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International Financial Institutions (IFIs) and particularly the relationship between the IFIs and the United States.
Scott Morris is a senior fellow at the Center for Global Development and director of the US Development Policy Initiative. This initiative seeks to broaden the US government’s approach to development, including the full range of investment, trade, and technology policies, while also strengthening existing foreign assistance tools. Additionally, he works on issues related to the International Financial Institutions (IFIs) and particularly the relationship between the IFIs and the United States. Morris served as deputy assistant secretary for development finance and debt at the US Treasury Department during the first term of the Obama Administration. In that capacity, he led US engagement with the World Bank, Inter-American Development Bank, African Development Bank, EBRD, and Asian Development Bank. He also represented the US government in the G-20’s Development Working Group and was the Treasury’s “+1” on the board of the Millennium Challenge Corporation. During his time at Treasury, Morris led negotiations for four general capital increases at the multilateral development banks and replenishments of the International Development Association (IDA), Asian Development Fund, and African Development Fund.
Before his post at the US Treasury, Morris was a senior staff member on the Financial Services Committee in the US House of Representatives, where he was responsible for the Committee’s international policy issues, including the Foreign Investment and National Security Act of 2007 (the landmark reform of the CFIUS process), as well multiple reauthorizations of the US Export-Import Bank charter and approval of a $108 billion financing agreement for the International Monetary Fund in 2009. Previously, Morris was a vice president at the Committee for Economic Development in Washington, DC.
In our previous post, we calculated voting power in the Asian Infrastructure Investment Bank (AIIB), using the formula published in the bank’s articles of agreement. Here we compare AIIB voting power to that of the World Bank and Asian Development Bank (ADB), the other two major multilateral development banks MDBs) active in Asia.
China is a much larger leading shareholder in the AIIB than either the United States or Japan is in the other MDBs. In fact, China’s voting power of 26.06% is slightly more than the combined voting power of the United States and Japan in the ADB.
Voting power has very practical applications within these institutions in determining how much say each shareholder has over operations. In this way, it can serve as a concrete measure of a country’s “influence”, an otherwise vague concept.
We provide a measure of four leading countries’ influence across the MDBs active in Asia, and show how relative influence has changed as a result of the AIIB. As depicted below, “aggregated voting power” simply expresses total voting power across the MDBs weighted by the size (capital) of each institution. With the creation of the AIIB, China has surpassed Japan in the region’s MDBs, although it still falls short of the United States in total voting power.
To the degree Japan continues to consider membership in AIIB, this question of regional influence is no doubt paramount, and the loss in relative power depicted here is likely a cause of concern for both Japan and the United States. Going forward, growth in the AIIB could further erode the US and Japanese positions, particularly if capital expansions at the other institutions do not keep pace.
The Asian Infrastructure Investment Bank’s new articles of agreement contain a great deal of information about shareholding and governance in the new institution. However, the articles require some additional analysis in order to answer key questions about voting power and board composition. Based on the information provided, we are able to generate voting shares as well as some preliminary conclusions about the composition of the AIIB’s board of directors.
The published articles include the number of shares allocated to each AIIB member, so called “shareholding.” But shareholding and voting power are slightly different concepts, and voting power matters more when it comes to institutional governance. For the AIIB, voting power includes two redistributive elements, “basic” votes and “founder” votes. The latter serve to reward the founding members of the institution, but both types of votes tend to give a boost to the voting power of the smallest shareholders and dilute the power of the largest shareholders.
Nonetheless, overall voting power is strongly aligned the principle of weighted shareholding, and China’s large share of AIIB capital translates directly into a large voting stake, followed at a distance by India, Russia, and Germany. Critically, China’s voting power of 26.06 percent is slightly larger than the 25 percent needed to block any decisions requiring a super majority vote (a super majority is defined by the articles to be three-fourths of the voting power and two-thirds of the members). China’s veto power over super majority decisions is a key governance characteristic of the new institution and a measure of the largest shareholder’s power.
