemisphere financial architecture, if implemented as desired by policymakers in the U.S., Venezuela, or Brazil, implies for regional integration more generally. To this end, we propose a fivefold categorization of types of regional integration, moving from the most market-oriented to the most state-directed. These five categories, shown in Table 2, provide a theoretical framework for our larger study on competing regional integration projects of which this paper’s consideration of regional financial projects forms a part.

Table 2.Varieties of regional integration, from market-based to most state-directed

Deep private & market-

based integration

Voluntaryregulatory

emulation & convergence

Regular multilateral consulation

Formal commitments to

foreswear unilateralism

Exclusive regionalism:

collective barriers against

rest of world

At one end of the continuum we have deep integration of private markets or social spaces within the region. In the non-financial sphere this type of integration implies many private, transnational links among individuals and organizations within the region, including tourism, cultural ties, trade, and cross-border collaboration by non-governmental organizations, political parties, or capitalist firms.4 To some extent

4 For a careful consideration of the implications of increasingly dense cross-border ties see Deutsch 1954 [2006].

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governments may intentionally shape their national regulatory frameworks to generate incentives to individuals and organizations to choose to forge transnational links. However, governments play no role in directly urging their citizens, firms, or groups to move abroad. In the specifically financial sphere this type of integration implies rising regional financial internationalization, or an increasing share of bilateral cross-border links among countries within the region within the total financial assets of regional states. Although such financial internationalization is driven mostly by the decentralized and uncoordinated investment decisions by private actors, the national financial policy framework provides most of the regulatory structure of tax, interest rate, legal and other environmental considerations that structure incentives to private actors and firms. Behind private, voluntary market decisions therefore lies a regulatory framework designed by public policy.

A second form of regional integration is voluntary regulatory emulation and convergence among countries within the region. In the non-financial sphere this would refer to one country copying from another the key institutional characteristics organizing national social, economic, or political life within a public policy arena. The model country may offer technical assistance and expert advice to the converging country, but neither coercion nor formal treaty commitments are involved, and the vast majority of the contacts will be “transnational,” meaning between private parties, not “multinational,” referring to contacts between national governments. Application to the financial issue arena means that national financial rules--governing such topics and sectors as banking, equity and corporate debt markets, trading in public debt securities, and the rights and privileges of foreign portfolio and direct investors—within the countries of a geographic region will come to resemble one another. Emulation may occur either because the country altering (“reforming”) its previous financial regulatory framework admires the results achieved by the dominant country in terms of financial deepening or economic growth. Alternatively, regulatory emulation may reflect implicit economic or political coercion of the smaller or weaker country by its dominant neighbor. For example, regulatory emulation may be a condition of bilateral foreign assistance, or even of loans from international financial institutions (IFIs) on whose governing boards the regional hegemon wields a controlling vote.

The third variety of regional economic integration is institutionalized multilateral policy consultation, which may include informal mutual policy adjustment or even explicit policy collaboration on some issues. Sometimes a new, common regulatory framework is in the process of being negotiatied among the countries within a region. However, participating countries have not formally yielded national decisionmaking authority, either to a supranational authority or via formal treaty commitments that limit future policy space. In the financial realm, this would imply regular, albeit not necessarily formally-specified, meetings of high-level technical personnel such as finance ministers, central bank presidents, and directors or regulators of the stock and securities exchanges from countries within the region. These meetings may be for the purpose of macroeconomic surveillance or policy coordination, as in the case of an international financial crisis, or in order to discuss creation of a new regional financial process or institution, whether a regional development bank, regional currency, or an emergency

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currency swap facility. These initiatives are not necessarily aimed at excluding states outside the region, nor to they preclude member states from participation in extra-regional financial governance.

Our fourth category of regional integration is formal commitments to foreswear unilateral policymaking in a portion of an important public policy arena. Such commitments may come in the form of an agreement to accept supranational decisionmaking or dispute arbitration, as when countries agree to be bound by decisions of the International Court of Justice or the World Trade Organization’s Dispute Resolution Mechanism. Or they may simply be embodied in a country’s treaty commitments, as when countries adhere to the nuclear Non-Proliferation Treaty, which proscribes the development of nuclear weapons at any time in the future. Similarly, in the financial sphere, the type of regional integration has at least two very different expressions. On the one hand, it may imply creation of supranational financial institutions, such as regional banks, securities exchanges, currency swap arrangements, or a common currency. On the other hand, countries can precommit to yield up national financial policy space by promising, via formal treaty commitments, not to implement controls on capital inflows, credit subsidies for national firms, or national preferences in being chosen to implement government banking business.

The fifth and final variety of regional integration is exclusive regionalism, meaning a regionalism that tends not only to solidify policy consultation and joint institution-building among the member states, but does so in a way that tends to close off members from the outside world. For example, much of the debate in the economics literature about regional trade arrangements turns on the question of whether a given trade agreement will tend to promote its members integration with the larger world (“open regionalism”) or to erect new tariff or other barriers (“closed regionalism”). We note that exclusive regionalism is is not truly a separate category, but instead is a politically and economically important subset of our fourth category, foreswearing unilateral policymaking. We include it in our categorization because it constitutes a politically-important endpoint to our continuum of market-based to state-directed regional integration. Exclusive financial regionalism describes a financial project that explicitly is aimed at strengthening financial links within the region at the expense of those with the rest of the world. For example, an exclusive regional financial vision might promote the creation of a regional development bank that was intended to free member states from the necessity of borrowing from the established international financial institutions such as the World Bank or International Monetary Fund. Or a leading state might offer technical assistance in setting up capital controls or implementing financial reforms enabling member states to better control private national banks and foreign investors. The common thread is the uniting of regional member-states against an external environment perceived as perilous.

Studying regional financial projects presents a second methodological challenge: what do we mean by “regional finance”? As with other global public policy challenges--including eroding biodiversity, fast-spreading pandemics, and climate change—it is understandable that national leaders wish to influence the public policy decisions of their

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geographic neighbors as one means of reducing the uncertainties and threats to themselves. National leaders with the desire to shape the financial or monetary decisions of their counterparts in neighboring countries are pursuing a regional financial project, which we define as a set of foreign policy preferences held by key senior national leaders (elected and appointed officials) for particular money, credit, investment, or financial regulatory conditions that the leaders would like to see adopted (or retained) by neighboring states. A regional financial project, therefore, may but does not necessarily imply a vision of more regionally-integrated finance.

We will compare countries’ financial policy frameworks, and the competing foreign policy projects for promoting regional finance in the Americas, along three financial dimensions, summarized in Table 3. First, we look at patterns of domestic financial regulation and institutions, and at preferences of would-be leader states for influencing these patterns in their regional neighbors. A state with a regional financial project typically seeks, at a minimum, regulatory convergence between its neighbors and itself, although leader states may pursue this goal with greater or lesser enthusiasm and resources. Regulatory convergence means that national financial rules--governing such topics and sectors as banking, equity and corporate debt markets, trading in public debt securities, and the rights and privileges of foreign portfolio and direct investors—within the countries of a geographic region come to resemble one another.

Table 3. Describing national financial profiles: Main categories

Domestic financial regulation

Architecture of international financial insertion

Participation in international financial

governance* Monetary authorities * Private banks & financial firms* Capital markets* Role of state banks

* Capital controls* Foreign exchange regimes * Foreign debt rescheduling

* Global and regional multilateral institutions * Transnational public-private bodies

A second dimension of interest is a state’s architecture of international financial insertion, and the preferences of would-be regional leaders for shaping their neighbors’ patterns of regional and global financial insertion. The architecture of international financial insertion refers to the set of national rules governing cross-border money, credit, and investment flows. Included in this category would be regulations and practices governing capital controls (such as tax treatment and licensing of foreign investment or foreign exchange, sectoral or performance requirements differentially-applied to foreign as compared to national capital), and all aspects of exchange rate management, from the formal choice of an exchange rate regime to the type of daily management exercises engaged in by the central bank or other responsible authority. A state’s rules and practices for renegotiation of its foreign debts also provide a piece of this architecture.

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The third aspect of a country’s national financial profile, and thus the third component implicit in a would-be leader’s regional financial vision is a country’s participation in multilateral financial governance. This category encompasses participation in initiatives aimed toward intra-regional financial governance, beginning with regular high-level consultative meetings of finance ministers, central bank presidents, or directors or regulators of the stock and securities exchanges from countries within the region. These meetings may be for the purpose of macroeconomic surveillance or policy coordination, as in the case of an international financial crisis, or in order to create or implement a new regional financial process or institution, whether a regional development bank, regional currency, or an emergency currency swap facility. The category also includes participation in extra-regional financial governance, as in the activities of international organizations such as the financial Group of Twenty (G20), the World Bank, or International Monetary Fund.

This section has offered two analytical classification schemes, one for varieties of regional integration and the other for the main components of a country’s overall national financial model, both which we apply below. The paper’s next section provides a factual baseline for the subsequent discussion of competing regional financial visions.

III. Situating the Western Hemisphere in global finance

Prior to comparing the ways in which senior policymakers in the U.S., Venezuela, and Brazil would like to see hemispheric financial ties evolve, we need to situate the Western Hemisphere in the larger space occupied by global financial markets and architectures. Four subsections address, in turn, the extent of international financial integration in the larger world, the degree to which Latin America is financially-integrated with global financial markets or within the region, the main characteristics of the current national financial architectures of key countries in the hemisphere, and the systemic financial importance of these same major countries.

The world financial context

Financial globalization is a reality. Since about 1990, most measures of the importance of money, credit, and securities in the global economy have registered notable increases, as the world has become more tied together by cross-border financial flows than ever before. Three tables summarize these trends. Table 4 shows that the financial sector has become a larger part of the collective global economy as the ratio of world financial assets to world gross national product (GDP) has increased. This is known as financial deepening. To many or most economists financial deepening implies expanded opportunities for the financing of potentially-profitable business enterprises, bringing jobs and growth.5 Political scientists meanwhile note that, ceteris paribus, a larger financial sector may mean greater influence for private financial interests in the national political process of a democracy, leading them to worry about data showing that, for example, the share of financial services in the U.S. economy rose from about 3 percent in

5 For example, Goldsmith 1969; Shaw 1973; Levine 1997; Demirguc-Kunt and Levine 2001.

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1950 to over 8 percent in 2000, a point we return to below.6 Table 4 reports that the ratio of the stock of total financial assets held in each country’s home market to total global production (world GDP) has risen from about 225 in 1990 to over 300 percent at the end of the first decade of the twenty-first century, for an increase of over 30 percent.7

Table 4.World financial deepening

1990 1995 2000 2005 2008World GDP, US$ trillion 21.2 28.4 37.0 48.6 60.7

Financial assets as % of world GDP* 227 246 303 320 293

World financial assets,US$ trillion

48.1 69.9 112.1 155.5 177.9

Note: “Financial assets” refers to the sum of assets reported in the domestic economy of each country, and includes equity, private debt securities, public debt securities, and bank deposits. Source: McKinsey Global Institute 2009a: 9.

While Table 4 measures the share of all financial assets, Table 5 focuses only on financial assets held across national borders: financial internationalization or “globalization.” The table actually underestimates the phenonemon, as it does not include all foreign financial assets held by private individuals and firms, but only those easiest to track comparatively: holdings by institutional investors of foreign equity (shares) and short and long-term debt securities. Table 5 shows an increase of over 150 percent between 1990 and 2008 in the share of such international financial assets relative to the size of the world economy, as measured by GDP.

6 The previous high was just under 6 percent in 1930, after which the share of financial services fell sharply. See Philippon 2008, slide 2.7 The dip in global financial depth in 2008 shown in Table 4 is almost entirely accounted for by the crisis-related fall in equity prices, and is likely to be temporary.

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Table 5.World financial internationalization

1997 2001 2005 2007 2008International assets as % world GDP

19.5 39.8 57.0 70.5 50.2

Note: International financial assets = private portfolio investments in foreign equity, and long and short-term foreign debt securities, as reported by creditor (= investor) countries. Sources: For portfolio assets, International Monetary Fund, Coordinated Portfolio Investment Survey online database online, accessed at www.imf.org in September 2010. For world gross domestic product (GDP): International Monetary Fund, World Economic Outlook database online, also accessed September 2010.

Table 6 captures a third aspect of the rise of finance in the world economy: the increased speed with which money leaps across national borders and into and out of countries’ currencies. Average daily foreign exchange turnover in 1992 was $820 billion, already an exponential increase over the quantities normal in the 1970s or even 1980s. By early 2010 the daily sum was nearly $4 trillion, a 300 percent increase in two decades.

