Stage of definitions on the Southern Bank

8 August 2008 by María José Romero


The Southern Bank is one of the three pillars of the new regional financial architecture in South America, together with a Southern Fund and a South American Monetary Unit. This fact was agreed upon by the presidents of Argentina, Bolivia, Brazil, Ecuador, Paraguay and Venezuela in the Quito Declaration signed on May 3, 2007. This Bank is intended to be an expression of sovereignty and financial independence, as well as an entity which will finance another kind of integration with emphasis on the energy sovereignty, food security and intra-regional trade. After its creation, nevertheless, a series of facts and debates have arisen which show that this path will not be so easy to take.

The creation of the Southern Bank was made official on December 9, 2007, in Buenos Aires, Argentina, when the presidents of the seven member countries, Argentina, Bolivia, Brazil, Ecuador, Paraguay, Uruguay and Venezuela signed the foundation charter of this institution. As from that moment, the Committee in charge of the technical aspects of the Bank set themselves the task to agree on a proposal of articles of agreement to be drafted within 60 days, so as to submit them to the presidents’ consideration and in the last instance submit said proposal for it to be ratified by the respective parliaments.

However, said term was long overdue without the Commission reaching a consensus proposal. As stated by Gabriel Strautman of Jubilee Brazil, “debate has been marked by disputes between those who aim at the idea of breaking up with the international financial system and those who believe in respecting the rules imposed by globalized finance and who, therefore, just consider the regional multilateral institution as a new source of finance for old projects”. (“South Bank: 90 days of silence”).

The different technical instances complied with as from December aimed at the achievement of political and technical agreements – capital contribution and Bank management being two of the most controversial issues. In this process, the meeting held in Montevideo on April 25 is a fundamental instance. On that occasion, the finance ministers from the different countries, with the exception of Argentina, absent from the meeting , agreed on the capital contribution to be made by Bank member countries. Three groups were created so as to allow for the asymmetries among bloc countries. The first group includes Brazil, Argentina and Venezuela, countries which will contribute 2 billion dollars each. The second group includes Uruguay and Ecuador, which will be contributing 400 million. While in the third group we find Paraguay and Bolivia, with 100 million. This is therefore the confirmation of the start of the Bank operations with a 7 billion dollar capital. This resolution must have the approval of Argentina and on that occasion the type of management given to the Bank was not considered.

Two months later, the government of Ecuador and different civil society organizations set up a technical workshop called “New Regional Financial Architecture: Southern Bank” in Quito, Ecuador, as a new instance of debate concerning the Bank objectives. Such activity took place from June 23 to 26 and had the support of the United Nations Development Programme UNDP
United Nations Development Programme
The UNDP, founded in 1965 and based in New York, is the UN’s main agency of technical assistance. It helps the DC, without any political restrictions, to set up basic administrative and technical services, trains managerial staff, tries to respond to some of the essential needs of populations, takes the initiative in regional co-operation programmes and co-ordinates, theoretically at least, the local activities of all the UN operations. The UNDP generally relies on Western expertise and techniques, but a third of its contingent of experts come from the Third World. The UNDP publishes an annual Human Development Report which, among other things, classifies countries by their Human Development Rating (HDR).

(UNDP). Representatives of a number of civil society organizations, academics, technicians and former officials from other multilateral banks, such as 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 Asian Development Bank, took part in this event, as well as delegates from Paraguay, Bolivia and Ecuador technical commissions, involved in the official negotiations for the Bank’s creation.

Immediately after this event, a meeting was held in Buenos Aires on June 27 by the Finance Ministers of Argentina, Brazil, Ecuador and Paraguay, together with representatives from Uruguay, Bolivia and Venezuela. Representatives from Chile and Guyana also attended it as observers. In this meeting, the Quito technical workshop conclusions, as regards the Bank’s mangement and administration, were set forth.

Issues in Debate

In a heated debate, the Quito workshop participants presented, from different perspectives, advantages and drawbacks regarding the Bank’s technical issues pending solution. Among them it is worth hightlight the following:

a) Management and Administration

As it was established in the Foundation Charter, the representation and vote at the Board will be democratic, such as one country-one vote. However, it is necessary to determine which issues will need a vote and which are part of the everyday operations of the Bank (no vote).

The Bank’s organizational structure is still pending definition. The options that were dealt with during the workshop are about the classic division by departments, according to areas of activities: transport, health, others, or something more alternative/binding, that remains yet unclear. Participants explained that the structure predetermines investment (e.g. transport departments only find transport projects), therefore a politicial definition is necessary in this regard.

A definition is also required regarding the duties of management/administration bodies, the criteria according to which the Bank staff will be selected (proportion of specialists and project officials, staff quotas per country, etc.), and their work conditions (immunities, exemptions and privileges for Bank officials), removal and/or suspension of member countries.

b) Capital, Stock and Gathering of Funds

The definitions on the Bank capital began to take place at the ministerial meeting held in Montevideo. Anyway, alternatives are still pending regarding the following: stock classes per member and non-member countries, currency tranches, subscribed, paid and authorized capital.

