Bank Of The South & Latin American Integration

Analysis prepared by COHA Research Associate Roberto Mallen

Bank of the South: Another step toward Latin American integration

* Member countries analyze the proposal as Banco del Sur (Bank of the South) is about to be launched

* Lula, while skeptical, is moving ahead

* Dealing with the opposition to the Bank

* Not a Chávez-controlled institution, but one aimed at development and integration, infrastructure loans and aiding each other's investment requirements

Since coming to power in 1999, Venezuelan President Hugo Chávez may have been seen as a controversial figure, universally known for his confrontational stance regarding U.S. foreign policy aims. However, his zeal for social reform, promotion of Latin American integration and his unquestionable good will toward other nations will reach a high-water mark on Sunday, December 9, 2007, when the Bank of the South will be formally launched.

Integration has been a recurrent theme on Chávez's political agenda--not Washington's kind, but the more regional-centric ALBA (Bolivarian Alternative for the Americas)-- which is given reality by the oil concessions Venezuela has negotiated with various Latin American countries, as well as his most recent proposal for a development bank for South America, which has been given the working title of Banco del Sur (Bank of the South).

The Bank of the South appears to be one of the region's most compelling projects leading towards authentic Latin American financial bolstering, as well as helping to allow for a new-found autonomy. It appears that for the first time in its history, the region actually will have its own entirely autonomous financial institution with each of its members having one vote and which is most likely scheduled to be capitalized from $7 to 8 billion dollars. This large institution will be capable of promoting financial integration and cooperation. Under its members' jurisdiction, it will support the development of badly needed infrastructure projects, especially in the energy sector. This initiative has the support of seven South American countries (Venezuela, Ecuador, Bolivia, Brazil, Argentina, Uruguay, and Paraguay) in addition to several other Caribbean and Asian nations that already have expressed varying degrees of interest in the project.

Nobel Laureate and Columbia University Professor Joseph Stieglitz gave his blessing to the project after meeting Chávez in Caracas. In a subsequent press conference, he observed that "one of the advantages of having a Bank of the South is that it would reflect the perspectives of those in the Western Hemisphere. It would boost Latin America's development and provide a useful alternative to the World Bank and the International Monetary Fund (IMF). It is a good thing to have competition in most markets, including the market for development lending."

Some open questions and possible disagreements regarding the Bank's policy framework and its objectives persist among the founding countries. Public opinion in Latin America in general has a low regard for International Financial Institutions (IFIs), especially the IMF, which has been widely chastised for its prejudicial treatment of the Argentine economic melt-down earlier this decade and for the scores of years it spent setting harsh conditions in return for providing access to international credit. Therefore, given how Latin American governments are reluctant to seek aid or credit from IFIs, the region needs a large alternative financial institution that would be noted for its transparency and which permits its members to actively engage in the decision-making process, which is exactly what Bank of the South proclaims it will do.

The Proposal

President Chávez initially proposed the creation of Bank of the South at the Cochabamba Summit in December 2006. The initial proposal was to create a development bank for South America to finance regional development projects, while being accountable and seeing to it that provisions be made for the necessary amount of public participation.

The bank project is well underway with a target of raising over $7 billion in initial capital (Venezuela has already offered $1.4 billion and Argentina $350 million). However, there is some disagreement on what the institution's objectives and framework should be. Should it be an institution designed to aid countries in financial crisis (such as the IMF does)? Will it be in competition with the other IFIs, such as the Inter-American Development Bank (IDB)? Or will it be yet another institution that will, as Prof. Stieglitz phrases it, promote competition in the market for development lending but this time in a higher-minded manner?

Venezuela has taken the lead in proposing the creation of an institution that will be specifically aimed at servicing South America. It is no surprise that Chávez is the leader who first envisioned this kind of institution, considering how he chose to withdraw Venezuela from the IMF and the World Bank earlier this year and how he has publicly attacked those institutions for being instruments of American imperialist design in the region. Venezuela, as the lead country of ALBA, Chávez's model for an altruistic foreign and financial policy, also insists that the main distinction between the IMF and Bank of the South will be that the latter will not impose a definition for cooperation based on "neo-liberal" mandates. Vince McElhinny of the Bank Information Center points out that Venezuela foresees an institution that will play a significant role in regional monetary policy and provide financing for needy members. Colombia's approach, on the other hand, would have been pragmatic, rather than provocative, and was not expected to cause Washington any grief.

Colombia's Explosive Announcement and its Impasse with Venezuela

Colombia's announcement that it would not be attending the Buenos Aires gathering did not cause any great surprise because it came as a consequence of Colombian President Alvaro Uribe's angry spat with Chávez. He also presumably felt that attending would put him in hostile territory and that he better identify with the status quo. Uribe managed, until the other day, to have maintained a cordial working relationship with his Venezuelan counterpart while relying on the White House to aggressively lobby the Democratic Party leadership to obtain the necessary backing to get the approval for a Free Trade Agreement with Washington. Uribe's relationship with Chávez is currently under siege due to his abrupt termination of Chávez's role in attempting to achieve, with Bogotá's consent, the release of hostages being held by the leftist FARC (Fuerzas Armadas Revolucionarias de Colombia) guerillas.

Following Uribe's shutdown of Chavez' mediation in the conflict, after the latter spoke directly to the commander of Colombian military about the direction of the negotiations, Chávez angrily announced that relations with Colombia would be put "in the freezer." Due to Uribe's intemperate actions, Chávez said he was no longer planning on rejoining the Andean Community of Nations, a trade bloc of which Colombia is a major member. The crisis is also expected to affect commerce between the two countries, which share a healthy $5-6 billion in annual trade, most of it in non-traditional products.

