A New Agenda for the MDBs: Five Practical Reforms

Today, the Center for Global Development, the Brookings Institution, and the Overseas Development Institute released The New Global Agenda and the Future of the MDB System, a report we jointly prepared as input to the deliberations of the G20-convened Eminent Persons Group (EPG) on Global Financial Governance. We argue that current global economic challenges require a rethink of the role that multilateral development banks (MDBs) can play in developing countries.

Here are the top five areas where MDB reform is needed to help meet the 2030 Sustainable Development Goals:

First, the call to mobilize more development financing (“from billions to trillions”), especially from the private sector, requires MDBs to increase their catalytic role in finance. Private financiers are in search of fundable projects and developing countries have projects seeking finance—but they have trouble finding each other. Given MDBs’ deep knowledge, both of regions and of development solutions, and their AAA ratings in the markets, they are in a unique position to link the money to projects. But that requires a big change in the MDBs’ business model—it’s not about getting their own money out the door, it’s about leveraging their expertise and money to get others’ money working effectively for development. This requires new thinking about measuring risk, impact, and additionality, and new modalities for originating projects, mitigating risk, and pooling and recycling financing. Staff and managerial incentives will have to change too.

Second, MDBs have a critical role to play in financing global public goods (GPGs). The case for the MDBs’ dominant role in financing GPGs was well articulated by the CGD-led High-Level Panel in 2016; the panel’s report included some very specific suggestions on how to best mobilize needed financing, starting with better tapping of current capital resources especially at the World Bank, and optimization of MDB balance sheets.

Third, MDBs need to increasingly tailor their policy advice, instruments, and prices to country circumstances. The beginning of the twenty-first century has seen a divergence in countries’ development as economic growth rates have differed markedly across the world. MDBs never had a “one-size-fits-all” operating model (despite rumors to the contrary), but increasingly a case can be made for differentiation. If MDBs are to help fragile states break into a higher growth regime, they need more latitude to deepen and lengthen their support for institutional development in areas such as domestic revenue mobilization, spending quality, public sector administrative reform, public utility management, and oversight of the security sector. In many fast-growing lower-middle-income countries, increasing levels of debt may pose a problem. More work is needed to improve debt management capacity and enhance the effectiveness of public investment. More broadly, the MDBs need to advance thinking on their role in future debt workouts, given the increasing complexity of lending arrangements on both the creditor and debtor sides. And MDBs should remain involved with upper-middle-income countries, whose role as regional hubs and growth drivers is often critical. Financing is less of a problem in these countries, but GPGs loom large and MDB engagement allows direct learning from their development experience and expertise.

Fourth, on all these issues, to be effective MDBs must work together more closely, using each institution’s regional and technical expertise on a global scale. MDBs will be more effective as a group if they share common regional and country diagnostics; have common legal frameworks and procedures for lending; and use the same country-based platforms for knowledge sharing, project preparation, and technical assistance. Such joint efforts by the MDBs will make it easier for developing countries to find and mobilize the expertise they need to advance their own development strategies, especially in sustainable infrastructure.

Fifth, for the MDBs to rise to these challenges, the international community needs to revamp the MDB governance framework to set clear international priorities, encourage partnership with the private sector, foster cooperation among the MDBs, and marshal more institutional resources to go to developing countries. Without establishing any new fora, a periodic review of systemic priorities and performance by the international community, as called for in CGD’s High-Level Panel report, can help set agendas for MDB governing boards. And an examination of governing board operations at the MDBs is long overdue.

We eagerly await the recommendations of the EPG, due to the G20 in October 2018. But the work agenda is clear and is already underway. At CGD, we have established a research program on Sustainable Development Finance that supports this reform agenda, aiming at

• unlocking private-sector financing for sustainable development;
• ensuring sustainable development finance meets the social sector needs of the full spectrum of developing countries;
• ensuring development finance has maximum impact and does not cause future debt problems; and
• strengthening development institutions to help deliver higher volumes of finance.

My colleagues Nancy Lee and Paddy Carter are working with the MDBs and the private sector to leverage MDB expertise and resources to mobilize more development finance that has development impact, with a special focus on women entrepreneurs. In following up on the High-Level Panel’s report, Nancy Birdsall and Scott Morris are looking at issues of funding GPGs and of MDB governance, with a focus on the World Bank and the African Development Bank. Antoinette Sayeh, Sanjeev Gupta, and I are investigating how best to support fragile states, particularly in domestic revenue mobilization. And John Hurley and I are working on the issue of debt and debt sustainability in lower-middle-income countries.

The need for reform is clear. Time is short. The work agenda is long. All hands on deck!