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Impact of multilateral development finance institutions on economic growth

Research reports

Written by Isabella Massa

Development finance institutions (DFIs) finance and promote private investment with the purpose of fostering economic growth and sustainable development while at the same time remaining financially viable in the long term.

DFIs can be either bilateral or multilateral. In this paper, we focus only on multilateral DFIs, such as the International Finance Corporation (IFC), the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB). Multilateral DFIs provide a broad selection of financial services, ranging from loans and guarantees to investors and entrepreneurs to equity participation in firms or investment funds. They operate in a wide variety of countries: IFC invests in several developing countries and emerging markets all over the world, whereas a large majority of EIB’s activities are within the European Union (EU). Multilateral DFIs also invest in a wide variety of sectors, ranging from the financial sector to infrastructure, agribusiness, manufacturing, industry and others.

While there is a rapidly growing literature assessing the effects of DFIs at the micro level, there are gaps in the evidence on the macro impact of DFIs’ investments. For example, a number of DFIs have carried out specific evaluations to assess the results of their investment operations in terms of contributions to employment creation, technology transfers, market organisation, capacity building, etc., and a few independent studies have tried to measure and assess the performance of DFIs. However, as far as we know, there is no study investigating the impact of DFIs on macroeconomic variables such as economic growth.

The main task of this paper is to fill this gap by analysing the extent to which multilateral DFIs contribute to fostering economic growth. In order to do this, we take into account different income categories of countries as well as different sectors in which multilateral DFIs operate. Our results show that investments by multilateral DFIs are growth enhancing and that their role is stronger in lower-income countries than in higher-income countries. It appears that lower-income countries benefit mainly from investments directed to the agriculture and infrastructure sectors, whereas in higher-income countries investments by DFIs in the infrastructure and industry sector play the predominant role in fostering economic growth.

Isabella Massa