On May 31, 2009, seven South American Finance ministers agreed on the basis for establishing the Bank of the South and on September 28, seven South American presidents finally signed the founding agreement. The motivation for forming the new development bank is the belief that keeping Latin America’s precious reserves at home—to loan to other Latin American governments for their mutual development—is preferable to accepting aid and development loans from the Inter-American Development Bank (IADB) and other multilateral development banks (MDB). These external loans often stipulate that consulting or whole projects be sourced from outside the region thereby preventing nascent Latin American corporations from maturing by reducing their income stream.
|Several of the South American leaders whose countries have
agreed on the establishment of the new Bank of the South.
On May 8, the four member countries of Mercosur (Argentina, Brazil, Paraguay, and Uruguay) along with Union of South American Nations (UNASUR) members Bolivia, Ecuador, and Venezuela, met and finally agreed on the details for the formation of the Bank of the South (BDS, Banco Del Sur). Chilean President Michelle Bachelet also came to the BDS foundation on the Island of Margarita, Venezuela on September 28.
This key element of a new financial architecture in Latin America and the Caribbean has the potential to structurally reorient development financing in the region.1
The Finance ministers agreed to BDS technical rules on May 8. This detailed agreement runs a bit behind schedule. On December 9, 2007, the then-presidents of these seven countries signed the founding act in the Presidential Palace in Buenos Aires. The technical discussions were supposed to be finished within two months.
Instead, negotiations took a full 21 months. After just 17 months former Argentine Economics Minister Carlos Fernandez, put on a positive face, praising the agreement, "given [that the process] took place during an international economic and financial crisis."
"We have now closed discussions at a ministerial level and what remains is approval by the presidents and national congresses," Fernandez said in a press announcement with his Brazilian counterpart, Guido Mantega. He added that he did not believe that ratification by the seven member countries would be a problem, as negotiators have already reached a compromise on some of the more contentious BDS operating rules. "The founding agreement includes rules that have been negotiated by commissions of ministers of both economics and foreign affairs (state departments) covering topics such as capital requirements, voting mechanisms, recruitment of personnel, jurisprudence, legal and taxation issues for personnel, and the purpose and rules of the bank itself have all been clarified."2
One example worth noting is that the one-country, one-vote rule has been effectively altered. "Each country will have one vote in the entity," said Fernandez, but he added that approval of loans of $70 million dollar equivalent will require support from votes representing two-thirds of capital subscription. According to the agreement, Argentina, Brazil, and Venezuela will provide $2 billion each; Uruguay and Ecuador, $400 million each; and Bolivia and Paraguay $200 million each. The contributions are to be paid in five installments over five years.3
The Timing of the Regional Effort
Given the current global financial difficulties, some might question the logic—or at least the timeliness—of creating regional financial infrastructure4 while the existing system is close to collapse. But Latin American leaders acted now precisely to head off the kind of regional impact experienced in the 1990s when the "Tequila Effect" sparked by Mexico’s currency freefall hit economies across Latin America, factoring into the collapse of the Argentine economy in 2001-2002.
These Latin American financial crises, like those now experienced worldwide, resulted in mass unemployment and unheard-of levels of indigence, bringing death by starvation to marginal communities of food-exporting countries. As is the case in many financial crises, some profited, emerging as billionaires.
While global cooperation is practical and ultimately necessary to resolve issues such as regulating transnational banks, establishing international accounting standards, and monitoring or eliminating offshore tax havens, regional trade and finance can also play a vital role in regional stability.
In times of global recession, multilateral financial groups often disagree on strategy. First the G-8, then the G-20, and now the United Nations G-192,5 a group of mostly developing nations that propose a plan devised by Joseph Stiglitz,6 have presented competing proposals to buffer the planet against the effects of financial excess. Global, regional, and national stimulus packages and financial rescues have already promised between 9 and 11 trillion dollars in funds.
Included in recommendations from the G-192 from Stiglitz’s "Commission of Experts of the President of the General Assembly on Reforms of the International Monetary and Financial System" are various suggestions for the role of regional development banks. For example, in the section "Support for financial innovations to enhance risk mitigation," the group recommends the following:
"Regional development banks and other official institutions should be encouraged to play an active role in the promotion of such financial products. International financial institutions need to explore meaningful innovations that would enhance risk management and distribution and how to encourage markets to do a better job. […] Lending by international and regional financial institutions in local currencies, baskets of local currencies, or in regional units of account, as well as the provision of exchange and interest rate covers might be important steps in improving international risk markets."
