Latin America Banks on Independence

The new Bank of the South shatters neoliberal economics

Mark Engler January 22, 2008

Latin American leaders launched the Bank of the South at a ceremony in Buenos Aires on Dec. 9, 2007. The back will support regional development in order to wean the region of institutions like the International Monetary Fund and the World Bank.

In the clos­ing weeks of 2007, a region in revolt against the eco­nom­ics of cor­po­rate glob­al­iza­tion issued its most uni­fied dec­la­ra­tion of inde­pen­dence to date. 

On Dec. 9, stand­ing before the flags of their coun­tries, the pres­i­dents of Argenti­na, Bolivia, Brazil, Ecuador, Paraguay and Venezuela, along with a rep­re­sen­ta­tive from Uruguay, gath­ered in Buenos Aires and signed the found­ing char­ter of the Ban­co del Sur, or the Bank of the South.

The Bank of the South will allow par­tic­i­pat­ing gov­ern­ments to use a per­cent­age of their col­lec­tive cur­ren­cy reserves to strength­en Latin America’s econ­o­my and pro­mote coop­er­a­tive devel­op­ment. It plans to begin lend­ing as ear­ly as 2008 with around $7 bil­lion in capital.

By itself, the bank rep­re­sents a seri­ous chal­lenge to U.S.-dominated insti­tu­tions, such as the Inter­na­tion­al Mon­e­tary Fund (IMF), the World Bank and the Inter-Amer­i­can Devel­op­ment Bank (IDB). As part of a larg­er trend, it sig­nals a major break from the poli­cies of free trade” neolib­er­al­ism that dom­i­nat­ed in the region through­out the 80s and 90s.

The Bank of the South’s cre­ators are keen­ly aware of the sig­nif­i­cance of this break. In the words of Venezue­lan Pres­i­dent Hugo Chávez, the bank is aimed at free­ing us from the chains of depen­dence and under­de­vel­op­ment.” Ecuado­ri­an Pres­i­dent Rafael Cor­rea con­curred, argu­ing that with the bank, South Amer­i­can nations will be able to put an end to their polit­i­cal and finan­cial depen­dence that they have had with the neolib­er­al model.”

Offi­cial­ly, the inter­na­tion­al finan­cial insti­tu­tions are keep­ing their tone upbeat. On Dec. 11, IMF Direc­tor Gen­er­al Dominique Strauss-Kahn told Agence France-Presse that the new bank is not a prob­lem; it’s maybe an oppor­tu­ni­ty.” Sim­i­lar­ly, Augus­to de la Torre, World Bank chief econ­o­mist for Latin Amer­i­ca, said, As far as the World Bank is con­cerned, this new ini­tia­tive is not per­ceived as a competitor.”

But in March 2007, as Latin Amer­i­can lead­ers were first dis­cussing the cre­ation of a new body, one anony­mous insid­er at the neolib­er­al IDB told the Finan­cial Times that the Bank of the South rep­re­sent­ed the largest threat to his insti­tu­tion in decades. With the mon­ey of Venezuela and polit­i­cal will of Argenti­na and Brazil, this is a bank that could have lots of mon­ey and a dif­fer­ent polit­i­cal approach,” he explained. No one will say this pub­licly, but we don’t like it.”

Break­ing Washington’s hold

There is good rea­son for those invest­ed in the Wash­ing­ton Con­sen­sus to dis­like the Bank of the South. In recent decades, the IMF, the World Bank and the mul­ti­lat­er­al region­al banks have large­ly con­trolled poor­er coun­tries’ access to cred­it and devel­op­ment financ­ing. These insti­tu­tions allowed devel­op­ing coun­tries to avoid default­ing on their debt, pro­vid­ed funds in some dif­fi­cult times and gave a nod of approval to pri­vate cred­i­tors. But the price the coun­tries paid in return was steep.

In order to stay in their good graces, devel­op­ing nations have had to pri­va­tize indus­tries, open mar­kets to for­eign busi­ness­es, lib­er­al­ize cap­i­tal flows, keep mon­e­tary pol­i­cy tight and imple­ment fis­cal aus­ter­i­ty (that is, cut need­ed social ser­vices for their peo­ple). In the end, such poli­cies proved dis­as­trous in Latin America. 

Per capi­ta GDP, which had been grow­ing at a steady rate through­out the 60s and 70s, grew hard­ly at all in the sub­se­quent two decades of neolib­er­al­ism. Dur­ing the lat­ter peri­od, the region also devel­oped some of the high­est lev­els of inequal­i­ty in the world.

The Bank of the South would work to rem­e­dy this sit­u­a­tion. Unlike the pre­ex­ist­ing finan­cial insti­tu­tions, the new bank will be run by Latin Amer­i­can coun­tries them­selves, will not be dom­i­nat­ed by any sin­gle nation and will be free to sup­port devel­op­ment approach­es that are much more sen­si­tive to the needs of the poor. 

