Chavez´s Bank

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.

8 Responses to "Chavez´s Bank"

  1. mark turner   June 21, 2007 at 9:21 am

    thanks felipe, it’s about time this subject was broached here.  So far i have been in 100% “wait and see” mode on Banco del Sur. The general framework seems ok, and the inclusion of equal voting rights for all partners seems to be a key point too.   Overall i like the idea, and i don’t think the mere word “Chavez” should scare off any other nation per se. However it might be wrong to judge the initiative merely on bottom line performance; personally i am assuming the role of the bank will me more social (with a lower case “S”) than the other international bodies mentioned in your blog. Way too early to tell, but perhaps the affect the bank has on GDP performance of members will ultimately be a better yardstick.

  2. mark turner   June 21, 2007 at 9:23 am

    and excuse my typos.

  3. Anonymous   June 21, 2007 at 12:27 pm

    Felipe, you seem too kind to the Banco del Sur…to me this looks like a Chavez plan that is more consistent with his foreign policy goals of exporting his chavista revolution than anything based on sound economic and fianancial goals…am i wrong?

  4. JohnH   June 21, 2007 at 2:47 pm

    I love it when American observers have the chuztpah to assert that the IMF and World Bank are not politically driven institutions! Why else would neo-cons Wolfowitz and Zoellick have been appointed to head the WB?   Maybe at least the Banco del Sur won’t put the interests of US contractors above endogenous development of local economies. And maybe it won’t use grossly phony economic projections to justify loans that put local economies in hock to Western powers. If you don’t know what I’m talking about, I suggest reading John Perkins, “Confessions of an Economic Hit Man.”

  5. Anonymous   June 23, 2007 at 9:22 am

    Chavez fans the political flames Published Date: June 06, 2007   Venezuelan President Hugo Chavez said during his weekly radio address June 3 that the student protests that followed his refusal to renew the contract of Radio Caracas Television (RCTV) were instigated by the United States – and that it is clear the 1999 constitution is too permissive of foreign influence on public dissent and should be revised. In the same address, Chavez also suggested that the Bolivarian Alternative for the Americas (ALBA), which is made up of Venezuela, Bolivia, Cuba and Nicaragua, should form a federation of republics.   Though Chavez is strong enough to get his way on almost any domestic issue, his response to the student protests could turn the group of pro-RCTV demonstrators, which originally dealt only with the issue of RCTV, into a more serious opposition movement. Meanwhile, the ALBA proposal is likely to be a nonstarter with Bolivia, and could estrange Ecuador, which is not a member of ALBA but has been considering joining.   As expected, Chavez halted RCTV’s public broadcasts May 27 despite large protests. In Stratfor’s first discussion of the issue it was suggested that, having failed to save RCTV, opposition groups would drop their campaign, at least for awhile. However, we did not anticipate that Chavez would fan the flames by claiming the students are being funded by the United States’ Albert Einstein Institution as part of a US attempt to destabilize the country, much as nongovernmental organizations (NGOs) did during Ukraine’s Orange Revolution.    Student protesters are notorious for their ideological immaturity, rowdiness and copious amounts of free time, and they rarely are taken seriously as a political movement. The RCTV protesters are no more powerful than most; however, they likely will resent the accusation that they are acting on behalf of a foreign influence – particularly the United States. Instead of simply ignoring the students, Chavez has poured salt on a wound that was likely to go away on its own. This could sustain the protesters’ anger and turn them into a more serious opposition group. Though the students are unlikely to pose an immediate threat to Chavez, the movement could strengthen opposition to the president’s proposed constitutional reforms.   Chavez’s comments that the current constitution is too “permissive” carry dire implications for the funding, personnel and activities of NGOs in Venezuela, particularly those with U.S. ties. Chavez’s reference to the Orange Revolution, which was spurred by several of the country’s NGOs, could indicate a coming crackdown on such organizations in Venezuela.   The president did not provide many details on how he wants ALBA, a regional Chavez fan club that was formed in response to the United States’ proposed Free Trade Area of the Americas, to become a federation of republics. The organization will hold a ministerial meeting June 6, so it is possible Chavez will elaborate on his proposal then. The idea is unlikely to please Venezuelans, who already are complaining that Chavez devotes too much attention to international events and not enough to problems at home. It also is unlikely to please residents of other ALBA countries, many of whom are concerned that Chavez has too much influence over their leaders.   Taken together, Chavez’s recent announcements could even compel Bolivian President Evo Morales and Ecuadorian President Rafael Correa to further distance themselves from the Venezuelan president. Both Bolivia and Ecuador are in the midst of instituting their own constitutional reforms – partially inspired by the Venezuelan effort that resulted in the 1999 constitution. Morales is seeking to overcome lowland opposition to his reforms, and Correa is trying to push forward his agenda while reassuring businesses that Ecuador will continue to be a relatively stable environment in which they can turn a profit. The last thing they need is for their respective oppositions to accuse them of following a leader who clamps down on civil liberties and attempts to subjugate their sovereignty for his regional vision.   Though Chavez’s moves likely will backfire in the short term, they might not be a total miscalculation. It is possible Chavez is attempting to regain symbolic control of the domestic and regional agenda by acting aggressively. At home, the student protests have made headlines, and he likely felt the need to cast doubt on the idea that this is a homegrown movement. Abroad, Brazil has successfully reached out to the region via its ethanol diplomacy; stymied the Banco del Sur; criticized the RCTV closure; and is preventing Venezuela from co-opting Mercosur as a forum for Chavez’s regional ambitions. These events likely convinced Chavez that he cannot rely on Brazil or Mercosur to be the seed for his vision of an integrated Latin America, and he needs to focus on further developing ALBA.   As such, Chavez is turning back to his tried-and-true method of using the United States as a scapegoat, and he is looking to his long-time allies to further his vision for Latin American integration. But he might be unpleasantly surprised to find that such actions are increasingly seen by his supporters as ill-advised. – Stratfor

