IFIs Latin American Monitor
María José Romero
Mon May 14 2007
The initiative to create the Bank of the South as a "financial alternative for the economic recovery and integration of South American countries", was originally fuelled by president Hugo Chávez, of Venezuela, and Néstor Kirchner, of Argentina. The presidents of Ecuador, Bolivia, Paraguay and Brazil eventually added their support, although they have different ideas about what should be done by this Bank. Would Latin America have found an alternative to the International Monetary Fund (IMF), the World Bank and the Inter-American Development Bank (IDB)?
The expectations brought about by the creation of this new entity, both inside and outside the region, can be summed up in the following question: would Latin America have found an alternative to the International Monetary Fund (IMF), the World Bank and the Inter-American Development Bank (IDB)? Since the Bank of the South’s creation process is still in its first steps, such question cannot be answered yet. However, it is possible to analyse the context in which the proposal was brought forward and its potentialities.
The relationship between Latin America and the IMF-World Bank has changed substantially in recent years. Most presidents currently in power declare themselves – although with considerable differences in terms of tone and style – to be against the policies promoted by both institutions through their conditionalities. And in order to break free from IMF tutelage, Argentina and Brazil, followed later on by Uruguay and more recently by Ecuador, pay-off their debts to this institution ahead of schedule. This was made possible thanks to the economic growth registered by Latin American countries following the rise in export prices at international level and the availability of alternative sources of credit.
In this new setting, the IMF has lost relevance as guiding institution in terms of economics and policies. Since the 1997-1999 financial crisis in Southeast Asia, the IMF’s policy guidelines – the liberalisation of financial systems, among them – are undergoing a deep legitimacy crisis owing to their responsibility in aggravating the Asian crisis and in the Argentine collapse of 2001. Against all evidence, IMF board members have refused to accept any responsibility of the institution whatsoever in both situations.
The proposal of the Bank of the South comes at a moment in which a reform of the global financial architecture is being demanded by different sectors although it still remains unclear whether it will be a development institution like the World Bank or Brazil’s National Economic and Social Development Bank (BNDES in Spanish), or a fund aimed at facing future payment crisis, like the IMF. Latin American economies need both. There is a need to promote investment and there is also a need for a last resort tool in case of financial crises.
Furthermore, the creation of the Bank of the South requires founder members to negotiate its structure, form of governance and authorities, operations (loan framework and criteria for admission) and the relationship of the new institution with already existing regional entities: the Latin American Reserve Fund (FLAR), the Andean Development Corporation (CAF) and the Financial Fund for the Rio de la Plata Basin (Fonplata).
In order to influence the process it is necessary to take part in it and maybe that is the reason why Brazil fully joined it as founder member at the meeting held in Quito on May 3. Brazil already has its own development bank, the National Economic and Social Development Bank (BNDES), so its objectives and needs may be different from those of Argentina and Venezuela. The Lula administration has expressed interest in devoting the Bank of the South to cover the infrastructure investment needs of an expanded Mercosur and seems less interested in protecting its reserves. On the other hand, according to statements made by Chávez and his Finance Minister, Rodrigo Cabezas, the idea of Venezuela is to turn the Southern Bank into the IMF of South America, a project which is backed by Argentina. "We cannot go on placing 200 billion dollars of our reserves in the First World and then be forced to accept their conditions to obtain a few dollars", said Ecuadorian President, Rafael Correa. And the Argentine Minister Felisa Miceli considers that the Bank of the South should allow "to improve the financial autonomy" of countries taking part in it. However, according to Brazilian Guido Mantega "the contribution of international reserves (by member countries) is not the best way to capitalise the Bank".
In this sense, the Ecuadorian initiative to create the Southern Fund could represent an alternative to the original project. Thus, a bank as an institution for the promotion of public investment, separated from a fund as an instrument of intervention in case of national economic emergency, appears as a more appealing proposal for Brazil, which rejected the option of a sole institution to serve both purposes.
Nevertheless, not all countries in the region have been seduced by the project. The governments of Chile, Colombia and Peru have expressed their total disagreement with the Bank of the South, by stating that "they are very pleased with the CAF, the IDB and the World Bank, since they are being taken care of".
Uruguay, the only Mercosur country member that has not yet backed the initiative, maintains a skeptical position. According to Economy Minister, Danilo Astori, the project leaves him "with many doubts", since "the region has solid financial institutions which have been fulfilling a very good role".
From Mexico, the former minister of foreign affairs, Luis Ernesto Derbez, states that "it is not possible to talk about integration" with regards to the Bank of the South, since we are dealing with "the political project" of a government leader, in direct allusion to Chávez and his increasingly influential position in the region.
Until now, some advocates for this initiative maintain that the main reason for the Bank of the South is of a financial and economic nature – the total amount of international reserves of the six countries involved stands at 164 billion dollars – while others consider that preeminence should be given to the political nature of the project, thus impliying the reformulation of development finance contents and the search for a feasible alternative that may allow countries in the region to decisively get rid of international financial institutions. Those who are most optimistic believe that in less than two months we will be witnessing the birth of the new entity.
* Bank of the South: A reflection of declining IFIs relevance in Latin America, by Vince McElhinny (Bank Information Center)
* Bank of the South: A road towards a new financial architecture, by Pablo Dávalos (ALAI)
This article was first published at the Uruguayan newspaper La Diaria, May 10th, 2007