Latin America banks on independence

By Weekly Archive On Jan 29, 2008

The
new Bank of the South shatters neoliberal economics

In
the closing weeks of 2007, a region in revolt against the economics
of corporate globalization issued its most unified declaration of
independence to date.

On Dec. 9, standing before the flags of
their countries, the presidents of Argentina, Bolivia, Brazil,
Ecuador, Paraguay and Venezuela, along with a representative from
Uruguay, gathered in Buenos Aires and signed the founding charter of
the Banco del Sur, or the Bank of the South.

The Bank of the
South will allow participating governments to use a percentage of
their collective currency reserves to strengthen Latin America’s
economy and promote cooperative development. It plans to begin
lending as early as 2008 with around $7 billion in capital.

By
itself, the bank represents a serious challenge to U.S.-dominated
institutions, such as the International Monetary Fund (IMF), the
World Bank and the Inter-American Development Bank (IDB). As part of
a larger trend, it signals a major break from the policies of "free
trade" neoliberalism that dominated in the region throughout the
’80s and ’90s.

The Bank of the South’s creators are keenly
aware of the significance of this break. In the words of Venezuelan
President Hugo Chávez, the bank is "aimed at freeing us
from the chains of dependence and underdevelopment." Ecuadorian
President Rafael Correa concurred arguing that with the bank "South
American nations will be able to put an end to their political and
financial dependence that they have had with the neoliberal
model."

Officially, the international financial
institutions are keeping their tone upbeat. On Dec. 11, IMF Director
General Dominique Strauss-Kahn told Agence France-Presse that the new
bank is "not a problem; it’s maybe an opportunity."
Similarly, Augusto de la Torre, World Bank chief economist for Latin
America, said, "As far as the World Bank is concerned, this new
initiative is not perceived as a competitor."

But in
March 2007, as Latin American leaders were first discussing the
creation of a new body, one anonymous insider at the neoliberal IDB
told the Financial Times that the Bank of the South represented the
largest threat to his institution in decades. "With the money of
Venezuela and political will of Argentina and Brazil, this is a bank
that could have lots of money and a different political approach,"
he explained. "No one will say this publicly, but we don’t like
it."

Breaking
Washington’s hold

There
is good reason for those invested in the Washington Consensus to
dislike the Bank of the South. In recent decades, the IMF, the World
Bank and the multilateral regional banks have largely controlled
poorer countries’ access to credit and development financing. These
institutions allowed developing countries to avoid defaulting on
their debt, provided funds in some difficult times and gave a nod of
approval to private creditors. But the price the countries paid in
return was steep.

In order to stay in their good graces,
developing nations have had to privatize industries, open markets to
foreign businesses, liberalize capital flows, keep monetary policy
tight and implement fiscal austerity (that is, cut needed social
services for their people). In the end, such policies proved
disastrous in Latin America.

Per capita GDP, which had been
growing at a steady rate throughout the ’60s and ’70s, grew hardly at
all in the subsequent two decades of neoliberalism. During the latter
period, the region also developed some of the highest levels of
inequality in the world.

The Bank of the South would work to
remedy this situation. Unlike the preexisting financial institutions,
the new bank will be run by Latin American countries themselves, will
not be dominated by any single nation and will be free to support
development approaches that are much more sensitive to the needs of
the poor.

A
May 2007 statement of South American finance ministers affirmed that
the new bank and other mechanisms of regional integration "must
be based on democratic, transparent and participatory schemes that
are responsible to their constituencies."

With the
exception of Paraguay’s Nicanor Duarte Fruto, each of the Latin
American leaders involved in the Bank of the South was elected in
recent years on a mandate to split from Washington. Well aware of the
failures of economic neoliberalism in the region, and under pressure
from an enlivened citizenry, the bank’s members have outraged the
international business press by working to do just that.

Several
governments have moved to free themselves of direct oversight from
the IMF by repaying loans early. In December 2005, Argentina and
Brazil announced that they would pay off $9.8 billion and $15.5
billion, respectively. The IMF, which benefits from interest payments
on long-term loans, was nonplussed.

Argentina, which was a
model of the IMF during the ’90s and suffered severe economic
collapse in 2001, vocally declared good riddance. Then-President
Néstor Kirchner triumphantly proclaimed that throwing off the
chains of IMF debt constituted a move toward "political
sovereignty and economic independence."

Since then, Latin
American governments have been one-upping each other in their acts of
defiance.

In Bolivia, upon taking office in 2006, President
Evo Morales announced he would let the country’s standing loan
agreement with the IMF expire. In May 2007, he declared Bolivia would
withdraw from a World Bank arbitration center that handles investment
disputes, usually favoring corporate interests. Nicaragua has
similarly rejected the authority of the center.

Correa topped
them by ejecting the World Bank’s representative to Ecuador in April
2007. He declared the officer a persona non grata in the country,
insisting, "We will not stand for extortion by this
international bureaucracy."

