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| Several of the South American leaders whose countries have agreed on the establishment of the new Bank of the South. Radio Mundial |
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, by its Spanish initials). 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 Dec. 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 17 months. Argentine host, 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.
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 amounts must be paid in five installments over a five-year time span. (2)
On the night of the BDS founding, Dr. Pedro Páez, Ecuadorian Coordinating Minister for Political Economics, delivered an upbeat talk in Buenos Aires to civil society groups in the Judicial Federation of Argentina. He cited the need for civil society to continue to lobby for a socially conscious and effective BDS to counter conservative forces and other interests, which, he noted, had been responsible for delays in its formation. Paéz offered some general information on the BDS meeting (a closed-door affair), and information from the extraordinary meeting of ALBA held in Cumaná, Venezuela in April 2009. (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 American, factoring into the collapse of the Argentine economy in 2001-2002.
These Latin American crises, like those now being experienced worldwide, resulted in mass unemployment and unheard-of levels of indigence, bringing death by starvation to marginal communities of food-exporting countries. As 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 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 nine and 11 trillion dollars in funds.
Included in recommendations from the G-192 based on 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 current 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 Odebrecht (7) 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 alternate 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 the academic arena 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, by increasing regional control over capital flows in and out of the region or reducing external loan amounts.
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 and the Asian ASEAN countries plus Korea, Japan, and China have been actively promoting regional trade and financial stability pacts with varying degrees of success. The European Union and ASEAN have developed specific regional efforts to confront the current crisis. These regional efforts include the creation of smaller regional funds to alleviate the adverse effects of recession.
President Correa's ideas are based on the European Union's regional financial model. The ECU11—European Currency Unit—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. (12) 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." (13)
In Asia, the equivalent structure to the BDS takes the form of the ASEAN development bank (ADB). (14) The ADB has now become part of a more complex financial infrastructure, recently reinforced by hundreds of millions of dollars procured in the heat 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,15 that involves 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.16 Both China and Japan agreed to provide $38.4 billion, with 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." (17) 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.
The term "absurd" is used by Martin Wolf 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. Both regional efforts seek to rationalize capital flows, redirecting part to the needs of the 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 in 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 per annum, while Latin American governments often pay more than 10% in interest on public external debt, much of which is also denominated in dollars and Euros.
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 reflects 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).
| End Notes 1. When speaking of regional development, this article uses the term "region" in the sense of multiple countries, as opposed to regions within a country. In particular the article is based on the Latin American region and South American regional trade organizations Mercosur (Southern Common Market) and ALBA (Bolivarian Alternative for the Americas) in particular. 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. 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). 2. Bank of the South takes off with 7 Billion USD Capitol. 3. Name in Spanish: Federación Judicial Argentina. 4. 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. 5. International Financial Institutions in Latin America, accessed Monday May 11, 2009. 6. 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, accessed Monday May 11, 2009. 7. Spanish (diplomacy), El Comercio, accessed May 29, 2009; Portuguese, Odebrecht, (company arbitration statement) accessed May 14, 2009. 8. Soitu.es. 9. ECU stands for European Currency Unit, the predecessor of the Euro. 10. El Pais.com, accessed Sunday May 10, 2009. 11. Which Correa cites in an interview with Spanish journalists. 12. IMF's Role in the Asian Financial Crisis 13. Marxists.org. 14. Though it should be noted that the influence of the core ASEAN countries in the ADB is dwarfed by that of Japan. 15. After the city in Northern Thailand where the initiative was launched. 16. Minus Indonesia. 17. Financial Times |
Americas Program