 
Bank of the South Challenges Hegemony of World Bank and IMF
 KAIROS
Debt E-Bulletin
Fall 2007
John Dillon
On December 10th a new international financial institution will
be launched. Unlike the World Bank, the Inter-American Development
Bank (IDB) and the International Monetary Fund (IMF) that are dominated
by the USA, the Bank of the South will be controlled exclusively
by seven or eight South American countries. Since it was originally
proposed by Venezuela and Argentina in February, Brazil, Bolivia,
Ecuador, Uruguay, Paraguay all joined. Recently Colombia also announced
its intention to join although its status is not clear as this
bulletin is being written.
The Bank will have an initial capital of around US$7 billion and
specialize in development loans to its member countries with a
focus on regional economic integration. Although it will be officially
inaugurated in a December photo op when most South American Presidents
are in Buenos Aires for the inauguration of President Cristina
Kirchner, its actual statutes and procedures will still not be
completely decided.
At a September 2007 conference sponsored by the Latin American
Council of Churches Ricadro Patiño, Ecuador’s Minister
for the Atlantic Coast, spoke eloquently about his government’s
vision for the Bank of the South. According to Minister Patiño:
A Bank of the South is needed to end the outflow of capital from
the South to the North through debt payments, profit repatriation
by transnational corporations and capital flight initiated by wealthy
elites. The result is recession, poverty and migration from Southern
countries.
It’s ludicrous for Southern countries to keep their foreign
exchange reserves in US Treasury bills or Northern Banks when they
could be put to use for development. In the words of Ecuadorian
President Rafael Correa: “We cannot continue placing US$200
billion of our reserves in the first world and then later make
ourselves submit to their conditions to obtain a few dollars [in
loans].”
The goal is to break the chains of economic, financial and political
domination and contribute to the construction of a more human society
where people are empowered to have control over their own development.
Each member would contribute to the Bank according to its means.
A new financial architecture should include not only the Bank
but also a Southern Fund that would operate like a regional central
bank, initially building on the existing Latin American Reserve
Fund.
Over time national currencies and eventually a regional currency
would play a larger role in facilitating South-South commerce.
[President Evo Morales of Bolivia has proposed that South American
nations establish their own currency to be called the “Pacha” which
means “land” in the Quecha language.]
The Bank would be democratic based on the principle of one country,
one vote.
It would be transparent, rendering public accounts of its activities.
Loans would be provided for public services, small producers,
co-operatives and indigenous communities.
Civil society would have a role in the design of the bank, its
decision-making and in oversight of its operations.
The new Bank of the South will not impose economic policy conditions
on its borrowers like those demanded by the World Bank and the
IMF which have failed to achieve their own goals of economic growth
let alone any sustainable and socially just model of development.
Unresolved Issues
Then in the question period Minister Patiño acknowledged
that there are still many unresolved issues concerning how the
Bank will function.
The Bank was supposed to have been launched on November third,
but this was delayed until December fifth and then put off again
until December tenth. Even then negotiations concerning the Bank’s
structure and policies will still continue for another sixty days.
According to Patiño much will depend on how responsive the
sponsoring governments are to pressures from civil society. He
told the Latin American Council of Churches gathering that different
interests are involved in each country. Some governments and private
investors want a Bank that would fund large infrastructure projects
like multi-modal transportation corridors, pipelines and large
hydroelectric dams.
Venezuela does not need development loans but President Hugo Chavez
does want to sell its natural gas to South American partners. Argentina
without a bank of its own wants access to credit. Uruguay, Paraguay
and Ecuador as smaller countries want loans without having to borrow
from the World Bank or the IDB.
As the largest country in South America, Brazil is key. Within
Brazil itself different conflicting interests are at play. Brazil
already has a large state-controlled investment bank known as BNDES
(National Bank for Economic and Social Development). BNDES annually
makes loans worth nearly US$30 billion and is perceived as being
wary of the emergence of another regional bank with a different
mandate. Private bankers in Brazil have reacted negatively to the
prospect of a new institution that they view as politically motivated.
