Navigating Power Dynamics Within Latin America’s Regional Development Banks
By Leslie Elliott Armijo and Verónica Rubio Vega Sepehr
What can an international relations (IR) perspective reveal about cooperation within regional development banks—and vice versa? From the viewpoint of Latin America, the most democratic region within the Global South and the only one where most countries have been independent polities for two centuries, there have been three big shifts in international politics since the late 1980s: the end of the global Cold War, a brief unipolar moment for the United States, and then the rapid economic rise and political expansion of China in the early 21st century.
Many Latin American opinion leaders have embraced the vision of a less-dominant United States, implying greater foreign policy freedom of choice for the rest of the hemisphere. For example, Chile, Costa Rica, Colombia and Mexico are today full members of the Organization for Economic Co-operation and Development (OECD); Brazil cofounded the BRICS group with China, Russia and India; and Argentina joins Brazil and Mexico as members of the large economies’ Group of 20 (G20).
Of course, novel opportunities bring their own challenges. When the colossus of the North becomes comparatively less consequential, intra-regional power disparities become more noticeable. A new working paper examines three Latin American regional development bank (RDB) projects constructed with different understandings of the geographic scope of the “region.”
It argues that successful policy cooperation among neighboring states is more feasible when the region’s scope avoids, or at least plans around, certain structural-systemic problems created by power imbalances among the member states. Specifically, cooperation is easier to initiate and sustain when the interstate distribution of capabilities is either clearly hegemonic or genuinely multipolar.
The paper takes traditional neorealist IR theory, developed for thinking about military-security issues and conflicts, and reworks it to conceptualize some contemporary challenges of regional economic cooperation. We begin with four possible regional systemic structures: hegemony, unipolarity-without-hegemony, bipolarity and multipolarity.
These concepts provide insight into Latin America’s three major RDB projects: the Inter-American Development Bank (IDB), the Bank of the South (Banco del Sur) and the Development Bank of Latin America (CAF) as political entities. This allows us to explore how variations in regional scope and power distribution impact the success and lending activities of these banks. We define “success” simply as continued operation over time and lending activities by the value of loans extended and the types of projects promoted or avoided.
A hegemonic interstate system is one in which the power imbalance between the hegemon and all of its neighbors is such that even a coalition of all of the others cannot oppose the hegemon on an issue that its leaders feel strongly about. This describes the longstanding relationship of the United States with all its hemispheric neighbors, from at least the mid-19th century and continuing into the present. True, the 21st century has seen tighter economic and political links between Northern Latin America (Mexico, Central America and the Caribbean) and the United States, while South America now trades more with China than the US and has also increased trade with other Asian countries and Europe in the 21st century. Nonetheless, “Latin American” organizations constructed with a hemispheric membership, such as the Organization of American States (OAS), reflect a hegemonic power distribution.
The Inter-American Development Bank (IDB) is a comparatively well-funded institution in which the United States holds a de facto veto over its operations. This hegemonic structure has allowed for successful cooperation but has also entrenched a hub-and-spoke regional political economy. In other words, the IDB’s success is largely due to the clear dominance of the United States, which provides stability, direction and funding, albeit at the cost of Latin American autonomy.
A unipolar-yet-non-hegemonic international system is one characterized by a single large power and many lesser ones. However, the power differential is not so great that a coalition of most of the others could not successfully oppose the unipole. Brazil holds this position in South America. This makes the transaction costs implied to organize cooperation high relative to the short-term anticipated political and economic gains, although possibly not the long-term ones. Brazil is unable to match the US’ level of economic support to Latin American regional organizations, yet it chafes against being merely one country among 12. Nonetheless, shifting global politics inspired a slew of South American regional projects in the 21st century, including a leaders’ summit process and the Union of South American Nations (UNASUR).
The Bank of the South (Banco del Sur) was conceived to serve a subregion with a unipolar-but-not-hegemonic structure, in that Brazil’s total hard power capabilities – such as economic size, population, military strength or trade importance – roughly equal the sum of those of its continental neighbors. This relative power imbalance among the founding states made sustained cooperation challenging, particularly as Venezuela directly contested Brazilian leadership, leading to the Bank’s ultimate failure to launch successfully: although it was established by treaty, the Banco del Sur never extended a loan. At the same time, Brazil’s commitment to the project was less than those of other members, in that Brazil already had its own national development bank, the BNDES, one of the largest and most diversified development banks in the world.
