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The proposal to fund the Southern Bank has generated enthusiasm but also scepticism among political leaders, civil society representatives and regional analysts. The challenge that this institution will have to face is considerable , even more so when it is to be created with the principal objective of becoming an alternative to the IMF, IDB and World Bank in order to build the biggest financial integration tool for the development of Latin American peoples.

ONE. It is usually stated that Latin American governments – in the face of non-fulfilment of the many goals periodically set regarding regional integration – react by setting even more ambitious goals. Within the kingdom of “magical realism”, rhetoric usually takes the place of the patient setting up of institutions and long-standing commitments. It is with this kind of scepticism that most part of the regional public opinion, analysts, and even governments, have undertaken the proposal to set up the Southern Bank.

Consistently, though displaying less scepticism and quite a dose of cynicism and political intentionality, many opinion-makers suggest this is nothing but a new initiative of Venezuelan president Hugo Chávez in his attempt to establish some regional hegemony by taking advantage of the country’s abundant oil-related resources. Meanwhile, clever Néstor Kirchner and ideological allies Rafael Correa and Evo Morales only limit themselves to accompanying and taking advantage of the Bolivarian President’s initiative. From this approach, the most reasonable odds are for Brazilian President Lula minimizing and subduing the proposal. And, as it has become a constant feature of the approach taken by the progressive government’s economic team, Uruguay confronts or looks sideways whenever trying to differ from any significant and moderately conflicting initiative originating in Venezuela. Even more so if this is conceived and/or supported by the governments of Argentina, Bolivia and Ecuador.

In the other end, we have those who sistematically reduce the complex task of integration to a simple mathematical addition. To the addition of square kilometres of area, millions of people/consumers, hundreds of million units of all kinds of natural resources and products, and billions of dollars concerning the respective GDPs, they now add in the billions of dollars in reserves held by the different central banks in the region. Thus, the bank that would become an alternative to the IMF, IDB and World Bank in creating the great financial tool regarding integration for the development of countries in the region would be set up.

TWO. In any case, is a regional financial tool justified in order, for instance, to stand up to the considerable negative effects regularly arising from international financial markets lately – which have been made worse by the financial deregulation policy promoted by international financing institutions (IFIs)? Yes, of course it is! “The financial instability of countries in the region has worsened due to a lack of suitable mechanisms to provide emergency financing for countries facing balance-of-payment problems caused by external disruptions. The lack of an emergency financing network within the regional and international spheres has led countries to pursue a policy of self-insurance that is basically built on the accumulation of international reserves, which is far from being the most effective option for protection against world economy fluctuations. Proposals aimed at the reform of international financial markets and institutions have intensified in recent years. However, in terms of the adoption of strategies aimed at improving international financial agreements, the role played by regional financial institutions has been underestimated”, as stated by the quite moderate José Luis Machinea (ECLAC Executive Secretary) and Daniel Titelman (head of the Development Studies Unit) in a neat note included in the quite sensible magazine (issue N° 91) published by the “economically correct” ECLAC.

Is this an unprecedented initiative, a product of the feverish minds of idle bureaucrats or the intentionality of obscure politicians? No, it is absolutely not. “As from the 1997 Asian crisis, in fact, the demand for regional financial cooperation aimed at creating mechanisms for preventing further financial crises has been on the increase. This demand is focused on the granting of emergency loans, on the one hand, and on the development of financial markets which are stronger and offer greater liquidity, on the other. An example of recent attempts in that direction is the Chiang Mai Initiative (Thailand), dating back to 2000, which provides for the creation of a short-term liquidity service that operates through a bilateral monetary exchange network, as well as the initiative for the creation of an Asian bond market with a view to setting up a fully developed regional bond market”, adds the moderate publication.

THREE. Is there a reason for the countries of the region to try to create a financial fund, which can be rapidly mobilised and without conditionalities, with the purpose of assisting those countries first affected by new external financial crises? Yes, indeed, and every country has something to gain if this were to be the case. On the one hand, the great international liquidity has allowed countries to accumulate reserves, thus providing practical support to the proposal and placing it far away from the unimportant rhetoric. On the other hand, recent events evidence that the IMF has reacted late, scarcely and badly to the requests for assistance resulting from financial crises.

But, more importantly, what historical evidence shows is that the IMF and other IFIs have their own public policy agenda and that this does not necessarily coincide with the decisions or needs of developing economies. It is precisely in those critical moments when the IFIs and mainly the IMF try to impose their policies – whether the governments like them or not – but always with an increased degree of firmness and chances of success.

For example, if Robert Zoellick was appointed as the new president of the World Bank, and taking into account that as former US Trade representative he was the main promoter of the FTAA, is there any doubt of the type of trade openness policies he would promote? Is it reasonable for the World Bank to have this as the only view regarding the parameters around which international trade should move? On the other hand, do the countries of the region have extremely urgent needs to be fulfiled in what regards the financing of joint production projects (either private, public or public-private) and/or strong income-producing infrastructure both socially and economically? Of course they do. And the emergence of a new regional finance actor may – even due to the advantages brought about by the competition among institutions – be beneficial in this regard.

Is there a space and the need to try to develop a financial regional institution, involving the design of mechanisms aimed at promoting local currency bond issues, bond issues linked to GDP growth or to the price of export products? Yes.

Moreover, would it be convenient to promote mechanisms aimed at reducing the use of dollars for payments involving trade within the region? Yes. We learn from experience but these tasks are not simple, and are exposed to serious risks as well, and cannot be carried out solely under the influence of an integrationist will and in active opposition to IFIs.

And finally, is it feasible to expect that a sole institution will be able to carry out all the above-mentioned tasks? No, certainly not.

FOUR. Some practical examples. The Southern Bank would be governed by the principle of “one country, one vote” and the amount of paid-in capital would not be too large, at least in an early stage. If this is the case, it will have to resort to international markets to obtain, through the issue of securities, the resources to be later channelled to different projects. In the global financial market, regional banks such as the IDB and the Andean Development Corporation (CAF in Spanish), the former more than the latter, both have access to “investment grade”, which allows them to have access to long-term resources at favourable interest rates. This, in turn, leaves them in a favourable position when they have to make loans. This is the kind of mechanism that the Southern Bank will have to apply and it would not be reasonable for it to make loans at higher interest rates or under less favourable conditions than the other institutions. The purpose of the above is to highlight the point that a bank is not a club of political friends and that it will have to be managed in a professional way, even though the political and integrationist component is, as it should be, constituent part of its identity.

In any case and as it is implied in its name, the Southern Bank will have to be much more than a mechanism to channel funds from Venezuela to an Argentina that still cannot resort to global markets, or a way to direct funds from Venezuela to projects in Bolivia and Ecuador. And its institutional design and chart should be explicit in that regard.

The window of opportunity is open and the technical and political capacity of governments in the region has been satisfactorily challenged.

Gabriel Papa is an economist and columnist in Brecha, a weekly magazine that is published in Montevideo, Uruguay.

Related Information:

* The Southern Bank on the final stretch, by IFIs Latin American Monitor

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