But it becomes clear when looking closely at the question of board composition that there are actually four countries that will play an outsized governance role in the new institution. Based on the minimum thresholds set for board seats (6 percent of voting power among regional members and 15 percent among non-regional members), China, India, Russia, and Germany (the four largest shareholders) will each hold a seat, while the remaining countries will need to organize themselves into multi-country constituencies for the remaining eight seats. Non-regional countries are allocated three seats overall, and regional countries are allocated nine seats. As a result, the two non-regional constituencies will represent 9 countries, while the six regional constituencies will represent six countries.
The Chinese government has published the Asian Infrastructure Investment Bank’s (AIIB) newly adopted articles of agreement. That’s an encouraging early sign of transparency, and more importantly, of timely transparency. Much of what is in the articles was foreshadowed by previous comments and reporting, but there are surprises, such as stronger-than-expected veto powers for the Chinese and the possibility for non-sovereign membership.
Here are my first reactions:
This is very much a development institution in purpose. The Chinese early on sought to distance the AIIB from the other MDBs, both by leaving the “D” out of the name and by emphasizing that the new bank would simply be investing in infrastructure. Yet, the articles establish as a first priority that the AIIB’s purpose is to “promote investment … for development purposes.”
In operations, the AIIB is keeping its options open, with the possibility for financing and activities that extend well beyond traditional infrastructure lending. The articles allow for a range of financing instruments and clients, including identifying new instruments and activities at a later date. The articles also open the door widely to “special funds,” or trust-fund arrangements that are separate from the bank’s balance sheet. These funds do not appear to be restricted to bank members. So perhaps a USAID-funded infrastructure project preparation fund is in the AIIB’s future?
The Chinese will retain more control over presidential selection than do the Americans at the World Bank or the Japanese at the ADB. Specifically, the articles provide veto power for China over selection of the president, formalizing the largest shareholder’s power to decide in an area that has relied on informal arrangements at the other institutions.
More generally, the Chinese veto is more prevalent than might have been expected based on earlier characterizations of the Chinese position. Fair enough, no veto exists for project-level decisions, but the number of other decisions subject to supermajority requirements (i.e., vulnerable to a Chinese veto) appears to go beyond those in the other MDBs.
The articles allow for non-sovereign membership, which is an interesting departure from the traditional MDB model. Could we see a China Investment Corporation membership, or maybe Rio Tinto? The articles would not permit non-sovereign members from countries that are not themselves AIIB members. So, sorry Gates Foundation, this MDB isn’t for you.
The articles adopt (as widely anticipated) a non-resident board of directors, a laudable innovation in my view. Nonetheless, the functions of the board remain largely unspecified, signaling that hard decisions still lay ahead. And when it comes to critical operational questions about the balance of power between the board and senior management, the Chinese were careful to specify a super majority decision making threshold. So the largest shareholder knows key decisions still remain in this area, and they aren’t willing to throw those decisions open to a simple majority vote.
Finally, the composition of the 12-member non-resident board is striking. The articles allocate nine board seats for regional members and three seats for non-regional members, and establish higher minimum voting thresholds for the non-regional seats. These thresholds determine which countries get their own board seats and which countries will need to join multicountry constituencies. Based on the thresholds established in the AIIB articles, it appears that China, India, and Russia among the regional members, and Germany among the non-regionals will be eligible for board seats, while all other countries will be required to join multicountry constituencies. Specifically, 34 regional countries will have to organize themselves into 6 board seat constituencies, while 19 non-regional countries will have to organize themselves into 2 board seat constituencies. Perhaps more than any other governance standard, the rules and procedures around the non-resident board clearly establish the AIIB as a regionally dominated institution — both in the relative balance of board seats (6 to 3) and in the number of countries within each constituency (just under six countries per regional board seat and just over nine countries per non-regional seat).
Overall, the AIIB’s newly minted articles of agreement reflect an impressive degree of expertise and creativity. They are drafted with clear reliance on existing MDB articles and equally clear independence from those articles. The Chinese decided in establishing a multilateral institution that they would do so from a dominant position, and that position is certainly reflected in the AIIB’s articles. But the overall picture is more complicated than that. Beyond enshrining a favored position for the leading shareholder, the articles also establish clear priorities that favor the region as a whole in governance, seek to establish a governance model that is efficient as well as effective, and retain a high degree of flexibility in all aspects of bank operations so that the institution can evolve over time.