That same month, Chávez
announced that Venezuela would withdraw from membership in the IMF
and World Bank altogether. While the country is still working out the
details of this move, the prospect is unprecedented in the era of
corporate globalization.

The ability of oil-rich Venezuela to
provide its neighbors with financing they previously might have
needed to beg for from Washington is a significant factor in their
willingness to break with the IMF and World Bank. Venezuela has
offered billions in support to countries — including Argentina,
Bolivia and Ecuador — and those backup funds make many countries
less susceptible to threats of capital flight than in the past. Along
with investments from China and India, it dramatically reduces
Washington’s ability to starve dissident leaders of financial
resources when governments grow, in its view, disobedient. The Bank
of the South will help to formalize a source of alternative finance
and place it under regional control.

Rude
awakenings

The
establishment of the Bank of the South comes at a particularly bad
time for the IMF. The institution’s troubles were brought into relief
at its annual fall meetings in mid-October, after which the
Washington Post contended, "the International Monetary Fund
needs restructuring, and maybe a bailout."

IMF lending
has plummeted in recent years, as its supposed beneficiaries have
launched a rebellion. Cutting ties with the fund is not just a Latin
American phenomenon. Russia, Thailand, Indonesia and the Philippines
have also pursued strategies of early debt repayment. Many Asian
countries that were burned by the region’s neoliberal financial
crisis in 1997 are building large cash reserves to prevent a return
to the IMF in times of economic downturn, and they have recently
worked on creating a regional currency exchange that will further
increase their distance from Washington.

These developments
are sapping both the IMF’s influence and its cash flow. Its loan
portfolio has dwindled from nearly $100 billion in 2004 to around $20
billion today. A single country, Turkey, now accounts for the bulk of
its lending. The IMF has lost almost all influence in Latin America
with lending there plummeting to a paltry $50 million, less than 1
percent of its global loan portfolio. As recently as 2005, the region
had accounted for 80 percent of its outstanding loans.

Deprived
of lucrative interest payments from poorer countries, the IMF is now
desperately trying to meet its $1 billion administrative budget
without dipping into its gold reserves. In stark contrast to the
triumphalist pronouncements made in past fall meetings, in 2007 the
IMF’s newly installed Dominique Strauss-Kahn confessed that
"downsizing is on the table" for the institution.

Ignoring
the wider picture, pro-free trade pundits have generally responded to
the Bank of the South by minimizing its significance and predicting
failure. The Wall Street Journal characterized the bank as but one of
Hugo Chávez’s many madcap schemes, insisting that it is
"unlikely to live up to his grandiose vision." Meanwhile
the Economist asserted, "The IMF can sleep easy." It
pointed out that the Bank of the South’s founding agreement lacked
many details about its governance and lending policies, and that
disagreements persist among the region’s key players.

It is
true that Latin America has a history of internal disputes thwarting
dreams of regional unity — and that quarrels persist today. While
Venezuela and Ecuador have pushed for the bank to have a far-reaching
mandate, Brazil prefers a more modest institution. To the
disappointment of many of his progressive supporters, Brazilian
President Luiz Inácio Lula da Silva has adhered to
conservative economic policies designed to keep Brazil in good
standing with foreign creditors. The country also runs a large
internal development bank, which loaned $38 billion in 2007 to fund
national projects. Therefore, Brazil has less to gain directly from
making the Bank of the South into a robust regional
lender.

Activists, while generally positive, have expressed
some concerns. Environmentalists worry the Bank of the South, while
more democratically managed than its counterparts in Washington, may
nevertheless develop a similarly destructive record of funding
large-scale, ecologically harmful construction projects.

Other
progressives, ranging from the members of the Jubilee South coalition
to Cuban commentator Eduardo Dimas, have argued that the institution
must go beyond traditional development lending to support such
measures as land reform, a common regional currency and projects
explicitly designed to promote political solidarity in the region.
These would more closely link the bank with the Bolivarian
Alternative for the Americas (ALBA), an initiative through which the
Venezuelan government has paid for Cuban doctors to provide services
in the region and has promoted other forms of mutual
assistance.

Reservations about the Bank of the South’s
mandate, however, should not obscure the swiftness and severity of
Latin America’s assault on the international financial
institutions.

Chávez first floated the idea of the bank
in 2006, and the speed at which it has come into existence has been
shocking. The widespread support within Latin America for independent
bodies such as the new bank suggests that the days when the United
States could act as an economic overseer dictating policy for
countries across the globe are coming to an end.

Upon
the inauguration of the Bank of the South, even Lula da Silva
delivered a message of defiance to the North. "Developing
nations must create their own mechanisms of finance," he said,
"instead of suffering under those of the IMF and the World Bank,
which are institutions of rich nations." He added bluntly: "It
is time to wake up."

Mark
Engler, an analyst with Foreign Policy In Focus, is author of the
forthcoming
How
to Rule the World: The Coming Battle Over the Global Economy
(Nation Books, April 2008). He can be reached via the website
http://www.DemocracyUprising.com. Research assistance provided by
Sean Nortz. This article was first published by
In These Times
and appears with permission of the author.