The Ecuadorian proposal for a new regional financial architecture

Journal of Post Keynesian Economics / Winter 2009–10, Vol. 32, No. 2 163 © 2010 M.E. Sharpe, Inc.

0160–3477 / 2010 $9.50 + 0.00. DOI 10.2753/PKE0160-3477320202

PEDrO PáEz PérEz

The Ecuadorian proposal for a new regional financial architecture

Abstract: The neoliberal experiment in Latin America has consumed more than a generation of enormous resources with very little economic results, disastrous social and environmental effects, and a deterioration in democratic legitimacy that will have to be recovered. A necessary, although insufficient, condition to recover a hopeful horizon on these fronts is the qualitative advancement toward a continental integration process that includes monetary and financial dimensions, even while the classic themes of trade and tariff integration are still far from being resolved. The Ecuadorian plan that was introduced at the multilateral negotiations in relation to Venezuelan president Hugo Chávez’s initiative to create the Banco del Sur proposes the simultaneous and coherent promotion of a process to construct a New Regional Financial Architecture, in which the Banco del Sur would be the nucleus of one of the three fundamental pillars—that is, the transformation of the development bank. The other two pillars include the enrichment and coordination of the continental tasks of the central bank, connecting stabilization with development, and the convergence toward a common monetary scheme.

Key words: exchange rate, financial architecture, trade.

The exhaustion of the neoliberal effort in Latin America

During the last three decades and particularly since the external debt crisis initiated by Mexico in 1982, a correlation of internal and external forces prompted a shift in the regime of accumulation in Latin America, from one based on industrialization through import substitution—an interventionist state that oriented the economy through decisive influ-ence in key prices and the constitution of a circumscribed and paltry

Pedro Páez Pérez is chairman of the Presidential Commission for the Design of the New Financial Architecture–Banco del Sur, and member of the Experts High Com-mission, presided over by Joseph Stiglitz, and convened by the president of the Gener-al Assembly of the United Nations for the World Summit on the Economic Crisis. He is professor at FLACSO–Quito (Latin American School of Social Sciences, Graduate Program in Economics).

164 JOURNAL OF POST KEYNESIAN ECONOMICS

welfare state—toward an exports-oriented one based on comparative advantage—a reorganization of the state and an increasingly audacious labor-flexibility program.

The largest segment of Latin America’s population has witnessed the failure of this endeavor, after several relaunchings, whose rhythm and performance have varied from country to country.

One of the telling failures of this neoliberal regime was the patent stagnation of the gross domestic product (GDP). For instance, if we consider the two decades before the implementation of neoliberal policies, between 1960 and 1980, per capita GDP growth of the region reached 82 percent. Yet, in the following 20 years, which were dominated by the new regime of neoliberal inclination, this number collapsed to 9 percent, with important differences among countries. For instance, in Ecuador and Bolivia, per capita growth stagnated and even regressed. This meager performance is even worse when considering that annual capital flows include the significant sale of assets. The first years of the new millennium have seen a more positive tendency explained in part by the change in the course of the economic policies of several countries in the region and by the recovery of the terms of exchange, especially for energy-exporting countries.1

With respect to investment, both periods show great differences as well. During the first period, the Economic Commission for Latin America and the Caribbean (ECLAC)2 argues that the investment/GDP ratio grew sus-tainably until it reached 25 percent in the 1970s. But under the neoliberal regime, the ratio fell starting in 1982, to as low as 17 percent in 1990 and 2003; since then, however, there has been a rapid recovery, reaching as high as 20 percent in 2007. This phenomenon can be attributed partly to the fact that public expenditures and investments have begun to increase, favored by the evolution of exports and migrants’ remittances.

When we explore the consequences of these uneven performances for the average person, we can understand the social and political expressions of frustration that arise, manifested in increased delinquency, insecurity and social anomie, as well as by the massive emigration of workers in search of alternatives in other countries, or in the best of cases, through attempts to construct social and political alternatives.

