Modernizing The IDB To Compete With China’s Debt Diplomacy

Latin America and the Caribbean entered the COVID-19 pandemic with stagnant growth, and the region is now emerging in financial crisis with poor prospects. In 2020 alone, regional GDP fell 7.4% and public debt soared to 72% of GDP. Recovery is beset by high inflation, rising global interest rates, and high energy costs. To attract long-term resources from outside the region, governments have only two real solutions – a revitalized Inter-American Development Bank (IDB) that leverages private investment or accepting China’s debt trap diplomacy.

Structural reforms discussed at the IDB come at a critical moment, as the multilateral lender realizes it must do more to kick start growth than simply renew annual loan programs. Latin America needs private investment that isn’t beholden to Chinese objectives. This is why China’s growing financial footprint in the region must be strongly challenged by better offers from a reformed IDB.

Indeed, China’s role within the IDB itself has come under greater scrutiny. China joined the IDB in 2009 and remains its smallest shareholder, with a stake of just 0.004 percent. But it has managed to win about $2 billion in IDB-funded contracts since joining. This has amplified bipartisan U.S. Congressional concerns over China’s growing presence in the region.

China’s approach is designed around securing its own commodity supplies from other regions rather than long-term local development. Chinese state-controlled companies are subsidized in order to undermine competitive bidding, and its investment schemes often become debt traps. In 2021, the U.S. loaned Ecuador $3.5 billion to rescue it from a Chinese oil-for-loans deal that had been refinanced under opaque terms by a Chinese bank.

IDB leadership under President Mauricio Claver-Carone has proposed reforms that would not only modernize the bank but reaffirm the region’s relevance to global investors. It starts with a recognition that the region is facing more than just a public cash shortage. It needs substantial private investment, far beyond what a single lender can provide, and in short order. Social and political dissatisfaction will only deepen the longer economic stagnation characterizes the region.

A key pillar of the modernized IDB would use a “premier client-centered approach” to become a hub for attracting private capital to its client countries. This involves the IDB stepping up with assistance in redesigning regulations, promoting formal job creation, and de-risking private investment in the region. Sitting back and waiting for these frameworks to emerge on a country-by-country basis is not realistic nor would it help governments that are struggling to address immediate problems. It’s time for the IDB to lean in and more directly facilitate the reform process.

It also means the U.S. has to step up as well. Claver-Carone believes the U.S. has “undervalued the IDB” for decades and given China an opening to “fill that financial vacuum to their advantage.”

It’s in the U.S. national interest to back the $80 billion capital increase proposed by Sen. Bob Menendez, D-N.J., and embrace an IDB that will do a lot more than simply lend money. And the U.S. would be foolish to think that it alone can counter China in the region. Resources from other IDB members are equally vital. As Cynthia Arson of the Wilson Center observed, “dollar for dollar, the U.S. will never be able to match the deep pockets of Chinese investment banks.”

The choice is clear for the biggest stakeholders in the IDB. Unfortunately a small band of status quo advocates within the bank wants to undermine proposed reforms and re-litigate Claver-Carone’s election with unsubstantiated allegations of wrongdoing. The reform debate has been diverted by an investigation launched on the basis of an anonymous email rather than a formal complaint, unprecedented in a multilateral development bank. The diversion should be put aside, and the substance of what the IDB leadership proposes should prevail. Latin America can succeed by upping the ante on its own economic destiny.

Gary Clyde Hufbauer is a senior fellow at the Peterson Institute for International Economics in Washington, D.C.