Inter-American Development Bank (IDB)

The Inter-American Development Bank (IDB) is the world's oldest and largest regional development bank. Since its founding in 1959, the IDB has become the single greatest source of multilateral support for social and economic development in Latin America and the Caribbean. Each year the IDB provides $9 billion of financial and technical assistance to nations throughout the region. The bank plays an important role in promoting social equity, private sector development, state modernization, and environmental preservation.

MEMBERSHIP AND STRUCTURE

The IDB is headquartered in Washington, D.C., and has forty-seven member nations. Twenty-six of these nations are from Latin America and the Caribbean and are eligible to borrow from the bank. The remaining countries are non-borrowing members from North America, Europe, and East Asia. The highest policy-making body of the IDB is its Board of Governors. The governors establish broad institutional policies and oversee the bank's lending programs. Each member nation is permitted to appoint one governor. The IDB also has a four-teen-member Board of Executive Directors. The executive directors serve three-year terms and are responsible for approving project proposals and setting the administrative budget. The bank's president, who is elected by the Board of Governors and serves for a renewable five-year term, chairs meetings of the executive directors and manages a staff of eighteen hundred.

IDB operations are divided into three subregional departments. The first department oversees bank-supported projects in Mexico, Central America, and the Caribbean; the second department is responsible for the northern part of South America (Colombia, Ecuador, Guyana, Peru, Suriname, and Venezuela); and the third department covers the southern part of the continent (Argentina, Bolivia, Brazil, Chile, Paraguay, and Uruguay). The IDB also has offices in each of its borrowing member countries. These country offices are directly involved in the design, implementation, and supervision of bank-supported projects and programs. They also provide advisory services to local government authorities.

RESOURCES AND PROGRAMS

The IDB obtains its resources from a number of different sources. Member countries are assessed an annual subscription that is calculated to reflect the relative size of each nation's economy. Member countries are required to pay only a small fraction (4.3 percent in 2007) of the subscription. The remainder is considered "callable capital" in which governments agree to contribute as needed. Each country's voting power within the bank is based on its capital subscriptions. Unlike other multilateral financial institutions, such as the World Bank and the International Monetary Fund, borrowing member countries of the IDB have always held a majority of the voting shares.

The IDB's largest source of revenue is private capital markets. The bank is able to use its callable capital as collateral to borrow resources at competitive rates from international capital markets. The IDB also receives repayment of principal on previously extended loans and generates earnings through various investments. Lastly, the bank participates in cofinancing arrangements with other multilateral institutions, including the World Bank, Caribbean Development Bank, Central American Bank for Economic Integration, and Andean Development Corporation.

The IDB provides assistance in the form of loans, grants, and technical advice. Most lending programs come from the bank's Ordinary Capital account. Loans from this account are extended at near-market interest rates and are allocated for projects that are expected to become profitable within a reasonable period of time. The IDB established an Intermediary Financial Facility (IFF) in 1983 to reduce interest rates on loans from its Ordinary Capital account to a number of low-income countries including the Dominican Republic, Ecuador, El Salvador, Guatemala, Jamaica, Paraguay, and Suriname. In addition, the IDB administers more than fifty separate Trust Funds that have been established by a single country or group of countries and provide grants in specific sectoral or technical areas.

The IDB also has a concessional or soft loan window. The Fund for Special Operations (FSO), which was established in 1960, extends loans at low interest rates with forty-year maturities and ten-year grace periods. Use of FSO resources is limited in 2007 to Bolivia, Guyana, Haiti, Honduras, and Nicaragua. The FSO can also extend loans to the Caribbean Development Bank for use in countries that are not members of the IDB.

SOCIAL DEVELOPMENT

Accelerating the social development of Latin America is the preeminent objective of the IDB's lending strategy. The bank has long worked to meet the basic needs of poor communities throughout the region. Under the bank's mandate, lending for poverty reduction and social equity must reach at least 40 percent of total resource allocations and at least 50 percent of total operations. These benchmarks are considerably larger than those of most other multilateral institutions.

Expanding basic health coverage for the poor is an important part of the IDB's social development work. The bank has funded mobile teams to provide integrated health care in remote areas of Peru, trained community health agents in Brazil, and initiated programs to improve maternal and child health in Guatemala, Honduras, Nicaragua, and Panama. The IDB has also supported immunization campaigns in Colombia and Guatemala and helped modernize the national epidemiological surveillance system in Bolivia. The bank has also worked to further health care policy reform. Programs in Argentina, Belize, El Salvador, Guyana, and Uruguay have helped modernize public health systems and ensure more equitable access to clinics and hospitals.

