By PETER BATE

The meeting’s purpose, which took place a couple of months after the failed Bay of Pigs invasion, was to adopt President John F. Kennedy’s proposed Alliance for Progress, a $20 billion program that would channel financing from the United States to development projects in Latin America.

Ernesto “Che” Guevara, the Argentine-born president of the Cuban Central Bank, took the floor to ask U.S. Undersecretary of State Douglas Dillon whether Cuba would be included in the program. Dillon replied that the island nation could not participate since it was not a member of the IDB. That statement prompted the revolutionary leader to launch into a tirade in which he derided the year-old IDB as an institution chiefly concerned with financing the building of outhouses—a blunt jab at the Bank’s loans for water and sanitation projects.

When Guevara finished, the IDB’s founding president, Felipe Herrera, a young Chilean lawyer with a socialist political background, sprang up and walked over to the Cuban delegation. “You are absolutely right,” he said, pointing at the guerrilla-cum-central banker. “We are the Bank of the bathrooms. We are the clean water Bank, the Bank that will protect Latin America’s newly born and we will also be the Bank of economic integration.”

Herrera’s terse answer was recalled by Arnold Weiss, former manager of the IDB’s Legal Department, who was present at the conference and whose recollections are included in a recently published history of the Bank. In that reply and the speech that followed, Herrera forcefully framed the mission of the Bank, which was to spur the economic and social development of Latin America and the Caribbean to ensure greater welfare and justice for its people.

For 40 years the IDB has followed that path, helping the countries of Latin America and the Caribbean to modernize their societies and overcome their legacies of poverty and inequality. This formidable “social debt,” as Bank President Enrique V. Iglesias points out, remains the region’s biggest challenge.

In the process, the Bank that was forged principally as an instrument for cooperation between Latin America and the United States has become an international institution with 46 member countries, including nations from Europe and Asia. Its authorized capital has grown from $850 million to $101 billion, and it has long established itself as the leading source for multilateral financing for development in the region.

It has also proven that early pessimists were wrong when they doubted that a financial institution that was majority-owned and run by its own debtors could be sound and sustainable. This singular institution has always maintained the highest-possible credit ratings, an achievement that has allowed it to provide its borrowing member countries with affordable financing for projects that otherwise would be unlikely to attract such backing in voluntary lending markets.

Along the way the IDB broke new ground in development banking. It was the first multilateral institution to finance social projects, to make global loans and to support microlending in the region. It financed expansion of higher education and major tourism projects. Today it is helping countries to close the wounds left by civil wars and border disputes and encouraging communities to organize against violence.

The story of how the IDB has carried out the mandates of its member countries is summed up in the new book More Than a Bank, written by three former staffers, Luciano Tomassini, Oscar Rodríguez-Rozic and Jorge Espinosa Carranza, who worked intimately with the three presidents who have led the Bank.

Cold War beginnings. In many ways Felipe Herrera was the right man at the right time for the fledgling IDB. Although he was barely 38 years old when he became the Bank’s first president, he had already accumulated vast experience in politics, public administration and international negotiations. He began work at Chile’s Central Bank while he was still in law school. As a leader of the university student movement he became immersed in socialist politics. At age 26 Herrera was appointed legal counsel to the Central Bank, and he would eventually be named its general manager. As Chile’s finance minister under President Carlos Ibáñez del Campo, he took part in the protracted talks within the oas that led to the creation of the IDB in December 1959.

The concept of a regional bank for Latin America goes back to the 19th century. After the Second World War many governments in the region proposed the creation of a financial institution devoted to their own interests and separate from the Bretton Woods institutions. They viewed the newly established International Monetary Fund (IMF) and World Bank as already overburdened with the job of reconstructing the war-ravaged economies of Europe and Asia. They hoped that such a regional bank would be majority-owned and funded by the borrowing countries themselves. Given the troublesome evidence of social upheaval in several Latin American countries, such as the revolution that put Fidel Castro in power in Cuba, the Eisenhower and Kennedy administrations readily supported their neighbors’ proposal during the late 1950s and early 1960s.

