Multilateral Development Banks: the need for reform

In the seventy-plus years since the creation of the World Bank, the mandates and business models of the multilateral development banks (MDBs) have remained largely unchanged. As a result, while these global institutions are in principle well placed to address today’s global and cross-border development challenges – such as climate change, public health risks, fragility or migration – reforms would be needed for the institutions to fulfil this potential. Namely, changes are required to the mandates and operating models of the MDBs, they would require much greater collective firepower, and there would need to be much greater cross-institutional coordination, collaboration, and ideally a division of labour across institutions based on comparative advantage.

While reforms of the MDB system have been discussed for many years, we have failed to see any serious momentum for reform. We need to understand why this is the case, and whether the current circumstances – the conflict in Ukraine, rising interest rates, food and energy price inflation, all on the back of the economic devastation and severe supply chain disruptions caused the pandemic – could finally create a coalition in favour of real change.

Multilateral Development Banks: what for?

As mentioned above, the MDBs are uniquely well placed to support the global public goods (GPGs), but changes to their mandates may be necessary to realise this potential. At the same time, the often-implied dichotomy between supporting GPGs and the banks’ country-based lending model is in our view exaggerated. Rather, the MDBs should be exploring how they can merge GPGs with the development needs identified by borrowing countries, including middle-income countries (MICs), thereby aligning the interests of both borrowing and non-borrowing members. It should be noted that while a strong focus on tackling extreme poverty needs to be maintained, MICs are critical to meeting objectives on GPGs, as well as to the financial sustainability of MDB operations – as such, some major shareholders may need to change their attitude towards an expansion of lending in these countries and to cliff-edge graduation policies based on income per capita.

Such a shift of MDB mandates would likely mean packages of financing and advisory support in GPG areas which also meet individual country development needs (whether job/opportunity creation, infrastructure development, or other). For illustration, in the infrastructure area, the World Bank could combine substantial amounts of IBRD lending with advisory work with regulators, including to mobilise private capital behind a multi-year plan, including for example for:

• overhauling a country’s electricity generation and transmission to increase efficiency and decarbonise; and
• strategies/investment packages to support upgrading of urban transport infrastructure.

Such approaches would require more creative blending of concessional and non-concessional resources, and an elimination of sharp graduation cut-offs from concessional windows. It would also likely mean much greater volumes of lending to MICs.

Increasing firepower

MDBs are incredibly efficient institutions – the total paid-in capital to the IBRD since 1944 represents just 10% of annual aid disbursements by OECD DAC countries. While there is no substitute for general capital increases, it is also clear that there is no appetite for such replenishments. As such, MDB shareholders must allow the banks to make better use of their existing capital.

First and foremost, shareholders need to make use of the callable capital of MDBs, by changing capital adequacy policies so that they take into account in a portion of highly-rated callable capital. Such a change would be consistent with the existing practice of all three major credit-rating agencies. The G20 review of MDB capital adequacy could be a lever to push this agenda.

Second, shareholders could consider whether to relax AAA targets in a coordinated move across the major MDBs. The AAA rating should be a tool for the banks and not an objective in itself.

It is also clear that MDBs need to be more catalytic, and to mobilise private capital at much greater scale. Again, despite several years of discussions, little progress appears to have been made on mobilisation. The constraints to MDBs mobilising genuinely additional private capital at scale need to be better investigated and addressed, whether they be internal incentives, lack of investment-ready projects, or other.

While the relevance of MDB lending appears to be declining for MICs, a recent ODI survey on country perspectives suggests the majority of government respondents, including many from MICs/UMICs, expected the demand for MDB grants, loans, policy advice and technical assistance to increase over the medium-term. In particular, such demand may more readily materialise if MDBs were to adapt their products and instruments. Survey respondents suggested that client countries strongly value flexibility in development financing, although rate MDBs poorly on this front. Second, the ‘hassle factor’ of borrowing from MDBs is an important disincentive; this includes rigid and complex procurement and financial management rules, and excessively long initial stages of the project cycle (from concept note to first disbursement). Such a change in instruments would require a shift in approach, in particular from non-borrower shareholders.

Reforms to governance

In order to allow MDBs to adapt and become more responsive to the changing needs of borrowing countries, the governance structures of the MDBs also require adaptation. In a forthcoming paper, we will outline some options for reform, but the key elements include the following:

• properly delegating operational authority to management, with Boards of Directors shifting to a more strategic role. Such a shift could be accompanied by a clear accountability framework for management, such as the one at the AIIB;
• professionalising the recruitment of Directors, and ensuring that Directors have the balance of skills, knowledge and experience required by the institution;
• experience suggests that the above two elements are best served by a non-resident Board; and
• renewed efforts to rebalance voting power in several institutions.

Many of the various reforms outlined above will also require extremely tightly coordinated action across institutions. This coordination has been elusive in recent years, and the G20 focus on MDBs has not filled this gap. A separate coalition of likeminded major shareholders may be required to deliver the necessary change.

Reform of the World Bank leadership selection process

Merit-based competitive recruitment of the leadership of the MDBs is also critical. This is particularly the case for the World Bank which is at the centre of the MDB system. Namely:

• the President of the World Bank group should be appointed through a competitive process from among the strongest candidates from all member countries, rather than through a false competition in which the candidate nominated by the US government, the largest shareholder, always wins;
• whether the World Bank President is American or not, the postholder would need to have the requisite skills and experience to command respect and influence in the international development community, including in the regional development banks. The postholder would also need to have substantial management experience in order to steer a large and complex organisation;
• the structure of World Bank group senior management below the President also needs to reflect the tasks assigned to the institution. In our view, the post of COO of IDA/IBRD should be reinstated to deal with day-to-day operational issues. In turn, this would allow the President to focus more on strategy and the MDB system; and
• it is also important to move back away from political or nationality-based or appointments at the MD level in the World Bank.

The regional development banks, other than the Asian Development Bank, have moved towards more competitive (albeit still somewhat political) selection processes for their top jobs, which has helped their relative effectiveness.