Best of all, the AIIB articles have been established as a public document. Let’s hope that principle carries forward in all aspects of the bank’s operations.
With the likes of Larry Summers, Ben Bernanke, and Robert Zoellick decrying the state of US leadership in institutions like the IMF and the multilateral development banks (MDBs) in recent months, it was heartening at first glance to see a key Republican in Congress join the fray. Rep. Kay Granger, the House Republican’s lead on foreign assistance, had this to say in releasing the party’s overseas spending bill: “[t]he United States must do more to lead on the world’s stage.” It’s an encouraging statement because Granger and House Republicans are actually in a position to do something about it. And when it comes to exerting US leadership globally, the IMF and the MDBs have long been key instruments and partners.
Unfortunately, I don’t think I’ve ever seen greater distance between rhetoric and numbers when it comes to an appropriations bill. Remarkably, on the heels of China seizing the multilateral limelight with the creation of the Asian Infrastructure Investment Bank, House appropriators have responded not just with deep cuts to multilateral institutions like the World Bank and African Development Bank, but draconian ones. The House’s foreign assistance bill provides less than half of the funds needed to meet existing US commitments to the multilaterals (just $1.4 billion of the $3.2 billion needed). As the expression goes in budget circles, that’s not a haircut, it’s a beheading.
Sure, the House routinely cuts the president’s budget. But for comparison, the House last year provided $2.4 billion of the president’s $2.9 billion request for multilateral assistance. More importantly, in recent years, Senate appropriators could be counted on to offer up more funding than the president asked for. As a result, the reconciled funding bills at least came close to meeting US multilateral commitments. This year, it’s hard to imagine that a Republican Senate will provide more multilateral funding than the president has requested.
This situation only looks worse when we consider that the president’s request itself is far from ambitious in projecting US multilateral leadership. One of the characteristics of the US budget process is that multilateral funding requests are backward looking. That is, the president seeks funding from Congress for commitments his administration has already made. As a result, when Congress fails to come through, the US appears to be backtracking on the world stage. Of course, this is nowhere more evident than at the IMF, where a 2010 US commitment still has not been approved and funded by Congress.
As administration officials contemplate new multilateral commitments in the months ahead, any ambitious plan they might have had is certainly being tested by the situation on the Hill. Like Mike Tyson said, “everybody has a plan until they get punched in the face.” From the administration’s perspective, how can we consider Chinese-style ambition for institutions like the Asian Development Bank or World Bank when Congress is gutting our existing (and in many cases long-standing) commitments?
It’s a question that lacks an easy answer. But the president himself has signaled pretty clearly that he does not intend to roll over during his remaining time in office in the face of a hostile Congress. In part, this will require fighting for his multilateral budget on the Hill this year, particularly in the Senate, where there is an element of bipartisan support for the multilateral institutions.
But it might also mean taking advantage of presidential election season dynamics. One of the benefits of a presidential campaign is that it forces the parties to think and talk in terms of principles and strategy on issues, including questions of a global nature. If key candidates wish to align themselves with the House stance on multilateral support, then why not make that distinction even clearer by laying the groundwork for bolder international commitments, ones that better reflect a strategic view of multilateralism?
The United States first introduced a vision for projecting leadership through multilateralism at Bretton Woods, New Hampshire over 70 years ago. The Chinese are now adopting this vision and strategy as their own. As the presidential campaigns increasingly dominate the agenda in the months ahead, both parties would do well to consider whether they will let small-minded budget politics stand in the way of reclaiming the mantle of Bretton Woods.
The US failure to approve governance reforms at the IMF is what led China to create the Asian Infrastructure Investment Bank. Ben Bernanke is the latest prominent voice to employ this narrative. With China as the primary beneficiary of reforms that would have shifted voting power from Europe toward emerging-market countries within the IMF, the failure of the US Congress to act motivated the Chinese and 56 other countries to do something. And that something is the AIIB.
