As the phrase goes, insanity is doing the same thing repeatedly and expecting a different outcome. A new strategy is urgently needed because Latin America and the Caribbean (LAC) is now expected to grow at just 1.9 percent this year and 2.2 percent next year, the lowest growth rates of any developing area outside of war-torn Emerging and Developing Europe. The appeal to create a new, more effective method of doing business in the region is being heeded by the new leaders of the World Bank and the Inter-American Development Bank (IDB), two development organisations crucial to the future success of LAC.
Their activities come at a time when food insecurity and climate shocks have exacerbated structural economic weaknesses like slow growth, inequality, and low productivity. Development finance organisations and multilateral development banks (MDBs) as a whole face a difficulty in figuring out how to operate more effectively in LAC as development requirements expand and change throughout the region.
The historic collaboration agreement between the IDB and the World Bank, which was signed on August 31 by IDB President Ilan Goldfajn and World Bank President Ajay Banga, is a huge step in the right direction. The leaders gave three reasons for their partnership during the signing ceremony in Washington, DC: to increase scale, better impact, and to work together to address more complex challenges.
This deal is groundbreaking for a number of reasons. First of all, it corresponds with the “unmet… modern-day challenges” that Janet Yellen, the US Secretary of the Treasury, described in April 2022 at the Atlantic Council, reflecting a current knowledge of them. Its three top priorities—climate resilience in the Caribbean, digitalization with a special emphasis on education, and sustainable and inclusive development in the Amazon—concentrate on key areas where supply and demand—donor interests and World Bank and IDB product offerings—converge on the needs of client countries.
The first two objectives, in particular, provide as excellent illustrations of how international today’s development concerns are. The COVID-19 pandemic made it evident that in order to address these issues, more and better regional and global public goods must be provided, and implicitly, national governments’ and MDBs’ current country-based policies must be changed in a wise way. The MDBs need to be more instrumental than ever in fostering international collaboration, coordinating incentives, and fostering deeper national integration.
Second, the agreement should scale up the financing and impact of development. Both organisations have historically given LAC nations a significant amount of assistance, acting both as firm promoters of long-term prosperity and countercyclical lenders during times of distress. Their public and private sector operations in LAC totaled more than $40 billion in commitments for the fiscal year 2022. But a lot more is required. According to Goldfajn’s explanation from last month, funding climate change and environmental initiatives just requires the expansion of resources “from billions to trillions.”
Making the best use of the current resources will be crucial given the drawn-out process for obtaining the required financial and political commitment to an MDB capital increase. In this aspect, the accord is encouraging news. A permanent coordinating structure to deliberately promote deep convergence and foster trust was lacking and long overdue, despite the fact that the two organisations had previously co-financed and collaborated on numerous one-off projects. The IDB and World Bank teams will be urged to avoid redundancy and leverage their unique comparative advantages, including financial, technical, and sectoral strengths.
To maximise impact, the World Bank and IDB’s external coordination efforts should be improved and supplemented by improvements made inside. These internal measures may include raising the calibre, efficacy, and measurement of development operations, as well as balance-sheet improvements described in the Group of Twenty (G20) framework for capital adequacy. They might also involve placing more of an emphasis on environmental issues and improving services to low-income and vulnerable regions in middle-income nations. The Bretton Woods 2.0 Project’s suggestions for MDB governance could also be added as further suggestions.
Third, the agreement shows top-level support from the IDB and World Bank, as well as sustained momentum from Goldfajn and Banga’s historic visits to Jamaica and Peru in June. The leaders of the organisations’ first-ever joint tour launched technical discussions about cooperation. The procedure then remarkably progressed through the bureaucracy of both organisations in a little over two months.
The completion of this agreement’s first milestone shouldn’t lead to complacency. The project’s successful implementation and the achievement of tangible, quantifiable results depend on the leadership’s unshakable commitment from both organisations and the thorough staff follow-up. In two years, at the halfway point of the agreement’s execution phase, it will be critical to evaluate the extent to which the collaboration has increased the scope and impact of the institutions’ financial and technical support for the three objective areas. The proliferation of similar significant collaboration agreements with or among new participants, such as the International Monetary Fund, CAF-Development Bank of Latin America and the Caribbean, the Climate Investment Fund, and the World Bank, in the future is another success metric and legacy that this agreement could leave behind.
In addition to the multilateral organisations, the agreement serves as a call to action for the larger development community. For instance, the proposed partnership between IDB Invest, the private sector arm of the IDB Group, and the Multilateral Investment Guarantee Agency, the World Bank’s political risk insurance arm, is a nod to the growing significance of enabling development through private sector financing and expertise. It also highlights the possibility for borrowing nations to more effectively collaborate and bring in the private sector by making use of MDBs’ distinctive financial and operational tools and their function as an honest broker. In general, borrowing nations would be wise to keep contributing ideas to the IDB-World Bank partnership.
Donor nations should pay attention to this new cooperation and the initiatives that underpin it. The agreement should act as three reminders for the United States, which is both the largest shareholder and the location of both organisations’ main offices. First, there are opportunities for high-impact development via which to fund and include LAC. Second, the fact that LAC saw the development of this historic accord before other regions is not an accident. LAC is a useful source and testing ground for cutting-edge solutions to some of the most critical problems facing the world, despite its own development challenges.
Third, organisations like the IDB and World Bank indirectly foster a rules-based system that attempts to directly improve people’s lives by promoting socioeconomic progress in the developing world through programmes with high standards, effect, and transparency. For instance, the combined commitments of the World Bank and IDB in LAC were more than $40 billion in fiscal year 2022, which was more than five times the $7.4 billion global commitments of the US International Development Finance Corporation during the same time period.
Empowering cooperation between multilateral organisations like the World Bank and the IDB is a promising indicator of what is feasible notwithstanding continued geopolitical fragmentation and development concerns. It demonstrates how enduring institutions can start to evolve for the benefit of both their own long-term effectiveness and the prosperity of the entire world. As always, the next difficulty is to make the ambition a reality.