What Does the Inter-American Development Bank Do?
The Inter-American Development Bank strives to enhance economic and social progress in Latin America and the Caribbean, yet critics argue for necessary reforms.
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Summary
- Established in the aftermath of World War II, the Inter-American Development Bank stands as the primary contributor of development funding in Latin America and the Caribbean. The United States maintains its position as the bank’s predominant shareholder.
- Throughout recent years, the bank has extended financial assistance to the region, offering relief from debt in places such as Haiti, and aiding countries in navigating the challenges posed by the COVID-19 pandemic.
- Nonetheless, its detractors contend that both the bank and similar development institutions require fundamental improvements to adequately accomplish their mandates, with a particular focus on addressing climate-related concerns.
What Does the Inter-American Development Bank Do?
Over the course of more than six decades, the Inter-American Development Bank (IDB) has held its position as the foremost provider of long-term funding for economic, institutional, and social progress in Latin America and the Caribbean. During this time, the bank has significantly broadened its membership and expanded its capital base. Notably, in 2021, as the COVID-19 pandemic wrought havoc in the region, the bank mobilized a record $23.4 billion in financing to support countries in their response efforts.
Nevertheless, the IDB has not been without its share of criticisms since its inception. Some analysts argue that the IDB struggles with project implementation efficiency, while others contend that the divergent interests of its member states hinder its ability to achieve its objectives. Concurrently, the bank is actively seeking to promote greater private investment and accelerate its efforts in climate financing.
Why was the Inter-American Development Bank created?
The concept of establishing a regional bank to drive economic and social development originally surfaced through the ideas put forth by Argentine lawyer Juan Bautista Alberdi in 1844. As the early twentieth century dawned, Latin American nations began to express growing dissatisfaction with their limited representation within international financial institutions, including the World Bank.
However, it wasn’t until the aftermath of World War II that U.S. President Dwight D. Eisenhower endorsed this concept, driven by concerns over escalating inequality and the expanding influence of the Soviet Union in the region. In 1959, the IDB charter [PDF] was formulated by the United States and nineteen other member states of the Organization of American States (OAS).
Throughout the intervening decades, the bank has witnessed seven presidential elections, experienced a nearly threefold growth in its original membership, and augmented its capital from an initial foundation of $1 billion to a present-day sum exceeding $170 billion.
Its sphere of influence has also broadened significantly, with the bank acknowledging the imperative to extend its activities beyond conventional economic development initiatives. It now champions a diverse array of principles encompassing gender equality, diversity, climate action, environmental sustainability, and the rule of law.
Today, virtually every country in the Western hemisphere holds membership in the bank, with the notable exception of Cuba, mirroring Havana’s exclusion from other regional organizations.
What does it do?
The Inter-American Development Bank (IDB) has at its core the primary objectives of promoting social inclusion and equality, fostering increased productivity and innovation, and reinforcing regional economic integration. The IDB extends support to both public and private sector clients through two principal mechanisms:
- Grants: The IDB directly allocates funds to facilitate organizations in enhancing their technical expertise, knowledge, and capabilities. Haiti has been a significant beneficiary of grants, receiving $2 billion over a ten-year period, particularly following the catastrophic earthquake of 2010. The IDB continues to provide grants to Haiti, even in light of its deteriorating security situation.
- Loans: The bank offers loans and loan guarantees to stimulate economic, developmental, and social initiatives across various sectors, including education, infrastructure, and sustainable tourism. These loans provide flexibility in terms and long-term financing options, accompanied by advisory services. Their “preferred” status ensures their repayment priority over loans from other lenders. In some instances, these loans may also be offered at below-market rates, with Guyana, Honduras, and Nicaragua currently qualifying for subsidized financing.
Furthermore, the IDB conducts economic research and takes on responsibilities encompassing technical assistance, policy guidance, and training, among other activities.
What is its budget?
In 2021, the IDB, along with its private sector arm, IDB Invest, achieved an unprecedented milestone by mobilizing a record $23.4 billion in financing, marking a $1.4 billion increase from the preceding year. This noteworthy achievement included an all-time high of $4.5 billion allocated to projects addressing the critical issue of climate change.
Since its inception, the IDB has undergone nine capital increases, unlike many other multilateral development banks, which typically adhere to regular schedules. The most substantial and recent of these increases occurred in 2010 in response to the global financial crisis of 2008. This augmentation injected $70 billion [PDF] into the bank’s existing capital of $100 billion, significantly bolstering its lending capacity. Prior to this increase, the IDB’s annual lending capacity was limited to approximately $8 billion, exclusive of emergency cases.
