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LATIN AMERICA - Banco de Chávez

With the launch of Banco del Sur, Venezuelan President Hugo Chávez challenges the Washington consensus, and Washington.

For decades Latin American countries have chafed under the economic and political domination of the U.S. and its hegemony over the International Monetary Fund and the World Bank. Those organizations enforced austerity measures in response to the Latin American debt crisis, stunting the region’s growth during the 1980s. Then the so-called Washington consensus of the 1990s left opposition groups fuming that those policies of privatization and trade and capital liberalization merely carved up Latin American economies for the benefit of Western capitalists rather than helping local populations.

Now the region is fighting back — and with more than words. Buoyed by record reserve accumulation and the continent’s strongest economic performance in decades, seven South American countries have agreed to pool their newfound wealth and launch their very own development bank, Banco del Sur, or Bank of the South. The bank, a pet project of Venezuela’s socialist president, Hugo Chávez, aims to knit the region’s economies more closely together and combat poverty by financing the construction of roads, ports and other infrastructure and subsidizing social welfare programs. But even more important, the bank seeks to overturn the hemispheric order and challenge Uncle Sam for friends and influence across South America.

Banco del Sur will be governed on the principle of one member, one vote, eschewing the weighted voting that gives the U.S. a veto at the World Bank and the IMF. And the bank’s founders say it will extend financing without conditions such as those imposed by the IMF and World Bank, which frequently require countries to adopt austerity measures in return for emergency lending.

“It will be a decisive instrument for the process of independence of our peoples,” Chávez declared at the bank’s signing ceremony in Buenos Aires in December. “Only united can we be truly independent, truly free.”

The time is right for launching the new institution, says Brazilian President Luiz Inácio Lula da Silva. “All the countries are living the best moment of the past ten years, and it is only possible to consolidate integration in moments of economic growth in which society is optimistic. If not, everything will be more difficult.”

Ecuador, a country that suffered a devastating recession after defaulting on its foreign debt in 1999, welcomes the members’ commitment to lending without conditionality. “The fundamental reason for the bank is that if I seek a loan from the Inter-American Development Bank and the World Bank, they’re going to lend with those conditions,” the country’s Finance minister, Fausto Ortiz, tells Institutional Investor. “That hasn’t gone well for us.”

Despite the new venture’s populist allure, Latin American leaders face big challenges in fulfilling their ambitions. For all of the fiery declarations of independence by Chávez and his colleagues, the bank lacks a clear mission statement, budget, management or lending criteria. Founding members Argentina, Bolivia, Brazil, Ecuador, Paraguay, Uruguay and Venezuela committed themselves at the December signing to developing statutes for the bank’s operation within two months, but there has been little sign of progress. The bank is expected to start with a capitalization of $7 billion to $10 billion, but technical negotiators failed to agree on details of capital backing, lending limits and governance at a meeting in Caracas, Venezuela, in January. Colombia cited the absence of agreement on the financing and operation of the bank as its reason for declining to join. By comparison, the IADB has $4.3 billion of paid-in capital and $96.5 billion of callable capital.

Officials expect the members to resolve the bank’s mechanics, but critics say the institution’s premise is fundamentally flawed. “It’s a political fund,” says Pedro Pablo Kuczynski, a former prime minister and Finance minister of Peru who currently works as an adviser to investment bank Lazard. “A bank without conditionality is not a bank and has a high probability of getting into trouble.”

Peru, too, has shown its skepticism by declining to join the bank. Foreign Minister José Antonio García Belaúnde explains the government’s stance by saying, “Don’t make us sign blank checks.” In an interview with II, he dismisses so-called integration projects as “ideological” and says South American nations should focus instead on “what we can all do together: advance connectivity, finance IIRSA [the Initiative for the Integration of Regional Infrastructure in South America] and projects on border areas, all of which are poor.” Chile, which like Colombia and Peru enjoys a free-trade agreement and close ties with the U.S., has also declined to join the bank.

