It has been a week in Latin America. On September 7th, Argentina officially emerged from its ninth default. On September 9th, violent protests erupted in Colombia after a man was killed in police custody. On September 10th, Peru’s president edged closer to being removed by its Congress. Until this week when reported cases in India skyrocketed, Brazil was the reigning COVID-19 capital of the world and its president’s wife and son were under investigation for potential theft of public wages. The region is headed towards the greatest economic crisis in a century, while Mexico’s president reportedly plans lawsuits against five former presidents of the country.
To cap such a volatile week, tomorrow, the countries that own the Inter-American Development Bank (IDB) will likely elect a new president—US citizen Mauricio Claver Carone (aka MCC)—from a field of one. Others have parsed the pros and cons of this outcome given the upcoming US election; here, I look at the priorities and reforms that MCC has floated in the media and reflect on their fit vis a vis the challenges in the region.
1. Make the IDB “a financial heavyweight”
MCC has repeatedly promised to deliver a general capital increase to the IDB. This is unquestionably important given the massive private debt being contracted by governments alongside the fiscal crises underway.
But it wasn’t only COVID-19 that landed the region in its current disaster—governance catastrophes, unsustainable pension and other entitlement burdens, dysfunctional decentralization arrangements, unprofitable quasi-public companies like PEMEX, and profound corruption in public procurement all helped to drive the region’s economies to the brink. All this in addition to very low levels of human capital accumulation and financial inclusion, among other plights.
The role of the IDB then is not mainly or even mostly about the money—it is about its capacity to partner with governments, private sector and civil society to drive the profound reforms needed to get back to a sustainable economy. It would good to hear more about the agenda from this perspective.
Finally, given the upcoming election, MCC’s ability to deliver a capital increase may be at risk, as my colleague Clemence Landers and Karen Mathiasen have pointed out earlier here.
Transparency as an issue was often mentioned by MCC in the press, mainly referring to the need for representative hiring from all member countries and his plans for greater representation from Central America and the Caribbean in management roles.
Indeed, this is an issue that has been contentious for some time—since 2015, only 55% of management positions were made through merit-based competitive processes.
However, this problem is hardly fixed if MCC also promises quota-based representation of all member countries and the creation of new managerial roles. Instead, the focus should be on merit-based hiring with some equal opportunity arrangements that weight candidates from Central America and the Caribbean (or other underrepresented nationalities) more heavily given similar qualifications.
3. End “China-centrism”
MCC often implies that China pulls the strings at the IDB despite China’s ownership of only 0.004 percent of the IDB (versus the US’s > 30 percent share). Other issues mentioned are shares of procurement awarded to Chinese firms and Chinese government contributions to trust funds.
Here, the solution is to do an independent evaluation of project and corporate procurement at the IDB to determine the extent to which there are signs of unfair treatment, competition or quality issues; a smart idea in any case given that IDB financing was a part of several infrastructure projects involving the infamous Odebrecht firm, investments that resulted in the IDB debarring of their Latin American subsidiaries ex post (see here).
On trust funds, the US should simply provide more trust fund support if they are worried about undue influence—in active trust funds currently under management, the US provides less than a tenth of what China provides ($94 million vs 1 billion, see here).
Finally, it is worth thinking twice about strategy on this issue as these kinds of issues could backfire. Alienating China could push the Chinese further toward the CAF, and strengthen an organization that is a major competitor to the relevance and impact of the IDB. Or worse still, China might avoid multilaterals altogether and strengthen its bilateral interaction with individual countries or groups of countries.
MCC has also suggested that the IDB needs to be restructured—and here we may just suggest that he look to the failed restructure at the World Bank under Jim Kim—reorgs take time and effort, and a sense of what it is that you are trying to fix. A recent WSJ editorial claimed that “the Bank has little to show for more than 60 years of lending…it has become a jobs program for friends of the influential.” Both assessments seem grossly unfair to an organization that issues a yearly development effectiveness scorecard of its investments and operations, and basically invented and evaluated the cash transfer-based safety net that helped reduce extreme poverty to almost zero prior to the current crisis. One hopes that MCC will look at the current juncture of events and conclude that there are more important issues at stake, especially if lending volumes must increase dramatically.
Barring the unexpected, MCC will start his new job almost immediately after the IDB election (October 1) and a month prior to the US election. MCC has assured the region that his support from the US will be sustained no matter what the US election outcome, despite a Biden campaign declaration stating the opposite. The US State Department also assured countries that “there would be no reprisals” for not supporting the MCC candidacy; this must be so—an IDB president for the few will never be able to deliver.
In the meantime, we at CGD continue our work related to the region. Next week, CGD’s Liliana Rojas-Suarez will take a look at the upcoming challenges for financial systems in Latin America, and make recommendations for reform. RSVP here.
Disclosure: I worked at the IDB from 1998-2006 and from 2008-2010.
Thanks to Clemence Landers, Scott Morris and Liliana Rojas-Suarez for their review of the blog.