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The Inter-American Development Bank isn't broke, so don't fix it

The Inter-American Development Bank isn't broke, so don't fix it
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Latin America has become the epicenter of the current global health, economic and social crises. The Inter-American Development Bank (IDB), which has been the main source of development funding in the region for decades, is poised to play a leading role in combating the virus, protecting the vulnerable and harnessing a sustainable recovery. However, the Trump administration has other plans.  

Trump insists that the IDB break its tradition of having a Latin American at the helm and put a geopolitical operative from the U.S. instead. There couldn’t be a more misguided policy toward Latin America amid these urgent crises. The U.S. should honor the decades-long arrangements that Latin Americans lead the IDB and support a candidate from the region.

Latin America has seldom found itself in such dire straits. The International Monetary Fund (IMF) projects the GDP in Latin American and the Caribbean will fall by 9.4 percent in 2020 — the worst performance of any region in the developing world. Specifically, the IMF expects the Brazilian economy to shrink by 8 percent and by 10 percent in Mexico. Some countries had hardly recovered from the social uprisings of late 2019 when they were hit by the pandemic, and now the region has become a hotspot with the largest number of cases per 100,000 people in the world. With the lockdowns more or less implemented, an economic recession appears to be looming. Much of the progress made in poverty reduction over the past decades is under threat. The UN Economic Commission for Latin America and the Caribbean estimates that the number of poor people will increase by 30 million or more due to the crisis.

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Founded in 1959 — and part of the network of regional development banks around the world — the IDB has established an enviable record in promoting growth and development across the Western Hemisphere. Its founding president, Felipe Herrera, a former finance minister of Chile and a true visionary, gave it from early on its imprint as an entity committed to regional integration and social progress. His pioneering presidency (1960-1970) was followed by those of two other senior Latin American statesmen — Antonio Ortiz-Mena (1971-1988) and Enrique Iglesias (1988-2005). They made the bank into perhaps the most respected Pan-American institution.

In these years, the IDB made the transition from a traditional North-to-South lending entity, to a true financial cooperative, in which both creditor and borrowing members work together. The change in voting shares that took place in the 1990s established a near parity in voting shares between both types of members. Latin American countries have actively contributed to replenish the capital of the bank and regard it as one their own, in a very different relationship from the one that exists between the World Bank and/or the IMF and the borrowing countries.

Focusing on infrastructure, energy, education and health — and now climate change — the bank fosters the sort of cross-border investments that are so critical in attracting private capital and triggering economic growth. As Nancy Birdsall, a former executive vice president of the bank, has observed, part of its success is due to its governance structure and staffing. Like the unwritten rule that the president of the World Bank will be an American and the managing director of the IMF a European, traditionally, the president of the IDB has been from Latin America. At least that was President Eisenhower’s commitment at the launching of the IDB, who advised that “for this institution to be successful, the function of leading it must belong to Latin American countries." This commitment is now in danger of being broken.

The United States has announced the candidacy of Mauricio Claver-Carone, who is currently the director of the Latin America at the National Security Council at the White House, to be the bank’s next president. Given that the U.S. has 30 percent of the votes, with a couple of additional countries, it may have a majority. Yet, this throws a monkey wrench into the way the bank has been run for 60 years.   

Departing from the traditional leadership structure leaves unanswered questions about how the bank would be managed, and speaks to the uneasy balance development banks need to strike between legitimacy and effectiveness. Implementing such changes could seriously affect its legitimacy throughout the Western Hemisphere. It would put it into the same category as other Northern-led International Financial Institutions, just at a time when the trend is toward a greater role for borrower countries in the running of these institutions.

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The argument has been made that an American at the head of the bank would make it easier to replenish its capital. That is not the case. 

The IDB is the main source of development financing for the Latin American and Caribbean regions and it enjoys a well-deserved standing there. To mess with the way it has been run until now and putting its very future at risk is a high-stakes gamble. The last thing the United States needs is to endanger the effectiveness of an instrument that has taken more than half a century to build up — and actually works — just at the time when it is most needed.

If it ain't broke, don't fix it.

Kevin P. Gallagher is director of the Global Development Policy Center at the Frederick S. Pardee School of Global Studies at Boston University. Jorge Heine is a professor at the Pardee School.