Multilateral Development Finance 2020

Overview

Panorama of the multilateral development system

The multilateral development system has evolved into a complex environment since its inception in the aftermath of World War II (Figure 1). The continued expansion of the multilateral system in terms of scope, mandate and financing volume attests to its sustained relevance from its creation in the 1940s until today. It also demonstrates the widespread recognition of multilateral organisations as effective channels of development finance.

On the other hand, the continued proliferation of new multilateral entities and channels has turned the multilateral system into an increasingly crowded and fragmented space. In a global geopolitical context marked by the resurgence of nationalism and rising international tensions, multilateral organisations have become the target of recurrent criticism regarding their alleged lack of transparency, accountability and effectiveness. Part of this distrust may stem from a growing sense of complexity and opacity conveyed by the multilateral system, often perceived as an incoherent assemblage of entities with competing, and sometimes overlapping, mandates.

Figure 1. Multilateral development finance has grown into a complex ecosystem

Note: FIFs: financial intermediary funds

Source: Authors’ design adapted from (Eichenauer and Reinsberg, 2017[1]), “What determines earmarked funding to international development organizations? Evidence from the new multi-bi aid data”, https://doi.org/10.1007/s11558-017-9267-2

The 2030 Agenda revitalised the demand for multilateral approaches to support global development goals. The recognition of the integrated and interlinked nature of the Sustainable Development Goals (SDGs) helped to put multilateral approaches on centre stage: multilateral actors were given a pivotal role and an expanded mandate with the adoption of the Addis Ababa Action Agenda (AAAA), as development stakeholders acknowledged the need to leverage the strengths of the multilateral system to support the SDGs (Gulrajani, 2016[2]; Rudolph, 2017[3]).

The COVID-19 crisis has once again swung the spotlight onto the multilateral development system by revealing the high degree of interdependence among countries. There is broad consensus that the multilateral development system has a crucial role to play in addressing the triple crisis looming in developing countries (health, economic and humanitarian). Multilateral organisations have contributed to the immediate response to the crisis with unprecedented scale and speed. Yet, the crisis has also exposed some limitations in the multilateral development system, underlining that multilateral organisations must keep adapting to the magnitude of new global challenges.

In the current context, inertia is the biggest threat to the multilateral development system. In the past, global crises have often led to multilateral innovation or the implementation of long-deferred reforms. In the spirit of “building back better”, multilateral stakeholders could turn the COVID-19 crisis into an opportunity to build a more effective multilateral development system – one that is better equipped to address the global development challenges of the 21^st century.

Building on recent research, this report highlights three key reform areas to maximise the impact of multilateral development finance: (i) the scale of multilateral finance, to ensure that the multilateral system can help address development challenges of a new magnitude (e.g. extreme climate events or pandemics); (ii) efficiency, to demonstrate value for money in a context of constrained resources; and (iii) accountability, to restore trust in the system.

The report also identifies six building blocks required to achieve progress in these areas: (i) greater transparency on financing and results; (ii) increased systemic coherence; (iii) improved co-ordination, both among donors and multilateral organisations; (iv) increased financial capacity for multilateral organisations; (v) better selectivity of multilateral operations; and (vi) increased capacity of multilateral organisations to adapt to evolving circumstances. These building blocks, summarised in Figure 2, apply to all stakeholders and span all stages of the multilateral development finance process: from donors’ funding to the multilateral system, covered in Chapter 2 of the report, to the development activities financed by multilateral organisations (Chapter 3). Together they outline a possible research and policy analysis agenda for the OECD Development Assistance Committee (DAC) to contribute to the reform of the multilateral development system.

Figure 2. Key reform areas and building blocks to adapt multilateral development finance to 21^st century challenges

Source: Authors’ design.

