Bank of the South

An alternative to the IMF World Bank

Eric Toussaint

Published by VAK, Mumbai, India in 2007

Preface by Ajit Muricken

Contrary to the common beliefs and perceived notions, the IMF, World Bank Group does not set out to reduce poverty but rather it reproduces and enslaves the debtor nations. It is in fact the central force behind the neo-liberal offensive to integrate the economies of the South by profound changes in trade, export-oriented growth model, finance and technologies. The twin institutions IMF, World Bank are the key instruments designed to subordinated nations to the interest of the world's most industrialized hegemonic power.

The ideological world view of the Banks holds that the development of the South has been delayed due to insufficient domestic capital. This formulation actually meant that countries wishing to accelerate economic growth must firt appeal to external aid, then attract foreign investments and thirdly, increase exports in order to procure the hard currencies necessary for the purchase of foreign goods that facilitate further growth.

The ideological construct that underlies the argument is fairly logical within the neo-liberal paradigm and is based on the following prescriptions :

- Micro-economic reform through structural adjustment of the economy by the removal of all barriers to investment and removal of any impediments. Free competition, deregulation of the market freedom leads to rapid economic growth that in turn contributes to the reduction of poverty;

- Maximisation of 'Comparative Advantage' (This theory argues that a nation can maximise efficiency in resource-use by producing and exporting commodities in which it is relatively efficient and by importing commodities in which it is relatively not so);

- State deregulation of the economy and maximising privatisation is the key to enhancing macro economic efficiency and consumer welfare;

- Removal of all impediments leading to the free mobility of capital across the globe; and

- Converting exports into the main source of economic growth.

The consequences of such a policy have been traumatic for the people of the South with intensified poverty and inequality. The debt repayment sucks up part of the social surplus produced by the workers of the South (whether salary earners, small individuals or family producers, or workers in the informal sector) and directs this flow of wealth towards the holders of capital in the North, while the ruling classes of the South make their profit.

Under the spell of neo-liberal growth model the whole range of natural resources is privately appropriated which opened up a natural resource bade for MNC's to

plunder. This shameful pillage of humanity's collective resources is commited under the spell of the neo-liberal economic model. Even those areas of life-forms once considered sacred, like teh genetic codes, flora, fauna, seeds and even natural resources like water once considered common heritage of humanity are now converted into commodities and tradable items to be exploited for profit.

The worldwide flow of capital follows its own operating methods and creates its own laws, which not only transcend but also overrule national legislations. In fact, the global trinity WB/IMF/WTO dominated by the G-8 countries mount intense pressure on the policies of the borrower countries. This leads to increasing deregulation, that is, the abrogation of legal and social control on financial and economic activites by nation states. The purpose is to accelerate transactions without hindrance and lead to phenomenal gains.

The loan conditionalities attached to the World Bank are a major part of the problem that the Global South is faced with. Such sweeping economic reforms induced by the World bank are not without its political implications.

There is a growing realisation that the conditions - covert and overt- attached to foreign debt, specifically by multilateral financial institutions, threaten to substantively curb the democratic rights of people in all countries contracting such loans. This is also true of South Asia. Under one garb or the other the independence and rights of even the elected representatives to enact legislations, to frame policies, to monitor and oversee foreign firms contracted by these financial institutions directly or indirectly are under serious threat. These curbs ultimately affect the quality of life of people and erode their control over their own resources. Thus these conditions severely undermine any serious efforts to eradicate poverty. It is therefore necessary to form a broad people's alliance to monitor the activities of the global financial institutions, to launch audits of the debts incurred by the national (or local) governments, to critically examine all deals.

The World Bank is managing to be so powerful through its infiltration into the bureaucracy and gaining access into the decision-making apparatus of the State, effecting a paradigm shift - from its earlier project-based role, it has now given way to a much more powerful policy-based role - influencing substancial decisions in favour of the bank's agenda. Through such strategies the Worl bank is effectively infiltrating the lower levels of the Panchayats, Zilla Parishads and municipalities through its private, public partnership projects and various other schemes.

The structural reform promoted by the World Bank and IDB, which placed special emphasis on bringing about strong institutional changes, has deeply modified the institutional framework and has dismantled state regulation capacities, while reinforcing groups and monopolies, and multiplying the existence of clientele networks and bank-aid practices. These neo-liberal

structural reforms have been so strong that they have even hindered the creation of development alternatives in the region.

With the increased control of the bank over hte bureaucratic apparatus it ahs acquired legitimacy and voice in policy making at both national and state level. It now commands and controls the entire macroeconomic policy including future direction. The entire policy package makes a significant departure from the past. The long cherished priciples of growth with justice, social responsability and accountability, equity and self-reliance have been rendered obsolete with the new slogans of 'liberalisation', 'privatisation', 'globalisation', "efficiency' and 'competitiveness'.

The mecanisms of debt cycle have subjected the developing countries to the demands of Washington (where IMF, World bank and US Treasury are all located). Most of the economic policy is decided here, outside teh country concerned. Debt repayment sucks up part of the social surplus produced by the workers of the South ( wheter salary earners, small individual or family producers, or workers in the informal sectorà and direct this flow towards the holders of capital in the North, while the ruling of the South take their commission.

Since 1998, these institutions have been undergoing a profound crisis of legitimacy. the economic, social and environmental disasters due to policies imposed on Periphery countries by the IMF and the World Bank has obviously cost these institutions their credibility on a massive scale within the countries concerned. Trade regulation policies conducted by TNC's and attacks on State sovereignty have also made public opinion in both the Center and the Periphery wary of the WTO. The structural adjustment policies dictated by the IMF and the World Bank are hated with a vengeance by the vast majority of countries where these are enforced and have lost all credibility and universally denounced, criticised and opposed. They have been widely discredited, which is why they must be abandoned or dismantled. Since their inception, these institutions have shown a market reluctance to consider the respect to human rights as an integral part of hteir mandate. They have systematically supported dictatorships and their policies have often violated basic human rights.

It was in this context that the President Chavez of Venezuela advocated the possibility of setting up financial institutions that would provide an alternative to the World bank and the International Monetary Fund for all countries of the South. The formation of the Bank of the South would definitely alter the power relations within multilateral development banking, and would reproblematise development within a context in which the liberal ideology has blocked the way to the major goals of humankind, particularly to critical and alternatives discourses and proposals for making another world possible.

The collection of articles of Eric Toussaint and Damien Millet introduces new debates over the need for a nex global financial institution - the bank of the

South. The central argument they posit is that the World Bank Group has to be replaced by other global institutions based on democratic accountabibilty. The new World Bank and the new International Monetary Funds, whatever thier new names may be, must have radically different missions from those of the former institutions; they must make sure that the international treatises on the (political, civic, social, economic and cultural) human rights are actually carried out through their action in the field of international credit and international monetary relations. These new global institutions must be part of a global institutional system controlled by a thoroughly reformed United Nations Organisation. it is an essential priority that the developing countries must get together into regional entities as soon as possible, with a common Bank and a common Monetary Fund.

From the perspective of the South, the idea of the bank of the South opens possibilities for challenging neo-liberalism in previoulsy forbidden fields : on the one side, development financing with due respect for the sovereignty and integration of peoples, and on the other hand, the theoretical thinking on a equitable, intercultural, democratic, sovereig,n plane and developing a people-center development paradigm.

The authors' critical analysis of the World bank groups as instrument designed to subordinate indebted nations to the interest of the industrialised North and the need for an alternative financial institution - the 'Bank of the South' provides ground for discussion among activists, people's organisations, movements and policy makers. Such views are not without potential elements of controversy. Not all readers will agree on all the points made by the authors. That is a ground, we believe, for a healthy debate.

Ajit Muricken - Director VAK - http://vakindia.org/

Bank of the South,

international context and the alternatives1

Eric Toussaint2

Two important opposing trends at the international level

Today’s overriding trend, in existence for 25 to 30 years, has been the pursuit of a neoliberal and imperialistic capitalist offensive. Over the last few years, this trend has been expressed by more and more frequent recourse to imperialistic wars, the increase in arms by the super powers, the pursuit of reinforcing trade opening of the dominated countries, the generalisation of privatisation, a systematic attack against wages and collective solidarity mechanisms won by workers. All these are part of the Washington Consensus.A counter trend has been developing since the end of the 1990s. Its most advanced form is expressed (almost) uniquely in Latin America: the election of Presidents advocating a break with neoliberalism (this round began with the election of Hugo Chavez at the end of 1998) or at least a variation of same; Argentina suspending payment of its public external debt to private creditors from the end of December 2001 to March 2005; the onset of the state reclaiming control of large public corporations (PDVSA)3 and of natural resources (natural gas in Bolivia); the failure of FTAA (Free Trade Area of the Americas) and the diminished isolation of Cuba.This counter trend would be inconceivable without the powerful social resistance that has been opposed to the neoliberal offensive since the 1980s (February 1989 in Caracas) in different parts of the world and that have since flared up periodically.The resistance that imperialism encounters in Iraq, Palestine and Afghanistan also play a fundamental role.

The international economic context 2003-2006

The crisis which struck the US economy in 2000-2001 has been overcome by a voluntary anti-cyclical policy of the Federal Reserve Bank (the US Central Bank) which drastically lowered its official interest rate bringing it to almost zero. The objective was to avoid the bankruptcy of Enron and Worldcom extending to other large heavily indebted corporations in the private sector. The radical reduction in interest rates allowed corporations to refinance their debts in

1 Preliminary document prepared on 5 August 2006 for the International Debt Observatory conference

being held in Caracas 22-24 September 2006. www.oid-ido.org and www.cadtm.org 2 Eric Toussaint who holds a PhD in Political Science from the Universities of Liège and Paris 8, is president of CADTM (Committee for the Abolition of Third World Debt) Belgium. Author of Your Money or Your Life: The Tyranny of Global Finance, Haymarket Books, Chicago, 2005; co-author with Damien Millet of The Debt Scam, VAK Publication, Mumbai, 2003 and Who Owes Who? 50 Questions about World Debt, Zedbooks, London, 2004; co-author with Damien Millet of Tsunami Aid or Debt Cancellation! The Political Economy of Post-Tsunami Reconstruction, VAK Publication, Mumbai, 2005. For more information: www.cadtm.org 3 Petróleos de Venezuela, S.A., Venezuela’s state-owned petroleum company.

the least cost-effective manner. It was the same for North American households whose debt level was unprecedented (130 per cent of annual income). The total sum of all debts in the US, both in the private and public sectors, is more than $37 trillion.The US was able to overcome this crisis and re-established a level of growth supported by domestic consumption which has been fed and financed externally.The economic recovery in the US took place while Europe and Japan experienced weak growth. The US has since then played the role of being the world’s economic engine in 2002-2003. US consumption implies a strong recourse to imports, especially Chinese products. The US engine has swept China along in its wake. China has thus maintained a growth rate close to 10 per cent. China’s needs for combustibles and raw materials have boosted the world market prices of these products.According to the Bank for International Settlements (BIS: www.bis.org), in 2005, “China accounted for more than 57% of the incremental demand for aluminium, 60% of that for copper and over 30% of that for oil” (BIS Annual Report 2006, p. 41).Since 2003, we have witnessed a very sharp rise in the real price of oil, other raw materials and certain agricultural products. At the same time, the prices of manufactured products rose slightly.This is why we are living in a world characterised by an improvement in the terms of trade in favour of developing countries exporting raw materials, combustibles and several agricultural products. This contrasts sharply with more than 20 years of degradation of the terms of trade4 to the detriment of developing countries.In the case of Latin America, since 2003, Brazil, Chile, Columbia, Peru and Venezuela have all benefited from a sharp rise in the prices of their exports (BIS 2006, p. 40).This upswing in the terms of trade produced an enormous increase in foreign exchange reserves of developing countries. In fact, more than 130 of them (out of 165) saw an increase in their reserves.Between 2000 and April 2006, the foreign exchange reserves of developing countries (which include the countries of the former Soviet bloc) have almost tripled (from $973 billion up to $2,679 billion). The foreign exchange reserves of oil producing developing countries have quadrupled (from 110 to 443). China’s reserves have increased by more than five times (from 166 to 875). Latin America’s foreign exchange reserves increased at a more modest rate of 40 per cent during the same period.The world’s total outstanding foreign exchange reserve, according to the BIS, reached $4.17 trillion in December 2005 (of which ⅔ is in US dollars, the remaining comprising euros, yens, pound sterling and Swiss francs). Of the amount, only $1.292 trillion are in the possession of the most industrialised countries. Still, it must be noted that the US only possesses the equivalent of $38 billion (in different currencies) and the Eurozone only $167 billion. As for Japan, it only holds $829 billion (BIS 2006, p. 83).