1 The accumulated per capita GDP growth in Latin America between 2000 and 2005 reached 5 percent and rose to 8 percent if 2006 is included (see Weisbrot, 2007). ECLAC estimated that between 2003 and 2008, per capita GDP in Latin America and the Caribbean would reach a growth rate of 20 percent.

2 See www.eclac.org/publicaciones/xml/3/29293/lcg2338e.pdf.

A NEw REgIONAL FINANCIAL ARCHITECTURE 165

The evolution of inequality, the polarizing conditions of poverty, and the instability and fragility of labor markets have worsened the social characteristics of a capitalism that from its historical core has been highly polarizing.3 The growing presence of political forces and social movements opposed to neoliberalism, with some even reaching within the levels of national governments in various countries, is a symptom of these structural dynamics that are gestating in the continent, demanding important changes.

regardless, from the financialization and the technological revolution now currently under way, the globalized economy poses substantial challenges to the efficacy and sustainability of these changes. Previous formulas of protectionism and state intervention are insufficient, or in some cases, simply unviable. Moreover, several operative aspects of the nation-state that were familiar in the last century have been placed in doubt by recent events. The space to exercise sovereign economic policies has been reduced considerably, given structural conditions, the dynamic of insertion into the international division of labor, and the specific geopolitical role of distinct social formations. The symptoms of such tendencies include the proliferation of more restrictive trade-offs in macroeconomic management, the erosion of fiscal power, and monetary and financial regulation.

The new horizons of Latin American integration

In response to the limitations of popular will that appear to have the ir-resistible weight of a natural law, several endeavors are underway—with differing degrees of success—in several parts of the world and not only in the periphery or semiperiphery. They aim to construct supranational areas of sovereignty, in a paradoxical process in which political and economic viability are decided by the local efficacy in offering valid alternatives to the people.

3 According to the estimates of ECLAC’s 2006 Social Panorama of Latin America (www.eclac.org/publicaciones/xml/0/27480/PSE_2006.pdf), the number of poor (measured by the coverage of the basic food basket) grew from 136 million in 1980 to 221 million in 2002, then fell to 205 million in 2006. Among them, the number of indigents grew in the same years from 62 million to 97 million and then to 79 million, in large part linked to the reactivation of the formal labor market and the correspond-ing reduction of open unemployment since 2002 (and which extends to 2007 accord-ing to the preliminary version of the Economic Study of 2006–2007; www.eclac.org/publicaciones/xml/3/29293/lcg2338e.pdf). Despite this improvement in recent years, in terms of both poverty reduction and economic growth, inequality indexes, such as the simple average pondered in the Gini coefficient, show stagnation in the very high levels of social polarization.


The nature of these processes of economic integration varies signifi-cantly in relation to the regime of accumulation in place for the involved countries, and in the periphery of the system; the differences are even more notable.4

The relative exhaustion of import substitution that arose from the con-flictive distributional dynamic and the technological dependence that it generated established severe limits for proposals of productive and trade complementarity whose rhythm and orientation were based on traditional economic theory and the successful example of Western Europe.5 The neoliberal transformations of the last decades have highlighted many dead ends in these attempts, as they have internally changed the actors and redefined the environment of the global market.

Within this framework, the process of Latin American integration has been relaunched in recent years through a series of regional initiatives that have run up against important impasses, given the various different interests among the multiple actors, whose regional positions reflect a complex process of extraversion, modernization, and transnationalization. The most important direct antecedents of this rebirth of Latin American integration in its new form begin with the failure of the Area Libre Co-mercio de las Americas (ALCA) negotiations, encouraged by the United

4 In February 1960, the modern history of Latin American integration began with the Asociación Latinoamericana de Libre Comercio (ALALC), initially constituted by Argentina, Brazil, Chile, Paraguay, Mexico, Peru, and Uruguay, and to which quickly adhered Colombia, Ecuador, Bolivia, and Venezuela, and the Mercado Común Cen-troamericano (MCCA), to be converted in 1980 into the Latin American Integration Association (ALADI). Within this framework of difficult concretion, subregional proj-ects appeared, whose most significant examples were the Andean Pact (the Southern Cone Common Market) (born in 1969 as an ambitious scheme for industrial planning) transformed in 1991 into the Comunidad Andina de Naciones and Mercosur (1992). The trade exchange among member countries grew sustainedly at a pace of 87 percent between 2004 and 2007, increasing from $62 billion to $116 billion. Among total external sales, intraregional exports represent 15.4 percent and imports 18.5 percent within ALADI (see http://es.noticias.yahoo.com/efe/20080311/twl-el-consejo-de-aladi-elige-un-nuevo-s-e1e34ad.html).

