Bank of the South: Toward Financial Autonomy

The launch of the Bank of the South is an ambitious and strategic gambit in regional integration, one that could result in a truly regional development bank. Despite Brazilian concerns, this new institution is ready to be launched.

"Positive," Joseph Stiglitz, Nobel Laureate in Economics, concluded in a recent speech to the Argentine business association in Buenos Aires. He noted that the new Bank of the South (BoS) would allow South American nations to assist each others’ economies, adding that a major obstacle for emerging markets is a lack of long-term financing, and development banks have been successful in the past at filling this void.

On May 22 in Asunción Paraguay, the six founding states—Argentina, Brazil, Bolivia, Paraguay, Ecuador, and Venezuela—reached an agreement on the Bank of the South after two months of negotiations. The BoS will begin operations in 2008. It was to be formally presented to the public in the next presidential summit in Venezuela on June 26, although the date has been delayed. Unlike the International Monetary Fund (IMF) and World Bank, the BoS assigns a single vote to each member country, independent of the size of its financial contribution.

The First Steps

Venezuelan president Hugo Chávez initially proposed the idea of the Bank of the South. Argentine president Nestor Kirchner soon followed suit.

The first step was to throw down the gauntlet. Chávez and Kirchner did this on Feb. 21 in Puerto Ordaz, Venezuela, during the inauguration of the first active oil well in a joint venture between their two state energy companies, Energia Argentina S.A. (Enarsa) and Petroleos de Venezuela S.A. (PDVSA).

The two presidents proposed creation of an institution to quickly and effectively finance regional development projects in a more independent manner. Currently there are two regional banks. The River Plate Basin Financial Fund (FONPLATA), consisting of Argentina, Bolivia, Brazil, Paraguay, and Uruguay, has a mere US$410 million at its disposal. The Andean Promotional Corporation (CAF) manages US$10.5 billion, available for investment in infrastructure. Both banks are related to the World Bank and the IMF, and are structured along the same lines.

During the annual governing meeting of the Inter-American Development Bank (IADB), held in March 2007 in Guatemala, the Argentine and Venezuelan finance ministers made some progress on technical matters and solidified objectives for the proposed institution. In early May, representatives of the six countries reached a consensus known as "The Quito Declaration" that proposed the creation of the Bank in the first quarter of 20071. They also agreed to a stabilization fund designed to aid countries suffering international speculative attacks, and to develop a regional currency. The critical challenge was bringing Brazil on board.

Difficulties and Obstacles

There are two countries professing left-wing progressive governments that are notably absent from the bank’s founding members—Chile and Uruguay. The former has a bilateral trade agreement with the United States and applies neoliberal economic policies. The latter, although a full member of the South American Common Market (Mercosur), has serious political issues with its neighbors, Brazil and Argentina. Uruguay has collided repeatedly with Brazil on trade issues and resents the fact that its powerful neighbor announced its refusal to accept Uruguay’s intention of signing a unilateral trade agreement with the United States. In Argentina’s case the main issue is a dispute over a new paper pulp mill built on the Uruguayan bank of the river that forms Uruguay’s western border with Argentina.

Another difficulty relates to the situation in Brazil. Brazil already has its own development bank, the National Bank of Social and Economic Development (BNDES), and does not need to create a new regional financial entity. It may also be that Brazil would be required to supply more funds than it might expect to receive.

The BNDES currently handles more funds than all other regional development organizations put together, including the IADB2. For this reason Brazil is leaning toward the reactivation of currently existent banking entities.

Despite frictions on economic issues, the main problems confronting the Bank of the South are political. In May two positions evolved: the first was that of the Venezuelan and Argentinean finance ministers, the second, that of Ecuador. Each group drafted documents reflecting their views. According to the Ecuadorian documents, the joint Argentine/Venezuelan position lacked environmental protection, cultural, and educational policies. Furthermore it took the position that each nation’s vote should be allotted according to the funds provided. In general their criticism was that much of the proposed ordinances were carbon copies of those of the World Bank, the IMF, and the IADB3.

The document presented by Ecuador proposed three pillars: a regional monitory fund, the BoS, and a regional currency. It bases these on the guiding principle that "the implementation of economic instruments should bring about the guarantee of fundamental human rights."4 This perspective implies that the bank’s clients should not be large corporations; rather it should give loans "to the public sector, to small producers, to local communities, to municipalities, and to states or provinces."5

Finally the document asserts that BoS should not be a behemoth like the World Bank with its 13,000 employees, and it should account for operations and activities on an annual basis. It required an annual public debate for the bank to explain its activities to the citizenry whose taxes it used.

