This chapter provides an overview of the multilateral development system: it presents the scope and purpose of multilateral development finance and describes its value proposition. The chapter also provides a historical perspective by retracing the evolution of the multilateral development system, starting with its inception in the aftermath of World War II, and describing the mix of development needs and geopolitical interests that have led to the creation of the complex multilateral finance system we see today. After analysing the implications of the 2030 Agenda and the COVID-19 pandemic for multilateral development finance, the chapter presents three key reform areas, and six related building blocks, with the potential to make multilateral development finance fit to address today’s global development challenges.
Multilateral Development Finance 2020
Abstract
The multilateral development system encompasses all multilateral organisations conducting work of a development-related nature. This report defines the multilateral development system as the totality of multilateral organisations that are mandated by their members and shareholders to promote international development. The analysis in this report covers over 200 multilateral agencies and institutions, including entities from the United Nations Development System (UNDS), the World Bank Group (WBG), regional development banks, vertical funds, as well as other multilateral organisations included in the OECD Development Assistance Committee (DAC)’s list of official development assistance (ODA)-eligible international organisations that report to the OECD Creditor Reporting System (CRS).1 The main organisations are shown in Figure 1.1.
Source: Authors’ design based on (OECD, 2020[1]), “OECD DAC Annex 2 - List of ODA-eligible international organisations”, available at https://www.oecd.org/dac/financing-sustainable-development/development-finance-standards/annex2.htm.
Analysing multilateral development finance as a system can help assess whether multilateral efforts to finance development co-operation are effective. It helps to identify the specific areas where the system works well (for example through well-arranged co-ordination and division of labour among organisations), but can also help spot potential inefficiencies in the form of redundancies, inconsistencies and incoherence in the multilateral finance architecture.
As pointed out in previous editions, the term “system” can be somewhat misleading by suggesting the existence of a “perfectly cohesive and coherent system, which develops through an orderly process guided by simple principles” (OECD, 2018[2]). In reality, the multilateral development system is closer to a collection of living organisms that adapt to overarching shifts in the broader international order, the development landscape and the development of co-operation architecture.
This report analyses the multilateral development system through the lens of multilateral finance. In doing so, it looks both at (i) the funding that is directed to or channelled through, multilateral organisations – multilateral inflows (Chapter 2); and at (ii) how this financing is used by the multilateral development system to address specific development challenges – multilateral outflows (Chapter 3). Most of the analysis in this report is based on data from the OECD CRS. However, since the scope of multilateral development finance goes beyond the data available in the CRS, the report also presents an analysis based on alternative datasets and includes caveats where the available data may not provide a complete picture. For example, the OECD CRS does not include detailed data on the multilateral contributions provided by many non-DAC countries (e.g. People’s Republic of China [“China”], Brazil, etc.) or the financing that multilateral development banks (MDBs) raise from the capital markets.
Note: FIFs: Financial intermediary funds.
Source: Authors’ design adapted from (Eichenauer and Reinsberg, 2017[3]), “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.
Multilateral ODA2 is the cornerstone of multilateral development finance (Figure 1.2). It provides multilateral organisations with essential funding that they can pool and incorporate as part of their financial assets. The governing boards of multilateral organisations have the unqualified right to allocate these funds as they see fit within the limits prescribed by the organisation’s mandate. In 2018, core multilateral ODA represented USD 46.4 billion. In addition to core multilateral ODA, development partners usually pass part of their bilateral funding through multilateral organisations by earmarking it for specific uses:3 in 2018, earmarked contributions to multilateral organisations represented USD 25.5 billion. Total support to the multilateral development system, which combines both core and earmarked contributions, amounted to USD 71.9 billion in 2018 (Figure 1.3).
DAC countries’ and other official providers’ bilateral, core and non-core (earmarked) multilateral ODA, 2018
Note: Disbursements, in USD billion.
Source: Authors’ design and calculations based on (OECD, 2020[4]), “Creditor Reporting System”, https://stats.oecd.org/Index.aspx?DataSetCode=crs1.
Multilateral development institutions can be broadly classified into four categories: the United Nations Development System (UNDS), multilateral development banks (MDBs), vertical funds, and other organisations with specialised mandates or particular governance models, such as the International Monetary Fund (IMF) and the European Union (EU) (Figure 1.1). Each is described further below. Although they share broad characteristics, the organisations within each category can be further distinguished by their various mandates, governance structures and operational models. Depending on the type of analysis conducted, this report either refers to these four categories of multilateral actors, or specific multilateral organisations.
The UNDS consists of 34 entities (UN funds, programmes and agencies) that receive funding to carry out operational and standard-setting activities for development. The mandates of UN entities vary widely, ranging from service provision to policy development and norm-setting across a wide range of sectors (health, education, environment, food security, migration, etc.). The UNDS includes affiliate organisations such as the UN Development Programme (UNDP), the UN Children’s Fund (UNICEF) and the World Food Programme (WFP), as well as specialised agencies such as the Food and Agriculture Organisation (FAO) and the World Health Organisation (WHO).
MDBs include entities with a global mandate, such as the World Bank Group or the New Development Bank, as well as organisations with a regional or subregional focus. MDBs are widely recognised for their role of providing financial and technical assistance for development in low-income and middle-income countries. A key characteristic of MDBs is that, unlike other types of multilateral entities relying primarily on multilateral ODA provided by bilateral donors, they have the capacity to leverage their balance sheets and borrow from the market to increase their lending and grant provision capacity. Financing raised from capital markets accounts for a sizable portion of MDBs’ resources. The International Bank for Reconstruction and Development (IBRD), an entity of the World Bank Group, for example, had a borrowing portfolio amounting to USD 229 billion at the end of June 2019, compared to equity holdings of USD 45 billion, which includes capital contributions from member countries.
Most prominent among the MDBs is the World Bank Group, which is comprised of five entities: (i) the above-mentioned International Bank for Reconstruction and Development (IBRD); (ii) the International Development Association (IDA); (iii) the International Finance Corporation (IFC); (iv) the Multilateral Investment Guarantee Agency (MIGA); and (v) the International Centre for the Settlement of Investment-related Disputes (ICSID). MDBs also include regional development banks, such as the African Development Bank (AfDB), the Asian Development Bank (ADB), the European Bank for Reconstruction and Development (EBRD), the Islamic Development Bank (IsDB), and the Inter-American Development Bank (IADB).
