Over the last half century, multilateral development banks (MDBs) have established their position as major development financiers in the global financial architecture.
The MDB system now faces multiple challenges arising from shifts in the global economy and political debate since the 2008 financial crisis. The focus of this task lies in meeting the Sustainable Development Goals (SDGs) by 2030. While global poverty reduction has slowed and extreme poverty is now concentrated in fragile states, income inequality is on the rise in both developed and developing countries. Technological advancement is threatening jobs and affecting income distribution. Migration and forced displacement have both increased. Challenges such as climate change and pandemics increasingly demand cross-border solutions. Now more than ever, infrastructure development is a priority.
Adding to the challenge ahead is the fact that development finance architecture itself has also changed significantly. International capital markets, remittances and foreign direct investment have overtaken MDBs and Official Development Assistance, which now contribute a smaller share of the overall volume of finance. New actors have emerged meanwhile. They include private philanthropies, health-related multilateral agencies such as The Global Fund to Fight AIDS, Tuberculosis and Malaria and GAVI, the Vaccine Alliance, all of which have delivered good results. China has also become a large, fast-growing and dynamic donor that took the lead to fill the gap in the demand for infrastructure by establishing the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank.
The MDB system is also under scrutiny as major shareholders retreat from the multilateral system. Support for development aid in many developed countries is under threat with the rise of populist and inward-looking politics associated with anti-globalisation sentiments. A new growth narrative for the SDG era needs to incorporate income distribution, demographic challenges, climate change and global public goods (GPGs). However, unless developing countries and MDBs can overcome existing challenges, the new goals will not be achieved.
MDB management and shareholders should consider several courses of action. Crucially, they must recognise that poverty reduction is a central element of the SDGs in many regions and that growth is indispensable for achieving those goals. MDBs should renew their push towards building better public institutions, in particular for public-private partnerships for infrastructure, along with tax administration and, finally, human development with regards to health and education.
The G20 has already instructed MDBs to increase their efforts to crowd-in private finance to fund public infrastructure. The next crucial step is for client countries to build up stable and predictable regulatory frameworks and impartial civil services to oversee regulations, and improve understanding of the complexities of deals with the private sector. A medium-term revenue strategy proposed by institutions including the IMF, the OECD, the UN and the World Bank, charts core elements for redesigning tax policy settings, reforming revenue agencies and strengthening legal frameworks. This concept should be fully shared and incorporated in the work of the regional development banks. This strategy can help to achieve taxpayer compliance and equity.
MDBs should also intensify their collaboration with the World Health Organization and health-related multilaterals to ensure universal health coverage for the poor. Building on progress in net enrolment in education, more attention to quality and links to jobs are required. Here a four further suggestions for how this can be achieved:
- MDBs should help formulate public policies and strengthen institutions to overcome the negative impact of new technology on labour. MDBs should be cautious in presenting views about technological advancement. Digital technology and big data can certainly increase efficiency and development effectiveness. For example, Civil Registration and Vital Statistics (CRVS) is important for public goods delivery and equity, but appropriate data governance or rules for access to big data and privacy should urgently be established.
- There need to be joint country diagnostic platforms in place on the investment climate and human capital. These cover political economy analyses and conflicts including migration and forced displacement, institution assessment and poverty assessment.
- MDBs should allow post-conflict and fragile countries and International Development Association (IDA) graduate countries more flexible transitory finance strategies with more moderate timelines.
- They should encourage China’s bilateral agencies to join country coordination fora and share details of their transactions.
The magnitude of development challenges can justify and, from a risk-sharing point-of-view, even encourage, the existence of multiple MDBs in each region. The question of how these institutions are to work together to maximise delivery and minimise overlap is, perhaps, the most important on the horizon.