5 In the theoretical field, in contrast to the orthodox proposals of authors such as Balassa, Viner, and Meade, critiques arose from authors such as Perroux and Byé and, obviously, within Latin America, Prebisch, Furtado, and the original ECLAC think-ing. At the beginning of the 1990s and within the framework of attempts to construct a neostructuralist thinking as a counterweight to the neo-Walrasian orthodoxy and a “Santiago Consensus” as a counterweight to Washington, ECLAC put forward the the-sis of open regionalism, which signaled a sense of direction for rearticulating integra-tion processes of older vintages, in clear decline.


States, resulting in the creation of the Unión de Naciones Sudamericanas (UNASUr; Union of South American Nations).6

However, beyond the manifestation of political intentions, the objective determinations of internal productive structures, marked by an increas-ingly polarized international division of production and the growing vulnerability of the Latin American economies subjugated to the jealousy of transnational financial capital, define a difficult perspective of trade integration within a regional block. Only an efficient renegotiation of a continent’s participation in global markets can make the construc-tion of continental unity viable. A necessary, although insufficient, condition in this effort is the materialization of a new regional financial architecture.

From the little fuel offered by trade integration, new financial and monetary dimensions would provide a structure of incentives that grant new and powerful forces to the process, within both the public and pri-vate sectors.

The Ecuadorian proposal for a new Latin American financial architecture

Background and principles

The powerful Venezuelan initiative for the creation of a Banco del Sur as a development bank and stabilization fund was made several years ago and began to come into focus in February 2007 with the signing of the Protocol of Intention between Venezuela and Argentina, to which Bolivia, Ecuador, and later Paraguay joined. Brazil was originally skeptical of the initiative, preferring to adjust its efforts solely toward the stabilization fund, but this was overcome with the Quito Declaration (May 7, 2007) as a result of the Ecuadorian proposal that opened wider channels for the involvement of various countries following their own rhythm. Likewise, the skepticism of larger countries regarding the Ecuadorian proposal of “one country, one vote” was overcome in the Declaración de Asunción (May 22, 2007) after which Uruguay enlisted in the design of the Banco del Sur, with Chile participating as an observer. After the Declaración de río (October 8, 2007), Colombia requested to join the project.

6 In 1993, Brazil proposed the constitution of an área de Libre Comercio Sudamer-icana (ALCSA) in response to the proposal of the North American Free Trade Agree-ment (NAFTA) to include South American countries. In the third presidential meeting, in Cuzco (December 2004), the Community of South American Nations (CSN) ap-peared as a new option, which was converted into the UNASUr the following year.


During the multilateral talks7 and with the discussions in the Meet-ing of Economic Ministers in Quito, and President rafael Correa, as a starting point, in May 2007, the Ecuadorian proposal has been based on three central themes:

1. Democratic and transparent governance with proportional and equal responsibility;

2. Simultaneous construction of a new process of financial integra-tion advancing toward three basic components—a development bank, a regional central bank, and a common monetary scheme;

3. Efficient and technical operation oriented toward another type of development, and new relations between states, companies, and popular economies.