Table 6. International financial velocity

1992 1995 1998 2001 2004 2007 2010Average daily FX turnover, $bn

820 1,190 1,527 1,239 1,934 3,324 3,981

* Average daily foreign exchange (FX) turnover is from April of each year. Source: Bank for International Settlements, Triennial Central Bank Survey, Foreign Exchange and Derivatives Market Activity (Geneva: BIS, 2007 and 2010). Accessed online in September 2010 at: www.bis.org

Finance ministers and scholars, especially in developing countries, long have worried over the resulting enormous (and non-trade-related) swings in demand for any given country’s home currency, resulting in waves of currency, banking, and macroeconomic crises.8 Since 2008, even the core countries of the international capitalist economy have become enmeshed in financial booms, panics, and busts. Nonetheless, there remain vastly different interpretations of both the current crisis and its predecessors. To begin to understand why, we next map financial ties within the Western Hemisphere.

8 See Eichengreen 1999; Blecker 1999; Eatwell and Taylor 2001; Armijo, ed. 2002.

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Global and regional financial integration within the Western Hemisphere

This paper proposes a comparison of three alternative regions whose geographic scope differs. One conceptualization of the “region” includes the hemisphere as a whole (Cuba excepted), another contains all of Latin America, often with the Caribbean brought in as well, while the third comprises only South America. The economic statistics and studies reported in this subsection, however, discuss either “Latin America” or “Latin America and the Caribbean,” because most economic data hitherto has been collected this way. In practice, studies of “Latin America” often collect data only on the so-called “Latin American Seven” (LA7), the largest countries by population and economic size: Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela. Ecuador is sometimes also included. We work with this constraint.

There are at least three basic ways to conceptualize the global and intra-regional financial integration of a set of culturally or geographically-related countries. A first way to think about financial integration is to evaluate the correlations among price movements of financial assets in countries of the region, while a second is to examine patterns of cross-border stocks and flows of investment. A third means of conceptualizing a financial “region”—joint or converging policy choices about financial architecture—we leave to subsequent sections of the paper.

Financial ties within Latin America are often described in comparison to those in other regions consisting of “emerging economies,” such as East Asia (excluding Japan) or Eastern Europe. Which is more integrated? García-Herrero and Wooldridge (2007: 60-3) find that two of the three market-price indicators they examine show Latin America’s domestic financial markets to be the most globally-integrated of the three emerging regions. Thus, in Latin America the savings-retention coefficient is near zero, meaning that savings are as likely to be invested abroad as at home. Similarly, the local market prices of globally-traded financial assets closely reflect world price movements, not local shocks. However, a third market-price indicator—the degree to which the yields on local currency-denominated government bonds move in tandem with global bond markets--shows no difference among the regions at the end of the period measured (p. 65). Policy variables also point to Latin America being more financially-globalized than East Asia: Latin American countries have lower capital controls than in East Asia, although slightly higher ones than Eastern European countries seeking to join the Eurozone.

On the other hand, quantity indicators show East Asian developing countries to be more globally-integrated than Latin American ones. In 2004, the stock of international investments--measured as the absolute values of international financial liabilities and assets as a percentage of GDP—was 350 percent in East Asian emerging markets, against 260 percent in Eastern Europe and only 150 percent in Latin America (Ibid., 63). Current flows suggest that these differences persist but may be narrowing. In 2008 new international flows as a share of GDP were 13, 14, and 11 percent in emerging East Asia,

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emerging Europe, and Latin America, respectively.9 In all three regions, global financial integration has increased over time although in slightly different ways. In East Asia cross-border asset ownership (financial internationalization, as in Table 5 above) has become more common, while in Latin America and especially in Eastern Europe it has become easier for investors to move funds into and out of the country.10

Another interesting question concerns the degree of intra-regional financial integration. We know that emerging economies have become more significant globally as foreign investors. For example, developing countries accounted for only about 5 percent of FDI outflows in 1995 but are estimated to be responsible for around 27 percent in 2010.11 García-Herrero and Wooldridge (2007:65-6) also report data on intra-regional financial ties. In terms of price movements of liquid financial assets, the developing countries of East Asia and Latin America look slightly more regionally-integrated among themselves than those of Eastern Europe, although this difference is not statistically significant. In terms of cross-border holdings of financial assets, all three regions show substantial integration with the regional hegemons: Japan in East Asia, the EU 15 in Eastern Europe, and the U.S. in Latin America. However, only in East Asia did emerging economy neighbors hold substantial stocks of one anothers’ bank loans, debt securities, and portfolio equity as of 2005. Latin America’s financial ties with the United States remain extremely strong, with the U.S. accounting for 50-70 percent of foreign loans and investment in portfolio debt and equity in the region. One likely explanation is that the high foreign exchange earnings of China, Taiwan, South Korea and others have inspired regional portfolio diversification in East Asia.

In sum, integration with global financial markets is well advanced in all three areas of the major new emerging markets. East Asia may have more of the type of global financial integration that is consistent with the retention of domestic policy autonomy, while the greater openness of Latin America to liquid capital flows may enhance both the efficiency of investment (according to neoclassical economic theory) and the region’s vulnerability to external shocks. Intra-regional financial integration has increased within Latin America in the early twenty-first century, yet by most measures also lags behind that in East Asia. Finally, there are some early signs of greater intra-Latin-American (likely intra-North American and intra-South American, although the data to demonstrate this are more difficult to locate) integration to come. For example, foreign direct investment (FDI) in trans-regional production chains may be a leading indicator of future capital markets ties. If we plausibly assume that outward FDI by multinational corporations based in Latin America (the “trans-Latins”) goes overwhelmingly to

9 Author’s calculations based on data in Institute of International Finance (IIF) 2010, pp. 17-24, accessed September 2010 at www.iif.org. GDP at purchasing power parity (PPP) figures from World Development Indicators, accessed August 2010 at www.worldbank.org, using the countries included in IIF regional aggregates.10 Stallings with Studart 2006 also makes an extended comparison of the LA7 with a similar group of emerging economies from East Asia. In their study, East Asia enters mainly as the better-performing region, and the authors wish to understand why. They question, inter alia, the oft-heard conclusions that private banks always outperform public ones, and that greater integration with global financial markets yields superior results.11 IIF 2010, p. 13.

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neighboring countries, then intra-Latin investment accounted for perhaps a fifth of inward FDI to the region in 2008-9.12 Most of Latin America’s largest corporations are from Brazil, Mexico, and Chile, and many have more than a quarter of their sales, investment, or employment elsewhere in the region.13 Deeper intra-regional financial integration in the future is therefore possible though not inevitable. Its course likely depends as much or more on national politics and policy choices as on purely market-driven incentives to individual firms or investors.

National financial characteristics of major countries in the Western Hemisphere

Next we compare the national financial characteristics of the nine largest countries of the hemisphere: the United States, Canada, and the “Latin American Seven” (LA7). The subsection presents overviews of two types of information about these key countries: first, their national “financial architectures” shaping domestic money and credit markets; second, the main rules governing their interactions with global markets. Two caveats deserve mention. First, in several of the tables Mexico is grouped with the U.S. and Canada. This is done because, as we argue below, we see little option for Mexico at this point but to continue to participate in the regional financial project of the United States. Second, many tables omit statistics on Bolivia and Ecuador, although these two countries figure prominently in Venezuela’s hopes for a redesign of the regional financial architecture, because as noted many sources do not include these countries in their databases. For purposes of our hemispheric statistical description, we simply note that their economies are relatively small, financially more shallow, and less systemically signicant than the nine that we profile.

The figures recorded in Table 7 allow us to comment on three politically and economically significant dimensions for the LA7: the structure of bank ownership, the relative importance of credit as compared to capital markets, and whether or not we can judge their contemporary financial architectures to be reasonably successful in terms of their most basic social imperative: providing finance for business investment.

12 ECLAC 2010, pp. 58-9.13 Ibid., p. 62.

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Table 7.Bank ownership, domestic financial structure, and availability of financing in the Americas (percent)

Foreign banks/bank assets

State banks/ bank assets

Credit/ GDP

Capital markets/GDP

Financing/ GDP

Success in providing finance

No. Amer.Canada 7 0 130 206 340 …Mexico 80 .. 23 69 93 FairU.S. 9 0 211 278 488 …So. Amer.Argentina 26 42 14 34 48 PoorBrazil 20 45 54 133 187 GoodChile 64 17 86 148 235 GoodColombia 18 15 43 57 99 FairPeru 43 12 20 114 134 FairVenezuela 33 10 27 4 30 Poor

Notes: Foreign banks’ share of assets is total share of banking assets held by banks with 50 percent or more foreign ownership of voting shares, 2005. State banks are those with 50 percent or more government ownership, 2005. Credit refers to outstanding loans to the private sector from banks and non-bank financial institutions, 2008. Capital markets include equity market and private bond market capitalization, 2008. Total financing is the sum of credit and capital markets financing. Sources: Bank ownership is from Barth, Caprio, and Levine 2008. Credit and capital markets financing from Beck and Demirguc-Kunt 2009. Final column reflects this author’s judgment.

The initial two data columns of Table 7 report on the structure of bank ownership. This variable reflects the influences of both the size of the economy, with smaller countries (mostly excluded from the table) much more likely to have a high level of foreign bank ownership, and the government’s overall economic ideology, with higher foreign ownership corresponding to a more open and market-friendly economic regulatory framework, while a larger role for state banks typically reflects a stronger belief in the guiding strategic role of the state. As expected, the U.S. and Canada have (or had in 2005) no state-owned commercial banks. The relatively small foreign bank presence in these two advanced industrial economies reflects the strong global competitive position of U.S. and Canadian home banks. Mexico, with the fourth largest economy in the hemisphere (third in PPP terms, surpassing Canada), has an astonishingly high 80 percent of its banking assets held by foreign banks, a reflection of the extremely open rules on trade in financial services (that is, foreign direct investment in banking, insurance, and other financial services) that Mexico adopted when it joined the North American Free Trade Agreement (NAFTA), which took effect in 1994. Chile also has a relatively high share of foreign banks (68 percent) in its economy, reflecting the fact that

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it is the smallest among the hemisphere’s larger economies. Only Brazil and Argentina have a large state presence in commercial banking. Surprisingly, despite seven years of “Bolivarian” rule in Venezuela, in 2005 nonetheless Venezuela had the smallest state banking sector of all countries in the table.14 Bank ownership structures as of late 2005 were therefore quite heterogeneous. Among the three would-be leader countries, the U.S. and Venezuela had banking sectors dominated by private national firms, while Brazil, like Argentina, had a fairly even distribution of bank assets across national, private, and foreign banks.

The next columns show credit to individuals and firms, and capital markets financing to firms, as a share of gross national product (GDP). Using data that mostly ended in 2001-02, Stallings and Studart concluded that most of Latin America, including the larger, more industrialized countries, had bank-based financial systems (2006: 5 and passim). But this is not the picture today. Confounding conventional wisdom that suggests that the U.S. is the country of capital markets financing while most Latin American firms rely on bank credit, Table 5 suggests that in 2008 only the U.S. and Columbia had roughly equivalent shares of loans as compared to capital markets financing.15 Everywhere else, the stock of corporate finance in 2008 came diproportionately from the capital markets, with the exception of Venezuela, where the capital markets were hardly functioning except as a place to trade government debt, not included in the table.

What of comparative financial performance, the main dependent variable in most studies of Latin American financial systems? While we could have compared interest rates, bank profitability, financial repression, or a host of other possible indicators, we prefer to assess the performance of national financial systems by a rough quantity judgment, viz., the overall availability of financing. By this logic, the most robust providers of loans to the private sector were Chile and Brazil, although even their outcomes would not look impressive if compared to East Asian emerging markets. The strongest Latin American capital markets at the end of the first decade of the twenty-first century were those of Chile, Brazil, and Peru. Summing these measures of availability of finance through both credit and capital markets, Table 7 suggests that, as of end 2008, Chile and Brazil had the strongest financial systems among the Latin American Seven (LA7), and Argentina and Venezuela clearly the weakest. Mexico, Peru, and Colombia fell somewhere in between. Our assessment of relative financial competence correlates fairly well with these countries’ international credit ratings, although as of this writing in 2010Q3, Argentina had improved its position somewhat, mainly as a result of resolving most of the outstanding conflicts associated with its 2001 debt default, while Venezuela had further declined.16

14 Subsequent to the data reported in Table 7, the Venezuelan government increased its ownership of commercial banks through nationalizations in 2009 and 2010, and may now own as much as 30 percent of the banking system.15 The U.S. equity figures for 2008 reflect temporary losses due to the financial crisis, which spread to Latin America somewhat later. Yet the larger comparative point still holds. 16 On the status of Argentina’s return to international capital markets, see IIF 2010, p. 22.

