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The Center for Global Development convened a high level panel on the future of multilateral development banking in 2015. The geographically diverse group includes leading voices from the private sector and academia, as well as those with distinguished careers in the public sector. By bringing together a group that broadly reflects the diversity of the MDBs’ shareholder countries, we expect to provide useful guidance to the policy community at a time of considerable change for the MDBs. The panel's work has culminated in a report to the shareholders of the MDB system with five key recommendations.
Find CGD’s previous work on the future of the World Bank here.
The multilateral development banking model, first introduced 70 years ago at Bretton Woods, has proven to be remarkably durable. The innovation at the time, embodied in the International Bank for Reconstruction and Development (IBRD), was to capitalize a multilateral institution with public funds from shareholder governments, so that the “bank” could leverage those funds through private borrowing and lend the proceeds to member countries for “development” purposes.
The basic model is still with us today in the IBRD and has been replicated elsewhere, reflected in the rise of regionally based multilateral development banks (MDBs). Not only has multilateral development banking lasted more than seven decades, it seems to be enjoying a renaissance. The traditional multilateral development banks have all seen shareholder-led expansions of their capital within the past five years, other regional development banks have grown significantly (from the CAF in Latin America to the Saudi-based Islamic Development Bank to the EU’s massive European Investment Bank), and perhaps most significant, a new generation of institutions has emerged, largely spearheaded by the Chinese government, along with other large emerging-market governments.
How can the international community best capitalize on the resurgent MDBs? What are the core missions that should guide their activities? How big should they be, and how should they deploy their resources? What “rules of the road” should they follow when it comes to environmental standards and procurement rules? How are they best governed to ensure their legitimacy and effectiveness?
The high level panel report addresses these fundamental questions as part of an effort to provide a new policy blueprint for multilateral development banks, both new and old. Starting with the basic elements of financing and governance first defined seventy years ago, the panel's report identifies what is essential, what is adaptable, and what no longer serves a useful purpose in MDBs.
Montek Singh Ahluwalia, Distinguished Visiting Professor Stern School of Business, New York University
Lawrence H. Summers, Charles W. Eliot University Professor and President Emeritus, Harvard University
Andrés Velasco, Professor of Professional Practice in International Development, School of International and Public Affairs, Columbia University
Caroline Anstey, Global Head UBS and Society, UBS
Afsaneh M. Beschloss, Founder, President and CEO, The Rock Creek Group
Chris Elias, President, Global Development Program, The Bill & Melinda Gates Foundation
In this report, we argued that the creation of the AIIB and the New Development Bank (BRICS Bank) in 2016, is a noteworthy sign that the multilateral development bank model, invented at Bretton Woods in 1944, still makes sense—though in need of retooling for the 21st century.
We visited the AIIB a few weeks ago, and heard more about the emerging AIIB model: What is likely to be the same—as at the five big legacy banks (the World Bank and the four regional development banks) and what is likely to be different.
As President Jin of AIIB has emphasized, environmental, social and human rights safeguards will be the same—meeting high standards consistent with the global agenda reflected in the Sustainable Development Goals. (We hope the new banks can implement the same standards at lower costs for borrowers, avoiding the extreme level of aversion to risk that past scandals have fostered at the legacy banks, but only time will tell.)
But our discussion brought to mind five likely differences from the other banks. They represent some welcome innovations to the MDB model:
A single and singular focus on infrastructure—reflecting China and other borrowers’ investment priorities; (yes China wants to deploy its engineering and construction capacity too….). It looks as though hydroelectric power and railroads could be priorities.
A single governance structure with minimal use of special funds and trust funds directed by outside donors. The World Bank and the African and Inter-American Development Banks have concessional windows with legally distinct governance arrangements. In 2016, the World Bank’s over 900 trust funds, most with their own governance structure (usually representing the principal funder or funders—with most funders being one or more member government donors), had holdings of about $11 billion, covered about 25 percent of the Bank’s administrative expenses, and represented 7 percent of total disbursements. The EBRD does not have trust funds, but does rely heavily on the availability of European Union funding to provide, for example, project preparation funds to its borrowers.
