LatinFinance / March 2007
By Larry Luxner
When the Inter-American Development Bank convenes on Mar.16-20 in Guatemala City for its annual board of governors meeting, the agenda will include everything from social inclusion to private initiative for public welfare. One topic delegates won't be debating, at least not officially, is the IDB's continued relevance. Yet it's a subject that cannot be ignored as the 48-year-old bank struggles to maintain its traditional role in the face of new and serious challenges.
Sub-regional lenders like the Corporación Andino de Fomento, national institutions like Brazil's BNDES and governments like the Chinese, as well as revenues from hydrocarbon and mineral exports, are increasingly financing development projects in the region, according to the Bank Information Center (BIC), a Washington-based NGO that tracks international financial institutions (IFIs). "These other institutions, often with lax environmental and fiscal controls and only slightly higher interest rates, are directly competing with the IDB," it adds.
"Meanwhile, a new crop of socialist and left-leaning government in Latin America are dubious of the merits of doing business with the IFIs and their neoliberal blinders. Presidents like Evo Morales in Bolivia and Hector Correa in Ecuador have made clear their disdain for the IFIs. With Chavez in Venezuela willing to lend a hand, the IDB is being pushed to the margins."
And no one knows this better than the bank's new president, Luís Alberto Moreno.
"We cannot continue with business as usual," Moreno told LatinFinance in a recent interview in Washington. "I basically have focused on realigning the bank, modernizing it to make it more attuned to the needs of the hemisphere, and developing the right kind of management skills to be more flexible. Our challenge is how to remain relevant at a time when most countries in Latin America can access capital markets for their financing needs."
He added: "Collectively, countries are always thinking about how best to engage multilateral institutions. For this reason, we have to provide more knowledge behind our lending. We've got to be able to build opportunities for the majority. We've got to be strong in working for poor people in the middle-income countries of Latin America."
Moreno, Colombia's former ambassador to the United States, is only the fourth president in the IDB's 48-year history. He took over in October 2005 from Uruguay's Enrique Iglesias, who had led the bank for 17 years.
A friendly, energetic man who looks much younger than his 53 years would suggest, Moreno cannot sit still.
On an average day, Moreno arrives at 8:30 a.m. and doesn't leave until 8 p.m. The day after our interview, Moreno flew off to El Salvador for a two-day trip and had only two days to recover before leaving again, this time for Ecuador.
"Travel is a very tough part of this job," he said. "When you're ambassador in Washington, most of your life is dedicated to what happens inside the Beltway. But when you're the president of the IDB, you've got to get outside the Beltway to the 26 countries where you have activities. That means constant demands on your time. The terrain is so different."
He adds: "Of course, Colombia is still my country and I work a lot here on advancing U.S.-Colombian relations, and I keep in touch with President Uribe."
The bank, headquartered in Washington, has an estimated $100 billion in assets and is owned by 47 countries ó 26 of them in Latin America and the Caribbean. At present, the United States accounts for 30% of the IDB's shares and voting power, while Latin American and Caribbean countries collectively own 50%, European countries and Israel 11%, Japan 5% and Canada 4%.
"It's a very interesting makeup, in that 50% of the shares are in the hands of the lending countries," Moreno explained. "That's not the case with the World Bank or the IMF. This works more like a credit union of sorts."
To stay ahead of the game, the IDB must find ways to lend more money faster. According to the BIC, Moreno has led the bank in setting a goal of $12 billion in infrastructure financing over the next five years, which would represent 40% of typical lending flows.
"This is part of an attempt to salvage the IDB's flagging relevance to its borrowers in the region," said the NGO. "It confirms a trend away from smaller, empirically grounded development projects toward the type of massive, works-based projects that sitting governments enjoy building and that enable the IDB to move large loans quickly."
Under the new structure, approved by the IDB's board of governors last December, the bank will — among other things — create quicker mechanisms for preparing and disbursing loans in order to shorten the time between approval and disbursement. It will also boost lending to sub-national entities like provincial and municipal governments, and it will also raise the maximum loan amount for the private-sector department in a single project from $75 million to $200 million — and up to $400 million in "extraordinary" circumstances, according to BIC.
Last year, in fact, the IDB approved 112 projects for close to $6.4 billion and made almost $6.5 billion in disbursements, an 18% increase over 2005. That included 76 loans for public-sector investment projects totaling close to $3.6 billion, 17 policy-based loans for nearly $1.8 billion and 19 operations without sovereign guarantees for $904 million. The latter category of loans and credit guarantees was made possible thanks to new policies that raised the cap for such operations and expanded them to more sectors.