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We are also interested in mapping the patterns of these countries’ insertion into the global economy. Table 8 compares the same nine countries plus Bolivia and Ecuador in terms of their capital controls and exchange rate regimes. As expected, the U.S. and Canada have few if any capital controls, although the U.S. has some. Peru’s total absence of controls reflect its free trade area treaty commitments with the United States, of which more below. Surprisingly, the countries with the most vigorous capital controls are not those whose overall public policy regimes lean most leftwards (Bolivia, Ecuador, and Venezuela), but instead the larger, more industrialized Latin American countries: Argentina, Brazil, Chile, and Mexico. This pattern suggests that the presence of de jure capital controls is more a matter of a country’s possession of sufficient weight or credibility vis-à-vis international markets to be able to effectively manage foreign capital flows. Of course, even these countries have controls that are in the moderate range, reflecting legal arrangements that are in place to be used if and when the monetary authorities judge this advisable. For example, the measurements reported in the table reflect the mean of 2000-5. Between then and this writing in 2010Q3, Brazil, whose high domestic interest rates and strong growth had led its freely floating currency to become among the world’s most appreciated since early 2008, instituted additional capital controls in the form of a 2 percent, then a 4 percent, temporary tax on short-term inward flows. Although the table does not show it, movement since the 1980s has been uniformly in the direction of lesser capital controls.

There are also interesting patterns in the distribution of exchange rate regimes. Historically, most countries throughout Latin America and the Caribbean linked their currencies to that of the United States, until recently the major trading partner of every country in the Americas. A formal peg was the norm until the 1990s, but has since given way to various other arrangements, ranging from full dollarization (the contemporary exchange regime in Panama, Ecuador, and El Salvador) to a managed float.

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Table 8.Architectures of international financial insertion in the Americas: Capital controls and exchange rate regimes(Capital controls range from “1 = most closed” to “0 = most open”)

Capital controls regime (mean 2000-5) Exchange rate regime, April 2008Inward Outward Overall

No. AmericaCanada .08 .17 .00 Free float and inflation targetingMexico .25 .54 .40 Free float and inflation targetingU.S. .00 .26 .13 Free float and multiple targets

for monetary policySo. AmericaArgentina

.40 .80 .60Fixed peg, with exchange rate anchor to US$ and quantitative

monetary targetsBolivia .17 .00 .08 Crawling peg, with exchange

rate anchor to US$Brazil .36 .58 .50 Free float and inflation targetingChile .43 .29 .36 Free float and inflation targetingColombia … .. .. Free float and inflation targetingEcuador .15 .11 .22 Fully dollarized Peru .00 .00 .00 Free float and inflation targetingVenezuela .17 .00 .08 Fixed peg with exchange rate

anchor to US$

Notes: Capital controls are de jure; exchange rate regimes are de facto.Sources: Capital controls from Schindler 2009. Exchange rate regimes from IMF 2009. , “De Facto Classification of Exchange Rate Arrangements and Monetary Arrangements,” February 25, 2009. Available at: http://www.imf.org/external/np/mfd/er/index.asp

The countries with the weaker domestic financial systems, as estimated in Table 5 above, attempt to control exchange rate volatility by fixing their currencies. Three of these countries are in ALBA’s anti-capitalist alliance, while Argentina’s presidents since 2003 also have leaned left. Ecuador has used the U.S. dollar as its national currency since 2000. Argentina and Venezuela fix their currencies to the dollar, and Bolivia employs a crawling peg. The remaining Latin American countries in the table have relatively stronger domestic financial systems and have followed the U.S. and Canada in adopting freely floating exchange rates with inflation targeting monetary regimes. Nonetheless, considerable de facto intervention occurs. For example, a study reported in the Economist in early October 2010 concluded that Peru, ostensibly with a freely-floating currency,

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was the most aggressive intervener in Latin America in comparison to the size of its economy.17

The systemic financial importance of key countries in the hemisphere

We have now compared nine key states in terms of the main characteristics of their domestic and international financial architectures. We now turn to the question of these countries’ systemic financial importance, or lack thereof. Since the purpose of this paper is to describe and analyze the regional financial projects of three would-be leader states in the hemisphere, it may be useful to have a sense of what kind of financial capabilities and presence they have on the global and regional stages.

One measure of financial “power” is the ability of a country to attract foreign direct investment (FDI). Table 9 offers a view of the evolution over time of key Latin American countries as foreign investment destinations. Note that the figures report absolute national shares of total inward foreign direct investment (FDI) flows to the region, not shares relative to each country’s GDP. That is, we aren’t here interested in comparing the relative attractiveness of countries as investment destinations per se, but rather countries’ systemic importance within the region. The table shows that, as expected, Brazil and Mexico, Latin America’s two largest economies, receive the largest FDI inflows. The rest of South America, taken together, receives about as much as Brazil, while all of Central America and the Caribbean receives less than 15 percent of total inflows. The trend that jumps out, however, is the sharp decline in Mexico’s share of inward FDI during the first decade of the twenty-first century. Mexico has had almost the lowest growth in the region for this entire period. Moreover, due to its close trade and other economic ties with the still-struggling U.S., Mexico is the major Latin American country expected to remain economically depressed for the longest in the aftermath of the recent financial crisis.

Table 9.Country shares in total inward foreign direct investment flows to Latin America and the Caribbean(percent, except as noted)

2000-5 2006-8 2009Mexico 34 22 15

Central America & Caribbean 9 13 14Brazil 29 31 34

Other South America 26 34 37Total, annual average, $ bns 66.37 106.19 76.68

Source: ECLAC 2010, p. 30.

17 “Flood barriers,” Economist, October 7, 2010, accessed at www.economist.com.

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As we move toward the more political sections of this paper, we also construct a composite measure of the apparent global systemic financial importance of key countries in the hemisphere. The goal is to provide an initial assessment of which countries might be in a position to exert financial influence over their neighbors. Table 10 presents comparative data on a smorgasboard of dimensions, each of which plausibly is related to systemic financial significance. The national share in total global production (GDP), shown in Table 10’s first column, arguably remains the most important single dimension. Here the U.S. clearly dominates. In fact the U.S.’ enormous and productive economy, still the world’s largest (unless the European Union is considered as a single economic unit) is intimately related to its extraordinary privileges as issuer of the world’s major reserve currency, a dimension not included in our table.18 The next column reports national shares as of end 2008 in total world financial assets. The U.S. domestic market contains about a third of all financial assets worldwide, a figure that would be even higher if we had been able to include figures on more exotic and difficult to document financial assets along with the basic assets (bank deposits, corporate stocks, corporate debt securities, and public debt securities) included in the international figures. Canadians own just over 3 percent, Brazilians just over 2 percent, and Mexicans somewhat under 1 percent of worldwide financial assets, while no other country in the hemisphere owns enough to register at a global level. For international financial assets (foreign assets owned by residents of these nine Western Hemisphere countries) the U.S. share is about a fifth worldwide. Other countries in the hemisphere to date have been relatively unimportant to the rest of the world as foreign investors.19

18 See MGI 2009b for a discussion of the economic power and political influence accruing to the reserve currency country.19 Had we used international financial liabilities (the sum of one’s home country financial assets held by foreigners) Latin American countries would have appeared slightly more significant.

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Table 10.Systemic financial importance of major countries of the Americas, 2008(percent)

Share world GDP, PPP

Share of world financial assets

Share of globalizedfinancial assets

Share of world forex reserves

Share of new equity capital

Systemic financial “weight”

North America 24.9 36.6 19.2 2.8 28.0 22.7

Canada 1.9 3.2 1.8 0.6 5.0 2.4Mexico 2.2 0.7 0.2 1.3 … 1.3U.S. 20.8 32.7 17.3 0.9 23.0 19.2South America 5.5 3.0 0.6 4.7 4.3 3.9

Argentina 0.8 0.1 0.1 0.6 0.2 0.5Brazil 2.9 2.2 0.4 2.6 3.9 2.5Chile 0.4 0.2 0.1 0.3 0.2 0.2Colombia 0.6 0.1 0.0 0.3 0.0 0.3Peru 0.4 0.1 0.0 0.4 0.1 0.2Venezuela 0.5 0.2 0.0 0.5 0.0 0.3Lat Amer 7 7.7 3.7 0.6 6.0 … ..

Notes: Financial assets include bank deposits, equity market capitalization, and private and public bond market capitalization. Foreign exchange reserves exclude gold. World new equity capital is new capital raised by shares. Globalized financial assets are sum of absolute values of foreign financial liabilities and assets. Systemic financial importance calculated as weighted mean of five preceding columns, with GDP given double weight. Sources: GDP at PPP values from IMF WEO online, April 2010. Financial assets calculated from WB financial structure database. Globalized financial assets from IMF CPIS of April 2010. Foreign exchange reserves from IMF IFS online, September 2010. New capital raised by shares from WFE, accessed online September 2010.

The initial two data columns of Table 10 just discussed are intrinsically retrospective in their assessments of relative importance, as they record the sum of existing stocks of financial assets. The next two columns, by contrast, document annual financial flows recorded in 2008, and thus are more sensitive to contemporary shifts in the relative weight of countries in global markets. Share of foreign exchange reserves reflects a combination of export surpluses and the degree to which a country’s national monetary authorities choose to accumulate foreign exchange rather than spending it on imports. Large foreign exchange reserves allow a country to defend against future financial contagion in global currency markets—as well as enabling the central bank to intervene to hold down the value of the national currency, thus stimulating export-led growth. In the next data column, the share of new equity capital raised reflects one

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important measure of new investment, both foreign and domestic in origin, flowing to domestic firms via the stock market.

There is no unambiguous rationale for how to combine these diverse measures. Table 10’s final column therefore computes one possible composite measure. GDP is given a double weight, and each of the strictly financial measures a single weight, as a rough indicator of systemic financial significance. Not surprisingly, the U.S. shows up as the hemisphere’s only global financial giant, notionally accounting for something like a fifth of the total potential worldwide financial influence captured by these indicators. Canada and Brazil look about equally significant, and Mexico somewhat less so, while other countries of the hemisphere are unimportant in the global scheme.

Were we to calculate these measures over the entire 1980-2008 time period, however, we would note that all of the major advanced industrial democracies, including the U.S., have become less systemically financially significant, while a small set of emerging economies, including China, India, Russia, and Brazil, have become dramatically more so, even though they do not yet look like financial powerhouses. The IMF recently calculated a similar index of systemic financial significance, employing banking sector indicators only. The Fund study placed both Brazil (#17) and Mexico (#25) in their a list of 25 “systemically important” banking countries worldwide. The only other emerging economies included were China (#11), India (#14), Hong Kong (#16), Russia (#18), South Korea (#19), Singapore (#23), and Turkey (#24).20 We conclude that U.S. financial hegemony is both global and regional in scope, yet has been declining over time. Brazil and Mexico have recently achieved some presence in world financial markets, perhaps giving them an objective contemporary financial “weight” somewhat similar to that of Canada. At least on the measures included here, other countries of the hemisphere, including would-be financial leader Venezuela, lack an important global presence. This need not mean that they lack influence on the redesign of hemispheric financial architecture, but is an important background condition to keep in mind.

This section has presented descriptive statistics on the course of international financial globalization, intra-regional financial ties, the financial policy framework in key hemispheric states, and the global systemic importance (or not) of these same states. We may conclude that both financial internationalization and the velocity of global finance have increased dramatically in the past two decades. Latin American countries, not surprisingly, have become more integrated globally and also regionally, although intra-regional integration is as yet new and modest in scope. Within Latin America, Chile, with a large role for foreign banks, and Brazil, with large state banks, have the strongest financial systems, a judgment quite similar to that of Stallings and Studart (2006), who examined a much broader range of measures for a slightly earlier period. Surprisingly, private capital markets are now more important than banks in all of the LA7 except Venezuela. As to systemic financial importance, only the U.S. has a clear global presence. Looking at the three countries whose regional financial projects we examine,

20 Systemic banking importance from IMF 2010, p. 16.

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Brazil has about a seventh the objective financial “weight” of the U.S., while Venezuela wields about an eighth the financial capabilities of Brazil.

The paper’s next three sections compare regional financial projects of the three would-be leader countries: the United States, Venezuela, and Brazil. In each case we begin with the likely social and political sources of a country’s foreign financial preferences, then characterize the government’s policy preferences, where they can be known or intuited, for its neighbors’ domestic financial regulatory frameworks, forms of insertion into international financial markets, and participation in global financial governance.

IV. The U.S. vision: Strong property rights and free movement of capital

The overriding political imperative driving United States’ foreign financial policies of United States in the Americas has been the desire of its multinational banks and institutional investors to have free access to markets abroad and U.S.-style protections for financial property in those markets. Close observers including financial journalist Paul Blustein (2001), former World Bank chief economist Joseph Stiglitz (2002), and former IMF chief economist Simon Johnson (2009), each have written of the extraordinary public policy influence within the U.S. of private sector financial firms such as Citicorp, Bank of America, J.P.Morgan Chase, and Goldman Sachs. Even as compared to other advanced industrial democracies such as Germany, France, or Japan, private banks and institutional investors in the U.S. long have had much greater direct access to both the national legislators who write the major financial regulations and to the executive branch via the Department of the Treasury and various financial regulatory agencies.21 Moreover, the U.S. financial services sector has grown more important in the overall economy over time, as noted above.

