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Emerging Market Economies and the Reform of the International Financial Architecture: Back to the Future

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  • Jan Kregel
Abstract
Emerging market economies are taking an ill-targeted and far too limited approach to addressing their ongoing problems with the international financial system, according to Senior Scholar Jan Kregel. In this policy brief, he explains why only a wholesale reform of the international financial architecture can adequately address these countries' concerns. As a blueprint for reform, Kregel recommends a radical proposal advanced in the 1940s, most notably by John Maynard Keynes. Keynes was among those who were developing proposals for shaping the international financial system in the immediate postwar period. His clearing union plan, itself inspired by Hjalmar Schacht's system of bilateral clearing agreements, would have effectively eliminated the need for an international reserve currency. Under Keynes's clearing union, trade and other international payments would be automatically facilitated through a global clearinghouse, using debits and credits denominated in a notional unit of account. The unit of account would have a fixed conversion rate to national currencies and could not be bought, sold, or traded--meaning no market for foreign currency would be required. Clearinghouse credits could only be used to offset debits by buying imports, and if not used within a specified period of time, the credits would be extinguished, giving export surplus countries an incentive to spend them. As Kregel points out, this would help support global demand and enable a shared adjustment burden. Though Keynes's proposal was not specifically designed for emerging market economies, Kregel recommends combining this plan with current ideas for regionally governed institutions--to create, in other words, "regional clearing unions," building on existing swaps arrangements. Under such a system, emerging market economies would be able to pursue their development needs without reliance on the prevailing international financial architecture, in which their concerns are, at best, diluted.

Suggested Citation

  • Jan Kregel, 2015. "Emerging Market Economies and the Reform of the International Financial Architecture: Back to the Future," Economics Public Policy Brief Archive ppb_139, Levy Economics Institute.
    • Handle: RePEc:lev:levppb:ppb_139
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    1. Jan Kregel, 2015. "Emerging Markets and the International Financial Architecture: A Blueprint for Reform," Economics Working Paper Archive wp_833, Levy Economics Institute.
    2. Jan Kregel, 2015. "Emerging markets and the international financial architecture," Brazilian Journal of Political Economy, Center of Political Economy, vol. 35(2), pages 285-305.
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