Photo: Inter-American Development Bank (IDB) headquarters in Washington, D.C. Source: IDB.
Since the Inter-American Development Bank’s creation in 1959, Latin America and the Caribbean has never faced so many interconnected crises. From the pandemic’s horrific toll and the fallout from the war in Ukraine to worsening hurricanes, the region is reeling from high inflation, slow global growth, inadequate infrastructure, scarce financing and high-debt levels. While the recent firing of the Inter-American Development Bank (IDB) president, Mauricio Claver-Carone seemingly could not have come at a worse time, the search for a new president provides the Bank with an opportunity to reestablish its credibility and do far more to support the region.
The next IDB president must be a consensus builder with real clout to regain trust and persuade members to approve a capital increase. Ideally, the next president will also be from the LAC region and a woman. Crucially, she should offer a compelling vision as to how the IDB can help lead an economic recovery consistent with achieving net zero emission and climate-resilient economies—which can drive growth, job creation, and investment while reducing risks to public finances.
Fortunately, there is broad recognition that multilateral development banks (MDBs) like the IDB need reform and greater ambition. For instance, U.S. Treasury Secretary Janet Yellen, has proposed changes to MDBs, pushing them to move beyond country-specific loans to address global threats like climate change and speed the flow of private capital to the Global South.
There are several skilled potential candidates that have been floated for the role of leading the IDB. Among the likely candidates is one woman, Isabel de Saint Malo de Alvarado, the former Panamanian vice president and minister of foreign affairs. Unlike his predecessor, the Biden administration will not put forward a U.S. candidate as it returns to the unspoken agreement that the IDB president come from the Latin American and Caribbean (LAC) region while a U.S. citizen serves as the Bank’s number two. This is a particularly encouraging sign, as a well-respected candidate from the region would be better placed to secure a capital increase. Claver-Carone, a Trump administration official, was unsuccessful due to his reportedly frosty relations with Democratic leaders in the United States.
While the IDB and its private-sector arm, IDB Invest, provided a record US$23.4 billion in financing and other commitments in 2021—including a record US$4.5 billion for climate-related projects—the impact of this financing remains limited given the scale of the climate crisis facing the region. Globally, the UN estimates that emissions will increase by 10.6% by 2030—far short of the required 45% cuts needed to limit warming to 1.5 degrees Celsius. Indeed, the UN has concluded that “only an urgent system-wide transformation” will do.
In the LAC region, the IDB should lead that transformation. To achieve the Paris Agreement goals while addressing social challenges, the region would require realigning 7% to 19% of GDP—or up to US$1.3 trillion—worth of private and public spending annually. To help the region shift investment at that scale, the IDB needs a leader who can support reforms and secure a capital increase while leveraging international finance to accelerate action. While the United States, Europe and China have all made huge investments in climate action, the LAC region risks being left behind.
To prevent that, the new IDB president should build upon recent successes including its support for Costa Rica’s National Decarbonization Plan, financing renewable energy projects, and helping finance ministers design fiscal policies for climate action. By ramping up support, the IDB could help unleash the potential for stronger climate action and bring about new economic opportunities in the region—including 15 million net new jobs and billions of dollars in benefits from decarbonization.
The next president must put the Bank at the forefront of managing climate risks. In scenarios consistent with limiting warming to 1.5 degrees Celsius, Latin American oil production needs to fall to less than 4 million barrels per day by 2035. This would mean that 66 to 81 percent of proven, probable, and possible oil reserves will not be used before 2035. The fiscal impact of this would be enormous with regional oil exporters potentially losing up to US$ 3 trillion in royalties by 2035. Moreover, the increase and intensity of climate impacts, especially in the Caribbean and Central America, shows why IDB and other financing is essential to support countries manage their fiscal risks while building resilience and sustainable engines of growth and public revenue. A reconsideration at the IDB of other climate policies is also warranted. The role of carbon markets in the region appears limited as multiple peer-reviewed papers show that globally they do not lead to decarbonization. Instead, the Bank should support sectoral reforms, such as carefully reducing costly fossil fuel subsidies, which maintain an unlevel playing field for low carbon technologies.
The IDB modernization process to make it more innovative, agile, and risk-prone must continue and is essential to aligning the Bank’s operations with the Paris Agreement. According to Secretary Yellen, the new IDB president (alongside other MDBs) should implement changes on internal incentives, operating models, and uses of the Banks’ financial resources. For example, policy based-loans matched with high quality technical cooperation can advance required sectoral reforms. These reforms are also in line with the Bridgetown Agenda for the Reform of the Global Financial Architecture, led by Barbados, which calls for an ambitious debt service suspension initiative to improve liquidity, expand multilateral lending, increase risk appetite, and prioritize concessional lending. At COP27 in Egypt, Prime Minister of Barbados, Mia Mottley, repeated this message for reforming MDBs and drastically increasing their lending.
This process will prove difficult without deeper reforms. The IDB’s contractual process for new hires is often glacial and it regularly loses talented consultants from the region due to three-year limits. This can result in stalled projects and institutional memory loss. A review of the Bank’s salary and benefits structures for staff is required to free up resources in order to attract and retain talent. Management practices also need to be improved to create a more compassionate and trusting environment which empowers employees.
On November 20, countries should use their vote to choose a new IDB president who will reestablish the credibility of the Bank and unleash its full potential to spur a sustainable economic recovery that addresses the climate emergency.
Guy Edwards is a featured contributor with Global Americans. He is also a PhD student working on great power competition and climate change at Sussex University and a scholar at the Climate Social Science Network. He was formerly a co-director of the Climate and Development Lab at Brown University and a senior consultant at the Inter-American Development Bank. Follow Guy on Twitter at @GuyEdwards
Marcela Jaramillo is a co-chair of the Low Emissions Development Strategies Platform for Latin America and the Caribbean (LEDS LAC) and was formerly a senior consultant at the Inter-American Development Bank. Follow Marcela on Twitter at @JGMarcela