Funding to the multilateral development system (inflows)

Despite growing tensions in the multilateral space, financial contributions to the multilateral development system continue to grow. In 2018, total funding to the multilateral organisations reached a new all-time high, at USD 71.9 billion (representing 38% of gross official development assistance or ODA). This represents a 3% increase in real terms over 2017 and a 32.4% increase over the period 2011-2018 (Figure 3). However, this growth is primarily driven by a rise in earmarked contributions, prompting concerns over the progressive “bilateralisation” and declining quality of multilateral funding. Between 2011 and 2018, for example, the share of earmarked funding in DAC members’ total ODA rose from 11% to 15%, while the share of direct bilateral funding fell from 62% to 58%.

Figure 3. Multilateral contributions are growing while the share of bilateral aid is declining

Note: Disbursements, 2018 prices. Core contributions are funds added to multilateral organisations’ general budgets, while earmarked contributions are tied to projects for specific regions, countries, themes or sectors.

Source: Authors’ calculations based on (OECD, 2020[4]), “Creditor Report System”, https://stats.oecd.org/Index.aspx?DataSetCode=crs1.

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Legacy multilateral organisations, such as the United Nations (UN) and the World Bank Group, face increased competition for resources. The UN and the World Bank Group remain the two pillars of the multilateral development system: together they account for more than three-quarters of the funding provided to multilateral organisations. However, the emergence of new multilateral development banks and the growth of vertical funds are slowly reconfiguring the multilateral finance landscape, as evidenced by the large number of replenishments observed in 2019 (Kharas, 2019[5]).

Non-DAC actors account for a growing share of the contributions to the multilateral development system. Although DAC countries remain the majority shareholders and funders of the multilateral development system, other official providers and non-state actors play an increasingly important role. The share of total multilateral contributions from non-DAC members to the UN system increased from 22% in 2008 to 29% in 2017. This trend, which reflects shifts in the global economy, is particularly visible in some sectors, such as health, where philanthropic foundations and other private actors represent a sizeable source of multilateral funding.

The DAC has an important stake and responsibility in the multilateral development system. DAC members still retain a central role in multilateral development finance and need to make strategic and effective use of their multilateral contributions. For this reason, the report analyses the strategic implications that DAC members’ funding volume and quality can have for the overall performance and governance of the multilateral development system.

The analysis suggests that the system is evolving towards multilateralism “à la carte”. The declining ratio of core contributions provided to the multilateral development system shows that multilateral donors are progressively abandoning consensus-based approaches, while increasingly opting for ad-hoc funding decisions to address specific development challenges (Figure 4). This trend reflects, in large part, the increasingly diverging views and lack of collective vision among the main shareholders of the multilateral development system. Ultimately, there is a risk that this trend will result in a transfer of decision making and accountability from the governing boards of multilateral organisations to a narrower set of multilateral donors that can influence the priorities of multilateral organisations through their earmarked funding (Barder, Ritchie and Rogerson, 2019[6]). A strategic rethink of DAC members’ use of, and support to, the multilateral development system is thus necessary.

Figure 4. The rise of earmarked funding reflects a shift towards “à la carte” approaches

Evolution of the funding received by the multilateral development system as a share of core funding (vertical axis) and changes in multilateral contributions since 2000 (horizontal axis)

Note: Disbursements, 2018 prices. The changes in the volume of multilateral contributions (horizontal axis) are calculated as a five-year moving average.

Source: Authors’ calculations based on 2000-2010 data from (Eichenauer and Reinsberg, 2017[1]), “What determines earmarked funding to international development organizations? Evidence from the new multi-bi aid data”, https://www.ipz.uzh.ch/de/forschung/lehrstuehle/ep/research/internationaldevelopment/multi-bi-aid/data.html and 2011-2018 data from (OECD, 2020[4]) “Creditor Reporting System”, https://stats.oecd.org/Index.aspx?DataSetCode=crs1.

