It took a while to get formalised, and even now there are several hurdles to be crossed before it becomes operational. Nevertheless, the signing of the agreement on December 9, 2007 in Buenos Aires, to create the Banco del Sur is a very welcome sign that the complacent world of development finance run by the Bretton Woods lending institutions is about to get some much-needed shocks.

The Banco del Sur is a pet project of the President of Venezuela, Hugo Chavez, who has seen it as an important means of reducing the influence of the IMF and World Bank in imposing neo-liberal economic policies with adverse consequences upon developing countries. While it has global aspirations, the current focus is on Latin America, where it is also seen as part of the moves towards greater regional integration and reduced dependence upon the United States.

The seven countries that signed the agreement in early December were Venezuela, Bolivia, Argentina, Ecuador, Brazil, Paraguay and Uruguay. (The surprise new entrant, Colombia, whose leader is a close ally of the US, asked to join but later pulled out, presumably under US pressure.) While these countries have divergent interests and aspirations with respect to the Bank, the move reflects a general disillusionment with the role of the IFIs in the region. These include not only the IMF and the World Bank, but also the Inter-American Development Bank (IDB), which has some participation from Latin American countries but is dominated by the US. It has generally adopted the same approach and policies as its larger counterparts.

It is general knowledge that the IFIs’ record in the region is less than admirable. In the 1980s, when the external debt crisis forced several large debtor countries in Latin America to turn to the IMF, it imposed severe and misplaced monetarist adjustment policies that led to the dramatic fall of incomes and growth potential, such that the period became known as a “lost decade” for the region. In the 1990s, the IFIs encouraged very rigid macroeconomic policies as well as policies of privatization with inadequate regulation that worsened already very unequal income distribution and damaged possibilities of increasing aggregate productivity.

The crisis management record is also abysmal. Mexico in 1995 and Argentina in 2001, for example, both suffered more as a result of the wrong policies imposed upon them by the IFIs. And the World Bank has routinely pushed market-based and private solutions in areas such as education and health, even when the consequent problems are all too well-known.

The extraordinary thing is that the IFIs appear to have learned very little from their past mistakes. Nor do they seem to recognise that they deserve to have very little say in determining policies, given how little they have actually contributed to development finance in recent years, not only in Latin America but in the developing world as a whole.

Indeed, in the Latin American region the changing nature of international capital markets has meant that the IFIs - and official finance generally – have been not just minor but actually negative net contributors to resources for development. Chart 1 shows how net financial flows to the Latin American and Caribbean region have been dominated by private equity flows (and within that, incidentally, by FDI rather than portfolio flows).