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Latin America’s Dueling Development Banks

Prepared by: Stephanie Hanson
June 1, 2007

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Venezuelan President Hugo Chavez proposed a regional development bank in the same March 2007 speech announcing his country’s withdrawal from the World Bank and the International Monetary Fund. Clearly, he hoped the so-called Bank of the South would supersede the two Western-dominated lenders. This vision, however, is not shared by most countries in the region, particularly regional powerhouse Brazil. Chavez lobbied for the bank to combine project lending with emergency-aid functions, but a recent meeting of finance ministers decided the bank would be solely a “development bank” (Economist). Several countries—including Colombia, Peru, Chile, and Mexico—have refused to participate (La Diaria) in the bank altogether.

Chavez has a history of such overreaching. In 1992, his attempt to overthrow then-President Carlos Andrés Pérez was quashed due to poor planning and lack of support. And a recent plan announced to create a single political party has run aground, as a new CFR.org Timeline on Chavez’s political rule describes. Now, his aspiration to create a regional development bank has fallen victim to regional politics.

The Bank of the South’s potential influence is also restrained by its somewhat modest capitalization. In the latest meetings on the bank, Brazil succeeded in persuading member countries that the bank should have equal representation and capital share from its seven members—Argentina, Bolivia, Brazil, Ecuador, Paraguay, Uruguay, and Venezuela. This limits the bank to capital shares that can be borne by the smaller member countries, or an estimated total funding of about $2.1 billion. The World Bank alone gave nearly $6 billion in loans to Latin America in 2006, which means the Bank of the South “is not about to edge out the ‘competition’ in development loans,” says intelligence analysis website Stratfor. A new Backgrounder examines how the World Bank and affiliated development banks function.

The World Bank is not the prospective bank’s only competition: There are already several institutions in the region that fund development projects. According to its financial statements, the National Bank of Economic and Social Development of Brazil (BNDES) lent roughly $24 billion (PDF) in 2006 to clients including Brazilian and foreign entities and individuals. The Bank Information Center, a monitoring group critical of BNDES, notes that “As a relatively non-transparent and unaccountable institution, the lending prowess of the BNDES poses a formidable barrier to any alternative institution that seeks to raise standards for development finance in the region.” Another group, the Andean Development Corporation, lent roughly $4.7 billion to Andean region countries in 2005.

Private lenders further complicate the lending landscape. Though they can also attach tough conditions to their loans, their lending rates can be more favorable than those of the World Bank or the IMF, and they lack the same tarnished image in the region. Yet it’s unclear how their favorable borrowing terms would affect the theoretical Bank of the South. Washington Post columnist Marcela Sanchez argues that despite the unpopularity of the World Bank and the IMF in Latin America, most regional leaders want the institutions reformed rather than closed. A Council Special Report recommends IMF reforms should include giving developing countries more voting power.

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