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

32 Pages Posted: 26 Feb 2008

See all articles by Stijn Claessens

Stijn Claessens

Bank for International Settlements (BIS)

Geoffrey R. D. Underhill

University of Amsterdam - Amsterdam Institute for Social Science Research (AISSR)

Xiaoke Zhang

University of Nottingham - School of Politics

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.

Suggested Citation

Claessens, Stijn and Underhill, Geoffrey R. D. and Zhang, Xiaoke, The Political Economy of Basle II: The Costs for Poor Countries. World Economy, Vol. 31, Issue 3, pp. 313-344, March 2008. Available at SSRN: https://ssrn.com/abstract=1096760 or http://dx.doi.org/10.1111/j.1467-9701.2007.01090.x

Stijn Claessens

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Geoffrey R. D. Underhill

University of Amsterdam - Amsterdam Institute for Social Science Research (AISSR) ( email )

Amsterdam, 1012 CX
Netherlands
+31 20 525 2172 (Phone)
+31 20 525 2086 (Fax)

Xiaoke Zhang

University of Nottingham - School of Politics ( email )

Nottingham
United Kingdom
+44 115 846 7781 (Phone)

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