Southern comfort

19/10/2007 | Lucien Chauvin

The birth of a new regional development bank for South America seems to have hit a few obstacles before its proposed launch in November

After months of fanfare, the far-reaching vision – first proposed by Venezuela – for a development bank funded and run by Latin American countries themselves appears to have been scaled down.

Venezuelan president Hugo Chavez sees the so-called Banco del Sur as part of an alternative to the World Bank and IMF, from which Venezuela has announced its attention to withdraw. His finance minister, Rodrigo Cabezas told Emerging Markets that the bank is a means to “definitively rid ourselves from the strangulating and humiliating conditions” of the Washington-based lenders.

Former World Bank chief Joseph Stiglitz has also weighed in. “It is a good thing to have competition in most markets including development lending,” he told a recent press conference in Caracas.

But first, members need to agree on how to fund the institution. The original goal was to raise $7 billion in capital. This is, of course, a mere fraction of the combined $164 billion that its putative member nations – Argentina, Bolivia, Brazil, Ecuador, Paraguay and Venezuela – have deposited in banks outside the region.

Brazil’s decision, after much vacillation, to join the bank has put paid, for now, to grandiose funding visions. It has quashed Argentine proposals to inject 10% of reserves, or $3.7 billion, into the bank, and is instead pushing for a more modest $500 million from each member state, partly to guarantee equitable shares. Venezuela and Argentina have both pledged to put in more than $1 billion each to get things going.

Luis Rosero, Ecuador’s deputy finance minister, says the new bank will be in tune with the needs of the region and have a structure that allows decisions to be made quickly. “Unlike the multilateral institutions, each member nation in the Bank of the South will have an equal voice,” he tells Emerging Markets.

Still some way off

The leaders of Argentina, Bolivia, Brazil, Ecuador, Paraguay and Uruguay are expected to join Chavez in Caracas at a November 3 summit to launch the Bank. Yet so far little has happened to make it a concrete reality. Aside from funding, several key issues remain for its founding members to tackle before the bank can be born.

There is still no consensus on how the bank will operate. The smaller economies represented in the bank have proposed that the institution lends to communities and municipalities as well as small producers and businesses. The Ecuadorian proposal also says that cultural, environmental and educational criteria will be taken into account when loans are made. A separate proposal called for the creation of the Southern Fund, to serve as a contingency fund in times of financial crisis, in theory replacing the IMF. Brazil – in an echo of a broader, regional tussle for influence – has flatly rejected this idea.

The wealthier countries back the Venezuelan vision of a bank with the clout, scope and project lending capabilities of the Inter-American Development Bank (IDB), but with a sharper focus on industries and local production. The plan calls for “recuperating the industrial fabric of poorer nations and strengthening that of the wealthier ones”.

In the end, a June meeting of member states was to work toward meshing the two proposals, a process that has not been completed. The idea for the Southern Fund was scrapped.

Cabezas maintains that the bank will still be bold in its ambition. He told Emerging Markets that it “will be a development bank with a social commitment, which will deal with the asymmetries in Latin America”.

Broadening the base

But the new bank needs to find a way to include more nations if it is to be representative, and not act as a kind of financial arm of the Bolivarian Alternative for the Americas (Alba), Venezuelan president Hugo Chavez’s response to US-led free trade agreements.

Moreover, six nations are barely enough to create an institution of any weight, especially if members such as Bolivia and Paraguay face problems making their $500 million contribution. This would be even more difficult for Nicaragua, a country Chavez would like to see join the group.

What’s more, the bank’s founding membership does not include Uruguay, the only full member of Mercosur not part of the plan. Although only a small economy, its absence is symbolically important. Chile, an associate member of Mercosur, is economically important and also not a member. The other two South American countries not interested, Colombia and Peru, are focused on free trade agreements with the United States and the European Union.

Then there’s the issue of competition. The bank would also vie against existing regional institutions, notably the Andean Development Corporation (CAF) – the region’s principal lender, managing more than $10 billion. Its president has denied there will be any tension between the two. “We will finance different things, and the programmes of [Banco del Sur] will be different from ours,” he told Emerging Markets earlier this year. “We can work together.”

IDB president Luis Alberto Moreno declined to comment directly on the threat posed to his institution, saying only that the IDB works “with all institutions” in the region.

World Bank president Robert Zoellick said: “The issue is not granting money. The real issue is how to help build capacities, transparency, governance, so that the money is used in a way that is beneficial for the people.”

Despite the unease expressed by some of his staff, many doubt that the Bank of the South is viable. Liliana Rojas-Suarez, senior fellow at the Center for Global Development, says that discussions have to be taken seriously “in the sense that it generates political fragmentation”. But she does not see a “long-term challenge” to the IDB or other multilaterals, as she argues that the bank would struggle to attract top-flight staff with the right technical know-how.

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