Hence Brazil for a time delayed progress on the establishment of
a rival bank.
Then President Lula da Silva declared that the Bank of the South
would go forward. Speaking recently in the Republic of the Congo,
Lula stated that "Developing nations must create their own
mechanisms of finance instead of suffering under those of the IMF
and the World Bank, which are institutions of rich nations . .
. it is time to wake up." While this vision is welcome, other
Brazilian officials indicate that there is a more pragmatic side
to Brazil’s support.
Jose Botafogo, a former Brazilian Ambassador explains “Lula
and Brazil are not socialists like Chavez but they are under pressure
from Brazilian companies who do a lot of business in Venezuela
to keep relations good. Brazil would probably rather not have a
new bank, but it’s willing to accept one if it’s a
real bank and not just a Chavez social program.”
Brazil’s Economy Minister, and former BNDES President, Guido
Mantega has emphasized that the Bank of the South must adhere to
conventional banking standards and to “the norms of the market.” Mantega
has said that most members would contribute between US$300 million
and US$500 million to the Bank’s initial capitalization while
Venezuela would put in US$1.4 billion.
President Alvaro Uribe of Colombia is the latest head of state
to verbally support the Bank declaring that “It is not a
rejection of the World Bank or of the Inter-American Development
Bank. Rather it is a gesture of solidarity and loyalty to South
American fraternity.” Analysts in Bogota are sceptical of
Uribe’s motives saying that by siding with a Venezuelan initiative
he may be sending a signal to Washington concerning his irritation
with delays in the approval of a US-Colombia Free Trade Agreement
One of the most difficult issues, according to Ricadro Patiño,
has been whether the Bank would operate on the basis of “one
country one vote.” Reports indicate that this principle was
accepted as applying to the Bank’s Board of Directors that
will only meet once a year. However, when it comes to the actual
allocation of credits there may be a system of weighted voting
according to the contributions made by various members.
One contentious issue concerns whether the Bank will Finance large
infrastructure projects that are widely opposed by environmentalists.
On this issue the Ecuadorian government has been out of step with
some of its supporters. Patiño responds that there are differences
of opinion among environmentalists concerning the value of some
megaprojects. President Correa has declared his support for an
ambitious plan to connect the Brazilian Amazonian city of Manaus
to the Ecuadorian port at Manta creating a transcontinental transportation
corridor from the Atlantic to the Pacific.
President Hugo Chavez has revived his plan for a huge 9,000 kilometre
gas pipeline from Venezuela, across the Amazon and down into Argentina.
Chavez wants this project for fulfilling his vision of South American
integration to be partly financed by the Bank. Environmentalists
are harshly critical of the project’s consequences for deforestation,
not just by the pipeline itself but also because building access
roads would open up huge tracts of the Amazon rainforest for settlement,
dislodging some of the 22 indigenous peoples who live there. They
cite the danger to the region’s biodiversity and the contamination
that will result from the need to traverse numerous rivers and
streams.
Critics are also concerned that the immense cost of the project – estimated
at around US$25 billion – would add to external debt and
potentially eat up a large portion of the Bank of the South’s
resources. They point out that it would be cheaper to ship gas
from Venezuela to Argentina by Liquefied Natural Gas tankers.
A Civil Society Vision
In an open letter to the Presidents of Argentina, Bolivia, Brazil,
Chile, Colombia, Ecuador, Paraguay, Uruguay and Venezuela hundreds
of civil society organizations from throughout the Americas and
beyond have called for a Bank that overcomes the negative experiences
of the past that led to ever greater foreign debt, loss of sovereignty,
deregulation and privatization of basic services and acquiescence
with the undemocratic practices of the World Bank and the IMF.
