Inter-American Development Bank

The background history of the IADB is the product of complicated efforts to foster Latin American regionalism dating back to the late 1800s (Barria and Roper 2004), as discussed in Chapter 2. There was a further push to create a body for the region from 1939 which again proved unsuccessful, in part because the proposed body was far broader than just a development bank and because the US withdrew its support. The Organisation of American States (OAS), founded in April 1948, organised the 1957 Economic Conference of OAS in Buenos Aires, Argentina, which (again) proposed that the Inter-American Economic and Social Council form a specialised committee to investigate the feasibility of an inter-American financial organisation. The US supported the proposal in 1958, in part because of Vice President Richard Nixon’s hostile reception on a tour of Latin America and of the increasing success of Cuban revolutionaries (Barria and Roper 2004, 623, Tussie 1995, 18-19). Interestingly, one other trigger for the lADB’s formation was as a ‘counterweight’ to the IBRD’s monopolistic position as a ‘market player rather than a market maker or facilitator’ (Phillips 2009, 17). Even investors on Wall Street were concerned by the unrivalled presence of the World Bank. Further, countries in the region ‘felt that the World Bank was not paying enough attention to Latin America, was uninterested in regional integration projects, and was too concerned with past defaults’ (Krasner 1981, 305). To illustrate, the IBRD approved $170.9 million to Latin America and the Caribbean in 1957 and 1958, while Asia and the Middle East received $516.9 million. IBRD loans of the time to Latin America also focussed on electric power and transportation, not domestic industry and social projects as were wanted by countries from the region (Humphrey 2016, 98).

Many Latin American and Caribbean countries during the 1950s felt their region lacked suitable investment to meet development financing needs. The IADB emerged from talks favouring the state-led development model of Raúl Prebisch and the UN Economic Commission for Latin America (UN-ECLA). The IADB was seen as a crucial link in resource transfers to overcome market failures, weak private sectors, and insufficient capital investment (Tussie 1995). That the US accepted these arguments confirms Rapley’s (2002, 1) position that, ‘[i]n the early post-war period, development thought like conventional economic wisdom, was really neither left nor right. There existed a broad consensus that economies need more state intervention than they have been given in the past.’ The IADB was finally established in 1959, when the OAS approved its Articles of Agreement, which is quite like the IBRD’s.

The IADB was mandated to foster economic and social development in the developing member countries of the region by promoting both individual country growth and collective regional integration. The concept of a ‘Latin American and Caribbean region’ is relatively less contested and more geographically

The regional development banks 115 determined compared to the far more contentious and fluidly constructed ‘Asian’ or ‘Asia-Pacific’ region (Bull and B0as 2003, 250). The US suggested including a concessional lending arm in the establishing agreement - the Fund for Special Operations (FSO) - as a parallel to the International Development Association (IDA), which was only established in 1960. Further, the establishing agreement ‘permitted more flexibility than the World Bank to make loans directly to private industry without requiring a government guarantee, an important demand of Latin American countries intent on developing their domestic industrial base’ (Humphrey 2016, 99), a territory the World Bank was, in fact, not willing to traverse. Still, in its early years, it actually lent mostly to sovereign states for housing, education, and sanitation (Ben-Artzi 2016). Technical assistance has an explicit place in the lADB’s functions, which was not the case in the earlier MDBs.

There are now 48 member countries in the IADB: 26 regional developing member countries, 20 non-regional member countries, and the US and Canada. As per its Articles, each member country holds 135 votes plus one for each share of ordinary capital stock held. The US is the largest shareholder with 30% voting power (enabling it to veto FSO decisions, though not ordinary capital loans), while regional developing countries collectively hold over 50% voting power. However, the US exercises considerable influence due to the RDB’s headquarters being in Washington, DC, its Executive Vice President always being an American citizen (Babb 2009, 27-28), and it employs a ‘large percentage of American citizens’ (Ben-Artzi 2016, 92). If the US does not support a proposal, it is unlikely to get to the voting stage (Ben-Artzi 2016).

The Board has 14 members and they meet weekly and are fairly active (Ben-Artzi 2016). This may be part of the way that it keeps it distinct regional characteristics. Regional states as collective majority shareholders perceive themselves as decisive in decisions, leaders in development finance and donor coordination, and the IADB President has evolved into a ‘regional statesperson’ (Nelson 2000, 407). Of the regional member states, Argentina and Brazil dominate with close to 11.4% of voting power each, followed by Mexico with 7.3%. Most remaining regional member countries own less than half a per cent each. Although not greatly influential during its early decades, the IADB - just like the AfDB and AsDB - has become a powerful regional actor (Bull and B0as 2003).

