From: wolda002@umn.edu
Date: Thu Jun 04 2009 - 00:46:42 EDT
Axis of Logic
Finding Clarity in the 21st Century Mediaplex
World News
South American Nations Agree on Technical Rules for Bank of the South
By Tony Phillips
Americas Program
Wednesday, Jun 3, 2009
Seven Latin American Finance Ministers have agreed on the basis for
establishing the Bank of the South. The motivation for forming the new
development bank is based on the belief that keeping Latin America's
precious reserves at home—to loan to other Latin American governments for
their mutual development—is preferable to accepting aid and development
loans from the Inter-American Development Bank and other multilateral
development banks. These external loans often stipulate that consulting or
whole projects be sourced from outside the region thereby preventing
nascent Latin American corporations from maturing by reducing their income
stream.
Several of the South American leaders whose countries have agreed on the
establishment of the new Bank of the South. Radio Mundial
On May 8, the four member countries of Mercosur (Argentina, Brazil,
Paraguay, and Uruguay) along with Union of South American Nations (UNASUR)
members Bolivia, Ecuador, and Venezuela, met and finally agreed on the
details for the formation of the Bank of the South (BDS, by its Spanish
initials). This key element of a new financial architecture in Latin
America and the Caribbean has the potential to structurally reorient
development financing in the region. (1)
The Finance ministers agreed to BDS technical rules on May 8. This detailed
agreement runs a bit behind schedule. On Dec. 9, 2007, the then-presidents
of these seven countries signed the founding act in the Presidential Palace
in Buenos Aires. The technical discussions were supposed to be finished
within two months.
Instead, negotiations took a full 17 months. Argentine host, Economics
Minister Carlos Fernandez, put on a positive face, praising the agreement
"given [that the process] took place during an international economic and
financial crisis."
"We have now closed discussions at a ministerial level and what remains is
approval by the presidents and national congresses," Fernandez said in a
press announcement with his Brazilian counterpart, Guido Mantega. He added
that he did not believe that ratification by the seven member countries
would be a problem, as negotiators have already reached a compromise on
some of the more contentious BDS operating rules.
One example worth noting is that the one-country, one-vote rule has been
effectively altered. "Each country will have one vote in the entity," said
Fernandez, but he added that approval of loans of $70 million dollar
equivalent will require support from votes representing two-thirds of
capital subscription. According to the agreement, Argentina, Brazil, and
Venezuela will provide $2 billion each; Uruguay and Ecuador, $400 million
each; and Bolivia and Paraguay $200 million each. The amounts must be paid
in five installments over a five-year time span. (2)
On the night of the BDS founding, Dr. Pedro Páez, Ecuadorian Coordinating
Minister for Political Economics, delivered an upbeat talk in Buenos Aires
to civil society groups in the Judicial Federation of Argentina. He cited
the need for civil society to continue to lobby for a socially conscious
and effective BDS to counter conservative forces and other interests,
which, he noted, had been responsible for delays in its formation. Paéz
offered some general information on the BDS meeting (a closed-door affair),
and information from the extraordinary meeting of ALBA held in Cumaná,
Venezuela in April 2009. (3)
The Timing of the Regional Effort
Given the current global financial difficulties, some might question the
logic—or at least the timeliness—of creating regional financial
infrastructure4 while the existing system is close to collapse. But Latin
American leaders acted now precisely to head off the kind of regional
impact experienced in the 1990s when the "Tequila Effect" sparked by
Mexico's currency freefall hit economies across Latin American, factoring
into the collapse of the Argentine economy in 2001-2002.
These Latin American crises, like those now being experienced worldwide,
resulted in mass unemployment and unheard-of levels of indigence, bringing
death by starvation to marginal communities of food-exporting countries. As
in many financial crises, some profited, emerging as billionaires.
While global cooperation is practical and ultimately necessary to resolve
issues such as regulating transnational banks, establishing accounting
standards, and monitoring or eliminating offshore tax havens, regional
trade and finance can also play a vital role in regional stability.
In times of global recession, multilateral financial groups often disagree
on strategy. First the G-8, then the G-20, and now the United Nations
G-192,5 a group of mostly developing nations that propose a plan devised by
Joseph Stiglitz, (6) have presented competing proposals to buffer the
planet against the effects of financial excess. Global, regional, and
national stimulus packages and financial rescues have already promised
between nine and 11 trillion dollars in funds.
Included in recommendations from the G-192 based on Stiglitz's "Commission
of Experts of the President of the General Assembly on Reforms of the
International Monetary and Financial System" are various suggestions for
the role of regional development banks. For example, in the section
"Support for financial innovations to enhance risk mitigation," the group
recommends the following:
"Regional development banks and other official institutions should be
encouraged to play an active role in the promotion of such financial
products. International financial institutions need to explore meaningful
innovations that would enhance risk management and distribution and how to
encourage markets to do a better job. […] Lending by international and
regional financial institutions in local currencies, baskets of local
currencies, or in regional units of account, as well as the provision of
exchange and interest rate covers might be important steps in improving
international risk markets."