As much as this storyline might be useful in prodding the US Congress to do the right thing on IMF reform, it is also almost certainly wrong. And wrong in ways that matter.
The basic problem with the “AIIB is about the IMF” narrative is that the IMF is not a development bank. The AIIB will do what the World Bank and Asian Development Bank do, which is not what the IMF does. China did not choose to lead a multilateral effort to create a rival to the IMF. Rather, it created the AIIB for a specific purpose: to expand the pool of multilateral capital available for infrastructure investments in the developing world.
Ok, but what about China’s frustration over the governance of institutions like the IMF and World Bank? Here, it’s important not to lump the two Bretton Woods institutions together. In fact, the governance reforms that have stalled at the IMF because of congressional inaction were actually approved for the World Bank by Congress in 2012. As a result, China is now the third largest shareholder in the bank (behind the United States and Japan) and remains one of the institution’s largest borrowers. This position as large shareholder and borrower arguably gives the country a unique degree of influence within the institution in ways that belie claims that China is deeply frustrated by its standing in the World Bank.
Yet, where Bernanke and others might be wrong in attributing the AIIB directly to IMF governance reform, they are right in focusing on the role of the United States. By all means, the US Congress should act on IMF reform for all of the reasons that have been exhaustively detailed during the five years since the IMF deal was struck.
But if the United States wants to respond directly to the rise of the AIIB, then the Obama administration and Congress will need to shift their focus. Yes, further progress on World Bank governance reform will be helpful and necessary in the years ahead, but the United States has less to give here than do key European countries.
Instead, what the United States can provide through existing multilateral development banks (MDBs) such as the World Bank and Asian Development Bank is the same thing the Chinese are now providing through the AIIB: more capital for infrastructure spending. This is hardly a secret. China and other emerging-market countries have been calling for more capital at the World Bank and ADB for years, and the US-supported capital increases of 2010 have not kept pace with the demand for infrastructure spending.
Unfortunately, the United States has been the voice of opposition when it comes to calls for more MDB capital. But if the United States wants to limit the ambitions of emergent development institutions like the AIIB where US influence is limited, then it has to demonstrate greater ambition in the existing MDBs. The United States can choose to forge a pro-development partnership with China through the MDBs (old and new), or it can continue to stand on the sidelines as China pursues new partnerships elsewhere.
Congress could pass IMF reform tomorrow, and the United States would still be facing this critical choice in the world of the MDBs.
The African Development Bank dramatically raised the bar for public accountability and transparency in its presidential selection process by live tweeting the voting rounds last week in Abidjan. It’s already old news then that Akinwumi Adesina, the Nigerian candidate, will be the bank’s next president. Adesina garnered an impressive 60 percent of the regional vote and 58 percent of the total vote of the AfDB’s shareholders.
So what will the institution get with its new leader? You can judge for yourself by watching his performance during the CGD-hosted AfDB candidates forum in April. Although many of his comments were delivered in French, so have your translation software ready if you’re not fluent. Here’s a clip:
As far as vision goes, Adesina offered up an agenda that looks a lot like that of his predecessor, with emphasis on infrastructure, private sector, job creation, and regional integration. This does not represent a radical reset or course correction for the institution. Fortunately, by most accounts none is called for. It’s what the African continent overwhelmingly wants and what the AfDB does well.
There is one question mark though. Beyond the issues mentioned above, Adesina has repeatedly stressed the need for a greater focus on agriculture. That’s no surprise coming from an agriculture minister with a PhD in agricultural economics. And there’s no question that agriculture has been an underperforming sector in most African countries. Yet, beyond financing feeder and trunk roads, the AfDB hasn’t been a particularly big player in agriculture. This might lead to a future clash in priorities. Put differently, how much agriculture minister will stay within him as the AfDB President? Only time will tell.
But Adesina definitely will have the opportunity to make his mark early by shaping the institution through his management and staff selections. With current vacancies and expected departures, and against the backdrop of the bank settling back into its headquarters in Abidjan, the new president will need to make key hires a top priority in the early months.
