South-South monetary regionalism: a case of productive incoherence?

The variety of monetary and regional cooperation institutions often is characterised as uneven, fragmented, and partially contested. In contrast to this narrative, Grabel (2018) applies a Hirschmanian mindset to monetary and regional cooperation that highlights the experimental nature of recent innovations as a ‘productive incoherence’. This paper presents a case study of such productive incoherence. We examine the institutional set up of the Local Currency Payments System (SML) between the Mercosur countries based on interviews with Central Bank staff and statistical analysis. We assess the factors that explain the emergence, limitations and institutional linkages of the SML. The results suggest that, despite its small scale, the mechanism expanded and provided to be remarkably robust in midst of a generally agonising Mercosur, representing the first cooperation between the Mercosur central banks after decades of absence of coordination of exchange rate policy and foreign exchange regulation. Our findings confirm and further refine Grabel’s approach: assessing incremental changes in terms of highly specific and contingent policies is key to understanding the role institutions play for development. We conclude that even very small-scale initiatives such as the SML can contribute to developmental monetary and financial governance as a building block of reform and change.