During the workshop different positions were also pointed out on the use of international reserves and other alternative sources, the use of special funds (donations by other countries, private donors, trust funds and others), co-financing mechanisms with other multilateral agencies and the limit of exposure.

c) Investment policies and instruments for the social, environmental and financial development of the region

For many social organizations this is one of the points that shall mark the difference between the Southern Bank and the rest of financial institutions. In view of this, there are many elements that call for definitions. Among them: the type of instruments and conditions for financing; the availability of concessional or non-concessional loans, and the terms of the concessionality; the 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.
and the criteria applied to (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.
per capita, type of activity, mode of production, etc.; the financing sources and how to determine its amount as per percentage of total spending; the elegibility criteria (countries, regions, sectors, type of investment, etc.); the type of guarantees Guarantees Acts that provide a creditor with security in complement to the debtor’s commitment. A distinction is made between real guarantees (lien, pledge, mortgage, prior charge) and personal guarantees (surety, aval, letter of intent, independent guarantee). and the conditions for technical assistance.

Since not all areas can be financed, it is necessary to establish a criterion to prioritize the investment portfolio (allocation per country, per population, per poverty, per contribution, per sector, etc.). According to the declarations signed all along the Bank creation process (Asunción Declaration, Quito Declaration, Rio Declaration) it is possible to think that the following criteria will be privileged: food, energy and health sovereignty; the regional productive complementarity; the expansion of infrastructure and regional productive chains; inequality/poverty reduction; economic growth in marginalized areas. Anyway the criteria must be expressly provided for in the articles of agreement of the institution.

d) Cycle of Operations, Safeguards and Purchases of the Bank

It is necessary to establish whether there will be environmental and social safeguards: sociocultural and environmental protection, women, indigenous peoples, Afro-descendants and communities’ rights; mitigation of involuntary resettlements, and others; respect for labour regulations.

Bank purchases and acquisitions could be or not attached to the aid facilitated by the institution. The alternatives are linked to whether the Bank will prioritize the purchase of input produced in the region, in which percentages, and how conflicts will be solved in case of questioning for competitive bidding.

e) Participation and Transparency

The possibility that the Bank opens to social control and civil society participation mechanisms is part of a technical and political debate that fails to be close yet, at least for social organizations. For that reason it will be necessary to define the control mechanisms and its scope.

The transparency of Bank operations seems to be another expected goal. This will result from: criteria regarding the access to information; definitions as to bank secrecy and corruption; accountability; internal or external auditing; internal or external evaluation.

This discussion has made it clear, and it has been so for many civil society organizations since the beginning of the process, that in many cases it is about giving priority to political decisions over technical concepts, which finally implies a political decision as well.

For those organizations which favour the setting-up of a financial institution which substantially stands out from the existing ones, such as the World Bank, the IMF 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
and Inter-American Development Bank (IDB), it is about not replicating models, since if said institutions operated in line with their original purpose and in favour of equitable and sustainable development of Latin American countries, the creation of a new institution would not be under discussion.

It is for this reason that there is a latent contradiction among many technicians, who support the use of structure, financing and income-raising models from the existing development institutions, and the expectations raised in the region by the creation of an institution upon new bases.

The Last Definitions

At the ministerial meeting held in Buenos Aires, the agreements reached in Montevideo regarding capital contributions from member countries, were ratified, and the invitation to the other countries that make up the Union of South American Nations (UNASUR) was reiterated. On account of this, by way of optimistic omen, one further step was taken, by stating that the opening subscribed capital will be 10 billion dollars. This implies that 3 billion will be added to the 7 billion originally agreed, which would be contributed by Colombia, Peru, Chile, Surinam and Guyana. But so far, only Colombia and Surinam have requested to be incorporated to the Bank. Colombia did so on October 12, 2007, after the ministerial meeting held in Rio de Janeiro on October 8, but its incorporation made no progress as a result of the conflicts with its neighbouring countries (Ecuador and Venezuela). Surinam requested to be incorporated during this last meeting in Buenos Aires.

As reported by various media, one additional step towards regional monetary integration will yet be taken by Argentina and Brasil next September, when both countries stop using the dollar as the currency for their exchanges and these are carried out in current account by both their central banks, which will then compensate the 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 them. The detachment from the dollar means one more step towards the search for a South American currency unit, a project in which economist Oscar Ugarteche has worked extensively.

The currency unit and the creation of the Southern Bank are doubtlessly paving the way towards a new regional financial architecture, which seeks to reinforce the independence of the region as regards the policies promoted in the 1990s. The Southern Bank has been vindicated by the South American debt movement, which is working in pursuit of the initiative and watching negotiations with expectation, and this grants legitimacy to the process. But the moment they stop feeling the initiative as their own, the Bank will lose one of its major assets and turn into a financial institution just like any other.

The author specially thanks the comments and suggestions by Carlos Bedoya (Jubilee Perú - Latindadd) which contributed to the final version of this article.

A short version was published by Forum Solidaridad Perú at Alerta Perú.

Article published at http://ifis.choike.org/informes/871.html



CADTM

COMMITTEE FOR THE ABOLITION OF ILLEGITIMATE DEBT

35 rue Fabry
4000 - Liège- Belgique

00324 226 62 85
info@cadtm.org

cadtm.org