The IDB has also funded a wide range of educational initiatives in Latin America. Bank loans have been used for the construction and renovation of schools in El Salvador, Haiti, and Venezuela and for the installation of information technologies in Argentina, Barbados, El Salvador, Jamaica, and Uruguay. The IDB also supported the creation of distance learning centers in Nicaragua that are designed to reach secondary students in rural areas. In Brazil and Jamaica the bank supported curriculum development, and in the Dominican Republic, Ecuador, Guatemala, and Haiti the bank helped develop new instructional methodologies for primary and secondary school teachers.

The IDB's social development projects have frequently targeted those groups that have been historically excluded from the benefits of economic growth. The bank has placed special emphasis on meeting the needs of women. This includes strengthening its institutional capacity to mainstream gender issues into all bank activities. The subregional departments use gender experts to assist project teams in designing bank-supported programs. The IDB has also funded projects to improve the lives of ethnic minorities. In 2001 the bank adopted an Action Plan for Combating Social Exclusion Based on Race and Ethnicity, which includes institutional procedures to incorporate underprivileged minority groups into the daily activities of the bank. Support for community development projects in Central America and the Andean region has been contingent on specific measures to ensure access by indigenous groups. Additionally, the bank funded projects to enhance educational and economic opportunities for people of African descent in Brazil, parts of Central America, and the Caribbean.

PRIVATE SECTOR DEVELOPMENT

Private sector development has also been a longstanding objective of the IDB. A number of bank projects and programs have been designed to create an enabling environment for private businesses. This, it is argued, helps generate economic growth, higher living standards, and the ability to compete in the global economy. The bank's Private Sector Department, established in 1994, is largely responsible for the coordination and oversight of private sector activities.

Investments in physical infrastructure have been a key component of the IDB's private sector strategy. Bank officials frequently link the region's poor infrastructure to an inability to attract sufficient investment. The IDB has invested heavily in transportation systems. This includes highway construction in Belize, Brazil, Guyana, Jamaica, and Nicaragua; repairs to bridges and roads in the Dominican Republic, El Salvador, and Peru; improved air transportation in Ecuador; and the creation of integrated mass transit systems in Colombia. Loans from the IDB have also helped improve the quality of passenger train service in Argentina and port operations in Chile. The bank has also funded improvements in the energy sector. This includes electrical power projects in Argentina, Brazil, the Dominican Republic, Paraguay, and Uruguay, a rural electrification project in Bolivia, the construction of a geothermal facility in Costa Rica, and the building of hydroelectric power plants in Colombia.

The IDB extends a small number of loans directly to private businesses without government guarantees. These loans are frequently channeled through the Inter-American Investment Corporation (IIC), the bank's private sector affiliate. The IIC, which began operations in 1989, provides long-term loans to help modernize small- and medium-size enterprises. The corporation also provides financing in the form of direct equity investments. The IIC can finance up to 30 percent of the cost of a new enterprise and up to 50 percent of the cost of an expansion project. The Multilateral Investment Fund (MIF), which was established in 1992, also provides loans, grants, and technical assistance to micro and small enterprises in the region.

POLICY-BASED LENDING

Since the 1990s the IDB has become much more directly engaged in the promotion of macroeconomic policy reforms in member countries. This is a response to the continued economic difficulties that many of these countries have experienced, including chronic budget deficits, deteriorating foreign reserves, and debilitating external debts. The bank has introduced policy-based loans that support institutional changes on the sector and sub-sector levels. Loans are granted after recipient nations agree to alter sectoral policies that are deemed inimical to growth and create an environment that is more private-sector friendly. Particular emphasis is placed on the privatization of state-owned industries. Nations are also encouraged to further integrate their economies in global markets through the promotion of exports and reduction of barriers to foreign goods. Lastly, governments are called upon to create incentives for foreign direct investment, such as legal protections for investors, more efficient financial markets, the removal of entry restrictions on capital markets, and liberalizing credit and interest rates.

The introduction of policy-based lending has been a source of considerable controversy for the IDB. Critics charge that the sectoral reforms advocated by the bank intensify social and economic inequalities. Poor communities, it is argued, are most adversely affected by these reforms. The IDB has responded by creating Social Investment Funds, which help mitigate the social costs of adjustment. Job-training programs, for example, have been expanded in response to loss of public sector employment. The IDB has placed a limit on the size of its policy-based lending programs: Work in this area cannot exceed 25 percent of total bank lending.

