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Hugo Chavez and the Bank of the South

by Dan Armstrong

What can we expect from Hugo Chavez? Will he be just another in a long line of charismatic, but abrasive and willful Latin ideologues? Or is he the kind of visionary leader that an often troubled and seemingly hopelessly patrician South America has sought and needed since its first break from the old world two centuries ago? Earlier this year, the Venezuelan President announced a plan to create a development bank, a South American alternative to the World Bank and other Washington-based multilateral lenders. For the last sixty years, First World banks have managed Third World development like second-rate real estate with the same kind of results. A move to financial autonomy is exactly what South America needs. This Bank of the South or Bolivarian Bank, as it is sometimes called, is a step in right direction. Its success or failure could very well be the measure of Hugo Chavez.

Hugo Chavez

A career military officer and founder of the Bolivarian Revolutionary Movement-200, Chavez led a failed coup against then Venezuelan President Carlos Andres Perez in 1992. Six years later, he won the presidential election with fifty-six percent of the vote on a socialist platform aimed at reducing poverty, ending political corruption, and enabling the working class. Hero to some, outlaw to others, Chavez is now entering his tenth year as President of Venezuela. A four-year spike in the price of oil has put him in a position of unusual power and influence, and unlike other radical Latin leaders who have had vision but not wealth, Chavez has the wherewithal to lift Venezuela and perhaps all of South America from its Second World status.

From as far back as 1983, Hugo Chavez envisioned a Bolivarian Revolution, an end to the extreme division of wealth in South America and the creation of a new socialist society. More than just a populist vision for his own country, Chavez has set his sights on a far-reaching and ambitious continentalism that would unify South America into an independent economic power block, free of the heavy hand of the United States. His Bank of the South could provide the foundation for just such a movement. In a world where aggressive finance is the leading edge of commerce, banking and monetary management is everything. A development bank of South America run by South Americans could make all the difference in the world.

Economic development has long been considered the golden means to social progress; education levels, health standards, fertility awareness, and human rights climb with increased standards of living. In the halcyon days after World War II, western economic leaders gathered in Breton Woods, New Hampshire and created the monetary framework for an international market place and the first vestures of a new global order based on free market capitalism. The World Bank was founded at this time with the idea that fair-minded money management could facilitate world development, simulate a global economy, and build a better world for all. And for many years, it appeared that this was happening. But resource rich continents like Africa and South America were also fertile grounds for western expansion and corporate profit. The line between public and private loans began to blur as the same wealthy capitalists who controlled western markets were also in a larger sense the World Bank.

With the underlying premise that the growth-based western economies must continually forge new frontiers, in a not so subtle way, corporate conquest has gone hand in hand with the financing of Third World development. Instead of aiding the emergence of independent economies, First World interests with influence focused in Washington, D.C. have methodically taken control of Third World markets through the extension of credit, leveraged loan apparatus, and neoliberal trade philosophies. For all the glow of World Bank and International Monetary Fund ideology, the sad truth is that loan-based development is an economic tightrope in the free market arena, especially when you are entering the G-8 monetary system from the outside. (See sidebar to right: "Fractional Reserve Banking.") Whether by design, mismanagement, or the steady hand of capital advantage, Third World borrowers have faired poorly, and once loan payments fall behind, which happens more often than not, these same developing nations are at the mercy of the bank as a second loan is made to re-service the first. International Monetary Fund loan reconstruction and structure adjustment programs are then imposed, and things get considerably harder for borrowing nations.

The IMF sends its own financial managers, as economic supervisors, to the nation in question to make sure the new loan is used properly. Unfortunately, in many cases, a third and fourth such "austerity" loan is necessitated to keep the system afloat. This method of maintaining multiple generations of loans becomes a steady lean against the people, the resources, and the environment of the borrowing nation. IMF austerity programs for loan restructuring are just that—imposed austerity. In addition to the trimming of social programs and unwarranted resource harvest, the catchment of import liberalization adds insult to the injury. The strongest national economies of the world today, the United States, Germany, Japan, China, attained their success through heavily protectionist import/export laws, monetary control, and tariffs. Import liberalization and trade conditionalities imposed by outside managers are not the way to build economies. They are certain strikes against emerging markets and, arguably, little more than First World colonialism disguised as financial assistance.

Import liberalization assures that loaned money will return quickly to the G8 conglomerate via trade. This effectively turns these loans into grease for the wheels of large exporting economies. Markets are pried open and the kind of trade protection that is necessary for an emerging economy to survive is undermined. In short, the billion dollar loans that come from the IMF and the World Bank are only granted through the auspices of First World trade advantage. That is, the U.S. Congress will not sanction an IMF loan if the conditions of the loan are not imminently profitable for U.S. business interests. As long as this is part of the loan restructuring apparatus, these loans are not really granted in good faith to the original constitution of the IMF and World Bank. Instead of facilitating development, compounding interest and trade liberalization have become the silent oppressors of three-quarters of the world.

