Reformed multilateral development banks may offer fairer rescue deals to needy nations

The World Bank, the IMF and other development banks must expand their resource base.

The recently held G20 summit's unanimous declaration on the need to reform multilateralism and make it more inclusive underlined the need to make global institutions more representative, effective, transparent, and accountable. This can be considered to be a big development. It is no secret that global institutions have failed miserably to meet the aspirations of developing countries. After the end of the Second World War, a need was felt for some major efforts to deal with the devastation, imbalances and disruptions caused by the war. Two institutions were created under the auspices of the United Nations — the International Bank for Reconstruction and Development (IBRD), which was later known as the World Bank, and the International Monetary Fund (IMF). Additionally, the General Agreement on Trade and Tariffs (GATT) that became the World Trade Organization (WTO) in 1995 was created to promote free trade.

Winds of Change 

The G20 Delhi Declaration on September 10, 2023, said that the global scenario has changed after the Second World War due to economic growth and development, decolonisation and technological achievements. Although India, China and other large and emerging economies were not named, the declaration clearly said that new economic powers have emerged in the meantime. It was said that due to the challenges facing the world like climate change and the achievement of sustainable development goals (SDGs), there was a need for reforms in global institutions.
If we talk about the WTO, we see that the consensus reached regarding the Development Round in the Fourth Ministerial Conference held in Doha has now been completely buried by the developed countries. The developing countries are extremely upset about getting a raw deal. From the functioning of the World Bank and the IMF, it is undoubtedly clear that despite the rapid economic growth and transformation in the emerging economies, the developed countries continue to dominate the two global institutions. This is because, when these institutions were created, the initial contribution of the developed countries was more. Both the World Bank and the IMF work to advance their agenda while providing finance to needy countries. While giving loans, they impose such conditions that not only endanger the sovereign right of nations to decide their economic policies but also adversely affect their economies. This is why developing countries when in crisis, try to deal with the problems themselves and avoid finance from either the IMF or the World Bank.

The Delhi Declaration underlines the urgency of the finance requirements of developing and vulnerable economies. The declaration states, “The 21st century also requires an international development finance system that is fit for purpose, including for the scale of need and depth of the shocks facing developing countries, in particular the poorest and most vulnerable.” It further says, “We are working to deliver better, bigger and more effective multilateral development banks (MDBs) by enhancing operating models, improving responsiveness and accessibility, and substantially increasing financing capacity to maximise development impact. Stronger MDBs will be important to our efforts to mobilise financing from all sources for a quantum jump from billions to trillions of dollars for development.” There will be a need to understand the diverse dimensions of change in global institutions, about which voice has been raised in the G20 conference.

Expanding the Resource Base 

The G20 has suggested a roadmap to implement the recommendations of the G20 Independent Review of the Multilateral Development Bank Capital Adequacy Framework. This means that the World Bank, the IMF and other development banks must expand their resource base. In this regard, the G20 has also called for leveraging private capital through their innovative financing models and new partnerships. Various other suggestions have also been given for supplementing their capital.

The G20 declaration states that there is a need to revise the shareholding patterns of these financial institutions in order to reduce the cost of investment and enhance the capacity of international development agencies to address global challenges. In this regard, reference has been made to the concluding report on the shareholding review of 2020 of the IBRD. It has also been said that the G20 is looking forward to the shareholding review of 2025. That is, it can be assumed that if the cost of development finance is to be reduced for the needs of developing countries, the resources of these financial institutions will have to be increased through shareholding and increased share for emerging economies in these institutions.

The effort towards strengthening MDBs is also supported by the United States, as it wants to offer the World Bank as a ‘credible alternative’ to China's external debt. The US Administration says that foreign lending by China is often not transparent, which subsequently creates risks for the countries. We understand that sources like the World Bank are certainly more transparent than alternatives like China's foreign loans, which have trapped many developing countries in a debt trap.

The United Nations and its institutions have been talking about their commitment to the SDGs. In the G20 declaration, member countries call on MDBs to make broader efforts to develop their approaches, incentive structures and financial capacities to deliver on their objectives and their commitment, to accelerate progress towards achieving SDGs. An important consensus reached in the G20 is about the 'management of global debt vulnerabilities'. “We re-emphasise the importance of addressing debt vulnerabilities in low- and middle-income countries in an effective, comprehensive and systematic manner,” it said. It is noteworthy that poor countries are fast falling into a debt trap due to various reasons, including debt trap diplomacy of China, fiscal mismanagement, over-ambitious infrastructure plans or others, with hardly any mechanism to deal with this situation, despite the right intentions of global financial institutions. African countries and some countries of South Asia including Sri Lanka, Pakistan and Bangladesh are suffering from debt vulnerabilities. There is a need to deal with this crisis sooner than later.

Endorsed by Finance Ministers 

The expert group on MDB reforms, under the leadership of Harvard University economist Lawrence Summers and Institute for Economic Growth president NK Singh, has also submitted its report. It states that there are significant and encouraging developments where a number of MDBs such as the African Development Bank, the Asian Development Bank, the Asian Infrastructure Investment Bank and the World Bank Group are moving fast towards reforms including efforts towards enhancing their capital, mobilising private funds, harmonisation of lending procedures, provision of guarantees, etc.

Accepting most of the suggestions of the panel, the G20 finance ministers at the October 12-13 meeting held at Marrakesh recommended promoting private sector funding in MDBs, widening the capital base, creating appropriate incentive structures, standardising guarantee contracts, aggregating guarantees under different institutions, building partnerships with other MDBs, etc. The recommendations also include that the World Bank and the IMF would issue new guidelines for debt sustainability assessment (DSA). Innovative steps have also been suggested to help achieve SDGs.

Ashwani Mahajan is a professor at PGDAV College, University of Delhi, and the national co-convener of the Swadeshi Jagran Manch. Views are personal and do not represent the stand of this publication.