A May 2007 state­ment of South Amer­i­can finance min­is­ters affirmed that the new bank and oth­er mech­a­nisms of region­al inte­gra­tion must be based on demo­c­ra­t­ic, trans­par­ent and par­tic­i­pa­to­ry schemes that are respon­si­ble to their constituencies.”

With the excep­tion of Paraguay’s Nicanor Duarte Fru­to, each of the Latin Amer­i­can lead­ers involved in the Bank of the South was elect­ed in recent years on a man­date to split from Wash­ing­ton. Well aware of the fail­ures of eco­nom­ic neolib­er­al­ism in the region, and under pres­sure from an enlivened cit­i­zen­ry, the bank’s mem­bers have out­raged the inter­na­tion­al busi­ness press by work­ing to do just that.

Sev­er­al gov­ern­ments have moved to free them­selves of direct over­sight from the IMF by repay­ing loans ear­ly. In Decem­ber 2005, Argenti­na and Brazil announced that they would pay off $9.8 bil­lion and $15.5 bil­lion, respec­tive­ly. The IMF, which ben­e­fits from inter­est pay­ments on long-term loans, was nonplussed. 

Argenti­na, which was a mod­el of the IMF dur­ing the 90s and suf­fered severe eco­nom­ic col­lapse in 2001, vocal­ly declared good rid­dance. Then-Pres­i­dent Nés­tor Kirch­n­er tri­umphant­ly pro­claimed that throw­ing off the chains of IMF debt con­sti­tut­ed a move toward polit­i­cal sov­er­eign­ty and eco­nom­ic independence.”

Since then, Latin Amer­i­can gov­ern­ments have been one-upping each oth­er in their acts of defiance. 

In Bolivia, upon tak­ing office in 2006, Pres­i­dent Evo Morales announced he would let the country’s stand­ing loan agree­ment with the IMF expire. In May 2007, he declared Bolivia would with­draw from a World Bank arbi­tra­tion cen­ter that han­dles invest­ment dis­putes, usu­al­ly favor­ing cor­po­rate inter­ests. Nicaragua has sim­i­lar­ly reject­ed the author­i­ty of the center. 

Cor­rea topped them by eject­ing the World Bank’s rep­re­sen­ta­tive to Ecuador in April 2007. He declared the offi­cer a per­sona non gra­ta in the coun­try, insist­ing, We will not stand for extor­tion by this inter­na­tion­al bureaucracy.” 

That same month, Chávez announced that Venezuela would with­draw from mem­ber­ship in the IMF and World Bank alto­geth­er. While the coun­try is still work­ing out the details of this move, the prospect is unprece­dent­ed in the era of cor­po­rate globalization.

The abil­i­ty of oil-rich Venezuela to pro­vide its neigh­bors with financ­ing they pre­vi­ous­ly might have need­ed to beg for from Wash­ing­ton is a sig­nif­i­cant fac­tor in their will­ing­ness to break with the IMF and World Bank. Venezuela has offered bil­lions in sup­port to coun­tries – includ­ing Argenti­na, Bolivia and Ecuador – and those back­up funds make many coun­tries less sus­cep­ti­ble to threats of cap­i­tal flight than in the past. Along with invest­ments from Chi­na and India, it dra­mat­i­cal­ly reduces Washington’s abil­i­ty to starve dis­si­dent lead­ers of finan­cial resources when gov­ern­ments grow, in its view, dis­obe­di­ent. The Bank of the South will help to for­mal­ize a source of alter­na­tive finance and place it under region­al control.

Rude awak­en­ings

The estab­lish­ment of the Bank of the South comes at a par­tic­u­lar­ly bad time for the IMF. The institution’s trou­bles were brought into relief at its annu­al fall meet­ings in mid-Octo­ber, after which the Wash­ing­ton Post con­tend­ed, the Inter­na­tion­al Mon­e­tary Fund needs restruc­tur­ing, and maybe a bailout.” 

IMF lend­ing has plum­met­ed in recent years, as its sup­posed ben­e­fi­cia­ries have launched a rebel­lion. Cut­ting ties with the fund is not just a Latin Amer­i­can phe­nom­e­non. Rus­sia, Thai­land, Indone­sia and the Philip­pines have also pur­sued strate­gies of ear­ly debt repay­ment. Many Asian coun­tries that were burned by the region’s neolib­er­al finan­cial cri­sis in 1997 are build­ing large cash reserves to pre­vent a return to the IMF in times of eco­nom­ic down­turn, and they have recent­ly worked on cre­at­ing a region­al cur­ren­cy exchange that will fur­ther increase their dis­tance from Washington.