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The analysis also reveals that some multilateral development organisations face a high degree of funding vulnerability. This is especially true of many UN agencies devoted to humanitarian aid, due to their relatively concentrated donor bases and a high share of earmarked funding (Figure 5). The recent announcement by the United States of its withdrawal from the World Health Organisation (WHO), following charges of the organisation’s close ties with China, illustrates how a high degree of reliance on a few large donors and low funding quality can affect the independence of multilateral organisations and the sustainability of their programmes. These findings call for increased attention from DAC countries to ensure financial contributions are built around collective priorities and incorporate sufficient flexibility. This would ensure the sustainability of programmes, and allow organisations to maintain impartiality in delivering these priorities.

Figure 5. Several UN entities present high funding vulnerability

Concentration of multilateral organisations’ donor base - scale from 0 (less concentrated) to 100 (most concentrated) and 2016-2018 share of earmarked funding

Note: The analysis focuses on multilateral organisations that are largely reliant on donors’ multilateral contributions to finance their core functions and their operational activities. For this reason, the analysis excludes the non-concessional arms of multilateral development banks, which derive a significant share of their financing from other sources (e.g. from the capital markets).

Source: Authors’ calculations based on (OECD, 2020[4]), “Creditor Reporting System”, https://stats.oecd.org/Index.aspx?DataSetCode=crs1.

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Financing from the multilateral development system (outflows)

The multilateral system has remained a stable source of development finance over time: despite a slight drop in 2018, multilateral outflows have increased steadily since 2011, mainly driven by non-concessional lending from multilateral development banks (Figure 6). Multilateral outflows exceed inflows from contributions by DAC and non-DAC members reporting to the system because some organisations, notably multilateral development banks, have access to financing from capital markets.

Figure 6. Multilateral outflows have been steadily increasing since 2011

Note: Commitments in USD billion, 2018 prices.

Source: Authors’ calculations based on (OECD, 2020[4]), “Creditor Reporting System”, https://stats.oecd.org/Index.aspx?DataSetCode=crs1

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Infrastructure and production are still the primary beneficiaries of multilateral outflows. Infrastructure remains the largest recipient sector of multilateral outflows (accounting for 27% of total outflows in 2018). This is followed by the productive sectors (25%), which have seen a steep increase in recent years, in particular in the areas of banking and financial services, agriculture and industry. While humanitarian aid still receives a relatively small portion of total multilateral outflows, volumes have rapidly increased since 2012 as a consequence of the Syrian civil war and the refugee crises.

Middle-income countries are among the biggest beneficiaries of recent increases in multilateral outflows. The growth in non-concessional flows reflects an increased focus of multilateral finance on middle-income countries, especially upper middle-income ones (UMICs). On the other hand, multilateral finance appears less focused than in the past on least developed countries (LDCs) and other low-income countries (LICs), although the reclassification of many recipient countries in recent years largely explains this shift.

DAC members expect the multilateral development system to add value across a variety of development areas. The recent OECD survey on DAC members’ policies and practices vis-à-vis the multilateral development system (OECD, 2020[7]) reveals that DAC members harbour particularly high expectations for the future role of legacy multilateral development banks (such as the World Bank, African Development Bank, Asian Development Bank, Islamic Development Bank and European Bank for Reconstruction and Development) to tackle global public “bads” and socio-economic challenges. They expect new MDBs, such as the Asian Infrastructure Investment Bank and the New Development Bank, to help close the gap in infrastructure investment, and anticipate a larger role for the UN in supporting peace and security, and delivering humanitarian aid.

Development effectiveness remains at the core of the multilateral value proposition. Improvements in multilateral effectiveness are also indispensable to increase the scale, efficiency and accountability of multilateral development finance. The 2018 monitoring round of the Global Partnership for Effective Development Co-operation (OECD/UNDP, 2019[8]) indicated a stronger performance of the multilateral system compared to bilateral providers in most areas of effective development co-operation, including alignment with partner countries’ strategic priorities, and making forward expenditure and implementation plans available to partner countries (Figure 7). On the other hand, multilateral organisations’ results for funding predictability were more mixed than those for bilateral partners.