Ultimately, the bank’s effectiveness and Adesina’s legacy will rest on the institution’s ability to attract, retain, and promote the best and brightest from the region and from around the world. President Kaberuka has helped a great deal by handing off an institution with a strong reputation. But it will be up to the new president to build on that reputation one person at a time. Good luck Mr. Adesina.
Good news from the Asian Development Bank's annual meetings in Baku, Azerbaijan this past weekend, where shareholders approved a plan to almost double the amount of financing available to developing countries. Bank president Takehiko Nakao's proposal to merge the ADB's concessional and non-concessional lending was nearly two years in the making. His persistence - and that of his team - shows that creative thinking and a bold approach to engaging with shareholders can yield big gains for development. In this case, the amount of ADB financing available to developing countries will increase from $23 billion to $40 billion a year.
CGD colleagues Nancy Birdsall, Enrique Rueda-Sabater, and I had the privilege of providing an independent assessment of the ADB proposal last summer. At the time, we concluded that the proposal was highly credible and shareholders should move expeditiously to approve it. So it is gratifying that approval was achieved in a matter of months.
More importantly, we urged swift approval because we saw the ADB financial reforms as just the first step toward a more flexible and innovative institution, one that is even better positioned to play a central role in meeting the region's development needs. And it sends a signal to other multilateral development banks that change is not only good but achievable.
With all of the drama and attention surrounding the establishment of the Asian Infrastructure Investment Bank (AIIB) in recent months, the opportunities presented by the ADB reforms may not get the attention they deserve. That's why we are releasing a new essay exploring the ways in which the ADB's financial merger introduces new possibilities for the institution in the years ahead.
So along with our hearty congratulations to the ADB and its shareholders for the important milestone achieved in Baku, we urge them not to rest on their laurels but to move forward by fully exploiting the opportunities now made available by the merger.
This week the Center for Global Development will convene a high level panel to consider the future of multilateral development banking. Co-chaired by Montek Ahluwalia, Arminio Fraga, and Lawrence Summers, the panel is comprised of members from Africa, Asia, Europe, Latin America, and the United States, all of them distinguished by their experience and leadership on international development and finance issues in the public and private sectors and in academia.
The panel meets at a time of resurgence for multilateral development banks (MDBs), something that few might have predicted just five years ago. Even as the MDBs were lending aggressively into the global financial crisis, much of the language from their major shareholders was tempered in restraint when it came to future directions. For example, the World Bank’s shareholders agreed to provide an infusion of capital to the institution in 2010, but just enough to ensure a smooth downward glide path from the institution’s elevated crisis lending.
What a difference a few years makes. Today, the talk around MDBs is one of renewed ambition, with new institutions coming online and existing ones exploring expanded activities on various fronts. Discussion of capital increases, once anathema to key shareholders, has become more common.
Our group will explore the future for these institutions during this unsettled period. Is the new ambition merited? If so, how can it best be channeled to productive and effective development purposes? Are there compelling new missions and mandates awaiting the MDBs that would take them beyond traditional conceptions of their development agendas? How can governance of the MDBs evolve in a more constructive way to ensure the institutions’ legitimacy and effectiveness globally?
Questions like these will likely animate the panel’s discussions this week. As the project’s co-directors, Nancy Birdsall and I have spent the summer engaging one-on-one with the panelists, and we have both been struck by the enthusiasm, creativity, and expertise they are bringing to the initiative. So stay tuned for more on the panel’s work, which will culminate in a report in early 2016.
With the 50th anniversary of ADB as a backdrop, this event will examine how the bank is adapting to the dramatic changes in Asia, and what its role in the region should be in the years ahead. Does ADB financing still matter in a region that is seemingly awash in capital? How do the bank's leading shareholders like the United States and Japan see the institution's role going forward? Are new institutions like the AIIB partners or rivals, and how are they causing the ADB to adapt?
The Australians are using their G-20 presidency to make a fresh start with the group’s infrastructure agenda, launching a new “Infrastructure and Investment” working group this week in Mexico City.