An interstate system with a bipolar structure is one with two powers that roughly balance one another, and which are notably larger or more powerful than their neighbors. The prediction is bifurcation of cooperation into two groups, with cooperation across the entire system unlikely unless there is an external threat. Ibero-America (with or without the Caribbean) is bipolar, with Mexico in Northern Latin America and Brazil in South America.
Although the global international organizations conceptualize Latin America in this way, the regional organizations that have been established on this basis, most recently the Economic Community of Latin America (CELAC), generally have not succeeded, either existing only as an occasional summit process or simply fading away. The most successful Latin American regional economic organization is the Economic Commission of Latin America and the Caribbean (ECLAC, but usually known by its Spanish acronym, CEPAL), which produces valued and independent research on economic development, but does not extend loans. However, ECLAC is not actually an independent regional organization, but instead an agency of the United Nations, from whom it receives funding.
Finally, a multipolar interstate system is defined as one with three or more states with similar hard power capabilities. In the traditional neorealist model of IR, multipolarity is dangerous, because it leads to uncertainty and miscalculation, and it encourages countries to stumble into conflict and war. The working paper suggests, in contrast, that regional multipolarity may promote regional economic cooperation, as states are likely to be less fearful of mutual interdependence than of the asymmetrical dependence that would result from economic integration with a much larger neighbor.
Originally the Andean Development Corporation, the Development Bank of Latin America (CAF) exemplifies a multipolar membership structure. Its five founding members (Bolivia, Colombia, Ecuador, Peru and Venezuela) retain majority control and include several countries with roughly equal overall power capabilities, which has fostered both cooperation and innovation.
However, this structure also means higher costs and fewer resources compared to a hegemonically-structured bank like the IDB, which can raise funds more cheaply due to the hegemon’s own credit rating and other dimensions of economic and political power. Despite these challenges, the CAF has been successful in promoting regional cooperation and development projects, including in sectors such as heavy, physical infrastructure, valued by member governments but difficult for either the IDB or the World Bank to fund as environmental groups in the United States often oppose them.
Key theoretical insights
The paper employs a structural realist approach to IR, repurposing the classical neorealist balance-of-power theory to analyze economic cooperation. This framework helps identify the underlying patterns that influence the success or failure of RDBs. Our approach underscores the importance of considering both power distribution and geographic scope when designing and implementing regional cooperation initiatives of all types.
We argue that a hegemonic structure can achieve successful cooperation but will not challenge the existing power dynamics within the region. Conversely, a multipolar structure can foster innovation and cooperation but may struggle with resource limitations and higher operational costs.
The research also suggests that an RDB constructed on the basis of a bipolar structure – such as a hypothetical Latin American and Caribbean development bank with both Brazil and Mexico as members but without US or Canadian membership – would find sustained cooperation difficult without external support. The CAF appears to be aimed in this direction; yet it has minimized its political challenges through leaving formal voting control with its five Andean founders, while allowing its technocratic staff to exercise day-to-day operational decision-making power.
The future of South America
Finally, the working paper raises the intriguing geopolitical puzzle of how a proto-region like South America, despite structural unipolarity, might evolve to become a functioning region capable of resolving common policy challenges, from managing migration, to fighting the next pandemic, to coping with transborder crime, environmental damage or narcotics trafficking. Even in the trade realm, both Latin America as a whole, and continental South America within it, are today the world’s least integrated region and subregion.
Meanwhile, the 21st century’s global interstate system is evolving toward either a new US-vs-China bipolarity and Cold War – or toward multipolarity, with Western Europe, India, and Japan as lesser yet important poles. In either case, the countries and peoples of South America will be in a significantly better position to develop and grow economically, as well as negotiate politically with the rest of the world, if their political leaders (along with transnational activist groups, subnational governments and other non-state actors) can cooperate more successfully within the continent. Understanding, and considering how to resolve, the challenges of structural unipolarity-without-hegemony would be an important beginning.
Verónica Rubio Vega Sepehr is a co-author on the working paper. She has a PhD in Global Political Economy from Wilfrid Laurier University, Waterloo, focusing on leadership in multilateral lending in South America.
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