New Developments in South-South Cooperation: China ODA, Alternative Regionalisms, Banco del Sur Isabel Ortiz

South-South cooperation is becoming increasingly important given criticisms on the current process of globalization. Since the 19th century, non-hegemonic countries and regions forged alliances as a strategy to reduce dependency and dominance from Northern powers. At the beginning of the 21st century, Southern countries remain associating to promote South-South cooperation. This article focuses on new developments in bilateral South-South ODA and regional integration, including South-South banks.

South-South Bilateral ODA and Investments: Emergence of China
South-South aid and investment tend to occur on bilateral basis. Main non-OECD donors are Brazil, China, India, Kuwait, Mexico, the Russian Federation, Saudi Arabia, South Africa, South Korea, Taiwan Province of China, and Turkey. Precisely for being outside of the monitoring lens of the OECD Development Assistance Committee (DAC), data on South-South transfers is unreliable. DAC points that in 2005, 4.4 per cent of total ODA was provided by non-OECD countries, but this is an underestimation.

The case of China must be highlighted, given the magnitude (and controversy) of its investments in developing countries, particularly in Sub-Saharan Africa, as well as in neighbouring East Asian countries. Beijing does not officially report on its ODA, but estimates to have spent $5.7 billion on assistance for Africa alone up to 2006 – though it is unclear what this figure includes[1]. In 2003, China set an important example by honouring the commitments made by the world community at the Monterrey Conference on Financing for Development by reducing or cancelling $1.2 billion of debt in favour of 31 African countries, arguing that world peace and development cannot possibly be sustained if the North-South divide grows wider and developing nations grow poorer. In 2006, President Hu Jintao announced that China would double its assistance to Africa by 2009, and provide $5 billion additional in loans.
The Export-Import Bank of China plays a strategic role. Since its foundation in 1994 to 2006, Exim Bank China developed 259 loans in Africa alone (concentrated in Angola, Nigeria, Mozambique, Sudan and Zimbabwe), most of them large infrastructure projects: energy and mineral extraction (40 per cent), multisector (24 per cent), transport (20 per cent), telecom (12 per cent) and water (4 per cent). Most known examples include oil facilities (Nigeria), copper mines (Congo and Zambia), railways (Benguela and Port Sudan), dams (Merowe in Sudan; Bui in Ghana; and Mphanda Nkuwa in Zambia) and thermal power plants (Nigeria and Sudan). Social sector investments have not been a Chinese priority; however, in a much lesser scale, China has offered free technical assistance and goods such as anti-malaria drugs [2].

According to Exim Bank China Annual Report 2005, only 78 loans of the total Bank loan portfolio were concessional, below-market rate loans. When the terms are concessional, interest rates can go as low as 0.25 per cent per annum, subsidized by the Chinese Government; however most of the procurement has to be imported from China, this is, is tied aid.

Apart from the condition to procure inputs from China, there are no other strings attached to these loans, this is, no policy conditions, no environmental or social standards required, a main reason why Southern governments find Exim Bank China loans attractive.

International and national organizations, including civil society groups, have criticized that China is supporting highly repressive regimes (Burma, Sudan, Uzbekistan, Zimbabwe) to satisfy China’s need for natural resources, particularly oil; creating new debt in low income countries to promote Chinese exports; undermining the fight against corruption and the promotion of environmental and social standards. In view of this, Exim Bank China recently approved an Environmental Policy (its quality remains to be evaluated); it has no social safeguards yet but there are signs that this may be reversed.

Alternative Regionalism in the South: Emergence of MERCOSUR and ALBA
Regional integration is a major form of South-South cooperation, and a constructive alternative to the current pattern of inequitable globalization. Regional formations offer a means of ‘locking in’ finance for the development of its member countries. Regionalist trading strategies are an effective means of protecting, promoting and reshaping a regional division of labour, trade and production. While the European Union is the best existing example of how regional solidarity may be articulated, there are increasing experiences in developing countries.

All countries in the world fall under some regional block: the Association of South East Asian Nations (ASEAN), the African Union, the Andean Community (CAN), the Caribbean Community (CARICOM), the League of Arab States (LAS), the South Asian Association for Regional Cooperation (SAARC), the Southern Africa Development Community (SADC), to mention some. The most mature Southern regional integration case is MERCOSUR (Southern Common Market) and the most radical, the recently created ALBA (Bolivarian Alternative for Latin America), both in Latin America[3].

MERCOSUR has evolved slowly but steadily, from a custom union in 1991 to establishing a MERCOSUR Common Parliament last May 2007. The importance of MERCUSUR comes in being the best example of regional integration after the European Union, which is meritory given the high growth volatility in the region and the fact that several economies collapsed in the period. Countries also managed to resist external Northern pressures that would have eroded MERCOSUR potential, such as the US-led Free Trade Association of the Americas (FTAA) – ”Our North is the South” says MERCUSOR motto. MERCOSUR has progressively expanded its role, from common external tariff agreements to a more comprehensive economic and political integration of its member states. With 260 million people and a combined GDP of $4.2 trillion per year, MERCOSUR is the sixth largest economy of the world when considered as a single market. However, intra-regional transfers to support local development (ultimately, to raise living standards and expand the internal market) remain low, as compared to the European Union, where the Social Cohesion Funds absorb 36 per cent of the EU budget.

This is different in ALBA. ALBA was created in 2006 to address the ”social debt” of Latin America, that is, address the needs of those who have lost out in the process of globalization –and as an alternative to the neoliberal FTAA. ALBA countries argue that a new set of public policies is needed to redress social asymmetries and raise living standards, based on social spending, public investment, and macroeconomic policies geared towards employment and the expansion of national markets.

