Saying "NO" to the World Bank and IMF

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.