Even the founders have profoundly different views of the bank’s role. Brazil’s Lula has added his country’s considerable economic weight to the project in an apparent effort to restrain Chávez’s radical ambitions. Luiz Eduardo Melin, until recently secretary for international affairs at the Brazilian Finance Ministry and now chief of staff, announced two days before the December signing that Brazil would not tap its massive $187 billion pool of international reserves for the bank and rejected suggestions that Banco del Sur could supplant the Bretton Woods institutions or the major regional organizations, the IADB and the Andean Development Corp., known by its Spanish acronym, CAF. “It was never thought the bank would substitute for existing organizations,” he tells II. “The World Bank, IADB and CAF have very relevant roles and will continue.”

Although Banco del Sur has much to prove, it nonetheless represents a significant innovation that speaks volumes about the shifting centers of power in today’s global economy. South American countries are enjoying greater prosperity than at any time since the 1970s, thanks to robust global growth and record commodity prices; their national treasuries are more solvent, arguably, than ever. Countries that a decade ago went cap in hand to the international financial institutions are running budget surpluses and have built up foreign exchange reserves in excess of $250 billion, collectively. Argentina and Brazil prepaid their combined IMF debt of $24 billion in 2005. On the continent only Paraguay and Peru still have standby agreements with the Fund. Latin American governments have often railed against Yankee imperialism, but never before have these countries had the wherewithal to declare their financial independence and establish a regional lender.

“It’s the beginning of a reform process of the international financial architecture that is going to take place at the national and regional level to allow more-effective macroeconomic and development policies, and loan more for social needs,” says Mark Weisbrot, co-director of the Center for Economic Policy and Research, a Washington-based think tank.

In the meantime, the existing development institutions say they are prepared to work with the new bank and don’t regard it as a threat. “We don’t know about the orientation of the main programs from Banco del Sur,” says Pamela Cox, the World Bank’s vice president for Latin America and the Caribbean. “We know member countries have said they will continue to work with other institutions, such as the World Bank.”

Many observers are skeptical that Banco del Sur would work with the World Bank or the IADB, because of the U.S.’s voting power in those institutions. The new bank may well cooperate with the CAF, though, Venezuelan officials and CAF president Enrique García have said.

The bigger question is whether the new bank is truly needed. Development spending across Latin America and the Caribbean already amounts to more than $23 billion a year. The World Bank lends about $5 billion to $6 billion annually to the region, with roughly one third going to health, education and water and sanitation projects; another third to improve public administration and financial systems; and the remainder largely to agricultural projects. That figure could well increase following last fall’s move by World Bank president Robert Zoellick to slash lending rates to make Bank funds more attractive to middle-income countries like Brazil. The IADB and the CAF each loaned more than $6 billion last year to the region, with the former devoting one third of its lending to infrastructure and power projects.

Brazil’s National Bank for Economic and Social Development, or BNDES, extended $37 billion in domestic loans in 2007, of which $10 billion was devoted to infrastructure. The bank has an additional $9.2 billion in the pipeline for regional infrastructure.

South America’s fiscal health also poses a challenge to the new bank. “Governments are borrowing less and less every day. They don’t necessarily need another multilateral option,” says Vince McIlhenny of the Bank Information Center, a Washington-based watchdog on multilateral development banks.

Yet the region’s development spending needs are massive, notwithstanding the recent strength of South American economies. And Banco del Sur members agree on the priority of funding infrastructure for integration — roads, waterways, ports, telecommunications and energy grids — that would smooth the flow of goods across the Andes and through remote tracts of jungle, and create the facilities for an efficient export platform for the continent. Latin America needs to at least double its annual spending on infrastructure, to 4 percent of GDP, if it is to catch up with countries like South Korea and China, the World Bank reports.

“There is room for several players,” the CAF’s García tells II. “We don’t see a conflict.”

García is leading an aggressive expansion of the CAF, which finances regional integration projects across the same turf that is home to Banco del Sur. The CAF welcomed Uruguay as a new member in December and gained an additional $1.2 billion last year in new capital contributions from Argentina, Brazil, Chile and Uruguay. The bank counts 17 member nations, all from Latin America with the exception of Spain.

Banco del Sur governments also want to narrow the region’s huge disparities in living standards. “The richer countries understand that they must have more-favorable policies with the economically smaller countries,” Brazil’s Lula said in December at the Buenos Aires signing ceremony to launch the bank. Bolivia, the continent’s poorest country, wants to use the bank to finance antipoverty programs.