As close neighbors and allies, regional structures work with specific
advantages and disadvantages. Their proximity can facilitate issues such as
the construction of gas pipelines or train lines. But neighboring countries
also have their spats. A case in point emerges in the current dispute
between Brazil and Ecuador involving default on repayments to the National
Development Bank of Brazil's solidarity fund. Ecuador is refusing payments
on a contract won by Brazilian giant Odebrecht (7) to build a hydroelectric
dam in Ecuador alleging it was poorly executed, questioning payments on the
"foreign aid" package included. With frequent political meetings in various
Latin and South American forums such as UNASUR and Mercosur, governments
have a strong incentive to resolve such issues. In this case, presidents
Lula and Correa have discussed the matter but Odebrecht has rejected
Ecuadorian offers of external arbitration. (8)
In South America, the BDS is viewed by regional presidents and some of
their economics ministry staff as a key factor in promoting development by
retaining capital flows in the region. In an April 28 interview with the
Spanish newspaper El País, President Rafael Correa, a trained economist,
offered succinct and revealing statements on the creation of a new regional
financial architecture:
"[we have been] proposing [the BDS] for some time and it is now taking
shape. Latin America's current financial reality is an absurdity. As a
result of neoliberalism among other issues, in the 90s, all [Latin American
National] Central Banks were made independent [of their governments]. With
absolutely no technical or theoretical basis, it was insisted that
autonomous central banks would work better. This was a huge lie. They were
autonomous from our democracies, but very dependent on international
bureaucrats. These Central Banks handle our international monetary reserves
and they invest them abroad, in the first world. Latin America has more
than $200 billion abroad financing the United States and Europe. That is
absurd."
When asked about his alternate proposals, Correa suggested:
"Take these reserves back, create a reserve fund for Latin America that
will allow local economies to back their currencies [so that by sharing
such a reserve pool] each individual country will require less reserves.
[...] the strategic elements are: BDS, a South American Regional Reserve
Fund, and a regional currency, which can begin as a transactional
electronic currency, like the ECU."9
"This is what has been demonized here [by conservative financiers in
Ecuador] and this is what we have begun." (10)
President Correa referred to conservative forces—frequently tied to
transnational capital—that continue to dominate public debate in Latin
America in the academic arena and in the media. Such groups are strongly
opposed to any change in Latin America's regional financial architecture
that would weaken U.S. and European influence in the financial sector in
general, and the banking sector specifically, by increasing regional
control over capital flows in and out of the region or reducing external
loan amounts.
The BDS/UNASUR effort is not entirely unprecedented in the world. In other
regions, trade associations are expanding to include financial cooperation.
The European Union and the Asian ASEAN countries plus Korea, Japan, and
China have been actively promoting regional trade and financial stability
pacts with varying degrees of success. The European Union and ASEAN have
developed specific regional efforts to confront the current crisis. These
regional efforts include the creation of smaller regional funds to
alleviate the adverse effects of recession.
President Correa's ideas are based on the European Union's regional
financial model. The ECU11—European Currency Unit—was a forerunner of
the Euro. His regional development banking proposals closely follow the
experience of the European Bank for Reconstruction and Development. When
Correa refers to a (as yet unnamed) bank that might manage Latin American
reserves and emit bonds, he is also describing a structure similar to the
European Central Bank (ECB).
The ASEAN group of Asian nations is another groundbreaker in establishing
regional financial architecture. As a region, ASEAN shares a recent history
of financial crises including the Asian financial crisis that began in
1997. (12) To their detriment, Asian countries, like their Latin America
counterparts, submitted to the same questionable International Monetary
Fund (IMF) advice during the financial crises of the 1990s. The more rapid
recovery of nations such as Malaysia and China that maintained more capital
controls on their national finances proved an important lesson in
developing a healthy autonomy from international agencies. However, the
lesson was largely lost on the international finance institutions. As John
Maynard Keynes lamented: "Worldly wisdom teaches that it is better for the
reputation to fail conventionally than to succeed unconventionally." (13)
In Asia, the equivalent structure to the BDS takes the form of the ASEAN
development bank (ADB). (14) The ADB has now become part of a more complex
financial infrastructure, recently reinforced by hundreds of millions of
dollars procured in the heat of the global financial crisis. On May 3,
Asian governments put their financial might behind an ASEAN regional
stabilization initiative, known as the Chiang Mai Agreement,15 that
involves a $120 billion currency scheme involving swaps and reserves. The
Chiang Mai Agreement was ratified by the ASEAN countries, plus Japan,
China, and South Korea.16 Both China and Japan agreed to provide $38.4
billion, with South Korea pitching in another $19.2 billion, and the
remainder of the promised $100 billion divided among the remaining ASEAN
members.
