Summit Implementation Review Group Report on IDB Progress

by Stephen Quick, October 1998

Director Mr. Alleyne, Secretary General Mr. Gaviria, Ambassador Portales, distinguished ambassadors, delegates, participants from the international organizations, ladies and gentlemen.

On behalf of President Iglesias, thank you for allowing us to outline the IDB’s programs and activities in furtherance of the Santiago Summit priorities. As you are aware, the IDB is the responsible coordinator for transportation and microenterprise, and is sometimes asked to provide assistance in other areas. Following is a summary of the most noteworthy events of the past few months in all those areas.

Education

Currently the IDB has over $2.5 billion in education sector loans under execution. As President Iglesias stated in Santiago, the Bank continues to provide loans and technical cooperation in support of modernization and reform of the education sector in the region. In 1998 the Bank expects to approve five loans for the sector amounting to US$ 290 million. The Bank is presently working with several countries to prepare projects or programs with an expected lending value of US$1 billion. In addition, nearly $150 million in technical cooperation programs are under consideration.

One of the major challenges in the sector is to improve the allocation and management of resources in order to overcome distortions. Among these are the existence of cash-strapped basic education systems alongside well-financed public higher education institutions. The Bank is already supporting programs that grant school systems greater autonomy and choice, so that principals, teachers and parents associations have more say in the way schools are run and supervised. This is contrary to highly centralized systems that are often detached from the needs of the communities where the services are delivered.

Among its initiatives, the Bank is proposing an international network of virtual schools to improve mathematics and science teaching. Already in the planning stages is a Bank-sponsored program that will allow participating countries to link schools with new electronic media for the joint teaching of mathematics and science. This program will involve distance education and use technologies such as computers, the Internet, and television for delivery.

Strengthening Justice Systems

In 1998 the Bank has approved four operations amounting to $103 million. This brings the total support to this critical area since 1994 to twenty-six operations valued at $138 million in loans. Furthermore, reflecting the continuing demand for resources in this area, the Bank is currently working on five operations with an approval value of $217 million.

In crafting its support to the countries of the region in judicial modernization, the IDB is seeking a broad political and social consensus in order to strengthen the sustainability of the reforms. The Bank supports the requirement of a high degree of independence for the judiciary, and considers it essential to ensure transparency and public participation in the formulation of projects. The Bank also grants high relevance to the different national realities in terms of cultural traits, endowment in natural and human resources, and the degree of institutional development.

Free Trade Area of the Americas

The core of Bank support in this area has been in framing the request by the ministers of the hemisphere for the OAS/IDB/ECLAC Tripartite Committee to provide support of the FTAA process. The main activities supported during 1998 are:

In addition, the Bank is currently reviewing two funding requests: a $3 million regional cooperation program to support an FTAA administrative secretariat in Miami, and a technical assistance program to provide comprehensive assistance to countries in the area of institutional strengthening for trade-related matters, including the FTAA.

Financial Markets

During this decade most countries in the region achieved significant progress in restructuring and developing their financial markets, building upon a foundation of political and economic stability. As governments increasingly liberalized those markets, they attracted growing amounts of capital. Consequently, Latin American markets, which had been severely jolted by the Mexican peso crisis early in 1995, managed to largely withstand the shockwaves from the recent Asian financial collapse.

Nevertheless, the region must consolidate and extend those reforms in order to foster the development of more sophisticated markets, institutions and instruments. Countries in Latin America and the Caribbean will have to take steps to reduce their reliance on bank-dominated systems and create the conditions for other institutions that may meet their ?? investment needs.

In order to reduce the potential cost of any future financial crises, the countries must also persist in efforts to bolster their regulatory and supervisory bodies. The Bank, has financed financial reform projects worth over $5.7 billion in twenty-three countries during this decade, and constantly seeks new ways to work with governments, regulators and private sector institutions in order to develop efficient markets. To that end the Bank will strive to recognize advances, point out potential shortcomings, disseminate information and provide financial and technical resources.

Besides the support for financial reform granted to twenty-four countries through its regular operations, the Bank strongly supports implementation of the initiative contained in the plan of action. In particular it has financed a review of compliance by the Bank’s superintendencies with the Core Principles of Banking Supervision, and is preparing a special Financial Markets Initiative to support the implementation of corrective measures wherever deficiencies are detected.

