More equal power distribution in Banco del Sur demanded by Venezuela
The Venezuelan Minister of Popular Power of the Treasury, Rodrigo Cabezas, stated that Banco del Sur will set a precedent by creating a multilateral financial institution free of non-regional shareholder veto power over projects and policies. The bank would provide an alternative to borrowing from the Inter-American Development Bank, the International Monetary Fund and the World Bank, to which Venezuela recently expedited the pay off of $3.3 billion debt it owed when Mr. Chávez was elected in 1998. Subsequently, Venezuela announced that it would be withdrawing from the World Bank and IMF. In related moves, Ecuadorian President Rafael Correa expelled World Bank Country Representatives, Eduardo Somensatto, for failing to explain Bank restrictions placed on approved credits to the country. Venezuela, along with Bolivia and Nicaragua, will pull out of the World Bank's International Center for Settlement of Investment Disputes, a body that mediates disputes between governments and foreign investors with which Southern governments never seem to win their disputes against transnational companies.
Minister Cabezas took explicit aim at the IDB and the U.S. in his remarks at the most recent IDB Annual meeting questioning the institution’s credibility among a growing number of borrowers. “No one, by themselves, will be the owner of Banco del Sur,” Cabezas claimed (In Spanish), informing that the government of Venezuela is proposing that in the Bank’s statutes a clause will be incorporated “that prevents any country from possessing a majority stock ownership,” as well as other clauses that prevent the application of adjustment mechanisms employed by the World Bank, IDB and IMF.
Others close to the process of constituting the Banco del Sur have indicated that although the membership and lending rules will take some time to negotiate, a voting structure tied to need rather than financial or political power may become the norm for Banco del Sur. Under such a system, member countries that have the greatest need for development finance would have the proportionately greater voting power on the Bank’s board.
IDB shortcomings, Banco del Sur as an alternative, and comments from Brazil
This explicit criticism of the benevolent despotism of U.S. hegemony on the Boards of U.S. based IFIs has joined the chorus calling for greater scrutiny of the prevailing systems of IFI governance. With growing demands for deeper structural reforms in the governance structure of the World Bank and the recent resignation of the Bank President Paul Wolfowitz, the U.S. is carefully considering its options. With its dominant 30% vote share on the IDB Board, the tide of criticism toward the U.S. is echoed by other borrowing (and some non-borrowing) Bank members. President Bush himself raised serious questions about the IDB’s development effectiveness as he criticized Latin America for its inability to lower the region’s seemingly impenetrable 40% poverty rate. At the IDB, the Latin American dissent behind the realignment at the IDB has also reportedly moved the U.S. Treasury to offer its non-objection to the relocation of the IDB headquarters to a Southern country.
A decisive influence in the future of any alternative Latin American institution will be Brazil. Under Lula’s Presidency, Brazil’s influence at the IDB and in particular for the last year as chair of the Board of Directors has been relatively unremarkable – offering little evidence that greater Brazilian control would substantially change the direction of IDB policies. Indeed, the annual lending of nearly $30 billion by the National Bank of Economic and Social Development of Brazil (BNDES) makes the IDB financing somewhat obsolete in Brazil. As a relatively non-transparent and unaccountable institution, the lending prowess of the BNDES poses a formidable barrier to any alternative institution that seeks to raise standards for development finance in the region.
Roberto Teixeira da Costa, board member of Banco Itau Holding Financeira S/A and Sul America SA recently characterized the view (in Portuguese) of the Banco del Sur held by the Brazilian private sector. "My initial reaction to the creation of Banco del Sur was negative, and this perception hasn't changed. I still have the sense that such an institution is going to overlap other channels dedicated to finance the region. Not only the IDB, as indicated, but also the Andean Development Bank (CAF), that is fully committed to finance the region, particularly in the so badly needed projects for infrastructure. Apart from the IDB and CAF, BNDES, and Fondo Plata of Argentina are also in position to finance the region. What the region needs are sound and viable projects to be financed. I think overall there are available resources, not a lack of funding. Thus, I continue to think that Banco del Sur is a project moved mostly by the political aspirations of President Hugo Chavez to have stronger influence in the region based on his petrodollars. Since he is seen as great for the region, I wouldn't be surprised if it receives support. If the Bank does get off the ground, I don't think that it will pose a threat to the multilateral lenders. I question the success of financial institutions that are politically managed."
Upon announcing Brazil’s official support for the Banco del Sur, Brazilian Treasury Minister and former President of BNDES Guido Mantega emphasized Brasil’s preferred adherence to conventional banking standards (in Spanish). "The Banco del Sur has to be a development bank with the norms of the market, that demands guarantees and has very clear principals for the allocation of resources the application of which, in the end, we are all responsible. The resources belong to the countries ...and will be supervised financially just like any other resource of the public treasury."
CAF: Solution or Problem?
An open question is whether the emergence of Banco del Sur reflects upon the CAF as part of the solution or part of the problem? Does the CAF, a largely regionally owned and operated Bank fall into the camp of non-responsive, Northerner controlled public banks? The current governance structure of the CAF is a Presidentialist structure, offering considerable decision making leeway to Enrique García to exercise policy and even approved loans independently. The current board includes 17 members (all Latin American), plus Spain and 12 commercial banks.