The letter strongly opposes the conditions imposed by these International
Financial Institutions (IFIs) that have led to capital flight and
deindustrialization. Moreover, the IFIs have subordinated Southern
countries to Northern interests by imposing an economic model based
on exports of minerals and agricultural products. In addition,
they have exacerbated social inequalities and ecological damage.
Instead the hemisphere’s social organizations want The Bank
of the South
- to promote a new development framework that values peoples’ sovereignty
over their territories; self-determination over economic, social
and environmental policies; solidarity; sustainability and ecological
justice.
- to be guided by concrete goals including dignified employment;
guaranteed food, health care and housing; universal public education;
redistribution of wealth to overcome inequalities including of
gender and ethnicity; and the reduction of greenhouse gas emissions.
- to be an integral part of a new Latin American and Caribbean
financial architecture that will include a new South Fund that
will serve as a continental Central Bank capable of facilitating
a payments system, promoting macroeconomic stability, reducing
structural asymmetries and eventually establishing a common monetary
system enabling countries to trade in their own currencies and
working towards establishing a regional currency.
- to facilitate the recuperation of the historical, social and
ecological debts owed by the peoples of the North to the peoples
of the South who are actually the creditors of these debts.
- to allow for the participation of citizens’ organizations
and social movements in decisions on its structure and on its
operations monitoring how its funds are allocated.
- to respect the principle of “one country one vote” at
all levels of decision making.
- to be funded by contributions in proportion to the capacity
of each member country with funds coming from foreign exchange
reserves, loans from member countries, common international taxes
(for example a Currency Transaction Tax) and from donations.
- to have a transparent management, its books open to public
inspection and its loans constantly audited.
- to have a high quality of administration without any kind
of immunity for its functionaries (as occurs with other International
Financial Institutions).
- to promote a genuinely co-operative regional integration
based on the principles of subsidiarity, proportionality and
complementarity; financing public projects; assisting self-reliant
development and equitable trade among family farmers, co-operatives,
indigenous communities, women’s organizations, and groups
of fishers or workers.
- to give to projects for food sovereignty, energy self-reliance,
technologies appropriate to endogenous and sustainable development,
including free software; generic medicine production; the recuperation
of ancestral knowledge; the promotion of environmental justice;
and the strengthening of public services.
- to promote alternatives to the economic model promoted by
existing international financial institutions based on the building
of mega-projects that destroy the environment and biodiversity.
Will the Bank of the South live up to these expectations? Much
will depend on the political negotiations among its sponsors and
their responsiveness to popular pressure for a progressive model
in solidarity with the aspirations of social movement.
Even if the initial structure of the Bank does not fulfill all
the movement’s expectations, it is sure to grow and evolve
over the years just as the World Bank and the IMF have changed
drastically since they were first planned at the 1944 Bretton Woods
conference.
We in Canada and other Northern countries are not mere bystanders.
At an October civil society meeting in Oslo, Norway, Minister Patiño
said “There has been a lot of pressure from the North, from
the international financial institutions, for us not to create
it. The IMF has called it ‘adventurous’, ‘Chavez
creation’ and said it is technically impossible.” Patiño
called on Northern civil society groups to press their governments
and the IFIs not to boycott the Bank of the South.
While there has been little overt public opposition from the IFIs,
an insider at the Inter-American Development Bank told the Financial
Times: “With the money of Venezuela and political will of
Argentina and Brazil, this is a bank that could have lots of money
and a different political approach. No one will say this publicly,
but we don't like it.” With initial capitalization worth
US$7 billion, the Bank of the South would outweigh the IDB’s
$4 billion of paid-in capital.
It is up to us to make clear that far from being a threat, the
emergence of the Bank of the South is an opportunity for a much-needed
new type of lenders.
A Favourable Conjuncture for New Initiatives
The launch of the Bank of the South follows an unprecedented crisis
of legitimacy that has weakened the power and influence of both
the IMF and the World Bank.