This finance initiative is a comprehensive package for financial markets development. It includes crisis prevention and support for early problem detection; implementation of risk management systems in private banks; implementation of the core principles also in securities and in insurance supervision; enhancement of financial disclosure at the public and private level; and support for early resolution of problem credits, among other activities.

Regarding Payments and Clearance and Settlements in the region, the Bank has supported seven operations in thirteen countries. In October, the Bank hosted an international conference on this issue, supporting the strengthening of relations between institutions in the region.

Hemispheric Infrastructure

Private Sector Support. The IDB estimates that if the countries of Latin America and the Caribbean were to grow at an annual clip of five percent, they would have to invest nearly $70 billion every year in infrastructure. Since many countries in the region must attain even higher rates of economic growth, that figure may be too conservative.

Historically, infrastructure support has been the biggest component of the Bank's lending program. Between 1971 and 1994, the Bank invested an average $1.8 billion annually in projects in sectors such as transport, power, water and sanitation, and telecommunications. These resources were traditionally channeled through the public sector. However, in recent years, the private sector has played an increasingly important role in infrastructure projects, largely due to the region's massive privatization programs. The Bank responded to this trend by opening a direct lending window for private sector projects in 1994.

From 1995 to 1997, the Bank lent an average $1.7 billion a year for infrastructure projects. The private sector's participation in that financing increased from $128 million in 1995 to over $280 million last year. The IDB's Inter-American Investment Corporation has been supporting small- and medium-scale infrastructure projects carried out by the private sector since its creation in 1989. Currently it has $61.5 million of its $570 million investment portfolio in thirteen private infrastructure ventures. Finally, the Bank's Multilateral Investment Fund has provided $33.8 million in grants to support regulatory reforms and privatization programs that foster the private sector's participation in infrastructure. During 1998, the Bank is expecting to approve, for both private and public projects, ten loans valued at $800 million, financing projects with over $3 billion in total cost.

The IDB Group expects to expand the scope of its operations in this field, enhancing its guarantee program to cover most political risks. However, the public sector will continue to be the major beneficiary of the Bank's project lending.

The Bank has also been and will continue to be a major player in the creation of the enabling environment through its Multilateral Investment Fund (MIF), which has recently approved a special line of credit (activity) to support concessions. The private sector department is also opening a special credit line to finance preparatory studies leading to concessions.

Transport. In this priority area, the Bank has been an important provider of funds for public and private investment. Currently the Bank is increasing its funding for private ventures in transportation. In several countries, Bank loans are facilitating the shift to private management of an important portion of their transport infrastructure. In this effort the Bank has been funding rehabilitation and improvements of transport links that are targeted for concession or have potential for private operators.

Science and Technology

The Bank’s support for the summit initiatives in the area of science and technology has two parts. First is the development of a bank strategy in the sector. Second are special initiatives to deal with the impact of weather phenomena in the region.

The IDB has made major contributions to strengthening country capacities since lending began in 1962. Past IDB lending for science and technology has built human and physical infrastructure, especially in universities; strengthened science funding agencies, especially through channeling funds through peer review and open competition; encouraged private sector investment in research and development through technology development funds; and supported individual research institutions of merit.

The Bank is currently debating the direction of a new strategy for science and technology. The new strategy emphasizes a systems approach; an increased role for technology; continued, but more focused, support of science research and training; increased support to smaller, poorer countries, and a parallel increase in support for education and training, which will impact both directly and indirectly on science and technology capacity in the region.

Recently, and in line with the summit priorities, the Bank has undertaken initiatives to improve the prediction and mitigation of natural hazards, such as El Niņo. The Bank has already taken immediate steps with emergency loans arranged to deal with the immediate impact of El Niņo for Ecuador, Peru, Argentina, and Paraguay.

On a related subject, the Board of Executive Directors has given clearance for a new strategy and operational policy in the area of information-age technologies. This new and exciting area of Bank action is seen as an important gateway to the future and to innovation in the countries of the region.

