Collective Financial Statecraft in Latin America: Regional Development Banks

• In Event: International Finance Challenges and Tools

Abstract

Multilateral cooperation at the regional level within Latin America is replete with innovative but overlapping institutions, and idealistic yet failed initiatives. Regional projects reliably display a three steps forward, two steps back policy trajectory. Why? This paper considers the experience of regionally-focused collective financial statecraft (that is, the founding and operation of regional development banks and capital markets) to illuminate this puzzle. It assumes that the easy explanation—viz., Latin American politicians and economic policymakers are uniquely fractious and driven by partisan myopia—is mostly inaccurate, and therefore investigates the less-obvious structural factors. A qualitative narrative history of the record since the early 1990s reveals that issue-arena-specific incentives to national policymakers are roughly balanced between economic reasons to create such institutions and political economic reasons to let them fail. Moving to the dimension of geopolitics, the paper suggests that US hegemony within the hemisphere historically has undermined regional financial cooperation. Since the early 21st century, however, growing global multipolarity has increased the net extra-regional incentives for intra-regional cooperation. These propositions provide an interpretative scaffolding for a qualitative narrative of thirty years of regionally-based efforts at collective financial statecraft in an important neighborhood of the Global South. The research method is process-tracing, consisting of twenty odd elite interviews supplemented by extensive reading of journalists’ accounts of political battles over public policy (a primary source in this context), as well as government and academic reports and analyses, including many suggested by interviewees, themselves mostly drawn from a loose epistemic community of economic and financial experts.

The paper has five sections. Following the introduction, Section 1 contains the theory and expectations. It first considers the incentives to senior national policymakers to engage in collective regional financial statecraft that follow from characteristics of the international policy sector (aka issue arena) itself. Taking the issue arena to be “collective financial governance to boost the intra-regional supply of long-term investment funding,” we see a strong economic case to be made for policymakers to pursue the pragmatic “third way” option of moving some aspects of financial regulation and institution-building from the national to the geographic neighborhood (regional) level, while eschewing full external opening to global capital markets and institutions. However, there also exist a number of political economy disincentives for bold, sustained regional financial governance collaboration, mainly resulting from the intercountry distribution of anticipated benefits and costs. The expectation is that many projects will be begun, but few will succeed. Moving to the overall geopolitical environment for national governments’ foreign policymaking across all international issue arenas, one may identify two stages since 1990. Hemispheric political and economic hegemony of the United States is the clear theme in the earlier years. This structural condition impeded independent regionalism. During the early 21st century, rising global multipolarity became increasingly important. Multipolarity has its main regional effect in increased trade and financial links between Latin America (especially South America) and extra-regional partners, first in Europe and then in East Asia, especially China. Geopolitical shifts have led to tighter hub-and-spoke links to the US for Northern Latin America, while simultaneously weakening South America’s links to the US. The expectation is thus that, ceteris paribus, global political shifts during the study period and beyond incentivize greater regional joint financial statecraft, but mainly in South America.

Section 2 narrates the trajectory of regional development banks, including the Inter-American Development Bank (IDB), the Development Bank of Latin America (CAF), the stillborn Bank of the South, and Brazil’s own National Economic and Social Development Bank (BNDES), whose vast size complicates regional collective action. Section 3 reports on the sub-regional joint stock trading platform, the Integrated Market of Latin America (MILA), and other initiatives focused on liberalizing private capital flows within the neighborhood. Section 4 synthesizes the findings, which generally support our expectations. Section 5’s conclusions briefly speculate on the applicability of these findings to other regions and policy sectors in the Global South.

Author

• Leslie Elliott Armijo, Simon Fraser University