Because ALBA countries are standing against the orthodoxy of Northern powers and the IFIs, they feel that the only chance of success comes by associating and uniting efforts, creating a new political bloc that provides support to its members. ALBA is using policies of regional solidarity to pursue social transformations at both national and regional level; oil-rich Venezuela has been funding a number of economic and social investments among neighboring countries, such as under the Petrocaribe Initiative. The largest is Project Grand National (April 2007) which includes multiple proposals for ALBA countries, from literacy programs and regional universities to the promotion of industrial technology policies; from radio/TV media with indigenous content to investments in energy generation and distribution; from regional fair trade agreements to the issuance of an ALBA bond.

Critics argue that ALBA redistributive policies depend on the price of oil; if oil prices were to plummet, regional integration may fall apart. While diversification of regional contributions and lesser dependency on a single resource is advised, it must be pointed that oil prices are likely to remain high. Venezuela is doing with ALBA what it was hardly done earlier by OPEC: using funds to develop the region. In the past, OPEC countries lost a golden opportunity for development, a large majority of petrodollars coming from the oil bonanza ended in Northern banks.

South-South multilateral Banks: Arab Development Banks, CAF and the potential of Banco del Sur

The most elaborate South-South multilateral banks are found in the Arab and Islamic world. Most of these institutions started operating in the 1970s as vehicles to transfer some of the resources from oil-rich countries to poorer countries in the region and Africa. The Islamic Development Bank objective is to foster the economic development and social progress of Muslim communities in accordance with the principles of shari’ah. In 2006, it announced a major funding operation in support of MDG-related expenditures among its member States. The second-largest is the Arab Fund for Economic and Social Development (AFESD), which provides soft lending for Arab League countries, mostly for infrastructure projects.

The Andean Development Corporation (CAF in its Spanish acronym) is also a successful case of Southern multilateral bank, also created in the 1970s under the auspices of CAN. In recent years its portfolio (US$3 billion), again mostly in infrastructure, largely surpasses investments by the World Bank and Inter-American Development Bank in the Andean region. Its board includes seventeen Latin American members, plus Spain and twelve commercial banks; most of the Andean borrowing members value CAF’s proximity, lack of conditionalities and speedy processes (as low as 3 months for loan approval). However, the lack of transparency regarding the most basic of CAF functions and the costly pricing of its loans puts some questions on the institution.
South-South banks appear friendly to governments given their lack of policy conditionalities and lesser requirements, however, unless there are created with a different set of principles, they will replicate the same problems that exist in the Northern-driven multilateral banks, such as concentration of ODA in a few countries and sectors, residual social investments, inequitable outcomes, etc.

In May 2007, countries from MERCOSUR and ALBA associated to create an alternative Bank, Banco del Sur (Bank of the South)[4]. Several member countries have withdrawn from the IMF and the World Bank and they intend that Banco del Sur becomes an instrument of South-South solidarity and fair development, an alternative to the IFIs, combined with a revamped Latin American Reserve Fund (known by its Spanish acronym FLAR) as a regional monetary fund that would ensure a “collective insurance” to its members, pooling funds against financial risks. The founding chart of Banco del Sur assigns one country-one vote, which is an important advance as compared to the rest of multilateral banks who assign votes according to contributions (so richer countries remain in control). The bank expects to raise US$7 billion in paid-in capital.

Banco del Sur is likely to expand the model of BANDES (Bank for Economic and Social Development of Venezuela, created 2001)[5] at a regional scale. BANDES, under the Ministry of People’s Power for Finance, supports advice and investments in less developed areas, fostering local economic and social development, offering concessional rates to public/social enterprises (SOEs, coops, community ownership) according to the priorities of Venezuela’s National Development Strategy. In 2005-06 most of BANDES portfolio (US$1,2 billion for the biennium) was onlent to rural, industrial, SME and mutual banks, supporting from milk producers to health services.

Many questions remain ahead the new Banco del Sur, such as agreeing on a lending framework, type of loan guarantees expected, the criteria for selecting investments to ensure equitable development, and its social and environmental safeguard policies, among others. The fact that it intends to be a truly alternative bank hopefully will bring transparency and accountability to its processes, and question the drive of most Southern institutions to spend resources in large infrastructure projects with no social and environmental standards, bypassing more complex but needed economic and social development investments. With its egalitarian principles, Banco del Sur may be the first Southern institution that invests solidly in national productive capacities and does not consider social development as a residual investment.

[1] OECD DAC ODA statistics do not include OECD countries Export-Import Banks non-concessional loans; a major international effort is needed to start monitoring non-OECD ODA. Simply for reference, total ODA in year 2005 was estimated at $111 billion.

[2] See Exim Bank. 2005. Export-Import Bank of China Annual Report. Exim Bank China, Beijing; Booshard, Peter. 2007. China’s Role in Financing African Infrastructure. International River Network and Oxfam, Berkeley; and Broadman, Harry. 2007. Africa’s Silk Road: China and India’s New Economic Frontier. The World Bank, Washington D.C.

[3] MERCOSUR members are Argentina, Brazil, Paraguay, Uruguay and Venezuela (Bolivia, Chile, Colombia, Ecuador and Peru currently have associate member status) See http://www.mercosur.int/; ALBA includes Bolivia, Cuba, Ecuador, Nicaragua and Venezuela. See http://www.alternativabolivariana.org/

[4] Argentina, Bolivia, Brazil, Ecuador, Paraguay and Venezuela signed on 22 May 2007 the Asuncion Declaration, to constitute Banco del Sur.

[5] Banco de Desarrollo Economico y Social de Venezuela. See http://www.bandes.gob.ve/