What is the Bank of the South?

19 December 2008 by Halifax Initiative


On December 9th, 2007, representatives from Argentina, Bolivia, Brazil,
Ecuador, Paraguay, Uruguay, and Venezuela met in Buenos Aires, Argentina,
to launch “el Banco del Sur” or the Bank of the South (BoS). With the
creation of the Bank, the leaders of Latin America envisaged a new
development institution to help promote growth and tackle poverty. The BoS
was originally proposed in 2006 by Venezuelan president Hugo Chavez.
Chavez, along with other South American leaders, wanted a Bank that would
allow them to assert their political and financial independence from
traditional international financial institutions (IFIs), like 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 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 put an end to
decades of 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/
policies imposed by the IFIs on countries
in Latin America.

Why now?

Many Latin American countries argue that the conditions attached to IFI
loans - privatization, deregulation, and economic liberalization - have
failed. The IFI model of development has generated more poverty and
inequality, and a permanent drain of capital and resources from countries
to transnational corporations by way of 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. payments and profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders.
remittances .

Against this context, the rising price of export commodities Commodities The goods exchanged on the commodities market, traditionally raw materials such as metals and fuels, and cereals. has led to an
unprecedented accumulation of foreign exchange reserves and increasing
terms of trade in South American countries. Real 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.
in South America grew
by over five percent annually between 2005 and 2007, and is expected to
ebb only slightly in 2008 as a result of the financial crisis that began
in the United States . As a result, in early 2006, Argentina and Brazil
paid their remaining IMF loans ahead of schedule, and in July 2006,
Uruguay announced a $900 million payment to the IMF, which amounts to half
of their debt to the institution . Oil-rich Venezuela, which recently
repaid its World Bank loans five years ahead of schedule, severed ties
with the IMF and World Bank in May 2007 . The IMF, as a result, has lost
nearly all of its influence in South America with lending falling to under
$50 million, less than 1 percent of its global loan portfolio .

The emergence of numerous left-leaning leaders in South America has also
led to a trend towards greater regional integration and less reliance on
IFI-imposed solutions. Alongside Venezuela’s Hugo Chavez came Brazil’s
Luiz “Lula” da Silva, Argentina’s Christina Kirchner, Chile’s Michelle
Bachelet, Bolivia’s Evo Morales, Ecuador’s Rafael Correa, Uruguay’s Tabaré
Vázquez and now Paraguay’s Fernando Lugo. From this group, only Chile, who
along with non-BoS members Peru and Columbia, have been resistant to a new
regional financial institution.

Accordingly, the founding members of the BoS have expressed a commitment
to use the Bank to break with IFI policies of the past, recover the fiscal
sovereignty of the South American people, and stop the transfer of
resources from the South to the North. In the same spirit of financial
independence and in parallel to the BoS, another regional bank, the
Bolivarian Bank for the Americas (ALBA) was established in January 2008
between Cuba, Bolivia, Nicaragua and Venezuela. ALBA promotes economic
integration and infrastructure development .
What is the structure of the Bank?
The bank will be headquartered in Caracas, Venezuela, with offices in
Bolivia and Argentina, and its board will be comprised of the finance
ministers from founding states. The Bank will consist of a Board of
Ministers, an Administrative Board, an Audit Board, and a Board of
Directors, and an executive committee to do the day-to-day work of the
Bank.

Participants at the 2007 launch agreed that the BoS would be guided by
three priorities:

1. financing the economic and social development of countries belonging
to the Union of South American Nations (UNASUR);
2. strengthening regional integration; and,
3. reducing asymmetries and promoting the equitable distribution of
investments among BoS members.

The Bank’s founders agreed that the primary recipients of its loans should
be national development banks and public financial institutions. Lending
arrangements will also differ depending on the objectives of the
recipient. Participants agreed that the Bank should have a number of
lending instruments ranging from ordinary loans at non-concessional
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.
(close to market) for those projects anticipated to
generate a profit, and concessional loans (less than market rate) for
projects with high social returns but less profitability.

Members also generally agreed that, “without putting at risk the Bank’s
viability, all efforts need to be made to make sure that this would be a
genuine development bank that would ensure resources were made available
to projects and beneficiaries without access to credit” . Providing loans
to organizations with lower credit ratings, but with social development
objectives in mind, and ensuring that the BoS does not attach conditions
to its loans, represent its biggest departure from IFI policies in South
America. While the broad principles of the Bank’s structure have generally
been agreed upon, member governments have been slower to agree on specific
governance and structural issues.
What are the problems with the Bank of the South?
Well beyond the 90-day window assigned in December 2007 to resolve
outstanding structural challenges, many disputes remain that are holding
the Bank back from starting its operations.

Voting Power

Although the founding declaration of the Bank states that “the Bank of the
South will have an equal representation of each of the South-American
countries based on a democratic operational system,” there are concerns
about the power balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. between the governments involved.

