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The Bank of the South: a review of what is at stake
by Eric Toussaint
20 May 2007

Two opposite tendencies at play in Latin America

On one hand, the United States government and the EU countries make bilateral free-trade agreements with the countries of the region - an arrangement which benefits their own companies. These companies have taken advantage of the massive privatizations of the 1980s and 1990s to take control of numerous economic sectors that are vital for development. Capital flows go out of the region to the most industrialized countries via debt servicing, repatriation of profits made by the trans-national corporations of the North, and flight of capital organized by Latin-American capitalists. The internal public debt is on the rise, living conditions are stagnating and the people most exploited are further impoverished, despite the mitigating effect of certain public aid programmes (in Brazil, Argentina, Venezuela, Ecuador).

On the other hand, a number of popular mobilizations in the last few years has led to the election of new governments, some of which are trying to reverse the course of the last thirty years and counteract the first tendency described above by re-establishing public control over the country’s natural resources (Venezuela, Bolivia, Ecuador), over other key sectors of the economy (Venezuela) and by foiling certain strategic projects of the United States (failure of the FTAA in November 2005 and difficulty in implementing Plan Colombia due to the opposition of Venezuela, Ecuador [1] and Bolivia). Certain governments undertake social reforms by following a re-distributive policy. Venezuela since 1999, Bolivia since 2006, and shortly afterwards Ecuador, decided to modify their constitution in a democratic direction. The Bolivarian Alternative for Latin America and the Caribbean (ALBA) brings together Venezuela, Bolivia, Cuba, Haiti, Nicaragua and, as an observer, Ecuador.

The creation of a Bank of the South scheduled for the end of 2007 is a kingpin of this counter-tendency.

Preparations for the Bank of the South

By February 2007, Argentina and Venezuela, joined by Bolivia, had reached an agreement for creating the Bank of the South. Very soon Ecuador, Paraguay, and more recently, Brazil (since 3 May) officially joined these three countries. The text submitted for ministerial discussion, before Ecuador intervened with an original proposal, was dated 29 March and took the form of a proposal put forward by Argentina and Venezuela. Ricardo Patiño, the Finance Minister of Ecuador, and four members of his cabinet drew up the Ecuadorian proposal. Three non-Ecuadorians, Jorge Marchini [2], Oscar Ugarteche [3] and myself, were involved in the process. On 30 April, the Finance Minister, accompanied by his cabinet and myself, submitted this proposal (produced over some fifteen hours on 27, 28 and 29 April) to President Correa. President Correa ratified this proposal, which was immediately sent to the representatives of the other countries. The ministerial meeting, held on 3 May in Quito and chaired by the President of Ecuador, lasted some 4 to 5 hours. I was invited to be a part of the Ecuadorian delegation. The other countries were represented by their Finance Minister, and, as a general rule, by a deputy minister or a cabinet member.

The focus is now on a presidential summit, due to take place before the end of June as per the Quito Declaration. This summit will adopt a text defining the Bank of the South and proclaiming the final creation of this institution.

What was the orientation of the text drafted by Argentina and Venezuela?

The initial text drawn up by Argentina and Venezuela is in its way both surprising and shocking since the initial diagnosis includes considerations that are completely in line with the neo-liberal view, the view of the World Bank (WB), the view of dominant economic thinking, and the view of the capitalist class regarding the reasons for Latin America’s deficiencies. The text observes that under-development of the financial markets is the main cause of Latin America’s problems. In its general considerations, it specifies the need to promote the establishment of multinational corporations with regional capital, without mentioning that they must also be public. Knowing Argentina’s leanings, the fact that nothing is said about the corporations being public is as good as saying that they are private, or that they are mixed. The general considerations also make it clear that this means promoting the development of capital markets and regional financial markets.

Second element: the project proposes the creation of a Bank of the South, which would operate both as a Development Bank and a Monetary Stabilization Fund. A Monetary Stabilization Fund means a regional organization that comes to the aid of the countries of the region when they are faced, for example, with hostile takeovers. They need important exchange reserves in order to protect themselves from these speculative attacks. The joint Argentine-Venezuelan project proposed only a single organization called the Bank of the South, which can operate like a Development Bank and a Monetary Fund at the same time. There is nothing shocking about this. What is shocking is that once again the declared purpose is to develop capital markets, to promote industry, and to encourage the development of infrastructure, energy, and trade. Environmental protection or cultural and educational policies are left out of the picture. Considering the initial diagnosis, it is to be feared that the recommended macro-economic policies will remain within the logic of Structural Adjustment and orthodox monetarist policies. It is also said that the Bank will borrow on the financial markets.

