Multilateral Development Finance 2020

Executive summary

Five years on from the launch of the 2030 Agenda, the multilateral development system is under stress, perhaps as never before. The COVID-19 crisis has brought renewed attention to the crucial role multilateral organisations have to play in addressing the triple crisis looming in developing countries: health, economic and humanitarian. The global scale of the virus has highlighted the interdependence of nations and people around the world, demonstrating that the need for international co-operation and solidarity is greater than ever. Yet, the crisis has also exposed some limitations of the multilateral development system that need to be tackled to ensure multilateral organisations can best contribute to the recovery.

This report provides an overview of the multilateral system against the backdrop of the COVID-19 crisis. It presents the key trends in recent funding to the system and explores how multilateral organisations’ funding bases can affect their independence and the sustainability of their programmes. It also sheds light on the development activities financed by multilateral organisations in recent years, asks how they add value relative to other sources of development finance and assesses the effectiveness of their funding.

Are we moving towards “à la carte” multilateralism?

In 2018, total funding to multilateral organisations reached a new all-time high, at USD 71.9 billion, up by 3% in real terms compared to 2017. However, this growth, which is primarily driven by a rise in earmarked contributions, spurs concerns over the declining quality of multilateral funding.

The analysis in the report suggests that the system is evolving towards “à la carte” multilateralism: the declining share of core contributions reflects the growing tendency of donors to forsake consensus-based approaches in favour of ad hoc initiatives funded by a limited number of donors. As highlighted by recent research, this “à la carte” approach to multilateralism could ultimately see decision making and accountability transferred from the governing boards of multilateral organisations to a few large donors that can influence the priorities of multilateral organisations through their earmarked contributions.

Development Assistance Committee (DAC) members remain the major shareholders and funders of the multilateral development system, and therefore have a responsibility to steer the system towards collective priorities and greater effectiveness. The report calls on DAC members to make strategic and effective use of their multilateral contributions to ensure that the multilateral development system receives funding in sufficient quantity and quality to fully contribute to the 2030 Agenda and the COVID-19 recovery.

The report also reveals that some entities within the multilateral development system have a high degree of funding vulnerability. DAC members are thus called on to ensure their financial contributions build in sufficient predictability and flexibility. This would ensure the sustainability of programmes, and allow organisations to maintain impartiality and flexibility in delivering the priorities set by their governing boards.

Multilateral organisations fill a unique niche in the “decade of action”

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. Middle-income countries are among the biggest beneficiaries of recent increases in multilateral outflows.

Development effectiveness remains at the core of the multilateral value proposition. The 2018 monitoring round of the Global Partnership for Effective Development Co-operation indicated that the multilateral system performed more strongly than bilateral providers in most areas of effective development co‑operation, including alignment with partner countries’ strategic priorities. On the other hand, multilateral organisations’ results for funding predictability were more mixed than those of bilateral partners.

Multilateral organisations’ financing patterns confirm their added value vis-à-vis bilateral development partners. For example, the analysis shows that the multilateral development system retains economies of scale advantages over bilateral aid. Multilateral organisations also exhibit a stronger degree of specialisation than bilateral development partners, make greater use of government channels and devote a greater share of resources to fragile contexts. 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.

Three key reform areas could help the multilateral development system stay effective

In the past, global crises have often spurred innovation in the multilateral development landscape. In the spirit of “building back better”, multilateral stakeholders can use the current crisis as an opportunity to build a more effective and coherent system – one that is better equipped to address the global development challenges of the 21st century.

This report highlights three key reform areas with the potential to maximise the impact of multilateral development finance:

• The scale of multilateral finance: ensuring that the multilateral system can help address development challenges of a new magnitude (e.g. extreme climate events or pandemics).

• Efficiency: ensuring value for money in a context of constrained resources.

• Accountability: restoring trust in the multilateral development system.

Six building blocks will help achieve progress in these areas: a) greater transparency over financing and results; b) increased systemic coherence; c) improved co-ordination, both among donors and multilateral organisations; d) increased financial capacity of multilateral organisations; e) better selectivity of multilateral operations, and f) increased capacity of multilateral organisations to adapt to evolving circumstances.

These building blocks, which span all stages of the multilateral development finance process and apply to all stakeholders, outline a possible research and policy analysis agenda for the OECD DAC to contribute to the reform of the multilateral development system.