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The Political Economy of Basle II: The Costs for Poor Countries

Stijn Claessens (), Geoffrey R. D. Underhill and Xiaoke Zhang

The World Economy, 2008, vol. 31, issue 3, 313-344

Abstract: The financial crises of the 1990s triggered many changes to the design of the international financial system. We use the formulation of the new Basle capital accord for banks (B-II) to illustrate that, while much affected, developing countries have had very little influence on this so-called new international financial architecture. We argue that B-II has been formulated largely to serve the interests of powerful market players, with developing countries being left out. At the same time, we demonstrate that B-II is likely to raise the costs and reduce the supply of external financing for developing countries in particular. Furthermore, and importantly, B-II may well increase the pro-cyclicality of external financing, an unfortunate outcome given that developing countries already face much volatility in terms of capital flows. Overall, while B-II may indeed compensate for a range of weaknesses of Basle I, the exclusionary policy process and costs which B-II imposes on developing countries require a re-think of the way in which crucial elements of financial governance, such as the Basle capital accords, are developed and implemented. Copyright 2008 The Authors.

Date: 2008
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