Whether the new bank can compete financially with established development banks remains to be seen. The World Bank and the IADB both have triple-A credit ratings, but none of the member governments of Banco del Sur has an investment-grade rating, much less a top-notch one. (Brazil is one level below investment grade, with a double-B-plus rating from Standard & Poor’s and a Ba1 rating from Moody’s Investors Service.) With adequate capital backing and governance, the new bank should be able to achieve an investment-grade rating — Moody’s rates Brazil’s BNDES one notch higher than the government itself, at Baa3. “With a pooling of resources, the bank could obtain a higher credit rating than the countries themselves get,” says Weisbrot of the Center for Economic Policy and Research.

It will take time, though, to sort out all the details on capital backing, lending criteria and governance and turn Banco del Sur into an operational reality, as even the bank’s staunchest defenders acknowledge. The World Bank didn’t make its first loan until 18 months after it was founded.

The dream of a unified continent harks back to the 19th-century vision and campaigns of Simón Bolívar, the liberator of much of South America from Spanish rule — and Chávez’s inspiration. The realization of this goal would be formidable: A united South America would command a combined GDP of $973 billion and 361 million inhabitants, span 12 percent of the earth’s land mass and contain 27 percent of the world’s fresh water, 8 million square kilometers of forests and a hydrocarbon supply good for 100 years.

In the 21st century, making that vision a reality has gained powerful political endorsements and serious cash backing. The presidents of 12 countries joined forces in 2000 to create the South American Community of Nations. The leaders created IIRSA, the regional infrastructure program, to build a continental grid of transportation, energy and communications networks. The program has identified 320 projects with an estimated cost of some $31 billion. The group is developing 31 of those projects between 2005 and 2010 at a cost of $6.9 billion; they include four inter­oceanic highways that will stretch from Brazil’s Atlantic coast to Peru’s Pacific coast, one via landlocked Bolivia. Financing is coming from national governments, the IADB, the CAF, the World Bank and some private funds.

With so much already planned, does Banco del Sur have a useful contribution to make? The bank’s backers insist it does. “There is a lack of resources for meeting our needs,” says Ecuador’s Ortiz. “A refinery could cost $5 billion; a hydroelectric project costs $1.5 billion.” No single multilateral bank picks up those bills, he adds.

Brazil’s Lula says the bank would focus on financing projects that integrate the continent and strengthen the Union of South American Nations, a fledgling organization aimed at bringing together the Mercosur trade bloc of Argentina, Brazil, Paraguay and Uruguay and the Andean Community, which groups Bolivia, Colombia, Ecuador and Peru. He cites such possibilities as cross-border hydroelectric projects, ports and airports, as well as efforts to deepen regional financial integration.

“Commercial and investment banks are not in projects for infrastructure for integration and better connections between countries,” says Brazil’s Melin. “Individual countries of the region don’t have the scale to have a development bank of the size of Brazil’s with their own funding, but together they can have a development bank.”

Banco del Sur also reflects a search by the region’s governments for a new balance between the market and the state in economic policy matters. After more than 25 years of following the Washington consensus, Latin American countries, notwithstanding their recent progress, continue to struggle with relatively low growth rates, massive poverty and an export basket concentrated in natural resources and low-technology products. Latin American and Caribbean nations have grown at an average annual rate of more than 5.25 percent for the past four years — the area’s best performance in three decades, according to the IMF — but that was nearly 1 percentage point less than Central and Eastern Europe and more than 4 points below developing Asia; 36 percent of the area’s population lives below the poverty line, according to the United Nations Economic Commission for Latin America and the Caribbean.

The region also harbors bitter memories of its financial crises of the 1980s, the 1990s and the early part of this decade, and is eager to cast off the yoke of stringent IMF and World Bank lending conditions. Late last year Rodrigo Cabezas, then Venezuela’s Finance minister, recalled the humiliation of the country’s 1979 talks with the IMF, which it held to gain access to World Bank lending. “The loans were conditioned and favored U.S. suppliers,” Cabezas said. “Venezuela did not use one dollar of the World Bank loan and had to pay a $100 million penalty” for not drawing funds.