Currently tiers upon tiers of interest payments on so-called development loans swarm like locust around the globe, eating at the heart and soul of struggling new economies. Nearly every Third World country labors under debt. For most, it is vast crippling debt. Development has occurred, but piece meal, and causing, in more instances than not, as much devastation as progress.

Over time, with inflation and interest rate fluctuation, relative values of dollars loose sense, so the numbers have only limited relevance; but the compounding nature of the problem is revealed by a few bulk figures. In 1974, for instance, Third World debt totaled $135 billion. By 1980, it had grown to $567 billion. In the next twelve years, the indebted nations paid $1.6 trillion to their creditors. In that same period, however, the total debt rose to $1.4 trillion. The combined Latin American and Caribbean region alone paid out $739 billion in debt servicing, more than its entire debt in total. And still their debt continued to grow. (Read related article as PDF: "The 1980s Credit Crisis".)

How can this be? After many generations of loan restructuring, something of the principle in the original loan is lost to abstraction, only the steady demand of interest remains real. The bank cares little of the principle anyway. All but some small percentage was created out of pixels on a computer screen. It's the loan fee and interest payment that make the wheel turn.

The point is that the banking advantage always goes to the lender not the borrower. On a global scale, we have western banking services lending to the rest of the world and at the same time acting as the leading edge of corporate harvest. Clearly if South American countries can localize their own banking, it would be hugely advantageous. Like a community bank in a small town, the money would stay within the community. South America could become financially independent. Washington’s neoliberal philosophy could be junked for responsible market management. South America, not the corporate west, would profit most from its natural endowments and even, conceivably, manage them sustainably.

Hugo Chavez has initiated some bold and innovative social programs. He has stood up for the impoverished and dared to stare down to the western petroleum-industry. He has openly mocked President Bush in the United Nations and used Venezuela’s petroleum wealth for significant political leverage. He is a provocative new age revolutionary of wide yet uncertain potential. To many in the western establishment he is a blowhard and characterized as a Maoist. But this idea of a Bolivarian Bank, his Bank of the South, is good one. It could provide the financial substance to uplift all of Latin America by freeing them of the yoke of the western world, while also providing a powerful political shift from neo-liberal economics to a more egalitarian socialist model.

To be sure, Chavez's makeover of South America will not come easily or quickly. Though reelected in 2000 with sixty percent of the vote and again in 2006 with sixty-three, he remains a controversial leader within Venezuela. The wealthy land owners and foreign businesses, the financial establishment, are uncomfortable with a revolutionary in office. In Washington, D.C., the Bush Administration sees him as an agitator, potentially another Fidel Castro, and with fifteen percent of the United States' oil imports coming from Venezuela, too unpredictable. They have wanted him out since his first election. When depressed oil prices and a national oil industry labor strike caused a radical drop in Venezuela's economy in 2002, Chavez's social programs faltered. He became vulnerable, and there was an unsuccessful coup in April of that year, with rumors that it was supported even prompted by the United States. Ironically, it has been repercussions from George Bush's war in Iraq that have changed embattled Chavez's fortunes.

Venezuela, the world's fifth largest exporter of petroleum, received a tremendous windfall from the turmoil in the Middle East. Oil prices doubled in 2003. Its economy grew by 17 percent in 2004 and another 15 percent in 2005. The surge in oil profits were Chavez's saving grace. The outspoken President of a Second World nation suddenly had the money and political clout to stand up to the First World.

In the spring of 2006, Chavez made his most daring move. He initiated a nationalization of Venezuela's vast oil industry, forcing deals upon western oil companies that effectively doubled Venezuela's cut in the profits. A year later, in March of 2007, Chavez, empowered by Venezuela's growing wealth, announced his plan to create a development bank. A month later Venezuela completed payment on its World Bank and International Monetary Fund loans and cut all ties with those Washington-based institutions. On May 22nd, in a move led by Chavez and Argentine President Nestor Kirchner, Argentina, Brazil, Bolivia, Paraguay, Ecuador, and Venezuela announced tentative agreement on the principles for a Bank of the South. It was an important step forward for Chavez's Bolivarian Revolution and the unification of South America.

While the details and internal politics of creating a Bank of the South will pose significant hurdles to the process that could come to fruition in 2008 (see sidebar below: "Creating a Framework for the Bank of the South"), the real key to the project is money. Even a cursory review of South American economic fortunes of the last fifty years gives reason for pause. Political instability, links to U.S. policy, and dictatorial leadership have led to a predictably up and down economic history for nearly all of South America. Venezuela, even with their grand petroleum wealth, has undergone several periods of economic recession since 1990. Currently, however, Venezuela, Brazil, Argentina, and to a lesser extent the other South American nations are experiencing an extended period of economic growth based on increasing export prices, petroleum being the most obvious. Over the long term, as natural resources throughout the world become more dear, it should be expected that the prices of critical natural resources, metals, energy, and food products native to South America, will increase. If managed sustainably, instead of extracted by foreign interests with no thought to the long-term health of the land or the nation, South America has the capacity to maintain a vibrant economy for some time. A strong regional development bank would serve as the first step to refocusing the South American economic picture. If the model of Cuba, embargo torn and geographically limited, could be applied to resource rich South America, to form a strong, relocalized and independent economy like that of the European Common Market, South America would be on new footing.