The vertical funds have emerged as a new category of multilateral actors in recent decades. Vertical funds are multilateral financing mechanisms that pool finance from both public and private sector sources to target needs in specific development domains, such as health or the fight against climate change. The most prominent vertical funds operate in the health sector (the Global Fund to fight AIDS, Tuberculosis and Malaria, or the Vaccines Alliance – Gavi), the environment (the Green Climate Fund – GCF, the Adaptation Fund – AF, and the Global Environment Facility – GEF), and education (Global Partnership for Education – GPE).
Some important organisations with specialised mandates and governance structures do not fit in any of the above-mentioned categories. This is the case for the International Monetary Fund (IMF), which provides financial support to member countries facing balance-of-payments crises. Unlike the multilateral development banks, the IMF does not lend for specific projects and most of its lending is non-concessional, although concessional financial support is also provided through the Poverty Reduction and Growth Trust (PRGT). In addition to its lending activities, the IMF provides technical assistance and training in a wide range of areas, such as central banking, monetary and exchange rate policy, tax policy and administration, and official statistics.
The European Union (EU) holds a unique place in the multilateral development finance architecture due to its dual role in development assistance. The EU is a full DAC member and a provider of ODA in its own right, with its development policy and its own resources. The EU institutions by themselves ranked fifth amongst DAC members in 2019 for their official development assistance (ODA) volume, which amounted to USD 18 billion (OECD, 2019[5]). At the same time, the EU operates as a group of multilateral institutions. For analytical and statistical purposes, the EU is therefore often presented as a multilateral organisation in DAC publications, including in this report (OECD, 2018[2]). The EU funds its development assistance from several sources, including the: (i) EU budget: (ii) European Development Fund (EDF); (iii) European Investment Bank (EIB); (iv) European trust funds; and (v) European Fund for Sustainable Development (EFSD).
Transfers of resources across multilateral organisations reveal the extensive collaboration and mutual dependence that characterises the multilateral development system. Multilateral organisations frequently channel their resources through other multilateral actors to increase their financial leverage, or to tap into the expertise of other institutions. Figure 1.4 illustrates the rich network that results from such cross-funding and collaboration among multilateral organisations.
The UNDS is a major hub of the multilateral development system, in line with its universal mandate. UN entities are highly interlinked, with some entities such as the Peacebuilding Fund often channelling funds to a range of other UN organisations with implementation capacity. Other UN entities, such as the WHO, UN Women or UN-Habitat, are on the receiving end of funding from multiple UN entities. The network graph reveals the centrality of some specific UN entities, such as UNDP, within the multilateral development network: UNDP is both at the giving and receiving end of cross funding within and outside of the UN development system, and has traditionally played a co-ordinating role in the UN ecosystem.
MDBs are vital players due to their large financing capacity, as well as their extensive field presence and operational capacities. The World Bank, for example, receives funds from diverse actors, including UN entities and vertical funds, looking to benefit from its operational infrastructure and expertise. The Asian Infrastructure Investment Bank (AIIB), as a relatively new player, is not yet reflected in this network, which is based on OECD CRS data for the period 2011-2018.
Vertical funds are financially dependent on traditional multilateral institutions due to their specific governance and business models. Since global vertical funds usually lack implementing capacity and field presence, they tend to channel funds to a range of actors across the multilateral development system to fulfil their mandates. This is true of all the main climate and health-related vertical funds. The Global Environment Facility (GEF), for instance, which was created in 1991 as a programme hosted by the World Bank, continues to channel most of its resources through the World Bank, UNDP and the UN Environment Programme (UNEP) for implementation, despite gaining considerable autonomy since its inception and attaining a high profile as a standalone body.
Note: This graph shows transfers of resources among multilateral organisations between 2011 and 2018, but does not capture other forms of collaboration (e.g. co-financing). Multilateral organisations, and MDBs in particular, frequently collaborate as part of co-financing arrangements, which are not captured by the OECD Creditor Reporting System.
Source: Authors’ calculations based on (OECD, 2020[4]), “Creditor Reporting System”, https://stats.oecd.org/Index.aspx?DataSetCode=crs1.
Despite the creation of new multilateral entities in recent decades, legacy multilateral organisations such as the UN and the main MDBs seem to retain a key and central role in the system. Vertical funds have often been presented as a new and more effective way to channel funds to address global development challenges than traditional multilateral organisations. However, the analysis shows that vertical funds continue to rely on traditional multilateral institutions (especially MDBs) for their implementing capacity and operational infrastructure, as well as their convening power, geographical presence and expertise in financial and trustee services. The fact that these vertical funds still rely on the traditional multilateral system suggests that DAC members’ support to new or emerging multilateral channels should always go hand in hand with continued and sustained support to the rest of the multilateral development system.
The sizable portion of ODA channelled through multilateral entities reflects the widespread recognition of the strengths and relevance of the multilateral system. Previous editions of this report (OECD, 2011[6]) have highlighted that donors’ motives for channelling development finance through the multilateral development system can be manifold. Some of the motives frequently invoked are the efficiency gains and enhanced effectiveness resulting from multilateral organisations’ characteristics, such as (i) economies of scale and scope, and reduced transaction costs from resource pooling; (ii) financial leverage; (iii) thematic and geographical expertise (e.g. in fragile contexts); (iv) global reach and large field presence; and (v) large operational and implementing capacities. In Chapter 3 of this report, we analyse whether multilateral organisations still enjoy a comparative advantage in some of these key areas.
Efficiency is often presented as one key value proposition of the multilateral development system. By allowing development partners to pool their resources to address specific development challenges, multilateral organisations are believed to offer substantial economies of scale (efficiencies of volume) and scope (efficiencies of variety). However, research shows that concrete evidence to verify claims of comparative efficiency is generally difficult to find (Gulrajani, 2016[7]).4
The system is also said to add qualitative value to development finance. Multilateral organisations are increasingly recognised as providers of technical assistance and as knowledge hubs; they are also valued for their normative, standard-setting and policy advisory roles (Gulrajani, 2016[7]). Moreover, their global presence and convening power allow them to disseminate international best practice, either as part of their country work or through international surveys, forums and conferences. A recent survey conducted among DAC member countries (OECD, 2020[8]) showed that they appreciate multilateral entities for their technical expertise and knowledge, financing capacity, convening power, as well as support to global public goods (Figure 1.5). For example, the UNDS is generally viewed as having great convening power, an ability to respond to crises promptly, as well as an extensive reach and country presence. MDBs and vertical funds, on the other hand, are widely recognised for their capacity to mobilise additional public and private resources.