Funds for IDB lending originate from four primary sources:
- Member country contributions.
- Fees and interest generated from IDB loans.
- International bonds issued by the IDB, which enjoys a prestigious triple-A rating.
- Accumulated equity since the bank’s inception.
All IDB member countries make annual contributions to the Ordinary Capital, the principal funding source for the bank, a portion of which is maintained as cash reserves. The remainder is referred to as callable capital, to which members have pledged but are not obliged to make payments unless the bank faces imminent financial risks (an option that has never been invoked by the IDB to date).
Following the 2010 capital increase, the IDB has strived to allocate a minimum of one-third of its lending to member nations with the lowest per capita income, such as El Salvador, Haiti, and Nicaragua.
The U.S. Is the IDB’s Biggest Shareholder
Share of IDB votes, 2023
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How is it organized?
The bank forms an integral part of the larger entity recognized as the IDB Group, comprising IDB Invest (formerly the Inter-American Investment Corporation) and IDB Lab (formerly the Multilateral Investment Fund). Working in unison, IDB Invest and IDB Lab collaborate with clients from the private sector and entrepreneurs within the region, while the IDB itself refrains from direct investments.
Much like the World Bank, the highest authority within the IDB is the Board of Governors. Each member country appoints a governor to this board, typically individuals like finance ministers, central bank presidents, or other top economic officials, with their voting power determined by the capital contributed by their respective countries.
Apart from supervising the bank’s operations and administration, the Board assembles annually for a summit to establish high-level policies. During the most recent summit held in Panama City, Panama, in March 2023, governors mandated the formulation of a capital increase proposal for IDB Invest and deliberated on a new institutional strategy proposal, slated for approval in 2024. Day-to-day decisions of the board are overseen by fourteen executive directors, who handle tasks such as approving individual loan proposals and establishing interest rates.
The Board of Governors is also responsible for electing the IDB president, who serves a five-year term and presides over executive director meetings. Ilan Goldfajn, formerly the head of Brazil’s central bank, has been at the helm of the IDB since December 2022. During his tenure, he has identified several focal areas for his administration, including addressing food insecurity, combating climate change, and investing in more sustainable digital and physical infrastructure.
Who are its members?
Ownership of the IDB is distributed among forty-eight sovereign states, all of which are both members and shareholders of the bank. Furthermore, regional members, apart from contributing to the bank’s capital, are obligated to be part of the Organization of American States (OAS), whereas non-regional members must maintain membership in the International Monetary Fund (IMF).
A distinguishing feature of the IDB is the substantial influence wielded by developing member countries, surpassing the norm in many other international institutions. The twenty-six borrowing members collectively control slightly over half of the bank’s total shares. This distinctive characteristic, observed since its establishment, has prompted some critics to label it as a “debtors’ bank” due to the perceived higher risk of default.
Nonetheless, the IDB’s twenty-two non-borrowing members retain significant leverage in the decision-making process. The United States, a non-borrowing member, assumes the position of the IDB’s largest shareholder with 30 percent of the vote, with Argentina and Brazil closely following at 11.4 percent each.
The Inter-American Development Bank
Membership as of 2023
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What are some leading examples of its work?
For numerous decades, the IDB has stood as a pivotal source of financial assistance for nations facing economic challenges. In 2007, for instance, the IDB provided debt relief amounting to approximately $4.4 billion to Bolivia, Guyana, Haiti, Honduras, and Nicaragua, as part of a global, multilateral initiative aimed at alleviating the overwhelming debt burden of impoverished countries.
In response to the COVID-19 pandemic in 2020, the IDB Group authorized around $8 billion in financing to address public health and employment needs. Additionally, it mobilized $1 billion for vaccine procurement and distribution, thereby augmenting the overall availability of funds. IDB grant funds have also been directed toward aiding countries in integrating migrants by improving their access to healthcare, education, housing, and security services.
To secure IDB loans, countries typically navigate a lengthy project cycle, involving the creation and approval of loan proposals. Among the projects within the IDB’s active portfolio, nearly one-third are concentrated in Argentina, Brazil, and Uruguay, while more than 40 percent are dedicated to initiatives related to state reform, water and sanitation, and social investment.
As an example, a current project is focused on enhancing water services in the province of Buenos Aires, Argentina, while another endeavor seeks to bolster the digital governance capabilities of subnational governments in Brazil. Historically, approximately one-fifth of all IDB projects have been situated in Argentina and Brazil.
