The Latin alternative: A new financial system

by Tim Anderson

As stock markets crashed and a global credit squeeze threatened all the “real” economies, Latin American governments pushed ahead with plans for a new financial architecture, to replace the current bankrupt system.

The people of the world “no longer support” this privatised banking system, says Venezuela's President Hugo Chavez. The IMF was one of those principally responsible for the financial crisis. It should “dissolve itself” and “disappear from the earth”. Ecuador's Economic Policy Minister Pedro Páez said society must “reclaim the leading role that has been kidnapped by the centres of political and economic power . . . the capitalist system is not the only option”.

Proposals for a new financial system were backed by an international conference of political economists in Caracas. In a joint report to the Venezuelan Government (see below) this group urged immediate action to socialise the banks and protect national savings without bailing out private investors.

The Latin American proposals differ in important respects from the bailouts taking place in the US and Europe, which seek to underwrite private losses and restore the privatised finance cartels.

Such a plan requires substantial political will and coordinated capacity, but that might now be there. Latin America was “no longer” the weak and compliant region of the 1980s, said Ecuador's President Rafael Correa. Emerging from debt and structural adjustment, the region has seen sustained economic growth, expanding reserves and a series of new and independent governments.

Venezuela has already withdrawn most of its $40 billion in reserves from the US, and has been creating new domestic and international state-run banks. It is still planning for significant economic growth, even if oil prices fall back to $60 per barrel.

Ecuador has just passed a remarkable new constitution which, amongst other things, prohibits state takeovers of private debt, such as those envisaged by the US “Paulsen Plan”. After its own Audit Commission on “illegitimate debt”, Ecuador is strongly animated against any new round of debt and financial leverage.

The six Latin America and Caribbean countries that subscribe to ALBA (Cuba, Venezuela, Bolivia, Nicaragua, Honduras and Dominica) have created their own bank. Venezuela has recently created joint banks with Iran, Russia and China, the latter with $12 billion in commitments. Chavez also wants to revive his OPEC proposal for an oil exporters' bank.

Bancosur (the Bank of the South) has been planned over the past year, with broad South American support. Such an institution could displace the Washington-controlled IMF, World Bank and InterAmerican Development Bank, the region's chief proponents of capital liberalisation.

Brazil and Argentina's support for Bancosur is crucial, but also compromised by those countries' powerful private investment groups. Whether these governments will be able to commit to a powerful new bank which favours public investment and social projectsremains to be seen.

With the onset of the Wall Street crash, Venezuela invited 40 political economists to Caracas, to debate the crisis and propose alternatives. The conference titled “Responses from the South to the Global Economic Crisis” was chaired by Venezuela's Planning and Development Minister Haiman El Troudi and Luis Bonilla from the Centro Internacional Miranda. The group presented papers and debated for four days, before presenting the Venezuelan Government with a joint statement. Though wider issues were discussed, the first report of this “International Political Economy Conference” focussed on finance and monetary reform. It seems the group will meet again in 2009. Following is a summary of the recommendations of the first report:

1. States of the region should take immediate control of their banking systems, without indemnification, according to the principle of the new Ecuadorian constitution (290.7:
   “nationalisation of private debt is prohibited”). These measures should aim to prevent capital flight. There is a need for each state to shut down offshore banking mechanisms. Banking supervision must be strengthened to help make the bank transparent witih deposits of peoples' savings, and as a public service. One of these services should be to guarantee a minimum national investment level of liquid assets.
2. There is a need for monetary coordination to avoid a war of “competitive devaluations” which would worsen the crisis, blocking a regional response and undermining the integration process of UNASUR (a South American integration process begun in 2007 which envisages a new continental currency). There must be clear signals from a Latin American monetary agreement and the definition of a system of payments based on a basket of Latin American currencies, which would provide measures of liquidity for each country. This in turn requires a substantial coordination of central banks and “overcoming neoliberal dogma”. In this respect we propose a South Fund (Fondo del Sur) as an alternative to the IMF.
3. Taking advantage of the excess reserves of each country to create a payments system, we propose the immediate implementation of the Bank of the South (BancoSur), based on a democratic system of one country one vote. This bank can be “the heart” of the transformation of the existing network of banks. It is necessary to establish exchange controls to protect reserves and prevent capital flight.
4. Countries of the region should consider suspension of payments on public debt, as a transition measure to protect sovereign resources from the crisis and avoid an emptying of treasuries.
5. We propose an emergency social fund to back food and energy sovereignty, as well as to attend to the migratory problems and a possible cutting of remittances. This fund could function within BancoSur or the ALBA Bank.
6. Following the principle of assisting the people and not the bankers, social programs must be maintained, the priorities being: employment security, universal income, public health and education, housing.
7. This is the opportunity for the countries of the region to get rid of the Inter American Development Bank, the IMF and the World Bank, and to begin creating a new international financial architecture.

---

Source: Australian Options, Issue 56, Autumn 2009, pp. 34-6.