President Hugo Chavez’s initiative to create the Banco del Sur (Southern Bank) is the in process of being implemented. In the next few weeks, the presidents of Argentina, Bolivia, Brazil, Ecuador, Paraguay and Venezuela will sign a document establishing the Banco del Sur with a initial capital of $7 bn. These funds would come primarily from the member countries’ international reserves.
According to diferent variety of sources, the bank’s main goal is to provide financing for trade activities and to foster the regional integration of its member countries. In the long run, the idea is to foster development projects in the fields of infrastructure, technology, and basic services among others. As of now, there is a commission that will set the rules for the bank’s operations. Nevertheless, upon its creation, it is likely that the first project to receive financing will be the Bolivia-Argentine portion of the planned gas pipeline of the south.
What about the existing multilateral institutions?
Both presidents Chavez of Venezuela and Kirchner of Argentina– have stressed that the Banco del Sur should have features and mission statements different from other international banks which initially emerged from the need to promote real investment, but have come to impose “severe punishments for the people”. It does not take much to notice that Kirchner and Chavez are heavily criticizing institutions like the International Monetary Fund, the World Bank and the Inter-American Development Bank (IADB).
Some analysts believe that the new bank may induce some Latin American countries to withdraw from the IMF and the World Bank, following Venezuela’s lead. Others believe that the new bank is unlikely to replace these institutions, except for countries with serious difficulties in accessing the international credit markets.
We do not aim to discuss the legitimacy of such initiative. There is little doubt that it is fair for a group of countries to get together to create a joint project. What is at stake is whether such an institution will be an effective way to gather funds for development or if the goal is to foster the political agenda of its main proponent. It is important to note that creating any new institution has associated costs. Indeed, one should verify if it is posible for the Banco del Sur to implement better policies than the existing institutions at a lower cost.
Especially after the Asian Crisis, there are some valid criticisms against policy prescriptions made by the IMF/World Bank to Latin America countries. Other criticims are less valid mostly because they have had a more political than economic tone. The anti-U.S. sentiment of Chavez would seem to be a poor starting point and one that is not shared by all future members of the bank. In this respect, Brazil could serve as a good counterweight –if it ends up joining the bank.
Nevertheless, the heavy burden of an ‘anti-U.S.’ attitude from president Chavez may be inevitable. As an example, Venezuela chose to withdraw from the Andean Community of Nations in April 2006, when the U.S,. was negotiating a free trade agreement with some of its member countries, because –in his words—the U.S. had come to possess the soul of the Community.
Banco del Sur: Quo Vadis
Beyond the IMF’s role in the Asian Crisis, the technical criticisms against the multilateral institutions mainly concern their bureacracy and the protocols required to implement projects. In this way, a major advantage of the Banco del Sur may be to increase competition to the existing international institutions that may lead to an increase in their efficiency. Overall, the addition of new agents in the markets tends to add efficiency to existing suppliers. In some cases, older institutions may be destined to disappear, if the new entrant is more efficient than those that are already in the game. Thus, if the new bank brings increased competition with clear rules of the game, it should have a positive overall effect.
It is important to explain what we mean by clear rules. The most important aspect is to define how projects to be financed by the Banco del Sur will be evaluated. If loan officers and the board in charge use profitability (social and private) as the criteria, then we may be optimistic. However, if the relevant variable is the political agenda of President Chavez, then the Banco del Sur is doomed to fail, unless it is completely subsidized by the member countries. Such strategy tends to be short-lived because the presidents (and their agenda) change every four to five years. And as governments will change, it is unlikely that the countries will continue to finance a persistent deficit in the new institution.
If Chavez wants to create an institution to grant funds (in the form of credits) to his friends or allies, this is no longer a problem between Chavez and his friends, but should also involve the remaining shareholders in the Banco del Sur. Likewise one should not believe that Venezuela will indefinitely finance the Banco del Sur losses, given its dependency on fluctuating oil revenues.
The key question to be asked is: what is Banco del Sur’s major goal? If the answer is a genuine support for financing the development of its member countries then the projects should be technically evaluated In contrast, if the Banco del Sur pursues the political goals of its promoter, who has pursued an interventionist foreign policy in other countries of the region, then it will be doomed to fail as a Bank. Not even Chavez –even if he stays long enough in power—can guarantee long term financing for such a venture. Given this scenario, many Latin American countries would be wise in preserving a healthy distance from the Banco del Sur.