The New Inter-American Development Bank Institutional Strategy Commits to Ambitious Reform

A new institutional strategy for the years 2024–2030 was just approved by the Board of Governors at the annual meeting of the Inter-American Development Bank (IDB). This comes one year after Ilan Goldfajn assumed the presidency of the organization with a commitment to establish clear priorities and substantially improve development effectiveness. This blog assesses how well the new strategy satisfies expectations and identifies the main challenges that lie ahead in implementation.

A thoughtful regional diagnostic but lacking specifics on the problems the IDB is best suited to solve

Good strategies start by providing a specific definition of the problems they are supposed to solve. The new strategy’s diagnosis on the region’s development challenges is a careful distillation of the body of knowledge acquired by the IDB. It offers a thoughtful analysis of the region's subpar performance over the past few decades, emphasizing growing productivity and governance gaps. It is a synthesis of structural challenges that the region has been dealing with for a long time.

However, a more differentiated diagnostic broken down by country type and subregion would have been beneficial to the selection of priorities. For instance, it is somewhat perplexing that Haiti, the nation most in need of IDB help and the recipient of a sizable aid package following the earthquake, receives no mention in the diagnosis.

The strategy does not include an examination of how the role of multilateral and bilateral development finance has evolved in the region. The amount of funding coming from development finance institutions has been declining in the region relative to domestic resource mobilization and capital markets, as it has in other regions, particularly in middle-income countries. Also, a more prominent role has been assumed by borrower-led institutions, such as Corporación Andina de Fomento (CAF), or by emerging partners, like China. As the IDB becomes smaller in relative terms as a funding source, it needs more refined strategies to remain relevant and effective.

Moreover, an honest assessment of the role played by the IDB, portrayed as the largest multilateral lender for more than 20 years, in the region’s trajectory—with an eye toward the weaknesses of that engagement as well as the strengths—would have helped inform the right areas of focus going forward. To improve priority selection, an evaluation of the IDB's track record in addressing various needs and issues would have been beneficial. The bundle of resources and expertise that multilateral development banks (MDBs) provide is not necessarily well suited for addressing all types of development challenges. Finding “bankable” issues and solutions can be greatly aided by the evidence gathered via evaluation work.

The definition of priorities is quite broad, which means operational incentives will determine focus

Business strategies are often designed to concentrate maximum available resources on limited problems. MDBs frequently go against this notion, tackling massive problems with limited resources. That is why setting priorities is crucial. The strategy identifies three goals and seven operational priorities and devotes a long section to describe what the institution could do in broadly aspirational terms. The problem is that objectives and priorities are expressed in very broad terms and can accommodate a wide range of specific actions. It is difficult to determine which projects—if any—the IDB approved under the previous institutional strategy that would not fall under the purview of this one. It will depend on implementation to determine the fate of the current broad portfolio of sector divisions and clusters and the distribution of resources among them. Experience demonstrates that sector proliferation acts as a powerful disincentive for more selective programming, in addition to being a barrier to reaching the critical mass of funding and knowledge to reach meaningful scale and impact.

In fairness, it challenging to prioritize in MDB strategy documents. They are less of a tool for resolving conflicts and more of an exercise in broad legitimation and shareholder management due to their requirement to compromise on competing priorities and interests. That applies to this strategy as well. In the past, ambiguous priorities have left the door open to lending decisions that have prioritized short-term financial requirements, rather than long-term transformational impact.

An ambitious IDB reform agenda with demanding implementation requirements

While the strategy shows more continuity than change in terms of priorities, it commits to an ambitious reform agenda for the institution with the objective to achieving “scale and impact.” If properly implemented, it can transform the IDB business model and yield significant improvements in performance. Key reforms are as follows:

First, the IDB embraces the G20 expert panel paper recommendations on capital adequacy. Jointly with the approved capital increase for IBD Invest, the IDB’s private sector lending window, balance sheet optimization measures and mobilization could add up to US$ 112 billion in financing capacity. This is easier said than done, as tradeoffs exist when stretching capital use, but it is undoubtedly the way to go, as other MDBs already show. The challenge is to enlarge lending capacity ensuring sustained client demand, which has receded when borrowers in the region have enjoyed favorable capital market conditions.

Second, an outcome-focused impact framework is to be approved. It must establish clear, transparent outcome and output targets by operational priority area and country strategy to be useful as a guidance and accountability tool. This will allow prioritizing operational decisions and align incentives with scale and impact objectives. For that to happen a connection needs to be built between lending resources and results achieved. According to a recent CGD analysis, the MDB with the highest success standard at the time is the African Development Bank. To live up to expectations, nothing less than that will do.

Third, there is a need to redesign the country engagement process, operational instruments, and development effectiveness standards. The best course of action is to adopt a programmatic approach backed by instruments that are results-driven, which will lower transaction costs for borrowers and create the right incentives. The announced knowledge initiative collecting evidence on interventions that work will be key to support a more methodical engagement at the country level, scaling up funding on impactful interventions. This will not be achieved just by a marginal adjustment of current instruments and frameworks of intervention, added incrementally in the past. Budget support through results-driven instruments, attracting counterparty resources, should take a much bigger share of the portfolio. Borrowers and non-borrowers will need to discard their old prejudices towards lending instruments and settle on the solutions backed by the evidence.

The strategy includes other interesting although still vague propositions on meritocracy and synergies amongst IDB windows; nonetheless, whether a transformative effect on IDB performance is realized will ultimately depend on how well the aforementioned reforms are put into practice. Strategy may be defined by intentions, but it is realized by action.