A single balance sheet—as is now the case only at the Asian Development Bank. The World Bank and the Inter-American Development Bank have separate balance sheets and governance structures for their private sector operations. The idea of the single balance sheet at the AIIB is to maintain a focus on its core objectives in all its operations. The single balance sheet will also better enable the bank to deploy a range of financing instruments (loans, equity, guarantees), without the hassle of these products being siloed within separate entities within the institution.
A fresh experiment (for MDBs) in the challenge of what can be called good corporate governance. A non-resident board meets four times a year. The model will rely on far more delegation of power for project approval to management, making the president as chief operating officer more directly accountable for the success of project operations. The Audit Committee of the board, one of three committees, will have two independent, external members, also an innovation. This marks a true innovation over the other MDBs, which rely on the same set of board members to perform the full range of oversight functions, irrespective of their expertise.
No graduation policy. Members will self-graduate, presumably when they can get better terms (interest rate and term of loan), considering whatever tradeoffs they face in greater delays and transactions costs at the AIIB. (Graduation policy from the IBRD (the non-concessional window) at the World Bank has been much discussed and for some countries was reversed.)
The staff of the AIIB listed three cross-cutting priorities: sustainability (as in high environmental standards); cross-border investments (consistent with the idea of China’s One Belt One Road program); and mobilization of private capital. If these prevail as the priorities (avoiding new priorities), they can be added to the list of innovations.
At its founding, the role of China at the AIIB echoed the role of the United States at the World Bank at that institution’s founding. China is so far the single major creditor with 32.4 percent of the capital subscription an effective veto, with 27.8 percent of the votes and key decisions requiring 75 percent; the institution located in its capital city; and the first president a Chinese national. The United States still “reigns” in some ways at the World Bank—but less so at the other legacy banks. Only the future will tell how the AIIB innovates or not on this score.
Dig deeper, though, and something different, but no less remarkable, is going on. The fact is this replenishment was not primarily about donor pledges. Instead, it marked a fundamental turning point for the World Bank, with an agreement among the donors to allow the bank for the first time to leverage IDA's resources through borrowing in the marketplace.
More on this in a minute, but first it's also important to recognize the major policy decisions taken as part of this replenishment. It is satisfying and encouraging to see a range of commitments that align with key recommendations from CGD's High Level Panel on Multilateral Development Banking. These include the financial reforms themselves, greater effort toward crisis preparedness, more focus on fragile settings, a new collaboration with IFC to better target private sector development at the bank, and new commitments to pursue global public goods like climate financing. All of these commitments, if implemented effectively (something that bears watching), should move the World Bank closer to the institution it needs to be in the face of today's development challenges as laid about by our panel earlier this fall.
But let's consider more closely the impact of those financial reforms. Assuming that traditional IDA donor contributions stayed the same in this replenishment (the World Bank will not release details about donor pledges until early next year, but it's a safe bet that donor contributions as a whole did not increase from the $35 billion in commitments in 2013), those contributions as a share of total IDA resources have now fallen significantly, from two-thirds of total resources three years ago to less than half today. Consider the United States in particular. In the last IDA replenishment, the Americans pledged $3.9 billion, which accounted for about 7.5 percent of total IDA resources. The same pledge today accounts for just 5 percent of the total replenishment.
As a one-time change, this is striking, and as a directional shift, the longer term implications are huge. To put it bluntly, by opening the door to a major source of non-donor financing in the years ahead, these financial reforms will mean that the World Bank can now literally afford to say no to the United States and other major donors like the United Kingdom and Japan on a range of policy matters.
The implications of this are far-reaching. Will it remain a given that the US nominee will continue to capture the World Bank presidency? Will the bank continue to avoid working in countries like Iran and Zimbabwe at the behest of the United States alone? Will the World Bank bend to the will of a new political regime in Washington and reverse course on its coal financing restrictions? Historically, the United States (and often the US Congress) has exerted its will on issues like these by using the threat of withholding its IDA contributions in any given year. As this contribution becomes vanishingly small relative to total resources, that threat starts to look pretty weak.
Going forward, it is likely that the United States will need the World Bank more than the bank needs the United States. As I’ve said elsewhere, the United States relies on the bank as an extension of its strategic and foreign policy in a way that is unique among the institution’s shareholder countries. What China does bilaterally through entities like China Exim Bank and China Development Bank, the United States mostly seeks to do through the World Bank and the other MDBs in which it is a leading shareholder. Major World Bank commitments to support the Obama administration's Power Africa initiative are a positive example of this.
