A year ago, an Independent Expert Group, which we co-convened on behalf of the Indian Presidency of the G20, recommended a vision for better, bolder, bigger multilateral development banks (MDBs) as a central tool to respond to the issues facing emerging markets and developing economies (EMDEs). It entailed: (i) revamping vision, mandate and role to respond rapidly and effectively to clients addressing global and national challenges; (ii) bringing engagement with the private sector to the center through a culture of informed risk taking; and (iii) tripling direct financing and quadrupling private finance catalyzed by their efforts.
Our recommendations were endorsed by the G20 Finance Ministers and Central Bank Governors. The Brazilian G20 has followed up by developing a Roadmap of MDB reforms. We, nevertheless, believe we have an obligation to monitor the progress and inform public opinion.
What have we learned in the past year?
First, our diagnosis was right. While new technologies, for example in renewable energy, offer enhanced economic growth opportunities, their adoption in emerging economies will be slowed by limited access to affordable financing. With their special role as low-cost capital providers and technical and policy advisors, MDBs remain necessary leaders in the required transitions.
Second, while every MDB has embarked on a program of reform, the pace and ambition of implementation falls well short of what is required to deliver on the vision set out in our report. MDBs have put in place measures to expand annual sustainable lending by making better use of their balance sheet and attracting additional capital through innovative channels, but the volumes involved - about 30% of current lending volume—fall far short of the tripling they need, given their enlarged mandate. We had also recommended a tripling of concessional finance channeled through MDBs to the poorest countries, but we see few signs of any meaningful rise. Expanding mandates with insufficient financial resources will not work effectively.
Third, changing MDB relationships with the private sector has proven to be hard and difficult. Despite some commendable improvements, for example on the expanded use of guarantees, the aggregate volume of private capital mobilization- about $70 billion in the last year—demonstrates an incremental approach, not a radical transformation of business models.
Major shareholders of the MDBs must shoulder the main responsibility for this disappointing performance. History has shown that MDB reform proceeded most substantially when it had the full backing and energy of the largest shareholders. Unfortunately, shareholder signaling of support for the overall agenda has not been matched in the implementation phase or in the provision of additional resources. MDB management can also learn from each other to ensure that best practice in one bank rapidly spreads to others.
The picture is not all bleak. The attached note highlights a few examples of innovation, risk taking and evolution in both large and smaller MDBs. However, commendable as they are, these examples do not yet reflect the system wide transformation that is needed for MDBs to play the role dictated by science and societal goals. Nor can we be assured that the current trajectory will deliver the vision that we set out in our reports.
In our view, the short-sighted approach of waiting until a crisis hits before acting forcefully on MDB reform will turn out to be a costly misjudgment. Time is not on our side.
Read the report card.
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise.
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