4 There has been a downswing in the terms of trade for developing countries during the 1950s and the 1960s. This was followed by an upswing during the 1970s. Since the 1981 oil crisis until 2003, we have witnessed another downswing in the terms of trade.

Developing counties have never known such a situation: they have a sum equivalent to more than double the foreign exchange reserves of the most industrialised countries at their disposal. The composition of the foreign exchange reserves of developing countries are as follows: 60 per cent in US Dollars, 29 per cent in Euros and the rest in Yens, Pound Sterling and Swiss Francs.The IMF, which, since its inception in 1944, has been officially in charge of assisting countries who face balance of payment problems, only has the equivalent of approximately $9 billion that are directly in circulation at its disposal. Though total contributions represent $300 billion, it must be noted that the 184 members of the IMF do not necessarily make these sums available to the Fund. Its lending portfolio is no more than $35 billion. It is looked upon as a dwarf with respect to some 20 developing countries. Its situation is aggravated by the fact that its lending portfolio is diminishing (and consequently its revenues) due to advance repayments by several Asian countries, Brazil and Argentina, closely followed by Mexico and Uruguay.Developing countries are, literally as well as figuratively, net lenders to the most industrialised countries.It is so true that they lend money to the US treasury and to Western European countries by buying their treasury bonds. Developing countries hold US treasury bonds exceeding several hundred billion dollars.The World Bank itself recognises that developing countries are net lenders to the most industrialised countries. In its 2003 Annual Report entitled Global Development Finance (GDF), the World Bank states that “Developing countries, as a whole, are net lenders to developed countries”. In the 2005 edition of GDF, the World Bank writes: “Developing countries are now net exporters of capital to the rest of the world” (World Bank, GDF 2005, p. 56). In GDF 2006, the World Bank states again that “Developing countries export capital to the rest of the world, particularly to the United States” (World Bank, GDF 2006, p. 139).There is nothing that demonstrates the futility of the prevailing theory more than in the area of development. In fact, according to the prevailing thought, one of the principal obstacles to development of the South,5 is the lack of capital. Therefore, for development purposes, developing countries must look elsewhere for the capital they lack. They must be at the same time indebted and attract foreign capital.The present policy with respect to foreign exchange reserves is, from all perspectives, absurd because it conforms to the orthodoxy of international financial institutions.Instead of using a large part of their foreign exchange reserves for investment and current spending (for example, on education and health), the governments of developing countries use it for repaying their debts or for lending purposes to the treasury of the United States or to the treasuries of Western Europe.But it does not end there. The governments of developing countries use their foreign exchange reserves as a guarantee on future payment and contract new

5 For a critique, see Éric Toussaint, « Les idées de la Banque mondiale en matière de développement » [“The Concepts of the World Bank on Development”] Chapter 10, Banque mondiale, le Coup d’État permanent [The World Bank, the Permanent Coup d’État], CADTM-Syllepse-Cetim, Liège-Paris-Genève, 2006.

debts with private foreign banks or financial markets. It is absurd from the point of view of general interest.Another absurd policy from the point of view of the nation is that the public treasuries of developing countries, in order to prevent an inflationary effect linked to the high level of foreign exchange reserves, incur debt with local banks in order to withdraw surplus money from circulation.Let us take another look at the different actions mentioned above.

a) Advance payments to the IMFFrom the end of 2005 until the beginning of 2006, Argentina made advance repayments to the IMF by using part of its foreign exchange reserves. The country, however, would have been perfectly entitled to challenge the amounts due to the IMF since the Fund is responsible for a series of actions which have inflicted harm on its people and economy. The IMF actively supported the Argentine dictatorship between 1976 and 1983, a regime that systematically committed crimes against humanity and put the country heavily into debt by implementing an economic model prejudicial to the interests of the nation. The IMF then demanded that the democratic government, which succeeded the dictatorship, repay the odious debt contracted by the military junta.Afterwards, it has continued, to this day, dictating an economic policy against the nation’s interests. Argentina was perfectly within its right to refuse to continue repaying its debt to the IMF.The same could be said about Brazil and its advance repayments on its debt.By using their reserves to repay the IMF, Argentina and Brazil have wasted a part of their resources that could have been utilised for more useful and worthy ends.One of the main reasons given by the Argentine and Brazilian governments for advance repayment of their IMF debt was the desire to regain their freedom of movement.It must be clearly stated that after repayment, these governments maintained an economic policy supported by the IMF. For example, they did not re-establish controls on the movements of capital or on foreign exchange.

b) Loans to the US government by purchasing treasury bondsMost developing countries purchase US treasury bonds. The exact amounts are unknown, but this amounts to several hundred billion dollars being lent to the US government. The argument most commonly advanced is that US treasury bonds are highly convertible assets, i.e., they can be resold quickly and easily. Besides, it is generally assumed that they are risk free since it is inconceivable that US treasury would be in default in the short or medium term. Simply put, developing countries are thus contributing to the maintenance of US imperial power. Developing countries are giving the master the baton with which to beat them up and rape them. In fact, the US has a vital need for outside funding to finance its enormous deficits and maintain its military, trade and financial might. If it were to be deprived of a significant portion of the loans from developing countries, the US would find its position weakened.Additionally, those who advocate purchasing US treasury bonds generally omit to mention the fact that the dollar is falling. The yield of those bonds is in devaluated dollars.

Let us immediately agree that the purchase of West European treasury bonds is in no way a viable alternative, although it may be a lesser evil.It would be far better to use surplus reserves productively or make them available to a “bank of the South”.

c) The pursuit of public debtInvesting reserves in US treasury bonds (or any other treasury bonds) generally means in return new borrowings. This may seem surprising, but in reality, this is how things work. On the one hand, a part of foreign currency reserves is invested in US (or other) treasury bonds; on the other, all levels of government borrow from domestic or international markets in order to repay the national debt. In any case, the interest earned from investing in foreign treasury bonds is less than the interest paid to borrow. This amounts to a loss for the treasury of the country concerned.Leaving a significant amount of reserves in the hands of the central bank frequently leads to it being in debt!To explain: The massive influx of foreign capital in the form of foreign exchange ends up in the hands of local agents who will exchange it at their own banks for local currency. This results in an increased accumulation of the domestic currency, a potential source of inflation. In order to avoid this, the central bank performs transactions designed to “freeze” these reserves so as to prevent the influx of foreign exchange from being transformed into the local currency. There are two main possibilities:

1. The central bank can decide to increase the rates for reserve assets of the banking system. This leads to additional costs for banks, which will certainly be reflected in the interest rates on the loans they offer. This will make credit more expensive and should thus slow down the generation of money (since every time credit is given, money is generated, just as there is monetary “destruction” every time credit is repaid).

2. The central bank carries out open-market transactions, i.e., it issues securities, designed to take local currency out of circulation, thereby limiting the risk of inflation.

The problem with this strategy is that the central bank has, on the one hand, foreign exchange reserves that it invests in international capital markets (which earn a T1 interest) while on the other, the earnings from the securities that it issues is at T2, which is greater than T1, since the risk premium has more significance within the domestic markets of developing countries than in international markets.It is for this reason that, in order to control inflation as well as the rates of exchange (this also depends on the exchange modes, whether flexible or of the fixed currency board type), both the central bank and the state are forced to incur debt simply to finance the discrepancy between the rates.This is the combined result of a monetary policy whose principal objective is the fight against inflation (according to familiar liberal perspectives) and a general economic policy that limits the active intervention of the state into productive activity and considers social expenditure to be non-productive (and a source of inflation).

A crushing majority of governments give precedence to this policy, giving rise to an increase in the national debt as a counterweight to the high level of foreign exchange reserves.6 This is true for China as well as for Latin America.Instead of creating mountains of reserves, in particular to protect them from speculative assault, the governments of developing countries would do better to:

1. Adopt measures to control capital and currency movement (a far more effective way of protecting oneself from speculators and fighting capital flight);

2. Use a significant part of their reserves for productive investment in industry, agriculture (agrarian reform and sovereign control over food resources), infrastructures, environmental protection, urban development (urban improvement, construction/renovation of homes, etc.), health care and education services, culture, research, social security, etc.;

3. Use part of their reserves for the creation of a pool of common financial institutions (Bank of the South, Monetary Fund of the South, etc.);

4. Create a front of indebted countries for non-payment;5. Establish and strengthen cartels of countries producing essential goods;6. Negotiate barter agreements such as those between Venezuela and Cuba,

recently extended to include Bolivia.These will be developed in the following two sections.

Potential Alternatives

Let us return to the favourable economic situation in developing countries in 2006. As discussed above, the situation is favorable for developing countries for several reasons:

• A significant number of them have an unprecedented level of international reserves at their disposal, while the reserves of the US and Western Europe are at a historic low level,

• The terms of trade are favorable to them,• Most developing countries have a positive balance of current accounts,• The IMF is presently weak.

One could add that in 2005 the average growth rate in developing countries was twice that of the most industrialised nations, and international interest rates, even though they are rising, are relatively low. The premium on high-risk countries that the developing countries have to cover has also reached a historically low level.On the political level, in several countries the Left has achieved successes in 2005-2006: the election of Evo Morales in 2005 as President of Bolivia; and important progress made by the Left in the elections in India and Mexico.On the military level, Washington and its allies have become bogged down in Iraq and Afghanistan, which will make it difficult for them to intervene directly in another country.With respect to the multilateral agreements favorable to the big powers, the Free Trade Area of the Americas was abandoned in 2005 and WTO negotiations on the Doha Agenda have come to a standstill (for the time being, in any case).

6 World Bank, Global Development Finance 2006, p. 154

Within this context, it is potentially possible to implement an alternative strategy. If the governments of developing countries wanted to challenge repayment on their public debt, they would be in a good position to do so because they have what is needed to stand up to the threats of retaliation by multilateral, bilateral and private creditors. The level of their reserves gives them enormous room in which to manoeuvre.If Argentina was able to stand up to the private creditors on its own from the end of 2001 to the beginning of 2005 (they demanded it resume repayment of a debt amounting to about $100 billion) and to gain significant concessions, one can easily imagine the strength that a united front of several countries would have.Now is the time to set to work on an audit of the debt.A united front of countries for non-payment would also be able to further the matter of restitution of the historical and ecological debt contracted by the most industrialised nations.Public opinion and social movements would largely support the governments of the South in taking this legitimate position.

• The governments of the developing countries could take the initiative in creating a Bank of the South and an international Monetary Fund of the South (see further on). They could withdraw from the World Bank and the IMF, bodies that are totally controlled by a few of the biggest and most industrialised countries.

• They could work on developing a strategy to stabilise the prices of raw materials and agricultural products by forming cartels between producing nations and by strengthening OPEC’s position.

• They could create and/or strengthen regional Southern associations and, why not, endow themselves with a common currency.

