Remaking the architecture: the emerging powers, self-insuring and regional insulation

Abstract

This article examines the interaction between the emerging and traditional powers in global governance reform, and asks whether we are heading towards an international financial system that is more fragmented, where power is more diffused and national and regional arrangements play a more prominent role, at the expense of global multilateral institutions. It begins with a brief discussion of the global systemic and country-specific factors that motivate Brazil, China and other emerging countries to accumulate large currency reserves. We find that national arrangements for managing financial and currency crises will continue to hold sway for emerging countries in the wake of the global crisis. However, the actual capacity of regional arrangements in managing future financial crises is uncertain, and the significance of regional alternatives in the emerging architecture should not be overstated. The real capacity of East Asian regional arrangements to manage financial crises, payments problems or currency attacks is still untested, and key thresholds in multilateralization still lie ahead. In South America, multilateral lender-of-last-resort support inside the region is largely confined to the sub-regional level and is limited by Brazil's reticence. Enduring reliance on bilateral measures for financial crisis management is noted. Where there has been progress in regional solutions, since the global crisis, has been in the role of regional development banks in providing financing for developing countries to enact counter-cyclical policies. Such support also provides insulation for states in the region against the contagion effects of international financial crisis. We are in the midst of transitioning to a more diverse and multi-tiered global financial and monetary system. A reformed IMF could have a role to play in addressing global imbalances and encouraging a shift from national reserves to collective insurance, however, it would be preconditioned by significant shifts in the policy, lending operations, and internal governance of the Fund, and willingness among the G20 to strike a new consensus on how to deal with imbalances, and new accommodation on acceptable reserve levels.