Multilateral organisations complement one another in their thematic strengths and specialisation. For example, in the recent survey of DAC members’ policies and practices vis-à-vis the multilateral system (OECD, 2020[8]), DAC members were very positive about the UN’s work in humanitarian aid, food security and peace and security. The World Bank Group and other MDBs were viewed as performing well in infrastructure financing and support to inclusive growth and in their advisory role on tax and fiscal matters, as well as trade and financial sector policy and regulation. Overall, DAC members also had a positive perception of the multilateral system’s performance in addressing global public goods (e.g. climate and environmental issues) and cross-cutting issues (e.g. gender mainstreaming).
Some experts note that there is scope to build further on these key strengths, for example by focusing more on localised and contextualised knowledge (Kharas, 2016[9]). Given their large field presence and operational experience, multilateral organisations seem uniquely positioned to cross-fertilise knowledge and to actively promote South-South and triangular co-operation in their knowledge-based work. Development practitioners, for example, refer to the “hummingbird” role of the World Bank Group to describe its capacity to leverage knowledge and good practice across different countries and regions (Canuto, 2018[10]; Peters, 2006[11]).
Note: The scores shown on the graph correspond to the number of survey respondents indicating that they think multilateral organisations add value vis-à-vis bilateral channels in the specific category.
Source: (OECD, 2020[8]), “Survey on DAC providers' policies and practices vis-a-vis the multilateral development system” (unpublished).
The multilateral development system is also a financial innovator. Multilateral organisations offer a wide range of financial instruments that can be tailored to the needs of countries across the development spectrum. Figure 1.6 provides an overview of the wide array of financing instruments made available by different categories of multilateral organisations. The key and unique role of multilateral development banks in multilateral development finance is visible through the large variety of financing instruments that these institutions offer to their client countries, allowing for a tailored response to their financing needs.
Source: Authors’ design based on (OECD, 2020[4]), “Creditor Reporting System”, https://stats.oecd.org/Index.aspx?DataSetCode=crs1.
Multilateral organisations’ potential to mobilise and engage with the private sector is seen as another key asset of the multilateral development finance system. In recent years, policy makers and researchers have increasingly called upon multilateral organisations to scale up their private sector development efforts (Nielson, 2017[12]) and pointed to private sector finance as an indispensable component to achieve the Sustainable Development Goals (OECD, 2018[2]). This includes the mobilisation of private sector resources for development, but also partnerships with the private sector (including in recipient countries) to foster their positive impact on sustainable development. However, progress in this area has so far been complex to track and measure because of the difficulty of obtaining comprehensive and comparable data. Data and information on amounts mobilised from the private sector by multilateral organisations, for example, are often subject to disclosure exceptions because of commercial sensitivity and the need to protect business interests.
In recent years, multilateral organisations have been under close scrutiny. One recurring criticism is their alleged lack of effectiveness and accountability. The growing complexity of the multilateral development system, made up of a constellation of entities with different mandates, geographical scope and expertise, has also spurred concerns over a possible lack of coherence across the system. While the global reach of multilateral organisations is a core strength, it also raises questions regarding potential mandate overlaps. Our analysis shows that there are, on average, 20 active multilateral entities in each developing country (Figure 1.7). Uganda is the country receiving support from the largest number of active multilateral entities (30), closely followed by other eastern African countries: Ethiopia, United Republic of Tanzania and Kenya (29 each). Africa is the continent featuring the largest average number of active multilateral entities per country, at around 23.
Note: This map, as well as any data, included herein, are without prejudice to the status of, or sovereignty over, any territory, to the delimitation of international frontiers and boundaries and the name of any territory, city or area.
Source: Authors’ calculations based on (OECD, 2020[4]), “Creditor Reporting System”, https://stats.oecd.org/Index.aspx?DataSetCode=crs1.
However, surveys show that there is still broad trust in the multilateral development system among the general public. Recent studies confirm that multilateral organisations retain a generally positive view and image in most countries. The Pew Research Center’s 2019 Global Attitudes Survey, based on opinions of 34 904 respondents, finds that a median of 61% respondents from across 32 surveyed countries have a positive view of the UN, while a median of just 26% expressed a negative view (Pew Research Center, 2019[13]). The views of the multilateral development system tend to be especially positive among young people: in 19 of the 32 countries, respondents between 18 to 29 years old are more positively inclined towards the UN than those aged 50 and older. Another survey of millennials in the United States confirmed the broadly favourable view of the multilateral development system among younger people (Edelman, 2019[14]). The Ipsos group’s 2019 Global Influence Report finds that a majority of citizens across 28 countries believe that multilateral organisations such as the United Nations (71% of respondents positive), EU (70%), the World Bank Group (61%) and IMF (58%) have a positive influence in the world (Bricker, 2019[15]).
This section provides a concise historical perspective on the evolution of the multilateral development system over its 75 years of existence. In doing so, it illustrates the consecutive movements of expansion and fragmentation of the multilateral development system. (Figure 1.8)
The multilateral development system is an increasingly crowded and fragmented space. Since its inception more than 75 years ago, the proliferation of new multilateral organisations and the progressive expansion of their mandates in response to new global development challenges has profoundly transformed the multilateral development landscape.
Four main waves have marked the evolution of the multilateral development system; each wave tried to address the shortcomings of the previous one. The first wave, at the end of World War II, was a response to the absence of multilateralism and a system of alliances that had led to the war. It resulted in the creation of the modern multilateral development system, led by the UN and the Bretton Woods institutions. The second wave, from the 1960s to the 1970s, coincided with a call for increased decentralisation and regionalisation of multilateral governance and resulted in the establishment of the first regional development banks. The third wave, during the 1990s and early 2000s, emerged as a consequence of the rise in prominence of sector-specific global development issues. It was characterised by the creation of the global vertical funds, as well as rapid growth in the number of trust funds hosted by multilateral organisations. The fourth wave, observable since the early 2010s, saw the creation of new multilateral development banks in response to major geopolitical and economic shifts in the international order, in particular the emergence of the BRICS (Brazil, Russian Federation, India, China, and South Africa). Each wave is analysed below.
