FINANCING ALLEGIANCES

By Samantha Sparks

THE REAGAN ADMINISTRATION has made funding of the two Washington-based development banks a key issue in its campaign to bring the "magic of the marketplace" to development.

In 1985, both the World Bank and the Inter-American Development Bank (IDB) were tapped by U.S. Treasury Secretary James Baker to help defuse the Third World's more than one trillion dollar debt crisis. The two multilateral agencies were called on to increase lending to middle-income debtor nations that were willing to implement market-oriented economic reforms. Both banks were expected to need a big increase in resources in order to accomplish this goal.

As the third and final year of the "Baker plan" gets underway, however, only the World Bank has won the promised capital increase. The IDB, scene of a fierce power struggle between its borrowers and donors, is not expected to receive any new money until 1989.

At the World Bank, the administration's satisfaction with far- reaching internal reorganization and a growing emphasis on balance-of-payments support to reform-minded debtors has translated into a $75 billion general capital increase (GCI). U.S. support for the increase, announced by Baker in October, was critical since Washington is the Bank's largest single donor.

The GCI, formally endorsed by the bank's 22 executive directors on February 19, will nearly double the agency's capital base and provide for a steady increase in annual lending to about $20 billion by 1993. In order to take effect by mid-1989, the GCI must be approved by three-quarters of the bank's 151 member countries by May 2, 1988.

The IDB faces a very different future. With a new president slated to take over April 1, the regional Latin lender remains embroiled in a bitter dispute that has stalled a $20 to $25 billion capital increase and left the bank desperately short on cash. This year, with less than $2 billion to lend, the IDB expects to receive more money from debt-strapped members like Argentina, Brazil and Mexico than it can give in new loans. All sides agree that a breakthrough in the replenishment talks must come soon. But many fear that in order to win new money, the IDB will have to accept changes that will end nearly 30 years of Latin control over the only development bank devoted exclusively to the region's needs.

The IDB's new president, former Uruguayan foreign minister Enrique Iglesias, has moved quickly to demonstrate his willingness to compromise. According to sources, Iglesias has already agreed to accept as his vice-president James Conrow, the U.S. official who has led the administration's attack on the bank. Iglesias' predecessor, former Mexican finance minister Antonio Ortiz Mena, had refused to nominate Conrow, a deputy assistant treasury secretary, when the United States delayed the increase in the IDB's resources. Washington traditionally has had the right to name the vice-president of the Bank and Ortiz Mena's swan-song gesture of defiance infuriated administration officials.

Even if, as expected, Iglesias nominates Conrow, the Uruguayan's new job will not be easy. U.S. officials involved with the IDB have made no attempt to conceal their distaste for Iglesias: objections cited have ranged from Iglesias' long career of public service to Montevideo's efforts to bring Cuba back into the Organization of American States. And while talks on the replenishment may resume as early as March at the IDB's annual meeting, it is unlikely that the bank will receive any new money this year. The administration's fiscal year 1989 budget request has already been submitted to Congress and contains no requests for money for the regional bank.

While the economic cost of the deadlock at the IDB is clear, the dispute carries strong political overtones as well. Senior U.S. officials claim they only want to improve the quality of IDB loans, but their Latin counterparts at the bank disagree. "The United States says this bank makes poor quality loans," said Jose Luis Flores, the executive director for Mexico. "I don't find that justified." Flores and other directors believe that underlying all U.S. criticism is a single desire: "What they want is control of this institution."

Critics of the administration's stance at the IDB warn that while the bank's borrowers are the short-term losers in the current stand-off, in the long run neither side will gain from the political polarization caused by the dispute. They contend that the U.S. government's position reflects a fundamental lack of understanding of Latin America's fragile democracies and economic needs. "There has been a consistent political misreading of Latin America" by the U.S. Treasury, argues one senior IDB official. And, he adds, the U.S. stance shows "despite the [stated] goal of international partnership, the U.S. doesn't accept this in practice."

