Latin America at the Center of Shift in International Development Banking

Since 1959, the Inter-American Development Bank (IDB) has been a cooperative venture between its current 26 Latin American regional borrowing states, the United States, and other global powers interested in financing regional development projects. Prior to its founding in 1958, U.S. President Eisenhower spoke at the United Nations, in which he made clear that in order for the IDB to function as intended, its president must be from a Latin American nation. Under its first four presidents, all from Latin America, the IDB has reaped increasing returns from its investment in regional leadership. The influx in capital investments into IDB development projects from regional member nations is directly correlated to a greater sense of ownership and control over the direction of bank policy. The IDB has since succeeded in financing more development projects in Latin America than any other multilateral development bank, including the World Bank. This large-scale management of projects is important for regional growth and is highly dependent on bank leadership being led by someone with a local perspective. 

What is now a $13 billion loan portfolio, the IDB has provided funding for infrastructure development, social programs addressing economic exclusion of Indigenous and Afro-Latinos, climate change projects, and now, most importantly, solidifying public health infrastructure. However, on September 12, President Trump’s pick for the IDB presidency, Mauricio Claver-Carone, was officially named as the first American to run the bank in its 60-year history. Claver-Carone’s highly politicized and contentious election adds more uncertainty to a region fighting for stability in the aftermath of the coronavirus pandemic. 

Approximately 50% of total votes granted to Latin America and the Caribbean were split over support for Claver-Carone’s nomination. Of the Latin American countries that supported the nomination, Brazil (11% of the vote) and Colombia (3% of the vote) proved the most influential. Colombian President Iván Duque justified his support by pointing to both a history of cooperation between Colombia and the United States within international organizations and the ability of U.S. lending power to push Latin America out of economic catastrophe. However, other Latin American leaders resent the United States for imposing its will by violating the unwritten rule that only a Latin American may lead the IDB. 

Five former Latin American country presidents, including Colombian Juan Manuel Santos, have expressed their “deep concern” over the conversion of one of the most effective development tools in the Western Hemisphere into yet another instance of the United States weaponizing aid to benefit a political agenda. Claver-Carone’s divisive political rhetoric—especially in relation to his “hard-line policies” against Cuba, Venezuela, and Nicaragua—suggest a possible conflict of interest while leading a development bank that should adhere to the needs of the general population and not by political preference. While this politicization of a development organization should concern nations dependent on financial support from the IDB, early supporters of Claver-Carone like Duque are banking on Trump’s re-election to secure additional loans and aid packages for their respective nations. Such use of political leverage when coupled with Claver-Carone’s framing of the IDB as a tool for private investments threatens the very nature of the IDB as an institution of public lending targeting poverty alleviation. 

Contrary to the opinion of Colombian President Duque, Claver-Carone’s election will not have a positive effect on the economies of Latin America. The politicized nature of Claver-Carone’s nomination unearths possible U.S. political backlash that risks disrupting all IDB operations.  While a Trump re-election could transform the IDB into a politically discriminatory mechanism used to financially reward countries that support Claver-Carone and punish those that don’t, the potential for Democratic control over the executive and legislative branches of government could yield a different kind of damaging result.  If the Democrats regain a majority in the Senate come November, the Appropriations Committee could refuse funding to a Claver-Carone controlled IDB. For this reason, the governments of Argentina, Chile, Mexico, and Costa Rica had supported an EU call to postpone the election of the bank’s leader until after  U.S.  elections. However, El País journalist Ignacio Fariza cites a lack of a unified position among Latin American nations as the primary reason why the United States was able to finalize their nomination of a candidate that brings superfluous political baggage. 

Any absence of IDB operations could have disastrous effects in countries dependent on favorable loan contract negotiations. Historically, the IDB has implemented safeguards for its loans and has designed creative financing mechanisms, such as green bonds and gender bonds, whose development would not be possible in a private market lacking competition. Of the $140 billion in Chinese loans granted to Latin American countries since 2005, 90% has gone to Venezuela, Brazil, Ecuador, and Argentina. However, Claver-Carone’s election could force other Latin American countries to seek financial assistance from riskier Chinese loans that offer fewer beneficial contracts. Ideally, with a stable IDB, Latin American governments would be in a better position to negotiate contracts and assess the risks posed by Chinese banks. While the Trump administration and Claver-Carone seem eager to “wean the region away from China,” encouraging a U.S. led monopoly on regional development banking will not benefit Latin America. Since there is a greater need for development investments and loans in Latin America than either the United States or China are capable of providing, a hardnose response to Chinese investment in the region will negatively affect Latin American country’s ability to negotiate terms of contracts from competing banks. 

The European Union—and more broadly the international liberal order—should also be concerned by the violation of the decades-long unwritten rule that the IDB be run by a Latin American. Critical to the stability of this order are the rules and institutions that guide the behavior of member states. The preservation of organizations like the World Bank and the IMF relies heavily on nations abiding by their rules and customs, whether written or unwritten. Similar to the IDB, there is a long-standing “gentlemen’s agreement” that the IMF managing director is a European and the World Bank president is an American. The European Union’s role in leading several Latin American countries in a push to postpone the election of the president of the IDB relays their anxiety about a renewed drive for a complete overhaul of such unwritten rules within international institutions. Perhaps a European hold within the IMF could similarly be threatened. Instability within the IMF could then have a ripple effect on Latin America, even, given the region’s heavy dependence on IMF loans.

While the election of an American as the president of the IDB broke a long-standing norm regarding the nationality of the bank’s leader, Latin America and the IDB must look forward and focus on the bank’s core purpose: development. In a time of great crisis and increasing inequality, it is imperative that all IDB members and IDB leadership limit financial liberalization and privatization policies advocated by the IMF and World Bank through agreements made at the Washington Consensus. In this regard, the abolition of unwritten norms could favor the people of Latin America by threatening the status quo of a system of international development banking that has often raised inequality through debt, rather than lifting people out of poverty through bottom-up development projects. While the presence of the IMF and Chinese banks in Latin America offer greater competition and the potential for more favorable contracts, the IDB must distinguish itself as a regional leader by continuing to target disenfranchised communities most affected by rising inequality. To accomplish this goal, the IDB must distance itself from the current trend towards the politicization and privatization of development aid.