STATE MODERNIZATION

Since the mid-1990s, the IDB has become engaged in the promotion of public sector reform in Latin America. This also represents a departure from past practices. The bank traditionally focused on supporting social and economic projects and avoided interference in the internal political affairs of member countries. In the early twenty-first century, however, bank officials argue that "state modernization" is necessary for the success of its social and economic work. A new division on State, Governance, and Civil Society was established to coordinate political reform programs, and State and Civil Society divisions were set up within each of its three subregional departments.

The IDB has heavily invested in public administration reform. A bank project in Uruguay helped improve the management of public resources by modernizing the administration of state revenues and enhancing the transparency of public sector procurement. The IDB has provided technical assistance to the governments of Bolivia, Colombia, Honduras, Nicaragua, and Peru to establish performance-based administrative systems, restructure the organization and functioning of central government agencies, and introduce integrated financial management, procurement, and accountability systems. In Argentina, Brazil, the Dominican Republic, El Salvador, and Guatemala, IDB projects have helped streamline administrative procedures and improve the supervisory capacity of the executive branch.

The IDB has worked to strengthen legislatures and judiciaries throughout Latin America. The bank has provided advisory services to ensure that oversight and control functions are properly administered and has established training programs for legislative and judicial leaders. In Colombia and El Salvador the IDB helped make national assemblies more independent and transparent and introduced ethics codes for lawmakers. In Brazil, Chile, Paraguay, and Peru the IDB provided support to modernize federal, state, and municipal legislatures. In Bolivia, Honduras, Nicaragua, and Panama the bank helped strengthen oversight mechanisms, upgrade information systems, and improve communication between legislators and their constituents. IDB projects have helped modernize judicial administration in Costa Rica, Ecuador, and Venezuela, reform court procedures in the Dominican Republic, and improve the organization and operation of judicial offices in Nicaragua and Panama. In Guatemala, Honduras, and Uruguay the IDB worked to strengthen the managerial, technical, and administrative capacities of court systems.

ENVIRONMENTAL PRESERVATION

The IDB is placing greater emphasis on the preservation of natural environments in Latin America. New projects and programs have been formulated to ensure sustainable resource management and conservation. The bank established an Environmental Protection Division to oversee its work in this area and has incorporated environmental impact assessments as part of its evaluation of all project proposals.

Reforestation programs and community-based forestry management plans have been supported by the IDB in Brazil, Ecuador, and Peru. It has supported biodiversity conservation projects to preserve fragile ecosystems such as the Galapagos Islands of Ecuador and Pantanal wetlands of Brazil. The IDB has supported a regional biodiversity strategy to conserve ecosystems in the Andean region. It has fortified management of water resources, especially coastal and marine resources. In El Salvador, Guatemala, Honduras, and Panama, bank projects have strengthened the management of watershed areas.

The IDB has worked to develop capacity of national environmental regulatory bodies. This includes the establishment of legal and institutional frameworks for environmental management in Panama, training and logistical support for the principal environmental agency of Suriname, and the development of a national environmental management system in Ecuador. The IDB has also worked with governments throughout the region to rationalize environmental policy and strengthen environmental laws.

CONCLUSION

The Inter-American Development Bank plays an important role in the social and economic progress of Latin America and the Caribbean. The bank has consistently supported public sector projects and programs to help meet the basic needs of the region's poor. The IDB channels a large share of its resources to the poorest communities in the poorest countries. IDB support has been especially critical in the provision of primary healthcare and basic education. The bank has also worked to accelerate private sector development, modernize public administration, and preserve natural environments.

The IDB has a strong record of success in Latin America and the Caribbean. The vast majority of the development projects it has funded have achieved their intended objectives and many became self-sustaining after support from the bank ended. The IDB has been successful for a number of reasons. It has accumulated considerable experience and expertise since its founding in 1959 and has forged close working relationships with governments in the region. The bank is careful to tailor its projects to the specific requirements of each member country while retaining the capacity to respond rapidly to changing conditions. Lastly, the IDB ensures that the intended beneficiaries of its lending programs actively participate in the planning, design, and implementation of development projects. This is a crucial component of the bank's lending philosophy. Poor communities are not simply viewed as the recipients of assistance but as active participants in improving their own conditions. This helps create more self-reliant communities which have the resources and skills necessary to meet their own needs on a long-term basis. Given the IDB's past achievements and continued expansion, it will certainly play a critical role in the social and economic progress of Latin America and the Caribbean in the years to come.

See alsoBanking: Overview; Economic Development; Pan-American Conferences: Montevideo Conference (1933); Pan-American Conferences: Washington Conference (1889); World Bank.

BIBLIOGRAPHY

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                                     Francis Adams