Latin America: Return to the IMF or reinforce alternatives?

17 April 2009

Today Latin American countries are faced with the option of returning to international and regional financial institutions – IMF, World Bank and Inter-American Development Bank (IDB) – or rejecting the failed recipes of the 1990s in order to build and reinforce alternatives that allow them to face the current crisis.

The crisis is a global phenomenon that fails to forgive either regions or countries. The Institute of International Finance has forecast a dramatic reduction in private capital flows to emerging markets. While capital flows in 2007 amounted to $929 billion, they predict in 2009 flows will only reach $165 billion. Therefore, we are facing the possibility of a significant contraction of capital flows and investment in emerging economies. The question is how and by whom this contraction can be compensated.

The political argument that Latin American countries used when moving away from the IMF is the same that led them to accumulate international reserves and think of funding alternatives for the region. Now they must decide between participating in the recapitalisation of IFIs and demanding reform that gives them more power in their decision-making, or else advancing the construction of South-South cooperation mechanisms, giving shape to a regional currency and setting the Bank of the South into operation.

reject the IFIs

On the eve of the G20 meeting, South American presidents travelled to Doha to participate in the second summit of South American-Arab countries (ASPA), to strengthen the South-South axis and join forces to give more weight to their voices at the international level. Since the first meeting of ASPA in Brasilia in 2005, Brazilian exports to the Arab world have increased from $8 billion to $20 billion; while Argentinian exports also rose from $1.8 billion to $4.5 billion. According to Argentinian government officials, this relationship has been based on cooperation rather than on imposition.

The BRIC group of countries made up of Brazil, Russia, India and China, announced in March that they will only provide more money to the IMF if the institution is reformed and the voting power of emerging countries increased (see Update 65). This reform should also include the reduction of loan conditionalities for poor countries, and an increased capacity to discipline the most powerful nations.

However, many people still doubt the real magnitude of the reforms to be implemented at the IFIs. According to Argentinian economist, Benjamín Hopenhayn, a reform of the IMF’s thinking is not credible, since it needs to “change its ideology and that of the 3,000 economists that are part of the IMF.”

On the other hand, economist Anwar Shaik, professor at the New School for Social Research, of New York, has said that “global coordination would be a good idea but the question is what interests it will respond to. I do not trust the IMF or the World Bank to tell us what is right. Their track-record is awful. If coordination goes along these lines, I’d rather not have it.”

Brazilian president, Luiz Inácio Lula da Silva, has also intensified his discourse against neo-liberalism, its policies and institutions, asserting that institutions such as the IMF or World Bank had been “incapable of anticipating and controlling the financial disorder.”

In recent months, China extended currency swap arrangements worth billions of dollars to South Korea, Hong Kong, Indonesia, Malaysia and Belarus, after rejecting the requests of rich countries that it give substantial funding to the IMF in the absence of an institutional reform. This list is now joined by Argentina to which China has offered a $10.2 billion curency swap. According to Mark Weisbrot of US-based think tank Center for Economic and Policy Research this implies a specific alternative for the South American country to escape from IMF influence.

At the IDB’s 50th annual meeting in Medellin, Colombia, in March, the president of the Central Bank of Argentina, Martín Redrado talked about the convergence of macro-economic policy and made reference to the proposal for creating a single regional currency. This builds on the initiative of Venezuela to implement the Sucre as a trading currency between Venezuela, Cuba, Nicaragua and Ecuador.

Finally, the Bank of the South should be launched next May with starting capital of $10 billion from Argentina, Brazil, Venezuela, Bolivia, Ecuador, Paraguay and Uruguay (see Update 62).

Civil society and organisations in the region are demanding that their governments reject the IFIs and turn towards people-centred regional alternatives.