The multilateral development system as we know it was born in the aftermath of World War II. The United Nations and the Bretton Woods institutions (the International Bank for Reconstruction and Development – IBRD – and the International Monetary Fund - IMF) were created from the ashes of World War II.
The United Nations (UN) officially came to existence on 24 October 1945. While the UN is best known for its mission to maintain international peace and security through international co-operation, the preamble of the UN charter also mentions the promotion of “social progress and better standards of life” as one of the main goals of the organisation and vows to “employ international machinery for the promotion of the economic and social advancement of all peoples”. At present, 187 UN agencies, funds, programmes and commissions are included in the OECD DAC List of ODA-eligible International Organisations. Beyond its purely development-related work, the UN also co-ordinates humanitarian relief operations in support of national authorities and helps enforce global norms and standards.
In parallel to the creation of the UN, the Bretton Woods conference held in July 1944 established the IBRD and the IMF. The initial mandate of the IBRD was to extend loans for economic development to finance the reconstruction of post-war Europe, although its focus shifted to development activities and developing countries in subsequent years. Over time, a new set of specialised entities was also created alongside the IBRD to constitute what is now known as the World Bank Group: these entities are the International Development Association (IDA), the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), and the International Centre for the Settlement of Investment-related Disputes (ICSID). In 2013, the World Bank Group adopted two goals to guide its work: (i) ending extreme poverty by 2030; and (ii) boosting the shared prosperity of the poorest 40% of the population in every country.
The rise of regional development banks originated from a call for greater decentralisation of the multilateral development system. This movement implied a radical shift of multilateral development finance from a global to a regional, and even sub-regional, focus. The creation of the Inter-American Development Bank (1959), African Development Bank (1964), and Asian Development Bank (1966) was primarily a consequence of the rising discontent among developing countries with the aid and development policies of global institutions (Ben-Artzi, 2016[16]). However, the geopolitical realities of the time, characterised by the Cold War and decolonisation processes, also played a crucial role in the emergence of these organisations (Engen and Prizzon, 2018[17]). In the 1970s the rising economic power of oil-producing Arab states led to the establishment of new banks, such as the Islamic Development Bank (IsDB) in 1975.
The governance framework of regional development banks mirrors the World Bank’s, with a large role devolved to traditional donors. However, a major difference exists between the ownership of the World Bank and that of the first generation of regional development banks: the IaDB, ADB, and AfDB all count more borrowers than donors among their shareholders – the exact opposite of the World Bank Group. This is true not only in absolute terms but also in terms of voting shares, as borrowers also retain the majority of percentage voting shares in all three organisations.
The mandate of most regional development banks builds on two pillars: (i) fostering sustainable economic development; and (ii) supporting regional co-operation, economic integration and within-region or among-member states trade (Engen and Prizzon, 2018[17]). Nonetheless, a handful of these organisations have an additional specialisation, such as Shari’ah-compliant finance for the Islamic Development Bank (IsDB), or infrastructure investments in the case of the East African Development Bank (EADB).
The third wave in the evolution of the multilateral development system shifted the focus from regional to thematic specialisation. An early example is the establishment of the Consultative Group on International Agricultural Research (CGIAR) in 1971 to support successful public-private research partnerships to help developing countries achieve food self-sufficiency.
In the late 1990s and early 2000s, the increased attention by the international community on new global challenges coincided with the emergence of the global vertical funds. This movement was accelerated by the adoption of the Millennium Development Goals (MDGs) in 2000: vertical funds appeared as appropriate tools to advance the MDGs as they allowed donors to eschew the classic horizontal, country-based model of traditional international financial institutions and to instead allocate funds to specific sectors (such as health, education, agriculture) (Gartner and Kharas, 2013[18]).
The list of vertical funds has grown considerably over the past few decades. Nowadays, it includes high-profile entities such as the Global Environment Facility (GEF, established in 1992), the Vaccine Alliance (Gavi, established in 2000), the Adaptation Fund (created in 2001), the Global Fund to Fight AIDS, Tuberculosis and Malaria (set up in 2002) and the Green Climate Fund (GCF, launched in 2010).
Owing to their governance and operational model, vertical funds have taken an increasingly prominent role in support of global public goods. Their thematic orientation and global mandate are expected to facilitate the shift away from country-based solutions and approaches, towards interventions that target the under-provision of global public goods and the over-production of global public bads. However, most of these funds still rely in part on traditional multilateral organisations (UN entities and multilateral development banks) for implementation.
The early 2000s was also a period of internal fragmentation within the multilateral development system. Development partners significantly increased their volume and share of non-core (earmarked) funding, leading to rapid growth in the number of trust funds hosted by multilateral organisations. Since then, several multilateral organisations have launched reforms to limit this proliferation (see Box 2.1. in Chapter 2).
The emergence of new multilateral entities at the turn of the 21st century reflects major shifts in the international economic order. The global geopolitical context has changed significantly since the end of the Cold War in the early 1990s, with the BRICS, and China, in particular, taking an increasingly important role in the global economic landscape. Between 1990 and 2019, the size of China’s GDP relative to the world’s total income increased from 1.7% to 16.3% in real terms. In aggregate, the BRICS’ contribution to global GDP grew from 7.9% to 24.1% over the same period.
The creation of the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (NDB) responded to the need to fill the huge infrastructure gap in developing countries. Filling this gap, which has been estimated to be in the range of USD 3 billion to USD 5 billion annually, is considered as a prerequisite to the achievement of many SDGs. The AIIB is almost unique in multilateral development finance by bringing geographical (Asia) as well as sectoral (infrastructure) considerations under the same roof (Chin, 2019[19]). However, beyond the purely developmental motives, the establishment of these new institutions is also often interpreted as a move by developing countries to gain greater representation and weight in the multilateral aid architecture (Wang, 2019[20]).