  6. Guest   June 23, 2007 at 9:24 am

    South Bank Emerges at MERCOSUR  Asuncion, June 14 (Prensa Latina) The Banco del Sur (South Bank) will be founded within the framework of the Presidents Summit of the Common Market of the South (MERCOSUR), here until the end of the month.   Representatives of Argentina, Bolivia, Brazil, Ecuador, Paraguay and Venezuela adopted an agreement in a technical meeting, which Chile attended as observer.    Consensus was achieved for the constitutive agreement of the Banco del Sur and on the foundation charter.    According to the draft each member country of the financial institution will contribute, equally, to the capital and will have equal representation.    The document will be presented to Economy Ministers next week, thereby preparing the agreement for signing in the MERCOSUR Summit.    Argentina, Brazil, Paraguay, Uruguay and Venezuela are current members of MERCOSUR while Bolivia, Chile, Colombia, Ecuador and Peru are associate states.    The draft designs the Banco del Sur as an institution of public international law for the purpose of financing economic and social development of the 12 South American nations that form the Union of South American Nations.

  7. Guest   June 23, 2007 at 9:27 am

    Stratfor(http://www.stratfor.com/products/premium/read_article.php?id=289193) MERCOSUR: Mercosur members’ foreign affairs and economy ministers announced some details about the proposed Banco del Sur on May 22. Most important is that the development bank will have equal representation and capital share from its seven members, with the initial capital likely totaling between $2 billion and $3 billion. At least initially, the bank will be capable of development lending, but not of bailing out countries in the event of a serious economic shock. This is a blow to the vision of Venezuelan President Hugo Chavez, who — with support from Argentina, Ecuador and Bolivia — has for months proposed Banco del Sur as an alternative to the International Monetary Fund, World Bank and Inter-American Development Bank. Brazil’s involvement in Banco del Sur has created the terms to keep the bank tame.

  8. Guest   June 23, 2007 at 9:43 pm

    The question is will Banco del Sur act as a real bank with the ultimate goal of producing profits for its stakeholders or will it become a welfare institution that finances doomed to failure socio-economic experiments ala Eva Peron model until Venezuela’s oil money runs out.   In large part this is going to be determined by the types of projects it chooses to fund. We should keep in mind that simply because a venture is politically motivated or socially driven does not mean that it is financially unsound. Another question is how are these funds going be used. Will they go to completing actual projects or will they be nothing more than payoffs for temporary political allegiance?  I think the fact that the first projects that the bank will fund are meant to improve the infrastructure are a sign that it is a real bank will real financial and economic motives. If on the other hand the bank starts making million dollar loans to Nicaragua to train all elementary teachers on the values of socialism then I would say that the bank, along with the government that funds it, is an empty political shell.  Whether Latin American countries will gravitate to it will be determined by basic market dynamics. If they are able to offer financing under better terms and with better guidance and direction then other current international financial institutions then they will. More than likely though even if they are just offering handouts like the USSR did during the Cold War Latin American countries will still gravitate towards Venezuela for no other reason that no one can turn down a free lunch.