Monica Campbell examines the Inter-American Development Bank’s record and finds it has little to show for its 45 years of existence but it is taking small steps to strengthen standards.
The Inter-American Development Bank (IDB) is facing a crisis of confidence. The oldest of the major regional development banks, it has had 45 years to make a difference in Latin America and the Caribbean. Yet, despite being the region’s largest creditor, it is struggling to find direction and produce the results that could reasonably be expected of it.
Latin American inequality remains entrenched and on many measures has become worse. The richest 10% of the population earns 48% of total income, and nearly 25% of the population lives on less than $2 per day, according to World Bank figures. But, far from constructing broad policy initiatives to deal with the problems, the IDB finds itself at an ideological crossroads.
On one side is the economic reality of the bank’s structure: a 30% share is held by the US, giving the US treasury a strong influence that pushes it towards Washington Consensus type policies – as much as IDB president Enrique Iglesias tries to deny it.
On the other side, like other multilaterals, the IDB is under pressure from a variety of left-of-centre and environmental groups, for its large-scale projects. The financing of the Camisea gas pipeline in Peru threatens indigenous tribes and endangered species, say these critics. And Mexican civil rights groups have protested against the Plan Puebla-Panama (PPP), which is designed to connect nine southern states and most of Central America with roads, bridges and power that would lay the groundwork for the Free Trade Area of the Americas (FTAA) agreement. Anti-PPP protesters say the project is an elite-driven, top-down project that is designed to benefit foreign investors at the expense of locals.
Enrique Iglesias: critics say more vision is needed
Unconvincing social policy
The anti-FDI argument is not convincing to anyone with just a small knowledge of development economics. But the failure of the IDB to settle on its own strategy and to explain its projects in a transparent and consistent manner is fuelling the opposition’s case. IDB executives cannot even agree among themselves whether it is better to back small-scale or large-scale lending.
“Hey, let’s be careful, because the paradigms we followed before have not produced the desired results. So we’re questioning them, trying to see if our support is delivering the desired results,” says Agustín Garcia-Lopez, an executive board member and director of Mexico and the Dominican Republic at the IDB. The executive board members set policy on behalf of the bank’s governors from the 46 member countries.
Referring to the ideological divide over the bank’s policies, Mr Garcia-Lopez says: “Some think it’s better to back small projects, such as bringing potable water to villages or providing micro-loans. Others say that large-scale projects are the way to go. We think that both are needed.”
Responding to the criticisms levelled at the bank, president Enrique Iglesias told The Banker: “We are constantly examining why there is still such wide inequality in the region. That is our biggest challenge. We’re always rethinking our policy. We don’t stick to any one model and we know we need more than the Washington Consensus. We need to look at the realities on the ground.”
Mr Iglesias has been at the helm of the IDB for 16 years and began his fourth five-year term last April, though, so he can hardly claim that he needs time to rethink the bank’s strategy and find direction. Critics say that although Mr Iglesias is urbane, diplomatic and well-meaning, the IDB needs someone more forthright and visionary at the top.
In 2002, the IDB managed more than $11bn and committed $4.5bn of that to 86 loan operations. It also financed 336 technical co-operation projects ($65m) and approved additional projects via its Multilateral Investment Fund (another $96m). On that basis, it apparently does not have a resource problem but it does seem confused about what should be its role.
On the one hand, the bank needs to make a difference on the ground but whether it should take the big project approach or pipe money to the region’s budding entrepreneurs is the subject of great internal debate.
On the other hand, it gets involved at policy level with lending that backs state reforms. Recent initiatives involve $300m for fiscal reform in Peru; a programme to strengthen foreign trade departments in Bolivia, Nicaragua and Peru; and another to modernise the justice system in Honduras. And, throughout Latin America, the drive is on to improve banking systems with an emphasis on better supervision.
The argument for this approach is that micro or specific lending may not produce results if the macro or policy environment remains substandard. But, if the more challenging task of fixing policy falls short then little is achieved for the bank’s money and resources. Yet a physical project, such as a dam or a road, will always have utility value.
Difficulty finding direction
Worse still is the bank’s involvement in balance of payments lending – following the emerging markets crises of 1998-99, for example. Acting at the behest of the IMF, the IDB used development resources to prop up failing currencies and busted banking systems.
The IDB’s ability to find direction is made harder by political pronouncements such as Latin American leaders’ recent calls for a trebling of the amount that it lends to small and medium-sized businesses. “Smaller loans can be expensive, time consuming and not very efficient,” says Dennis Flannery, the IDB’s executive vice-president. “We might prefer lending to a large corporation and telling them that a certain amount of our funds should be earmarked for small vendors. It’s the supply-chain approach. I might sound cavalier, but maybe the best way to help smaller businesses is to lend $1bn to General Motors.”
To its credit, the IDB can also point to some positive social programmes. There is the funding of low-income housing projects in Ecuador and Nicaragua, primary school building in the Dominican Republic and a literacy programme in Guyana.
“We’re levelling the playing field with these programmes. These are the projects where you can look into somebody’s eyes and know that you’re making a difference,” says Carlos Jarque, head of the IDB’s sustainable development department, which supervises a broad range of programmes.