With Herrera at the helm, the IDB set out to become something “more than a bank,” as its founding president used to say. Besides financing infrastructure projects— a staple of development banking— it became heavily involved in social programs, helping to fund water and sanitation systems, housing, health, education, job training and scientific and technological research. During Herrera’s tenure, the Bank also welcomed as new members the Caribbean countries that had become independent from Britain.

When Herrera resigned in 1970, he left behind an established institution that had supported Latin America as the region posted an average annual economic growth rate of 5.5 percent for the decade.

The IDB’s governors chose to replace Herrera with a man with a similar background, Antonio Ortiz Mena, a former finance minister of Mexico who had also been involved in the negotiations that preceded the Bank’s creation. The new president would face the challenge of building an even bigger institution, one capable of weathering major international crises.

During the two decades that followed its inception, the IDB’s lending program reflected Latin America’s faith in the development model devised by the United Nations’ Economic Commission for Latin America and the Caribbean (CEPAL) under the leadership of Argentine economist Raúl Prebisch. One of its principal tenets was that development does not happen simply as a product of market forces. Policies must be framed by long-term plans drafted by state agencies that are ultimately responsible for infrastructure. In the case of Latin America, industrialization was to be achieved rapidly by substituting imports with locally manufactured goods. This model, which was long sanctioned by the Washington-based financial institutions, would remain in place until it was shattered by the international debt crisis in the early 1980s. Before it was eclipsed, however, Latin America’s output grew 5 percent annually for nearly two decades, lifting millions of people out of poverty and into modern economic life. But the CEPAL model also kindled higher levels of inflation that masked disorderly public finances and economic inefficiencies that would eventually be its undoing.

Before that happened, however, Ortiz Mena led the IDB through a major expansion of its membership in the 1970s, when Canada, Japan, Israel and a group of European nations joined the Bank. The new members not only strengthened the Bank’s financial position but also gave it access to a wider and more diverse talent pool of professionals with strong backgrounds in public service and international aid and development. It also mirrored Latin America’s rising trade and investment links with other regions of the world.

During Ortiz Mena’s 17-year tenure, the Bank tripled its authorized capital to $30 billion and lending soared to more than $3 billion a year. Reflecting borrowing nations’ priorities during that period, the lion’s share of financing went to underwrite infrastructure and productive projects. The Bank also adopted an explicit policy to favor the least-developed nations by granting them concessional loans with longer maturities and grace periods, preferential interest rates and lower requirements for counterpart financing. Some of the more developed borrowers voluntarily declined to apply for loans and even set up funds to help poorer nations.

Ortiz Mena also revived the idea of establishing an investment banking affiliate, a project that had languished for years. In 1984, 34 of the Bank’s member countries signed the charter of the Inter-American Investment Corporation, a new institution that would support small and medium-size enterprises in the region with loans, equity investments and technical expertise.

Another legacy of Ortiz Mena’s presidency was increased financing for subregional development agencies to encourage greater economic integration. He was also a leading proponent of value-added taxes, which he viewed as a stepping stone towards regionwide standardization of tax rules. Virtually all Latin American countries eventually implemented such taxes.

During his tenure the IDB also instituted stricter policies to mitigate its projects’ social and environmental impacts. In the past such considerations had not always been a major priority for many borrowers, as was illustrated by an anecdote contained in the book More Than a Bank. When an IDB officer who was involved in a dam-building project asked a government official what plans they had for the people whose land would be flooded, the answer was: “We’ll give them swimming lessons.” But by the Ortiz Mena years, measures to mitigate such impacts had become a major focus of project design and execution.