The important and shocking third element: the proposal from Argentina and Venezuela envisages voting rights according to each country’s contribution. Thus, if Argentina contributes three times more than Ecuador or Paraguay, Argentina’s voting rights will be three times more. This is precisely the system of voting rights prevailing in the WB, the IMF, and the IABD (Inter-American Bank of Development). An anti-democratic criterion is proposed for this new institution, thus creating, at the operational level, an exact replica of what is severely criticized elsewhere. As regards membership, the Argentine and Venezuelan proposal evokes the possibility of participation in the Bank by African and Asian states, which will enjoy observer status. This is positive because it expands the scope of the South. But, while it has not been explicitly stated, there is a likelihood that a place will also be granted to multilateral financial institutions. It has been learned from other sources that in the discussions of March and April 2007, certain members of the cabinet, particularly from Argentina, envisaged that the WB and the IABD could be shareholders (without voting rights) of the Bank of the South. And to crown it all, the last part, chapter 8, entitiled “Immunity, Exemption and Privilege”, is exactly based on the statutes of the WB, the IMF and the IABD. Article 42 of this project states that records are inviolable, that is to say that audits of the Bank of the South will not be possible. It is also stated that the bank’s personnel, directors, officials and employees are tax-exempt. Article 45 states - and here we have a simple copy-paste of WB and IMF statutes - that there is total immunity regarding the legal and administrative procedures relative to acts committed by civil servants in the context of their mission.

This project came out of the meetings of a technical commission and would have been the only project submitted for discussion had Ecuador not decided to produce a new proposal. The text proposed by Argentina and Venezuela is completely consistent with the prevailing direction and policy of the Kirchner government in Argentina; on the other hand it is completely inconsistent with the positions adopted by Venezuela. A plausible explanation: the Argentinian and Venezuelans sherpas who created this text are technicians trained in Anglo-Saxon universities, and who are favourable to the dominant neo-liberal economy. One can only hope that this text was not really read, approved and adopted by the Venezuelan President.

What does Ecuador’s proposal contain, compared to the Argentinian-Venezuelan text?

Ecuador proposes three instruments: a Regional Monetary Fund, a Bank of the South and the creation of a common currency of the South. Ecuador proposes a shift towards a South American currency, which would allow the countries to trade between themselves in their own currency, whereas today trade between Latin American countries is conducted primarily in dollars. This third instrument was immediately accepted by Argentina, Venezuela, Brazil, Paraguay and Bolivia.

The text proposed by Ecuador starts with some important general considerations. The first consideration states that the two organizations - the Southern Monetary Fund and the Bank of the South, or the single organization if there is only a Bank of the South, must guarantee the effective application of human rights and must allow for the application of international agreements, criteria and treaties which relate to economic, social and cultural rights. It is an approach expressed in terms of human rights. It means setting up economic tools to be used for ensuring the application of fundamental human rights. Another basic consideration is that neo-liberal policies of the WB and the IMF type (and this is said implicitly) have led to a deterioration in the living conditions of large sections of populations, to an increase in inequalities in the distribution of income and resources, to a loss of control by the countries of the region over their natural resources, and to a strengthening of the migratory trend. To counter all this, public policies must be implemented to reinforce public structures, enabling countries to regain control of their natural resources and their regional productive apparatus, a large part of which has passed into the hands of trans-national companies in the North.

What other original proposals have been made by Ecuador regarding the Bank of the South?

It is important that these two organizations should not be indebted to the capital markets, as the World Bank and the IABD are. It should be noted that the WB, which is indebted to the capital markets, very often justifies its neo-liberal policy by explaining that it is fundamental to maintaining its AAA rating as a borrowing bank in the capital market, allowing it to borrow at the lowest rate. If we want to follow policies where profitability is not the first concern, we must not depend on this rating. This is why the capital of the Bank of the South, which enables it to grant loans, must come from four sources:
- 1) from a capital contribution from the member countries;
- 2) from the Bank’s borrowing from member countries (contracts that do not depend upon bonds issued on regional or Northern capital markets);
- 3) from common global taxes, namely various types of global taxes to be applied by the member countries, with receipts being transmitted to the Development Bank, like a Tobin tax, a tax on income repatriated by the trans-national companies, a tax for environmental protection, etc;
- 4) from donations.
If a Southern Monetary Fund is set up, it is planned that the money used to aid needy countries would be part of the reserves of each member State which are put at the Fund’s disposal in case of need. When necessary, the Fund can call on 20% of the exchange reserves of all the member countries. For example, if Bolivia is attacked by speculators: immediately the Fund asks the Central Bank of Brazil, Argentina, Venezuela, Paraguay and Ecuador to transfer, in a few hours, 20% of their reserves to defend Bolivia. It is important to note that the funds are not permanently blocked; they are pooled only in the event of need.