As close neighbors and allies, regional structures work with specific advantages and disadvantages. Their proximity can facilitate issues such as the construction of gas pipelines or train lines. But neighboring countries also have their spats. A case in point emerges in the dispute between Brazil and Ecuador involving default on repayments to the National Development Bank of Brazil’s solidarity fund. Ecuador is refusing payments on a contract won by Brazilian giant Odebrecht7 to build a hydroelectric dam in Ecuador, alleging it was poorly executed, questioning payments on the "foreign aid" package included. With frequent political meetings in various Latin and South American forums such as UNASUR and Mercosur, governments have a strong incentive to resolve such issues. In this case, Presidents Lula and Correa have discussed the matter but Odebrecht has rejected Ecuadorian offers of external arbitration.8
In South America the BDS is viewed by regional presidents and some of their economics ministry staff as a key factor in promoting development by retaining capital flows in the region. In an April 28 interview with the Spanish newspaper El País, President Rafael Correa, a trained economist, offered succinct and revealing statements on the creation of a new regional financial architecture:
"[we have been] proposing [the BDS] for some time and it is now taking shape. Latin America’s current financial reality is an absurdity. As a result of neoliberalism among other issues, in the 90s, all [Latin American National] Central Banks were made independent [of their governments]. With absolutely no technical or theoretical basis, it was insisted that autonomous central banks would work better. This was a huge lie. They were autonomous from our democracies, but very dependent on international bureaucrats. These Central Banks handle our international monetary reserves and they invest them abroad, in the first world. Latin America has more than $200 billion abroad financing the United States and Europe. That is absurd."
When asked about his alternative proposals, Correa suggested:
"Take these reserves back, create a reserve fund for Latin America that will allow local economies to back their currencies [so that by sharing such a reserve pool] each individual country will require less reserves. […] the strategic elements are: BDS, a South American Regional Reserve Fund, and a regional currency, which can begin as a transactional electronic currency, like the ECU.9 […] This is what has been demonized here [by conservative financiers in Ecuador] and this is what we have begun."10
President Correa referred to conservative forces—frequently tied to transnational capital—that continue to dominate public debate in Latin America in academia and in the media. Such groups are strongly opposed to any change in Latin America’s regional financial architecture that would weaken U.S. and European influence in the financial sector in general, and the banking sector specifically. Changes would increase regional control over capital flows in and out of the region or may lead to a reduction in external loans.
The BDS/UNASUR effort is not entirely unprecedented in the world. In other regions, trade associations are expanding to include financial cooperation. The European Union (EU) and the Asian ASEAN + 3 (South Korea, Japan, and China) nations have been actively promoting regional trade and financial stability pacts with varying degrees of success. Both the EU and ASEAN have developed specific regional efforts to confront the current crisis. These regional efforts include the creation of regional funds to alleviate the adverse effects of recession.
President Correa’s ideas are based on the European Union’s regional financial model. The European Currency Unit (ECU) was a forerunner of the Euro. His regional development banking proposals closely follow the experience of the European Bank for Reconstruction and Development. When Correa refers to a (as yet unnamed) bank that might manage Latin American reserves and emit bonds, he is also describing a structure similar to the European Central Bank (ECB).
The ASEAN group of Asian nations is another groundbreaker in establishing regional financial architecture. As a region, ASEAN shares a recent history of financial crises including the Asian financial crisis that began in 1997.11 To their detriment, Asian countries, like their Latin America counterparts, submitted to the same questionable International Monetary Fund (IMF) advice during the financial crises of the 1990s. The more rapid recovery of nations such as Malaysia and China that maintained more capital controls on their national finances proved an important lesson in developing a healthy autonomy from international agencies. However, the lesson was largely lost on the international finance institutions. As John Maynard Keynes lamented: "Worldly wisdom teaches that it is better for the reputation to fail conventionally than to succeed unconventionally."12
In Asia, the equivalent structure to the BDS takes the form of the ASEAN development bank (ADB).13 The ADB has now become part of a more complex financial infrastructure, recently reinforced by hundreds of millions of dollars procured in the height of the global financial crisis. On May 3, Asian governments put their financial might behind an ASEAN regional stabilization initiative, known as the Chiang Mai Agreement (CMA).14 The CMA includes a $120 billion currency scheme involving swaps and reserves. The Chiang Mai Agreement was ratified by the ASEAN countries, plus Japan, China, and South Korea.15 Both China and Japan agreed to provide $38.4 billion each, South Korea pitching in another $19.2 billion, and the remainder of the promised $100 billion divided among the remaining ASEAN members.
Keeping Capital at Home
Martin Wolf, chief economics commentator at the Financial Times, commented on ASEAN’s efforts in an article entitled "Asia Needs its Own Monetary Fund" on May 18, 2004. Wolf notes: "Today, Asian governments are exporting astonishing quantities of capital, overwhelmingly to the United States. This is not just absurd. It is also economically destabilizing."16 While Asian capital now seeks investments across the globe it does not fail to support its neighbors. Funds like the new ASEAN fund will encourage some of the region’s vast capital reserves to remain in Asia.
