Global Policy Forum

By Lourdes Heredia

Leaders of several South American nations have signed a founding document to create a new body, the Bank of the South, as an alternative to multilateral credit organisations such as the International Monetary Fund and World Bank.

The idea was first put forward by Venezuelan President Hugo Chavez in December 2006 as part of his battle against the influence of the US and the international financial institutions, which he has decried as "tools of Washington".

Argentina, Brazil, Bolivia, Ecuador, Paraguay, Uruguay and Venezuela have all joined the initiative.

Chile and Peru decided to remain on the sidelines, while Colombia, which had expressed interest, has put its decision on hold following recent disagreements between Colombian President Alvaro Uribe and Mr Chavez.

According to Venezuelan finance minister Rodrigo Cabezas, the creation of a new organisation is "a demonstration that times have changed".

The Bank of the South, known as Banco del Sur in Spanish and Banco do Sul in Portuguese, he explains, will be funded and run by South American countries themselves.

Lack of reforms

Analysts believe the Bank of the South initiative reflects the increased unpopularity of the IMF and the World Bank among many South American countries.

Mark Weisbrot, co-director of the Center for Economic and Policy Research in Washington, also sees it as one of many signs of a new independence from institutions such as the IMF and its "unwanted austerity measures".

"At the beginning of this decade, scepticism in Latin America was sealed when Argentina disregarded IMF advice by defaulting on its debt and then experienced robust economic recovery," Mr Weisbrot said.

Luis Maldonado, a presidential representative to the government body that helps regulate Ecuador's banking sector, argues that "Latin America has been impoverished and harassed long enough that we have no other choice [but to] start the Bank of the South. "

Venezuela has gone so far as to threaten to leave the IMF - although it has not set any date for such a move.

"If the IMF does not abandon its record of implementing tough policies with regards to emerging countries and being totally benevolent to developed countries, as it was in the last US mortgage crisis, it will struggle to regain its credibility," said Mr Cabezas.

Pulling out of the IMF would amount to a technical default on Venezuela's bonds and would raise the cost of future borrowing in global markets.

Other members of the Bank of the South share many of Venezuela's concerns about the IMF, but have made clear that they do not intend to leave it or other international institutions.

Gustavo Guzman, Bolivia's ambassador to Washington, explained to the BBC that the bank would provide a much-needed "alternative source" of funds.

He points out that it has been difficult for Bolivia to get loans from the IMF and international markets since the government's recent moves to renationalise its oil and natural gas industry.

Colombian finance minister Oscar Ivan Zuluaga said at a meeting in New York that the Banco del Sur was seen as an effort to integrate the countries of South America and "nothing more than that".

Obstacles

Venezuela hopes that the newly created bank, which will be based in Caracas, will begin to operate in 2008, but there are several obstacles.

The amount each country will contribute to the bank and how it will raise additional capital are details which have not been disclosed.

These issues may prove a major obstacle. Brazil and Venezuela differ, for example, on how shares in the bank should be distributed. Venezuela also insists that the initial capital contribution should not be mandatory, but rather a "donation" relating to each country's GDP.

Meanwhile, Ecuador wants each member country to make a contribution "equal to or greater" than it makes to the Inter-American Development Bank (IADB) and World Bank.

Mixed reactions

The Bank of the South proposition has been greeted with caution by most analysts, although they agree that having more options for countries seeking funding is not a bad idea.

Former World Bank chief economist and Nobel-prize winning economist Joseph Stiglitz has endorsed the bank on those grounds.

"It's good to have competition in most markets, including the market for development lending," he said.

Michael Shifter, Latin American expert at the Washington-based Inter-American Dialogue, said that while it was "tempting to dismiss the Banco del Sur because of the political agenda behind it", he would advise sceptics to wait and see.

"Chavez's political agenda is undeniable, but so is the money he has at his disposal right now," he said.

"Over the longer run, the initiative will have real problems because of politicisation, but in the meantime it would be a mistake to underestimate its possibilities."

Mr Shifter also feels the timing is fortunate. "Banco del Sur is taking off precisely when traditional multilateral institutions like the Inter-American Development Bank and World Bank are struggling to redefine their missions and adapt to new circumstances," he said. "Everything is in flux, so anything can happen."

Good governance

Even the representatives of the multilateral credit organisations seem reluctant to dismiss Banco del Sur.

The World Bank's vice president for Latin America, Pamela Cox, recently said that there was enough scope for both agencies to work in the region. "The Banco del Sur is a complement, not a competitor," she said.

And the new president of the World Bank, Robert Zoellick, offered advice to the bank on transparency. "One of the lessons we have learned on good development practices is that they should be combined with good governance, proper respect for the laws and firm practices against corruption," Mr Zoellick said.