And not a moment too soon. A recent CGD study group Scott chaired concluded that this highly compelling agenda risks becoming a stale one absent some new approaches.
Our group came up with five new ideas, some big, some small, but all aimed at helping the G-20 have a demonstrable impact on meeting developing countries’ infrastructure needs. (Read this note for the full explanation.)
1. Commission a new global knowledge product for infrastructure investment, the “Investing in Infrastructure” survey. While “Doing Business” and other surveys have done a good job informing us how the lack of roads, ports, etc. are barriers to growth, this country-level survey would identify policy and regulation changes that could ease the challenges of actually investing in and building that infrastructure.
2. Cultivate a new generation of infrastructure investors by launching a sustained engagement with the pension fund community. With the long term investment horizon of pension funds and the long term returns of infrastructure projects, the two are a good match to meet development goals. But so far, a lack of practical engagement has left the estimated 20.7 trillion managed under pension funds untapped.
3. Unlock the project preparation process by focusing on the right role for public funding. Many infrastructure projects get stalled early on, due to lack of government capacity and mismatched funding opportunities for project preparation. Restructuring support for country governments to package and negotiate projects would catalyze infrastructure investment from its earliest stages.
4. Make a sustained commitment to the multilateral development banks. The emphasis on private sector involvement should not come at the cost of core support to the MDBs. Revisiting a one-time commitment to capital increases and coordinating on policy agendas could renew the effective leveraging of MDB capital for infrastructure.
5. Launch a new agenda on sovereign debt (particularly sub-national debt). Studying and addressing the uneven and confusing credit worthiness standards, which prevent many developing countries from accessing global bond markets, will help developing countries raise their own financing for infrastructure while appropriately managing the risks.
We hope these suggestions will help Australia make the most of the G-20’s infrastructure for development agenda this year and going forward. Working together with priorities already being set by developing nations, an engaged and “concrete” effort by the G-20 to strengthen infrastructure could catalyze growth and prosperity for all.
The US Development Policy Initiative at CGD has created the Foreign Assistance Agency Briefs for policymakers, researchers, advocates, and others that work on these issues and these agencies. Each brief outlines each agency’s mission and role, structure, historical budget, programs, and mechanisms for delivering foreign assistance.
As donors gather next week in Rome to pledge funds to the International Fund for Agriculture Development (IFAD), they may be wondering where the United States is. During a recent debate on the floor of the US House of Representatives, Congresswoman Maxine Waters raised the possibility that the Trump administration may not make a pledge to IFAD. If true, this would represent the loss of the fund’s largest donor and could jeopardize funding from other donors this year. Given the generally high marks this independent fund earns for development effectiveness, the uncertainty around a US pledge is troubling.
In this “America First” moment, it’s worth asking when it comes to IFAD, what’s in it for the United States and what will be lost if the United States drops out?
IFAD is the only multilateral institution dedicated exclusively to eradicating poverty and hunger in rural areas of developing countries. It was established in 1977 as one of the major outcomes of the 1974 World Food Conference, which was organized in response to the food crises of the early 1970s. To date it has granted or lent about US$12.9 billion for over 1,000 agriculture and rural development programs in 124 different countries.
The need for this support is clear. According to the 2017 State of Food Security and Nutrition in the World report, for the first time since 2003 the number of chronically undernourished people in the world has increased, up to 815 million from 777 million in 2015. And the Food and Agriculture Organization estimates that keeping pace with population growth in the developing world will require a 50 percent increase in the production of food and other agricultural products between 2012 and mid-century.
Because most of IFAD’s financing is provided at highly concessional rates that low-income countries can afford, its capital must be periodically replenished in order to prevent a drop in lending capacity. Next week, the fund’s 176 members will wrap up discussions on the parameters for the eleventh such replenishment and the fund’s donors will make their pledges.