One domestic institutional factor promoting the public policy influence of the private banks, particularly in foreign financial policies, has been the independence of the U.S.’ central bank. The chairman of the United States Federal Reserve Bank, is appointed by the president, but serves a non-concurrent term, and cannot be dismissed by him or her. The Fed’s independent mandate has made its directors insensitive to popular preferences as represented by either the president or Congress, which was of course the intention, as the goal of this arrangement was to allow the makers of monetary policy to stand above politics. At the same time, the Fed also has the main responsibility for regulating the domestic banking system in the public interest, and of necessity maintains close links with private commercial banks, who provide it with essential information and elect its regional governors. Such central bank independence (CBI) tends to enshrine the financial sector’s preferences for low inflation above all else. As a partial counter, Congress in 1978 passed the Full Employment and Balanced Growth (“Humphrey-Hawkins”) Act that requires the Fed to consider unemployment as well as inflation in making its monetary policy decisions. Enforcement of this prescription is only via the

21 See Zysman 1983; Henning 1994.

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channel of greater transparency, as manifested in the requirement to report to the Congress semi-annually on the Fed’s progress.22

A second factor promoting preferential private financial sector access to national financial policymakers has been the U.S.’ financial regulatory framework, particularly the Banking (“Glass-Steagall”) Act of 1933 that, until its repeal in the Financial Services Modernization (“Gramm-Leach-Bliley”) Act of 1999, prohibited commercial banks from having investment banking subsidiaries that could take direct ownership stakes in industrial corporations. Consequently, the policy preferences of U.S. private banks seldom have been tempered by the concerns of commercial or manufacturing interests producing for the domestic market. The latter, for example, will tend to be relatively more interested than banks in policies promoting a competitive exchange rate. This is in contrast to countries such as Germany where large banks and industrial firms historically had interlocking directorates, an institutional condition that tended to dilute the financial sector’s natural preferences for low inflation with a greater orientation towards growth.

Domestic finance

The core U.S.’ recommendations for Latin America’s domestic financial regulation were unintentionally immortalized by well-known economist John Williamson (1989; 2004) as the “Washington Concensus” in a background article he wrote for a conference on Latin American economic reforms. One preference has been to end “financial repression,” defined to exist when governments control interest rates or direct credit to specific sectors and uses, implicitly at below-market rates. Williamson also usefully defined “Washington” as “both the political Washington of Congress and senior members of the administration and the technocratic Washington of the international financial institutions, the economic agencies of the U.S. government, the Federal Reserve Board, and the think tanks” (2000:PG). United States’ policy preferences for emerging economies in the Western Hemisphere and elsewhere would create national financial regulations with the intent of producing, in the words of then Treasury Secretary Lawrence Summers, “well-capitalized and supervised banks, effective corporate governance and bankruptcy codes, and credible means of contract enforcement” (2000:8). The U.S. generally supports the financial advice given to developing countries by the World Bank, International Monetary Fund, and Inter-American Development Bank, all institutions in which the U.S. retains a dominant voice and the ability to block loans to countries with whose policies the U.S. disagrees. Privatization, or the sale of state firms to private owners, has been another key component Washington’s policy advice to emerging economies, and one particularly aimed at public sector banks over the past decade.23 Many of the leading contributors to the new and prestigious academic subfield of “law and economics” have argued that the Anglo-American securities and financial regulatory framework consistently has produced better results than the continental

22 The formal requirement of these semi-annual sessions in which the Fed Chairman is grilled by the House Financial Services Committee [ck] expired in 2000, but the practice has continued.23 For the academic rationale, see, for example, La Porta, López-de-Silanes, and Shleifer 2002; Caprio et al. 2004.

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European or other models.24 Within this mental model the development of decentralized stock and securities markets with strong shareholder rights is the best check on possible corporate wrong-doing, while bank-based corporate finance easily lends itself to the evils of crony capitalism. Market-based allocation of finance and strong financial property rights (in particular the ability of creditors to take defaulting lenders to court) are common themes.

Architectures of international insertion

As financial globalization progressed from the mid 1980s onward, leading U.S. banks and institutional investors were very concerned that they continue to retain international competitiveness and find room to expand. As they increased their share in the U.S.’ economy, they also diversified abroad. Big banks pushed for a more liberal and pro-business investment climate in the Western Hemisphere, coordinating and publicizing their views through such trade organizations as the Institute of International Finance (IIF), based in Washington, D.C.. Official government views closely reflected those of multinational banks. To this end, the early 1990s negotiations for a North American Free Trade Agreement (NAFTA) between the United States and Canada on one side, and Mexico on the other, were not primarily concerned with traditional trade liberalization such as the reduction of tariffs and quotas on goods, since bilateral tariffs already were low, but instead focused on achieving liberalized rules for foreign investment. Important new provisions Mexico agreed to included removing barriers to “trade” in financial services (that is, foreign direct investment in commercial banking, insurance, and related sectors) and severely limiting the authority of Mexico’s courts and legal system over foreign direct investors. Instead, conflicts between foreign firms and local firms, individuals, or the government would be adjudicated by a technocratic, and presumably neutral, international dispute resolution body. While the desires of firms venturing abroad for predictable and familiar rules of engagement is entirely understandable, from another viewpoint there are echoes of the “extra-territoriality” once demanded of China and other sovereign but vulnerable states by European colonial powers. The U.S. attempted to extend investor-friendly rules similar to those in the NAFTA throughout the hemisphere through the proposed Free Trade Area of the Americas.25 Although the FTAA has been effectively blocked since late 2003, the effort continues in other venues.

The combination of economic reforms including bank privatization and liberalized entry rules for foreign investors implanted in Mexico via NAFTA and elsewhere through stabilization agreements with the international financial institutions (in the 1980s and 1990s) or bilateral free trade or trade and investment treaties (after 2003) helped to increase the foreign bank presence in Latin America. As summarized in Table 7, as of 2008 foreign banks owned 80 percent of Mexican banking assets, by far the highest share among the hemisphere’s larger countries. The ratio of loans to the private sector to GDP was very low given Mexico’s level of industrialization.

24 La Porta et al. 1989.25 On the proposed investment rules under the FTAA see Oxfam 2003.

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With respect to the legal framework governing cross-border capital flows, the overall U.S. preference has been for international financial deregulation, including few capital controls, whether of the more heavy-handed quantitative variety or the lighter-touch controls that operate through taxing short-term flows more heavily than longer-term capital. The only capital controls that appear legitimate to U.S. policymakers are those intended to stop or impede money-laundering, not those imposed to attempt to slow or avert a currency crisis. U.S. trade negotiators have pushed hard to include clauses precommiting developing country signatories to reduce or eliminate existing capital controls and abjure their future use. Countries with somewhat greater systemic importance--either on strictly material grounds or because, as in the case of Chile in the Western Hemisphere, they are frequently held up as models of the growth successes that can follow from an economically-liberal policy framework—have been able to negotiate more flexibility when signing bilateral trade agreements with the U.S. Other countries, such as the six smaller signatories to the CAFTA-DR free trade agreement, tried to negotiate such policy space, but were unable to do so. Given their high dependence on import access to the North American market, their governments felt obliged to accept the higher vulnerability to future international financial contagion that the architecture preferred by U.S. banks imposed on them. Kevin Gallagher notes that the bilateral trade agreements negotiated by the European Union and Japan (where for historical reasons private financial institutions have had less sway in foreign financial policies) have significantly greater flexibility with regard to the use of capital controls as safeguards, and that even the IMF has recognized their value in preventing financial contagion.26

Another important issue has been conflicts over whether emerging country borrowers have the right to renegotiate foreign debt obligations, for example, sovereign debts contracted by a previous administration. During the 1980s the U.S. steadfastly opposed the formation of a sovereign debtors’ cartel to negotiate jointly with the London and Paris Clubs, creditors’ associations (and cartels) representing Latin American countries’ private and official creditors, respectively.27 Several developing countries have begun to argue in favor of retroactive “ability to pay” clauses, tying debt servicing to export revenues, commodity price movements, or GDP growth. For example, Argentina defaulted on its mostly dollar-denominated foreign debt in late 2001 as it was forced off of its currency board exchange rate regime, which had led the Argentine peso to maintain an hard parity with the dollar which was increasingly at odds with underlying economic fundamentals. Many Argentine policymakers in the incoming government blamed the U.S. and IMF for their support for the currency board—until this was abruptly withdrawn in late 2001, precipitating the crisis. In these conflicts and other conflicts the U.S. Treasury and other officials have been strong supporters of the sanctity of the financial property rights of creditors, irrespective of a range of possibly extenuating factors. In fact, in its bilateral trade and investment agreements U.S. negotiators have attempted to get developing countries to precommit, as per a formal treaty, to abjure future foreign debt defaults or renegotiations.28

26 Gallagher 2010a; Ostry 2010.27 Biersteker 1993 offers a revealing set of debt-negotiation case studies.28 Gallagher 2010b summarizes the argument for considering sovereign debt defaults as a collective action problem, arguing in favor of establishing a new international agency to help manage restructuring. See also

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A third component of a country’s architecture of international financial insertion is its exchange rate regime. For the most part, U.S. policymakers have not needed to express strong preferences about hemispheric exchange rates, as they have not been acutely problematic for the de facto regional hegemon. This is because trade flows between the U.S. and the Americas have been more balanced than with other world regions, with the U.S., for example, typically running a trade surplus with Mexico in the post-NAFTA years but a deficit with Brazil. Nonetheless, the theoretical models of most of the policy-oriented economists in Washington, D.C. suggested to them that the so-called “corner solutions” of either a hard peg or a free float would be superior.29 The problem with corner solutions is that they again cut out developing countries’ potential space for public policy interventions.

Except during times of acute business and Congressional worries over the U.S. trade deficit (as during this writing in late 2010), financial interests have tended to dominate in U.S. exchange rate policymaking, for reasons explored above. Banks generally prefer less exchange rate management, and often actually enjoy exchange rate unpredictability, in that unanticipated movements offer more opportunities for financial specialists to earn fees and profits through arranging swaps and other insurance mechanisms or engaging in arbitrage among still partially-segmented markets. Multinational firms have tried to insulate themselves from exchange rate movements by diversifying production abroad, which inter alia functions as a rough sort of insurance that any sharp movement will cut both ways for their worldwide balance sheets. Thus far, U.S. exchange rate levels vis-à-vis haven’t become an issue within U.S. politics, however, as commodity price pressures have tended to push Latin American interest rates up with respect to the U.S. dollar over the past decade.

Participation in global financial governance

Meanwhile, the U.S. has been reluctant to dilute its agenda and decisionmaking authority in both global and regional international financial institutions, although it slowly is being obliged to do so. The first international financial crisis of the twenty-first century, which began in U.S. mortgage markets in 2007 and by late 2008 had spread to most developed country financial markets, is as of this writing in late 2010 still rippling around the world. The relatively small adverse consequences for Latin America and most other emerging economies (who had begun to acquire large foreign exchange reserves for protection following the East Asian financial crisis of the late 1990s) of the 2008-9 global financial crisis has seriously undermined the reputations of the U.S., and the other major advanced industrial democracies, as possessors of the most efficient and modern financial architectures.30 At the global level, the most obvious result has been the effective substitution since late 2008 of the large economies Group of Twenty (G20, also known as the financial G20 to distinguish it from the trade G20 of developing countries organized by Brazil, India, and South Africa to negotiate at the WTO’s Cancún ministerial meeting

Blecker 1999; Eichengreen 1999; Eatwell and Taylor 2001.29 For example, Summers 2000.30 Porzecanski 2009.

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in late 2003). The large economies G20, a once-obscure international organization convened after the East Asian financial crisis to make (or at least to publicly certify) recommendations on reform of the global financial architecture, has since late 2008 come surprisingly suddenly to substitute for the Group of Seven (G7) major advanced industrial economies, founded in the early 1970s, as the most important multilateral economic governance forum.31 Within the hemisphere, the U.S. has seen the international financial institutions in which it has dominated or played a leading role, including the World Bank, International Monetary Fund, and Inter-American Development Bank, all headquartered in New York City or Washington, D.C., challenged in terms of both their research and policy agendas, and the amount of funds they have to lend out, by institutions based in South America, as discussed below.

Two aspects of the U.S.’ regional financial vision have quite often been misrepresented or misunderstood. First, although the U.S. derives clear benefits from the U.S. dollar’s role as the major global reserve currency, it does not follow that the U.S. foreign policy establishment, or any other politically-significant interest, seeks dollarization of the domestic economies of Latin American or Caribbean countries, although this has happened in some countries, notably Panama, Ecuador, and El Salvador. Rather, what the U.S. financial policymakers principally seek is improved financial property rights and rules similar to those that pertain within the U.S. But the U.S. gains no particular economic benefit if its home currency comes to displace that of a foreign country in that country’s local markets, at least so long as the majority of international transactions continue to be invoiced in U.S. dollars, removing the currency risk for U.S. importers and exporters. Eric Helleiner (2003) suggests that, historically, U.S. views on the desireability of dollarization have tended to mirror monetary ideologies holding sway within the U.S. itself, which might mean that increasing talk of currency wars in the U.S. Congress in the difficult period at the end of the first decade of the twenty-first century would coincide with even less interest in the U.S. in what once would have been called dollar imperialism.

