“The alternative would be a Bank of the South, not the BRICS Bank”

Éric Toussaint interviewed by Benito Perez for the Swiss newspaper Le Courrier from Geneva

22 August 2014 by Eric Toussaint , Benito Pérez

Éric Toussaint knows what is at stake in development finance inside out. Founder of the Committee for the Abolition of Third World Debt (CADTM) in 1990, the Belgian political scientist was directly involved in launching the Bank of the South at the behest of the Ecuadorian government. Even though this entity is presently at a standstill, Mr. Toussaint still believes in this project initiated in 2007 by seven South American countries as a progressive alternative to 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, 180 members in 1997), 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.

http://worldbank.org
. On the contrary, he has doubts about the investment bank announced by the five major emerging economies.

Q: The emergent countries known as BRICS announced that they want to create an alternative to 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, 180 members in 1997), 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.

http://worldbank.org
(WB). Is this good news for development?

Éric Toussaint: Any alternative to the WB would be great news indeed, but I do not at all believe that this is the case here. The five BRICS countries are emerging capitalist economies trying to preserve their interests, just as the big traditional powers do with their control of 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) and the WB. By promising not to set conditionalities such as Structural Adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

IMF : http://www.worldbank.org/
Plans, the New Development Bank (NDB) stands apart with its loans and its democratic principle: one country, one vote (but to what extent will it be followed?). As an alternative, it’s not enough. It would just be a lesser evil.

Q: To summarize, we are going to swap a WB subservient to Washington with a NDB serving Chinese imperialism?

Éric Toussaint: We can speak about sub-imperialism taking our cue from the Brazilian economist Rui Mauro Marini, in the sense that these countries, Brazil and China in particular, are investing heavily in developing countries for pushing their political or economic self-interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. , not for the development of the recipients of the funds. What differentiates them from real imperialists, such as the United States, is that they have not yet resorted to military means, with the exception of Russia.

Q: In your opinion, what would be a real alternative to the WB?

Éric Toussaint: The announcement of the creation of the Bank of the South (BoS) in 2007 was a hopeful sign. When it was created, I participated in the drafting of Ecuador’s stand and subsequently in the committee formed with ministers from the seven founding countries, at the request of President Rafael Correa. Ecuador and Venezuela had a clear vision of an establishment which would boost employment and facilitate continental integration as well as involve very concrete projects, such as a pharmaceutical industry for generic products, or the reconnection of South American countries by railways, with local production of rolling stock, which would have meant less pollution along with industrial and technological breakthroughs. The Sucre was to be a common and alternative currency. It further involved the idea that countries with maximum foreign reserves should transfer resources to others. It was an integration project, which considered people’s interests and could easily have expanded to Central America and the Caribbean, especially as it aimed at transparency - Public Accounts, external audits - and democracy. As an alternative to the WB, this should have set an example, and therefore, had to be ambitious. For example, judicial immunity was out of the question for the BoS officials, unlike their WB counterparts.

Unfortunately, the Bank of the South has not taken off. Seven years down the line since it was established, the bank has not yet granted any loan! The Venezuelan government has announced that it would be operational before the end of 2014. Let us keep a close watch.

Q: Will the BRICS Bank have better luck?

Éric Toussaint: Will they manage to agree on joint projects? One may wonder if these five countries do not join forces merely to show the traditional powers that they can do it. In fact, in my opinion, these five countries have very few common interests.

Q: Do they have the financial basis to sustain such a bank?

Éric Toussaint: Obviously yes! China alone has more than $ 3,000 billion in foreign exchange reserves and it does not know what to do with it. It’s an enormous amount, almost twice the total external public debt of developing countries. A good chunk of that money has been invested in the United States Treasury bills. China is the largest creditor to the United States. Similarly, Brazil and Russia also have very large foreign exchange reserves. Only South Africa will find it difficult to put the $ 10 billion as capital for starting the establishment (which is in addition to the $ 5 billion required for the reserve fund. editor’s note)

Q: As for Brazil’s investment in the NDB, isn’t it the last nail in the coffin of the BoS?

