Where Does Banco del Sur Fit In?

By Marifeli Pérez-Stable and Christian Gómez, Jr.
Latin America Advisor, August 1, 2007

Where Does Banco del Sur Fit In?

WASHINGTON, DC—Venezuelan President Hugo Chavez envisions Banco del Sur as a key component of his larger Latin American integration project. In theory, Banco del Sur—a South American development bank for South America—would eliminate the region's reliance on international financial institutions (IFIs), such as the World Bank, IMF, and IDB.

But amid declining demand for financing from IFIs throughout the developing world, a South American development bank would be redundant. High commodity prices, generally low inflation, and favorable access to private capital flows are sustaining positive economic growth, high foreign reserves, and fiscal and trade surpluses.

Flush with liquidity, countries such as Argentina, Brazil, and Venezuela have paid off their debts to the World Bank and IMF. Furthermore, while Chavez and Ecuadorean President Rafael Correa see the establishment of Banco del Sur as the first step toward a regional stabilization fund and a common regional currency, the declining presence of the IMF in the region (less than $3 billion in 2007, down from $50 billion in 2002) demonstrates the declining need for such a mechanism.

While seven countries—Argentina, Bolivia, Brazil, Ecuador, Paraguay, Uruguay, and Venezuela—have signed on as founding members, the politics of South American integration have delayed the signing of the bank's charter. Disagreements over the bank's functions, size, and financing structure may not be easily resolved, especially in light of recent scandals that have led to the ouster of Argentine economy minister Felisa Miceli and her Ecuadorean counterpart Ricardo Patino.

Shrugging off initial reluctance, Brazil agreed to join Banco del Sur in May but conditioned its entry on terms that all members would commit an equal part of seed capital: between $300 and $500 million for a total of around $3 billion. Chavez had pledged $1.4 billion and wanted Brazil to match this commitment toward a total of $7 billion.

These are modest sums. In 2006, the World Bank and the IDB each lent about $6 billion to the region, while the Andean Development Corporation (CAF) contributed $5 billion, which represented over half of all development funds for the five Andean countries. Brazil's national development bank (BDNES) lends almost $30 billion annually. And while representing less than $1 billion of annual lending, the Fund for the River Plate Basin (FONPLATA) includes five Banco del Sur countries.

Under the presidency of Luis Alberto Moreno, the IDB—which some see as the institution most threatened by Banco del Sur—has a new management structure and a focus on new initiatives, such as promotion of entrepreneurship. While critics claim that the reorganization has not gone far enough, the technical expertise and client relationships gained over almost a half century give the IDB a significant advantage over a newly created institution.

So where does Banco del Sur fit in? If and when it sees the light of day, Banco del Sur will be a medium-sized development bank, coexisting with other IFIs at a time of receding relevance for all such institutions.

Marifeli Pérez-Stable is Vice President for Democratic Governance at the Inter-American Dialogue. Christian Gómez is Program Assistant at the Dialogue.