Facing Down a Poly-Crisis: The Case for Reforming Multilateral Development Banks
October 2, 2023
October 2, 2023
In 2022, multilateral development banks (MDBs) like the World Bank and the regional development banks gained center stage in the debates on financing for development. Most of their shareholders had very limited wiggle room in their international development cooperation budgets as they attempted to balance the books after the public spending spree brought on by the Covid-19 pandemic.
The scale and length of the pandemic, and the increasing pressure to contain the rise in global temperatures, are stark reminders that global challenges require global solutions. These solutions should in turn involve multiple stakeholders, including governments and international development agencies.
While some development finance institutions may have greater resources at their disposal, MDBs are perceived to be in a privileged position to help finance solutions to crises. Their regional or global reach gives them the heft to address transboundary issues and share knowledge in client countries. MDBs also offer financing at better-than-market rates, technical assistance on project implementation, policy advice on upstream reforms, research, and have strong convening power. Client countries find these features relevant for their own national development and regard MDBs as highly effective institutions. At a time when many government shareholders of MDBs are attempting to reduce their public spending, investing in these banks – especially in their non-concessional windows – offers excellent value for money to mobilise financing at scale. They also bring extensive experience in implementing large, climate-relevant projects that many countries lack. Their staff are directly involved in project negotiation and design and oversee project implementation.
Nevertheless, MDBs can do more to support countries in finding and delivering solutions to global challenges, particularly in designing and executing low-carbon transition strategies and building resilience to the impacts of the climate crisis. While most discussions have thus far centered on the World Bank Group, the need for reform also applies to regional development banks. Their smaller size and shareholding structure – often with a voting majority of borrowing shareholders – mean that they can be nimbler and more innovative than the World Bank.
To be truly transformative, not only must MDBs pursue and implement a stronger integration of climate and development objectives and strategies; they must also reach their potential lending capacity, scale up finance, create stronger incentives and support for client countries to take up MDB finances, and work more effectively as a system.
The governance structures of MDBs reflect the political nature of these institutions when they were first established; in most cases, they are either dominated by non-borrower Western shareholders or consist of a slim majority of regional borrowers. While MDBs are currently doing more than most in offering constructive international dialogue and negotiations, these institutions have yet to adapt to a new world economic order and increased assertiveness from client countries. Some countries have even decided to create their own institutions to bypass the inertia of governance reforms; the Asian Infrastructure Investment Bank and the New Development Bank are two such examples.
Setting aside more contentious requests for the modification of governance structures and voting rights might undermine the long-term relevance of MDBs in their client countries. Ignoring calls to change the shareholding structure of MDBs to make them more representative of borrowing countries is an even graver problem as the strategy and policies of MDBs often fail to capture the views of client countries.
MDBs were created with the ultimate goal of supporting socio-economic development in their client countries. Clients’ demands and preferences should in principle help inform and shape the lending volumes, strategies and operations of MDBs. However, we know little about client country preferences, what they value about the financing and operation models of MDBs, or what weaknesses could potentially curb their demand for assistance.
Surveys indicate that client stakeholders perceive MDBs to be operating on extremely relevant issues in some areas. However, in other areas that are not particularly prominent in the current MDB reform agenda but that still require greater attention (processing times, alignment of sector priorities, more tailored technical assistance) there is a perception that they are not always performing to desired standards.
MDB staff should have greater awareness of client country perspectives. The 2021 ODI survey has shown significant discrepancies between the priorities and preferences of government officials and the perceptions and views of MDB staff. For example, MDB officials on average tended to underestimate how important certain aspects of MDB financing and operations were for government officials. In most cases, only one of the top three sectoral priorities was selected by both government and MDB officials. Climate change mitigation and adaptation was among the top three choices made by MDB officials in most institutions but did not feature prominently among government officials. The biggest overlap between the preferences of government and MDB officials was found in the African Development Bank.
This time of poly-crisis calls not just for bigger banks, but for better banks serving their clients to the best of their ability. A failure to act will undermine both the long-term relevance of MDBs in their client countries and the demand for what they offer. And, of course, it will diminish their development impact at a time when developing countries in particular will be burdened by the consequences of accelerating climate change, persistent poverty and widening income disparities.
Andreas Bummel | October 9, 2023