A subscriber kindly sent me a correction to this week’s issue. The idea of the callable capital increase was raised by an IDB official at a roundtable held by the InterAmerican Dialogue, a DC think tank. A foreign affairs official who was present liked the idea and took it back to Ottawa. The subscriber was in attendance at the roundtable and reminds me that think tanks come up with ideas; governments execute them. I thank the subscriber for the correction and apologize to readers for the error.
Warning: Today’s edition has a long set up
Warning: I have some overseas travel coming up and will probably miss a week of The Thursday Question.
I wish I could be in Montreal on Saturday.
At the depths of the financial crisis in 2008-09, the world’s credit markets froze up.
When credit markets freeze, even successful companies cannot borrow money. That’s why, in 2008-9 the Harper government used every tool at hand - EDC, BDC, and so on - to inject liquidity into economy. Lots of profitable firms stayed in business as a result.
A credit crunch cab also hit national governments, and the 2008 one did. Since 1945, government credit crunches have been dealt with by international financial institutions - the IMF, the World Bank, the international division of the Federal Reserve, and more specialized ones. But in 2008, no one was sure the IFIs had enough money to backstop all the countries facing a credit crunch. And that worry was making the credit crunch worse. If even one small country found itself frozen out of the credit markets, investors worried there might be a contagion leading to a global credit collapse.
These financial institutions needed quick action to head off that global credit collapse. Canada, which was in a relatively strong position, contributed heavily to the G8 and G20 effort. The Harper government didn’t act because of woolly-headed idealism. It acted out of enlightened self-interest. Canadians make a living by buying and selling things to people in other countries. Ensuring those people have access to financing is in our interest, and in a crisis, quick action can reassure nervous investors.
Part of the Harper effort was to double Canada’s commitment to the InterAmerican Development Bank. IDB is a specialized international financial institution. It has been financing development projects in Latin America and the Caribbean since 1960 (1). Canada is a major IDB shareholder and has a seat on its board of executive directors. In 2009, Canada injected money into IDB’s balance sheet and challenged other shareholders to match its contribution (2). That let IDB expand its lending into the region when other sources of credit were freezing up., With fewer worries in the region, the IMF could turn its attention elsewhere.
Why was the Harper government so interested in IDB? A few years earlier, the Harper government had formulated an Americas Strategy. Before the global crisis, Mr. Harper and his ministers travelled in the region, building relationships, gaining familiarity with the issues, and earning credibility. Canadian firms were a major investors in the region. When the global crisis hit, it drew on the relationships, familiarity, and credibility to look for opportunities. The Finance Department pulled together the IDB financing package in a few days, and the public servant who did the work was later recognized with a public service award of merit. I had left the Harper government by this point, so I moved to DC and joined the IDB staff. I worked with the team that was pushing other IDB shareholders to follow Canada’s lead. Over the course of two years, Diane Ablonczy, Peter Kent, Jim Flaherty, and Mr. Harper all pushed their counterparts to get IDB’s $70 billion general capital increase approved.
I doubt any of the MPs who went door-to-door in the 2011 election heard about the Harper government’s role in recapitalizing the IDB. But the government’s reputation for having steered us through the financial crisis was forged from many successes you’ve never heard of. Canada’s major news outlets have never shown much interest in development issues, and I cannot remember anyone who covered Canada’s IDB effort as a news story.
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Once the general capital increase was approved, IDB staff had to convince its shareholder governments to deliver on their commitments. This was tricky. IDB wasn’t the only game in town. Most other international financial institutions were trying to get capital increases at the same time. The staff working to get the US to fulfill its share of the $70 billion had the hardest job of all. The US was a major shareholder in every IFI looking for capital. The Obama Treasury Department had agreed to these increases but then left it to the institutions to persuade Congress to appropriate the money that had been promised. Under the US separation of powers, the executive branch (in this case, the Treasury) can sign a funding agreement, but unless Congress appropriates the cash a funding agreement cannot be fulfilled.
Senior IDB officials spent months briefing members of the House and Senate and their staffs. Since each member had a say over whether the funding would be appropriated, they all had questions we had to take seriously. At the same time, since each member had a say over an issue that involved American global leadership, they couldn’t slough off the task at hand.
Most of the power was held by the members of one subcommittee of the House Appropriations Committee and their staff. One of my colleagues was working almost full time to bring the subcommittee’s Republican members and staff to our side. For these Republicans, it mattered that the capital increase had originated with the Harper government. It helped ease their worries about facing voters who might be angry at wasting money on foreign aid for dictators and corrupt countries. That colleague asked me to for a copy of the parliamentary appropriations bill that covered Canada’s contribution to the IDB capital increase.
I just laughed. “Our appropriations don’t work that way,” I said.
I had a great contact at Treasury Board back then, and friends at Foreign Affairs and Finance. None of them knew when the money for IDB had been appropriated by Parliament.
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