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Multilateral Development Banking for this Century's Development Challenges: Five Recommendations to Shareholders of the Old and New Multilateral Development Banks

10/5/16
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The multilateral development banks (MDBs) emerged as one of the international community’s great success stories of the post–World War II era. Set up to address a market failure in long-term capital flows to post-conflict Europe and developing countries, they combined financial heft and technical knowledge for more than five decades to support their borrowing members’ investments in post-conflict reconstruction, growth stimulation, and poverty reduction.

However, the geo-economic landscape has changed dramatically in this century, and with it the demands and needs of the developing world. Developing countries now make up half of the global economy. The capital market failure that originally motivated the MDBs is less acute. Almost all developing countries now rely primarily on domestic resources to manage public investment, and some of the poorest countries can borrow abroad on their own. Similarly, growth and the globalization of professional expertise on development practice have eroded whatever near-monopoly of advisory services the MDBs once had.

At the same time, new challenges 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. The list goes beyond major financial shocks, where the IMF’s role is clear—ranging from climate change, pandemic risk, increasing resistance to antibiotics, and poor management of international migration flows and of displaced and refugee populations. Other areas include the cross-border security and spillovers associated with growing competition for water and other renewable natural resources, and, with climate change, an increase in the frequency and human costs of weather and other shocks in low-income countries that are poorly equipped to respond.

These new and urgent challenges—including a restart of the healthy rates of economic growth that are at the heart of the MDBs’ contribution to the globally agreed sustainable development goals—have in common disproportionate risks and benefits for the developing world, and a particular need to combine financing, technical and country expertise, and a coordinated international policy response. The MDBs may no longer hold a monopoly on financing, expertise, and coordination, but they remain uniquely suited to combine these assets to deal with new and diverse challenges. In short, if the MDBs no longer existed today, the international community would have to reinvent them. 

We recommend that the shareholders of the seven major MDBs treat these global challenges not in the incremental and piecemeal manner that has become the habit of the last several decades, but instead as a system for the whole to be more effective than the sum of its parts. The system should hold in common the key principles of transparency, accountability, and sustainability. But specific roles and mandates across the MDBs should vary to recognize their inherent differences in comparative advantage, particularly between the World Bank and the regional MDBs.

Recognizing the growing global premium on environmental sustainability in a climate-challenged world, we call on member governments of the World Bank to take the first step in that direction by renaming the International Bank for Reconstruction and Development (IBRD) as the International Bank for Reconstruction and Sustainable Development (IBRSD)—and to reshape its mission accordingly, toward leadership on issues of the global commons or global public goods that are squarely in the development domain and require a global shareholder base to respond collectively. Shareholders should in turn look to the regional MDBs to take leadership in supporting the new imperative of sustainable development through country and regional operations across all sectors, but particularly in increasing investment in infrastructure that takes into account the logic of low-carbon and climateresilient economies in the developing world. In line with this approach to differentiated roles within an MDB system, the panel makes five recommendations to better realize the MDB system’s potential for meeting today’s development challenges.