• They could reintroduce controls over the movement of capital and foreign exchange.

• They could take back control of their countries’ natural resources.• They could pursue audacious public policies in the areas of education,

culture and research (particularly in health care) with sufficient financial means.

• They could be inspired by the trade agreements among the Bolivarian Republic of Venezuela, Cuba and Bolivia and advocate new forms of trade using barter (for example, oil in exchange for health care and education services).

• Such a strategy would presuppose giving priority to a radical redistribution of wealth within the developing countries as well as between the South and the North of this planet. The social content of an alternative strategy is fundamental. It is necessary to provide it with a socialist content to avoid the possible risk of it becoming an alternative “caricature”. The socialist content has nothing to do with a simple policy for reducing poverty, developing social welfare measures and a vague humanisation of capitalism. The socialist content implies major structural reforms, beginning with the question of ownership of the means of

production, natural resources and all common goods. To paraphrase Che:7

it is either a socialist alternative or a caricature thereof.• Any alternative must also essentially include the emancipation of women

by establishing a true equality between the sexes.

The Bank of the South and the Monetary Fund of the South

A first choice would be to create one or two institutions.If two were to be created, there would be a bank to finance development and a monetary fund whose primary function would be to protect countries from speculative attacks and assist them in resolving foreign exchange dilemmas where liquidity is a problem. There is also the possibility of creating only one institution which would be responsible for these important functions.In particular, the Bank of the South proposes to try breaking the dependence of developing countries on international financial markets, channel their own capacity for saving, stop the capital flight, channel central resources to priorities for independent social and economic development, change investment priorities, etc.It is about a public bank as an alternative to the Inter American Development Bank and the World Bank.The Bank of the South can grant credits with or without interest, as it can procure non-reimbursable aid in the form of donations.The Bank will be principally financed by contributions from member countries in the form of contributions and donations. Tax revenues through regional/international taxes can also be considered.Those receiving priority credits and donations must be public entities (state, province, municipality, public corporations in the areas of production and services). Additionally, it is essential to clearly define private agents who can receive credits and donations from the Bank so as to exclude the strengthening of big business interests from its activity. History from the last two centuries is replete with examples of public and popular banks which essentially served to strengthen capitalistic accumulation without any actual benefit going to the people.The Bank of the South cannot be dissociated from the debt situation. It is essential that the Bank avoid managing public debt for the benefit of financial capital.Another important aspect is the necessity of popular and democratic control in tandem with auditing initiatives of the debt. The active participation of parliaments in supervising the Bank’s function must also be encouraged.The foregoing only constitutes a few avenues which require collective and rigorous planning.

7 Socialist revolution or caricature of revolution.

Future perspectives for the economy

For economic as well as political reasons, improving the terms of trade for exporters of basic commodities does not appeal to most industrialised countries. This is because it stimulates initiatives in countries in the South. Similarly, the current level of reserves held by countries in the South are causing concern in the capitals of the most industrialised countries as well as in the boardrooms of the big multinationals.The decisions taken by the governments of the most industrialised countries are aimed at changing the situation in their favour. Meanwhile, the economic cycle follows its own logic (see further down). The lack of will on the part of the governments of the Periphery could well see those governments miss out on an historic opportunity.The central banks of the three economic powerhouses of the most industrialised countries are increasing their official market rate with respect to interest rates. Since 2004 this has been the case with the Federal Reserve of the United States and the European Central Bank. The same can be said about the Bank of Japan since the beginning of 2006.An important part of speculative capital which moved towards the countries of the South between 2002 and 2006 in the pursuit of greater returns to those offered by the countries of the North is coming back to the North. The fall of the stock markets in emerging countries in May 2006 is probably a harbinger of what is about to happen.For the Federal Reserve of United States it is vital to attract as much capital as possible so as to pay off the enormous trade deficit. A permanent flow of capital towards the USA is a first-rank necessity. Because of this, it is necessary to increase the interest rates in order to offer foreign investors a sufficient return. This is even more important since the value of the dollar dropped particularly with respect to the Euro and the Yen, and that the interest rates increase equally in the Euro Zone, the United Kingdom and Japan.It is possible that the current increase in interest rates will level off. The US monetary authorities know that if they raise interest rates too much, they risk provoking an explosion in the speculative real-estate bubble and a dramatic reduction in household consumption because US householders are in a lot of debt (totalling 11,500 billion dollars). Too much of an increase in interest rates also risks causing problems for big businesses in the US, starting with the automotive and aviation sectors. Nevertheless, even if Northern interest rates no longer rise sharply in the last quarter of 2006, they have already reached a sufficiently high level to attract a good part of the capital which had previously been diverted to the South in recent years.The price trend for basic commodities has been obviously influenced by the level of economic activity. It is necessary to be cautious with the forecasts of growth for 2007-2008. Having said this, a reduction of growth in the United States cannot be excluded. If it happens, it will be interesting to see the impact on growth in Western Europe and Japan. If it also slows down in these two regions, there is likely to be a decrease in the sale of raw materials as well as in

prices, unless China’s activity is maintained over an extended period of time, which would be surprising.Evidently, China is going through a stage of over-investment. The rate of return is generally quite low. Its activity is largely dependent upon its exports. The consumption of Chinese households is growing but only a small minority is benefiting from this domestic consumption. In short, the domestic market is unlikely to replace the external market as the outlet for Chinese production unless the Chinese authorities make a radical turnaround in their model of development (increase in salaries, a radical strengthening of the domestic market, looking for real constructive cooperation with other countries of the South), which, unfortunately, appears to be very unlikely. The struggles in which the Chinese workers are engaged – an improvement in salaries, better working conditions and a right to organisation – point objectively in the direction of a radical change in the model of development, but it is difficult to see how they could obtain satisfaction in the short term.There is a risk that the evolution of the Chinese economy will lead in the opposite direction. Let me explain. If a reduction in economic activity in the United States is not counterbalanced with sufficiently strong growth in Europe and Japan, the economic activity in China will certainly slow down. Given that the rate of return is low and the corporate debt level is quite high, it is probable that a reduction in activity will provoke significant reductions in personnel and business failure. Such a situation would not create conditions favourable to the Chinese workers.What I have just described is largely hypothetical and the time factor has not been specified: this evolution might play out over several years. Numerous variables are at play.For example, what is going to happen to the price of oil and gas? What will OPEC do? My impression is that the price is going to remain high, which is a good thing. But nothing is guaranteed.What is going to happen to other essential products? The price of certain products is such that we are witnessing a classic phenomenon in the evolution of capitalist economies, mines which were no longer profitable are being exploited again. Some have quite elevated investment costs. There is over-investment. This will produce a rise in supply, which will exceed demand, which will in turn result in price depreciation and corporate bankruptcy.What can stop this? Either an acceleration in the world economic growth, which is very unlikely; or the creation of a cartel made up of producing countries to plan production and limit growth in order to stabilise elevated price levels. This brings us to the need for an alternative. If governments of the South do not rise to the challenge, the situation will evolve unfavourably. One can only fear what might happen.What has just been described may also happen with the price of oil and gas. If there is a sharp decrease in the price of gas and oil, that would be disastrous for many countries of the South.Let us return to the variable “debt repayment”.Since 2003-2004, most indebted countries with middle incomes no longer find it difficult to service their debt. This is the consequence of several economic

factors: growing estimated returns thanks to the elevated price of raw materials which they export, the arrival of speculative capital in search of short-term profits notably in the stock exchanges of emerging countries, relatively low interest rates and extremely low-risk premiums in 2004-2006.All this can change within a year or a few years.The cash revenue and reserve levels can diminish, the interest rates at their height in the North can increase the servicing of the debt on the loans contracted at a variable rate, the cost of the new loans to refinance old debts is going to grow because it will be applied to a more elevated interest rate, the risk premiums can rise again.A significant number of indebted countries risk finding themselves in the situation of the cicada in the fable of La Fontaine. At the end of the summer, when the economic environment deteriorates, they risk finding themselves in payment difficulties and their exchange reserves risk melting like snow in the sun.It is a further argument for putting an alternative policy with respect to establishing a common front of indebted countries for the non-payment of the debt (see points 3 and 4) into practice.Before arriving at conclusions, I would like to leave you some impressions and additional information.

• For the last 20 years, the United States has succeeded in overcoming their crisis by applying a very interventionist policy and in making other countries pay a part of the cost for extricating itself out of the crisis. Let us not forget that the working classes of the USA have gone to great expense in extricating themselves out of the crisis (for example, through massive layoffs in 2001-2002, a very strong growth in the casualisation of labour, and a growth in the number of the working poor, a reduction in real salaries and their share in the national revenue). Nevertheless, the US economy has not been cleaned up from the capitalist point of view (it has a relatively weak growth rate, a relatively low profit rate). It will certainly have to go through a deeper purge, which implies a devaluation/destruction of capital (a significant number of bankruptcies). When will this purge happen? No-one can reasonably predict a date, but it is unlikely to be avoidable from the point of view of the capitalist logic itself. I want to make it clear that a purge is not synonymous with a collapse. On the contrary, it is arguably the best mechanism that capitalism has at its disposal to regain a durable elevated rate of profit and strong growth.

• The domestic debt of developing countries has grown sharply during the last three years in absolute figures. The soar of the national debt is particularly high and disquieting in a large number of middle-income countries. According to the World Bank, the national debt of indebted countries went from $1.3 trillion in 1997 to $3.5 trillion in September 2005.8

• The private banks of the North, after ceasing to give bank loans to the indebted countries in 2001-2002, have resumed issuing loans as of 2003.

8 World Bank, Global Development Finance 2006, p. 44

In 2005, the number of issued loans increased from 74 per cent in relation to 2004. Altogether 1,261 loan contracts have been signed, principally in the areas of oil and gas.

• In 2005, approximately 40 developing countries issued new bonds on the international financial markets. The bonds issued by 10 of those countries (Brazil, China, Hungary, India, Indonesia, Mexico, Poland, Russia, Turkey and Venezuela) represent 69 per cent of the total issued by the 40 countries. Let us look at bonds issued in Euros and how sharply they have grown at the global level during recent years. In 2000 the securities issued in Euros represented 29.8 per cent of all bonds issued. In 2005 they represented 45.4 per cent. Bonds issued in dollars, which represented 51.9 per cent in 2000, represented nothing more than 38.3 per cent in 2005.9

• In 2005, a large part of foreign direct investment was linked to privatisations/acquisitions/mergers which created no additional employment. In certain cases value and employment were destroyed.

• A new type of derivative has been launched in the market in recent years. It is known as Credit Default Swaps. The buyer of the bonds issued by companies or states pays an insurance against the risk of non-payment. This market which has literally exploded over the recent years on the global scale represents a notional (virtual) value of $7.3 trillioa, of which less than 5 per cent involves developing countries. According to the World Bank and the financial press, it is difficult to measure the strength of this type of derivative. Where there is a general difficulty with the repayment of debt, it will be difficult for the insurers to keep their commitment without risking bankruptcy.10

• The institutional investors, namely, the pension funds of the most industrialised countries, have invested a total of $46 trillion (i.e., an amount largely greater than the sum total of the entire world’s GDP), of which $20.7 trillion is controlled by US companies.11 It would be enough that they dedicate a tiny fraction of these investments to buying shares in the stock markets of the emerging countries or to buying currency, to increase their value (which is what happened in 2005). It would be enough for this same tiny fraction to be withdrawn to provoke a drop in the stock market in Sao Paulo or in Mumbai (which is what happened in May 2006), or even a reduction in the value of the currency of Thailand or Argentina. If governments do not take measures to control the movement of capital as well as foreign exchange, they are at the mercy of speculative attacks of the amplitude of those in the second half of the 1990s.

