Friday, May 8, 2009

The Bank of the South -- A step towards regional integration in South America

[South America Analysis] -- The significance of creating a new regional bank in South America.

** Note the opinions reflected in this article are my own and do not reflect any resource used in writing this analysis.

As high level Economy and Finance ministers from seven South American countries meet in Argentina with the goal of moving forward the creation of the Bank of the South (El Banco Sur), it is imperative to examine the bigger picture. I have synthesized two major points I would like to highlight.

1) South American countries are experimenting with new institutions. If found to be viable and efficient, these institutions can potentially form the building blocks of larger and more complex ones. The end result will be the promotion of legitimate regional integration in South America.

2) The Bank of the South, along with other efforts such as the Andean Development Corporation will provide South American countries first-hand experience in promoting economic development through South-South Cooperation. Development via this avenue takes advantage of the strengths and weaknesses of other developing countries to promote development from within. South-South Cooperation has great potential to create a new channel in which to promote sustainable economic growth and empower developing countries with the tools and means in which to help each other develop, thus cutting their reliance on external aid from wealthy donor countries or multi-lateral organizations such as the IMF (eventually).

The Bank of the South, which has been financed by the South American countries of Argentina, Brazil, Bolivia, Ecuador, Paraguay, Uruguay and Venezuela, will begin operations with an initial capital pool of $10 billion. This figure was agreed upon during the last meeting held in March in Caracas, Venezuela (MercoPress).

When you casually see hundreds of billions of dollars being thrown around in today’s headlines, it is easy to dismiss this $10 billion effort as menial, at best…

The real point however is not to rock the boat, the boat in this context being the International Monetary Fund (IMF) and other multilateral lending institutions. Hugo Chavez may be full of rhetoric that says otherwise, but as much as he would like the Bank of the South to counter the influence of the IMF, he knows at the moment it cannot.

Consider two major lending institutions—the IMF and the Inter-American Development Bank (IDB). Ideas are being floated around to increase IMF capital to $500 billion (see this BBC article). Granted not all this will go to Latin America, but no less this is a substantially larger capital pool than the Bank of the South will have. The IDB, which is a Latin America specific regional lender, has $101 billion of its own of capital.

However, if we look at one other regional lender—the Andean Development Corporation, which includes some of the remaining South American countries which are not participating in the Bank of the South (Peru, Chile and Colombia), has a capital pool of $5 billion. The Bank of the South, with seven founding members and $10 billion in capital to lend is a definite step forward for the region

Consider for a moment, the fact South American countries have not always been as successful as they are now at managing inflation, debt, budgets, political stability, etc. Today in 2009, South American countries have international reserves. Click here to access a great article with some straight forward data that illustrates this phenomenon from Victoria Saddi’s site, Brazil and Economics. In a few years the United States may have to add to their Chinese and Middle Eastern credit lines by opening up new ones with countries in Latin America.

Definitely not a good thing for U.S self-esteem, but that is another story all together. Discussion welcome for those who would like to share their opinions on the subject.

The Bank of the South will not tip the international balance of power in either the worlds of regional and or international lending institutions. It will however help create the foundation for future organizations and institutions which one day will rival the influence of first world institutions like the IMF.

~ Analysis by Bennett Reiss