The growing relevance of the CAF as the primary lender to Andean countries is indisputable, shown graphically above. On average the CAF lends over half of its total portfolio ($3 billion) to Venezuela, Colombia, Peru, Bolivia and Ecuador. As a group, the CAF represents 50% of all MDB lending, and in some years (2002) as much as two thirds has come from the CAF. While Venezuela has virtually ended borrowing from the IDB, World Bank and IMF since 2000, the government of President Chavez has maintained a healthy flow of $650 million annually from the CAF.
The lack of virtually any transparency regarding the most basic of CAF functions leaves final judgment about the probity of this institution to speculation. Implicit in the remarks of the Finance Ministers of Banco del Sur members is a similar critique of the Corporación Andino de Fomento, which is actually the largest lender to more than five Andean countries. Oddly, these same countries are some of the CAF’s largest, most unapologetic borrowers. Some of the Andean borrowing members greatly value the CAF’s proximity to the region as well as the rapid disbursement process for large loans (as low as three months).
Sovereign Latin American finance institutions
Clearly, the announcement of the Banco del Sur reflects the severity of the ongoing crisis of relevance in which the IDB finds itself. The stated goals of this new Bank— access to development finance that is not subject to US influence or non-borrower conditionality—only underscores a trend in Latin America distancing itself from multilaterals perceived as out of touch and often siding with the US against regional interests. This trend will continue with or without the Bank of the South. Venezuela and its associates in this new venture are both correct and savvy to drive deeper doubts between the Bretton Woods institutions and their Latin American clients. For the IDB, the run has lasted almost a half century, with the 50th anniversary coming in March 2009 in Cartagena.
However, beyond the politics of calling for new, sovereign Latin American finance institutions, the real work of creating them now underway will have many pitfalls. The first and most obvious is the influence that the IDB and sister institutions retain in preserving the status quo. This power ranges from new conditionality on existing and future commitments from Latin American borrowers to the cherished relationships with the gatekeepers of the international markets. Particularly if the regional or global economy slides into a recession, as is expected by some economists within the next 2-3 years, this dependence on the IDB for budget support will have its cost. The closest regional allies of Washington in the IDB Board (Mexico, Colombia, Peru, Central America and some of the Caribbean members) will almost certainly close ranks with the U.S. to oppose the Banco del Sur.
A second related pitfall involves the shortcuts that might be taken in the design of the Banco del Sur. In his remarks to the IDB Board of Governors at the Annual Meeting in March, Ecuador’s Finance Minister Ricardo Patiño Aroca call for structural changes among public lenders showcased the unfulfilled expectations that a growing number of Bank members have had in the IDB after nearly a half century of lending to the region. “A new financial system and a new international financial code must be structured – one that a) through new and existing multilateral institutions target lending at developing human potential to obtain, individually and collectively, the goods and services that are needed for a decent life; b) limit returns on financial capital so that society’s consumption capacity and productive activity are not throttled; and c) puts in place dispute settlement and arbitration mechanisms based on the criteria here presented. In a word: a new financial system and financial code that place money in the service of life and not life in the service of debt.”
The extent to which the Banco del Sur comes to represent a true alternative to the flawed IFI policies of the past will depend upon demonstrable commitments to transparency, participation, and accountability. While the IDB has failed to meet these standards after 50 years, the task for the Banco del Sur will be made even more formidable due to the pressure to begin disbursing and the lack of any similar policies at the CAF, BNDES, FonPlata or other state institutions that could become the new Bank’s principal borrowers. The design of environmental and safeguard policies should raise the bar (rather than lower it) for competing institutions. A consultative group on best practices in the design of such safeguard policies might represent an important first step in this direction.
Finally, distinction from the failed IFI policies and projects of the past will also depend on Banco del Sur clearly articulating in its lending framework its definition of effective development. Implicit in this framework would be a public system to be held accountable to the stated principals and strategic objectives. Demonstrable evidence of impact rather than lending volume will ultimately distinguish the Banco del Sur from its competitors. Clear statements will be needed about how such impact will be assessed.
While these proposals to strengthen accountability and other safeguard polices at the Banco del Sur may seem excessive for an institution that is just forming, to avoid addressing these challenges at the outset would have even greater costs. Among those costs, would be the acceleration of the ongoing race to the bottom in lending standards related to high risk infrastructure projects in Latin America. By introducing these policies up front, the Banco del Sur has the opportunity to hold other lenders to the higher articulated standards and become the financial force for change the region so desperately needs.
See also Banco del Sur (Español)
Conclusion: 10 Questions from Civil Society for Banco del Sur
- How will the policy framework of the Banco del Sur distinguish the institution from its competitors (IDB, CAF, World Bank)?
- Will the Banco del Sur subscribe to the grand integration mega-projects associated with U.S. influence in Latin America (the various manifestations of free trade, Plan Puebla Panamá, and IIRSA)?
- Will the Banco del Sur subscribe to the various sustainability protocols?
- What will be the criteria for prioritizing future lending (poverty or inequality reducing impact, public sector institution, etc.)?
- Will the Banco del Sur offer balance of payments support lending?
- What are the plans for a monitoring and evaluation framework to compare the results of Banco del Sur with other institutions?
- What are the models for the Bank’s safeguard policies?
- What are the Bank’s commitments to transparency, citizen participation and accountability mechanisms, and beginning with the design of the Banco del Sur itself?
- What are the principles for the governance structure including the voting power of member governments?
- Will Banco del Sur’s membership be limited to Latin America or will it include Asia and Africa?