The IDB has progressively forged direct collaborations with other multilateral institutions to implement its programs. Most recently, it entered into a four-year partnership with the World Bank, deepening cooperation to enhance sustainable development in the Amazon Rainforest, fortify climate resilience in the Caribbean, and expand digital access throughout the region.
This accord coincides with calls from high-level officials, including U.S. Treasury Secretary Janet Yellen, urging multilateral institutions to “modernize” their approach, including the mobilization of more private capital. The IDB, along with the IMF, has undertaken similar reform commitments.
Most IDB Projects Are in South America
Number of projects by country, 2023
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What do critics say?
As the IDB has expanded its scope and aspirations, there is growing consensus among policymakers that the bank, along with similar development institutions, requires reform to effectively address contemporary challenges, particularly pressing global issues like climate change. In a 2022 report by the IDB’s independent evaluation office, it was revealed that only 53 percent of IDB public sector projects were deemed successful in the fundamental areas of effectiveness, efficiency, relevance, and sustainability.
In terms of effectiveness alone, a mere 27 percent of IDB projects achieved their anticipated outcomes. However, a meta-review of IDB reports conducted by the Canadian government showed that 63 percent of project evaluations indicated positive outcomes.
Independent evaluators have identified various factors hindering the bank’s ability to fulfill its mission. These include the frequent turnover of Board members, divergent interests among member countries, a lack of institutional transparency, and a lack of accountability for senior management.
Furthermore, the bank is not insulated from the political dynamics of its member states, with analysts noting tensions between left- and right-leaning countries. Goldfajn himself has advocated for the bank to navigate these divisions by adopting a “less ideological” and more “technical” approach.
Timeliness is another concern, with some critics contending that the IDB is excessively slow and inefficient. A 2018 IDB report revealed that, on average, there is a 424-day gap between project approval and the commencement of implementation, and in some cases, it takes more than five years for a project’s funds to reach an 80 percent disbursement level.
Additionally, there is potential for the IDB to play a more substantial role in addressing climate change. While the bank has taken initial steps in this direction, such as setting new environmental standards for clients, experts argue that it can do more, considering the magnitude of the crisis.
By fostering climate-resilient economies, the IDB can contribute to “stimulating growth, job creation, and investment while reducing risks to public finances,” as outlined by Guy Edwards from the University of Sussex and Marcela Jaramillo from the 2050 Pathways Platform in a piece for Global Americans.
What’s the United States’ relationship with the bank?
The United States, as a founding member and the largest shareholder, has wielded a significant influence on the development of the bank, affording Washington a unique role. Since the bank’s inception, an implicit agreement has prevailed that the president would hail from a Latin American country, while the vice president would be a U.S. citizen. Mauricio Claver-Carone, the former IDB President from 2020 to 2022, who was an American born to parents of Cuban and Spanish descent, was the sole exception to this rule.
Under the administration of President Donald Trump, relations between the United States and the IDB took a turn for the worse, as Trump adopted a more stringent approach toward the region compared to his predecessors.
His actions included efforts to curb illegal immigration, suspension of foreign aid, and reductions in funding for regional organizations, including the IDB. In 2017, his administration terminated U.S. contributions to IDB Lab, marking the first instance since the lab’s establishment in 1993 that the United States did not contribute to its financial resources. Trump’s nomination of Claver-Carone was also seen as an affront to the autonomy of some Latin American countries.
In contrast, President Joe Biden has pledged to “reinvigorate” the IDB and other economic institutions in the hemisphere, with the aim of addressing slow economic growth and high inflation in the region. The U.S. budget for fiscal year 2024 includes an allocation of $75 million for IDB Invest to further stimulate private sector investment. Simultaneously, the U.S. is actively working to increase the involvement of American companies in over $4 billion worth of government contracts financed by the bank each year.
However, the bank has become entangled in U.S. concerns regarding China. Despite China holding less than 0.1 percent of all IDB shares, its membership enables it to bid on IDB-funded infrastructure projects. Between 2010 and 2020, Chinese construction and engineering firms secured $1.7 billion in IDB-funded contracts, while U.S. firms received contracts worth only $249 million during the same period.
In July 2023, a bipartisan group of four senators introduced legislation aimed at countering China’s “coercive economic agenda” in the region by enhancing transparency of China’s involvement in bank activities. If passed, the bill would mandate public reporting of all IDB projects involving Chinese funding or participation.