Éric Toussaint: The BoS is already in a bad state... but, with or without Brazil, South America still has the financial assets to start this project. I think that Brazil is mainly responsible for the current impasse. This country has its own development bank, BNDES (the National Bank of Economic and Social Development) with huge investments abroad. In South America, its stature is equivalent to that of the Inter-American Development Bank and WB loans for the region! Brazil prioritizes the BNDES and only participates in the BoS in order to stall a potential rival.

Q: Don’t this failure and the present financial difficulties of Argentina and Venezuela indicate that the dream of Latin American independence is out of reach?

Éric Toussaint: When Hugo Chávez proposed the BoS, the project sounded absolutely reasonable! May be it was wrong to assume that Brazil had to be counted in the deal at any cost. Nevertheless, most of the countries on the continent have proven that they can steer clear of neoliberal consensus. New structures, such as the ALBA (Bolivarian Alliance for the Peoples of Our America), are now functional. Ecuador, Bolivia and Venezuela have decided to withdraw from the WB group’s International Centre for Settlement of Investment Disputes (ICSID ICSID The International Centre for the Settlement of Investment Disputes (ICSID) is a World Bank arbitration mechanism for resolving disputes that may arise between States and foreign investors. It was established in 1965 when the Washington Convention of that year entered into force.

Contrary to some opinions defending the fact that ICSID mechanism has been widely accepted in the American hemisphere, many States in the region continue to keep their distance: Canada, Cuba, Mexico and Dominican Republic are not party to the Convention. In the case of Mexico, this attitude is rated by specialists as “wise and rebellious”. We must also recall that the following Caribbean States remain outside the ICSID jurisdiction: Antigua and Barbuda, Belize, Dominica (Commonwealth of) and Suriname. In South America, Brazil has not ratified (or even signed) the ICSID convention and the 6th most powerful world economy seems to show no special interest in doing so.

In the case of Costa Rica, access to ICSID system is extremely interesting: Costa Rica signed the ICSID Convention in September, 1981 but didn’t ratify it until 12 years later, in 1993. We read in a memorandum of GCAB (Global Committee of Argentina Bondholders) that Costa Rica`s decision resulted from direct United States pressure due to the Santa Elena expropriation case, which was decided in 2000 :
"In the 1990s, following the expropriation of property owned allegedly by an American investor, Costa Rica refused to submit the dispute to ICSID arbitration. The American investor invoked the Helms Amendment and delayed a $ 175 million loan from the Inter-American Development Bank to Costa Rica. Costa Rica consented to the ICSID proceedings, and the American investor ultimately recovered U.S. $ 16 million”.

https://icsid.worldbank.org/apps/ICSIDWEB/Pages/default.aspx
). Also, major foreign companies, exploiting natural resources in these countries, have to pay more taxes now. This is still insufficient when it comes to the actual potential of these countries and the challenges ahead, but we still have time. There should be a strong reaction in the next two years. Some government officials are driving in this direction.

If not, I am afraid South America will face serious financial difficulties. A situation similar to that of the 1982 debt crisis is looming large.

Q: Are there early warning signs?

Éric Toussaint: Yes, the United States is going to raise interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
which were lowered drastically during the crisis of 2007-2008. This will make debt refinancing Debt refinancing Taking out new loans to reimburse current debts. costlier, just when a declining global demand for raw materials is threatening the revenue of South American states. I am afraid these countries will only realize within the next two or three years what a terrific opportunity they missed during the past decade-an opportunity to develop alternative financial instruments Financial instruments Financial instruments include financial securities and financial contracts. against the decisions of Northern countries.

Translated by Suchandra De Sarkar in collaboration with Christine Pagnoulle and Eric Toussaint.


Author

Eric Toussaint

is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France. He is the author of Bankocracy (2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012 (see here), etc. See his bibliography: https://en.wikipedia.org/wiki/%C3%89ric_Toussaint He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. Since the 4th April 2015 he is the scientific coordinator of the Greek Truth Commission on Public Debt.


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