Four Presidents have led the IADB (see Table 6.3). Elected for five-year terms and able to be re-elected, the President is supported by an Executive Vice President and three Vice Presidents: for Countries, for Sectors and Knowledge, and for Finance and Administration. The President has always been chosen from a regional member country, unlike the IBRD and AsDB’s appointment of American and Japanese leaders. In practice, the US, Argentina, and Brazil have informally picked the presidents (Lopes 2019). Reflecting the World Bank’s MFD agenda, incumbent President Luis Alberto Moreno argued in 2017 that the IADB must become ‘bigger’ in its annual financial approvals and more flexible to respond to its heterogeneous region. A new president is scheduled to be elected in September 2020 and in June the US broke protocol by nominating an American, Mauricio Claver-Carone, a Trump Administration appointee in the National

116 The regional development banks

Table 6.3 Inter-American Development Bank Presidents

Source: Annual Reports and IADB Website.

Security Council and ‘anti-Castro warrior’ who seems have little expertise on the region outside Cuba (Waldron 2020). But the US has Brazilian backing so may yet prevail.

The World Bank Group, AfDB, and AsDB all have concessional lending facilities created after their establishment and operating as separate legal entities. The lADB’s soft loan window, the FSO, was built in and began operations when the Bank was founded in 1959, making it the first concessional lending body of the MDBs (Babb 2009,27, Tussie 1995,5). The purpose of the FSO is rather vague: ‘the making of loans on terms and conditions appropriate for dealing with special circumstances arising in specific countries or with respect to specific projects’ (laDB 1996, Article IV, Section 1). The IDA is clearer in providing concessional terms to less developed member states but both organisations probably took the idea of replenishments from SUNFED (see Chapter 3). The Articles allow for financing

FSO operations from the income derived from IADB operations, though it has only made minimal allocations over the years (Humphrey 2014). This is because borrowing states oppose the reallocation as a transfer from some borrowers to others. Transfers to the IDA are not in the IBRD Articles; they occur but have been opposed by many IBRD borrowers. This is a case of ideas flowing from an RDB to the World Bank rather than the reverse as generally highlighted in this chapter. In 2016, the IADB agreed to effectively close the FSO, transferring its resources to ordinary capital, though it did create a new blended loan instrument that five member countries have access to. This followed a similar AsDB decision in 2015 and, as noted earlier, is part of a donor push to limit grants, expand loans, and achieve harder financing terms for Global South countries.

Like the World Bank and E1B, there is an IADB Group, which comprises the IADB, Inter-American Investment Corporation (IIC), and Multilateral Investment Fund (MIF). The 11C commenced work in 1989, though the establishing agreement became effective in March 1986. It finances private sector investment projects without government guarantees, and so it is comparable to the World Bank’s 1FC. The IIC approved 162 projects totalling $2.24 billion in 2016, with sectoral approvals divided into financial markets (41.3%), energy (31.2%), science and technology (7.5%), transport (6.9%), agriculture and rural development (3.9%), and other (9.2%). In ‘other,’ the IIC mostly funds projects supporting private sector financing partnerships, securitisation, trusts, and development banks. This growth in IFC-equivalents funding financial intermediaries is a contemporary trend in the MDBs. The MIF was launched in 1993 to provide technical assistance for private sector growth. It approved $86 million in 2016, with an active portfolio of over 500 projects supporting micro and small private business development.

The IADB was a marginal development financier up until the 1980s under President Antonio Ortiz Mena. The vast increase in petrodollars after the 1973 and 1979 oil price shocks saw large commercial loan flows into the region, made possible by the removal of restrictions on finance ministers to offer government guarantees on commercial loans (Scheman 1997, 86). However, the 1982 debt crisis ended private capital flows to the region, and public lending was supported by structural adjustment. Compelled by a changing political climate and the impact of US President Ronald Reagan’s neoliberal turn, the IADB moved away from social sector lending and became ‘closely identified with the World Bank’s economic liberalisation and integration agenda’ (Nelson 2000, 407). Robin Broad, as an international economist working on the World Bank and IADB at the US Treasury Department, ‘was struck by the certainty of political appointees at Treasury about the unquestioned correctness of [structural adjustment] policies’ (Broad and Cavanagh 2009, 7). This situation was heightened by the close proximity of the IBRD and IADB headquarters in Washington, DC (Culpeper 1997, 115), and the centrality of the World Bank and IADB to the Baker Plan for debt relief proposed in 1985 (Babb 2009, 128). Further, Tussie (1995, 96) notes that President Iglesias (1988-2005) ‘warned against “counterproductive dichotomies” and promoted a pragmatic convergence of ideas’ under the Washington Consensus. During the

