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 entering a financial crisis with a bleak outlook. In 2020 alone, regional GDP fell by 7.4% and public debt rose to 72% of GDP. The recovery is being hampered 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 revived Inter-American Development Bank (IDB) that leverages private investment, or accepting China’s debt-trap diplomacy.

The structural reforms being discussed at the IDB come at a critical time as the multilateral lender realizes it needs to do more to spur growth than just renew annual loan programs. Latin America needs private investment that is not committed to Chinese goals. For this reason, China’s growing financial footprint in the region must be severely challenged by better offerings from a reformed IDB.

In fact, China’s role within the IDB itself has come under scrutiny. China joined the IDB in 2009 and remains the smallest shareholder with a stake of just 0.004 percent. But it has managed to garner about $2 billion in IDB-funded deals since joining. This has fueled concerns from the bipartisan US Congress about China’s growing presence in the region.

China’s approach is aimed more at securing its own supply of raw materials from other regions than at long-term local development. State-controlled Chinese companies are subsidized to undermine bidding, and their investment plans often turn into debt traps. In 2021, the US loaned Ecuador $3.5 billion to save it from a Chinese oil-for-loan deal that had been refinanced by a Chinese bank on opaque terms.

The IDB leadership under President Mauricio Claver-Carone has proposed reforms that would not only modernize the bank but also reaffirm the region’s importance to global investors. It begins with the realization that the region is facing more than just a public money crunch. It requires significant private investment, well beyond what any single lender can afford, and in a short amount of time. Social and political discontent will only deepen the longer economic stagnation plagues the region.

A key pillar of the modernized IDB would use a “premium client-centric approach” to become a hub to attract private capital to its client countries. This includes the IDB providing increased support for regulatory reform, promoting formal job creation and de-risking private investment in the region. Sitting back and waiting for that framework to emerge from country to country is neither realistic nor would it help governments struggling to address immediate problems. It is time for the IDB to step in and support the reform process more directly.

This also means that the US must also strengthen itself. Claver-Carone believes the US has “undervalued” the IDB for decades, giving China an opportunity “to fill this financial vacuum to their advantage.”

It is in the US national interest to support the $80 billion capital increase proposed by Sen. Bob Menendez, DN.J., and support an IDB that will do much more than just lend money. And the US would be foolish to think that it alone could face China in the region. Resources from other IDB members are also important. As Cynthia Arson of the Wilson Center noted, “dollar for dollar, the US will never be able to match the deep pockets of Chinese investment banks.”

The choice is clear for the largest stakeholders in the IDB. Unfortunately, a small group of supporters of the status quo within the bank want to undermine the proposed reforms and take the election of Claver-Carone back to court with unfounded allegations of wrongdoing. The reform debate has been sidetracked by an investigation launched on the basis of an anonymous email rather than a formal complaint, unprecedented in a multilateral development bank. The distraction should be put aside and the substance of what the IDB leadership is proposing should prevail. Latin America can thrive by raising the stakes for its own economic destiny.

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

https://www.ibtimes.com.au/modernizing-idb-compete-chinas-debt-diplomacy-1838211?utm_source=Public&utm_medium=Feed&utm_campaign=Distribution Modernizing the IDB to compete with China’s debt diplomacy

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