• The capitalists of the South increased capital flight in 2005. Even though the flight represented $172 billion in 2004, they rose to $318 billion in 2005.12

• Over the last few years, the South-South flow was developed principally under the management of capitalist firms of the South. For example, the flow in foreign direct investments between countries of the South went

9 World Bank, Global Development Finance 2006, p. 5910 World Bank, Global Development Finance 2006, p. 6211 World Bank, Global Development Finance 2006, p. 5312 World Bank, Global Development Finance 2006, p. 151

from $14 billion in 1995 to $47 billion in 2003. In 2003, these flows in South-South investment represented 36.6 per cent of the total foreign investment flows going to the South. Bank loans from the private banks of the South to other countries and businesses of the South went from $0.7 billion in 1985 to $6.2 billion in 2005. For the first time in its history, the World Bank dedicated an entire chapter in its annual report Global Development Finance to the flow of South-South capital13. That deserves a specific contribution on the subject. The South-South flow (with some exceptions linked to Venezuelan initiatives) completely follows the logic of capitalist globalisation. Chinese firms invest largely in Africa and in Latin America to ensure control of the source of raw materials. Petrobras is doing exactly the same thing in Bolivia, Nigeria and Angola. It is the same for the Russian firms. Elsewhere, the World Bank is proposing to the governments of the South to recycle a part of its enormous foreign exchange reserves in lending them to private local investors. In short, the World Bank is itself on the offensive on the theme of the Bank of the South by providing it with content in accordance with strengthening capitalism at the global level. Rather than proposing to the governments of the South that they equip themselves with South-South public instruments for financing their needs (and those, as a priority, of their people), the World Bank proposes to entrust the reserves to private capital of the South. That goes without saying but that brings us to the contents of the proposed the Bank of the South, which is discussed elsewhere in this text.

Conclusion

A new historical opportunity is being presented to people and governments in so-called developing countries to adopt a liberating initiative with international scope. The economic situation favouring strong initiatives will not be extended. Inaction or strategic errors will lead to an unfavourable reversal.If the opportunity is not seized (and it is very probable that it will not be seized), history will follow its course and people will be struggling under even more severe conditions than now. The battle will continue and faced with the cynical policies of their governments, citizens will become radical and claw their way to the top of freedom without God or Supreme Saviour. This is called revolution.

Translated by Gillian Sloane-Seale, Karin Baasch, Mike Williams and Jean-Pierre Schermann, Coorditrad volunteers.

13 World Bank, Global Development Finance 2006, chapter 4, p. 107-136

The Bank of the South:

a review of what is at stake14

Eric Toussaint

Two opposite tendencies at play in Latin America

On one hand, the United States government and the EU countries make bilateral free-trade agreements with the countries of the region – an arrangement which benefits their own companies. These companies have taken advantage of the massive privatisations of the 1980s and 1990s to take control of numerous economic sectors that are vital for development. Capital flows go out of the region to the most industrialised countries via debt servicing, repatriation of profits made by the trans-national corporations of the North, and flight of capital organised by Latin-American capitalists. The internal public debt is on the rise, living conditions are stagnating and the people most exploited are further impoverished, despite the mitigating effect of certain public aid programmes (in Brazil, Argentina, Venezuela, Ecuador).On the other hand, a number of popular mobilisations in the last few years has led to the election of new governments, some of which are trying to reverse the course of the last 30 years and counteract the first tendency described above by re-establishing public control over the country’s natural resources (Venezuela, Bolivia, Ecuador), over other key sectors of the economy (Venezuela) and by foiling certain strategic projects of the United States (failure of the FTAA in November 2005 and difficulty in implementing Plan Colombia due to the opposition of Venezuela, Ecuador15 and Bolivia). Certain governments undertake social reforms by following a re-distributive policy. Venezuela since 1999, Bolivia since 2006, and shortly afterwards Ecuador, decided to modify their constitutions in a democratic direction. The Bolivarian Alternative for Latin America and the Caribbean (ALBA) brings together Venezuela, Bolivia, Cuba, Haiti, Nicaragua and, as an observer, Ecuador.The creation of a Bank of the South scheduled for the end of 2007 is the kingpin of this counter-tendency.

Preparations for the Bank of the South

By February 2007, Argentina and Venezuela, joined by Bolivia, had reached an agreement for creating the Bank of the South. Very soon Ecuador, Paraguay, and more recently, Brazil (since 3 May) officially joined these three countries. The text submitted for ministerial discussion, before Ecuador intervened with an original proposal, was dated 29 March and took the form of a proposal put forward by Argentina and Venezuela. Ricardo Patiño, the finance minister of Ecuador, and four members of his Cabinet drew up the Ecuadorian proposal.

14 Written in May 2007.15 Rafael Correa, the Ecuadorian President, has announced that he will not renew the lease on the US military base at Manta in 2009 when the present one runs out.

Three non-Ecuadorians, Jorge Marchini16, Oscar Ugarteche17 and myself, were involved in the process. On 30 April, the finance minister, accompanied by his Cabinet and myself, submitted this proposal (produced over some 15 hours on 27, 28 and 29 April) to President Correa. He ratified this proposal, which was immediately sent to the representatives of the other countries. The ministerial meeting, held on 3 May in Quito and chaired by the President of Ecuador, lasted some four to five hours. I was invited to be a part of the Ecuadorian delegation. The other countries were represented by their finance ministers, and, as a general rule, by a deputy minister or a Cabinet member.The focus is now on a presidential summit, due to take place before the end of June as per the Quito Declaration. This summit will adopt a text defining the Bank of the South and proclaiming the final creation of this institution.

What was the orientation of the text drafted by Argentina and Venezuela ?

The initial text drawn up by Argentina and Venezuela is in its way both surprising and shocking since the initial diagnosis includes considerations that are completely in line with the neo-liberal view, the view of the World Bank (WB), the view of dominant economic thinking, and the view of the capitalist class regarding the reasons for Latin America’s deficiencies. The text observes that under-development of the financial markets is the main cause of Latin America’s problems. In its general considerations, it specifies the need to promote the establishment of multinational corporations with regional capital, without mentioning that they must also be public. Knowing Argentina’s leanings, the fact that nothing is said about the corporations being public is as good as saying that they are private, or that they are mixed. The general considerations also make it clear that this means promoting the development of capital markets and regional financial markets.Second element: the project proposes the creation of a Bank of the South, which would operate both as a development bank and a monetary stabilisation fund. A monetary stabilisation fund means a regional organisation that comes to the aid of the countries of the region when they are faced, for example, with hostile takeovers. They need important exchange reserves in order to protect themselves from these speculative attacks. The joint Argentine-Venezuelan project proposed only a single organisation called the Bank of the South, which can operate like a development bank and a monetary fund at the same time. There is nothing shocking about this. What is shocking is that once again the declared purpose is to develop capital markets, to promote industry, and to encourage the development of infrastructure, energy and trade. Environmental protection or cultural and educational policies are left out of the picture. Considering the initial diagnosis, it is to be feared that the recommended macro-economic policies will remain within the logic of structural adjustment and orthodox

16 Member of the Leftist Economists of Argentina (EDI), member of the International Debt Observatory (OID) and Professor of Economics at the University of Buenos Aires (UBA).17 Professor of Economics at the University of Mexico, member of Latindadd and OID.

monetarist policies. It is also said that the Bank will borrow on the financial markets.The important and shocking third element: the proposal from Argentina and Venezuela envisages voting rights according to each country’s contribution. Thus, if Argentina contributes three times more than Ecuador or Paraguay, Argentina’s voting rights will be three times more. This is precisely the system of voting rights prevailing in the WB, the IMF and the IABD (Inter-American Bank of Development). An anti-democratic criterion is proposed for this new institution, thus creating, at the operational level, an exact replica of what is severely criticised elsewhere. As regards membership, the Argentine and Venezuelan proposal evokes the possibility of participation in the Bank by African and Asian states, which will enjoy observer status. This is positive because it expands the scope of the South. But, while it has not been explicitly stated, there is a likelihood that a place will also be granted to multilateral financial institutions. It has been learned from other sources that in the discussions of March and April 2007, certain members of the Cabinet, particularly from Argentina, envisaged that the WB and the IABD could be shareholders (without voting rights) of the Bank of the South. And to crown it all, the last part, chapter 8, entitled "Immunity, Exemption and Privilege", is exactly based on the statutes of the WB, the IMF and the IABD. Article 42 of this project states that records are inviolable, that is to say that audits of the Bank of the South will not be possible. It is also stated that the bank’s personnel, directors, officials and employees are tax-exempt. Article 45 states – and here we have a simple copy-paste of WB and IMF statutes – that there is total immunity regarding the legal and administrative procedures relating to acts committed by civil servants in the context of their mission.This project came out of the meetings of a technical commission and would have been the only project submitted for discussion had Ecuador not decided to produce a new proposal. The text proposed by Argentina and Venezuela is completely consistent with the prevailing direction and policy of the Kirchner government in Argentina; on the other hand it is completely inconsistent with the positions adopted by Venezuela. A plausible explanation: the Argentine and Venezuelans sherpas who created this text are technicians trained in Anglo-Saxon universities, and who are favourable to the dominant neo-liberal economy. One can only hope that this text was not really read, approved and adopted by the Venezuelan President.

What does Ecuador’s proposal contain, compared to the Argentine-Venezuelan text ?

Ecuador proposes three instruments: a Regional Monetary Fund, a Bank of the South and creation of a common currency of the South. Ecuador proposes a shift towards a South American currency, which would allow the countries to trade between themselves in their own currency, whereas today trade between Latin American countries is conducted primarily in dollars. This third instrument was immediately accepted by Argentina, Venezuela, Brazil, Paraguay and Bolivia.

The text proposed by Ecuador starts with some important general considerations. The first consideration states that the two organisations - the Southern Monetary Fund and the Bank of the South, or the single organisation if there is only a Bank of the South, must guarantee the effective application of human rights and must allow for the application of international agreements, criteria and treaties which relate to economic, social and cultural rights. It is an approach expressed in terms of human rights. It means setting up economic tools to be used for ensuring the application of fundamental human rights. Another basic consideration is that neo-liberal policies of the WB and the IMF type (and this is said implicitly) have led to a deterioration in the living conditions of large sections of populations, to an increase in inequalities in the distribution of income and resources, to a loss of control by the countries of the region over their natural resources, and to a strengthening of the migratory trend. To counter all this, public policies must be implemented to reinforce public structures, enabling countries to regain control of their natural resources and their regional productive apparatus, a large part of which has passed into the hands of trans-national companies in the North.

What other original proposals have been made by Ecuador regarding the Bank of the South ?

