Argentina's outgoing President Nestor Kirchner (R) and Bolivia's President Evo Morales listen to Ecuador's President Rafael Correa (L) after signing a founding document for the Banco del Sur (Bank of the South) at the Casa Rosada Government House in Buenos Aires December 9, 2007. Seven South American nations founded a development bank to demonstrate their joint independence from multilateral lending practices that some have blamed for past economic crises. REUTERS/Bruno Domingos (ARGENTINA)By Stephan Kueffner
Dec. 15 (Bloomberg) -- Ecuador's President Rafael Correa wants Latin American countries to merge repatriated offshore assets in a fund that would back a proposed regional currency.
Correa, with five other South American leaders, on Dec. 9 signed off on a joint development bank, the Bank of the South, promoted by Venezuelan President Hugo Chavez to counter the influence of institutions like the International Monetary Fund and the World Bank.
``The Bank of the South is an important step but the next step is missing, to create a Fund of the South, a fund that will bring back all those funds that Latin America, particularly South America, holds outside its borders, close to $250 billion, to serve as a backing in the case of financial and balance of payments crises,'' said Correa today in his weekly radio address.
The fund could be used to support countries in the event of crises, its returns could be used to fund investments in infrastructure, and its assets could serve to back a regional currency from Mexico to Patagonia, he added.
Rather than booking transactions in U.S. dollars, the countries in the region could use a transaction unit backed by such a fund. ``That's the first step to later have a currency, the latino,'' said Correa.
Latin American central banks and other government institution hold investments overseas, like U.S. Treasuries. Correa and Chavez want to bring them back to make them available for local economies...
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4 comments:
Correa's right when he says that much remains to be done in terms of setting up institutional frameworks necessary to support a regional currency.
What Correa doesn't mention, though, is the most important reason that LA investors keep their moneys offshore, and that's that they don't have confidence in local economic policies, including those, lately, of Ecuador.
Correa's taken over the Central Bank and the Superintendency of Banks, accusing the entities of corruption, cronyism, and incompentence. This means that he now his hands firmly on the controls of the financial system, which he claims is (or was) controlled by his enemies.
Correa's wrong about the most important thing of all, though, and that's that the funds in those banks are controlled by investors who are watching this guy, and not liking what they see and hear. Reserves are going down because people are bailing out at the prospect growing disincentives to investment.
As well, with the Central Bank, what had been an independent reporting source on country economic performance is now in the hands of Correa subordinates (this paralells events in Venezuela) so investors will be watching like hawks to see if that entity starts issuing suspicious stats. to the degree they start improving.
At the moment, growth and liquidity are down and inflation is up, not at worrisome levels, but all headed in negative directions. Correa's a PhD in Econ, and I think he means well in terms of wanting a regional currency. Still, he ignores the fact that investors will make their own decisions at his own risk, the risk to the Ecuadorian economy, and of course, to his dream of a regional money.
What Correa doesn't mention, though, is the most important reason that LA investors keep their moneys offshore, and that's that they don't have confidence in local economic policies, including those, lately, of Ecuador.
This is the logic of race-to-the-bottom "globalization." As the logic goes, if you don't do what mobile capital wants, you're screwed. That means you can't have a system of progressive taxation, you can't lower interest rates, etc. etc.
The logic is erroneous. It's not as if the South Koreans in the '60s and '70s bent over backwards to please financial asset holders. No, the South Koreans simply told their financial asset holders that capital flight would be severely punished. That system worked fairly well.
The notion that states must do whatever mobile capital wants is already passé because, in the end, if you have to do whatever mobile capital wants, you're already fucked anyway.
Justin,
I can appreciate your frustration, but as has been pointed out here and other blogs relating to LA, LA is not Korea, and Latinos are definitely not Koreans.
I'm exaggerating, but Koreans are mean, non-nonsense sob's who'd just as soon shoot you as look at you if you step out of line and that axiom really did apply in Korean back in the 60's and 70's when that country started to take off.
En cambio, I've lived in several countries in LA where fx controls existed, and... well, it's LA, Justin. People bob, duck, weave, and scam, man, and the divisas keep on flowing out of the countries, when local policies are out of whack. LA's like a seive and the money flows, just like it's flowing out of Venezuela right now (see OW's latest posting on CAIVI ops and what's happening with fx outflows down there).
I presume you're familiar with some of the ways folks get their dollars out of country down here, so I won't go into the details here.
Suffice it to say that, in my opinion, Correa's getting off to a bad start, and it's already becoming manifest in the indicators I mention above. To be fair, I believe Correa means well, but he doesn't seem to understand the impact the market signals he sending, nor does he seem to appreciate the lengths to which people will go to protect their money from people like him. He's a supremely self-confident guy, and considers himself smarter than pretty much anyone else.
But, ojo, Justin, in my experience, the smartest guys of all are those guys who are running scared, looking out for their money. En fin, we'd all be much better served if Correa would slow down and stop making people nervous. That doesn't mean throwing with the capitalist oligarchs, rather it means appreciating human nature and the nature of people trying run their businesses down here (including me, btw!). regards, T
I presume you're familiar with some of the ways folks get their dollars out of country down here, so I won't go into the details here.
But that just speaks to Latin America's need to develop the administrative capacity to enforce capital controls, collect taxes, etc. Even the international financial institutions have found that, for their level of development, Latin American states are abnormally weak in their administrative capacity to collect taxes. That's one of the reasons Latin America is the most inequitable region of the world.
So the solution is not to simply surrender to the "markets." The solution is to strengthen the Latin American state's administrative capacity.
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