What is the role of the multilateral development banks (MDBs) in the 1990s and beyond? Are the roles which the banks have carved out for themselves since the 1950s still appropriate? Are there still gaps in development financing for the banks to fill, and do they serve a useful advisory role? The Group of Seven (G7) leading industrialised countries have recently endorsed proposals for strengthening the role of the MDBs, despite growing opposition and calls for an end to conditionality. Will this mean business as usual? Or will the impetus for change be sustained?

A recent study by Overseas Development Institute (ODI) researchers points out that the MDBs have changed dramatically over the last half century, as has the world in which they operate. The emergence of over one hundred newly independent developing countries has altered both the size and the composition of the banks' governing bodies, and shifted the balance of power within them. Many of the formerly poor developing countries have now emerged as significant global players. They are graduating from borrower status, and some are exporters of capital and contributors to the MDBs. Instead of a single `North-South' dichotomy, there is now a wide spectrum of economic strength in the global economy.

In this changing environment the MDBs' importance as a source of development finance has declined. By the late 1970s, bilateral aid programmes had overtaken them as the main external source of development finance to poorer countries, although large amounts of commercial bank lending went to the middle-income countries. Private sector flows dropped sharply after the 1982 debt crisis, but recovered rapidly in the 1990s. Since 1994 bilateral aid flows have stagnated and begun to turn down, in absolute and proportional terms; both they and multilateral flows have been overtaken by private sector flows.

With increasing doubt about the continued relevance of the MDBs, many attempts have been made to redefine their mission. The G7 Development Committee report of 1996 acknowledges the changing economic environment, in particular the large increase in private flows to developing countries. The report underlines five priorities:

• MDBs should support the majority of developing countries which do not benefit from private capital flows
• direct private sector loans should only be made if they are additional (e.g. there are insufficient private flows) and they serve a development need
• MDBs should focus ever more sharply on poverty reduction
• MDBs should withdraw by stages from countries which can look after themselves in respect of poverty reduction
• sustainable development policies should be a paramount goal.

Despite the current emphasis on privatisation and liberalisation, the report also restates the role of governments, especially in dealing with poverty. It further argues that there is still a demonstrable need for MDBs,even in their present role.

Responsibility is thus placed firmly upon governments to ensure that appropriate policy changes and other desirable reforms, are carried through. If there are to be no radical reforms, those in civil society who have sought to step up the accountability of the MDBs for the effects of their actions will find their case weakened. Questions must also be pressed home as to whether declared changes in government policy are substantive and not merely cosmetic?

Source(s):
Rethinking the role of Multilateral development Banks. ODI Briefing Paper November 1996(4) Full document.

id21 Research Highlight: 1998-Apr-29

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