A critical analysis of transnational payment systems in Latin America

Latin America has created some of the most innovative and novel responses to the problem facing many developing countries—namely that of high costs and risks associated with foreign exchange transactions, and the need to promote more regional trade and integration in the face of external constraints and the absence of structural change. This chapter explores three payment systems—the Reciprocal Payments and Credits Agreement (ALADI, created in 1965), the Local Currency Payment System (SML created in 2008), and the Unified System for Reginal Compensation (SUCRE) created in 2010 on the basis of Keynes’ post-WWII clearing union. All were created as the first step toward eventual monetary and financial integration; however, the empirical evidence shows that with few exceptional periods, these mechanisms have not delivered their promise. While they have somewhat reduced transaction costs, they did not promote intra-regional trade or become an important mechanism for channeling foreign trade transactions. The factors that account for this fact are both specific to the particular transnational payment system taken into consideration, and common to the three types of mechanisms analyzed in this chapter. Among the various lessons learned, one important one remains that regional payment systems need to be accompanied with better credit risk management, more flexibility, and above all structural policies to foster diversification at the basic level of productive structures, employment, and value added.