The Hindu Business Line : Can the Banco Del Sur fulfil Chavez’s dream?

The Banco Del Sur is part of Mr Hugo Chavez’s new political philosophy. The bank is seen as an alternative source of development finance free from the Fund/Bank baggage. Though the details haven’t been fleshed out, it remains to be seen whether the entity can survive on state funding alone, says K. SUBRAMANIAN.

A ‘Bank of the South’ (Banco del Sur) has been proposed by the Venezuelan President, Mr Hugo Chavez, as an alternative to the Washington-dominated International Monetary Fund (IMF), World Bank and Inter-American Development Bank (IDB).

Recent reports suggest that it would be officially launched on December 5. Though it does not amount to any historic achievement on date, it is portentous and seems to have disturbed the Washington Twins. It is rather tragic that the Twins cut their teeth in Latin America in the post-War years and took credit for restoring their economies through the application of a set of principles, which were catechised as the Washington Consensus. By the end of 1980s, it was evident that those principles were socially disastrous. No doubt there was growth and, in some countries, at high rates. But that growth came at a price. It exacerbated inequality. While fewer people lived under conditions of extreme poverty, nearly a quarter were earning below poverty wages. The indigenous population living in rural areas was harder hit. They took to arms and agitated outside the halls of WTO meetings at Seattle and elsewhere.

There has been backlash against the Washington Consensus generally, and the IMF and the Bank in particular. They were seen as the agents of the US and their conditionality serving the US interests more than those of Latin American governments or peoples Indeed, it is difficult to separate the pervasive anti-US sentiment from their hatred of the Washington Twins.

New philosophy

Mr Chavez bestrides the continent to bring it under one political agenda. He has been distributing largesse drawing on huge oil revenues. More significantly, he is spearheading a new political philosophy, which is termed as the Bolivarian Alternative for Latin America and Caribbean (ALBA). It has fatal attraction for the dispossessed masses all across Latin America.

The establishment of a Bank of the South is an offshoot of the new philosophy of Mr Chavez. It has not been a smooth journey and there have been hiccups along the way. Yet, it seems to have taken some shape and more remains to be done.

On date, there is more talk of generalities over its role and reach and less of its operational nitty-gritty. What is being attempted is a new financial architecture of a regional bank that would change power relations within multilateral development banking.

It is a daunting task and there are continuing differences within the members and with other regional agencies like the IDB, Andean Development Corporation (CAF) and funding agencies set up by governments like the National Bank of Economic and Social Development (BNDES) of Brazil. Mr Chavez has been pursuing the idea regardless.

The alternative bank

In February this year, during a visit of the Argentine President, Mr Nestor Kirchner, to Caracas, Mr Chavez announced that the two governments had agreed to launch the South Bank. He set a time table of 120 days to write down the bye laws, a five-year lending plan, fund raising programs, etc.

The idea clearly was to create a new development institution as an alternative to the existing Fund/Bank. It would be based on ethical, economic, political and social grounds and regional in ownership and management. It is open for other countries in the region to join. Its governance would be one-country one-vote unlike the Fund/Bank where the US has veto rights.

As one commentator put it, “the creation of the Southern Bank should not be considered from a financial point of view but rather from a geographical perspective, implying the reformulation of development finance contents.”

As the Venezuelan Finance Minister, Mr Rodrigo Casbeza, explained, “The idea is to rely on a development agency for us, led by us.” By October, the idea of forming the Bank moved forward with Brazil signalling its approval. At a meeting held in Rio de Janeiro seven countries agreed to join the Bank: Argentina, Brazil, Bolivia, Ecuador, Paraguay, Uruguay and Venezuela. A few days later, Colombia wanted to be included. Its President, Mr Alvaro Uribe, said that his country would join as long as the new Bank was an “expression of solidarity and brotherhood,” and not a rejection of the international lending institutions.

Colombia joining the bandwagon was surprising. Among Latin American countries, it is the closest to the US and has been receiving large value aid, especially for tackling drug traffic. Some analysts suggested that Colombia was frustrated over the delay in the ratification of its Free Trade Agreement with the US. Others relate it to the offer made by Mr Chavez to mediate between the Colombian government and the FARC, a guerrilla organisation. Whatever the reason, Colombia’s approval for the Bank was a diplomatic tour de force.

The reservations

Brazil had reservations over the role of the Bank. It had its own BNDES and did not need another agency to fund its projects.

However, it was more keen on the Bank of the South servicing the infrastructure needs of an expanded Mercosur. Further, it would not agree to the Bank having any role in bailouts to deal with economic crises. By and large, it expected the new Bank to adopt commercial criteria in providing loans. Argentina had developed close ties with Venezuela. It had played a stellar role in defying the IMF in the early years of this century. It had successfully negotiated directly with the bondholders and was able to reduce the debt by two thirds much to the embarrassment of the Fund. It was Venezuela’s subscription to Argentine bonds valued at $1 billion that enabled Argentina to meets its foreign commitments. Economic relations had also become closer. Notwithstanding these developments, Argentina has been hedging its alliances with both to ensure that neither – Brazil and Venezuela – gets an upper hand in the region.

Other smaller countries are no doubt interested in the formation of the Bank. They look more to an alternative source of development finance free from the Fund/Bank baggage. Perceptions and expectations vary. They range from the one extreme of Mr Chavez who looks upon the Bank as an agency to supplant the IMF, World Bank and IDB to the other extreme of Brazil, which looks upon it as yet another plain vanilla funding agency without political clout.

On the future of their relations with the IMF/Bank also the mood is somewhat ambivalent. Politically, they cannot live with them; when they turn to economics, they can’t live without them. As one report in Washington Post (‘IMF, World Bank face irrelevance’, May 11, 2007) suggested, “Most regional leaders aren’t about to follow Chavez off the precipice — they would rather see the 63-year-old institutions alive and reformed instead.” The tragedy of our times is that the Washington Twins do not want to get reformed.

The Bank of the South will be operational even if the schedule is delayed. However, it may remain a small regional player catering to its own clientele. It is as yet unclear how it will demonstrate commitment to transparency, participation and accountability. It may find it difficult to compete with the existing institutions like IDB, CAF, etc.

Given the current structure of the global financial markets and the manner of their operations through rating, certification and similar other rituals embedded in the system, it may not be able to raise capital in the market at competitive rates. How long can a Bank survive on state funding? And how viable it will be? The answers are clear.

(The author is a former Finance Ministry official with extensive experience in international, trade and finance issues.)

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