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Multilateral development banks and regional integration: a G20 agenda

Structural asymmetries in international financial relations, especially the international currency hierarchy, impose continuous challenges on peripheral countries, resulting in difficulties accessing foreign currencies and balance of payments crises, as well as long-term financing problems. Although analytically distinct, these issues are deeply interconnected. Regional financial cooperation emerges as a potential solution to mitigate these effects, particularly through short and long-term financing and macroeconomic coordination.

In Latin America, there are limited examples of macroeconomic coordination, but short and long-term financing initiatives have shown both successes and challenges. The advocated view is that these actions should be integrated and directed towards addressing structural difficulties rather than being guided solely by market failures or transitional missions.

Multilateral Development Banks (MDBs) are seen as ideal candidates to address these challenges due to their size, history, regional knowledge, and financial resources. The Brazilian presidency of the G20, with the proposal to reform MDBs to make them “bigger, better, and more efficient,” presents a significant opportunity. Besides capitalizing these institutions, five lines of concrete action are proposed: granting loans in local currencies, concessional loans for middle-income countries, providing short-term liquidity in reserve currencies, supporting regional financial cooperation initiatives, and deepening the dialogue with rating agencies.

The current geopolitical context, with increasing tensions and discussions on deglobalization, reinforces the importance of regional economic cooperation, especially for peripheral countries. The asymmetries of the International Monetary and Financial System (IMFS) create significant obstacles to the socioeconomic development of these nations, exacerbating financing problems and access to strong currencies.

In Latin America, recurrent balance of payments crises, high-interest rates, volatile exchange rates, and a lack of investment financing are common challenges. To address these difficulties, the note proposes a methodology that organizes regional initiatives into three axes: short-term financing, long-term financing, and macroeconomic coordination. This approach highlights the need for integrated policy strategies for regional integration.

Historically, the region has faced currency and debt crises, exacerbated by economic policies that often prioritize external debt repayment over internal development. Examples include the external debt crisis of the 1980s and episodes of “sudden stops” in the 1990s.

To mitigate these problems, regional financial cooperation is seen as crucial. The most effective cooperation experience for long-term financing is through Multilateral Development Banks, which offer financing at low costs and long terms. In Latin America, the main MDBs include the World Bank, the Inter-American Development Bank (IDB), and the Development Bank of Latin America (CAF).

These banks have a cooperative structure that brings together advanced and peripheral economies, allowing access to financial resources at low costs for countries with lower-quality currencies. They play a significant role in financing development projects, providing technical and financial support for various areas, from infrastructure to health and education.

The Brazilian presidency of the G20 is seen as an opportunity to promote reforms in MDBs, aligned with a holistic approach that considers the asymmetries of the IMFS. These reforms could include granting loans in local currencies, concessional loans for middle-income countries, and developing regional financial integration mechanisms. Additionally, continuing the dialogue with rating agencies is essential to improve the solvency assessment of MDBs and promote the rechanneling of Special Drawing Rights (SDRs) to these banks.

Regional financial integration is seen as a necessary step to minimize the effects of monetary asymmetries. Regional liquidity provision initiatives in strong currencies, complemented by measures to promote the use of local currencies, are essential tools to address the structural challenges imposed by the IMFS.

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