Reflecting its economic status and long-standing leadership role in the multilateral system, the United States has traditionally been the largest single contributor to IFAD replenishments. Its US$90 million pledge to the Tenth Replenishment of IFAD’s resources (2016-2018) represented 8.7 percent of the total. While significant, this share is much smaller than is the case for other international funding bodies, such as the Global Fund (33 percent) or the World Bank’s International Development Association (17 percent). Moreover, this US$90 million pledge helps leverage financing that enables IFAD to support a $7 billion program of work, representing a remarkable “leverage” ratio of almost 80 to 1.
IFAD has had a practice of complementing US bilateral assistance programs, thus magnifying the impact of USAID’s work. For example, in northern Ghana, USAID and IFAD have worked together to improve the production and distribution of maize, soya, and sorghum by smallholder farmers. IFAD, USAID, and the US Department of Agriculture have also worked together on agricultural research and pest eradication, including the highly successful eradication of the screwworm in North Africa.
Whatever reason US officials might decide to withhold a pledge from IFAD, it can’t be due to the fund’s effectiveness. In a joint CGD-Brookings assessment, IFAD outscored US bilateral assistance on all dimensions. And another recent independent assessment noted that IFAD has sound fiduciary policies and practices and is fully committed to a results agenda.
When it comes to a US pledge, the good news may be that congressional support for the fund has been very strong on a bipartisan basis over many years. Even as Congress routinely cut Bush and Obama administration requests for funding to the World Bank and other regional development banks, congressional funding for IFAD was routinely protected. More recently, the US government’s global hunger and food security approach embodied in the bipartisan Global Food Security Act (GFSA) of 2016 closely mirrors the fund’s mandate and strategic priorities. These forces could ultimately prevail upon a reluctant Trump administration to come back to the pledging table sometime this year.
But as all of IFAD’s donors meet next week, it will be important for IFAD’s allies in Congress and elsewhere to make clear that US support for the fund remains strong and any lack of pledge at the moment is a temporary problem.
In his appearance before the committee, Morris outlined findings from newly CGD published analysis exploring the debt implications of China’s Belt & Road Initiative—and offered his views on what it should mean for US global engagement.
Lost in all of the noise of the post-Lehman crisis response was an important structural shift in the international development landscape: a much bigger footprint for the regional development banks relative to the World Bank.
Starting in 2009, the G20 pursued a number of measures to help developing countries weather the crisis, one of the most visible of which was an agreement to have the multilateral development banks (MDBs) lend aggressively into the crisis, paired with the commitment of new capital from the institutions’ shareholders in subsequent years.
The result was an unprecedented series of capital increases for the World Bank (IBRD), Asian Development Bank (AsDB), African Development Bank (AfDB), and Inter-American Development Bank (IDB), within an 18 month period. All told, the G20-led effort increased the collective capital of these four institutions from pre-2010 levels of $379 billion to $712 billion after the crisis.
Less noticed in this set of actions was the relative allocation of capital among these institutions. With the G20 playing a soft coordinating function, the MDBs’ shareholders made a clear shift in favor the regional development banks over the World Bank. These figures tell the story.
Before 2010 the regionals as a group accounted for just half of the $379 billion in MDB capital. After the 2010 capital increases, they accounted for 61 percent of the $712 billion in capital.
Nothing in G20 declarations at the time or statements within each of the MDBs point to a deliberate snubbing of the World Bank. Rather, the decisions reflected a more affirmative stance toward the regional institutions, as well as a more aggressive posture coming from the leadership of these institutions – which is to say, they asked for more money than the World Bank did. And they got it.
In each case, the regionals made the case that they could operate just as effectively as the World Bank and were better aligned with the interests of the client countries within their respective regions.
Nowhere were these dynamics more evident than at the AfDB, which won a tripling of its capital base. After years of struggle, the institution had emerged in the mid to late 2000s with globally-respected leadership, a series of policy reforms aimed at matching World Bank “best practices,” and critically, an aggressive case about its particular credibility in the region. The direct ties to the region, reflected in the headquarters location and composition of the staff, also influenced the AfDB’s programming in a way the bank’s shareholders found compelling, particularly as a matter of mission focus and willingness to say “no” to sectors and initiatives that didn’t directly align with a regionally-driven agenda.