Disenchantment with liberal economic policies has been a major political issue in the region in recent years. Left-wing presidents now rule in six of the seven Banco del Sur founding countries. In addition to Chávez, who has threatened several times to pull Venezuela out of the IMF, the new bank’s biggest supporters are Argentina, Bolivia and Ecuador. Argentina, which defaulted on its foreign debt in 2002, has defied economic orthodoxy and refused to negotiate a rescheduling with creditor governments under the presidencies of Néstor Kirchner and his wife, Cristina Fernández, who succeeded him in December (see story, page 38). Bolivia envisages the bank as a source of financing for antipoverty programs and for meeting the investment needs of the national oil company, Finance minister Luis Arce told a news conference late last year.

President Rafael Correa of Ecuador sees the new bank as a vehicle for ending what he calls the region’s “incomprehensible financial masochism,” whereby governments invest growing reserves largely in U.S. banks instead of using that wealth to foster domestic development.

To tackle the nagging problems of poverty, the bank will pursue “new sets of priorities outside the logic of the market,” says Pedro Paez, Ecuador’s economic policy coordinator and chief negotiator on the bank. The institution will focus its lending on projects designed to foster the production of food, energy and generic medicines and to assist the “popular economy” of micro and small businesses, he adds.

The new bank’s influence will depend in large part on Brazil’s Lula. Banco del Sur may be Chávez’s baby, and it will be headquartered in Caracas, but it would have little weight or meaning without the participation of Brazil, the world’s sixth-biggest economy.

There is no small amount of tension between Chávez and Lula. The Brazilian leader offers a more moderate social vision for Latin America than does his Venezuelan counterpart. Domestically, Lula has increased spending on antipoverty programs and public investment while maintaining fiscal discipline and containing inflation. In his foreign policy he has sought to bolster economic cooperation in Latin America without antagonizing Washington. Indeed, Lula recently offered to work with President George W. Bush to revive the Doha round of global trade talks and to boost the development of biofuels.

Chávez and Lula’s differing visions of the new bank’s role reflect “the underlying struggle for leadership in South America,” says Albert Fishlow, director of the Center for Brazilian Studies at Columbia University in New York.

Chávez advised Bolivian President Evo Morales on the May 2006 nationalization of his country’s natural-gas fields, including those held by Brazil’s state-controlled oil company, Petrobras. The Venezuelan leader has also criticized Lula’s overtures to the U.S. about promoting ethanol production in developing countries. Brazilian senators are meanwhile blocking the entry of Venezuela into Mercosur because of Chávez’s move to force an opposition television network off the air.

Given those deep differences, Brazil is unlikely to support any Venezuelan efforts to turn Banco del Sur into a socialist tool. “There’s a style of Brazilian diplomacy to not follow Chávez, but not repudiate him,” says Peter Hakim, president of the Inter-American Dialogue, a Washington-based group that promotes cooperation in the Americas.

Chávez’s recent domestic difficulties are also likely to restrain his ambitions of challenging Washington and the international financial establishment. In the wake of the December defeat of a referendum that would have allowed him to remain in office indefinitely and greatly expand his presidential powers, which opponents argued would make him a virtual dictator, Chávez said he was “obliged to put the brakes” on his planned socialist revolution and concentrate on helping his coalition win local and regional elections later this year.

The Venezuelan leader also has mounting economic troubles at home that are sapping his popularity and influence. Despite the country’s oil wealth, the economy is showing strain from 20 percent inflation, which prompted the government in January to create a new currency, “the strong bolívar,” that’s worth 1,000 old bolívars.

Chávez’s woes have eased potential U.S. concerns about Banco del Sur, analysts say. “The U.S. has settled down. I don’t think there’s much nervousness about Banco del Sur,” says Hakim. “Most people think, ‘How is it going to get off the ground if they can’t deliver milk in Caracas?’” he adds, alluding to recent food shortages in the Venezuelan capital.

But given the region’s newfound financial resources, most observers are betting that Banco del Sur will indeed take off and that it has the potential to alter the way development business is done.

The new bank “does make sense,” says Gianfranco Bertozzi, senior Latin America analyst with Lehman Brothers in New York. “It won’t completely eclipse the Washington neoliberal lenders, but over time borrowers will get free of conditionality.”