South American Countries to Create a New Development Bank

Sources: Adios, World Bank!; Ecuador President Suggests Regional Fund to Replace IMF; South American Bank Members to Inject Up to $500 Million; South American Countries Agree Creation of Development Bank

During their meeting last week in Quito, finance and economic ministers from Argentina, Brazil, Bolivia, Ecuador, Paraguay, Uruguay, and Venezuela agreed on an initiative to establish a new multilateral development bank—the Banco del Sur (Bank of the South) — for South America and to restructure the Latin American Reserve Fund (FLAR), transforming it into the “Fund of the South,” a macroeconomic stabilization fund to manage the reserves of South American countries and provide a single monetary unit for the region. The president of Ecuador, Rafael Correa, still irate with the World Bank’s recent cancellation of an already approved US$100 million loan, expressed his public support for a South American multilateral lending fund and the creation of a regional currency; at a meeting with the various finance ministers, he suggested the proposed bank and fund comprise a strategy to obstruct the “financial logic” of the World Bank and International Monetary Fund (IMF). The World Bank cancelled Ecuador’s loan in response to Ecuador’s congressional reform of an oil-revenue fund originally established in 2002 at the behest of the International Monetary Fund (IMF); the fund was initially structured so as to apportion 70% of revenues for foreign debt repayment (e.g., repayment of loans to the World Bank). Ecuador—hoping to address the dire conditions of over half its population, which lives under the poverty line—lowered this amount to 50%. President Correa further commented that the World Bank and IMF have failed to balance their “dual roles as agents against poverty and representatives of big international creditors.”

Indeed, frustration over the last two decades across many South American countries with the World Bank and IMF, as well as other multilateral finance institutions, has gradually led to a backlash against these lenders and has simultaneously increased the momentum of plans for an alternative bank. Last month, the Venezuelan government declared it would pay off all its outstanding debt with the World Bank five years ahead of schedule; furthermore, President Chavez announced that Venezuela plans to withdraw its membership in the World Bank and IMF. Similarly, Argentina, Brazil, and Ecuador have settled their debts with the IMF. Supporters of an alternative development bank staunchly oppose the policy prescriptions and conditions the World Bank and other multilateral lending institutions have historically imposed on borrowing nations; studies by the Center for Economic and Policy Research and the United Nations’ Economic Commission on Latin America have shown a correlation between this “conditionality” and the persistence of poverty and inequality. It is thought that the imposition of inequitable conditions are attributable to the governance structures in multilateral lending institutions: voting privileges in the World Bank and Inter-American Development Bank (IDB) are based on financial contributions, thereby granting the United States Treasury the largest share of the vote. The United States is also the only member of the IDB to wield veto power. P romoters of the new development bank, in contrast, indicate that voting power will be based on neither monetary contribution nor political might, and that no single country will be the “sole owner.”

Brazil’s Finance Minister Guido Mantega explained that capitalization for the proposed bank of the South will come from contributions ranging between US$300 million and US$500 million from each member country. Preliminary estimates suggest the bank could start with between US$ 800 million and US$ 1 billion. Mantega further explained that the “ultimate objective is the creation of an economic, social, and political block like the European Union.” Ecuador’s Finance Minister Ricardo Patiño announced at a joint press conference that the member countries will invite Costa Rica to participate in the analysis of the restructuring of the Latin American Reserve Fund. Presidents of the member countries will formalize the creation the new development bank sometime in late June, possibly in Caracas, during the opening of the America’s Cup. The next planned meetings of officials will take place on May 11 in Rio de Janeiro, Brazil, and May 22 in Asunción, Paraguay.

For Discussion:

Will the Bank of the South be able to compete with the Inter-American Bank, whose major shareholder is the United States? Will the creation of the Bank of the South further delegitimize the World Bank? What kinds of innovative lending arrangements might member countries of the Bank of the South devise?