Argentina, Brazil, and Venezuela support a proportional system of voting
rights, with decision-making power commensurate with the financial
resources each member gives. In contrast, the less wealthy members,
Ecuador, Bolivia, Paraguay, and Uruguay, favour a system that gives all
members equal voting power. Venezuela has also proposed that capital
contributions be proportional to each country’s relative share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. of the
regional economy or regional population; that the contributions be
voluntary; and that they be no less than that pledged to the IFIs .

Despite the various proposals, the voting structure remains unresolved.
Most recently, Brazil and Argentina attempted to “qualify” the 1-country
1-vote system, arguing that it would only be applicable during the annual
meeting of the Bank’s board and not for day-to-day operations .

Capital Contributions

Bank’s members agreed to begin operations with an authorized capital stock
(shares issues by the Bank to raise funds) of US $20 billion and a
subscription base of US $7 billion. Argentina, Brazil, and Venezuela would
pay in $1 billion each, Ecuador and Uruguay $400 million each, and Bolivia
and Paraguay $100 million respectively. The remaining five members of
UNASUR, all of whom have been asked to join the Bank, would be expected to
provide the remaining subscription capital. All member states agree that
the IFIs should be able to invest in the Bank, although without a vote .
Members were also expected to pay in a minimum of 20 per cent of the
subscription base immediately (10 per cent of which can be in local
currencies). Once finalized, all of these decisions still need the final
approval of each country’s respective parliaments, a fact that may further
delay the start of operations.

Despite the tentative agreement on the initial capital base, there are
different positions among members on how the Bank’s capital should be
raised. For instance, in order to have sufficient guarantee of future
capital, Brazil favours using the capital markets of member countries to
raise funds by, for example, issuing bonds. Ecuador, meanwhile, favours
raising money for the Bank by withdrawing resources from member states’
exchange rate reserves as well as looking to international donors for
periodic replenishments .

The Brazilian Dilemma – how best to remain a regional powerhouse?
Initially Brazil was not interested in joining the BoS, arguing that the
National Bank of Economic and Social Development of Brazil (BNDES) already
performed the same function. Brazil’s position, however, changed as the
BoS gained momentum and Brazil feared losing influence in the region by
not participating. Either way, in contrast to the social development
programs that some members envisage for the Bank, Brazil seems set on
using both BNDES and the BoS to expand Brazilian capital and influence
into the region through infrastructure and export development via the
Initiative for Regional Infrastructure Integration in South America
(IIRSA).

IIRSA has been adopted as a regional development plan by UNASUR, and is
investing heavily in transportation, energy, and telecommunications with a
view to creating ten “hubs” of economic integration across the continent.
Over 40 mega-projects and hundreds of smaller infrastructure projects,
worth tens of billions of dollars, have been identified for IIRSA funding
.

South American civil society organizations (CSOs) fear that the projects
IIRSA funds will have enormous social and environmental impacts,
displacing millions and leading to massive deforestation. If Brazil sees
IIRSA as their model of South American integration and BNDES as the
financial vehicle for furthering this integration and investment, critics
argue that there is little room for broader social development initiatives
in the BoS with Brazil at the helm.


Civil Society Concerns

In contrast, South American CSOs have argued that what should separate the
BoS from IFI policies is its focus on social development and the
environment. By focusing on IIRSA, CSOs fear that the Bank’s first funding
project may be an 8,000 km gas pipeline running from Venezuela to
Argentina, a project they are not convinced will have an impact on either
poverty reduction or social development. In two open letters to the
presidents of the Bank’s founding members, southern CSOs strongly
condemned using the BoS to finance IIRSA .
Reactions to the Bank of the South
Reactions to the BoS have been mixed within the financial community.
Publicly the IMF, the World Bank, and the Inter-American Development Bank
(IDB) have been supportive of the BoS, suggesting that there is room for
another development bank in Latin America. Nobel prize winner and former
World Bank Chief Economist Joseph Stiglitz endorsed the BoS, calling it an
opportunity to reflect the perspectives of the South, and “a good thing to
have competition in the market, including the market for development
lending” .

Criticism of the BoS has been mostly directed at Venezuelan President Hugo
Chavez and his perceived “anti-American project” against the Washington’s
IFIs . More interesting is the response of Peru, Chile, Surinam, and
Guyana, who are members of the IDB but have so far resisted joining the
BoS. They have said the BoS is not a priority and that other financial
institutions, like the Andean Development Corporation (CAF), the IDB, and
the World Bank, are serving their needs . There is some evidence that
these four countries may change their minds once the BoS begins operations.

What is the status of the Bank of the South today?

A year since the Bank of the South was launched, a number of key
structural and policy issues remain. And now the current financial, food
and fuel crisis may also threaten the availability of member country
resources for the project. As a result of these various hurdles, it seems
unlikely that the Bank will begin operations before even mid-2009.
Intentions to establish a stabilization fund and regional monetary system
― two complementary objectives discussed in relation to the BoS at
the December 2007 launch ― seem even further off.

As the 2008 global financial crisis has seen the loan portfolio and
influence of the IMF grow once again, the time is right for a regional
alternative to the IFIs. The BoS is a powerful idea. What remains to be
seen is whether the BoS can live up to its original promise, or whether it
will revert to the limitations of its IFI predecessors.




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