It is important that these two organisations should not be indebted to the capital markets, as the World Bank and the IABD are. It should be noted that the WB, which is indebted to the capital markets, very often justifies its neo-liberal policy by explaining that it is fundamental to maintaining its AAA rating as a borrowing bank in the capital market, allowing it to borrow at the lowest rate. If we want to follow policies where profitability is not the first concern, we must not depend on this rating. This is why the capital of the Bank of the South, which enables it to grant loans, must come from four sources: 1) a capital contribution from the member countries; 2) the Bank’s borrowing from member countries (contracts that do not depend upon bonds issued on regional or Northern capital markets); 3) common global taxes, namely various types of global taxes to be applied by the member countries, with receipts being transmitted to the development bank, like a Tobin tax, a tax on income repatriated by the trans-national companies, a tax for environmental protection, etc; 4) donations.If a Southern Monetary Fund is set up, it is planned that the money used to aid needy countries would be part of the reserves of each member state which are put at the Fund’s disposal in case of need. When necessary, the Fund can call on 20 per cent of the exchange reserves of all the member countries. For example, if Bolivia is attacked by speculators, immediately the Fund asks the central banks of Brazil, Argentina, Venezuela, Paraguay and Ecuador to transfer, in a few hours, 20 per cent of their reserves to defend Bolivia. It is important to note that the funds are not permanently blocked; they are pooled only in the event of need.Another major element in the general principles of the Ecuadorian proposal is that the interlocutors of the Bank of the South or the Fund should be member

states. The idea is to grant loans to public companies, small producers, the co-operative sector, indigenous communities, etc. Theoretically, it should not grant loans to large trans-national companies of the South, such as those that exist in South America: Petrobras, the large private-public Brazilian company; PDVSA, the Venezuelan oil company; Techint, an Argentine private company…. Theoretically, a loan cannot be granted to these companies; it has to be to the public sector, the small producers, the local communities, municipalities, provinces, etc. The money should be lent to them via the member states. The idea is to stop the Bank of the South from becoming a “mastodon”. One must avoid what happens with the WB: it has nearly 13,000 employees, who bypass central government with multiple missions in every corner of the countries in the South. These missions purposely weaken the authorities. The idea is to have a Bank of the South structure, with lean staffing and with the states as the representatives/negotiators. The objective is that the states, in accordance with the Bank’s orientation, lend mainly to those who require it, with a view to finding an alternative model, respectful of the environment, seeking to promote social justice and assisting those who do not have easy access to capital, therefore by definition not primarily to large private companies.

Other differences between Ecuador’s project and the Argentine-Venezuelan text

The Ecuadorian project envisages that each member state will set up a mechanism so that, each year, it will be accountable for the operation and the activity of the Bank and the Fund. This mechanism must include a public parliamentary discussion. Instead of stating that records are inviolable, the principle is that these records are part of the public domain. There can be temporary exceptions, certain decisions of the Fund being provisionally classified as confidential when relating to hostile bids. The officials of the Bank of the South and the Fund are subject to tax.There is no immunity: it is stated that the officials of the Bank and the Fund will be answerable to law for their actions. The Bank and the Fund are defined as moral identities, and can be prosecuted.

What can be assessed from the ministerial meeting of 3 May ?

First of all, the outstanding fact is that Brazil, which up to then had been reluctant to join the Bank, affirmed that it adhered to the idea of a Bank of the South. It should however be noted that Brazil, in accordance with the economic and social policy and the foreign policies of the Lula government, sees this Bank of the South essentially as an instrument of commercial policy, speaks primarily in terms of economic bloc and uncritically accepts the European Union (EU) as its model. For the CADTM and for a series of social movements – European or otherwise – the EU in its present state is absolutely not a model. Of course, there are important positive aspects: the fact of having a common currency, a space

where internal borders have been removed and where people can move extensively. But it is certain that the current model of the EU supports the application of neo-liberal policies, and upholds the movement of capital more than the movement of people, since among the new member states, in the east, there are certain restrictions on the movement of citizens. The EU maintains fierce competition among workers. Within the EU framework, working conditions and employers’ obligations to workers have not been standardised upwards. Where favourable systems of social security are still to be found, for example in Hungary, the tendency is to privatise in exchange for participation in the EU.This uncritical vision of the EU, as expressed by Brazil, is undoubtedly shared by other Latin American governments: either they have illusions about the EU, or, more probably, and in full knowledge of the facts, they find that Europe is doing very well in its current state, and therefore prefer a model which remains well aligned to neo-liberal policies.

What to think of Brazil’s accession to the Bank of the South ?

Given the strength of the Brazilian economy in Latin America, Brazil’s participation gives the Bank far greater initial impetus. The problem with Brazil is the orientation of the Lula government and the economic and social model that it practises. It is clear that Brazil’s integration into the Bank of the South will lead the Bank to adopt a much more traditional pattern, not too far removed from neo-liberalism, while if Brazil did not participate, it would be easier to reach a definition closer to the alternative model that we advocate. Brazil has joined the Bank of the South because it cannot be absent from it: if the foundations of the Bank of the South had not been laid on the initiative of Venezuela and Argentina, Brazil would never have given it any thought. But to maintain its regional economic dominance Brazil cannot stay away from the Bank of the South. If we look at it from the viewpoint of Ecuador, Venezuela and Bolivia, it is easy to understand why these governments are interested in having Brazil in the Bank of the South, because it is an important economic power and because a series of progressive governments in the region wish to maintain good relations with Brazil so that it does not strengthen its ties with the United States, which would weaken the region vis-à-vis American aggressiveness. A truly diplomatic and geo-strategic game is being played. In a more ideal world, the Brazilian government would adopt a truly leftist policy – an alternative to its alliance with the US and its support for the agro-exporting industry and for an export-based policy which is set on conquering the markets of the region. But that is a far cry from reality.

Which trend will predominate on the regional scale ?

The current government of Paraguay is a right-wing one, and this government could be replaced after this year’s presidential elections. A Left-wing priest may be the winner in these elections. As for Argentina, there is anti-IMF and anti-neo-liberal rhetoric but the Argentine government is oriented towards

strengthening capitalism in Argentina. In fact, two great initiatives are at work today in Latin America. On the one hand we have the Bank of the South and MERCOSUR which is expanding. It initially included Brazil, Argentina, Paraguay and Uruguay. Venezuela, which wants a stronger regional alliance in opposition to the US proposal of FTAA, has joined MERCOSUR. Bolivia did so too, while Ecuador is there as an observer. This makes an economic bloc defined mainly by commercial and economic relations and dominated by a capitalist model. This bloc facilitates trade and promotes a certain type of regional integration.Then there is another initiative, ALBA, or the Bolivarian Alternative for Latin America and the Caribbean, in which Venezuela and Bolivia are members. Cuba, Haiti and Nicaragua have also joined, with Ecuador as an observer. A meeting of ALBA was held in Venezuela five days prior to the Quito meeting on the Bank of the South. ALBA is a political group with Cuba-Venezuela-Bolivia as its central axis. The governments of these three countries state explicitly that their objective is a “Socialism of the 21st century” – an anti-capitalist and anti-imperialist orientation, aiming at solidarity among the people.So here we have a highly specific situation in Latin America and the Caribbean region, with two types of projects, partly competing with each other, but which nevertheless coexist, since several countries are members of both. Venezuela and Bolivia are in MERCOSUR and ALBA; on the other hand Brazil is not in ALBA, because ALBA clearly has a more Left-wing orientation than MERCOSUR, and also because Cuba is in it. Brazil, without being opposed to Cuba, clearly affirms its friendship with the Washington government.The Bank of the South is placed between the two, though it is closer to an extended MERCOSUR than to ALBA. It does not include key members of ALBA, starting with Cuba, but also Haiti and Nicaragua. Of course, it would be logical for the Bank of the South to extend to the Caribbean region and Central America in future, and why not to Mexico if there is a change of government, and to develop privileged relations with the other continents of developing countries, namely Africa and Asia. MERCOSUR is primarily an economic bloc, largely dominated by Brazil. In fact Brazil is a “sub-imperialistic” power, an economic powerhouse in the area, which dominates its economic partners. As for Argentina, Venezuela, Ecuador or Paraguay, these countries have a negative trade balance with Brazil, because Brazil exports to them much more than they export to Brazil. Brazil is endowed with trans-national corporations like Petrobras, which dominate the key economic sectors of its neighbours. Petrobras, together with other trans-national companies, dominates Bolivian gas and oil; other Brazilian companies dominate Paraguay. MERCOSUR, dominated by Brazil and Argentina, somewhat resembles the EU dominated by the Franco-German-British trio, with a dominant neo-liberal capitalistic streak, while ALBA is a project that is more political than economic, based more on exchanges such as barters and donations. Venezuela donates handsomely to Nicaragua, Bolivia and Haiti. ALBA seems to me a really interesting project. What will be the determining factors? The answer lies in the policy directions taken by the governments and the struggle of the social movements.

Ecuador has a radical orientation, supporting an income distribution policy that favours the most oppressed. Ecuador will not renew its lease for the US military base in Manta as from 2009. Ecuador questions the type of oil operations that is destroying part of its territory in Amazonia, for example. We can see that Ecuador’s policy, from this point of view, is closer to Venezuela and Bolivia than to Brazil. In Paraguay, there may be a change of President towards the Left. We should also not forget the great mobilisations in Brazil, particularly that of the Movement of Landless Peasants (MST), which reinforces action for a true land reform, in contradiction with Lula’s policy. In the coming months and years, we may see even stronger social movement and a reinforcement of the ALBA project. The orientation of the Bank of the South will depend on the governments that support its creation. Even if there is reason to fear that the orientation advanced by Brazil and Argentina will prevail, the field is still open. It is now that we must mobilise all our efforts so that the Bank of the South project fulfils all the hopes we place in it.

Debt: Ecuador at a historic turning point

Eric Toussaint - Damien Millet

The response of Rafael Correa's government to the debt issue

Ecuador is the country in South America that has to dedicate the highest percentage of its budget to servicing its debt. The contribution expected in 2007 is unsustainable since the foreseeable repayments amount to about US$ 2,800 million (i.e., 38 per cent of its budget).18 President Rafael Correa's new government, established since early January, has already been forced to pay substantial amounts to its creditors (nearly US$ 1,000 million) and consequently is attempting to staunch the haemorrhage in order to be able to serve its people. The new government intends to use the money which thus becomes available in order to improve the social conditions of the population, particularly in the area of health care. Already some 600 new health workers have been employed in order to immediately improve the quality of health services to those members of the population who are most in need. It aims at improvements in other areas too. This radical stance of President Correa and Ricardo Patino, his minister for economy and finances, has led to various attempts at destabilising the current government by local and international financial groups as well as by Right-wing parties. Anything goes in order to harm them.

A process is being set up to cancel the debt

The new government aims to identify those elements of the country’s debt which incontestably can be denounced and repudiated. Starting from the results produced by the audit commission of the former government, a new audit commission is being set up which should take investigations much further and consists of both national and international experts. Ricardo Patino's aim is to set up a commission consisting of at least six experts, three of them international personalities.19 The commission would rely on a research group of several dozen people who would identify illegitimate debts, whether to multilateral creditors (such as the WB, the IMF, the Inter American Development Bank) or to bilateral creditors (mainly Spain, Japan, Brazil and Italy). There are in fact over 15 bilateral creditors for a total US$ 2 billion, i.e., 20 per cent of Ecuador's public external debt. The government would also wish to audit debts held by private creditors in the form of bonds so as to determine which part is illegitimate and warrants cancellation. The same applies to public internal debt for which cancellation measures are already being implemented.The current Ecuadorian government wants to be quick about it. This is why international experts on the debt issue are ready to go back to Ecuador as soon as possible. Anyway, several ministers have in-depth knowledge of the debt issue 18 Total social spending is only 22 per cent of the country's budget, unless the government manages to radically reduce the percentage devoted to the debt and change the situation.19 Eric Toussaint might be one of them. He was invited, and he accepted. It still has to be confirmed by presidential decree. See the daily paper El Universo, Quito, sábado 28 abril 2007, p. 5. www.eluniverso.com

and many citizens’ associations have been working for years on auditing the debt. This is why the Ecuadorian authorities are ready to take measures based on well-documented research.

Which way forward ?

Unilateral action is necessary because were Ecuador to wait for the international community to set up an international settlement court, it would take years before any outcome was reached. The situation is critical. In so far as debt issues are concerned, unilateral action is legitimate and far more efficient. It is preferable to take the sovereign decision to denounce and stop servicing some debts even if it were subsequently decided to take up negotiations again with some creditors on some of them. In this case the government would be in the favourable position since it is the creditors who would be wanting payment to be resumed and would be more inclined to talk and tune down their demands. Ecuador thus has excellent reasons to undertake a unilateral action and decide on the basis of an audit that a large part of the external debt is illegitimate. A sovereign decision of the Quito authorities to stop servicing debts would be based on various arguments of internal and international law.