The entry of new actors in the multilateral landscape was initially met with mixed reactions. While some experts highlighted their potential complementary role in international development financing (Gu, 2017[21]), others depicted the NDB and the AIIB as a threat to traditional multilateral development banks, with largely redundant mandates and geographic coverage (Subacchi, 2015[22]). In the case of the AIIB, the creation of the institution also raised concerns that it would promote China’s geopolitical agenda. In its first few years of existence, however, the institutional growth of the AIIB has confirmed the global nature of its membership: four years after its launch, the AIIB counts more than 100 member countries.5 In comparison, the ADB, established in 1966, counts 68 members after its 54 years of existence.
The AIIB and the NDB have brought some innovation to the multilateral development system. These two organisations combine the classic institutional structure of traditional MDBs with some innovations derived from their shareholders’ 75 years of experience across the multilateral development landscape. Compared to traditional MDBs, for example, the governance of the NDB reflects a commitment to the equality of its five members, most evident in the equal distribution of their voting power. Another of its distinctive feature lies in NDB’s decision to offer local currency lending to its client countries. The AIIB, for its part, was designed with a non-resident Board of Directors (unlike the World Bank, the AfDB and the ADB, but similar to the EIB and Development Bank of Latin America or CAF). Another innovative feature of the AIIB’s governance model resides in its charter (Chin, 2019[19]), which provides the AIIB with the flexibility to adapt to changes in the global development context, for example by introducing new types of financing, or extending its support to non-members. These are only some examples, among many, of characteristics that differentiate these new institutions both from traditional MDBs, and from each other (Table 1.1).
Source: (Wang, 2019[20]), “The New Development Bank and the Asian Infrastructure Investment Bank: China's Ambiguous Approach to Global Financial Governance”, https://onlinelibrary.wiley.com/doi/full/10.1111/dech.12473.
The 2030 Agenda and the Sustainable Development Goals revitalised the demand for multilateral approaches to support the global development agenda. Multilateral actors received a pivotal role and expanded mandate with the adoption of the 2015 Addis Ababa Action Agenda (AAAA), which provided a blueprint to finance the implementation of the 2030 Agenda. The recognition of the integrated and interlinked nature of the SDGs helped to put multilateral collaboration at the heart of the agenda (Rudolph, 2017[23]). Due to the breadth of their activities, multilateral organisations have positioned themselves as key contributors to the SDGs. Figure 1.9 shows that the activities of multilateral organisations span the whole range of the 17 SDGs, with most categories of multilateral organisations providing support across multiple SDGs.
The 2030 Agenda also challenged the traditional approaches of multilateral development finance. The AAAA called for the mobilisation and alignment of all financing flows – including domestic public resources, private investment, remittances as well as official development finance – with the SDGs. As a result, the mobilisation of private finance for sustainable development has become an important function of the multilateral development system. Central to this is the vision to move from “billions to trillions” and use the multiplier effect of multilateral finance by leveraging investment from business, venture capital, sovereign wealth funds and other non-state sources (AfDB, ADB, EBRD, EIB, IADB, IMF; WBG, 2015[24]).
The extensive financial resources, field presence and expertise of multilateral organisations make them indispensable to address global challenges such as the SDGs. From its very inception, the multilateral development system has been created as an instrument for global burden-sharing and joint action (Martens, 2005[25]; Milner and Tingley, 2013[26]). As such, it provides an ideal platform to tackle development challenges whose impacts spread across large geographical areas, socioeconomic groups and generations (Gulrajani, 2016[7]). By co-ordinating interventions, harmonising approaches and promoting common standards and procedures, multilateral organisations can act as a powerful conduit for collective action. They are also uniquely positioned to tackle the collective action problems arising in the production and maintenance of public goods,6 such as free riding, the prisoner’s dilemma and the tragedy of the commons (Kharas, 2016[9]).
Note: The OECD SDG Financing Lab uses artificial intelligence to link official development flows (ODF) spending to the SDGs.
Source: Authors’ calculations based on (OECD, 2020[4]) “Creditor Reporting System”, https://stats.oecd.org/Index.aspx?DataSetCode=crs1, and (OECD, 2019[27]), “SDG Financing Lab”, https://sdg-financing-lab.oecd.org.
However, the 2030 Agenda has also exposed some inherent limitations of the multilateral development system that hamper its contribution to the provision and maintenance of global public goods. While many multilateral organisations have significantly stepped up their activities to support global public goods (GPGs) since 2015, their work has also revealed some basic shortcomings of their approach (Kaul, 2017[28]; McDade et al., 2019[29]). These shortcomings include: (i) the absence of clear strategies within and across multilateral organisations to collectively address cross-border issues; and (ii) the country-based operating models of traditional multilateral organisations, which are often perceived as restraining their ability to contribute to GPGs. In some instances, this has led to calls for overarching reforms to improve how multilateral organisations deal with cross-border issues. Proposals run the whole gamut from creating new institutions devoted to GPG provision, to adapting the mandates, operational models and governance structures of existing organisations in a way to better accommodate this increasingly important function (Kaul et al., 2015[30]; Kanbur, 2015[31]).
The financial capacity of multilateral organisations is another key limitation. In the years following the adoption of the 2030 Agenda, the magnitude of the SDG funding gap led policymakers to call for innovative financial reforms in multilateral development banks (G20, 2015[32]). As a result, the main MDBs implemented a series of measures aimed at optimising their balance sheets, for example by merging their concessional and non-concessional windows or by deploying exposure exchange mechanisms to diversify their portfolios (World Bank Group, 2016[33]). Despite these advances, a growing chorus of voices still points out the need to adjust the scale of multilateral development finance to the magnitude of the global development challenges (Humphrey, 2017[34]). According to the 2020 OECD survey on DAC members’ policies and practices vis-à-vis the multilateral development system (OECD, 2020[8]), the lack of financial resources was perceived to be one of the key constraints that hampered an effective response of the multilateral system to the COVID-19 crisis.
The COVID-19 pandemic, with its profound economic, social and human impacts, is a wake-up call for multilateralism. Although all countries are, in one way or another, affected by the recent COVID-19 crisis, the situation of developing countries is particularly worrisome. Unlike industrialised countries, which can rely on relatively strong healthcare systems and financial buffers to deal with the immediate impact of the crisis through fiscal or monetary measures, most developing countries have seen their access to finance severely compromised following the global economic slowdown. Early research points to record capital flight, accompanied by a drop in remittances and negative projections for domestic finance (OECD, 2020[35]). The measures implemented by governments around the world to deal with the devastating effects of the virus have also led to a temporary, albeit severe, rollback of globalisation. Yet, at the same time, 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.