The two concepts of the BoS are clearly contradictory and it does not seem possible to arrive at a consensus. To date all parties have agreed to some of the Ecuadorian proposals, such as equal voting rights. What remains to be decided is whether the bank has responsibility for intervening in financial crises (à la IMF) or whether it be viewed as a partner in economic development.

Brazil and Argentina are working toward a regional currency for Mercosur countries within the next four years. This year the two countries will launch a bilateral exchange of currencies. Whatever happens, it seems clear that the foundation and consolidation of the BoS shall depend on the ongoing volition of regional governments. Also necessary is that the majority of the countries involved maintain their current political orientation, which is not a sure thing, especially in the case of the all-important Brazil.

A New Financial Architecture

The founding documents of the BoS propose the creation of a financial architecture that will bring greater autonomy to the region, buffering it from international capital markets. "To break the vicious circle of financing in the region, where our reserves are placed in northern banks at interest rates below what we are charged when they lend to us," the document states6. In short, the new bank offers the dual benefits of escaping the financial controls exercised by developed countries and capital markets. The six member countries currently have US$164 billion deposited in northern developed countries.

In some ways, the Bank of the South forms part of the process of distancing their economies from neoliberal economic policy that has characterized many of the countries in the region to one degree or another. In 2006 both Brazil and Argentina paid off their IMF loans ahead of schedule and began to withdraw in practice from that institution. Last March, the eleven countries of the Union of South American Nations (formerly the CSN) proposed the creation of a regional stabilizing fund of US$5 billion7 to prevent speculative attacks on national currencies. According to the member countries, this was a means to avoid dependence on the IMF in crisis situations, thereby creating a complementary mechanism to that proposed in the Bank of the South.

Nevertheless, in order to comply with its charter the BoS should not simply play a regional financial role but should counteract the effects of decades of deregulation and reduced economic protection. Neoliberalism is not just an economic creed but a determining factor in all facets of society. For that very reason the BoS cannot limit itself to competing with the IADB, the World Bank, and the CAF in financing development projects, but should instead question the core definition of the term "development" as understood by these organizations8.

To begin with, the new bank should confront the process of converting the planet into an object of international finance, which is a key precept of neoliberal policy. Also, it should provide an impetus for development based on sovereignty of the peoples and integration that is not founded on free market precepts but on egalitarian and fraternal relations between peoples, regions, and nations.

As such, the financing of large infrastructure projects—one of the main themes for all regional banks—should give priority to internal development. Until recently, the common interpretation of the term infrastructure was that of finding the best way to link regional countries with markets in the developed world to export their raw materials to serve multinationals and northern markets.

Argentine economist Aldo Ferrer writes, "The Bank of the South should not be considered as an alternative to the IMF purely in the sense of its financial operations, instead it should be viewed as a bank for investment in technological and social change.9" Energy will be one of the first priorities of the new bank and one of its first projects will be to finance the proposed South American Gas Pipeline, which will link Venezuela with Argentina, passing through Brazil. This will be a real regional integration project because the gas transport is oriented toward regional economic development as opposed to exporting it to markets in the developed world.

Finally the Bank of the South can play a decisive role in reuniting a region divided by decades of neoliberalism. To implement the neoliberal model, its main beneficiaries—the financial institutions and monopolistic corporations—have weakened or dismantled the power of the nation state. It may be that one of the primary tasks of the BoS could be rebuilding state control and regulations10.

These types of questions are at the center of the Latin American regional agenda. The Bank of the South should not be considered an end in itself but rather a tool to further the changes currently underway. This is its main potential. It is coming into being to accomplish this, and all other tasks should be considered secondary.

It will be, above all, a different kind of bank: its members shouldn’t see it as a way of advancing their personal careers, its funds should not be destined to accumulate maximum earnings but dedicated to fulfilling the needs of the peoples and those who have historically been excluded.

End Notes

1. The Quito Declaration can be found at: http://www.cadtm.org/
2. Brazil’s BNDES has US$120 billion for use strictly within Brazil and the IADB has US$100 billion for the whole region.
3. See Eric Toussaint’s article, co-editor of the Ecuadorian document.
4. Ibid.
5. Ibid.
6. Argentine newspaper La Nación, March 25, 2007.
7. Argentine newspaper Página 12, March 17, 2007.
8. See: Pablo Dávalos, ob. cit.
9. Mercosur press agency, May 26, 2007.
10. Ibid.