Keeping Capital at Home
Martin Wolf, Chief Economics commentator at the Financial Times, commented
on ASEAN's efforts in an article entitled "Asia Needs its Own Monetary
Fund" on May 18, 2004. Wolf notes: "Today, Asian governments are exporting
astonishing quantities of capital, overwhelmingly to the United States.
This is not just absurd. It is also economically destabilizing." (17) While
Asian capital now seeks investments across the globe it does not fail to
support its neighbors. Funds like the new ASEAN fund will encourage some of
the region's vast capital reserves to remain in Asia.
The term "absurd" is used by Martin Wolf to describe poorer Asian countries
placing their reserves in U.S. Treasury Bills. President Correa uses the
same word when speaking of Latin American reserves. Both regional efforts
seek to rationalize capital flows, redirecting part to the needs of the
region.
For developing countries, Dr. Wolf's second conclusion that exporting
capital is "economically destabilizing" takes on particular urgency.
Economic stability relies on good economic planning. If a country has the
policy space to make a plan, then it also has a chance in planned
development. In the best of scenarios, reduced dependence on external
financial systems, such as the IMF and the U.S. Treasury, means that the
poorer nations of Latin America could use their own funds to encourage
their own development. Holding government reserves abroad in bonds
denominated in other currencies often yields less than 4% returns per
annum, while Latin American governments often pay more than 10% in interest
on public external debt, much of which is also denominated in dollars and
Euros.
Exporting financial capital is destabilizing because a country then has to
borrow to meet its own needs. High foreign debt forces a country to
scramble to procure funds to rollover debt principal and make each year's
interest payments. This short-term planning renders long-term development
impossible. If a development project requires major funds, such funds are
often only available through further external borrowing which implies more
debt, a vicious cycle which in the end is suffocating for national economic
development. Such is the case in many governments in South America, with
Argentina serving as an excellent example.
The absurdity of keeping reserves in bonds denominated in dollars and Euros
defies logic, except in the world of currency trading and speculation where
it remains essential to protect one's currency using large foreign
reserves. This is a risky and expensive game that European countries no
longer pay-to-play.
Similarly, the development motivations of forming the BDS reflects a belief
that keeping Latin America's reserves working at home for each other in
order to build much-needed physical infrastructure and economic growth is
preferable to taking aid and development loans from outside the region. The
future plans for currency stability mentioned by President Correa (above)
relating three key pedestals for real economic development, stable
economies based on stable currencies and indebted to each other (also part
of the European experience).
End Notes
1. When speaking of regional development, this article uses the term
"region" in the sense of multiple countries, as opposed to regions within a
country. In particular the article is based on the Latin American region
and South American regional trade organizations Mercosur (Southern Common
Market) and ALBA (Bolivarian Alternative for the Americas) in particular.
Mercosur is South American (Paraguay, Uruguay, Argentina, and Brazil),
whereas ALBA includes nations from South and Central America and the
Caribbean. The term "region" as used here refers to a block of neighboring
countries coming together for any social cooperation, be it trade, aid, or
development, or to contribute to mutual financial stability. Examples
include ASEAN (Association of Southeast Asian Nations), SACU (South African
Customs Union), Mercosur (Southern Common Market), ALBA (Bolivarian
Alternative for the Americas), the European Union, or even trade and
investment groupings such as NAFTA (North American Free Trade Agreement of
Canada, the United States, and Mexico).
2. Bank of the South takes off with 7 Billion USD Capitol.
3. Name in Spanish: Federación Judicial Argentina.
4. Regional financial infrastructure enables finance and trade. It is
defined for the purpose of this article as a sum total of multilateral
financial agreements between countries specific to the block and any
institutions created to support these. This infrastructure includes the
rules for trade in financial services between the countries, and the
banking structures and funds they manage for the aims in their charter,
such as protecting the stability of regional currencies, and promoting
development in poorer countries.
5. International Financial Institutions in Latin America, accessed
Monday May 11, 2009.
6. Stiglitz is chairman for the Commission of Experts of the President
of the UN General Assembly on Reforms of the International Monetary and
Financial System, accessed Monday May 11, 2009.
7. Spanish (diplomacy), El Comercio, accessed May 29, 2009;
Portuguese, Odebrecht, (company arbitration statement) accessed May
14, 2009.
8. Soitu.es.
9. ECU stands for European Currency Unit, the predecessor of the Euro.
10. El Pais.com, accessed Sunday May 10, 2009.
11. Which Correa cites in an interview with Spanish journalists.
12. IMF's Role in the Asian Financial Crisis
13. Marxists.org.
14. Though it should be noted that the influence of the core ASEAN
countries in the ADB is dwarfed by that of Japan.
15. After the city in Northern Thailand where the initiative was launched.
16. Minus Indonesia.
17. Financial Times
Americas Program