Regional or multilateral banks help developing nations through different means. They are instrumental in redistributing funds from richer to poorer nations. They provide liquidity in periods of stress in world capital markets. And they provide financing for long-term projects that require financing at maturities that exceed what the country may obtain in the markets at low interest rates.
What is the role for a new institution like Banco del Sur? The very concept of Banco del Sur defies basic tenets of international lending and development. Should it ever come to pass, Banco del Sur will have a negative effect on the region’s development and credit worthiness and dearly cost its members.
There are other organizations that already provide lending support and services in Latin America based on much more sustainable and market-logical criteria. Simplifying, the International Monetary Fund (IMF) is there to provide liquidity (and those that do not like it can self-insure through the accumulation of foreign reserves), and the World Bank, the Inter-American Development Bank (IDB) and the Corporación Andina de Fomento (CAF) are there to finance social and infrastructure projects in the region.
Supporters of the Banco del Sur have argued that the dependence of these institutions on the international financial system and the market-based criteria for evaluating and distributing loans from traditional lenders exaggerates social and economic inequalities. What’s necessary, they argue, is a new institution that would focus more on achieving equity and justice. But these are just rhetoric arguments.
First, the original pledged contribution of $20 billion capital to the Banco del Sur is not based on the relative level of development of each country. Of the $7 billion that will kick-start the Banco del Sur, Argentina, Brazil and Venezuela will contribute $2 billion each, while the other founding members contribute smaller amounts ($0.2 billion from Bolivia and Paraguay and $0.4 billion from Ecuador and Uruguay).
In other multilateral agencies the richer countries contribute more and the poorer countries usually receive more funds than what they contribute. This is not ensured in Banco del Sur. The per capita, adjusted GDP of Argentina is about $14,000, in Venezuela and Uruguay $12,500, in Brazil $10,000, in Ecuador $7,800 and in Bolivia and Paraguay less than $5,000. The contribution of each country as a fraction of their GDP goes from .14 percent in the case of Brazil, to about .7 percent for Argentina, Ecuador and Venezuela, to 1.2 percent for Bolivia and Paraguay and to 1.7 percent in the case of Uruguay. In other words, contributions from the beginning are inherently skewed and probably unsustainable. And the way in which these funds will be invested is unclear (see below).
Second, the existing multilateral agencies usually enjoy a high investment grade rating (AAA). This means that they can leverage their equity and transfer their collective rating to each developing nation that usually faces higher interest costs due to its lower credit rating. But one need only look at the rating of the members of Banco del Sur, in which none except Brazil enjoys such a raging, to realize that no such seal of approval is likely for the new institution. Without it, the planned bank will not be able to serve as an efficient intermediary between recipient countries and capital markets, unlike its existing counterparts.
Third, the argument that there’s a need for a new bank that is independent from international capital markets is a spurious—and largely ideological—claim. The only thing that countries need to gain access to world financial markets is a good record of monetary and fiscal policies. Anything less is simply lowering the bar for less responsible countries. Chile is an example of prudent fiscal behavior and rainy-day savings that allowed the country to deliver an aggressive fiscal policy to cushion the impact of the world financial crisis on its economy.
Before the financial crisis, prudent fiscal policies had allowed a growing number of countries to bypass the IDB and World Bank and go directly to private capital markets. Those interest rates were not much higher than those that deserving countries could obtain from multilateral lenders. To the extent that the road to normalcy continues in financial markets, countries will be able to receive finances to support for their infrastructure and social projects from the markets again simply by maintaining good domestic fiscal policies.
In reality, improving equity in the region requires efficiency in the delivery of public social expenditures. This depends most on the ability of each country’s institutions to ensure that the infrastructure and social projects have high social rates of return and do not favor interest groups or are mere pork barrel spending.
Banco del Sur does not look promising in this respect. Rather than focusing on efficiency with a professional team in charge of evaluating projects, by design Banco del Sur seems condemned to allocate money to smaller, poorer countries without regard to policies. Under its charter, every member of Banco del Sur has equal voting rights regardless of policy or contribution. Many are likely to block profitable projects in the larger countries if they do not receive financing for projects in their own countries, regardless of their rate of return or developmental value. Indeed this seems the intent.
Third, with a central goal of the Banco del Sur to provide low or negative rates of return to development projects free of market concerns, it’s unclear how it will avoid bankruptcy. If the Banco del Sur intends to shun international financial markets and is pledged to support projects for broader development goals, irrespective of their rates of return, how will it replenish its capital? The other alternative, a lending institution that invests in projects with high rates of return and remains in the good graces of international capital markets, duplicates what already exists. After all, aren’t those the goals of the existing institutions? If these institutions are not working efficiently, it seems better to restructure them rather than adding a new bureaucratic structure, with the risk that the cost of its failure will fall on the country members—many of whom can ill afford it.
What Latin America needs is to gain independence from clientelism, misguided development ideas and the lack of professionalism in the administration of public policies. Banco del Surr represents a step backward. For all the public statements and populist bluster, it seems like another example of the populist ambition and misguided policies that have taken hold again in the region.