What are the arguments in favour of cancelling the debts ?

Many contracts include usurious interest rates. Ecuador has to pay for projects that were never carried out or the outcome of which does not meet requirements. Debts were contracted to pay back debts contracted by dictatorships in the 1970s. A detailed analysis of the projects on which those debts are based thus yields several reasons for cancellation. Actually this concerns most of Ecuador's debt.We should now establish which debts can be called off and move on to the next stage, i.e., suspending payments. This could be done in the coming months, as early as summer 2007, the government and the President making the final decision.

How is the new audit commission going to proceed ?

The transparency policies of the new government mean that this newly created auditing commission will make all its results public. The auditing commission's offices will be open, accessible to any member of the public who would like to contribute to their work or could testify in order to identify embezzlements, projects that were not carried out or various types of fraud which Ecuadorian citizens have been victim to while being expected to pay the resulting debt.In accordance with the transparency policy the committee will open a website on which most contracts will be displayed. If this stage is carried out, CADTM along with other associations demanding the cancellation of the debt will launch an international call for witnesses. It is likely that some former World Bank, IDB or IMF consultants or officials, creditors, or agents of private creditors will

be ready to bring up dubious, illegal or criminal practices among creditors so as to help the Ecuadorian authorities not to pay their illegitimate debt.

An important testimony : John Perkins

This is for instance the case of John Perkins, whose book, The Confessions of an Economic Hit Man,20 has turned into an important event. He clearly explains what his mission was, namely “encourage leaders of various countries to become part of a wide network promoting the United States’ trade interests. At the end of the day, those leaders are riddled with debts, which make sure that they remain loyal. We can call on them for our own political, economic or military projects while they comfort their political position as they create industrial areas, power plants and airports for their populations. The shareholders of US engineering and construction companies thus become incredibly rich”. He happened to work in Ecuador for President Jaime Roldos: “Jaime Roldos was moving forward. He took his campaign promises seriously and he was launching an all-out attack on the oil companies. [...] The oil companies reacted predictably – they pulled out all the stops. [...] They tried to paint the first democratically elected president of Ecuador in modern times as another Castro. But Roldos would not cave in to intimidation. [...] He delivered a major speech at the Atahualpa Olympic Stadium in Quito and then headed off to a small community in southern Ecuador. He died there in a fiery airplane crash, on May 24, 1981.” An accident, really, as in the case of the President of Panama, Omar Torrijos, at the same time? Perkins never believed there was anything accidental about it: “They were assassinated because they opposed that fraternity of corporate government, and banking heads whose goal is global empire. We Economic Hit Men failed to bring Roldos and Torrijos around, and the other type of hit men, the CIA-sanctioned jackals who were always right behind us, stepped in.” The conclusion is obvious: “Ecuador is awash in foreign debt and must devote an inordinate share of its national budget to paying this off; as a consequence the only way Ecuador can buy down its foreign obligations is by selling its rain forests to the oil companies”. This means that utterly disregarding Ecuadorian sovereignty “the global empire demands its pound of flesh in the form of oil concessions….” John Perkins was back in Ecuador on 22 May 2007 to apologise to the Ecuadorian people. Other officials involved in the country's illegitimate debt might wish to follow suit.

Action is also needed in the North

In order to complete the process, auditing committees need to be created to investigate the debt repayments claimed by the governments of the North from countries in the South. Belgium for instance is demanding US$ 16 million from Ecuador, most of which was loaned within tied-aid projects. Even a cursory analysis of those projects shows that Belgium's loans to Ecuador were conditional upon Ecuador buying equipment, more specifically electrical

20 San Francisco, Berrett-Koehler Publishers, 2004.

equipment, from Belgian companies. However, Belgium itself claims that it relinquished any tied-aid policies years ago as being illegitimate. We the CADTM (Committee for the Abolition of the Third World Debt – www.cadtm.org), along with the CNCD (Centre National de Coopération au Développement) and other NGOs will produce a detailed analysis of the contracts signed between Ecuador and Belgium so as to determine whether Belgium can still legitimately demand any payment or whether the debt should be purely and simply cancelled, as Norway did in 2006, notably for five fishing ships it sold Ecuador over 20 years ago at a time when the transaction did more good to the Norwegian naval industry than to Ecuador's economy.

Translated by Christine Pagnoulle

The International Situation and the Debt:

The new challenges facing CADTM

Eric Toussaint

Increase in foreign exchange reserves

Since 2004, the economic situation has been characterised by the high price of raw materials and a number of agricultural products. This has allowed a large number of developing countries to increase their export revenues and accumulate significant foreign exchange reserves, especially countries which export oil, natural gas and minerals. Some agricultural exporters have also benefited from this favourable situation. However, not all the developing countries are included in this scenario; some sub-Saharan African States have seen their situation take a turn for the worse. In 2007, the developing countries together hold over 3 trillion dollars21 in foreign exchange reserves while the industrialised countries hold only half this sum. This favourable situation has been seized by a significant number of governments to pay off in advance all or part of their debts to the IMF, the World Bank, the Paris Club and private banks. Some have created development funds, into which they can place some of their foreign exchange reserves, for financing social and infrastructure projects.22 Seven South American countries (Argentina, Bolivia, Brazil, Ecuador, Paraguay, Uruguay and Venezuela) are negotiating the creation of a Bank of the South to finance their regional integration and social projects. Some among them are also contemplating the creation of the Bank of ALBA (Cuba, Haiti, Nicaragua and Venezuela). The signs of a divorce from the World Bank and the IMF are increasing: Ecuador expelled the World Bank representative at the end of April 2007, Venezuela is thinking of leaving the World Bank and the IMF, Bolivia does not recognise the authority of ICSID (International Centre for Settlement of Investment Disputes, a subsidiary of the World Bank) anymore.

Crisis of legitimacy for the World Bank and the IMF

Meanwhile, the World Bank and the IMF are suffering a crisis of legitimacy. Paul Wolfowitz, the president of the World Bank since 2005, was forced to resign in June 2007 on charges of nepotism. While many member countries of the World Bank argued for the appointment of a citizen from the South to the presidency, the US President has chosen a US citizen for the eleventh time to head the Bank. At the beginning of July, it was the turn of the managing director of the IMF, the European Rodrigo de Rato, to unexpectedly announce his 21 The value of foreign exchange reserves is calculated in dollars, the main international currency of foreign exchange reserves, although in fact, the reserves are also made up of other currencies: euros, yens, sterling, Swiss francs…. Worldwide reserves for 2007 are 2/3 in dollars, ¼ in euros and the rest in other strong currencies (See Bank for International Settlements, Annual Report 2007, Bale, p.97).22 This is the case of Venezuela, Russia and China. The Norwegian government has done the same thing to maximise the returns on petroleum (See Bank for International Settlements, ibid, p. 104).

resignation. The European states agreed to replace him with a Frenchman, Dominique Strauss Kahn. These recent events confirm, in the eyes of the population of developing countries, that the US and European governments want to keep total control of the two multilateral financial institutions, while another European, Pascal Lamy, presides over the WTO. In brief, both the circumstances of Wolfowitz’s resignation and the appointments of the new heads of the financial institutions responsible for the orientation of globalisation, demonstrate to the governments and populations of the whole world that good governance becomes relative when it comes to the distribution of power at the international level.

The new international architecture and the Southern banks

This adds urgency to the need to build a new international institutional architecture which would lead to a thorough democratic reform of the United Nations and the substitution of the World Bank and the IMF by democratic institutions. Achieving the construction of this new architecture will require the creation and reinforcement of South-South regional integration, the establishment of one or several Southern Banks which would have to coordinate their actions, and the setting up of compensatory23 exchange mechanisms which are mutually beneficial between developing countries. Such exchange mechanisms have already yielded interesting results particularly in Latin America and the Caribbean: improved health care, energy security (e.g., Petrocaribe), education and information (the development of Telesur).

The debt crisis is not resolved

These new developments, important as they are, must not blind us from the reality of the debt: each year, the governments of developing countries pay over 240 billion dollars to their debtors, which is equivalent to over three times the amount they need to reach the Millennium Development Goals (MDGs). Debts to the IMF and the World Bank remain very high and, realistically, unsustainable for a considerable number of countries where the majority of the population live below the absolute poverty line. These organisations, though weakened and lacking legitimacy, pursue policies which favour the privatisation of water, electricity, health, education and culture, even though these policies are making the weak economies even more vulnerable.

Massive increase in domestic public debt

A recent development which also has to be considered is that the domestic public debt is increasing rapidly. In 1998 the internal and external debts were

23 See the types of exchanges between Bolivia, Venezuela and Cuba in 2006-2007 particularly in the area of hydrocarbons, the transfer of technology, health and education.

equal, in 2006 the domestic public debt exceeded the external debt by a factor of three!24

This phenomenon is very important: from now on, it is no longer possible to measure the level of debt of developing countries on the basis of the external debt. Most of the measures of sustainability designed by the financial institutions are obsolete. The domestic public debt must be added to the external debt to measure the impact of indebtedness on public finances and the economy. It is even more important now that an increasing part of the domestic public debt is being bought by foreign creditors.25

Increase in indebtedness of private firms

We must not lose sight of the increasing indebtedness of private firms of developing countries. Since the raw material-exporting countries are witnessing an upturn in their fortunes, the private banks of the most industrialised countries have multiplied the loans to the private companies of developing countries. The two private sectors which are indebting themselves most in developing countries are the banks and the firms dealing with hydrocarbons and raw materials. We must pay particular attention to this development: the private banks of the developing countries are borrowing from the North at low interest rates in order to lend this money on the domestic market at a higher rate. If the economic situation suffers a downturn (which is likely in the coming years), we might witness a number of bankruptcies of private banks of developing countries, just like the financial crises which hit Mexico in 1994-1995, the countries of South-East Asia and South Korea in 1997-1998, Ecuador in 1998-1999 and Argentina in 2001. Today’s private debt of banks might become tomorrow’s public debts, hence the need for control of private sector indebtedness. The same applies to the sector of hydrocarbons and minerals. Private petroleum, gas and mineral companies take out loans to increase their production capacity in order to take advantage of the high price of raw materials. If the prices drop, the investments made through borrowing might turn out not to be profit-making and the debt would become impossible to repay. It is imperative to limit and control this indebtedness.

New wave of indebtedness in the areas of extractive industries, energy mega-projects and the exploitation of tropical forests

Alongside other actors, the World Bank plays an active role in the development of mining, petroleum and natural gas projects, as well as in energy mega-projects (massive dams) and the exploitation of forests. The CADTM and other citizens’ movements have detected a number of offences in relation to these projects, from the non-respect of the rights of populations directly affected by

24 World Bank, Global Development Finance 2007, Washington DC, p. 46.25 More and more foreign investors are buying bonds issued on the public debt as they have a higher yield! In 2006, the ‘foreigners’ bought $9 billion worth of domestic bonds of the developing countries. See World Bank, Global Development Finance 2007, Washington DC, p. 46.

these developments to crimes against humanity such as the massacre at Kilwa in Katanga in 2004.26

Uncontrollable growth of Credit Default Swaps (CDS)

New financial products have become more widespread, namely the Credit Default Swaps (CDS). CDS are bought to protect against the risk of the non-payment of a debt. The market for CDS has multiplied by a factor of 11 in the last five years.27 The problem is that these insurance contracts are sold without any regulatory control from the public authorities. The existence of these CDS is encouraging companies to take increasing risks. Believing that they are protected against non-payment, the lenders give out loans without verifying the ability of the borrower to pay. However, if the international economic situation deteriorates, tens or hundreds of borrowers could suddenly become bankrupt, in which case the CDS would become valueless pieces of paper as the insurers would be incapable of honouring their engagements.

