While the recent push for MDB transformation is welcome and reform urgently needed, the IEG report’s recommendations should be evaluated more critically
Multilateral Development Banks (MDBs) are in dire straits. Once instrumental in the global fight for spurring economic growth and eradicating poverty, MDBs are today approaching obsolescence in the face of persistent global challenges like climate change. Earlier this year, 13 world leaders signed an open letter emphasising that the reformation of MDBs is a “top priority”. To this end, India’s G20 Presidency commissioned Strengthening Multilateral Developmental Banks: The Triple Agenda, a comprehensive report by an Independent Expert Group (IEG) arguing for a redesign of the MDB system.
The IEG report has taken the MDB world by storm, with World Bank president Ajay Banga incorporating many of its recommendations in his address at the 2023 World Bank/IMF Annual Meetings. A critical analysis of its arguments presents a mixed bag. Overall, while there is much that engenders hope for tangible MDB reform, a couple aspects of the report—its focus on non-concessional lending and its support for a de-risking approach to private sector engagement—are not likely to effect meaningful change.
India’s G20 Presidency commissioned Strengthening Multilateral Developmental Banks: The Triple Agenda, a comprehensive report by an Independent Expert Group (IEG) arguing for a redesign of the MDB system.
The report’s recommendations consist of three broad elements—a triple agenda.
Despite differences in their individual mission statements, MDBs generally agree on a two-pronged developmental mandate, comprising encouraging national economic development and eradicating extreme poverty. Here, the IEG report states that a third prong must be formally adopted: Investing in global public goods (GPGs) related to climate change mitigation and adaptation, food and water security, and biodiversity preservation.
Accepting this triple mandate is a first step in the right direction. Adopting GPGs will allow the MDB system to align itself more closely with the global development goals of the 21st century. By doing so, the SDGs, the Paris Agreement, and the Kunming-Montreal Global Biodiversity Framework will be placed at the heart of MDB purpose, engendering more hope for coordinated global climate action. Additionally, given how intertwined GPGs are with the core two-pronged mandate, acting on a triple mandate will allow MDBs to reap synergistic dividends. Multidimensional poverty cannot be addressed without investing in air, water, and land; without funding climate adaption and resilience, quality of life outcomes for climate-vulnerable populations cannot be improved.
The SDGs, the Paris Agreement, and the Kunming-Montreal Global Biodiversity Framework will be placed at the heart of MDB purpose, engendering more hope for coordinated global climate action.
There is scepticism regarding the possibility of true MDB reform, owing to multiple unkept promises in the past. The onus lies with MDBs to follow through on these commitments in good faith. A triple mandate is only rhetoric until it is embodied in the actions MDBs take. A large contribution the IEG report has made is providing a concrete timeline for action. Organisations such as the G20 must hold MDBs accountable to this timeline.
MDB finance has traditionally been received on an ad hoc basis. The IEG report recommends putting lending in dialogue with the amount of capital actually required for countries to execute their developmental agendas. Specifically, it calls for a tripling in the annual level of MDB finance by 2030, meaning US$ 300 billion a year in regular lending and US$ 90 billion a year in grants and loans at concessional rates. Additionally, the IEG report stresses the importance of concessional finance, since this channel of funding most readily allows low-income countries to take on important non-revenue generating projects. To this end, a tripling of the size of the International Development Association (IDA) by 2030 is exhorted, requiring donor contributions to increase sharply.
The recommendation to triple non-concessional MDB finance does not take cognisance of the debt crisis in low- and middle-income countries. Nearly 80 countries today are in, or at risk of, debt distress. The total amount of external public debt has doubled between 2010 and 2021, causing debt servicing to demand a progressively larger portion of a country’s fiscal resources: Interest payments relative to GDP have increased by 300 percent for low-income countries since 2010. Countries are trapped in a vicious cycle of unsustainable external debt: Lacking the resources to offset climate-related losses and fund climate adaptation, a low- or middle-income country resorts to external borrowing; the consequent increase in debt servicing costs results in fewer resources being allocated to climate action, healthcare, education, and so on; the deficit in essential spending further erodes the country’s ability to finance sustainable development and adaptation; the country must resort to taking on more external debt; and the cycle continues. This vicious cycle of indebtedness directly undermines the achievement of the SDGs. Increasing the level of non-concessional MDB finance will not have the intended effect unless the debt crisis (and the World Bank’s role in its exacerbation) is acknowledged.