These devel­op­ments are sap­ping both the IMF’s influ­ence and its cash flow. Its loan port­fo­lio has dwin­dled from near­ly $100 bil­lion in 2004 to around $20 bil­lion today. A sin­gle coun­try, Turkey, now accounts for the bulk of its lend­ing. The IMF has lost almost all influ­ence in Latin Amer­i­ca, with lend­ing there plum­met­ing to a pal­try $50 mil­lion, less than 1 per­cent of its glob­al loan port­fo­lio. As recent­ly as 2005, the region had account­ed for 80 per­cent of its out­stand­ing loans. 

Deprived of lucra­tive inter­est pay­ments from poor­er coun­tries, the IMF is now des­per­ate­ly try­ing to meet its $1 bil­lion admin­is­tra­tive bud­get with­out dip­ping into its gold reserves. In stark con­trast to the tri­umphal­ist pro­nounce­ments made in past fall meet­ings, in 2007 the IMF’s new­ly installed Dominique Strauss-Kahn con­fessed that down­siz­ing is on the table” for the institution.

Ignor­ing the wider pic­ture, pro-free trade pun­dits have gen­er­al­ly respond­ed to the Bank of the South by min­i­miz­ing its sig­nif­i­cance and pre­dict­ing fail­ure. The Wall Street Jour­nal char­ac­ter­ized the bank as but one of Hugo Chávez’s many mad­cap schemes, insist­ing that it is unlike­ly to live up to his grandiose vision.” Mean­while the Econ­o­mist assert­ed, The IMF can sleep easy.” It point­ed out that the Bank of the South’s found­ing agree­ment lacked many details about its gov­er­nance and lend­ing poli­cies, and that dis­agree­ments per­sist among the region’s key players.

It is true that Latin Amer­i­ca has a his­to­ry of inter­nal dis­putes thwart­ing dreams of region­al uni­ty – and that quar­rels per­sist today. While Venezuela and Ecuador have pushed for the bank to have a far-reach­ing man­date, Brazil prefers a more mod­est insti­tu­tion. To the dis­ap­point­ment of many of his pro­gres­sive sup­port­ers, Brazil­ian Pres­i­dent Luiz Iná­cio Lula da Sil­va has adhered to con­ser­v­a­tive eco­nom­ic poli­cies designed to keep Brazil in good stand­ing with for­eign cred­i­tors. The coun­try also runs a large inter­nal devel­op­ment bank, which loaned $38 bil­lion in 2007 to fund nation­al projects. There­fore, Brazil has less to gain direct­ly from mak­ing the Bank of the South into a robust region­al lender.

Activists, while gen­er­al­ly pos­i­tive, have expressed some con­cerns. Envi­ron­men­tal­ists wor­ry the Bank of the South, while more demo­c­ra­t­i­cal­ly man­aged than its coun­ter­parts in Wash­ing­ton, may nev­er­the­less devel­op a sim­i­lar­ly destruc­tive record of fund­ing large-scale, eco­log­i­cal­ly harm­ful con­struc­tion projects. 

Oth­er pro­gres­sives, rang­ing from the mem­bers of the Jubilee South coali­tion to Cuban com­men­ta­tor Eduar­do Dimas, have argued that the insti­tu­tion must go beyond tra­di­tion­al devel­op­ment lend­ing to sup­port such mea­sures as land reform, a com­mon region­al cur­ren­cy and projects explic­it­ly designed to pro­mote polit­i­cal sol­i­dar­i­ty in the region. These would more close­ly link the bank with the Boli­var­i­an Alter­na­tive for the Amer­i­c­as (ALBA), an ini­tia­tive through which the Venezue­lan gov­ern­ment has paid for Cuban doc­tors to pro­vide ser­vices in the region and has pro­mot­ed oth­er forms of mutu­al assistance. 

Reser­va­tions about the Bank of the South’s man­date, how­ev­er, should not obscure the swift­ness and sever­i­ty of Latin America’s assault on the inter­na­tion­al finan­cial institutions. 

Chávez first float­ed the idea of the bank in 2006, and the speed at which it has come into exis­tence has been shock­ing. The wide­spread sup­port with­in Latin Amer­i­ca for inde­pen­dent bod­ies such as the new bank sug­gests that the days when the Unit­ed States could act as an eco­nom­ic over­seer dic­tat­ing pol­i­cy for coun­tries across the globe are com­ing to an end.

Upon the inau­gu­ra­tion of the Bank of the South, even Lula da Sil­va deliv­ered a mes­sage of defi­ance to the North. Devel­op­ing nations must cre­ate their own mech­a­nisms of finance,” he said, instead of suf­fer­ing under those of the IMF and the World Bank, which are insti­tu­tions of rich nations.” He added blunt­ly: It is time to wake up.”

Mark Engler, a writer based in New York City, can be reached here.
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