Figure 7. Multilateral partners out-perform bilateral partners on most effectiveness indicators

Note: PFM: public financial management. Detailed information on the calculation of effectiveness scores can be found at https://www.effectivecooperation.org/system/files/2020-09/Technical%20Companion%20-%20Final%20online.pdf.

Source: Analysis from Global Partnership for Effective Development Co-operation (GPEDC) based on raw data collated in (GPEDC, 2018[9]), 2018 Global Partnership Monitoring Round, https://www.effectivecooperation.org/content/gpedc-monitoring-excel-database.

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Finally, the financing patterns of multilateral organisations confirm their greater added value and complementarity compared to other development partners in several areas (Figure 8). For example, the analysis shows that the fragmentation of the multilateral development system has not eroded its scale advantages over bilateral aid. Multilateral organisations also exhibit a stronger degree of specialisation than bilateral development partners. The analysis also confirms that multilateral development finance makes greater use of government channels and that multilateral organisations devote a greater share of resources to fragile contexts than bilateral partners. Surprisingly, multilateral organisations devote a smaller share of their funds to multisector or cross-country activities than bilateral providers, reflecting a dichotomy between their global goals and their country-based engagement models.

Figure 8. Multilateral entities offer diverse and complementary comparative advantages

Note: The scores for the different indicators are calculated based on the average size of country portfolios and the share of specific types of projects in the overall outflows of multilateral organisations.

EU: European Union; MDBs: Multilateral development banks; UN: United Nations; WBG: World Bank Group; Other: all other multilateral organisations.

Source: Authors’ calculations based on (OECD, 2020[4]), “Creditor Reporting System”, https://stats.oecd.org/Index.aspx?DataSetCode=crs1.

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Main conclusions and policy recommendations

In line with the key reform areas and building blocks outlined in the first section, the following recommendations are made concerning multilateral inflows and outflows:

1. Recommendations on multilateral inflows:

• Use the momentum generated by the COVID-19 crisis to increase DAC members’ multilateral funding levels, in particular their total support to the multilateral development system. The current international context calls for an unprecedented financial effort, and display of global solidarity, from the main shareholders and funders of the multilateral development system. While the economic and financial consequences of the crisis may make it hard for DAC members to safeguard their multilateral aid budgets, now is also the moment where their multilateral contributions are most needed and can have the most transformative impact.

• Assess multilateral funding decisions based on multilateral effectiveness and good practice. Given the important implications of funding quality on the performance and governance of the multilateral development system, DAC members should carefully consider the trade-offs and alternatives to the different funding modalities at their disposal, and use a mix of core and earmarked funding in accordance with commitments made as part of the international reform agenda and good practice principles. The policy brief on DAC members’ earmarked funding that accompanies this report provides initial pointers to determine the most appropriate funding modalities according to the specific development objectives that are pursued.

• Ensure that DAC members’ financial contributions provide multilateral organisations with sufficient independence and flexibility to carry out their activities. This calls for increased attention from the DAC to the volume and quality of funding provided to multilateral organisations, as well as the degree of concentration of their funding base, to ensure that they are not vulnerable to excessive influence by specific members.

• Improve the data collection on multilateral contributions from non-DAC members. As the multilateral funding provided by non-DAC countries and other stakeholders (such as private actors) continues to grow, both in absolute and relative terms, it is increasingly important to ensure that these contributions are adequately captured in existing ODA data collection mechanisms, such as the OECD Creditor Reporting System and the forthcoming TOSSD1 framework. Failure to do so would result in a growing blind spot in multilateral stakeholders’ vision and understanding of the multilateral development system.

