New Roles for International Financial Institutions?

The recent establishment of the New Development Bank (BRICS Bank) by Brazil, Russia, India, China and South Africa, but arguably even more of the Asia Infrastructure Investment Bank (AIIB) by China has rattled the global development architecture. How this will affect the existing multilateral development banks (MDB) was the topic of an interesting discussion at this year’s European Forum Alpbach (Austria). Introducing the discussion I pointed to the fact that the mostly futile, long-term discussions at the Bretton Woods Institutions (IMF and World Bank) about giving emerging and developing countries both more representation, but also more influence on the direction of these institutions – which had been formed in 1944 with the aim to establish a post-second world war economic governance structure – has led the emerging countries to use their recently increased importance in the global economy to „vote with their feet“ – and create their own institutions. If they are not given adequate weight in existing institutions, if their own experience and development model is not able to find adequate consideration in the dealings and directions oft he Bretton Woods Institutions, they set out to create their own structures in order to promote their own strategic aims. The questions to consider in the future are twofold: one, will these new institutions (plus the BRICS Bank sister institution mirroring the IMF) be in competition with the existing global economic governance institutions, or will they cooperate; two, will this new emergence induce the existing institutions to change the content of their policy advice and financing flows, or will the Western-dominated development model (in earlier times this was called the „Washington Consensus“) prevail there, as well as the „unholy non-gentleman“ agreement (@ Kurt Bayer) of handing the IMF director position to a European and the World Bank one to an US citizen?

Inge Kaul (Hertie School of Governance, previously UNDP) holds the strong position that the country-by-country approach of development banks towards their clients makes them unable to fulfil one of their major mandates, i.e. provide public goods. This approach induces recipient countries to pursue socio-economic objectives which benefit themselves, but the sum of these activities will not be able to combat the lack of public goods provision, for instance with respect to climate change. Thus, the sum of individual actions will fall short of the required global actions. Inge considers this as a basic design flaw of MDB. In addition, she mentioned that financial flows taken away from poverty reduction activities in MDB in order to finance provision of public goods will hurt the main objectives of MDB. Her solution to the public goods problem would be to create special global institutions, in addition to the development banks, with their own financing sources, maybe akin to the Global Fund to Combat Aids. The creation of the new banks would not affect this problem.

Johannes Linn (Brookings Institutions, formerly World Bank) maintains that the „old“ development banks will still be necessary in the future, but that their role had already changed due to „new donors“ and new forms of financing, especially the increasing role of private sector financing. Existing MDB were obviously seen by the newly established banks as role models, since their governance structures are largely built according to these banks. The new banks could play a significant role in achieving the new Sustainable Development Goals (the extension of the Millennium Development Goals, whose target date had been 2015), and contribute to global public goods provision by „smart“ investments. However, before becoming fully operational, these new banks had quite a way to go: they need to establish credibility with the private financial markets, in order to secure AA(A) status for their re-financing, they need to recruit experienced staff, an operational strategy, and – lastly „bankable“ projects in their countries of operations. Given the history oft he existing MDB, this would take quite some time and effort. Linn does not see a diminished role for existing MDB, but is confident that a new cooperation model would result, given the large financing needs in the world.

Hans-Peter Lankes (European Bank for Reconstruction and Development, formerly IMF) stated that the recent Financing for Development conference in Addis Ababa has provided a long task list for MDB. With respect tot he initial „competition or cooperation“ question he sees three ways forward: one, accept and embrace these new institutions and develop projects for joint financing; two, leverage up joint capacity, stretch balance sheets (as the Asian Development Bank has been doing), become less risk-averse in project evaluation and portfolio development, increase speed of response (also by reviewing the frequently cumbersome procedures of MDB); three, develop a more skills-based architecture of MDB governance, including a better division of labor between MDB, by handing over main responsibility for specific topics (climate change, energy efficiency, private-sector development, health issues, etc.) to individual MDB to share their superior competence with other MDB.

In the end, none of the panelists sees in the establishment oft he new development banks a threat to the existing „architecture“, but rather sees opportunities for improving the client orientation and performance of all development banks. This is with the exception of Inge Kaul, whose fundamental criticism of MDB orientation would also extend to these new banks. None of the panelists addressed the question (close to my own mind) whether these new developments would promote a change of mind oft he existing dominators of the Bretton Woods Institutions (and regional development banks) and make specific efforts to accommodate their requests for more say there. It will be interesting to see, inhowfar the new banks will follow the business models oft he existing banks, whether they will have more democratic, „equal“ governance structures, what their position will be on the oft-criticized (by developing and emerging countries) environmental and social safeguards policies of MDB and whether they will seek cooperation or rather competition with existing institutions. Only experience will tell.

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Filed under Global Governance, Socio-Economic Development

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