Bank of the South, the future of financial architecture in dispute

The initiative of the Bank of the South will come into force this year after seven years of negotiations concerning various difficulties.

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The establishment of the Bank of the South marked a point of inflection in the projects of integration in Latin America, with the signing of the constitutive act at the end of 2007. The Union of South American Nations (UNASUR) proposed the creation of the bank in order to provide financial assistance to the twelve member countries for the execution of regional projects.


The initiative of the Bank of the South will come into force this year after seven years of negotiations concerning various difficulties.  Delay is alarming due to cuttings in the projections of the Economic Commission for Latin America and the Caribbean and the International Monetary Fund that estimate economic growth at 1 and 0.5% respectively for Latin America in 2015.


The end of economic prosperity due to high commodity prices from 2003 to 2007 indicated the need for the implementation of new policies to support development in Latin America. Nevertheless, the success of regional projects will depend on the cooperation and the convergence of member countries that have different interests, priorities and disputes in the region.


The general policies of the Bank of the South will be drawn up by the Council of Ministers made up of the ministers of economy and finance of the member countries. The economic power of the countries will not impact the decision-making, since each member country will have the right to a vote that they can use to reach the required minimum (75% of the total votes).


The importance of the Bank of the South is that the disposable capital comes entirely from Latin American countries. The Bank will complement the financing from the Andean Development Corporation, the Bank of ALBA, the Central American Bank for Economic Integration and the Caribbean Development Bank.


The Bank of the South can help to cover the insufficient financing from the four financial entities that provided loans of 82,465 million dollars during the period from 2008 to 2014. This insufficiency is reflected in the role of the Inter-American Development Bank (BID) and the World Bank (BM) that financed projects for almost double that of the four institutions (153,030 million dollars) over the same period.

Nevertheless, the initial disposable capital of the Bank of the South will be 8 billion dollars with the possibility growing to 20 billion dollars from Brazil, Argentina, and Venezuela with 4 billion dollars each, while Paraguay, Uruguay, Bolivia and Ecuador will together contribute 8 billion dollars.


In contrast, the aspiration of Brazil to change their status in the world system to that of big power endows their external relations with the Asian Infrastructure Investment Bank and the BRICS with large economic contributions in order to enhance their presence at the international level.


The positive evolution of the Bank of the South will demand greater contributions from the member countries due to the financial fragility of Latin America, which is unable to maintain the needs of financing in periods of crisis. This will allow Latin American access to alternative sources of financing, avoiding the conditionality of IMF and BM loans.


The areas of projects to be financed by the bank include a) support for key sectors of the economy, b) support for social sectors such as housing and healthcare, c) interconnection of regional infrastructure, and d) reduction of the asymmetries of member countries.


The financing of activities that support the diversification of productive structures is primordial in order to reduce the relations of dependence of Latin American economies. In consequence, the bank will help to cover the annual gap in infrastructure, presently some 320 billion dollars in Latin America[1].


The present situation is quite unfavourable since the majority of member countries (Venezuela, Ecuador, Bolivia, Colombia, Paraguay, Chile, Peru, Guyana, Suriname, Uruguay) have more than 80% of their exports concentrated in raw materials[2]. In this way, the international position of Latin American economies deepened the negative effects of the US crisis on Latin America since 2008.


This objective will be realized through support for projects of integration that will strengthen regional links. In this way, infrastructural projects should give rise to intraregional commercial relations in order to increase the aggregate value of exports of Latin American countries.


However, the positive result of the Bank of the South will depend on the implementation of national projects in key sectors that will stimulate the growth of Latin American economies. Hence the role of national authorities will be decisive to change the tendency towards the slowing of economic growth in Latin American economies with greater economic weight.


Again, the infrastructural projects demand the modernization of transport and communication to replace the deficient infrastructure of the region.  The kind of infrastructure to be established will determine the continuity of development in the region.


The Bank of the South will decide to change the tendency of the greater part of infrastructural projects pertaining to the integration of regional South American Infrastructure (IIRSA) financed principally by the Brazilian Development Bank.