With the implementation of a major new strategy at the World Bank today, there has been no shortage of unfavorable comparisons in play: the World Bank relative to BNDES; the World Bank relative to Chinese investment in Africa; the World Bank relative to global remittance flows. These comparisons typically are designed to either write the bank’s obituary or rally the institution for a bigger, bolder future.
I’m certainly not ready to write the World Bank off, and I do think there’s a strong case for bigger and bolder. But that case applies to all of the MDBs. The World Bank doesn’t need to be quite so dominant a presence among these institutions in order to be a more effective presence globally.
So whatever the future might hold for capital increases at the World Bank, the G20 would do well to continue to think of all of the MDBs as pieces of a whole, just as they did in 2009/2010.
 At the same time, the bank’s very commitment to be permanently headquartered in Cote D’Ivoire has been the source of considerable disruption and risk for the institution over the past decade, including in its ability to recruit and retain staff.
When the Chinese government launched a new multilateral development bank (MDB) with “infrastructure” in the name—the Asian Infrastructure Investment Bank (AIIB)—it hardly seemed far-fetched to assume a strong Chinese preference for infrastructure-related MDB financing. And everything we know about China’s bilateral development financing, particularly through its policy banks (the China Development Bank and China Exim Bank), suggests the same.
Yet, a closer look at the AIIB’s charter suggests openness to a broader range of sectors and activities, pointing to potential for investments in “other productive sectors.” And when we consider how another hegemon—the United States—has looked to the MDBs as a complement to its bilateral programs rather than an extension of them, it’s plausible to consider an evolving role for the AIIB.
We decided to test this proposition a bit further. Our conclusion? If you’re looking for Chinese-led MDBs to move into health, education, and other non-infrastructure areas, don’t hold your breath. Specifically, we took a look at China’s record as an MDB borrower over the past 30 years and the ways in which China has steered its contributions to MDBs. In both instances, we see an overwhelming focus on infrastructure relative to these institutions’ portfolios as a whole. In short, when it comes to infrastructure, China walks the talk, both as an MDB borrower and an MDB donor.
So how much does China’s MDB borrowing reveal an infrastructure preference? To answer this question, we analyze China’s cumulative borrowing from the Asian Development Bank (ADB) compared to the ADB’s operations as a whole in recent years. We find that China’s infrastructure-related borrowing (Energy, Transport, and Water) is at 80% compared to 60% of total lending at the ADB.
In particular, over half of the ADB’s total approvals for China have been focused on transportation. This is consistent with China’s borrowing at the World Bank, where the country’s program portfolio for the transport sector is the single largest program in any sector worldwide.
We see the same preference revealed in China’s activities as a donor to MDBs. At the Inter-American Development Bank (IDB), China is the smallest shareholder with just 0.004% of total votes, on par with South Korea, and behind countries like Slovenia and Croatia. As such, it has little direct influence over the bank’s core activities. In light of this, China has established trust funds at the IDB and other MDBs, which affords the country much more influence over the uses of these funds. We examine the IDB trust fund as a useful proxy for China’s attitude as an MDB donor.
In 2013, the People’s Bank of China committed $2 billion to establish the China Co-financing Fund for Latin America and the Caribbean in the IDB, which disburses funds alongside ordinary IDB loans.
Using the IDB’s total portfolio as a benchmark, we compare the sectors financed by the IDB as a whole and the Co-Financing Fund. The trust fund allocates much larger shares towards Infrastructure (nearly 60%) compared to the IDB benchmark of just over 30%. In social and policy based lending, the fund’s spending is negligible (less than 1% in total) compared to the IDB’s portfolio as a whole (40%).
It’s tempting to consider that the new AIIB will “stick to its knitting” when it comes to infrastructure financing during its start-up period and then explore other sectors and programs in later years. Yet, the evidence from China as both a borrower and donor in MDBs like the ADB and IDB—both of which have long-standing capacity and expertise in a wide array of sectors outside of infrastructure—suggests that the Chinese are largely indifferent to MDB roles in these sectors. Accordingly, it seems likely that the AIIB will stay true to its name.