2. Recommendations on multilateral outflows:

• Draw lessons from the multilateral response to the COVID-19 crisis. Assessing the effectiveness of multilateral organisations’ immediate response to the COVID-19 crisis should be a priority for multilateral stakeholders. This would reveal whether multilateral organisations are equipped to confront challenges of this type of magnitude, and could also help identify specific areas for improvement.

• Develop statistical methodologies and tools to shed light on the financial leverage and mobilisation capacity of multilateral organisations. Evidence for this aspect of multilateral development finance is difficult to come by due to the lack of detailed data and information in the public domain. A better understanding of the financial leverage and mobilisation capacity of the multilateral development system could help identify specific measures to increase the scale of its impact. A first step for the OECD DAC could be to conduct an initial mapping and quantification of data gaps in multilateral development finance, which would help to prioritise and plan the improvements required in data collection.

• Develop an analytical framework to assess and enhance the selectivity of multilateral organisations’ operations. In a context of constrained resources, as is likely to emerge in the aftermath of the COVID-19 pandemic, better prioritisation of multilateral activities will be key to ensure the best possible use of the scarce resources available (e.g. by making sure that multilateral development finance targets the most in need). Work to assess and improve the selectivity of multilateral development finance should rely on a careful analysis of its complementarity with bilateral ODA and other sources of development finance.

• Review the role, focus and contribution of multilateral organisations to specific development challenges deemed a priority for the “decade of action”. An assessment of the contributions of multilateral organisations to some of these key development challenges could help to ensure an adequate focus, prioritisation and alignment of their operations with the expectations of multilateral stakeholders. Specific topics to explore could include multilateral organisations’ contribution to: (i) the immediate response to the COVID-19 pandemic, (ii) the fight against climate change; and (iii) a green, resilient and inclusive COVID-19 recovery.

References

[6] Barder, O., E. Ritchie and A. Rogerson (2019), “Contractors or Collectives?” Earmarked funding of multilaterals, donor needs and institutional integrity: the World Bank as a case study, Center for Global Development, pp. 1-37, https://www.cgdev.org/sites/default/files/contractors-or-collectives-earmarked-funding-multilaterals-donor-needs-and_0.pdf.

[1] Eichenauer, V. and B. Reinsberg (2017), “What determines earmarked funding to international development organizations? Evidence from the new multi-bi aid data”, The Review of International Organizations, Vol. 12/2, pp. 171-197, http://dx.doi.org/10.1007/s11558-017-9267-2.

[9] GPEDC (2018), 2018 Global Partnership Monitoring Round, https://www.effectivecooperation.org/content/gpedc-monitoring-excel-database.

[2] Gulrajani, N. (2016), Bilateral versus multilateral channels: Strategic choices for donors, Overseas Development Institute, London, https://www.odi.org/sites/odi.org.uk/files/resource-documents/10393.pdf.

[5] Kharas, H. (2019), International financing of the Sustainable Development Goals, Dag Hammarskjöld Foundation, https://www.daghammarskjold.se/wp-content/uploads/2019/08/financial-instr-report-2019-interactive.pdf#page=71.

[4] OECD (2020), Creditor Reporting System (database), OECD, Paris, https://stats.oecd.org/Index.aspx?DataSetCode=crs1.

[7] OECD (2020), Survey on DAC providers’ policies and practices vis-a-vis the multilateral development system, Unpublished. OECD, Paris.

[8] OECD/UNDP (2019), Making Development Co-operation More Effective: 2019 Progress Report, OECD Publishing, Paris, https://dx.doi.org/10.1787/26f2638f-en.

[3] Rudolph, A. (2017), The Concept of SDG-Sensitive Development Co-operation: Implications for OECD-DAC Members, German Development Institute, https://www.die-gdi.de/uploads/media/DP_1.2017.pdf.

Note

← 1.  TOSSD (total official support for sustainable development) is a new international statistical framework for monitoring official resources and private finance mobilised by official interventions for sustainable development. TOSSD is being developed by an international task force of experts; the OECD serves as the Secretariat to the Task Force.