Microenterprise

During this decade Latin American and the Caribbean countries have recognized micro, small and medium enterprise development as a powerful tool to promote economic growth and reduce poverty. More than 200 million people, most of modest means, work in these businesses across the region. These entrepreneurs offer tremendous potential for economic growth, social development and job creation.

Only a small fraction of these businesses, especially the micro enterprises, have access to formal financial services. Lack of credit and other essential types of support curtails their growth. The IDB believes this is one of the biggest constraints the region faces in this field. These businesses also lack access to business development services and appropriate regulatory regimes to allow them to grow.

The Bank, a pioneer and a leader in micro financing, is carrying out a Micro 2001 Initiative, under which it plans to devote $500 million over five years to microenterprise projects. Besides streamlining its own internal procedures to speed up approval of such programs, the IDB will work with borrowing countries to draft legal, tax and labor reforms needed to grow these small businesses. The Bank will also continue with its projects of strengthening NGOS that offer credit and other services to the micro enterprise sector.

The Bank has long supported the development of small and medium size businesses, especially through lending programs designed to increase their access to investment credit. Through its multilateral investment fund (MIF), the Bank is also helping to create business development centers and providing other support for non-financial services to small and medium enterprises, as well as helping to create venture capital funds to promote investment in the expansion of these businesses.

The Bank took the following measures to implement the summit’s action plan in 1998:

1. Promoting inter-institutional coordination through the following interchange mechanisms:

· A consultative forum on micro enterprise development in Mexico City, attended by over 500 practitioners, policymakers, business people and development agencies from Latin America, the Caribbean and other parts of the world.

· A roundtable discussion among top policymakers responsible for small enterprise development in Latin America, the Caribbean, the United States, Canada, Europe and Japan to compare experience and promote best practices.

2. Preparing a regional technical cooperation program to identify and promote appropriate finance policy reforms that will accelerate the entry of formal financial institutions into micro finance and the upgrading of non-formal micro lenders into regulated institutions. The program will be carried out in conjunction with the association of bank supervisory authorities of Latin America and the Caribbean (ABSALAC), and the superintendencies of banks of Colombia, Peru and Paraguay. All member countries of ABSALAC will participate in the discussion and dissemination of the results of the program.

3. During 1998, the multilateral investment fund (MIF) approved a $10 million line of activity for technical assistance to micro finance institutions to help them to upgrade and expand their operations. The program is being executed in collaboration with international and bilateral donor agencies, including USAID.

4. During 1998, the Bank will finance over 30 projects to support the development of micro, small and medium enterprise for a total amount equivalent to over us$100 million.

Women

In recent years the IDB made considerable gains in building institutional capacity to address gender issues and in undertaking new initiatives that benefit women, all in line with the initiatives proposed by the summit. The Bank has strengthened its institutional capacity by expanding its Women in Development Unit, the regional operational departments and, most recently, the country offices.

Recently the Bank has approved over $23 million in technical cooperation grants in new areas such as child development and care, women’s leadership, domestic violence, strengthening of national women’s bureaus, women’s access to technical training, and reproductive health.

At the same time, lending operations in the area of justice and legal reform are beginning to include activities for the control of domestic and social violence, and activities to legislate on the issue. Among these are programs to modernize the administration of justice in Honduras and to support reform of the justice system in El Salvador; and the first two "stand-alone" anti-violence operations, in Colombia and Uruguay. Domestic violence is a new area of Bank action where successful mainstreaming of gender considerations has been achieved from the outset, as the Bank and its member countries begin activities.

The Bank continues to invest significant resources preparing the regional program to support women’s leadership and representation. This is a collaborative program designed in conjunction with UNIFEM, UNICEF, UNDP, OAS/CIM, and the coordination of Latin American and Caribbean NGOs that seek to increase women’s participation and their access to leadership positions in public and civic life. The main areas to be considered for funding are leadership skills training, young women’s leadership, coalition building, legislative reform, public education, policy influence and research.

Modernization of Labor Ministries

The IDB has been asked to play a supporting role in this area of priority, mainly by providing technical cooperation resources. Recently the Bank granted technical assistance to support the organization of the 11th Inter-American Conference of Labor Ministers held in Santiago de Chile on October 19-22. At the conference, the Bank pledged to support the different working groups set up by the meeting.

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