The pillars of the new architecture

Based on these principles, the Ecuadorian proposals have pressed for the simultaneous advancement of the following three fundamental in-stitutional pillars:

1. The founding of the Banco del Sur, as the heart of a process of transformation toward a type of development that is an alterna-tive to the dozens of existing entities of financial development (national, subnational, and supranational);

2. Strengthening the functions of a regional central bank, starting with a closer association with national central banks and, possibly, the organic enrichment of the Latin American reserve Fund8 and of other organisms such as Fonplata, in an attempt to link the tasks of macroeconomic stabilization with the reduction of structural asymmetries;

3. Give coherence to these processes within a particular logic, with the creation of a common monetary scheme connected to the strengthening of the intraregional trade ties with a vision toward the establishment of a regional currency (the experience of the

7 Out of delicacy for the other delegates of sister countries, I will only comment on the matters proposed by the Ecuadorian commission, which have always been public in nature, as from its origin, the commission includes at its core the representation of civil society. This can in no way deny the valuable proposals of other delegations that have always converged in the same spirit and have contributed to technical refinement.

8 The Latin American reserve Fund was created in 1976 as the Andean reserve Fund, attached to theAndrean Pact and widened to countries outside of the Andean region in 1991, which allowed for the incorporation of Costa rica in 2000 and Uru-guay in 2008.


scheme of payment compensations from ALADI could be a base for this effort).9

Capital support, democracy, equality, and integration

The challenge that we now face is to reconcile democratic principles with an institutional design that, on one hand, does not encourage moral hazard and, on the other hand, constitutes a respectable capital base for the significant entry into financial markets. For the above-mentioned principles to be coherent within the constitution of the Banco del Sur’s capital, we have proposed the following:

• Capitalsubscriptionwithinagroup,withequitableeffortaccordingto the capacities of the different economies;

• Integrationofcapitalaccordingtotheaverageoftheratiosofthistype of regional financing, with further differences accounted for regarding the capabilities of each country;

• Differentiatedtimetablesandstructuresofpaymentaccordingtolevels of relative development, geography, and dollarization of the economy;

• Growing of the role of national currencies and the regionalcurrency;

• Accesstocreditforeachcountryinaninverseproportiontoitscapital subscription, so that the bank can be an instrument to over-come asymmetries.

Political and economic advantages of the proposal in the regional scenario

The paths that are proposed in the Ecuadorian plan generate a series of advantages for significant advances in this new stage of Latin American integration. With these, opportunities will arise so that countries with

9 This common monetary scheme does not imply a substitution of physical money in circulation in each country, but rather the creation of an accounting unit of account and of a system of electronic operations that foster trade and financial transactions in the continent on a new level.

The Convent of Payment and reciprocal Credit of ALADI was subscribed on Au-gust 25, 1982, within the framework of the Board for Financial and Monetary Issues of ALADI, integrated by the governors or general managers of the central banks of Argentina, Bolivia, Brazil, Colombia, Chile, Ecuador, Mexico, Paraguay, Peru, Uru-guay, Venezuela, and the Dominican republic, replacing what was signed into action in 1965 in ALALC. This was based on the U.S. dollar and toward the end of the 1980s came to cover 90 percent of intraregional imports, but due to the financial turbulence related to the exchange rate fragility of our economies, in recent years this coverage has plummeted to below 2 percent.


diverse political, financial, and economic realities can incorporate them-selves into this new drive toward a process of integration whose key reference today is UNASUr, but which can be transcended. Moreover, without this qualitative leap forward toward financial and monetary in-tegration, which would open new channels for the development of more efficient and transparent capital markets at the continental level, the very consolidation of UNASUr could become seriously hampered by the dif-ferent commercial options facing each nation, already underway.

This framework, with these three distinct and simultaneous pillars not only helps to resolve possible conflicts of interest among founding countries but also proposes very attractive conditions for entry for a large number of smaller countries in Latin America.

At the same time, if geopolitical conditions or those of internal politics were to limit the adoption of one of the pillars, other components of the plan would stay open so as not to isolate any country from continental policies. Growing synergies would invite new convergences in the most intense processes of integration, regardless of the time frames of other historical experiences. As such, we cannot advance in sequential terms: it must be a simultaneous effort, in which the maturity of one component will demand that of others.

Simultaneity of the three components

There are good reasons to simultaneously advance on these three fronts. The most important, perhaps, has to do with the capital of the Banco del Sur, its leverage, and required monetary stability. For example, in the capital structure of the Banco del Sur, there must be space for national currencies as well as the regional currency. These currencies must also be included in issuance operations and as such should also have demand in other member countries. To make this sustainable, it is necessary to strengthen the functions of the regional central bank, guaranteeing that the regional currency functions and national currencies could interact in other terms.