Second, although the U.S. preferences for financial regulations in its neighbors are billed as free market and non-statist, they are not unintrusive. In fact, they are formal treaty commitments by governments to abjure, in perpetuity, use of a whole range of possible financial and monetary policy instruments. The NAFTA-inspired provisions of the FTAA that U.S. policymakers had hoped to replicate throughout the hemisphere include treaty commitments for states not to expropriate foreign investors, default on sovereign debt, differentially tax foreign financial institutions or subsidize domestic ones, or otherwise alter the national financial regulatory environment in ways detrimental to foreign financial capital. Yet many of these financial policy instruments are precisely those being lauded by those we might term the new structuralists as essential to providing national governments with the “policy space” to aid their national firms in competing in the global economy.32

31 On the history of the G7 see Bergsten and Henning 1996. For the argument that the G20 remains ad hoc and insufficiently representative see Wade and Vestergaard 2010.32 Woo-Cummings 1999; Chang 2002, 2003; Gallagher 2005.

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V. The Bolivarian hope: Popular control of a morally-suspect profession

Venezuela’s domestic and international financial policies do not arise from private business preferences, nor from senior government regulators. Instead they reflect the views of the incumbent president and his political partisans. Unlike the foreign financial policies of the U.S. and Brazil, which typically are conducted by government and private financial elites, Venezuela’s international financial relations on several occasions have become a subject for popular passions and mass rallies. The main motive force behind President Hugo Chávez’ efforts to articulate a regional financial vision may be his government’s recurrent conflicts with the financial community. For all its oil and gas reserves, Venezuela needs credit and investment funds to develop. In fact, the high commodity dependence of both the Venezuelan economy and government finances mean that reliable access to credit is acutely desired in order to smooth the enormous income fluctuations generated by international petroleum and natural resource price swings. The incumbent government’s hope has been to find a way to access financial resources while minimizing its need to deal with uncongenial counterparties: private national banks, foreign direct investors, and the multilateral financial institutions, especially the IMF and World Bank.

Domestic finance

Like Brazil, although for different reasons, Venezuela’s banking sector experienced a meltdown in the mid 1990s, requiring billions of dollars in central government funds before banks were returned to private ownership.33 Bolivarian ideology considers banking a morally-suspect profession which must be carefully controlled, yet recognizes the need for finance. The incumbent administration has had repeated conflicts with Venezuela’s private banks, whose owners nearly uniformly support the political opposition. In January 2010, for example, the government abruptly nationalized or closed five private banks, as it had done on several previous occasions, accusing them, inter alia, of money-laundering and failing to direct sufficient credit to approved sectors and activities, as required by law.34 This climate does not encourage bank lending or expansion.

Yet confounding Chávez’ developmentalist goals, Venezuela has had the smallest state banking presence of any of the seven largest Latin American countries (see Table 7). In 2009-10 the Bolivarian government took steps to confront what it experienced as the problem of a hostile private banking sector, purchasing the nation’s third largest commercial bank, Banco de Venezuela, from its Spanish owner, Banco Santander, and obligatorially nationalizing several other smaller banks and prosecuting their executives, as well as reducing central bank independence and imposing further regulations directing credit to priority uses, as determined by the political authorities. By end 2009, the state

33 The precipitating factor in Venezuela was Latin America’s “tequila” crisis, representing financial contagion from Mexico’s peso crisis of 1994-5. Brazil’s banking crisis resulted from the end of decades of extraordinary profits associated with Brazil’s chronic very high inflation. Stallings with Studart 2006:224-9.34 “Venezuela Seizes More Banks,” Latin Finance, January 20, 2010.

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may have owned banks accounting for 21 percent of deposits. However, ownership did not necessarily imply effective control. The president, for example, was outraged to discover that even state banks, rather than making loans at the below-market rates required, had kept substantial sums on deposit at private banks.35 The relevant point for present purposes is that the Venezuelan government has not yet found a workable relationship with its domestic financial sector. Other than encouraging its ALBA partner states to be vigilant against their own banking sectors, Venezuela has little to offer as an exportable model.

In January 2008, President Chávez decreed a “currency reform,” essentially the issuing of a new currency that would drop embarassing zeros to put a good face on acute inflation, bringing to mind the repeated heterodox shocks attempted by countries such as Peru and Brazil in the 1980s.

Architecture of international insertion

We have defined the architecture of international insertion to include positions on matters such as capital and investment controls, debt and investment renegotiations, and exchange rate regimes. Venezuelan government preferences for national architectures of international financial insertion in its region emphasize the goal of retention of maximum national autonomy within a framework of natural resource nationalism. It is helpful to begin with the country’s own links with global markets. The Venzuelan government believes in and employs capital controls, although its de jure legislation during 2000-5 suggested otherwise, as shown in Table 8 above. President Chávez has felt free to renegotiate or expropriate foreign direct investors, and has actively encouraged his ALBA partners to do likewise. Both President Rafael Correa of Ecuador and President Evô Morales of Bolivia have unilaterally and forcefully renegotiated natural resource concessions with foreign firms—including not only the traditional vertically-integrated private petroleum firms based in the advanced industrial countries, but also Brazil’s state-owned oil giant, Petrobrás. The Bolivarian ideology clearly presents such renegotiations not as an assault on property rights, as within the U.S. model, but instead as a virtuous reclamation of the nation’s patrimony from foreign exploiters. In 2007 ALBA members Venezuela, Bolivia, and Nicaragua all announced their plans to withdraw from the World Bank’s International Center for Settlement of Investment Disputes, arguing that its decisions invariably favored Northern firms.36

The prices of many commodities, including petroleum (usually priced in dollars), fluctuate widely and abruptly, giving the country great variation in its foreign exchange earnings. This becomes a problem for the government in that about 50 percent of government revenues come from petroleum exports. In addition, exchange rate management has long been problematic for Venezuela, as well as for many Latin American countries, including Venezuela’s ALBA partners Cuba, Ecuador, and Bolivia. Venezuela has had chronic problems with the so-called “Dutch disease,” of persistent exchange-rate appreciation due to its high commodity exports of petroleum and natural

35 Cancel 2009.36 McIlhinny 2007.

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gas, resulting in on-going difficulties for the industrial sector. Of course President Chávez’ chilly relations with Venezuelan business, both banks and industry, has meant that their concerns were not high on his agenda. For example, the president has actively pursued the option of joining Mercosur since 2003, despite complaints from Venezuelan industry about the country’s persistent merchandise trade deficit with Brazil.

Meanwhile, high domestic public spending has led to persistent inflation, in 2010 set to approach 40 percent annually, leading to pressures for devaluation. In response, the Venezuelan government in recent years decreed two major “currency reforms”: first, a declaration of a new currency with the loss of three zeros (1 nuevo bolívar = 1000 bolívars) in January 2008, and second, a devaluation plus new three-tiered exchange rate in January 2010, including a priority rate for essential food and medicine imports, an “oil rate,” allowing PDVSA to receive double its previous compensation in local monies for its hard currency earnings, and a free floating parallel market rate. As the free-floating rate dropped precipitously throughout 2010, President Chávez appeared before Congress in May and thundered, “We need to stop this right now; we need to smash speculation as the bourgeoisie do not listen to appeals to their conscience. Let's act with a firm hand.”37 Bond traders were jailed and the central bank was given the task of rationing foreign exchange in the ostensibly free segment of the market.

In sum, the basic story line for both Venezuela’s domestic and foreign is the familiar one of South American populism, in which out-of-touch elites are replaced by a vigorous leader who draws political support from previously excluded social groups. Following government deficit spending to make up for decades of neglect of the poor, the leader blames the country’s resulting macroeconomic woes on rapacious capitalists, often bankers. The combination of loose public finances, commodity export dependence, and a continuously-precarious insertion into the global financial architecture is replicated under current leftist governments in ALBA members Ecuador and Bolivia.

Given this picture of Venezuela’s own financial weaknesses, many or most discussions of Latin American financial development or of regional financial architecture held in and around the international financial institutions, or in finance ministries and universities within the more conservative countries of South America, have ignored or disparaged the ALBA groupings’ proposals for a new regional financial architecture (NRFA). However, this stance misses the proposals’ impressive political profile within Latin America and beyond. Moreover, and particularly in the context of the global financial crisis originating the advanced industrial core countries, the ideas have appealed to many intellectuals and activists.

Participation in global financial governance

While President Chávez has attempted to use bilateral financial ties to reward and bind allies,Venezuela’s big ideas for financial reform focus on strengthening multilateral (that is, state to state) financial ties among progressive governments of the region. Financial largesse deriving from the state’s petroleum revenues has served as an

37 Janicke 2010.

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instrument of Venezuelan foreign policy to build and maintain support for ALBA. During periods of high international prices such as the middle years of the 2000’s, Venezuela offered subsidized oil to several Caribbean island states, and even to a few beleagured Northeastern cities in the U.S. In 2007, when Argentina was in the midst of a difficult and protracted foreign debt rescheduling with unhappy private creditors, Venezuela purchased a large quantity of Argentine government bonds.38 Venezuela also has accessed bilateral funding for itself: in 2010 the Chávez government accepted the first tranche of a planned $20 billion loan from China in return for a contract guaranteeing prepaid future oil deliveries. The problem with all such arrangements, whether to loan or borrow abroad, is that they are fundamentally ad hoc, reflecting creative opportunism but not a real or sustained international financial strategy, much less a means of freeing the Bolivarian government from having to depend on what it views as an untrustworthy private financial sector.

As a solution to Venezuela’s financing challenges, President Chávez repeatedly has returned to the option of a regional development bank. If controlled by progressive governments, he and his advisors hope, such a bank could be a means of borrowing substantial sums while escaping the loan conditionalities of the traditional international financial institutions, retaining foreign exchange within the region, and creating a viable alternative to a difficult to manage private banking sector. President Chávez’s first regional development bank (RDB) project was the Banco del Sur, first mooted in 2006. In the process of bringing Argentina and (especially) Brazil on board the project, Chávez was forced to yield some ideological and operational control. The Banco del Sur formally came into being in December 2009 as a project of the Union of South American Nations (UNASUR). It has a modest total total of $7 billion in capital contributed by Venezuela, Brazil, and Argentina, and membership of South America’s ALBA (Venezuela, Bolivia, and Ecuador) and Mercosur (Argentina, Brazil, Paraguay, and Uruguay) countries. As the Bolivarian leader wished, the Bank’s headquarters will be in Caracas. The new bank’s institutional design now looks more similar to that of existing regional development banks such as the Inter-American Development Bank (IDB), Andean Development Corporation (CAF), and River Plate Basin Financial Development Fund (Fonplata) than was Venezuela’s original intention, although the test will come when it begins operations. Meanwhile, the more politically and economically conservative Andean countries—Chile, Colombia, and Peru—have declined to join.

In the end, the Venezuelan leader has had a political victory, but perhaps not the regional development bank that he wanted. As it became clear that the Banco del Sur would be a Mercosur/UNASUR rather than an ALBA project, the indefatigable Chávez began to rally supporters for a second regional development bank, the Banco de ALBA, to serve member countries through Latin America and the Caribbean. Leftist intellectuals within and outside the region have hailed these innovative institutions.39 Yet it remains unclear whether either regional development bank will be run on sufficiently businesslike terms to survive.40 Loans are to be extended without traditional economic pre-conditions,

38 Verify date.39 For example, Hart-Landsberg 2009.40 Artana 2010.

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seen by the Venezuelan and other ALBA governments as biased and unfair. Consequently, skeptics observe, politicized loans and spotty repayment are likely to erode the capital base quickly.

The larger project is for a new set of multilateral financial arrangements for the region, first for like-minded neighbors of Venezuela, but ultimately intended as a model for all of Latin America and the Caribbean.41 Organizers hope that the “New Regional Financial Architecture” (NRFA) for South America eventually can include a regional development bank, currency, and emergency currency-swap fund. A key goal is to free the region, at least partially, from its dependence on a reserve and transactions currency controlled by political authorities outside the region, that is, the United States government.42 The Ecuadorian government and the United Nations jointly organized a technical workshop on the Bank of the South in Quito in 2008. Despite institutional sponsorship from UNASUR and the United Nations’ Economic Commission on Latin America and the Caribbean (ECLAC or CEPAL), and the presence of senior government financial officials from South America’s ALBA trio, Brazil and Argentina were represented not by government experts, but instead by left-leaning academics and civil-society activists.43 In mid 2009 another workshop in Quito under the joint aegis of the Banco del Sur and the Global Mechanism (GM) project of the United Nations Commission on Desertification emphasized the need for development bank financing to protect the environment, in an indirect swipe at the IIRSA project of the IDB, CAF, and Fonplata (and Brazil’s BNDES), of which more below. In the words of the GM website, “This is the first time the GM has had the opportunity to impact on a new bank’s operations and advise on its SLM [strategic land management] portfolio – an exciting and important responsibility.”44

Meanwhile, Ecuadorian President Correa has been the main promoter of another ALBA project to establish a regional currency, to be called the SUCRE (Unified System for Regional Compensation), initially to be used to invoice intraregional trade, with the option (or hope) of evolving into something more, as happened in the European Union. In mid 2009 ALBA went on record as intending to implement the SUCRE project. But in December 2009, the leaders of the small Caribbean ALBA members, worried about their standing within the Caribbean Common Market (Caricom) held a press conference to disassociate themselves from plans for a regional ALBA currency. At present, President Correa’s domestic political difficulties, including a police rebellion in late 2010 that may or may not have been an attempted coup, have slowed further forward movement on the regional currency.