The multilateral development system is in a unique position to meet the vast and pressing financial needs of developing countries during the crisis. The multidimensional and global nature of the COVID-19 crisis calls for leveraging the comparative advantages of the multilateral development system, and to let it assume a central role both in the immediate response to the pandemic and in the medium to long-term efforts to mitigate its social, economic and human impacts. The global reach of multilateral organisations – combined with their broad mandates and expertise, convening power, large array of financing instruments, and knowledge of local contexts – makes them ideal candidates to lead and co-ordinate global efforts to address the current crisis (Table 1.2). The added value of multilateral partners’ financing, including its effectiveness, is discussed in more detail in Section 3.2 of this report.
Source: Authors’ design based on (UN, 2020[36]), “A UN framework for the immediate socio-economic response to COVID-19”, https://unsdg.un.org/resources/un-framework-immediate-socio-economic-response-covid-19 and (World Bank Group, 2020[37]), “Saving Lives, Scaling-Up Impact and Getting Back on Track: World Bank Group Covid-19 Crisis Response Approach Paper”, http://documents1.worldbank.org/curated/en/136631594937150795/pdf/World-Bank-Group-COVID-19-Crisis-Response-Approach-Paper-Saving-Lives-Scaling-up-Impact-and-Getting-Back-on-Track.pdf.
A large part of the financing made immediately available to developing countries during the crisis was channelled through the multilateral system. Multilateral development organisations have reacted swiftly to the crisis, launching a timely response to step into the financial vacuum generated by the global pandemic. The recent replenishments of some MDB concessional windows, such as the IDA and the African Development Fund, turned out to be particularly timely and put the system in a strong position to respond to the crisis. This allowed the multilateral development system to make available nearly USD 250 billion for the immediate response to the crisis in the weeks following the declaration of the pandemic. This compares to an estimated USD 5.5 billion reported as COVID-19 response by DAC members and other official providers, as of the end of May 2020 (OECD, 2020[38]). Considering the challenging context in which multilateral organisations had to operate, characterised by numerous operational constraints (travel restrictions, lockdown measures, disruption of supply chains, and volatility of the international capital markets), their ability to ensure business continuity and to mobilise large volumes of financing in record time is an impressive feat.
A number of flexible financing mechanisms allowed the IMF and the main MDBs to rapidly deploy their resources at scale. The IMF, for example, provided emergency financial assistance to developing countries through its Rapid Credit Facility (RCF) and Rapid Financing Instrument (RFI). It also provided grants for debt relief through the Catastrophe Containment and Relief Trust (CCRT), a facility that had already been used to support Guinea, Liberia, and Sierra Leone during the 2014 Ebola outbreak. The World Bank Group and the main regional development banks used fast-track financing facilities and repurposed part of their existing portfolio to provide rapid support to their client countries. The flexibility demonstrated by multilateral development banks in reallocating resources and repurposing their portfolios played a key role in the speed at which these organisations were able to respond to the demand and needs of developing countries.
The UN put in place a two-track response plan to address the humanitarian and development aspects of the crisis. To combat the social and economic dimensions of the crisis, the UN launched a Global Humanitarian Response Plan (GHRP), which aims to address the urgent health and humanitarian needs of populations already caught up in humanitarian crises. A strong focus of the UN response was to provide support to and through local health systems, especially in fragile contexts characterised by weak institutions. The UN further announced the creation of a COVID-19 Response and Recovery Fund (RRF) to help low and middle-income developing countries to combat the virus7 and called for an unprecedented global stimulus to be provided to developing countries to help them cope with the economic and social fallout (UN, 2020[36]).
In addition, the multilateral system was instrumental in promoting collective action and supply-side co-ordination to mitigate the impact of the pandemic in developing countries. For example, multilateral actors, such as the World Bank Group and the IMF, have been actively promoting and facilitating the G20 debt moratorium to alleviate the burden of debt repayment for the most vulnerable countries.
As well as scale and speed, the effectiveness of the current multilateral response to the crisis will also be determined by its capacity to adequately prioritise its interventions. Given the limited resources available and the magnitude of the challenge posed by COVID-19, the multilateral development system needs to exercise careful selectivity to ensure it is able to serve the most in need while taking into consideration each country’s absorptive capacity (including debt sustainability considerations). It is worth noting the efforts made by multilateral organisations to better understand the needs and vulnerabilities generated by the crisis at the global level.8 Once data and information related to the immediate response to the COVID-19 crisis become available, a review of the activities financed by the multilateral development system would be welcome to shed light on the sectoral and geographic focus of the response, and analyse how multilateral organisations prioritised their interventions.
In the years preceding the COVID-19 crisis, the multilateral system was already facing numerous stress factors. Many of these factors appeared to be exogenous, originating from changes in the global development landscape rather than from the failings of multilateral organisations. In the recent OECD survey on DAC members’ policies and practices vis-à-vis the multilateral development system, for example, respondents pointed to the changes in the global geopolitical landscape as the main stress factor affecting the multilateral development system, with 58% of respondents rating it as a highly significant factor (Figure 1.10) (OECD, 2020[8]). In order of importance, the next stress factors highlighted as highly significant by respondents were the emergence of new global development challenges (43%), and the declining trust among member countries (37%). Most factors related to the performance of multilateral entities, such as public perceptions of multilateral effectiveness (21%), the expanding mandates of multilateral organisations (16%) and their operational models (11%), ranked last. These results suggest that in order to be effective, any reform of the multilateral development system should be contextual (i.e. take into account changing circumstances), inclusive (i.e. address the deficiencies of all multilateral stakeholders – not only multilateral organisations) and holistic (i.e. consider the whole chain of multilateral development finance – not only the final link in the chain)
Which factors put the multilateral development system under increased stress?
Source: (OECD, 2020[8]), “Survey on DAC providers' policies and practices vis-a-vis the multilateral development system”,(unpublished) .
The COVID-19 pandemic is a test of the multilateral system’s ability to address global development challenges. The crisis has already exposed the fragility of the multilateral system, with many countries reacting to the crisis in an uncoordinated fashion, and a few governments raising concerns over the competency and impartiality of some multilateral organisations. By challenging the multilateral development system and pushing it to its limits, the crisis can help to identify potential deficiencies that should be solved to prepare the system for other challenges of the magnitude posed by climate change and the COVID-19 pandemic.
