Forging an MDB System: The Missing Piece in the Governance Architecture
Published: April 20, 2021
Few would argue that collaboration and collective efforts across the multilateral development banks (MDBs) are not urgently needed. We look to them as critical actors to help finance recovery from global crises, like the pandemic and the global financial crisis before it. Their role in financing global public goods (GPGs) which require collective action, like combatting climate change, is no less important and no less pressing.
Yet while the logic and need are obvious, the actual extent of collaboration between MDBs is limited. In their 2018 report to the G20, the Eminent Persons Group cites “the largely untapped potential for collaboration among the international financial institutions…to maximize their contributions as a group.”
MDBs typically engage individually with client countries and not much with each other. The reasons are not hard to understand. They are judged principally by the volume of finance they themselves commit and disburse every year, not by how much space and opportunity they create for other actors—public or private—to invest. They each have their own boards, operational processes, fiduciary standards, environmental and social protection standards, institutional strategies, results frameworks, etc. Their boards do not meet jointly. And other multilateral bodies fall short of meaningful oversight of collective MDB performance. The G20 and G7 periodically focus on MDBs, usually during crises, but do not systematically mandate or monitor anything like a shared MDB strategy for GPGs or anything else.
Most glaringly, while G20 and G7 communiqués offer various calls for more finance or more debt relief for poor countries, these groups have no actual low-income countries (by the World Bank definition) in their midst. This can result in a mismatch between needs and solutions, as, for example, in the case of the G20 Debt Service Suspension Initiative, in which more than 30 of the 73 poor countries eligible declined to participate.
In sum, we should not be surprised that MDBs do not systematically collaborate to achieve shared goals. Their managements are incentivized to prioritize individual over collective MDB performance. Shareholders have not agreed on either collective goals or a strategy to achieve such goals. Nor do shareholders have a body to oversee collective MDB performance.
Our recent paper explores how this gap in the international financial architecture might usefully be filled. It addresses what a new cross-MDB governing body might do and what it might look like.
What would be the purpose(s) of a collective MDB governing body?
The first purpose would be to forge a common, long-term strategy for MDB performance as a system. Such a strategy would not replace the strategies of individual institutions. Rather it would focus on how the MDBs would work together collectively to achieve development goals, especially for GPGs, more rapidly than they can individually.
The second purpose would be driving rapid combined MDB crisis responses when needed. In this century we have already experienced two deep global crises and, in both cases, the international community, including the MDBs, struggled to respond fast enough and at a sufficient scale to forestall avoidable suffering and long-term damage. Having in place agile processes for a timely combined finance surge, targeted as required by the nature of the crisis, is clearly needed. The collective MDB governing body could play a key role in shaping this surge capacity and triggering its deployment.
The third purpose would be oversight, both of the long-term strategy and short-term strategies for crisis response. Such strategies would not long be relevant or meaningful without the ability to hold MDBs collectively accountable and to drive course corrections as needed.
What might be the areas of focus of a collective MDB strategy?
We propose focusing on GPGs, specifically combatting climate change, as a logical place to start. Here are five areas where a shared strategy is needed—that is, challenges and activities that cannot be addressed at the level of individual institutions.
- Assess collective MDB capital adequacy, capital efficiency, and finance capacity for climate-related finance.
- Set and oversee achievement of aggregate MDB targets for climate finance, including the path to net zero emissions and Paris Agreement alignment at the portfolio level.
- Promote harmonization of MDB climate investment processes and shared transaction costs to scale the pipeline of investible projects and the size of the investments possible.
- Drive the pooling of MDB climate-related assets to attract large-scale institutional investors.
- Mandate risk-sharing across MDBs and shared access to concessional finance for boosting operations in difficult environments.
What kind of governing body should oversee collective MDB performance?
Our paper proposes three options for such a body with four criteria in mind. It should: (1) be a manageable size; (2) include countries which account for the bulk of capital shares in the major MDBs, (3) include poor countries, especially those with large shares of the global poor, and (4) either build on existing groups or select countries for inclusion based on objective, measurable criteria.
Option 1: Purpose-built group
As an experiment, we constructed a new group of 24 countries: a mix of high-income countries (HICs), upper middle-income countries (UMICs), and low-income countries plus lower middle-income countries (LICs+LMICs). Criteria for HIC selection were economic size, aid as a share of GDP, and share of contributions to IDA, the poor-country lending arm of the World Bank. Criteria for UMICs were economic size and share of global poor at $3.20/day. And criteria for LICs+LMICs were economic size and share of global poor at $1.90/day. The following 24 countries scored the highest based on these indicators.
This result has advantages in that it combines many of the existing G20 countries, which are the major MDB shareholders, with the largest poor countries. Its disadvantage is that it is new and would therefore require difficult negotiations and concerted efforts to gain legitimacy. A formal system of member outreach to non-member countries in different regions could be added to build their buy-in.
Option 2: G20 plus group
An alternative to constituting an entirely new group is to add LMICs and LICs to the G20 to address this set of issues. This could be done by adding the seven countries in the LMIC/LIC group above to the G20. (India is already a member of the G20.) Building on an existing group has practical and political advantages in terms of (1) avoiding the politics of excluding countries that are already in the G20, and (2) making use of the established mandate and practices of the G20.
Option 3: Constituency model
One other alternative is to deploy the constituency model used in MDB shareholding in which major shareholders have their own board chairs and other shareholders form constituency groups represented by rotating country chairs. The World Bank Executive Board constituency structure makes the most sense for this purpose as it is the only MDB that is global in its operations and membership. There are 25 Executive Directors representing the 189 member countries.
The major advantage of this structure is that it is inclusive, offering a voice to all countries. The disadvantage is that it is constructed based on World Bank shareholding, which gives larger shareholders a greater governance voice. In this case though, group decisions would be made by consensus, rather than voting with weights determined by capital shares.
It is always difficult to add to the international financial governance structures. But failing to do so has become too costly. For global public goods that cannot be pursued by individual MDBs, like combatting climate change, we need a global body empowered to mandate collective MDB strategies and hold MDBs accountable for collective performance.