Decision time for the future of the IDB

The Inter-American Development Bank (IDB) is the premier development bank serving Latin America and the Caribbean (LAC). The IDB is the best collective action vehicle we have in the region. The IDB’s president, Mauricio Claver-Carone, seeks to refocus the IDB on job creation, digitalization, and nearshoring. In order to do all of this, Claver-Carone is seeking a capital increase from the IDB’s shareholders at next month’s annual meeting. In a region marred with challenges exacerbated by the COVID-19 pandemic, shareholders should begin a good faith negotiation to carry out a capital increase for the IDB.

The IDB will host its annual meeting of the board governors in Punta del Este, Uruguay, March 17-20. On its agenda are digitalization, climate change, and overall COVID recovery. The IDB’s request for a capital increase, however, remains the elephant in the room. The IDB hopes to increase sovereign lending to governments in the region from $12 billion to $20 billion per year to respond to the historic needs of the region. With 30 percent of the shares, the United States essentially holds a veto.

The Biden administration has yet to declare an official position on the IDB’s request for capital increase. Yet, the time to make a decision is now.

The U.S.-hosted Summit of the Americas in June will focus on “building a sustainable, resilient, and equitable future,” aligning with IDB priorities. A capital increase, announced next month in Uruguay, would be a great component to a larger, positive hemispheric agenda that should be announced in June.

Claver-Carone, however, has a contentious relationship with the Biden administration.

Claver-Carone assumed the IDB presidency in October 2020 in a controversial institutional election that broke with the organization’s tradition of keeping a Latin American at the head of the bank: he’s the first American to lead the organization. That precedent, specific animus towards Claver-Carone himself based on philosophical and stylistic differences, and the perceived high-handedness of the United States in the process, caused several key shareholders to actively oppose his presidency. The Biden-Harris campaign explicitly criticized his candidacy, and the Biden administration and Congressional Democrats generally would like to remove him.

But the administration lacks the political capital and bandwidth to remove him.

At the same time, Claver-Carone enjoys some Congressional support. Plus, the region is too divided to come up with a suitable replacement. This leaves a political standoff both within the U.S. political system and with some of the other shareholders.

Several Latin American and Caribbean heads of state wrote to the U.S. Congress, petitioning support for the IDB capital increase this past December. The capital increase also enjoys some bipartisan Congressional support, with legislation proposed in March 2021. With the upcoming U.S. midterm elections comes the likelihood of Democrats losing control of the House of Representatives and possibly the Senate — which might strengthen Claver-Carone’s ability to seek financial support from Congress for a capital increase. A change in the Congressional landscape could force the administration’s hand.

The last capital increase the IDB received, IDB-9 in 2010, was in direct response to the 2008 global financial crisis and increased the IDB’s lending capacity to $12 billion per year. The IDB then offered Haiti, recovering from its 2010 earthquake, unprecedented financial aid with loan forgiveness and $2 billion in grants to rebuild. The effectiveness of these actions has had mixed results, but effectiveness should also be seen in the context that Haiti is the most challenging development case in the hemisphere.

The COVID-19 pandemic has aggravated existing development challenges in the region. The IDB already lent the region over $9 billion in COVID response aid. A capital increase would further support these efforts, important especially in vaccine distribution efforts and in strengthening key economic sectors like tourism.

In return for a capital increase, the United States should insist on several things. First, the IDB should continue to provide grant money to Haiti. Second, the IDB could allocate some grant monies for the Northern Triangle, fortifying the Biden administration’s “Root Cause Strategy.” Third, soft grant support might be given to low-income countries hosting Venezuelan, Haitian and other migrants similar to the Jordan Compact. Finally, and most important, the IDB should offer membership to Taiwan. As a member of both the World Trade Organization and the Asian Development Bank, there is little reason for Taiwan to be excluded from the IDB. Other potential members should include India and Australia, Singapore, and the Gulf States. One goal of a capital increase ought to be to “dilute” China’s influence in the IDB.

The IDB remains one of the most important American-influenced institutions in the region. A lack of U.S. leadership in regional initiatives, especially with the IDB, leaves a vacuum open for other competitive powers seeking an opportunity to meet regional challenges.

As the largest trading partner of several Latin American countries, China maintains significant influence in the region. The United States could leverage the IDB to reinstate itself as the premier, reliable regional ally in this competition. Supporting the IDB’s nearshoring efforts, for example, moves jobs away from China and into the hemisphere. Russia, though to a smaller extent, also maintains a presence in the region and seeks to grow it. IDB-funded activities in the region are activities that Russia and China have less ability to influence.

The Biden administration should move beyond its animus for Claver-Carone and use a capital increase at the IDB as a centerpiece of a positive agenda for the hemisphere announced at the Summit of the Americas in June.

Daniel F. Runde is a senior vice president and William A. Schreyer chair in Global Analysis at CSIS. He previously worked for the U.S. Agency for International Development, the World Bank Group, and in investment banking, with experience in Africa, Asia, Europe, Latin America and the Middle East.