Another major element in the general principles of the Ecuadorian proposal is that the interlocutors of the Bank of the South or the Fund should be member States. The idea is to grant loans to public companies, to small producers, to the co-operative sector, to indigenous communities, etc. Theoretically, it should not grant loans to large trans-national companies of the South, such as those that exist in South America: Petrobras, the large private-public Brazilian company; PDVSA, the Venezuelan oil company; Techint, an Argentinian private company ... Theoretically, a loan cannot be granted to these companies; it has to be to the public sector, the small producers, the local communities, municipalities, provinces, etc. The money should be lent to them via the member States. The idea is to stop the Bank of the South from becoming a “mastodon”. One must avoid what happens with the WB: it has nearly 13,000 employees, who bypass central government with multiple missions in every corner of the countries in the South. These missions purposely weaken the authorities. The idea is to have a Bank of the South structure, with lean staffing and with the States as the representatives/negotiators. The objective is that the States, in accordance with the Bank’s orientation, lend mainly to those who require it, with a view to finding an alternative model, respectful of the environment, seeking to promote social justice and assisting those who do not have easy access to capital, therefore by definition not primarily to large private companies.

Other differences between Ecuador’s project and the Argentinian-Venezuelan text

The Ecuadorian project envisages that each member State will set up a mechanism so that, each year, it will be accountable for the operation and the activity of the Bank and the Fund. This mechanism must include a public parliamentary discussion.

Instead of stating that records are inviolable, the principle is that these records are part of the public domain. There can be temporary exceptions, certain decisions of the Fund being provisionally classified as confidential when relating to hostile bids.

The officials of the Bank of the South and the Fund are subject to tax.

There is no immunity: it is stated that the officials of the Bank and the Fund will be answerable to law for their actions. The Bank and the Fund are defined as moral identities, and can be prosecuted.

What can be assessed from the ministerial meeting of 3 May?

First of all, the outstanding fact is that Brazil, which up to then had been reluctant to join the Bank, affirmed that it adhered to the idea of a Bank of the South. It should however be noted that Brazil, in accordance with the economic and social policy and the foreign policies of the Lula government, sees this Bank of the South essentially as an instrument of commercial policy, speaks primarily in terms of economic bloc and uncritically accepts the European Union (EU) as its model. For the CADTM and for a series of social movements - European or otherwise - the EU in its present state is absolutely not a model. Of course, there are important positive aspects: the fact of having a common currency, a space where internal borders have been removed and where people can move extensively. But it is certain that the current model of the EU supports the application of neo-liberal policies, and upholds the movement of capital more than the movement of people, since among the new member States, in the east, there are certain restrictions on the movement of citizens. The EU maintains fierce competition among workers. Within the EU framework, working conditions and employers’ obligations to workers have not been standardized upwards. Where favourable systems of social security are still to be found, for example in Hungary, the tendency is to privatize in exchange for participation in the EU.

This uncritical vision of the EU, as expressed by Brazil, is undoubtedly shared by other Latin American governments: either they have illusions about the EU, or, more probably, and in full knowledge of the facts, they find that Europe is doing very well in its current state, and therefore prefer a model which remains well aligned to neo-liberal policies.

What to think of Brazil’s accession to the Bank of the South?

Given the strength of the Brazilian economy in Latin America, Brazil’s participation gives the Bank far greater initial impetus. The problem with Brazil is the orientation of the Lula government and the economic and social model that it practises. It is clear that Brazil’s integration into the Bank of the South will lead the Bank to adopt a much more traditional pattern, not too far removed from neo-liberalism, while if Brazil did not participate, it would be easier to reach a definition closer to the alternative model that we advocate. Brazil has joined the Bank of the South because it cannot be absent from it: if the foundations of the Bank of the South had not been laid on the initiative of Venezuela and Argentina, Brazil would never have given it any thought. But to maintain its regional economic dominance Brazil cannot stay away from the Bank of the South. If we look at it from the viewpoint of Ecuador, Venezuela and Bolivia, it is easy to understand why these governments are interested in having Brazil in the Bank of the South, because it is an important economic power and because a series of progressive governments in the region wish to maintain good relations with Brazil so that it does not strengthen its ties with the United States, which would weaken the region vis-à-vis American aggressivity. A truly diplomatic and geo-strategic game is being played. In a more ideal world, the Brazilian government would adopt a truly leftist policy - an alternative to its alliance with the US and its support for the agro-exporting industry and for an export-based policy which is set on conquering the markets of the region. But that is a far cry from reality.

Which trend will predominate on the regional scale?

