1 October 2009
This Civil Society Concept Note outlines how the IDB proposal for a 9th Recapitalization of the Inter-American Development Bank fails on core principles of Governance, Development Effectiveness and promoting Environmental Sustainability.
The IDB’s announcement of a consultation process is a positive and welcomed step in the ninth capital increase review process. BIC recently participated with other civil society organizations in an initial meeting with Bank management last week to discuss two civil society GCI proposals that were submitted to the Bank on June 25th – focusing on Sustainability and Management for Development Results. Following on those inputs and the invitation to participate in the proposed consultation process, we respectfully submit this report, A Crisis Should Never Go To Waste: IDB Rush to Increase Capital Fails G-20 Stress Test.
The analysis and related recommendations are based on a review of the available documentation recently disclosed by the IDB for the GCI consultation and a series of conversations with Bank management and Directors, in addition to relevant research.
We reiterate our encouragement to Member Countries to ask the IDB to demonstrate improved performance in the areas underscored in the report in advance of the requested 9th capital increase.
To read or download the full report, see:
To read or download the report executive summary, see:
Executive Summary
In the midst of a spiral of financial panic that reversed the flow of about $1 trillion in investment to developing countries and deflated market capitalization of the largest U.S. financial giants by 85%, G-20 leaders convened an emergency meeting in Washington in November 2008. The stated objective of the G-20 meeting was to agree on a multilateral blueprint for cooperation to end the market free fall caused by bank collapse and a global credit freeze. The publicly funded IFIs, particularly the IMF, were viewed as critical players because governance flaws at these institutions contributed to the crisis, but also as the source for emergency credit in replacing the ailing private sector.
The multilateral development banks (MDBs) have used the impact of the financial crisis to boost lending volume and defend these higher lending levels as the new status quo. In hot pursuit of the IMF to capitalize on the pool of global stimulus resources, this opportunism has resulted in the first simultaneous MDB global capital increase (GCI) process in history, involving the six principle public and private sector multilateral development banks. At tension with their fundamental counter-cyclical function, MDBs relevance and reward are inherently tied to lending volume. A MDB’s share of the regional debt and investment markets are core performance indicators. The relationship between lending volume and effective, sustainable development is much less clear.
At the heart of the G-20 agenda are proposed reforms to the international financial architecture that would correct the failure of national and global financial systems to alert, self-regulate or remedy the causes of the financial crisis. A good deal of the correction lies with the IFIs, which failed to forecast the crisis and in the case of the IDB, engaged in the speculative practices that triggered it. Emerging economies whose banks were not nearly as leveraged have not failed to point out the developed country origins of the financial crisis. In part due to the revived dependence on IFI lending, developing countries have been more careful in questioning the role of the IFIs as an effective proponent of change for failing to forecast the implications of blatantly excessive risk taking and benefiting from the same dysfunctional credit rating system.
Once the G-20 gave a green light to international public stimulus, the Inter-American Development Bank began developing a proposal for its own historic global capital increase – the first since 1994. The reported $180 billion capital increase request is the ninth and largest by far in the IDB fifty year history – more than four times any prior GCI. Based on recent lending trends, the IDB GCI proposes a near tripling of annual Bank lending. This massive capital increase proposal comes on the heels of embarrassing losses of nearly $1.9 billion in 2008, due in large part to the high risk bets that crippled the financial industry and triggered the global crisis.
Making the case for a ninth IDB GCI hinges on moving beyond business as usual in two areas of the new institutional strategy: sustainability and results management.
Despite some advances in mainstreaming environmental and social sustainability, the IDB’s comparative advantage as a “green” bank in Latin America remains to be seen. The IDB’s capacity to provide high quality advisory services on the key challenges to sustainability has been hampered by the lack of an institutional strategy, bottlenecks in its institutional design, resource allocations and questions regarding leadership commitment. Recent initiatives on climate and sustainable energy have been at the margins of its core business, while poorly planned infrastructure and extractive sector investments have exacerbated land use contributions to GHG emissions. The proposed new institutional strategy has signposts pointing in opposite directions on environmental sustainability without adequate clarity about the Bank wants to achieve and how to achieve it.