The international call to “build back better” should also apply to the multilateral development system. Given the magnitude of the challenges lying ahead, the shareholders of the multilateral development system should explore ways to make the system fit for purpose to deal with these new and emerging development challenges. If the target of achieving the SDGs by 2030 seemed daunting before the COVID-19 crisis, the added challenge posed by the pandemic requires a move away from business as usual to engage in changes that help maximise the impact of multilateral finance.
Achieving this will require the multilateral system to improve in three key dimensions. This section presents three key reform areas, and six related building blocks, with the potential to make multilateral development finance fit to address global development challenges:
Key reform area 1 – Scale of impact: To stay relevant in the context of the 2030 Agenda and the global development challenges such as the COVID-19 pandemic, multilateral development finance needs a change of scale (Humphrey, 2020[39]). Maximising the impact of multilateral finance requires a rethink of the financial and operational model of the various institutions comprising the multilateral development system to ensure it is able to meet the ever-growing demand and needs (Bhattacharya et al., 2018[40]). This is especially relevant in times of crisis, when other financing sources (e.g. tax revenues, foreign direct investment, remittances, commercial lending, etc.) available to developing countries tend to dry up (UN, 2020[41]). At such times the multilateral system needs to use its funding strategically and catalytically.
Key reform area 2 – Efficiency: The socio-economic consequences of the COVID-19 pandemic have widened the already large gap in funding required to achieve the SDGs (OECD, 2020[35]; Inter-agency Task Force on Financing for Development, 2020[42]). In the resource constrained environment that is likely in the aftermath of the crisis, the multilateral development system must demonstrate that it constitutes an efficient channel to address new and emerging development challenges. Achieving progress in this area will require building on the comparative advantages of the multilateral system (Le Drian and Maas, 2019[43]).
Key reform area 3 – Accountability: Long before the pandemic, the perceived lack of accountability of the multilateral development system was already considered an area requiring increased attention from multilateral stakeholders. Over the past decades, the growing complexity of the system, made up of a large number of entities with various and sometimes overlapping mandates, has contributed to an increased sense of remoteness and opacity surrounding the governance and activities of multilateral organisations (OECD, 2011[6]). It is thus key for multilateral stakeholders to push for greater accountability in order to restore trust in the multilateral development system: this will require better communication of its results and impact, as well as clarifying the role of each stakeholder in the system, and ensuring a transparent and effective division of labour.
Progress in these three areas requires multilateral stakeholders to address existing constraints affecting the multilateral development finance process. Over the years, researchers and policymakers have highlighted a number of constraints limiting the scale of impact, efficiency and accountability of multilateral development finance (Figure 1.11). These constraints, which span all stages of the multilateral development finance process and concern all its stakeholders, call for a holistic and inclusive set of reforms.
Source: Authors’ design.
Removing these constraints requires action grouped into six building blocks. Together these outline a possible research agenda on the reform of the multilateral development system. The six building blocks aim to respond to structural, operational and financial shortcomings in the multilateral development system that are constraining its ability to respond to new global challenges (Figure 1.12). Most of them, however, warrant more research and analysis before they can be translated into actionable solutions. Where possible, the section highlights specific areas that would benefit from more in-depth research, analyses or reviews by the OECD DAC and other stakeholders. Since many of the building blocks are not new, further research could also be useful to understand what has so far prevented or deferred reform efforts to date.
Source: Authors’ design.
1. Transparency: Although multilateral donors and organisations put a great deal of effort into disclosing their financial contributions and activities, there are still numerous blind spots in the financing flows and operations of the multilateral development system.9 Part of these data and information gaps stem from the complexity of the system, comprised of myriad actors with different funding and operational models. The complexity of the multilateral development system makes the production of comprehensive and comparable data a costly and time-consuming task that also requires co-ordination among a multitude of multilateral stakeholders, including non-state actors. In the absence of such data, however, it is difficult to hold multilateral stakeholders accountable, as well as to identify and eliminate inefficiencies in the system. The emergence of new actors, whose financial flows are not yet captured in existing data collection and disclosure mechanisms, also affects the comprehensiveness of the data available. These data gaps are likely to increase over time as the multilateral system continues to grow in volume and complexity.
2. Coherence: Recent research points to the need to make the multilateral development finance architecture more coherent. This would help avoid overlapping mandates that result in inefficiencies and duplication of efforts and contribute to opacity in the system. Such an endeavour would require comprehensive reviews of the various functions and specialisations of multilateral organisations to clarify their mandate and scope of responsibility in tackling new development challenges, and ultimately ensure an improved division of labour. In the longer term, once sufficient analytical evidence has been collected, multilateral stakeholders could determine whether systemic adjustments are needed, such as: (i) adjusting the mandates and division of labour to address potential gaps; or conversely (ii) consolidating, ramping down or sunsetting organisations that have already fulfilled their missions, or whose mandates are deemed obsolete, nonessential or redundant. The coherence of donors’ multilateral policies and practices should also be considered. Specific areas of interest could include donors’ internal coherence (e.g. the coherence between their multilateral and bilateral programmes; the coherence of their programming on acute humanitarian relief, development, and peacebuilding10; or their use of whole-of-government approaches) as well as their external coherence (e.g. coherence across donors’ funding decisions).
3. Co-ordination: The COVID-19 crisis has exposed a lack of collective leadership and co-ordination among both multilateral institutions and multilateral donors, making it clear that multilateral stakeholders still have a long way to go to “work as a system”. While most multilateral organisations have ample experience collaborating with their peers (e.g. UN inter-agency collaboration, or project co-financing between multilateral development banks), the magnitude and multidisciplinary dimension of the COVID-19 pandemic calls for broader and more inclusive partnerships between stakeholders with very different mandates and governance models (for example between UN entities and MDBs, or between vertical funds with diverse sectoral mandates). Increasing the impact and efficiency of the multilateral development system calls for symbiotic partnerships (instead of purely opportunistic ones), building on the comparative advantages of each stakeholder across the variety of institutions which make up the multilateral development system. An in-depth review of the strengths and comparative advantages of multilateral actors engaged in the response to the COVID-19 crisis could be a good start to identify synergies and potential for increased collaboration and co-ordination.