Another crucial argument is the importance of trade, financial and mon-etary integration. It is impossible to separate the dynamics of trade and financial flows in productive activity from the functioning of the economy. In this sense, if a common currency, or a regional unit of account, is to be sustainable, there must be institutional structures that allow the links to be deepened. This does not mean forcing trade relations where they are not convenient; we must make changes in productive structures so that they complement each other.


The new financial architecture and productive transformation

It would be very difficult to advance toward a new international finan-cial architecture without simultaneously working toward a new national financial architecture and a new productive structure in our respective countries that allows for a more sustainable and democratic development. The economy is not linear: the productive apparatus structure is hierar-chical, and if we can make important inroads into strategic sectors of the economy, a new system of powerful interests committed to integration can be constructed. Today, the dependence on trade with the North is very high; as such, changing the productive structure will generate a series of very significant interests for the sustainability of the process.

In this sense, the Ecuadorian delegation has been suggesting the fol-lowing possible lines of intervention (among others):

• Energyandfoodsovereignty;• Researchanddevelopmentoffreesoftware;• Financingofthepopulareconomy;• Plannedandcomplementaryproductionofgenericmedicines;• Researchintotherecoveryofmedical,ecological,andagricultural

knowledge of our peoples; • Investmentinecologicalremediationanddevelopment;• Infrastructureunderdifferentorganizationalandspatiallogic,such

as the Camino del Inca.

Likewise, we have indicated the following possible lines of a new type of conduct (among others):

• Establishinganethicalcodeforcontractorfirms;• Definingaseriesofmechanismsforgreatertransparencyincon-

tracting and for the definition of financial costs;• Establishingsystemsofpublicinvestmentthatallowforasocial

comptroller and, among other things, the avoidance of overcharg-ing during the execution of projects;

• Definingnewmethodologiesandpracticesthatincorporateenvi-ronmental, social, and labor standards in the Banco del Sur.10

10 Since 1987, the World Bank and other international financial institutions have been incorporating an environmental perspective in their actions, in large part at the behest of the United Nations Environmental Program Finance Initiative (UNEP FI). Among the commitments that have been disseminated in theory, although less so in practice, are the incorporation of serious considerations of the environmental and social effects of projects to be financed, with the participation and auditing of effected populations; the implementation of rigid mechanisms of environmental appraisal that


We believe that these proposals along with a new institutional structure will contribute to the generation of new standards in all of these spheres under more accessible financial conditions, recycling the massive quantity of resources that are currently entangled in speculative activities outside of the region toward productive endeavors.

Conclusion

In summary, the need to define a solid and responsible answer to the historical requirements for change that Latin America demands must be emphasized. A seldom considered aspect in development literature is the mechanisms of monetary and financial dependence that have con-tributed to the perpetuation of the backwardness of our economies. The construction of a new Latin American regional financial architecture will not only open spaces for the exercise of sovereignty (understood now in a new dimension, both national and supranational), but can also establish orientations for the new international financial institutions and architecture that the current financial crisis demands. The recovery of the operational instruments of economic sovereignty through new functions of the central and development bank and within the framework of a new type of payment system can open the channels for relaunching regional growth from a more sustainable and democratic perspective.

REfEREnCE

Weisbrot, M. “Global Imbalances, Power Shifts and the Future of Multilateralism.” Event Transcript, Center for Economic and Policy research, Washington, DC, April 12, 2007 (available at www.cepr.net/documents/publications/global_imbalances_transcript_04_07.pdf).

accompany the development of financed projects; the creation of specific lines of credit for the remediation of degraded areas; “environmentally friendly” technological reconversion; assistance for community-based micro projects based on local wisdom and technology; and collaboration with universities and regional centers of investi-gation for the development of research on environmental recovery and low-impact technology.

The Ecuadorian proposal for a new regional financial architecture

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