Development results, rather than lending volume or other measures of effort, distinguish a development Bank from a commercial bank. The last IDB recapitalization strategy (GCI-8) mandate in 1994 recognized this and called for a “systematic assessment of the effectiveness of Bank development policies, and of the results of Bank financed activities.” Despite other recent mandates to enhance its development effectiveness systems, the IDB continues to emphasize the volume and speed of annual lending over quality.
The main reason for this is that IDB lacks a functioning system for results management that values evidence. Perhaps more importantly, the IDB lacks a consensus on how to define the value added by its operations and services to then be able to measure it.
Moreover, the IDB GCI review has until only very recently been pursued in typical IDB fashion – shrouded in secrecy and apparently conflicted over the scope and methods for public consultation. As a public development bank, the track record of the IDB in Latin America deserves a careful, meticulous review that some in the Bank would prefer to avoid.
For taxpayers that will have to put up the funds requested by the IDB, “stress tests” that provide accountability for past and future development goals should be non-negotiable. This analysis in this concept note applies the six criteria of the “Geithner Principles”, outlined by U.S. Treasury Secretary Tim Geithner at the IDB Governor’s Meeting in Medellin, Colombia, as a threshold stress test for weighing the merits of an IDB proposed global capital increase.
If the Geithner Principle framework were applied to evaluate the IDB eligibility for a global capital increase, this analysis finds that the IDB fails on three of the six indicators, and satisfies only one. Assessed IDB performance on the Governance and Risk Management criterion, composed of five sub-indictors, is deficiently low. The IDB fails on three of the five governance sub-criteria, contributing to a failing overall score.
|
MDB Stress Test Indicators |
IDB Score |
|
1. Clear Division of Labor with other MDBs |
Needs Improvement |
|
2. Flexibility in Balance Sheet Utilization |
Satisfactory |
|
3. Governance and Risk Management |
Fails |
|
4. Achieve Results and Show Innovation |
Fails |
|
5. Sufficient Focus on the Poorest |
Needs Improvement |
|
6. Cogent Demand Analysis |
Fails |
|
|
|
Provisional Result |
Fails |
Failing this initial stress test should call attention to the risks associated with an IDB replenishment that is not preceded by demonstrably improved performance. The poor quality of the recently released draft of a proposed new IDB institutional strategy reveals why the IDB should rank below all other MDBs in terms of any consideration for eligibility for a ninth GCI unless significant prior reforms are made.
As optimism about the global recovery leads to calls for “exit strategies” and plans for “unwinding the government stimulus,” the impetus for deep reforms diminishes. With the high-income bankers no longer staring into the abyss, the case for MDB recapitalization also becomes a less urgent demand that in turn rests more on a track record of past development effectiveness and bright ideas for the future. These circumstances do not bode well for the IDB, which can only see the looming recovery as the greatest threat to its opportunistic gamble on winning a recapitalization before the crisis mentality ends. Indeed, the IDB is in a race to its formal Governor’s in Cancun in March 2010, where the Bank’s Governors will need to make their case for a new infusion of public funding. Winning this race depends in large part on the Bank’s capacity to reinvent itself as a greener, smarter more accountable development institution that can find clients for these services as opposed to a status quo continuation of infrastructure and social compensation mega-projects.
The supporting analysis for these conclusions is organized into four parts. The first part reviews the stimulus and governance focus on the MDBs within the G-20 cooperation process since 2008, with emphasis on the implications for Latin America. Part two reviews the IDB’s own efforts to position itself within hunt for public stimulus funding by preparing a proposal for a ninth Global Capital Increase (GCI-9). The third section explains the lack of broad based participation by civil society in the IDB’s GCI-9 process so far. The final section examines the evidence that might be considered when applying the Geithner principles to any GCI-9 proposal by the IDB, expanding upon the principles outlined by the U.S. Treasury.