Capital flight and profit repatriation towards the North versus the movement of migrants’ remittances towards the South

Capital flight and brain drain from the developing countries to the most industrialised countries have grown over the last few years. The amount of profits repatriated towards the ‘parent company’ has multiplied by a factor of 4.5 between 2000 and 2006 (from 28 billion in 2000 to 125 billion in 2006).28

Moving in the other direction are the remittances migrants send to their native countries, which have also increased. Remittances, as the World Bank has acknowledged, are much higher than development aid.

Increase in prices of food

The price of food is rapidly increasing. This is mainly due to two factors. Firstly, there is the decision of many governments and multinational companies to develop the production of biofuels, such as ethanol which is produced from sugarcane, maize, colza or other plants. Nowadays, 20 per cent of US maize is used to produce ethanol, and 50 per cent of the sugarcane in Brazil!29 The rise in price of maize had repercussions in Mexico with the increased cost of tortillas. This is an example of the devastating effect of free-trade treaties. In fact, in 1994, a free trade agreement between the US, Canada and Mexico (NAFTA) was signed. Once NAFTA was in place, US agro-business flooded the Mexican market with cheap US maize, selling it at a price that was below the cost of production of the small Mexican farmers, thousands of whom subsequently lost their jobs (and have since tried to emigrate to their rich Northern neighbour).

26 See Myriam Bourgy, ‘Le massacre de Kilwa: Anvil Mining et l’Agence Multilatérale de garantie des investissements, complices de crimes de guerre’, in A qui profitent toutes les richesses du peuple congolais ? Pour un audit de la dette congolaise, edited by the CADTM, 2007, http://www.cadtm.org/spip.php?article234127 World Bank, Global Development Finance 2007, Washington DC, p. 83-84.28 World Bank, Global Development Finance 2007, Washington DC, p. 53. 29 World Bank, Global Development Finance 2007, Washington DC, p. 25.

Since 2006, the price of maize exported by the US has largely increased because of the demands linked to the production of ethanol. Consequently, the price of food went up in Mexico since maize is the main staple food. The Mexican peasants who used to produce the maize are not there anymore to respond to the demand. They have either sold their land and emigrated to the cities or the US, or they are crippled by debt and have difficulties to start growing crops again. A second phenomenon worsens the food situation of the poorest. The big grain companies based in the most industrialised countries with moderate climates have reduced, in 2006 and in 2007, their area of cultivation of cereals, thus causing a hike in cereal prices on the world market. This was a risky venture as it had the potential to cause severe food shortages in Africa and other continents which have along the years become net importers of cereals, since institutions such as the World Bank have encouraged them to prioritise the cultivation of tropical products (cocoa, coffee, tea, nuts, etc.). Today, the World Bank is ringing the alarm bells when it notices that cereal prices have doubled in late 2006-early 2007. The World Bank predicts the continued increase in the price of maize, wheat, rice and other staple foods as a consequence of the increase in the production of biofuels.30 Because of this, the number of people living in absolute poverty is likely to increase and a severe food crisis might occur. Moreover, the external debt of the poorest countries might equally rise due to the higher import bill for foodstuff.

Broken promises of the rich countries

The promises made by the rich countries in 2002 at the UN conference in Monterrey in terms of development have been broken.31 It is impossible to see how the rich countries, starting with G8 members, will be able to increase their aid to Africa to $50 billion before 2010 (as promised by G8 leaders at Gleneagles in 2005). To achieve this target, they will have to increase their aid budget by 16 per cent each year.

Increase in South-South loans and the increasing presence of China

Some private banks of some developing countries (China, India, Malaysia, South Africa) are increasingly granting loans to governments or other firms of developing countries. The loans of Chinese public banks to Africa are rising sharply. Between 2004 and 2006, the Chinese banks loaned 2 billion dollars to developing countries for work in the petroleum and natural gas sector.32 China, as well as India and South Africa, are in need of raw materials, and see their loans as guaranteeing that supplies continue to flow. The most vulnerable countries risk exchanging one sort of dependence on the most industrialised countries to another, which will not be necessarily better. We must also note the

30 World Bank, Global Development Finance 2007, Washington DC, p. 30-32.31 World Bank, Global Development Finance 2007, Washington DC, p. 55-56.32 World Bank, Global Development Finance 2007, Washington DC, p. 55-56.

rise of powerful private or public firms of the South (Petrobras, Petronas, PDVSA, CNOOPC, to take only oil companies as examples).

Increased spending on arms

A new arms race has started in the beginning of the 21st century under the impetus of the US. The amount spent on weapons by Washington is rising sharply and accounts for half the global spending. China will increase its spending on arms by 18 per cent in 2007. The US has recently given massive bilateral loans to its allies to spend on weapons. This threatens of a new rise in external public debt linked to buying arms.

What are the implications of the new international situation for CADTM?

The CADTM has to adapt its analysis to the new reality. For example, in the book Who owes Who? 50 questions about World Debt33 written in 2002, the authors have deliberately left out the question of domestic public debt. When they completely rewrite this reference book,34 they have to fully incorporate the growth of domestic public debt and its implications. Equally, Eric Berr and François Combarnous, the creators in 2005 of alternative ratios to those of the World Bank for the measurement of the impact of indebtedness, must take note of the new situation and adapt their tools of measurement (available on the site of the IDO – www.oid-ido.org). This will be addressed during the seminar of the IDO in Namur on 15-17 October 2007.Equally, all those who have invested themselves in the audit of the debt will have to take into account the impact of the domestic public debt. The Ecuadorian authorities have already grasped the issue. In July 2007, President Raphael Correa created a joint auditing commission for both domestic and external public debt. The CADTM, Jubilee South, Eurodad and Latindadd have been directly involved in the work of this commission,35 together with six representatives of the Ecuadorian social and citizens’ movements.An analysis of the development of the debt of private companies is also important, because if we are not careful, public finances will have to pick up the tab for any bankruptcies and non-repayments, creating an additional burden for the population. It is imperative to repudiate the idea that public debt is under control. New forms of indebtedness must be analysed as well as the new lenders.

33 Damien Millet and Eric Toussaint, Who owes Who? 50 questions about World Debt, Zedbooks, London, 2004; Debt Scam, 2003, Vak, Mumbai, http://www.cadtm.org/texte.php3?id_article=94234 It has been published in seven languages (including Arabic, Korean and Japanese) in 14 editions. Damien Millet and Eric Toussaint are currently writing a completely new version of the book, which should be published in French at the beginning of 2008.35 Eric Toussaint, who was part of the commission, was in Ecuador to work on the audit of the debt with Ecuadorian social movements, the Quito authorities and his international colleagues.

In 2008, CADTM Belgium will continue with its work, started in 2007, on the audit of the debt of Ecuador,36 the DRC, Mali and other countries where the social movements wish to start such an audit.Also in 2008, the CADTM will audit the repayments demanded by the most industrialised countries to the countries of the South, namely towards Ecuador and the DRC. The CADTM will work on this project, in close collaboration with Eurodad, the Observatory on Debt and Globalisation, ATTAC-CADTM Japan and other movements of the North who are willing to take on this task. Considering the importance of the new loans in the area of extractive industries, of energy mega-projects and forest exploitation and considering the numerous offences observed by the CADTM and other citizens’ movements, offences in which the World Bank is sometimes directly involved, the CADTM will continue its efforts to see that legal actions are brought about.In relation to the new financial architecture that is being built, we must make sure that the proposed Banks of the South respect democratic and transparent criteria (one country – one vote, no legislative immunity for the institution and its officials, access to the archives for auditing; an obligation for accountability to the parliaments and public opinion), and that their actions help to make the international treaties on fundamental human rights applicable by means of their contribution to improving the living conditions of their populations. The beneficiaries of loans or donations have to be public bodies, small producers and communities. The projects that the Bank will support must respect the environment. The Bank will have to avoid, as far as possible, financing its projects on the capital market. Together with other debt campaigns, in June 2007, the CADTM sent an open letter to the Presidents of South American countries that are uniting to create the Bank of the South.37 We must pursue this call and attentively follow the construction process of this new financial institution.The job is enormous, and the challenge gigantic. To attain these lofty ambitions, we must reinforce collaboration and create a unified action of all the organisations which work towards a just solution for the problem of debt. The international CADTM network will reinforce its collaboration with the other movements that campaign on the debt problem: Jubilee South, Eurodad, Latindadd, Afrodad and all the national organisations, whether or not they are part of an international network. The CADTM will continue to help towards the consolidation of the International Debt Observatory, which provides a common framework of reflection for all these movements. The CADTM will continue its actions in the context of the World Social Forum and the global coordination of social movements so as to guide the action of the global justice movement toward real alternatives and means of actions that are adapted to respond to the challenge of the debt and all forms of oppression.

Translated by Diren Valayden

36 See Ecuador at the cross-roads, For an integral audit of public indebtedness, CADTM, http://www.cadtm.org/spip.php?article276737 See http://www.cadtm.org/spip.php?article2720

BRICS Bank :

Is it an alternative for development finance ?

Daniel Munevar (CADTM/RMF) 27 July 2014

On July 15th, the governments of Brazil, Russia, China, India and South Africa announced the creation of a New Development Bank (NDB). According to the official press release, the main objective of the new multilateral institution is to establish an alternative to the current set of multilateral institutions as a source of development finance for emerging and developing countries (India, 2014). For this purpose, the founding members have committed to subscribe an initial contribution of USD 10 billion each, for an initial total capital of USD 50 billion. Based on this capital subscription, it is estimated that the NDB could lend up to USD 35 billion per year over the next two decades (Griffith-Jones, 2014). To place that number in perspective, the World Bank has lent on average USD 31,6 billion per year over the last 5 years (World Bank, 2014a). This makes it clear that the initial plan of the BRICS is not only to establish an alternative, but indeed a strong challenge to the World Bank.

It is precisely this potential that allows to understand the overwhelmingly positive reception that the NDB proposal has achieved (Griffith-Jones, 2014; Stiglitz, 2014; Weisbrot, 2014). Nonetheless, a comprehensive look at the context of the initiative provides a healthy dose of skepticism. Indeed, an analysis of the economic and politic realities faced by the BRICS raises serious concerns regarding the viability of the NBD. Furthermore, given their similar structure, is not unlikely that the NBD will end up experiencing the same problems, and fate, of the Bank of the South38. When it was established in 2007, this institution was heralded as a new model of development finance (Toussaint, 2008). Yet to this date it hasn't made its first official loan (Munevar, 2013).

Thus, at least three troubling parallels can be established between the NBD and the Bank of the South. First, the economic cycles of the member countries are closely aligned. As such, the institution is ill suited to face an economic downturn. Second, the economic disparities that exist between the countries will inevitably lead to struggles over the control of the resources of the bank. Third, and last, the ultimate issue has to do with the real goals that each partner assigns to the institution. As the vision regarding the role that a development bank fits within the larger policy goals of each country differs, it becomes increasingly complex to establish a unifying purpose for it. Without it is simply not possible to establish an operational institution.

Regarding the first issue, the relative economic success of the BRICS countries over the last decade has been closely associated with the economic 38 Institution created in 2007 by the governments of Argentina, Brazil, Venezuela, Bolivia, Ecuador, Uruguay and Paraguay. Its stated purpose is to finance projects that strengthen regional integration while reducing the dependence of the member countries to the World Bank and IMF.

growth of China and its impact on commodity markets. During this period, the reliance on commodity exports in general, and on Chinese demand in particular, is a key factor that allows explaining an important share of the economic growth experienced by Brazil, Russia, India and South Africa. On the first account, all of the countries experienced a significant increase in the participation of commodities in total exports (Table 1). On the second account, there has been a steady growth in the participation of China as a destination of exports, especially in the cases of Brazil and South Africa (Table 1). In addition, the economic impact of the increase in commodities demand was augmented by a positive terms of trade shock (Table 1).