The third component of the proposed NRFA is to facilitate the sharing of scarce foreign exchange among member states in times of financial crisis via a regional swap

41 Phillips 2009a, 2009b; Arruda 2008. 42 Fritz and Metzger 2006; Camara-Neto and Vernengo 2009.43 Bank of the South, “Outcome of the Technical Workshop,” held in Quito, June 23-27, 2008. Available at: <http://mef.gov.ec>44 “Spearheading regional natural resource sovereignty—Banco del Sur,” June 14, 2010. Accessed October 2010 at: <www.global-mechanism.org/news>

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arrangement.45 However, the Andean region of South America already has an international organization tasked with arranging central bank currency swaps. This is the Latin American Reserve Fund (FLAR), first established in 1972 when import-substituting industrialization, which typically implied exchange rate overvaluation and chronic foreign exchange scarcity, was the prevailing economic ideology throughout Latin America. FLAR, whose current members are Colombia, Venezuela, Ecuador, Peru, Bolivia, and Costa Rica, confronts serious technical challenges. FLAR has a mere $2 billion of paid-in capital, as well as some ability to borrow, a sum probably insufficient to provide much help in a crisis, even if it only affected one of the smaller member countries, such as Ecuador (with $8 of its own foreign exchange reserves) or Bolivia (with $9 billion in reserves).46 It would be hard to increase the funds available to FLAR, since its members all have similar problems of foreign exchange access, and their economies are likely to move both cyclically and together.47

The larger conundrum of the Andean countries’ existing reserve-sharing scheme is political. FLAR’s members include Colombia and Peru, today among the more conservative South American states, as well as the three South American ALBA states, who lean left. Venezuela announced its intention to withdrew from the Andean Community (CAN) in 2006, but didn’t withdraw from FLAR—even though FLAR has its headquarters in Bogotá, Colombia. (Chile, meanwhile, had withdrawn from CAN in 1976 under its then military dictatorship, but in 2006 announced its intention eventually to rejoin, and as of mid 2010 had associate member status.) Eichengreen (2010:6), thinking of FLAR as an essentially technical challenge in need of solution, writes that “in terms of facilitating the negotiation of conditionality and topping up finances [for the FLAR], it would be useful to establish an IMF link.” Closer ties to the IMF, of course, would be anathema to the ALBA members of FLAR, and probably would not be welcomed by the remaining members either.

In fact, there are two quite distinct competing theories about how best to employ foreign exchange reserves to protect South American—or other developing—countries from future financial contagion and crisis. One idea is to create a multi-country reserve pool, in essence, a mini-IMF for the region, although perhaps lacking the Fund’s macroeconomic surveillance and advice-dispensing attributes. This is the essence of both the FLAR and the proposed reserve-sharing fund in the NRFA proposals by the governments of Venezuela, Ecuador, and a host of Western Hemisphere non-governmental organizations and activists. The mainstream North American economics community, which is closer in training and ideology to academic and policymaking economists in Chile, Colombia, Peru, Brazil, and elsewhere, proposes a different solution. In their view, national foreign exchange reserves, admittedly scarce and particularly so in a crisis, would work better as “backstops to support strengthening of each country’s home financial systems [rather] than as regional co-insurance schemes.”48 In other words, a market-based program for financial strengthening would have superior results.

45 For background, see Fritz and Metzger 2006.46 Eichengreen 2010:5.47 Gnos, Monvoisin, and Ponsot 2009-10.48 Eichengreen 2006: PG.

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What the Venezuelan and ALBA initiatives ultimately will mean in practical policy terms is of course as yet unknown. The more conservative Andean trio of Chile, Peru, and Colombia—who share a geographic space with the South American ALBA trio--have repeatedly indicated their disdain for the ALBA’s financial projects. All three have signed free trade agreements with the U.S. and joined the U.S.’s new “Pathways for Prosperity” grouping. In September 2010 they announced plans to facilitate cross-border trading on their three national stock exchanges, hoping thereby to dramatically increase the volume of private capital markets in their countries. That is, they explicitly have decided to pursue market solutions to their individual and joint financial challenges. Cross-border cooperation among national securities regulators and exchanges, we note, is more transnational than strictly multilateral, as stock exchanges are typically private firms, albeit closely regulated quasi-monopolies. Chile, Peru, and Brazil already have the most developed securities exchanges in the hemisphere, as shown in Table 7 above.

VI. Brazilian pragmatism: A public-private financial partnership

The third regional financial project for the Americas is that being promoted by Brazil. In comparison to the relatively explicit visions pursued by government ministries in the United States and Venezuela, Brazil’s financial preferences for the region are somewhat more subtle, though we suggest no less intentional and a subject for high-level policy attention. Brazil’s foreign financial policies originate with the executive branch, particularly the foreign and finance ministries, but are elaborated and updated on the basis of comments from private business and academics, as well as ministerial level discussions with key allies, especially Argentina. Many in Brazil’s academic economics and government financial regulatory communities have North American advanced degrees but practical experience of Latin American markets, enabling them to speak the language of U.S. economic debates, but to arrive at somewhat more statist conclusions.

Domestic regulation

Like that of the U.S., Brazil’s regional financial project is very congenial to the country’s commercial banks and other financial institutions, who hope to become the dominant players in the region. Brazil has a successful and internationally-prominent private banking sector, but also a large and well-regarded public banking sector.49 Brazil has three commercial banks (the public sector Banco do Brasil, and private banks Itaú-Unibanco and Bradesco) in the top 20 by pretax profits worldwide. The top four banks in Latin America by Tier 1 capital are all Brazilian, and three of these are among the top fifty banks by this measure worldwide.50 Prévi, the public sector Banco do Brasil’s employee pension fund, is Latin America’s largest institutional investor. Among the top ten institutions worldwide in credit-card issuance, only half are in the major advanced industrial countries: the remaining five are split between Brazil (three) and China (two).51

Finally, Brazil also has one of the world’s largest and most innovative stock and securities exchanges: BM&FBovespa, formed from a merger of the two major exchanges

49 On Brazil’s public banks, see von Mettenheim 2010.50 Alexander 2010.51 Jenkins 2010.

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in 2009. In 2009 BM&FBovespa was tenth worldwide in equity market capitalization, and also tenth in terms of new investment capital raised.52 In September 2010, Petrobrás, the majority state-owned petroleum and energy giant, raised $67 billion in new capital in what was the largest ever corporate equity issue worldwide to that date. Brazil has been a leader in technical assistance to smaller exchanges throughout Latin America and the Caribbean, as well as in other emerging markets.

Brazil also possesses an enormous public sector industrial development bank: the Banco Nacional de Desenvolvimento Econômico e Social (BNDES). In 2008 the BNDES extended new loans worth $40 billion, while the multilateral development banks lent $32 billion to all of Latin America and the Caribbean: $13 billion from the World Bank, $12 billion from the Inter-American Development Bank (IDB), and almost $8 billion from the Andean Development Corporation (CAF).53 Since the mid 1990s, the BNDES has made export financing its major push. A particular focus has been providing financing to Brazilian firms engaged in mega-construction projects on roads, dams, and waterways throughout South America, associated with a multilateral (but largely Brazilian-conceptualized) set of infrastructure construction projects known collectively as the IIRSA (Integration of South American Regional Infrastructure) undertaking, formally inaugurated in Brazil under then President Fernando Henrique Cardoso in 2001, but incorporating a number of projects already underway or in the planning stage.54 The BNDES collaborates with the IDB, CAF, and Fonplata (River Plate Basin Fund), as well as private investors, in funding the IIRSA.

The Brazilian government’s preferences for the domestic financial regulatory frameworks of its neighbors are non-intrusive and certainly not publicly proclaimed, but favor a mostly pro-market regulatory framework not unlike that of the U.S., yet without the U.S.’s prejudice against public banks, particularly those oriented toward longer term development lending. In this vein, it is important to recall that the BNDES has strongly cooperated in government-led efforts to promote private capital markets. During the debt-crisis years of the 1980s, for example, the development banks’ equity-investment subsidiary, BNDES-Participações, kept many large national firms afloat by transforming their loans to it into government-owned shares, to be held until the firms were in better financial shape.55

Given Brazil’s sizable financial capabilities, its neighbors, with some justice, fear Brazilian financial imperialism, or the expansion of Brazilian banks and financial firms throughout the continent, although the Brazilian government tries hard to avoid seeming overbearing. Brazil’s finance ministry and various government financial regulators, including the Banco Central and the Securities Commission (CVM), as well as private financial sector organizations and even non-governmental organizations, have been very active participants and very frequently leaders in a host of multilateral technical financial exchange programs throughout the hemisphere, particularly in the areas of corporate

52 WFE 2010.53 McElhiny 2009.54 Zibechi 2006; Gustafson and Armijo forthcoming.55 Stallings with Studart 2006; von Mettenheim 2010.

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governance reform, promoting socially-responsible business practices through the stock exchange, and other projects to strengthen the capital markets.

Architectures of international insertion

Brazil’s regional financial project is to integrate South America (and sometimes also Meso-America, or Mexico and Central America) into the global economy, yet to do so without yielding up by prior treaty commitments the rights to use those financial levers of national development policy that have on past occasions apparently proven so useful within Brazil. These financial levers would include such institutions and techniques as state banks, the rights to impose temporary capital controls, taxes, directed lending requirements, or other handicaps on banks and institutional investors, including those headquartered abroad, and to make all such financial institutions subject to Brazilian law. The government also defends, in principle, the right to impose additional requirements specifically on foreign investors.56

For the most part, Brazilian government views on the optimal domestic regulatory framework for the financial sector are closer to those traditionally associated with, for example, Germany, France, or Japan, rather than to those of the United States. Consequently, in the various multilateral trade negotiations in which Brazil participates, including the Doha Round of the WTO and the talks over the FTAA, its negotiators have taken the lead in constructing multilateral South-South coalitions to oppose the so-called “deep integration” agenda of the U.S.

At the same time, representatives of Brazilian private financial capital, often supported by the government financial regulatory agencies to which they are close in training and economic ideology, are lobbying to liberalize the country’s financial rules. The main trade associations for banks and capital markets institutions—Febraban and Anbima—are working with the equity, debt, and futures exchange, BM&FBovespa, on proposed technical rule changes to transform Brazil into a major financial center.57 Brazilian multinationals are another source of pressure for financial deregulation and support for financial property rights, at home and abroad. As of 2009, Brazil’s own transnational firms have become important direct investors throughout Latin America.58 Brazil’s government recently has supported Brazilian direct investors and service providers vis-à-vis the governments of Ecuador and Bolívia, in disputes over the quality of dam construction and nationalization of Brazilian-owned natural gas assets, respectively.

Yet President Lula da Silva and his advisors consistently have treated the long-term diplomatic relationships as more important than the immediate investment disputes, taking relatively conciliatory positions that earned his government not inconsiderable

56 The basic framework for foreign investment and lending remains Law 4131 of 1962. Certain foreign currency legislation dates back to the 1930s. 57 da Costa 2010.58 ECLAC 2010.

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scorn from the press back at home.59 Other examples of Brazil’s basic preferences for the international financial regulations of its neighbors being subordinated to diplomatic concerns for building regional collaboration include Brazil’s muted responses to Argentina’s decisions to impose special tariffs on Brazilian imports to Argentina to compensate for exchange rate movements unfavorable to Argentine exporters (as in January 1999, when Brazil’s currency experienced a forced devaluation while Argentina’s remained pegged to the U.S. dollar) and to Uruguay’s repeated but as yet unrealized threats to sign a bilateral trade and investment treaty (BIT) with the U.S., technically a violation of Uruguay’s Mercosur commitments.

Participation in global financial governance

As is the case in Venezuela, Brazilian officials clearly conceptualize foreign financial policies in terms of international political strategy as well as in terms of national economic and financial goals. The Brazilian government’s most deeply held view is that Brazil, as a large and increasingly significant country, ought to participate more actively in global governance than it has in the past. In late September 2010 Brazilian finance minister Guido Mantega made headlines for implicitly echoing the U.S. position that too many East Asian countries (long including China, but very recently also South Korea and even Japan) had been manipulating their currencies, and suggesting that exchange rate management ought to be more multilateral and collaborative.60 Given that Brazil’s currency appreciated by about 38 percent between January 2009 and October 2010 vis-à-vis the U.S. dollar—not to mention with respect to Brazil’s major trading partner, which now is China—Brazil’s complaints are widely considered reasonable.61 Yet thus far Brazil’s government has not been a strong proponent, much less an organizer, of regional currency integration or currency swap schemes. A modest scheme to use their local currencies for trade has been in effect with Argentina since late 2009.62 However, the facility remains voluntary for trading firms, and seems designed mainly to ease transaction costs, not to make a statement relevant to large problems such as those of aligning currency levels or preventing financial contagion.