By the end of Ortiz Mena’s tenure the region was still reeling from the effects of the international debt crisis that started in 1982 when Mexico declared it could no longer meet its commercial debt obligations. After that, voluntary lending sources dried up and bilateral and multilateral financing dwindled. The region was further hit by rising international interest rates and falling commodity prices. Latin America’s ensuing economic crunch became known as “the lost decade” of the 1980s.

In 1988 the IDB’s Board of Governors chose Uruguayan Foreign Minister Enrique V. Iglesias as its new president. A former secretary general of CEPAL, Iglesias would face the task of building up the Bank’s resources in order to support the deep economic transformation the region would undergo during the following decade.

As the 1980s drew to a close, most Latin American and Caribbean nations embraced a new set of market-based policies aimed at achieving macroeconomic stability, trade and investment liberalization and state modernization. Many of the tools—privatization, deregulation, fiscal discipline, financial sector and trade liberalization, and tax reform—had been successfully employed by Prime Minister Margaret Thatcher in the United Kingdom and President Ronald Reagan in the United States to stage economic recoveries. Under these new policies, the private sector, and not the state, would lead economic growth. The region would also mend its relations with commercial banks in order to regain access to voluntary lending.

Iglesias led the negotiations among member countries that resulted in the IDB’s seventh and eighth capital increases in 1989 and 1994, for $26.5 billion and $40 billion, respectively. The former enabled the Bank to grant large sector loans to support a wide range of economic reforms in borrowing countries. In 1990, one of the first of those loans financed the bellwether privatization of Mexico’s Telmex telephone company. The second capital increase led to a major internal reorganization of the IDB to help the Bank carry out its mandate to reduce poverty, modernize the state, protect the environment and help vulnerable social groups. In addition, the Bank now had the capital base to enable it to become self-financing.

Under Iglesias’ stewardship the Bank has broadened and deepened its research efforts, establishing specialized offices devoted to economic investigation and the analysis of sustainable development issues.

During this period, the IDB has entered into areas of lending which would have been inconceivable in its early years. Among them are projects to strengthen democratic institutions, reform judiciary systems, promote the peace process among and within countries and bring together government and civil society. The IDB has also become a leading proponent of the economic links between culture and development. This is reflected, for instance, in the groundbreaking projects it is financing to revive the decaying urban centers of Latin America’s colonial cities. Small-scale programs to extend credit to microentrepreneurs, which the Bank pioneered, were expanded to national levels through innovative financial mechanisms.

Throughout this period the Bank has worked to bring new groups into the development process, funding programs in which beneficiaries help plan and carry out projects. Projects have been funded to help indigenous peoples preserve their cultural identity, slum residents to improve their neighborhoods, and rural villages to carry out public works.

In 1993 a group of member countries established the Multilateral Investment Fund to accelerate private sector development by helping to improve the region’s investment climate. Since then, the fund has been instrumental in supporting countries as they transferred state utilities and services to the private sector, helping to design and improve policy and regulatory frameworks.

During this decade the IDB has also helped its borrowers grapple with a series of major crises. First was the financial storm triggered by the devaluation of the Mexican peso in 1994. Then came the havoc caused by the meteorological phenomenon known as El Niño and several hurricanes and earthquakes. Most recently, the region had to deal with the contagion effect from the East Asia economic meltdown and the Russian debt default. In response to these “imported” threats, in 1998 the Bank established a special line of emergency loans that complement the massive financial packages supported by the IMF and the World Bank.

In an interview at the close of the book, Iglesias, who is currently serving his third five-year term as president, assesses the region’s achievements and shortcomings over this decade. On the positive side of the ledger, he notes that democracy is now firmly rooted, inflation has been tamed and economies have opened to international trade and investment. On the debit side, extreme poverty is still pervasive, income distribution is grossly skewed, high unemployment remains stubborn and many social groups have seen few benefits from economic recovery.

The first step in addressing those challenges is to make the region’s economies more efficient. “At the same time,” he said, “we must achieve social efficiency, solving social problems much more quickly than we have in the last few years.”