The greater part of the projects of the IIRSA consists in works of infrastructure and conduits that promote the export and exploitation of natural resources of South America. Brazilian multinational companies exploit regional biodiversity creating frictions and disputes with bordering countries that possess strategic natural resources.


The same thing is replicated with the new multilateral financial institutions created by BRICS. This is confirmed by the recent proposal of Brazil to the BRICS Development Bank to finance an interoceanic railway with Pacific port facilities to increase the competitiveness of prime materials exported to China.


Hence the infrastructure of transport should not only consist of the construction of works that promote the export of basic products of the member countries, but should create the necessary conditions to strengthen productive integration in Latin America over the long term.


On the other hand, the influence of the Bank of the South should not be limited to increasing the value of goods produced, but should deal with urgent needs of the Latin American population. Given this, the logic of operation of the Bank del the South consists in benefiting social majorities, in order to eradicate social exclusion in Latin America.


Thus, social projects of health, education, social security and community development will help to diminish extreme poverty that was 11.7% in 2013, a situation that involved 69 million people who cannot cover their basic needs in Latin America[3].


It follows that Latin American countries should undertake policies of redistribution of income that would change the balance of power between social classes. These actions will face numerous political conflicts since the present economic crisis exerts pressure to increase the exploitation of the popular classes and maintain the profits of big business.


Because of this, the radicalization of progressive governments will be fundamental to create new forms of development, in the long term, that can benefit the popular classes during difficult times when the fall of the prices of raw materials interrupts the economic progress of Latin America.


In addition the design of state policies will redistribute the benefits of the productive integration of the region. In this way, they foresee the creation of financial mechanisms that can resolve the problem of the unequal result of the processes of integration in Latin America.


The more vulnerable countries that depend on the demand for basic products need the support of the larger economies of the region.  Therefore, the support of Brazil will be decisive for the Latin American economies to develop the infrastructure needed to promote regional industrialization.


The distribution of the loans of the Bank of the South will benefit the smallest economies that will receive credits up to eight times the capital that they may have individually contributed. This action will be the first step that will permit the circulation of savings from the region with the end of helping the Latin American countries with fragile productive structures.


The creation of commercial policies is primordial to stimulate bilateral commercial relations among Latin American economies. In a parallel way, the excess of regional economies should be reinvested in the smaller economies in order to counter present structural differences.


Brazilian trade with South American countries is not enough to stimulate the growth of South American economies. For example, the intraregional trade of Brazil with members of the Common Market of the South (MERCOSUR) represents barely 10 % of total trade[4].


In addition the possible establishment of commercial agreements between MERCOSUR and groups of small Latin American economies such as the Bolivarian Alliance for the Peoples and the Caribbean Community has passed to second place against the agreements of large economies of the region.


The economic agenda of Brazil is to reinforce the relations of MERCOSUR with big blocks such as the European Union, the United States and China, so as to promote exports of raw materials in the face of negative economic results in 20015. These agreements cause new problems due to the opposition of the Argentine government that protects the industrial sector against European industrial enterprises.


Finally, the Bank of the South will emit bonds of member countries supported by a fund of guarantees.  This new financial mechanism will bring financing to Latin American countries with lower interest rates, thus reducing the high costs of indebtedness now present in Latin America.


To sum things up, the Bank of the South represents an initiative of regional financial cooperation with a greater reach and presence in Latin America.  Latin American countries should realize greater efforts in order for the bank to help overcome underdevelopment in the region and to have a base in the massive participation of social classes.


(Translated for ALAI by Jordan Bishop)


- Ulises Noyola Rodríguez is a collaborator of the postgraduate division of economics of UNAM.

[1] Comisión Económica para América Latina y el Caribe. La brecha de infraestructura económica y las inversiones en América Latina. Publication date: 13/10/2014.

[2] Banco Interamericano de Desarrollo. Carta Mensual INTAL. Publication date: 01/02/2015.

[3] Comisión Económica para América Latina y el Caribe. Panorama Social de América Latina 2013. Publication date: 05/01/2014.

[4] Banco Interamericano de Desarrollo. Informe MERCOSUR número 18. Publication date: 05/01/2014.
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