4. Financial capacity: New development challenges require a change of scale in development finance. While the Addis Ababa Action Agenda has already alluded to the need to turn billions into trillions, the COVID-19 pandemic and its socio-economic implications have intensified the urgency of scaling up the impact of development finance. Building on some of its comparative advantages, the multilateral development system can do so by (i) helping to pool resources from multiple donors for greater impact; (ii) offering a variety of financing instruments that can be tailored to the evolving needs of developing countries; and (iii) mobilising and aligning private finance with the SDGs. For this to happen at the required scale, however, a number of issues currently constraining multilateral development finance need to be solved. For example, the donor community needs to ensure that multilateral organisations are adequately capitalised and funded – both in terms of funding quantity and quality – and that their financial models are well suited to the type of challenges they are asked to address (e.g. country challenges or global public goods). This also means providing them with funding that is predictable, flexible and aligned with their core mandates, and ensuring that multilateral organisations are not vulnerable to the influence of small groups of donors. Finally, donors should push for a more catalytic use of the funding they provide to multilateral organisations in order to tap into the large pool of private finance necessary to reach the trillions target.
5. Selectivity: The pandemic implies a double risk for the multilateral development system: it could destroy hard-won development gains while at the same time reducing donors’ funding, ultimately increasing the challenge of achieving the SDGs. In this context, a key objective of the multilateral development system should be to optimise the resources made available by multilateral donors by allocating them where they are likely to achieve the greatest impact. This entails improving project prioritisation to better target those most in need, while keeping in mind demand-side constraints such as the limited absorptive or implementing capacity of some developing countries (including considerations linked to debt sustainability). An important but difficult question is whether the allocation criteria currently used by multilateral organisations are still valid to address challenges that transcend national boundaries, such as the COVID-19 pandemic.11
6. Capacity to adapt: The pandemic has exacerbated the uncertainty already present in the development landscape and caused by factors such as the shifting multilateral order and the increased probability of extreme events resulting from climate change. In this new context, flexibility must become a key feature in the design and funding of the future multilateral development system. Multilateral organisations need to be able to adapt swiftly to emerging challenges and to a rapidly evolving environment: they should be able to adjust their list of eligible recipients (e.g. to support non-member countries), to establish new partnerships with different types of stakeholders (e.g. private actors), to provide novel types of financing, or to adapt their thematic and geographic priorities. The experience of those multilateral organisations to have already undergone such transformations shows that engaging in such changes can be arduous and time-consuming when a certain degree of flexibility has not been incorporated from the inception in the governance framework and the funding of the organisation.12 Additional research would be welcome to assess whether the governance and funding modalities of the existing multilateral organisations give them sufficient capacity to adapt quickly to shifting contexts, and to determine whether specific changes in their governance framework could increase their capacity to adapt.
The next two chapters of the report provide insights into the two key phases of the multilateral development finance process within which these reforms should materialise. Chapter 2 focuses on the funding that donors provide to multilateral organisations (multilateral inflows), and outlines the systemic implications of their individual funding decisions. Chapter 3, on the other hand, sheds light on the development activities financed by multilateral organisations, and identifies areas where multilateral entities are expected to increase their contribution.
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← 1. For the complete list, see the OECD DAC Annex 2 – List of ODA-eligible international organisations, available at https://www.oecd.org/dac/financing-sustainable-development/development-finance-standards/annex2.htm.
← 2. Multilateral ODA are core contributions provided by governments to multilateral organisations. It includes both assessed and voluntary core (unearmarked) contributions.
← 3. Earmarked funding, also known as multi-bi or non-core funding, are resources channelled through multilateral organisations over which donors retain some degree of control, and which can be earmarked for a specific country, project, region, sector or theme.
← 4. Some recent studies claim that multilaterals no longer enjoy major cost advantages compared to bilateral ones, as their compliance procedures have become more cumbersome and costly while technology has helped smaller donors operate with lower transaction costs (Kharas, 2016[9]; Gulrajani, 2016[7]).
← 5. Made up of 44 full regional members, 37 full non-regional members and 20 prospective members (as of 29 June 2020).
← 6. Reisen, Soto, & Weithöner (2004[44]) define public goods as follows: “A public good is “a commodity, measure, fact or service which can be consumed by one person without diminishing the amount available for consumption by another person (non-rivalry); which is available at zero or negligible marginal cost to a large or unlimited number of consumers (non-exclusiveness); and which does not bring about disutility to any consumer now or in the future (sustainability). A global public good is an international public good which, while not necessarily to the same extent, benefits consumers all over the world.”
← 7. At the time of publication of this report, the RRF had received total commitments amounting to USD 2 billion.
← 8. OCHA, UNDP and the main international financial institutions (IFIs) have for example been collaborating on this.
← 9. Examples of current data gaps include: (i) funding flows to multilateral organisations from non-DAC actors (some data can be obtained on an individual basis from multilateral organisations but not in harmonised and comparable formats); (ii) data on outflows from multilateral organisations (varying quality across multilateral entities reporting to the OECD CRS); (iii) data on private finance mobilised by multilateral organisations (disclosure of such data is currently restricted due to commercial sensitivity and protection of business interests); and (iv) data regarding co-financing arrangements and other forms of collaboration among multilateral organisations (currently not captured in the OECD CRS). The mapping and quantification of existing data gaps in multilateral development finance could be the subject of a forthcoming policy brief.
← 10. See the 2019 OECD DAC Recommendations on the Humanitarian-Development-Peace nexus: https://legalinstruments.oecd.org/en/instruments/OECD-LEGAL-5019
← 11. In the case of global public bads such as climate change, for example, larger and more sustainable gains may be achieved for those most in need by addressing the root cause of the problem (e.g. reducing CO2 emissions in high and middle-income countries) than by focusing only on addressing the downstream consequences in low-income countries.
← 12. The IADB and AfDB charters, for example, have experienced several rounds of amendments to introduce changes such as opening their membership to countries from outside the region (Lichtenstein, 2019[45]). Building on their 75 years of experience, multilateral shareholders have made flexibility a key feature in the design of the AIIB to ensure that the organisation can adapt to changing circumstances and remain relevant over time.