"The United States comes out of this looking like it wants to wield the big stick again," comments Robin Broad, a former Treasury official who is now a resident associate at the Washington-based Carnegie Endowment for International Peace. "All this does is charge emotions in countries like Argentina and Brazil which presumably we would like to have on our side." Says Broad, "The U.S. needs to be a friendly player in multilateral institutions with countries it cares about having as allies."

The IDB's current troubles began when the Reagan administration decided it could not support a capital increase until the bank agreed to several changes that would give donor nations more control over the way the money would be spent. At present, the IDB's 25 Latin and Caribbean nations hold the majority 53.5 percent of votes at the bank while the United States has 34.5 percent and Canada holds 4 percent. Under the current system, charges the U.S. Executive Director Jose Manuel Casanova, borrowing nations "have a pact not to criticize loans [and] to block-vote" to ensure that all projects are approved.

U.S. criticism of the IDB began after Baker's 1985 proposal to expand the bank's lending program. "If you're going to give more money, you're going to be more concerned about the way it is spent," one U.S. official explains. With Conrow leading the U.S. negotiating team, the administration put forth a series of demands that included effective veto power over loans and an internal reorganization of the bank that would permit an increasing emphasis on policy reform as a condition for approval of IDB loans.

Of the $25 billion proposed as the upper limit to the IDB's capital replenishment, about one quarter, or $6 billion, was earmarked for quick-disbursing assistance in support of reforms to reduce the role of the state in borrowers' economies.

The IDB's cash-strapped Latin members welcomed the addition of balance-of-payments assistance to the IDB's lending program. Not surprisingly, however, the Latin team represented by Argentina, Brazil, Mexico and Venezuela refused to yield veto power over loans. They pointed out that such a change would require an amendment to the IDB's Articles of Agreement and thus every member government would have to approve it. "Would any Latin American congress vote to deliver the bank to the United States?" asks Flores, echoing the position outlined by Mexican finance minister Gustavo Petricioli in a July, 1986 letter to Secretary Baker. "It is impossible from our point of view."

Adds a South American director, "If the U.S. wants to stop [a loan], it already can. It doesn't need to change the charter." This director, who asked not to be named, noted that before talks on the replenishment broke down in October, the United States had kept over 50 percent of the IDB's 1987 loans on hold in an effort to increase leverage over the Latins. Washington was able to stall by refusing to agree on the terms for the bank's 1987 lending program, a U.S. official confirmed.

"We accept that when a significant minority [of the bank's members] opposes a loan, we should listen," says this director. "But the U.S. wanted veto power for itself and Canada. You'd lose your job tomorrow if you did that."

The administration has since backed down from its demand for veto power. Nevertheless, the two sides have been unable to agree on Washington's last request for a mechanism that would permit up to three directors to delay consideration of loans for up to two years. While Conrow and other U.S. officials insist their latest offer represents a big concession, the Latin team contend it will give donors informal veto by allowing them to delay a loan for so long as to render the proposed project irrelevant.

The two sides have already agreed, however, to changes that will begin to shift the IDB away from its traditional emphasis on basic development projects, toward greater involvement in borrowers' economic policies. The shift is intended to bring the IDB into line with moves by the World Bank, and to a lesser extent the other regional development banks, to exert a growing influence on the broad macro-economic policies pursued by Latin America and the Caribbean.

"When I first came here [in 1981], the IDB was promoting state socialism by financing state enterprises," complains U.S. director Casanova. In the early years of the Reagan administration, says Casanova, the U.S. team worked to get tougher conditions attached to bank lending. But despite some successes in implementing these reforms, the administration decided more radical changes in IDB structure and policies were needed to justify a replenishment.

"Policy change requires political will, which has been lacking" in borrowing governments, a senior U.S. official contends. "We believe that development is a question of economic policy, [but] the Bank viewed itself as a transfer of resources." Says Casanova, "We have to be the conscience of this institution. We can't come here to get a trophy for being popular."

In February, then-IDB president Ortiz Mena agreed to a U.S. initiative to hire six new economists for the bank's loan analysis division. The new team, to be led by a U.S. official, will begin developing borrowing "country programs" that will establish a market-oriented economic policy framework for IDB loans. Says one senior IDB official critical of the administration's efforts, "The bombardment has failed, so they're coming over the walls." .