1980s, the lADB’s annual lending increased to help with its role in debt and averaged $2.3 billion (the IBRD’s average per annum was $12.3 billion). A large capital increase in 1988, likely a reward for its support in implementing structural adjustment, further enhanced lending capacity. The 1988 increase was overseen by newly elected President Enrique Valentin Iglesias Garcia and was $26 billion, followed by an additional $40 billion in 1994, meaning its capital base reached $101 billion (Scheman 1997, 87). Further, like the IBRD, it has been consistently building up its reserves, another key determinant of capacity to borrow on financial markets.

Thus, the lADB’s fortunes changed in the 1990s. Lending dramatically increased in 1991 and since 1994 it has been Latin America and the Caribbean’s main source of development financing, only recently rivalled by the Development Bank of Latin America (CAF) (see Chapter 7). From 1994 to 2008, the IADB approved over $108.6 billion in loans to the region, totalling 50% of all multilateral lending. Notably too, from 1998 to 2009, the IADB was able to loan at a slightly lower interest rate than the IBRD, despite not having the backing of as many Northern states (Humphrey 2014). This may have been because of growing competition from a range of private and public financiers; on the public side, Chinese and Brazilian development finance increased substantially in the region and the CAF became more of a competitor.

Like the IBRD, the IADB sought a capital increase after the 2008 GFC, but it obtained quite a bit less than it sought, with the US and Europeans reportedly opposed to higher contributions, while borrowers sought a greater increase. As with the World Bank, the reluctance to increase paid-in capital has resulted in pressure to increase earnings to build up reserves, as a substitute for capital. The transfer of FSO resources to OCR also increased its capitalisation. As of the end of 2018, lADB’s subscribed capital reached $176.8 billion, while its paid-in capital was $11.9 billion. With many wealthy non-borrowing countries reinforcing its AAA credit rating, the IADB is comparable to the IBRD ‘in relation to capitalisation ratios and the use of reserves to build equity as opposed to paid-in capital’ (Humphrey 2014, 634).

Between 1961 and 2017, IADB OCR and FSO approvals totalled $266.8 billion, with FSO loans making up just $20 billion. The four largest recipients of OCR loans were Brazil (21%), Mexico (16%), Argentina (16%), and Colombia (9%). Approvals per annum increased significantly during the GFC, with $5.3 billion approved in 2000 while $15.5 billion was approved in 2009 (IADB 2010). In 1999, they started using country groupings to organise loans. Originally, they had four, but it is now two, with ‘Group Г comprising the higher per capita income states that get 65% of loans, while ‘Group II’ gets 35%. In 2017, approvals included 90 sovereign-guaranteed loans totalling $11.4 billion, divided into 73 investment projects ($7.9 billion) and 17 policy-based loans ($3.4 billion) (IADB 2017). The 90 sovereign-guaranteed loans focussed on infrastructure and the environment (51%), institutions for development (38%), the social sector (8%), and trade and regional integration (2%). Thus, its portfolio appears to have matched the general shift back to infrastructure that has been happening across the sector.

Beyond financial assistance, the 1ADB Group manages several advisory facilities for project preparation. These facilities include the Project Preparation Facility that provides up to $1.5 million in project preparation financing, an Infrastructure Fund that assists public, private, and mixed entities develop and prepare infrastructure projects, and the Regional Infrastructure Integration Fund that provides technical assistance for the preparation of strategic integration projects. Project preparation has long been a challenging issue for the World Bank (Bazbauers 2018), and the number of trust funds on this topic demonstrates that IADB faces the same challenge.

In summary, the IADB was the first Global South MDB, whereas the E1B emerged from the Global North. While the US is the leading shareholder controlling nearly 20% voting power more than the next largest shareholder, the RDB has legitimacy in the region and helped set groundwork for structures and institutional approaches adopted by the AfDB and AsDB.