Latin Americans agree further details for Bank of the South

from Eurodad

"A new regional development bank for South America known as the ‘Banco del Sur’ will be launched with an initial capital fund of $10 billion”, finance ministers and other representatives of seven Latin American countries announced in late June. A statement released on Friday by the Argentine Economy Ministry said that the Bank of the South has entered the final stage of its formation. The ministerial meeting in Argentina followed one in Ecuador where technical options for operationalising the bank were discussed.

The decision on the initial capital fund was taken at a meeting in Buenos Aires attended by economy ministers, deputy economy ministers and other representatives from Argentina, Bolivia, Brazil, Ecuador, Paraguay, Uruguay and Venezuela.

Also last week - in Quito - the Ecuadorian government and the United Nations Department of Economic and Social Affairs assembled officials from central banks and other relevant ministries of the Bank of the South’s founding governments. They discussed details of how to start up the new Latin American development bank and agreed a detailed outcome document. The meeting also included selected international experts and civil society resource people, including representatives of Latindadd and Eurodad.

In 2007 the “new wave” of Latin American governments decided to set up a regional bank to foster regional growth and fight poverty. They wanted to reassert their independence from global financial institutions and exercise international political leadership. Central bankers want to bring their countries’ money – international reserves accumulated in times of rising oil and commodity prices – back home. Social movements and civil society groups that for decades have been fighting social and economic injustice in the continent and the role of outside institutions are contributing to shape this new development bank. They want to make it a champion of the fight against poverty in a continent torn by appalling economic and social inequalities. One third of Latin American people are officially classified as living below the poverty line.

The big picture of what the new bank should do is clear, but agreeing the details of how it should fulfil Latin American peoples’ hopes and expectations is less easy. It offers a fantastic opportunity to step out from mainstream thinking and think creatively how to build an institution which can go much further and deeper to end poverty in one of the continents with the richest natural resources.

The structure of the bank and the way it will implement issues were discussed in the intense five day discussions last week in Ecuador. Some fifty people gathered to devise options to establish the governance of the Bank of the South, its funding mechanisms, lending instruments and its social and environmental safeguards. There was passion and tension, but also clear results.

Governance and administration

The foundational act of the Bank, signed by the Presidents of the seven constituent countries in December 2007, agreed to grant one vote to each member state. They said there would be no quota system or weighted votes depending on the capital subscribed, thus equalising power imbalances between countries.

Participants at the Ecuador meeting agreed that the Bank of the South should avoid setting up a whole new heavy structure which would be expensive and prone to complicated institutional dynamics. The Bank should instead rely as much as possible on existing country systems and domestic public financial institutions. The multilateral bank would mostly channel loans – and grants – to national development banks and public financial institutions which would keep a leading role in allocating and implementing the projects and programmes supported by the Bank of the South.

Decisions still need to be taken on the executive board of the new institution. Should it be a larger board with representatives from all member states or a smaller one with executive directors representing more than one country? Other issues at stake are whether:

* the board should permanently reside at the Bank’s headquarters or just assemble in Caracas whenever decisions need to be taken.
* the Bank’s staff should be drawn from nationals of its member states (thus supporting regional expertise) or should it open up positions more broadly thus in principle benefiting from the best expertise it could possibly get?
* the Bank should tie its procurement to its member state’s goods and services.

On the latter it is hard to see how the Bank could avoid opening its procurement policy beyond the seven countries that will set it up, but strong arguments were raised on how procurement policies could boost the economies and employment prospects of the participating countries.

Funding mechanisms

The funding mechanisms session at the Quito meeting raised more passion than many others. The major discussion was whether the Bank of the South should raise funds in financial markets – by issuing bonds or opening up to private shareholders.

Based on memories of previous Latin American debt crises, several participants warned against raising funds by increasing the debt levels. These participants suggested that funds could be raised through special taxes on financial transactions, or profits from natural resource extraction. Questions were raised on whether governments would muster the political will to set up such taxes or whether they would yield sufficient volume of funds. Issuing bonds for the Bank of the South could also contribute to the creation of a regional bond market. This could stimulate the use of regional savings and might attract ethical investors from other regions.

There were also concerns on how to generate the special funds, intended to provide highly concessional loans and grants. There was general agreement that ordinary resources should not be mixed with special funds so that the Bank generates a reliable return on its investments and avoids problems such as those faced in the past by the Andean bank. Many emphasised that the Bank of the South should be ambitious in making low-cost resources available for investments with low direct economic or financial returns but high social benefits. Options to replenish the special funds include returns from the Bank’s ordinary loans, grants from international donors; or planned multi-annual replenishments. It may be hard to have this resolved by the time the Bank is initiated although there is a chance that the Bank could benefit from traditional Northern donors who are keen to find multilateral outlets for their aid money and are disappointed with the approaches of the World Bank and other existing institutions.

Lending policies and instruments

Existing multilateral development bank founding charters are general in their aims and objectives, simply referring to broad development purposes. There was widespread agreement in the Quito meeting that the Bank of the South should spell out clearly that the Bank will promote the fight against poverty and inequality. Its founding agreement should specify that it will focus on poverty reduction, reduction of social asymmetries, strengthening the social sector and ensuring food sovereignty and sovereignty over natural resources.

There was more discussion on who should be the channels of the Bank’s financing. It is clear that national governments, regional institutions, and small domestic enterprises should be among the beneficiaries. Larger private enterprises in key sectors may also be financed.

Participants at the meeting agreed that there should be a number of different lending instruments, catering for different needs and objectives. These should range from ordinary loans at non-concessional (or close to market) interest rates for those projects or programmes which were profitable, to concessional loans and grants targeting at objectives with high social returns but not economically profitable. On the latter, concerns were raised that “a bank is just a bank, and not a charity”, so it needs to ensure its financial viability. Having said that, there was a general sense that without putting at risk the Bank’s viability, all efforts needed to be made to make sure that this would be a genuine development bank which would ensure that resources were made available to projects and beneficiaries without access to credit.

The Bank’s loans and grants should not come with any additional strings or conditions. They should also ensure that allocation was made on the basis of need – and avoid the commonly used allocation criteria and indexes used by other multilateral development banks which allocate resources on the basis of the “quality” of a country’s policies and institutions.

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