Controversial decisions
What sparks the most controversy is the IDB financing of some of Latin America’s largest infrastructure and regional integration initiatives, even though the economic case for these is usually solid. Although IDB activity in fiscal reform directly affects Latin Americans in, perhaps, the form of higher utility taxes, nothing hits home like the construction of a new dam that could displace thousands of people or a pipeline that could destroy a forest.
Closer inspections by non-governmental organisations (NGOs), both foreign and local, may yet force the IDB to step up its environmental standards, involve more locals when making decisions about projects and disclose more information to the general public.
In September 2003, the IDB was stung for deciding to finance the huge Camisea natural gas pipeline in Peru that, once completed, could turn the country from an importer of fuel into an exporter. The problem is that the pipeline runs deep into one of the more pristine swathes of the Peruvian jungle, and there are concerns that it will threaten isolated indigenous tribes and endangered species.
IDB officialdom has long insisted that the Camisea pipeline would bring great benefits and that any social and environmental costs could be “minimised”. But after persistent campaigns by watchdog groups, the IDB now says that it will tighten its environmental and social requirements for the Camisea project. The major beneficiaries of the project, including Pluspetrol of Argentina and Hunt Oil, a US firm, are now required to create compensation plans for indigenous populations that are affected by the construction and report on how ecosystems will be altered. The IDB has also granted Peru a $5m loan so that it can monitor Camisea better.
“We spent a considerable amount of time consulting with local and environmental groups but we’re still criticised for approving the loan to that project. We thought we were doing a pretty good job. But if we need to reach out more, then that’s what we will do,” says Mr Flannery. “On balance, I think the project will eventually be looked back on as good for Peru and that it didn’t disrupt the ecology to a discernible degree.”
Although some environmentalists appreciate the beefier environmental code attached to Camisea, the wording of the new policy remains loose, they say, and it is still unclear how effective it will be.
Dennis Flannery: “If we need to reach out more, that is what we will do”
Plan Puebla-Panama protests
Opposition to the PPP is also growing. At its core, it is a mega-project that aims to connect nine southern states in Mexico and most of Central America with roads, bridges, corridors and power lines to facilitate the movement of goods and resources (mostly tagged for the US market). It would lay the groundwork for the FTAA, which the US aims to seal by 2005, and the Central American Free Trade Agreement, which may be set this year.
The reaction to the PPP by civil groups in Mexico and Central America is far from optimistic. Many see it as yet another elite-driven, top-down venture that will fill the coffers of foreign corporations and leave the local population poorer. Since 2001, anti-PPP protesters have tried to block major roads in Guatemala and Mexico and have demonstrated at PPP infrastructure sites. Rallies to bring more public attention to the issue took place at last year’s World Trade Organisation meeting in the Mexican city of Cancún and at the FTAA summit in the US city of Miami last November.
When asked about the PPP, top IDB officials will give directions to the bank’s website, which is the main vehicle it uses to distribute information about its activities. However, this method of information dissemination is vastly unsuitable in the case of the PPP because most southern Mexicans and Central Americans lack internet access.
“The IDB does not go to the regions for discussions with the community,” says Vicki Gass, who monitors economic issues in the region for the Washington Office on Latin America (WOLA), a left-leaning think tank. “Talks take place in Washington or in a country’s capital, which isolates most people from the consultation process. Direct stakeholders in the project are left in the dark. The core problems at the IDB still have to do with transparency and accountability.” The WOLA lobbies US legislators to increase transparency and accountability mechanisms at the IDB, arguing that US taxpayers’ money should be used for development projects as intended.
Meanwhile, in Mexico, local IDB head David Atkinson has faced anti-PPP protests in front of his office in Mexico City’s posh Polanco neighbourhood. He will probably experience more resistance as the PPP moves inexorably forward. “Maybe the PPP could be explained better. The full story is not getting out there. There are eight components to the plan; infrastructure and electricity are just two of them. We also have plans for health, education, tourism and micro-businesses. The arguments against the PPP are mostly based on misperceptions of the programme,” he says.
Steps to strengthen standards
Last November, the IDB did take steps to strengthen its public disclosure standards. The main advance was the decision to publish board agendas and the minutes of its executive board meetings (the first development bank to do so). Other measures it has taken to shore up standards include the creation of an oversight committee to fight corruption in March 2001 and a toll-free, anonymous telephone hotline for reporting fraud.
Mr Iglesias is eager to make public the IDB’s efforts to increase transparency. Speaking last March in Milan at the annual IDB meeting, he said: “We are instituting zero-tolerance policies for the purposes of the bank’s projects and programmes, prompted by the need to ensure that our activities are free from fraud and corruption, and taking appropriate disciplinary measures in the event of confirmed instances of unethical conduct.”
More progress could be made, however. For example, IDB policy still allows deletions to be made in board minutes if the board deems the material to be “too sensitive for public distribution” – “too sensitive” is not defined. Detail, particularly about budgets and timelines, about major projects, such as the PPP, is still unavailable. And the framework regarding what mechanisms are available to individuals who feel that they are being wrongly denied information is flimsy.
“I realise that there is a perception, especially with big infrastructure projects, that there is money sloshing around and going into the wrong pockets. Okay, it is more than a perception. It happens. But we’re determined to fight this,” says Mr Flannery. “We’ve devoted a lot of time to how we respond to corruption. Whether we achieve the desired level is difficult to say. There will always be someone who says we don’t.”