Table 1 – Foreign Trade Statistics BRICS Countries

Source: World Bank (2014b), UN Commtrade.

Given this context, is worth pondering on the long-term impact of an economic slowdown in China over the performance of the BRICS countries. Since 2011, GDP growth rates in Brazil, Russia, India and South Africa has reduced quite significantly. This development has been associated with a reduction on both export demand and commodity prices, which has been in turn caused by lower growth in China (IMF, 2013, pp. 41–44). As a result, domestic economic pressures have started to build. As these countries turn their attention to deal with these issues, is unlikely they will devote the resources required for a NDB. The synchrony in the economic cycle of the BRICS is a limitation as it leaves the institution without a country that can support it during an economic downturn.

The effect that this type of limitation can have on the establishment of a new multilateral institution is clearly reflected on the difficult situation faced by the Bank of the South. As it is the case with the BRICS, the economic cycle of the founding members of the Bank of South was closely aligned and depended on the rise of commodity prices. The initial plan of the Bank was to have an operational institution by the end of 2008. Nonetheless, as the financial crisis of 2008 hit the region, those plans where shelved. As their economies came under pressure, the governments behind the Bank of the South delayed and scaled down their commitment to the integration agenda. This helps to partially explain why it took 6 years since the foundation of the Bank to have its first Council of Ministers, and 7 years for its first Council of Administration (El Pais, 2013; Nodal, 2014). In addition, as the foreign exchange struggles of Venezuela and Argentina deepen, there is still no date for the transference of the agreed initial capital contribution to the Bank. With this precedent, is not unrealistic to think the NDB could experience the same difficulties.

A second obstacle, which the NDB will have to overcome, is the power struggle over the control of the Bank. Even though each of the BRICS has committed to an equal subscription of capital it is evident that there is a significant disparity in terms of their potential contribution. For example, whereas the initial contribution for the NDB represents 20.1% of the foreign reserves of South Africa, it only equals to 0.3% of the reserves of China39. This disparity explains why despite the large scale of the initiative, the countries have only committed to transfer their contribution to the bank over a period of 7 years, with annual average payments of USD 285 million (Chacko, 2014). Nonetheless, given these differences, eventually China will start exerting their economic power in return for a greater degree of control over the activities of the NDB.

The problem is then, that instead of creating a new structure of power, where countries are given equal representation despite the differences in their economic contributions, the NDB will end up emulating the current structure of the World Bank. The difference would be that whereas the former organization would be controlled by China, the latter would remain under the control of the US. As a consequence, the problems in terms of accountability and political influence that have plagued the history of the World Bank would simply be replicated by the NBD.

The Bank of the South faced a similar problem regarding the control of the institution. On the one hand, Venezuela supported a “one country, one vote” principle, in order to ensure that the smaller members of the institution would have a say in its operations. On the other, both Argentina and Brazil supported a traditional multilateral bank model, where the control over the activities of the bank increased with the amount of resources devoted to it (Ortiz & Ugarteche, 2008). As the discussions on the Bank stalled, Brazil gradually increased the resources devoted to its own development bank, the BNDES. Indeed, since 2008, Brazil has used the BNDES as a strategic tool to support the expansion of Brazilian corporations in the Latin America region (Zibechi, 2012, pp. 176–183). Thus, faced with the choice of supporting an organization in which its partners could challenge its control of the resources or funding its own development bank, Brazil end up choosing the latter. It wouldn't be a surprise then if either Brazil or China simply retort to the use of their own development banks in case they become displeased with the distribution of power within the NDB.

The third and final issue has to do with an agreement on the ultimate goal of the NDB. Is it simply a tool to mobilize resources for infrastructure and sustainable development projects as it was officially announced? Or do the founding members have ulterior objectives behind the NDB? Recent experience shows that both China and Brazil have learned that a development banks can be a powerful tool to promote investment at the same time that it advances their economic agendas abroad. In the case of China, the China Development Bank 39 Calculated on the basis of the foreign reserves, including gold, at the end of 2013 (World Bank, 2014b).

(CDB) has become an integral part of the country strategy to strengthen its economic ties with Latin America. The objective of this policy is to open markets to Chinese manufactured goods and secure long-term access to raw materials in favorable conditions. Thus, between 2005 and 2013, the CDB has lent USD 78.3 billion to the countries of the region (Inter-American Dialogue, 2014). For countries like Argentina, Ecuador and Venezuela, which have been shunned by both international capital markets and multilateral institutions, these funds are a welcomed source of funding. Nonetheless, the costs are also significant. The interest rates of CDB are higher than those of multilateral institutions, include requirements to contract with Chinese companies, have inadequate environmental standards, and require payments in the form of commodities (Gallagher, Irwin, & Koleski, 2013). Furthermore, there is little to no transparency on the specifics of the agreements (El Pais, 2014).

The loans of the BNDES of Brazil follow a similar pattern to those of the CDB. Throughout the last decade, lending for infrastructure projects made by the BNDES in Latin America and Africa rose steadily from USD 228 million in 2004 to USD 1.3 billion in 2013 (Valor International, 2014). According to a recent survey, the socio-economic and environmental impact of BNDES projects in the Latin America region is a source of great concern. It is estimated that 42% of the projects fail to directly improve the economic conditions of the recipient country. Also, 67% of the programs involve the relocation of communities; at least 58% of them affect the living conditions of those communities; and 75% of the projects affect in a negative way the environment (DAR, 2014). Finally, the report raises the issue of the complete lack of transparency regarding the conditions in which the projects are undertaken. The resemblance with the record of the CDB is not a coincidence.

To make the situation of the NDB more complex, add to this dossier of lack of transparency and disregard of social and environmental issues, the possible motivations of Russia, India and South Africa. For Russia, it seems that the main motivation to participate in the NDB revolves around the issue of protecting itself from US imposed sanctions (The Moscow Times, 2014). In the cases of India and South Africa, their main interest seem to lie in increasing available funding for infrastructure investment in their own countries (Spector, 2014). With such a large variety of agendas it is very hard to believe that a minimum common denominator can be achieved in order for the NDB to become operative. When faced with the same impasse, the countries behind the Bank of the South simply could not achieve the basic commitment required to breath life into the new institution.

Despite the complexity of the situation, the larger point that shouldn't be missed is that initiatives like the NDB and the Bank of the South represent the clearest sign that the current model of development finance and governance of multilateral institutions is outdated. From this perspective, the problem with NDB is that instead of aiming to establish a new set of guidelines for development finance, it is simply replicating the established structure of

multilateral institutions. As such, it is bound to experience the same type of problems and disappointing outcomes. Thus, there is still a clear need for new thinking and practices in development finance in which recipient communities and countries have a greater say in the conditions in which projects are undertaken as well as how their benefits are distributed. On that regard, the experience of the Bank of the South shows how hard it is to break with established conventions. That doesn't mean that countries in the South shouldn't keep trying.

References

Chacko, S. (2014). BRICS Bank Is Mostly a Jointly Managed Sovereign Wealth Fund. Huffingtonpost. Retrieved July 22, 2014, from http://www.huffingtonpost.com/sunil-chacko/brics-bank-is-mostly-a-jo_b_5602995.htmlDAR. (2014). CASOS PARADIGMÁTICOS De inversión del Banco Nacional de Desarrollo Económico y Social de Brasil (BNDES) en Sur América Necesidad y Oportunidad para Mejorar Políticas Internas. Retrieved July 23, 2014, from http://www.dar.org.pe/archivos/publicacion/137_Casos_Paradigmaticos.pdfEl Pais. (2013, June 13). Arranca en Venezuela el Banco del Sur, que agrupa a seis países de la región. Ediciones El País. Retrieved from http://internacional.elpais.com/internacional/2013/06/13/actualidad/1371081851_375869.htmlEl Pais. (2014, April 11). Ecuador sumará 7.000 millones de dólares a su deuda con China. Ediciones El País. Retrieved from http://economia.elpais.com/economia/2014/04/11/actualidad/1397232571_064840.htmlGallagher, K. P., Irwin, A., & Koleski, K. (2013). The New Banks in Town: Chinese Finance in Latin America. Retrieved from http://ase.tufts.edu/gdae/Pubs/rp/GallagherChineseFinanceLatinAmerica.pdfGriffith-Jones, S. (2014). A new BRICS bank to mark global shift. Financial Times. Retrieved July 21, 2014, from http://blogs.ft.com/beyond-brics/2014/06/03/guest-post-a-new-brics-bank-to-mark-global-shift/IMF. (2013). IMF World Economic Outlook - October 2013 (pp. 41–44). Washington DC. Retrieved from http://www.imf.org/external/pubs/ft/weo/2013/02/pdf/text.pdfIndia, M. of E. A. (2014). Sixth BRICS Summit – Fortaleza Declaration. Retrieved July 21, 2014, from http://www.mea.gov.in/bilateral-documents.htm?dtl/23635/Sixth+BRICS+Summit++Fortaleza+DeclarationInter-American Dialogue. (2014). China Latin America Finance Database. Retrieved July 23, 2014, from http://www.thedialogue.org/map_listMunevar, D. (2013). Banco del Sur: Promesas y Realidades. CADTM. Retrieved July 21, 2014, from http://cadtm.org/Banco-del-Sur-Promesas-yNodal. (2014). Realizan I Consejo de Administración del Banco del Sur y afinan los detalles de su puesta en funcionamiento. Retrieved July 22, 2014, from

http://www.nodal.am/2014/07/realizan-i-consejo-de-administracion-del-banco-del-sur-y-afinan-los-detalles-de-su-puesta-en-funcionamiento/Ortiz, I., & Ugarteche, O. (2008). Bank of the South: Progress and Challenges. SSRN Electronic Journal. Retrieved from http://papers.ssrn.com/abstract=1353450Spector, B. (2014). South Africa’s scramble for new BRICS bank. Daily Maverick. Retrieved July 23, 2014, from http://www.dailymaverick.co.za/article/2014-07-18-south-africas-scramble-for-new-brics-bank/#.U897IVbjsc4Stiglitz, J. (2014). Nobel Economist Joseph Stiglitz Hails New BRICS Bank Challenging U.S.-Dominated World Bank & IMF. Democracy Now. Retrieved July 21, 2014, from http://www.democracynow.org/2014/7/17/nobel_economist_joseph_stiglitz_hails_newThe Moscow Times. (2014). Putin Wants Measures to Protect BRICS Nations From U.S. Sanctions. Retrieved July 23, 2014, from http://www.themoscowtimes.com/business/article/putin-wants-measures-to-protect-brics-nations-from-u-s-sanctions/503415.htmlToussaint, E. (2008). Bank of the South. An Alternative to IMF-World Bank. Mumbai: VAK. Retrieved from http://cadtm.org/Bank-of-the-South-An-AlternativeValor International. (2014, April 11). Increased BNDES lending for projects abroad draws criticism. Retrieved from http://www.valor.com.br/international/news/3513110/increased-bndes-lending-projects-abroad-draws-criticismWeisbrot, M. (2014). BRICS’ new financial institutions could undermine US-EU global dominance. Al Jazeera America. Retrieved July 21, 2014, from http://america.aljazeera.com/opinions/2014/7/brics-developmentbankimffinance.htmlWorld Bank. (2014a). World Bank Operational Summary Fiscal Years 2008-2013. Retrieved July 21, 2014, from http://siteresources.worldbank.org/EXTANNREP2013/Resources/9304887-1377201212378/9305896-1377544753431/OpSumLendingTables_EN.pdfWorld Bank. (2014b). World Development Indicators Database. Retrieved from http://data.worldbank.orgZibechi, R. (2012). Brasil Potencia: Entre la integración regional y un nuevo imperialismo. Bogota D.C.: Ediciones desde Abajo.