The current government of Paraguay is a right-wing one, and this government could be replaced after this year’s presidential elections. A left-wing priest may be the winner in these elections. As for Argentina, there is anti-IMF and anti-neo-liberal rhetoric but the Argentinian government is oriented towards strengthening capitalism in Argentina. In fact, two great initiatives are at work today in Latin America. On the one hand we have the Bank of the South and MERCOSUR which is expanding. It initially included Brazil, Argentina, Paraguay and Uruguay. Venezuela, which wants a stronger regional alliance in opposition to the US proposal of FTAA, has joined MERCOSUR. Bolivia did so too, while Ecuador is there as an observer. This makes an economic bloc defined mainly by commercial and economic relations and dominated by a capitalist model. This bloc facilitates trade and promotes a certain type of regional integration.

Then there is another initiative, ALBA, or the Bolivarian Alternative for Latin America and the Caribbean, in which Venezuela and Bolivia are members. Cuba, Haiti and Nicaragua have also joined, with Ecuador as an observer. A meeting of ALBA was held in Venezuela five days prior to the Quito meeting on the Bank of the South. ALBA is a political group with Cuba-Venezuela-Bolivia as its central axis. The governments of these three countries state explicitly that their objective is a "Socialism of the 21st century” - an anti-capitalist and anti-imperialist orientation, aiming at solidarity among the people.

So here we have a highly specific situation in Latin America and the Caribbean region, with two types of projects, partly competing with each other, but which nevertheless coexist, since several countries are members of both. Venezuela and Bolivia are in MERCOSUR and ALBA; on the other hand Brazil is not in ALBA, because ALBA clearly has a more left-wing orientation than MERCOSUR, and also because Cuba is in it. Brazil, without being opposed to Cuba, clearly affirms its friendship with the Washington government.

The Bank of the South is placed between the two, though it is closer to an extended MERCOSUR than to ALBA. It does not include key members of ALBA, starting with Cuba, but also Haiti and Nicaragua. Of course, it would be logical for the Bank of the South to extend to the Caribbean region and Central America in future, and why not to Mexico if there is a change of government, and to develop privileged relations with the other continents of developing countries, namely Africa and Asia. MERCOSUR is primarily an economic bloc, largely dominated by Brazil. In fact Brazil is a “sub-imperialistic” power, an economic powerhouse in the area, which dominates its economic partners. As for Argentina, Venezuela, Ecuador or Paraguay, these countries have a negative trade balance with Brazil because Brazil exports to them much more than they export to Brazil. Brazil is endowed with trans-national corporations like Petrobras, which dominate the key economic sectors of its neighbours. Petrobras, together with other trans-national companies, dominates Bolivian gas and oil; other Brazilian companies dominate Paraguay. MERCOSUR, dominated by Brazil and Argentina, somewhat resembles the EU dominated by the Franco-German-British trio, with a dominant neo-liberal capitalistic streak, while ALBA is a project that is more political than economic, based more on exchanges such as barters and donations. Venezuela donates handsomely to Nicaragua, Bolivia and Haiti. ALBA seems to me a really interesting project. What will be the determining factors? The answer lies in the policy directions taken by the governments and the struggle of the social movements.

Ecuador has a radical orientation, supporting an income distribution policy that favours the most oppressed. Ecuador will not renew its lease for the US military base in Manta as from 2009. Ecuador questions the type of oil operations that is destroying part of its territory in Amazonia, for example. We can see that Ecuador’s policy, from this point of view, is closer to Venezuela and Bolivia than to Brazil. In Paraguay, there may be a change of president towards the left. We should also not forget the great mobilizations in Brazil, particularly that of the Movement of Landless Peasants (MST), which reinforces action for a true land reform, in contradiction with Lula’s policy. In the coming months and years, we may see even stronger social movement and a reinforcement of the ALBA project. The orientation of the Bank of the South will depend on the governments that support its creation. Even if there is reason to fear that the orientation advanced by Brazil and Argentina will prevail, the field is still open. It is now that we must mobilize all our efforts so that the Bank of the South project fulfils all the hopes we place in it.

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Translated by Judith Harris, Suchandra De Sarkar and Sushovan Dhar

Footnotes :

[1Rafael Correa, the Ecuadorian president, has announced that he will not renew the lease on the US military base at Manta in 2009 when the present one runs out.

[2Member of the Leftist Economists of Argentina (EDI), member of the International Debt Observatory (IDO) and Professor of Economics at the University of Buenos Aires (UBA).

[3Professor of Economics at the University of Mexico, member of Latindadd and IDO.

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 Greece 2015: there was an alternative. London: Resistance Books / IIRE / CADTM, 2020 , Debt System (Haymarket books, Chicago, 2019), 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, etc.
See his bibliography:
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. He was the scientific coordinator of the Greek Truth Commission on Public Debt from April 2015 to November 2015.