In practice, the US has often exerted its will with the power of the IDA contribution as a key, if not leading, point of leverage over the institution.
US policymakers will need to do some hard thinking about how best to prioritize the demands they place on the bank, and how to reach broader consensus in this multilateral institution as an alternative to seeking to impose its will unilaterally. It's not at all clear that the incoming Trump administration, with its "America First" sloganeering, is up for this kind of hard thinking. But hope springs eternal. And in any event, this IDA replenishment sets the World Bank on a path that will help to ensure a future of sustainable financing in support of the institution's vital mission.
The multilateral development banking (MDB) system is regarded as having been remarkably successful—but is the model still fit for purpose? How can MDBs remain relevant in a changed world and tackle this century’s greatest challenges, including climate change, pandemic response, humanitarian crises, and more?
In a previous CGD Podcast, Summers explained how the recommendations in the report can help the MDBs come together to address transnational problems. For this week, I sat down with the co-directors of the High Level Panel, CGD president Nancy Birdsall and senior fellow Scott Morris, to delve further into what those recommendations are and how they can make MDBs more effective.
Watch the clip below to learn why MDBs are so important to borrowing countries, and listen to the full podcast at the top of this page.
In the face of growing U.S. indifference to multilateral development institutions, China is stepping up. The circumstances around the creation of the Asian Infrastructure Investment Bank (AIIB) have usefully brought to light a longer trend that will ultimately lead to a diminution of U.S. leadership in the multilateral development system.
From the article:
The multilateral development banking system is due for a major overhaul, according to a high-level panel assembled by the Center for Global Development. Institutions including the World Bank and regional MDBs need to recalibrate their missions, rethink their values, and work better as a collective system if they are to stay relevant, participants in the project concluded. The World Bank, the expert panel said, should establish “global public goods,” beneficial resources such as clean air or a stable climate, which can only be managed through cooperation.
Read the full article here.
“MDBs are one of the few places where nations come together,” says Lawrence H Summers. “They do more than talk. They do. And what they do is for the betterment of humanity and people everywhere.”
Summers, former US Treasury Secretary, Harvard professor, and the CGD Board Chair, is explaining why the World Bank and the regional multilateral development banks (MDBs) are well-placed to help address some of today’s urgent problems, including climate change, pandemics, and the problems of large-scale forced migration.
He joins me on the CGD Podcast in his capacity as co-chair of a CGD High Level Panel that just released a major new study called Multilateral Development Banking for This Century's Development Challenges. The other co-chairs are Montek Singh Ahluwalia, former deputy chairman of India’s Economic Planning Commission, and Andrés Velasco, former finance minister of Chile.
The report recommends changes that will make the MDBs operate as a more complementary system, and in a way that is more responsive to transnational problems that threaten us all, but which will hit the world’s poorest people hardest. It’s a call for more collective action at a time when some countries in the world seem to be turning inward. Watch the video above to hear why Summers sees this as a misstep.
The report contains specific recommendations for governments of the world—who are shareholders of the MDBs—to repurpose these banks to make them better equipped to tackle transnational problems. CGD president Nancy Birdsall and senior fellow Scott Morris were co-directors of the panel that produced the report. Read their blog about it here.
A new report by CGD’s High Level Panel on the Future of Multilateral Development Banking offers a frank assessment of current MDB policies and practices, situating them in the context of new development challenges. For over five decades the multilateral development banks have combined financial heft and technical knowledge to support investments in post-conflict reconstruction, growth, and poverty reduction. However, the geo-economic landscape has changed dramatically in this century. There are new banks, and also new challenges that call for global collective action and financing of the sort the MDBs are well-suited to provide but have been handicapped in doing so effectively. How should the MDBs respond?
From the article:
Finance and development ministers from around the world, who are gathered in Washington this week, will consider whether the World Bank needs more resources -- a new infusion of capital to permit more lending and new contributions from traditional rich-country donors to help the poorest countries.
But a bigger World Bank is not necessarily a better one, and any consideration of new money for it or for the regionally based multilateral development banks demands a fundamental look at their mandates and operations in the face of new development challenges in today’s global landscape.
Read the full article here.