The total amount of external public debt has doubled between 2010 and 2021, causing debt servicing to demand a progressively larger portion of a country’s fiscal resources: Interest payments relative to GDP have increased by 300 percent for low-income countries since 2010.
Throwing more regular lending at the problem is unlikely to help. The IEG’s acknowledgement of the importance of concessional finance is a breath of fresh air, and a tripling of the IDA is a start. However, more concessional finance must be mobilised for adequate action towards climate adaptation and the other SDGs; a significant level of grant financing is essential for breaking the vicious cycle of indebtedness. To increase the uptake of such finance, the penalisation of countries through corresponding increases in the cost of non-concessional finance must be stopped; the assumption that taking up concessional finance is a poor signal must be relaxed.
Substantial private capital will be required to meet global climate-related goals and the SDGs. Accordingly, the IEG report states that the ratio of private capital mobilisation (PCM) must be increased to at least 1.5 private dollars per dollar MDB lending, and annual private financing must be increased to at least US$ 740 billion. To facilitate this, the report suggests that MDBs use their positions with national governments to improve investment climates. A series of de-risking and risk-sharing measures are recommended for MDBs. These include deploying structured financial vehicles with MDBs in junior positions to de-risk more senior private investors; shifting from direct lending to more heavily relying on guarantee instruments; and collaborating with the private sector on investments from the early riskier stages.
In recent years, a new policy paradigm—the Wall Street Consensus (WSC)—has emerged that places private finance at the centre of development efforts. The WSC is reflected by the 2015 Billions to Trillions agenda and the 2017 Cascade Approach, both adopted by the World Bank under the Maximising Finance for Development umbrella. The IEG’s recommendation falls squarely in the WSC status quo, which itself has failed to yield dividends: 6 years after Billions to Trillions, the PCM ratio in 2021 was a mere 25 private cents to each public dollar. De-risking, guarantees, early-stage co-creation of projects: these measures facilitate a socialisation of risk while protecting a privatisation of profits. Furthermore, there is a deeper criticism of PCM: Private capital is inherently risk averse, with return-seeking private investors acting in their self-interest. It must not be neglected that there is, in fact, a trade-off between private profit and the public interest.
The IEG’s recommendation falls squarely in the WSC status quo, which itself has failed to yield dividends: 6 years after Billions to Trillions, the PCM ratio in 2021 was a mere 25 private cents to each public dollar.
While private capital can and must play an important role in bridging the considerable climate financing gap, it must be mobilised in a deliberate fashion. The IEG’s recommendations for sound banking, additionality, and impact assessment must be internalised into blended finance deliberations.
Moreover, private capital should only be mobilised for income-generating investments in infrastructure, energy, and public transport; and it should be steered away from essential services such as health and education, where the trade-off between profit and the public interest becomes more acute. Eventually, however, the World Bank must move beyond its ‘derisking’ approach. Rather than targeting relative prices by de-risking green investments, which has not tangibly succeeded in shifting financial flows away from carbon-intensive sectors, public dollars should be used to help states in taking a more active role in leading people-first green transitions. Private investments should be regulated to suit a country’s developmental needs, thus allowing dividends to flow to citizens instead of corporations.
Rishith Sinha is a Research Assistant at the Observer Research Foundation.
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.
Rishith Sinha is a Research Assistant for the President's Office. He completed his BA in Quantitative Economics from Reed College, graduating Phi Beta Kappa. His undergraduate ...
Read More +
PREV