In 2005 both Brazil and Argentina paid off all their debts to
the IMF and declared that they would not seek any loans from it
due to the unacceptable conditions attached to its lending. Their
precedents were quickly followed by other countries.
In March of 2006 President Evo Morales of Bolivia announced that
he would not enter into any agreements with the IMF. Two months
later Serbia paid off its debts to the IMF and Indonesia declared
that it would pay back all it owed to the Fund within two years.
Then in November Uruguay said it too would pay off the IMF and
in December the Philippines said it would follow suit.
Early in 2007 Russia and Thailand said they would pay off the
Fund. Then in March Angola terminated all consultations with the
IMF. Ecuador paid off its debts that same month. As a result of
this string of repayments the IMF is undergoing its own financial
crisis. Its portfolio of loans fell from US$70 billion in 2003
to a bit more than US$20 billion in 2006. The Fund faces a net
loss of about US$100 million in 2007 due to a lack of clients.
Nearly all of the IMF’s US$17 billion in outstanding loans
are owed by just two countries – Turkey and Pakistan.
In April of 2007 President Chavez announced that Venezuela would
leave both the IMF and the World Bank. That same month Bolivia,
Nicaragua and Venezuela also said they would withdraw from the
International Centre for the Settlement of Investment Disputes,
an arm of the World Bank that had been used by transnational corporations
to resist Bolivia’s efforts to take control over its own
water distribution.
Then President Rafael Correa expelled the World Bank’s representative
from Ecuador. When Correa was Economy Minister back in 2005 the
World Bank had refused to proceed with a promised loan worth US$100
million for Ecuador in apparent retaliation against a decision
by Correa to direct earnings from petroleum exports towards meeting
social needs instead of debt payments.
The World Bank is undergoing a crisis of legitimacy that goes
far beyond the scandal over the nepotism shown by former President
Paul Wofowitz towards his girlfriend. President Bush has appointed
another neo-conservative, Robert Zoellick, to replace Wolfowitz.
Zoellick is a big fan of Structural Adjustment Programs (SAPs).
When he was US Trade Representative, Zoellick promoted free trade
agreements as a way of making neo-liberal SAPs permanent.
Prior to these Bush appointees, the World Bank’s reputation
was already severely undermined during the tenure of James Wolfensohn
when it failed to act on the recommendations of three broad consultations
in which it actively participated:
- The Structural Adjustment Participatory
Review Initiative (SAPRI)
- The World Commission on Dams; and
- The Extractive Industries Review.
Even though each of these bodies made credible proposals for reform
of World Bank policies, no significant changes came about.
A key development that has made the emergence of new institutions
like the Bank of the South possible is the build up of huge amounts
of foreign exchange reserves in the coffers of Southern countries’ central
banks. According to World Bank data, at the end of 2006 Southern
countries held reserves equivalent to US$2,687 billion which is
larger than their combined foreign debts. Most of these reserves
are deposited in Northern financial institutions or used to buy
securities such as US Treasury bonds. While the largest part of
these reserves are held by Asian countries, particularly China,
the holdings of South American countries are not insignificant
reaching US$320 billion.
For further information or to be removed from this list please
contact John Dillon, Program Coordinator, Global Economic Justice
at KAIROS jdillon
“We are living in an important time, full of exciting
new challenges such as the emergence of the Bank of the South.”
With these words Rev. Israel Batista, General Secretary of the
Latin American Council of Churches (CLAI), explains why the CLAI
is working with social movements such as Jubilee South and Ecological
Action to influence plans for a new kind of bank.
The Latin American Council of Churches, Jubilee South and Ecological
Action are all KAIROS partners dedicated to freeing Southern peoples
from the burdens of financial debt and creating new, more just
and sustainable alternatives.
Help KAIROS work with these partners to promote these alternatives.
Click here to donate online now or go to
www.kairoscanada.org/e/support/donate.asp
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