Latin America has been devastated by the COVID-19 pandemic, and was already facing major economic challenges and headwinds even before the crisis hit. This should be the hour of the Inter-American Development Bank (IDB), the most important provider of development finance and public-sector assistance in the region. But to help Latin America emerge from the pandemic, the underfinanced IDB urgently needs a capital increase. The only problem: That capital increase risks being held hostage to the Biden administration’s desire to remove the former Trump administration official who is heading the IDB, Mauricio Claver-Carone, from his post before any decision on a capital increase is taken.
For those who do not follow Latin America: The IDB is the largest and most important development institution in Latin America and the Caribbean. It lends considerably more to the region than the World Bank does. In 2020, countries in the region received $12.6 billion in public sector loans from the IDB compared to just under $8 billion from the World Bank. The bank, which celebrated its 60th anniversary two years ago, has strong roots in the region. It operates as a cooperative in which Latin American governments have a large share of control and decision-making. In recent years, the IDB has expanded its membership to include 20 donor countries from outside the Western Hemisphere, including several European countries as well as China, Israel, Japan, and South Korea.
The IDB’s new leadership is now seeking a capital increase that would allow it to lend more money and help with growing challenges brought on by COVID-19. Beyond the immediate crisis, the region also faces tectonic shifts in global trade, a growing digital divide, and the effects of climate change. It urgently needs to reform education and move forward on deeper regional integration in infrastructure and energy.
The IDB’s board of governors—where member countries are represented and the United States has a key vote—will consider the capital increase when it meets in the second half of March. By that point, the U.S. Senate will have confirmed Janet Yellen as Treasury Secretary. With many key administration positions still vacant, the decision will come down to the White House, Yellen, and a handful of staffers. Later, the Democratic-controlled U.S. Congress will also have to approve.
But there is a hitch. The controversial election in October 2020 of Claver-Carone, the senior director for the Western Hemisphere on the U.S. National Security Council under then-President Donald Trump, as the IDB’s president greatly clouds the decision. Not only has he rankled feathers among the political left with his staunch views on Cuba and Venezuela, but his election broke an unwritten rule that the IDB should always be headed by a Latin American—much like the International Monetary Fund has traditionally been headed by a European and the World Bank by an American. The Biden administration now has two choices: It can vote to address the problems of the region now or spend another year on political intrigues, back-room campaigns, and innumerable meetings to try to remove and replace Claver-Carone. Given the urgency of the region’s problems, it would be far better to let Claver-Carone serve out his five-year term and focus on providing additional help to the region now.
An IDB capital increase could be a great investment. If the increase is similar to one that took place 10 years ago, the United States, as one of 48 shareholders, would be asked to contribute about $120 million per year for five years. That’s a very modest additional contribution compared to the $30.5 billion Washington spent on foreign aid in 2020, of which $1.86 billion was spent in the Western Hemisphere. The U.S. contribution, on the other hand, would be multiplied by the other shareholders, likely increasing the IDB’s capacity for public-sector lending by about $8 billion—from $12 billion per year now to $20 billion per year after the increase.
The process of increasing the IDB’s capital would also allow the shareholders to reevaluate the bank’s strategy and goals. In exchange for the increase, shareholders may demand some changes. During the last capital increase in 2010, there was an agreement to spin off the arm of the IDB that provides loans to the private sector, now known as IDBInvest. (The United States did not put additional money into the new subsidiary). There was also an agreement to set aside $2 billion in so-called soft grants for Haiti, which was then recovering from an earthquake that killed an estimated 250,000 people.
This time around, a capital increase could yield special initiatives ranging from the COVID-19 response to upgrades of digital infrastructure and projects to address sub-regional problems, such as those facing the Caribbean including Haiti or parts of Central America. Shareholders could also use the increase as an occasion to broaden the bank’s ownership, perhaps bringing in Australia, India, and the Gulf countries. They could even consider including Taiwan, which is already a shareholder of the Asian Development Bank and could pursue a similar status within the IDB.
A capital increase could also give the bank’s shareholders an opportunity to critically evaluate their relationships with Beijing. China is a top trading partner for many countries in the region, but is seen to bear significant responsibility for the COVID-19 pandemic among many of the IDB members’ publics, according to the Pew Research Center. China has also taken more aggressive steps in the region, including supporting the Maduro regime in Venezuela. China’s decision, as an IDB member, not to seat the Venezuelan IDB delegation under interim government head Juan Guaidó blocked the IDB from holding its 60th anniversary celebration that had been planned to take place in China in 2019, but was then held in Washington instead. Diluting China’s influence by inviting new members, including Taiwan, would be a suitable response to China’s behavior.
The most important question, then, is whether shareholders are willing to pursue a capital increase with the bank’s current management under Claver-Carone. He is the first American to serve as IDB president, , the result of a lack of regional consensus on the crisis in Venezuela and China’s growing influence in the region—and the inability of Latin American governments, who are sharply divided on these issues, to come up with a joint candidate. The appointment was immediately opposed by leading Democratic politicians in Washington, including Sen. Patrick Leahy, who chairs the subcommittee in the U.S. Senate that presides over foreign aid and will have to allocate any additional money for the bank.. The Biden presidential campaign signaled its displeasure as well. While a number of European and Latin American governments would also be pleased to see Claver-Carone gone, they will take their cues from the Biden administration and likely vote accordingly.
Though the IDB’s board of governors is unlikely to reach a consensus immediately, its first meeting in March will be a critical decision point. A capital increase would increase Claver-Carone’s power over Latin America’s purse. But trying to remove him would be a laborious, contentious, and lengthy process while COVID-19 continues to ravage the region. To Claver-Carone’s credit, he has been deftly adjusting the IDB’s priorities to be more in line with new President Joe Biden’s on issues such as climate change, has toned down his rhetoric on Cuba and Venezuela, and was quick to congratulate Biden on his victory. The final decision will fall on the Biden White House and the Democratic-controlled U.S. Congress, where there is an expressed desire to spend more on global development—including Latin America—and, equally, an unhappiness about Claver-Carone. If we all agree that COVID-19 is a unique and devastating crisis, then it should be an easy decision to prioritize a capital increase now.