Meanwhile, Brazil has been willing to join the Chávez-promoted Banco del Sur, and to contribute $2 billion in initial capital toward that project, and would surely participate in almost any credible study committee to consider regional currency swaps or a regional currency. At the moment, however, Brazilian policymakers appear to favor the status quo in terms of the content of international and multilateral financial policies. The shifts in global financial governance being actively pursued by Brazil are less about content and more about process. Brazil would like to see greater influence for itself and its region—whether South America or Latin America more generally—in global financial 59 In general, foreign economic policy in Brazil has been seen as a core component—and often the most important one—of the country’s overall foreign policy. See Armijo and Kearney 2008. 60 Wheatley 2010.61 The real more than doubled in value against the dollar between January 1, 2003, when President Lula first assumed office, and November 1, 2010, and was the currency that rose most among all of those tracked by Bloomberg. See “Brazil Treasury Plans to Sell More Real Bonds Abroad,” Bloomberg online, November 3, 2010.62 Eichengreen 2010; Bresser-Pereira and Holland 2009.

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governance. Brazil, Mexico, and Argentina all have been eager participants in the large economies’ G20, which largely has replaced the G7 of the major advanced industrial countries as the principal forum for collaborative consideration of major financial problems. And as noted, Brazil has not been shy about using this forum to make suggestions.

The Brazilian government and foreign policy establishment are also keen to influence international financial policies in South America and Latin America by exerting a strong presence in continental and hemispheric debates over financial, monetary, macroeconomic, and regulatory issues.63 Among the most important centers for such transnational debates over the financial future of the region and hemisphere, we may note the venerable United Nations’ Economic Commission on Latin America (CEPAL), headquartered in Sántiago, historically leftist and “structuralist,” although today centrist in economic ideology, and the Inter-American Development Bank (IDB) in Washington, D.C., sometimes tarred as “neoliberal” in Latin America, although in reality both pro-market and concerned for greater social equality. Brazilian academic economists at the country’s top university have on-going and very active interchanges with their colleagues at CEPAL, the IDB, and also the World Bank, the United Nations Development Program (UNDP), and the IMF, frequently citing one another’s papers.

Economists close to the Brazilian government also have played a large role in a new but increasingly influential private group of wise men and women, the Latin American Shadow Financial Regulatory Committee (CLAAF in Spanish), which held its first meeting in Rio de Janeiro in 2000. Relatively orthodox in the training and background of members, the CLAFF is poised to consider what options might be best for Latin America, even when these views are not those favored by the U.S. private financial community or U.S. government.64 Members must be well-known economists from Latin America, except when no Latin American individual with a particular expertise can be identified. The CLAAF meets three times a year to debate the current international and hemispheric economic policy scenario, frequently issuing consensus policy statements, intentionally couched in bland central bankers’ language, but not infrequently fairly pointed and controversial in their explicit policy recommendations. Its members have been early champions of the idea that many developing countries, however well their domestic economies are managed, suffer under the handicap of “original sin,” that is, lack access to long-term loans in their home currency.65

Our point here is that networks promoted by Brazil have been important in nuturing a distinctly Latin American (and often South American) ethos of what we might term pro-market developmentalism, including research that is sometimes open to exploring the implications of political variables. To date, there has been little intra-

63 Prior to the 1990s, debates over Brazil’s foreign policy largely took place within the government, with the involvement of career civil servants and senior political appointees in the foreign, finance, and commerce ministries. In recent decades foreign and public policy think tanks, which issue studies and convene seminars, have played an increasingly prominent role. 64 At <www.claaf.org>65 Eichengreen and Hausmann 2005.

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regional penetration of Latin American domestic markets in loans, equities, or debt securities by translatin financial firms, as shown in this paper’s section three above. Nonetheless, many members of bodies such as the CLAAF incline to the view that investors who are fellow Latins will be more sensitive to the needs of their Latin American customers. Such a view indirectly bolsters the Brazilian preference for an internally-united South America with a distinct and separate identity from North America. For example, Cuban expatriate Liliana Rojas-Suarez, the longtime CLAAF chair, has coauthored research suggesting that foreign-owned banks—with the exception of Spanish banks—tend to exacerbate the impact of global shocks on the domestic economies in Latin America, while domestically-owned banks do not.66

Moreover, Brazil. like almost every other South American country from Venezuela to Chile--and certainly including Brazil’s close Mercosur partner, Argentina--has been anxious to avoid having to accept the loan conditionalities of the international financial institutions such as the IMF when it accepts emergency credits as part of a strategy to avoid crisis. Yet rather than trying to establish parallel regional institutions that may be more responsive to Southern concerns, which has been Venezuela’s strategy in recent years, Brazil’s choice most of the time has been to seek greater representation and influence in the existing institutions. For example, the BRICs countries (Brazil, Russia, India, and China) at their first heads of state summit meeting in June 2009 in Yekaterinburg, Russia formally called on the major advanced industrial countries of the Group of Seven (G7) to reallocate votes and quotas toward emerging market countries in the World Bank and IMF.67 In support of this goal, China, India, and Brazil each voluntarily and with considerable public fanfare committed additional funds to the IMF, of $30 billion, $10 billion, and $10 billion, respectively, leading President Lula to exult that it was very “chic” to be lending to the IMF.68 The U.S.’ Wall Street Journal tartly observed that these upstarts had received a better deal than the advanced industrial countries, in that they had taken out large subscriptions to the Fund’s first ever global bond issue, which unlike ordinary paid-in capital subscriptions, could rise in market value and be liquidated at will in the secondary markets.69

Brazil’s vision of a financially-unified South America with both a strong market and a group of states capable of regulating and intervening in financial markets when the government decides this is necessary for the social good, has for the most part been well-served by having the example of the neoliberal U.S. to its right and popular socialist Venezuela to its left, allowing Brazilian diplomats to play their comfortable and customary role of sensible and moderate mediator. This pattern is reflected in the politics that accompanied both the formation of UNASUR and the formal establishment of the

66 Galindo, Izquierdo, and Rojas-Suárez 2010.67 The BRICs were able to agree on their collective demand for greater representation, but not on whether to publicly endorse the goal of trying to replace the U.S. dollar as the global reserve currency, with for example the IMF’s Special Drawing Rights. Although Chinese officials had been most vocal in raising this possibility going into the summit, their enormous dollar-denominated reserves, and “competitive” exchange rate vis-à-vis the dollar would mean that they would have most to lose from dollar turbulence or a precipitous slide. See press coverage of June 17, 2009. 68 Beck 2009.69 Davis 2009.

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Banco del Sur, as well as in Brazil’s now established reputation as a moderate and usually pro-West participant in multilateral councils including the large economies’ G20.70

VII. Comparing regional financial projects

This paper began by suggesting the existence of three regional financial visions that were either implicit or explicit in the overall foreign policies of the United States, Venezuela, and Brazil, three states that aspire to leadership in the Americas in the early twenty-first century. The three competing visions of regional financial integration differ substantially. To begin with, a different set of societal interests is represented within each would-be-leader state’s own national policymaking process for financial and monetary affairs, as summarized in Table 11. In the U.S., private financial sector interests have tended to drive financial policies and preferences, except during unusual circumstances, such as the aftermath of the 2008-09 financial crisis, which has led to re-regulation of the financial sector through the Wall Street Reform and Consumer Protection (“Dodd-Frank”) Act of 2010.71 Normally, foreign financial policy also is a matter for the executive branch technocracy to decide, with de facto active participation from private industry experts. Given the U.S. economy’s difficult situation in 2010, the Congress, and U.S. popular opinion, had become sufficiently involved to attempt, as of this writing without success, to have the Obama administration certify China as an exchange rate manipulator, triggering trade sanctions. The U.S.’ major transnational corporations, which normally side with the banks, have become sensitized to the charge of transporting jobs overseas, and so less likely to support financial capitalists on exchange rate matters. But on matters such as opening foreign markets to investment in financial services, and the protection of financial property abroad, U.S. preferences should remain stable.

70 Nonetheless, Brazil has been cool to the suggestion that it follow the path of Mexico and South Korea and join the “rich countries’ club,” the Organization for Economic Co-operation and Development (OECD), believing that it thereby would lose moral authority and bargaining power as a spokescountry for the developing world. See Fitzpatrick 2009.71 The views of private banks nonetheless appear to be driving the net business community preferences, though, as evidenced by the unusually intense lobbying of the U.S. Chamber of Commerce in the late 2010 elections. Even some in the normally enthusiastically pro-market financial press have expressed shock. See Tett 2010.

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Table 11.Interests represented within the national financial policymaking process: The U.S., Venezuela, and Brazil

Private banks & financial firms

Private industry

Organized labor &/or “popular sectors”

Finance ministry & central bank

Foreign ministry

United States Yes TNCs only No Yes SometimesVenezuela No No Yes No YesBrazil Yes Yes No Yes Yes

In Venezuela, the private financial sector is almost totally excluded from senior policy circles, serving instead as an object of demonization. Venezuelan banks are under siege from their government. Looking back to Table 7, we see that private stock exchanges and other capital markets, in most of the larger countries of the hemisphere a somewhat to a fairly significant source of business finance, in Venezuela barely exist. On the other hand, Venezuela’s President Chávez has been able to use national and regional financial policies, both real and merely hortatory, to build support among his mostly lower-class constituent base, and has advised his fellow presidents in Ecuador and Bolivia to do likewise. Venezuela’s foreign ministry is very involved in foreign financial policymaking. The government’s senior financial regulators and finance ministry officials are of course also consulted, yet aware of their low levels of independence from the political authorities.

For Brazil, Table 11 suggests that the profile of which domestic interests has input into foreign financial policies is more similar to that of the U.S. than Venezuela, with the difference that non-financial business interests have considerably wider access to senior financial policymakers.72 For example, prior to government institutional reorganizations in the early 1990s, both trade and foreign financial policies were carried out by agencies subordinate to the Ministry of Industry and Commerce, which saw the exchange rate quite explicitly as a tool of trade promotion.73 In Brazil, as in the other two countries, preferences about national financial regulatory policies, much less preferences about the financial policies of other countries, do not usually resonate with the general public, or even with the legislature. However, one aspect of international financial regulations—exchange rate policies—has become increasingly significant in Brazilian domestic

72 This poses an interesting problem for some political economy theories of the “varieties of capitalism,” in that, in Brazil as in the U.S., laws dating from the 1930s prohibited most cross-holdings of financial and industrial capital. In Mexico, by contrast, integrated financial-industrial conglomerates were the norm during most of the twentieth century. Yet it is Mexico, not Brazil, where financial interests appear to have held greatest sway over foreign economic policy. Cf. Maxfield 2005. 73 Armijo and Kearney 2009.

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politics since 2009. As in the U.S. worries over Brazil’s high exchange rate have began to acquire an increasingly high public profile.

Table 12, which compares the broad sweep of the foreign financial policy projects of each of the would-be regional leader countries, summarizes the essence of the paper’s research findings. We will summarize by columns, rather than by rows. With respect to domestic financial regulation, the U.S. would like to promote idealized U.S.-style arrangements throughout the hemisphere: an independent central bank, a competitive and agile private banking sector anchored by commercial banks but also populated by institutional investors and lenders, and deep securities markets for both corporate debt and equity. Venezuela’s current administration distrusts both private banks and those charged with implementing national monetary policy, but hasn’t yet found a means of freeing itself from the need for their services. It therefore hasn’t yet developed a positive foreign policy project for national financial regulation for export to the region. Brazil’s foreign policy project in domestic financial promotion in the continent (and other Southern destinations) is a source of considerable enthusiasm, with Brazil at or near the center of numerous transnational networks linking South American business school faculty, capital markets investors, exchanges, and regulators, and senior development bank officials. The substance of Brazil’s vision of financial development is quite similar to that of the U.S., with the important difference that the state is much more likely to be viewed as a valuable actor, particularly when subjected to democratically-imposed transparency and oversight. For example, in 2009 President Lula summarily fired the president of the publicly-owned Banco do Brasil (BB), one of the three largest banks in Latin America, on the grounds of failing to increase counter-cyclical lending sufficiently during the financial crisis. Meanwhile, finance minister Guido Mantega has been proud of the BNDES’ ability to do just that.74

With respect to the international financial architectures of neighboring states, the subject of Table 12’s second column, the U.S. seeks to have countries forswear the policy options of capital controls, barriers or limits to inward foreign portfolio and direct investment, although it has in very recent years made exceptions for barriers aimed at keeping out investments possibly linked to possible criminal activity. Since the wave of high-profile Japanese direct investments in the 1980s, the U.S.’s own legislation has become tougher on inward FDI, prohibited or limited in transportation, finance, media and other sectors deemed critical to national security, although such clauses typically are identified as market-barriers when imposed on U.S. firms from abroad. U.S. foreign financial policies strongly promote the sanctity of financial contracts, and decry unilateral debt default or rescheduling.

