On December 9, 2007 the presidents of Argentina, Bolivia, Brazil, Ecuador, Paraguay and Venezuela, together with a representative of Uruguay, signed the founding Charter of El Banco del Sur or the Bank of the South. These are seven signatory countries out of the total of twelve countries of South America.
Given the small domain of its membership, the challenge of the Banco del Sur relating to membership is two-fold (excluding, for the moment, the question of eligibility in procurement): (i) how to secure an adequate flow of development financing not only from within the region, but also from outside the region; and (ii) the size of the Board of Directors.
The Founding Charter underscores the characteristic of a new regional financial architecture as "an institution dedicated exclusively to the promotion of regional development, to be constituted under the sovereign control of South American countries."
That the scope of operations is confined to the geographical area of borrowing member countries is common to all regional development banks without exception. What is unique in the Bank of the South is that it does not contemplate, at least for the moment, to open up its membership door to non-regional countries as all other regional development banks have done.
The Inter-American Development Bank (IDB) originally limited its membership to the countries in the Americas. The African Development Bank (AfDB) likewise restricted its membership to African states in the continent. As their respective operations took off and started growing, demands for funding naturally increased.
To mobilise necessary resources, IDB and AfDB recognised the resource limitation imposed by the narrowness of the domain of membership, compared with the Asian Development Bank (ADB).
Accordingly, in 1972 IDB amended its charter to adopt what ADB calls "the principle of additionality" by mobilising additional development financing from countries outside the region "for the purpose of increasing the resources of the Bank," so that "non-regional countries which are members of the International Monetary Fund, and Switzerland, may also be admitted to the Bank."
AfDB adopted a different path from IDB for mobilising additional resources by creating a separate entity known as the African Development Fund (AfDF) in 1972. The original participants in AfDF were 15 non-African States and the AfDB.
Participation is open only to those States which are members of the United Nations or any of its specialised agencies or are parties to the Statute of the International Court of Justice. Subsequently, AfDB amended its charter in 1979 to allow non-regional members of AfDF, or non-regional contributors to AfDF, to become members of AfDB.
The Preamble of the AfDB Charter states that "a partnership of African and non-African countries will facilitate an additional flow of international capital through such an institution for the economic development and social progress of the region, and the mutual benefit of all parties to this Agreement [emphasis added]." This is a radical notion which sounds like an oxymoron that a regional bank includes non-regional countries as members.
The most recent regional development bank, the European Bank for Reconstruction and Development (EBRD) opened its membership doors to countries beyond the former Soviet Union republics and the Central and Eastern European countries.
Given such an historical development, prompted by the need for more resources, the Bank of the South is unique. In view of the small number of countries in South America, it will remain to be seen whether an endogamous institution of a small membership domain can be financially sustainable as a development institution.
Central to this question is, as explained in this column previously (see "The Principle of Burden Sharing," July 16, 2008), its subsidiary question, what would be an incentive for non-regional countries to subscribe to capital shares and make contributions to the Special Funds of the Bank when every member has only one vote, irrespective of the size of capital subscription and the mount of contribution to the Special Funds.
The principle of burden sharing has a more appeal to regional countries than non-regional countries, in that the former will be direct beneficiaries of "regional integration," and it remains to be seen whether non-regional developed countries will share South America's demands and expectations about its role vis-à-vis the IMF and the World Bank.
The inclusion of non-regional countries in the membership of the Banco del Sur will have a serious ramification to the decision-making structure of the Board of Directors as the Founding Charter makes it clear that the Banco del Sur is "to be constituted under the sovereign control of South American countries."
FURTHER, ARTICLE 5 STIPULATES: "The management of the Bank of the South will have an egalitarian representation for each one of the South American countries that constitutes it, under a democratic system of operations." Article 5 is understood to mean to have a "one member country, one vote" system regardless of the size of capital subscription of any member country.
Given the voting system of the Bank, the number of non-regional countries is ipso facto extremely limited since it cannot become a simple majority of the members of the Bank. If regional members are seven, as the Bank is organised today, the maximum number of non-regional countries will be only six.
Due to its voting structure, the Bank will have a problem in determining how many non-regional countries should be represented on the Board of Directors. In the case of ADB, for example, the number of Directors reflects the share-holding of the members between the regional and the non-regional countries on the basis of the ratio of 60:40, respectively. In the Board of Directors, unlike the Board of Governors, not every member country will be represented.
The Directors of the Board of Directors must be elected by member countries, and since the President of the Bank will be the chairperson of the Board of Directors, who will cast a deciding vote in case of equal division, the number of Directors on the Board of Directors must be even numbers. ADB has 12 Directors, of whom eight Directors are from the region, and four Directors from the non-region. In the case of EBRD, 23 Directors are grouped into 11 from the European Community countries and 12 non-EC countries, which are distributed to four Central and Eastern European borrowing countries, four other European countries and 4 non-European countries.
In all other IFIs, each Governor casts all votes of the country he represents for a single person, and the candidates who received the highest number of votes would be elected. Under the one country, one vote system of the Banco del Sur, however, the conventional voting formula of the other IFIs cannot apply.
Whether or not the Banco del Sur will include non-regional countries in its membership, it is imperative that the seven countries that are signatories to the Founding Charter should at least indicate how Directors will be elected in accordance with the one country, one vote system.
Should these seven countries decide to extend the membership of the Banco del Sur to countries outside the region, it should equally be imperative that they indicate eligibility criteria for membership in accordance with principles of international law.