The biggest part of the equation is undeniably Venezuela's oil. Its 78 billion barrels of proven reserves are the largest in the western hemisphere. If the 250-300 billion barrels of super-heavy crude in the Orinoco tar belt are included, Venezuela ranks number one in the world. Despite the increased profits of late, due to setbacks caused by the oil worker's strike in 2002, the oil industry infrastructure is a work in progress and demands further investment. Old fields are near depletion and new fields, though available, are still in the early stages of development. Add the need for more exploration and the special technology necessary to maximize the production of the super-heavy crude and the financial demands will be substantial. Overall production will have to increase significantly if Chavez hopes to use oil profits to provide for industry upgrades, his ambitious social reforms, and funding for the Bolivarian Bank. His plate is full. His vision is grand. The next three years will determine if there is substance or only hot air in this man Hugo Chavez.

Creating a Framework for the Bank of the South

Two major hurdles confront the formation of a development bank for South America. The first is logistical. Several multilateral development banks already exist that serve Latin America. The World Bank, the Inter-American Development Bank, the Andean Development Bank, and the Financial Fund for the Rio de la Plata Basin will provide significant competition for the new bank and to some extent a dissolution of its purpose, primarily that of providing an alternative to the neo-liberal policies (open markets, deregulation, privatization) which several of the left leaning Latin nations have grown to distrust. To this end politics becomes the second and largest hurdle, particularly regarding relations with the United States and the future of north-south free trade agreements. Gathering all of South America under one banner will not come easily as U.S. influence will steadily work against unification in order to protect its own extensive economic interests. A farsighted banking framework, one that counters the liberalization of markets inherent in the older lending institutions while also prioritizing participation of all South American nations, will be necessary for the formation of any kind of working development bank that hopes to serve as an economic center for South America.

Currently the Mercosur or Southern Common Market is the most notable organization of Latin American nations. Formed in 1991 by Argentina, Brazil, Uruguay, and Paraguay to enable economic coordination in the southern cone, the Mercosur now numbers ten nations, including Bolivia, Peru, Ecuador, Colombia, and Chile as associate members, and recent addition Venezuela as a full member. In May of 2007, six of these ten nations, Argentina, Brazil, Paraguay, Ecuador, Bolivia, and Venezuela met in Asuncion, Paraguay to launch the Bank of the South project. Uruguay, due to squabbles with Brazil and Argentina, remains on the outside with a wait and see position. Predictably, Peru, Columbia, and Chile, the nations with the closest ties to the United States, have said they are comfortable with the existing institutions.

In the May meeting, two positions evolved regarding the structure and purpose of the new bank. One proposed by Argentina and Venezuela, the two countries that have been the leading proponents of the bank, and another presented by Ecuador. The Argentina-Venezuela model included for both a development bank and a regional monetary fund like the IMF. The details of this proposal, however, were criticized for being too much like the existing development banks, containing many neo-liberal policies and lacking in progressive environmental, educational, and cultural guidelines. It also included for voting rights proportional to each nation’s contribution, as is done in the Inter-American Development Bank, IMF, and World Bank, where U.S. contribution levels have given it overriding control of those institutions.

Ecuador countered by insisting that all contributors have equal votes regardless of the size of their contribution and that “implementation of economic instruments should bring about the guarantee of fundamental human rights,” which would include protection of the environment, and that the bank’s activities would be aimed a small producers and the public sector, not large corporations. They also added an important third piece to the Argentina-Venezuela proposal, the creation of a regional currency.

Clearly differences exist even among the nations most interested in the bank, and several issues need to be hammered out before a Bank of the South can come into being. That Uruguay, Chile, Peru, and Colombia did not attend the meeting in May complicates the problem. As one of the founding members of the Mercosur, Uruguay could conceivably change its position. Chile, Peru, and Colombia will then have to reweigh their allegiance to the United States, something that would only happen if the bank were to show some early success. Events in the next year will be telling.

If there is to be a true economic union of South American nations, Ecuador's model seems the best fit. Absolutely necessary are a development bank free of neo-liberal trade philosophy, a monetary relief fund capable of crisis management and currency protection against outside financial speculators (see STATELESS MONEY), and a regional monetary unit that could be pegged against the euro. If an energy agreement for mutually assisted research and development (Petrosur) and a common market comparable to Europe's could also become part of this, South America would be in a position to control its own destiny. With the continent’s vast wealth in natural resources, comprehensive economic policy matched with sustainable land practices would be a powerful formula. Add responsible social contracts and a Cuban model medical system and we could be seeing the Bolivarian Revolution that South America needs. Hugo Chavez will have a big part in how this plays out.

For more on this topic read Pablo Davalos' excellent analysis, Southern Bank: "A Road towards a New Financial Architecture."

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