The Case of Brazil

Lula's support for the project has been hesitant, even distant at times, but in recent weeks he considerably has warmed up. Brazil initially was hesitant to give its support to the Bank because its strategy appeared to be based on creating an emergency fund, as the IMF does, to aid countries with urgent economic concerns. Given that the region currently has relatively strong credit ratings and budget surpluses--partly thanks to China and India's quest for mineral resources--Brazil's argument that the Bank may turn into an IMF-type of institution that is redundant. But Brazil decided to throw its full support behind the bank, after the bank planners clarified that the new institution would be limited to promoting investment and development in the region.

Another issue that may have promoted misunderstanding involved Brazil, which has the region's largest economy. Brasilia had opposed the idea that the voting structure of the Bank should be based on the principle of one nation one vote. Rather than equal voting rights, it favored a voting scheme based on the amount of capital that each nation will be pledging to the financial institution's capitalization allotments. Eventually, Brazil fell into line and agreed with the one vote per nation formula which was espoused by the majority of the membership.

One factor that initially complicated matters was that Brazil already possessed a development bank--the Banco Nacional de Desenvolvimento Econômico e Social (BNDES)--which already has become a powerful domestic financial factor in the country, lending more than $15 billion in the past year for in-country projects. Luciano Coutinho, the president of BNDES, said he was prepared to create a fund through his bank whose purpose would be to replicate the mission of the Bank of the South. This brings up the question of exactly how Brazil will benefit from the Bank if it already has a development bank that finances such projects in the country. Apparently, Brazil's vision for the Bank is one that adheres to orthodox fiscal standards and basically finds itself involved in financing the infrastructural investment needs of an expanded Mercosur, the southern cone free trade area. Most of the development projects that BNDES finances are in fact of this type and normally tend to relate to Mercosur-associated energy policies. Given that Brazil is Latin America's largest economic force and a country with immense potential, its support gives the Bank of the South huge legitimacy and will help it materialize other projects, such as a very ambitious proposal for a gas pipeline which would eventually serve most of South America.

Opposition to the Bank

Opposition to the Bank of the South is centered on the premise that the Bank itself is part of Chávez's vision for South America, and that any country that supports the idea is backing a socialist scheme for Venezuela as well as the rest of the region. Some have gone as far as to say that some of the South American members are supporting the Bank only to secure the good will of oil-rich Venezuela.

Roberto Teixeira da Costa, a board member of the private Banco Itau Holding Financeira S/A and Sul America Sam, stated that the Bank will overlap institutions dedicated to financing the region--not only the IDB, but also the Andean Development Corporation (CAF), which is partially committed to financing badly needed infrastructural projects. He also alleges that the region is not lacking funding, but rather sound and viable projects to be financed.

Countering the Opposition by Creating a New and Thoroughly Democratic Structure
Indeed, there is little doubt that the Banco will, to a certain extent, overlap existing policies and goals of other lending institutions. However, it should be clear that the proposed charter for the Bank of the South is in sharp contrast to the IDB or CAF when it comes to an open democratic structure in the Bank's favor. According to Venezuela's Minister of the Treasury, Rodrigo Cabezas, the Bank's charter will prevent any country from possessing a majority stock ownership, as well as include other clauses that will prevent the application of adjustment mechanisms employed by the World Bank, IDB and IMF.

Moreover, the Bank of the South should not be looked upon as trying to undermine the role of CAF, the biggest present lender to many Andean nations. However, as Bank of the South seeks for a more wholly democratic structure, it does not intend to achieve this by emulating the hierarchical structure of CAF.

Not a Chávez-Led Institution

The idea that any of the potential members of the Bank of the South will be candidates to also join Chávez's foreign policy alternative, ALBA, or that the Bank will be controlled by Chávez, is probably riding the wrong horse. While it is true that Chávez took the initiative to establish the Bank, and that Venezuela is positioned to be a major participant in its operations, and that its main headquarters will be in Caracas, this doesn't mean that Chávez in any manner will directly control its activities, or that the Bank will be used to funnel Chávez's "Bolivarian" vision automatically into Latin America. It is worth noting that the Bank demonstrably will possess a structure that will enable all of its member countries to actively participate in its operations: or, as Cabezas has stated, the Bank will be an institution "for us, led by us." Also, while some countries, like Colombia, may have serious ideological differences with Chávez and may not want to be considered part of an institution allegedly led by him, or at least be part of Chávez's ALBA, this does not mean that they are prepared to turn their backs on the new institution, even though Bogota has now done this, at least for the present time.

In an interview in October with the New York Times, Brazilian President Luiz Ignacio Lula da Silva dismissed such concerns that Venezuela would try to exert control over the Bank. He stated that "it is small-minded to think that one bank created with the multilateral representation of many countries would be at the service of one person or one country. It's not that simple."

Conclusion

Although Colombia's relationship with the Bank has ended, for now, all of the other proposed members seem to be committed to actively participating in the financial institution. Yet, much remains uncertain regarding working out its policy framework and strategies that will be utilized after the December 9 gathering. Much of what will eventually make Bank of the South very successful as well as very popular with its clientele will be its commitment to transparency, participation and accountability.

South American countries must come to see in the Bank of the South as a window of opportunity to create an institutional model for development that, if successful, could be emulated by grouping of countries around the world. There is still a long road ahead, but the Bank's member countries are set to meet on December 9 to discuss and publicly announce the final structure of the Bank's operating framework. This meeting is expected to come forth with reasonable understandings on how to proceed so that the project becomes a popular reality in short order.

ENDS

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