Preferences, Variance, and Politics of Multiple Lenders: The Case of Brazil

Ruth Ben-ArtziDepartment of Political ScienceProvidence College

Prepared for IPES, College Station, TX11/14/09

RESEARCH QUESTION

IS THERE UTILITY IN HAVING MULTIPLE PUBLIC DEVELOPMENT BANKS SERVE THE SAME COUNTRY?

CONSIDERATIONS: DO BANKS MAKE LOANS TO THE SAME SECTORS IN A GIVEN COUNTRYDO BANKS OF A DIFFERENT GLOBAL-STATE LEVEL HAVE DIFFERENT DECISION-MAKING CALCULUS

THREE INSTITUTIONAL LEVELS

The world bank (WB)Inter-American development bank (IDB)Brazilian development bank (BNDES)

All make project/program loans to Brazil

WHY IS THIS IMPORTANT?

Countries spend billions of $ on aidIs the (political) involvement of shareholders influential in different ways for the three institutional levels?No study of how different multilateral financial institutions (that aid the same country) compare to each otherWho benefits from the existence of multiple development banks?

LITERATURE

IFIs are a platform for advancing political interests of principal member states (Vreeland, Stiglitz, Easterly, Thacker)

Governance of IFIs: the extent of delegation by member states (Tierney et al, Martin, Gould)

Why states have an interest in membership in IFIs (Rodrik, Milner)

ARGUMENT

A

B

C

institution country

X

How are decisions made? Where is the money going?

ARGUMENT

World Bank (US, Wash. Cons.) A

IDB (US, but LA influence) B

BNDES (domestic interest grps) C

institution

country

X (Brazil)

How are decisions made? Where is the money going?

METHODOLOGY

WB

IDB

BNDES

institution

country

BRAZIL

•shareholders

•‘politicking’

•delegation

•amount

•sector

•region

power structure/instit design

strategy

BASIC FACTSWB IDB BNDES

Lending since… 1949 1961 1953

Shareholders 185 48 1

Shareholder power

US 16.38% LA 50.016%; US 30.007%

--

Brazil’s shares

2.07% 10.752% 100%

Gvt guarantee √ √ √

Microlending New, not much, through IFC

New, not much, through the IIC

yes

mission “global poverty reduction and the improvement of living standards”

“contribute to the acceleration of the process of economic and social development of the regional developing member countries, individually and collectively”

“foster sustainable and competitive development in the Brazilian economy, generating employment, while reducing social and regional inequalities”

LOANS TO BRAZIL

$0.00

$1,000.00

$2,000.00

$3,000.00

$4,000.00

$5,000.00

$6,000.00

year

World Bank

IDB

LOANS TO BRAZIL

$0.00

$2,000.00

$4,000.00

$6,000.00

$8,000.00

$10,000.00

$12,000.00

$14,000.00

$16,000.00

$18,000.00

1949

1954

1959

1964

1969

1974

1979

1984

1989

1994

1999

2004

Year

$ (m

illio

n) Total WB

Total IDB

total BNDES

2005-7 SECTOR DISTRIBUTION

0 1,000 2,000 3,000 4,000 5,000 0 1,000 2,000 3,000 4,000 5,000 0 1,000 2,000 3,000 4,000 5,000 0 1,000 2,000 3,000 4,000 5,000

0, Agriculture/Rural Development 0, Energy and Mining 0, Financial Sector/Economic Policy 0, Infrastructure

1, Environment/Pollution1, Multi-sector Credit and Pre-investment1, Public Sector/Governance 1, Social Investment

2, Health, Nutrition, and Population 2, Microenterprises 2, Private Sector Development 2, Science and Technology

3, Education 3, Industry and Trade 3, Tourism 3, Urban Development

Brazilian Development Bank World Bank

Interdevelopment Bank

Graphs by var7 and sectorname

INTERVIEWS

Multilateral development banks should not be lending to BrazilBrazil is a safe borrowerBanks need to show success

FINDINGS

Global, regional and domestic development banks all do the same workThese institutions overlap and compete with one anotherAid/development projects are the same despite different institutional configurations (power structure/institutional design)

CONCLUSIONS

It is not clear that there’s a need for multiple public lenders to middle-income emerging marketsA domestic development bank appears more effective despite its politicizationIt seems the IFIs’ potential as a policy tool for principals sustains their continued loan-making to BrazilBrazil has influence

Preferences, Variance, and Politics of Multiple Lenders: The Case of Brazil

Ruth Ben-ArtziDepartment of Political ScienceProvidence College

Prepared for IPES, College Station, TX11/14/09

Variables and measurements (methodology 2)

major shareholders/Brazil’s sharesnegotiations (how decisions are made)% of loans to sector% of loans to regionPresident/political party in powermajor trading partnersRegional-level socio-economic indicators (to test for alternative explanation – need based)

WB (Mission and Functions)

IBRD and IDA: “Global poverty reduction and the improvement of living standards.” ~promote long term growth

~promote investment

~more urgent projects dealt with first

~not to compete with other sources of financing

IBRD

185 membersMaking loans since 1945 (Brazil member since 1946)Shareholders: Brazil 2.07%; US 16.38%Developed countries hold majority of votes

IDB (Mission and Functions)

“contribute to the acceleration of the process of economic and social development of the regional developing member countries, individually and collectively”

~Use funds raised in financial markets, its own capital and other available resources to finance the development of its borrowing member countries; ~ Supplement private investment when private capital is not available on reasonable terms and conditions; and ~ Provide technical assistance for the preparation, financing and implementation of development projects, programs and strategies.

IDB

Started making loans in 1961Lends more to Brazil than the WBSometimes works with the BNDESShareholders: Majority to LA countries (50.016%); US has veto (30.007% - more than any other country)Brazil’s vote share: 10.752% (together with Argentina is largest regional voter; next is Mexico with 6.912%)

BNDES

Federal development bankIssues loans at low costFinanced small projects/micro-lendingReceives $1bn annually from the IDB

Brazil - politics

1960-4: democracy, weak1964: military coup1964-1985: military regime1985: elections, democracy restored1985-1990: Jose Sarney (PMDB)1990-2: Fernando Collor de Mello (PRN)1992-4: Itamar Franco (PMDB)1994-2002: Fernando Henrique Cardoso (PSDB) (re-elected 1998)2002--: Lula da Silva (PT) (re-elected 2006)

Brazil Loan Data Sector Variables

1-Agriculture/Rural Development2-Urban Development3-Infrastructure – Sanitation, Transportation4-Environment/Pollution5-Private Sector Development6-Public Sector/Governance (Reform/Modernization of the State)7-Social Investment – Development, Protection8-Financial Sector/Economic Policy

9-Education10-Health, Nutrition, and Population11-Energy and Mining12-Industry and Trade13-Science and Technology 14-Multi-sector Credit and Pre-investment15-Tourism16-Microenterprises