Martin Wolf uses the term "absurd" to describe poorer Asian countries placing their reserves in U.S. Treasury Bills. President Correa uses the same word when speaking of Latin American reserves in the United States. Both regional efforts seek to rationalize capital flows, redirecting part to the needs of their own region.
For developing countries, Dr. Wolf’s second conclusion that exporting capital is "economically destabilizing" takes on particular urgency.
Economic stability relies on good economic planning. If a country has the policy space to make a plan, then it also has a chance of successful planned development. In the best of scenarios, reduced dependence on external financial systems, such as the IMF and the U.S. Treasury, means that the poorer nations of Latin America could use their own funds to encourage their own development. Holding government reserves abroad in bonds denominated in other currencies often yields less than 4% returns (currently yields are even less) per annum. Latin American governments often pay more than 10% in interest on public external debt, much of which is also denominated in dollars and Euros. That huge spread means more poverty.
Exporting financial capital is destabilizing because a country then has to borrow to meet its own needs. High foreign debt forces a country to scramble to procure funds to rollover debt principal and make each year’s interest payments. This short-term planning renders long-term development impossible. If a development project requires major funds, such funds are often only available through further external borrowing which implies more debt, a vicious cycle which in the end is suffocating for national economic development. Such is the case in many governments in South America, with Argentina serving as an excellent example.
The absurdity of keeping reserves in bonds denominated in dollars and Euros defies logic, except in the world of currency trading and speculation where it remains essential to protect one’s currency using large foreign reserves. This is a risky and expensive game that European countries no longer pay-to-play.
Similarly, the development motivations of forming the BDS reflect a belief that keeping Latin America’s reserves working at home for each other in order to build much-needed physical infrastructure and economic growth is preferable to taking aid and development loans from outside the region. The future plans for currency stability mentioned by President Correa (above) relating three key pedestals for real economic development, stable economies based on stable currencies and indebted to each other (also part of the European experience).
- When speaking of regional development, this article uses the term "region" in the sense of multiple countries in one region, as opposed to regions within a country. In particular, the article discusses the Latin American region and South American regional trade organizations Mercosur (Southern Common Market), UNASUR (The Banco del Sur is UNASUR’s bank), and ALBA (Bolivarian Alternative for the Americas). Mercosur is South American (Paraguay, Uruguay, Argentina, and Brazil), whereas ALBA includes nations from South and Central America and the Caribbean. The term "region" as used here refers to a block of neighboring countries coming together for any social cooperation, be it trade, aid, or development, or to contribute to mutual financial stability. Other examples include ASEAN (Association of Southeast Asian Nations), SACU (South African Customs Union), Mercosur (Southern Common Market), ALBA (Bolivarian Alternative for the Americas), the European Union, or even trade and investment groupings such as NAFTA (North American Free Trade Agreement of Canada, the United States, and Mexico).
- For more information on what happened between May and September, see: http://alainet.org/active/33345.
- http://en.mercopress.com/2009/05/09/bank-of-the-south-takes-off-with-7-billion-usd-initial-capital, accessed Oct 13, 2009.
- Regional financial infrastructure enables finance and trade. It is defined for the purpose of this article as a sum-total of multilateral financial agreements between countries specific to the block and any institutions created to support these. This infrastructure includes the rules for trade in financial services between the countries, and the banking structures and funds they manage for the aims in their charter, such as protecting the stability of regional currencies, and promoting development in poorer countries.
- http://ifis.choike.org/informes/922.html, accessed Oct 13, 2009.
- Joseph Stiglitz is chairman for the Commission of Experts of the President of the UN General Assembly on Reforms of the International Monetary and Financial System. http://www.un.org/ga/president/63/commission/financial_commission.shtml, accessed October 13, 2009.
- Spanish (diplomacy), accessed May 29, 2009, http://www.elcomercio.com/solo_texto_search.asp?id_noticia=177440&anio=2009&mes=5&dia=6; Portuguese, (company arbitration statement) accessed May 14, 2009, http://www.odebrecht.com/web/ptb/pag_noticias.php?id=1257.
- ECU stands for European Currency Unit, the predecessor of the Euro.
elpepuint/20090428elpepuint_5/Tes#EnlaceComentarios, accessed Oct13, 2009.
- Though it should be noted that the influence of the core ASEAN countries in the ADB is dwarfed by that of Japan.
- Named after the city in Northern Thailand where the initiative was launched.
- Minus Indonesia.