74 Fleischer 2009; Wheatley 2009.

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Table 12.Regional financial themes and preferences: U.S., Venezuela, and Brazil

Domestic financial regulations

Architecture of international financial insertion

Multilateral financial governance

United States * Prefer private to state-owned banks * Encourge deep capital (equity & securities) markets* Central banks should be de jure independent* Regulatory convergence to U.S. example

* No capital or investment controls, except on money-laundering* Limited national security exceptions (but only for U.S.?)* Pre-commitment to neutral international arbitration for FDI or other disputes

* Continue technocratic, “best practices” IFI management* IFI conditionality is necessary* Prefers transnational & industry-based regulation * Democratization of global governance exacts costs in efficiency & fairness* Only ad hoc & bilateral currency swap arrangements

Venezuela * Private banks are a necessary evil* Do not encourage capital markets, havens for corrupt speculators* Central banks should be politically subordinate

* International capital & investment controls are essential development tools* The state, as representative of the people, sometimes may need to renegotiate w/ TNCs

* IFIs are neoliberal servants of U.S. and TNCs* Regional IFIs can break dependency & end unjust loan conditionality* Need for new regional financial architecture (NRFA) to retain scarce FX & credit resources

Brazil * Both private & public banks have essential roles* Encourage deep capital (equity & securities) markets* De facto central bank independence is sufficient

* Occasional capital or investment controls are the legitimate prerogative of sovereign states* International financial contracts should be honored—but should not have formal treaty status

* Democratized governance of existing IFIs can fix what’s wrong* Developing countries should participate in world financial governance & transnational debates* Support for new regional IFIs is good politics* Lukewarm on regional swap or currency plans

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Venezuelan rhetoric and policies support maximum national policy space vis-à-vis foreign investors, posing investment conflicts as between the people and rapacious capitalists. President Chávez has encouraged his ALBA partners to take a similarly tough stance, although all of the ALBA countries find their options limited by skeptical global financial markets, whose funds they still need. The Brazilian government has vocally opposed yielding up financial policy instruments, such as the sovereign right impose taxes on hot money inflows or renegotiate financial contracts with foreigners in host country courts, arguing these points in multilateral fora such as trade negotiations. At the same time, Brazil is increasingly an investor (home) country for multinational firms, and plays the traditional diplomatic role of supporting its companies in their dealings abroad. The Brazilian government generally supports private financial property rights, but is reluctant to enshire such rights in sovereign treaties, having been in the position itself of declaring a unilateral debt moratorium in the not too distant past.75

Our final comparative category concerns the three would-be leader countries’ views about their neighbors’ participation in multilateral financial governance. The U.S. favors bilateral and temporary measures to respond to the spread of international banking and currency crises (“financial contagion”). Thus the U.S. Federal Reserve Bank in 2009 entered into a number of short-term emergency reserve swap arrangements, including with Brazil, Mexico, South Korea, and Argentina in 2009 for up to $15 billion and eighteen months each. The only institutionalized multilateral swap arrangements the U.S. supports are those through the IMF, where loans come with sharp economic conditions. The United States is willing to support incremental adjustment of quotas and votes to favor greater inclusion of developing countries in the international financial institutions such as the World Bank and IMF, since the countries of the EU are likely to lose relatively more from such an exercise than the US. But the U.S. remains suspicious of new institutions that it will not control. Intellectuals close to the Washington, D.C. policy establishment often focus on the costs—in reduced efficiency and effectiveness—likely to result from expanding developing country participation in critical global governance institutions, invoking images of stalemate, gridlock, and the selfishness and irresponsibility of unseasoned members.76 In terms of regulatory cooperation for cross-border financial transactions, the U.S. government generally looks most favorably on voluntary and sector-specific regulation negotiated among small groups of cogniscenti—in this case financial firms themselves and national regulators, such as the International Organization of Securities Commissions (IOSCO) or International Accounting Standards Board (IASB)—rather than via a more open, public, and possibly conflictual process.

Venezuela has been the most active of the three aspiring regional leaders examined in promoting new forms of multilateral financial cooperation, putting the government’s not inconsiderable cachê around South America and among global social movements behind the effort to create a New Regional Financial Architecture (NRFA). ALBA has floated ambitious plans for new Latin American and Caribbean institutions including two development banks, a regional currency swap fund, and a regional

75 The debt moratorium was imposed in 1987, and rescheduling wasn’t completed until 1994. Brazil’s last IMF borrowing was in 2002, and it repaid all existing loans early in 2005.76 Keohane and Nye 2001; Castañeda 2010.

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currency all to be managed on humane and redistributive lines. Venezuela’s problem lies in locating and managing the funds necessary to such an effort.

Brazil’s principal preferences with respect to its neighbors’ attitudes toward multilteral financial governance are that voices outside the traditional G7 be heard more. That is, Brazilian policymakers have been willing to start new multilateral institutions—but also to work within existing institutions. Their quarrels with the World Bank, IDB, and IMF concern representation rather than deriving from a fundamentally-distinct economic ideology. In fact, Brazil has been lukewarm in its enthusiasm for new regional currency swap arrangements or establishment of a regional currency—perhaps due to reasonable fears that Brazil would have to be a primary funder for any such ambitious new project.

VIII. Conclusions: Financial projects and regional integration in the Americas

Our conclusions return to the larger project of which this paper forms a piece. Processes of financial integration and regionalization are occuring alongside those in other sectors, and what happens in finance will help shape the overall political economy of the Western Hemisphere. Our final comparative exercise in this paper examines the types of overall regional integration that the three regional financial projects of the United States, Venezuela, and Brazil seem designed to promote. It is important to note one difference between Table 2 above, which laid out diverse types of regional integration or cooperation as ideal-types, and Table 13 here, which locates the alternative actually-existing regional financial projects within this theoretical space. While Table 2 suggested a continuum, Table 13 instead proposes that complex and multi-dimensional national foreign policy projects such as those we have described may tend to promote multiple types of integration. As in the previous section, the discussion proceeds via columns.

Table 13.Types of overall regional integration promoted by the competing financial visions of the United States, Venezuela, and Brazil

Deep private & market-based integration?

Voluntaryregulatory emulation & convergence?

Regular multilateral consulation?

Formal commitments to foreswear unilateralism?

Exclusive regionalism: collective barriers against rest of world?

U.S. Yes Yes No Yes (FTAs) NoVenezuela No Yes Yes Yes (NRFA) YesBrazil Yes Yes Yes No No

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We begin with the first column. The regional financial projects of both the United States and Brazilian governments intentionally promote further market-based financial internationalization—or the proliferation of cross-border, private, and uncoordinated financial ties--within the region. The United States was the main source of foreign loans, financial advice, and international investment in Latin America and the Caribbean from the 1930s through at least the end of the twentieth century, but is now losing this hegemony, with the sharpest losses in those countries that are most geographically distant. The U.S.’ most important contemporary financial goal in the hemisphere is to recoup those losses by pursuing expanded access to the domestic financial services markets in the developing countries of the hemisphere, most of which are growing at much faster rates than the U.S. Realization of Brazil’s regional financial project also would further decentralized, market-driven forms of regional integration. The strategy of Brazilian private banks is to separate off South America, or perhaps even the entire Latin American market, from U.S. dominance. Governments in both countries will tend to support their private banks, although the Brazilian government and its banks, unlike those in the U.S., thus far have been content to work within their neighbors’ existing national financial regulatory frameworks. With the advancement of either vision, further market integration is likely.

Table 13’s second column asks about voluntary regulatory emulation and convergence. All three of the would-be leader countries discussed here would like to transfer their domestic financial models—or at least an idealized model of them—to their neighbors. All three governments have funded studies, conferences, and even summits of heads of states to promote their visions of democratic control of credit and money. In fact, promoting a vision for voluntary emulation would seem to be implicit in the notion of having a regional financial vision.

The third column, inquiring into the multilateral consultative processes envisioned by each regional financial project, reveals divergence among the leader states. The U.S. emphatically is not promoting new initiatives in regional financial consultation or governance, having concluded that its condition as the sole global superpower and issuer of the world’s main reserve currency implies a sufficiently large difference of systemic financial importance as to make ostensibly equal consultation with even Brazil and Mexico unreasonable and impractical. As a practical matter, the 2008-09 U.S. and world financial crisis has obliged the U.S. and the other major advanced industrial democracies of the G7 to participate with some seriousness in the G20 large economies forum, and to include countries such as China, Brazil, Mexico, Argentina, South Korea, and Turkey in their discussions, an incremental but significant global power shift that U.S. policymakers already struggle with.77 By this same logic, the U.S. has little interest in promoting hemispheric dollarization, as its leaders and diplomats would not like to have to fend off requests from its neighbors to, for example, elect Latin American regional representatives as governors to the Federal Reserve Bank. United States policymakers thus have seen it

77 Something similar occurred in the early 1980s, when the G5 group established on the breakdown of fixed exchange rates among the major industrial democracies found itself compelled to include the then new financial powers, Germany and Japan.

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in their national interest to downplay regional consultation over monetary and financial policies—except when, as in the 2008-09 crisis, their hand has been forced.

In contrast, both Venezuela and Brazil see value in regular multilateral consultations, as for example via the meetings in 2010 of the refounded Rio Group (uniting all of Latin America and the Caribbean, but excluding the U.S. and Canada, as in the geographic vision of the “region” promoted by Venezuela) to share information on macroeconomic stimulus packages in the wake of the international financial crisis. Regular consultations among national financial and monetary policymakers already take place within Mercosur auspices, and both countries would be happy to see the newer UNASUR grouping promote similar consultations.

The table’s fourth column, which asks about each regional financial project’s formal commitments to forswear unilateralism, is perhaps the table’s most interesting. For the most part this paper has painted the financial visions of the U.S. and Venezuela as ideological opposites, with Brazilian economic ideology falling somewhere between the two. Here, and counterintuitively, we have placed the U.S. and Venezuela on one side of the fence, with Brazil taking the other position.

The United States’ stance on monetary and financial unilateralism in the hemisphere is quite subtle. As noted, the U.S. is not pursuing new fora dedicated to regional financial or macroeconomic collaboration or even serious consultation. How, then, can we suggest that the U.S.’s financial project tends to establish formal reductions in national autonomy in favor of some other decisionmaker, such as a multilateral institution? Our argument is that, in effect, the U.S. is seeking the same goal as Venezuela: pre-empting unilateral actions by its regional neighbors that the leader state might consider undesireable. The U.S.’ tactic is to get other countries to precommit via formal treaty obligations to refrain from certain financial behaviors--such as imposing capital controls or unilaterally declaring debt mortoria. In exchange for this explicit relinquishment of policy space, U.S.-partner countries get the plausible promise of increased foreign direct investment, especially from the U.S. This was the essential bargain underlying Mexican accession to the NAFTA in the early 1990s, and has been continued through various modalities since.78

Venezuela’s position is quite clear: the current government would like to see a new regional financial architecture established, presumably with Venezuela as the leading player. Although the Bolivarian ideology explicitly opposes loan conditionalities and other sanctions on sovereign states for non-compliance with international financial commitments, joining a regional currency or reserve fund presumably brings certain very difficult to avoid financial obligations to one’s fellow governments, inconsistent with unilateral decisionmaking. Brazil, in contrast, is interested at present in building multilateral consultative and political institutions, but seems not to care about locking in particular monetary or financial policies, or perhaps even strong commitments to make

78 Foreign direct investment in Mexico, especially from the U.S., increased following the inauguration of NAFTA in early 1994. As shown in Table 9 above, however, Mexico’s share in total inward FDI to Latin America has fallen sharply since the turn of the century.

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joint decisions, from its neighbors. The Brazilian foreign policy establishment has confidence in its private financial sector’s ability to compete effectively within the existing and semi-liberal financial regulatory architecture in the region.

Table 13’s final column inquires into the ideological and political tenor of the competing regional financial visions. Both the U.S. and the Brazilian regional financial projects are at base market-oriented and tending toward an “open regionalism” vision of integrating the Latin America with the larger world. That is, in the medium-run both promote financial globalization, although Brazil’s vision allows more room for safeguards and sand in the gears. In contrast, the Bolivarian vision promoted by Venezuela today represents exclusive regionalism: the putting up collective financial barriers against an external environment perceived as treacherous and, in the absence of such strong protections, impossible to control or regulate.

In closing, we sidestep the question of whose vision is more likely to prevail—or, more precisely, more likely to have some influence on real financial developments in the Americas. The one observation that seems certain is that the very fact of the existence of three competing financial projects per se appears most likely to promote Brazil’s vision, in that on several dimensions it represents a centrist or middle ground position between the U.S.’ preferences on its ideological right and those of Venezuela to the left.

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