The Southern Bank: the struggle of the big ones against the small ones

18 January 2008 by Oscar Ugarteche Galarza


After the launching of the Southern Bank in Buenos Aires the countries had to reach an agreement on the contribution that experts considered would be made in equal parts. Argentina, with the support of Brazil, said that this was unreasonable; that the contribution of the larger countries should be greater, and their power within the Bank should therefore also be greater. Naturally this distorts the idea of a democratic Bank with a board composed by seven equal associates in which each country would have a vote.

Big fish eat up small fish. It what may be only natural, but is nonetheless abusive. This is precisely what may be about to happen in the constitution of the Southern Bank if Argentina’s initiative, with the support of Brazil, succeeds.

The Southern Bank is presumably the democratic alternative to the international development banks based in Washington. The criticism levelled at the IFIs, the Inter-American Development Band (IADB), the World Bank World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

and the International Monetary Fund IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
(IMF), is that the votes are proportional to the countries’ GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
size, so that the richer countries have more votes than the poorer ones and ultimately, the richest country has veto power in the boardroom. Thus the president of these institutions is chosen by Washington and the G7.

The May 2007 Quito Declaration went against this type of plutocracy. The declaration boasted that the democratic elements of the new regionally-based international financial architecture that would take root in South America with the development bank known as the Southern Bank. The bank would target more socially-oriented projects and the poorer areas in order to breach the gap between the most and the least prosperous areas.

The Declaration of Quito was based on a proposal of the Government of Venezuela with the support of Argentina to launch a development bank that would simultaneously act as monetary stabilization fund. Brazil apparently objected to this idea as anti-technical partly because it was and partly because it had not been proposed by Brasilia. After getting over the resentments typical of these multilateral initiatives, the Southern Bank was given a structure and after seven months of negotiations, in December 2007, it was launched in Buenos Aires by the presidents of the seven member-countries in South America. Colombia, Peru and Chile, who have signed free trade agreements with the United States or are in the process of signing them, did not join. Emir Sader, Brazilian political sociologist and current executive director of the Latin-American Council of Social Sciences (CLACSO) holds that South America is split in two between countries who desired integration as peers and those who preferred integration subordinated to the United States.

After the launching of the Southern Bank in Buenos Aires the countries had to reach an agreement on the contribution that experts considered would be made in equal parts. The seed capital of the Bank is seven billion dollars, a sum which divided among the seven member-countries equals a one-billion dollar contribution from each. Argentina, with the support of Brazil, said that this was unreasonable; that the contribution of the larger countries should be greater, and their power within the Bank should therefore also be greater. Naturally this distorts the idea of a democratic Bank with a board composed by seven equal associates in which each country would have a vote.

This brings to mind the discussions that took place when the future European Economic Community was created in the 50s and it then turned out that Luxembourg, which is a city state, had the same weight inside the Community than Germany, the powerhouse of Europe. The issue had a political solution then and with time the smaller countries of Europe ended up balancing out the tensions of power with the larger countries. The headquarters of the Economic European Community was established in Brussels and for this reason, today the city is the capital of the European Union.

The solution to the impasse is in sight. If Cristina Fernández’s government pretends to uphold the democratic spirit of the Quito Declaration, it would agree to a proposal that would allow the smaller countries to have unpaid seed capital for one billion dollars but they would have a different time to contribute the capital than the big countries. The financing for the bank would come from its leverage Leverage This is the ratio between funds borrowed for investment and the personal funds or equity that backs them up. A company may have borrowed much more than its capitalized value, in which case it is said to be ’highly leveraged’. The more highly a company is leveraged, the higher the risk associated with lending to the company; but higher also are the possible profits that it may realise as compared with its own value. by issuing bonds in the member-countries’ currencies, in a currency pool or in a South American monetary unit that is still being designed.

Perhaps this is the best moment for the big fish to consider not eating up the small fish but to become partners, bearing in mind that what they have in front of them is a shark waiting to eat them all up and who would be delighted if this initiative failed.




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