At the same time, said Moreno, the region's economic situation is the best it's been in many years.
"Latin America has had four years of economic growth and the debt-to-GDP ratio is now below 50%. Today, there's no inflation, fiscal deficits are in check and countries have current-account surpluses," he said. "All of that is good, but it has not translated as quickly to millions of people. That explains the region's dramatic increase in kidnappings, robberies and murders.
Out of roughly 500 million people, close to 200 million Latin Americans live on less than $2 a day.
"This is the biggest issue for the bank: building social cohesion," Moreno said. "Despite becoming more empowered politically, all this good economic news hasn't really trickled down to these people, and that's really the issue. The gap between rich and poor in Latin America is the widest in the world."
Perhaps this is why, in 10 presidential elections held throughout the region last year, five of them were won by leftists and in two more, the anti-U.S. candidate narrowly lost.
Indeed, record growth in 2006 didn't stop voters from electing or re-electing leaders like Argentina's Nestor Kirchner, Brazil's Luiz Inacio Lula da Silva, Ecuador's Rafael Correa, Nicaragua's Daniel Ortega, Bolivia's Evo Morales and ó in what many perceive to be the region's biggest threat of all ó Venezuela's Hugo Chavez.
Even so, Moreno argues, "Latin America is less to the left than the press would like you to think. This whole idea of leftist movements in Latin America makes for good headlines, but the reality is that many of these governments have very solid microeconomic management. That's largely due to the fact that Latin America went through some very difficult times, and developed a cadre of very good technocrats.
"Brazil is a good example," he said. "Lula comes from the Workers' Party, and he's made very difficult reforms on social security and foreign-debt reduction. I mention Brazil because it's such an important country, representing 40% of Latin America's population."
In Moreno's opinion, Chile, Costa Rica and Panama have made the most progress in fighting poverty.
"Bolivia is a different story," he said. "[President Evo] Morales has taken some decisions that are going to make it difficult to attract private investment. Remember that 60% of Bolivia's population is indigenous. It was only natural that, sooner or later, an indigenous leader would be elected."
South America's poorest country, Bolivia has been the focus of several IDB initiatives. For example, the country will benefit from a $120 million IDB loan aimed at improving the Santa B·rbara-Rurrenabaque section of the Northern Corridor highway. The project aims to reduce travel times in the mountainous region, lower vehicle operating costs and provide continuous access throughout the year with better road safety conditions. It will also boost economic activity by linking zones with agricultural and ranching potential to Bolivia's main centers of commercial activity.
"Infrastructure is one of the major needs of our hemisphere," said Moreno, estimating that Latin America requires $80 billion in infrastructure investments per year ó ranging from power plants and roads to bridges and hydroelectric dams.
Frank Vogl, co-founder of Transparency International, praised Moreno for tackling the issue of corruption ó an area in which the IDB has traditionally played a low-key role.
"Obviously, if you look across Latin America, corruption is an enormous issue," he said. "Moreno was very convincing in his first public statements on corruption in November, with particular emphasis on the need to ensure vigilance in public procurements on major infrastructure projects such as the expansion of the Panama Canal."
Vogl added: "Moreno believes that the IDB can be very supportive of anti-corruption efforts, both by using its own diplomatic influence with member countries in the region, and through a new $600,000 initiative that provides micro-grants to civil society for anti-corruption programs." The initiative is being coordinated by the Partnership for Transparency Fund, an NGO based in Uruguay.
Likewise, the IDB has a program in place to help countries make more productive use of money flowing from the United States in the form of family remittances. According to a recent IDB study, immigrants living north of the Rio Grande send $60 billion a year to their families living in Latin America and the Caribbean.
"The real challenge we have is to turn those remittances into productive remittances," Moreno said. "Instead of sending money to pay rent, you can buy a home. Instead of paying for health insurance, you can pay for your kid's education. But those kinds of things require the development of products that can be sold to immigrants here or people in Latin America. In Mexico, where a third of all the remittances are going, 50% of them are sent through bank accounts. But that's not the case in other countries."
Moreno said the IDB — which employs 2,000 people and has an annual budget of $400 million — must bring certain ongoing projects to completion, such as debt relief and the use of concessional resources. He added that the bank should also consider extending IDB membership to other countries beyond the current 47 members.
"Transpacific trade is the fastest-growing trade anywhere in the world. Last year, 53% of China's foreign investment went to Latin America," he said, revealing that the IDB is in "preliminary talks" to admit China as the institution's 48th member state.