Context

• In recent years, the restructuring of Multilateral Development Banks (MDBs) has received increasing attention.
• In his address to the US Congress, the PM of India talked about the relevance of MDBs and the need to reform them.

Multilateralism and The Debate to Reform MDBs

• In international relations, multilateralism refers to an alliance of multiple countries pursuing a common goal.
• It is the most transparent and preferred mode of international cooperation that has been undergoing constant evolution in scope, dimension, and outcomes.
• The current debate on the reforms of MDBs is a subset of the wider debate on the value, content, and scope of multilateralism.
• The joint statement made by the US President and the Indian PM during the later’s US state visit also underscored the need to strengthen and reform the multilateral system to reflect contemporary realities. 

Emergence of Multilateralism and Creation of IMF and World Bank Group (WBG)

• Post WWII, delegates from 44 countries met in Bretton Woods (New Hampshire, US)to agree upon a series of new rules for international cooperation and reconstruction.
• This led to the creation of the IMF and WBG in 1944.
• WBG was responsible for providing financial assistance for the post-war reconstruction and economic development of the less developed countries. The role evolved over the years.
• While the WBG is the oldest and the largest MDB, several other MDBs and regional development banks (RDBs) have emergedover the years.
• Today, there are about 15-16 prominent MDBs and RDBs.

Branches of the WB and Their Functions

• International Bank for Reconstruction and Development (IBRD) which lends to low-and middle-income (LICs and MICs) countries.
• The International Development Association (IDA) that lends to LICs.
• The International Finance Corporation (IFC) that lends to the private sector.
• The Multilateral Investment Guarantee Agency (MIGA) that encourages private companies to invest in foreign countries.
• The International Centre for Settlement of Investment Disputes (ICSID) for dispute settlement.

 Why is there a debate to reform MDBs?

• New Emerging Challenges
  • Over the years, despite far-reaching geopolitical changes, economic crises, and uncertainties, MDBs have remained relevant as credible institutions to support the development of both MICs and LICs.
  • Yet, it is widely believed that these institutions are no longer suited in terms of the resources, cultural ethos, and methods to address the emerging challenges.
  • These new emerging challenges include global public goods, climate change and pandemics.
• Need To Discover New Roles and Methods
  • MDBs are in a complex situation, trapped in their procedures, approach and methods of work and restrained to structural changes.
  • Given their technical knowledge, experience, and credibility in the financial sphere, they need to rediscover their role and methods.
• Need to Broaden the Mandate and Vision
  • The two traditional goals shared by all multilateral institutions have been the elimination of poverty and fostering shared prosperity.
  • We must be conscious that poverty elimination and shared prosperity have remained elusive goals. Shared prosperity at intra and inter-country levels has also worsened in recent times.
  • MDBs need to broaden the mandate and vision to address the challenges of transboundary issues and the opportunities connected with climate change.
  • We need a symbiosis of the two visions with these added dimensionsandeach of these requires different modes of financing and methods of work.
• Need to Change the Current Operating Model
  • There is also a need for creating an incentivestructure and bring changes to the current operating model of the MDBs.
  • MDBs must work in close coordination with each other.
  • Broad and deep changes are required to significantly strengthen performance, such as realistic return targets and risk management.

Broadening the MDBs Mandate and Vision Along with Tradition Priorities

• The need for matching the ability of MDBs to finance these larger goals without reducing development financing is central to the issue.
• While broadening the mandate of MDBs is imperative, it should not be at the cost of available funding for traditional priorities – addressing poverty and inequality – as they remain dominant concerns in LICs and even emerging economies, including India. 
• In this context, the Expert Group of G20 is calibrating different options, to ensure that concessional finance targeted towards LICs, is not compromised. 

How to secure credible sources of finance to meet these enhanced challenges? 

• The MDBs need to optimise their current balance sheets to create higher leverage from existing funds and to attract private capital.
• They need to fix annual targets and judge performances by the outcomes secured in this altered framework of accountability.

Need to Mobilise Private Capital and the Role of MDBs

• The current system has failed to raise sufficient private finance.
• On the demand side, there are concerns of moral hazards associated with private capital.
• On the supply side, private capital is not immune to risks such as those associated with foreign exchange. Many projects, therefore, do not move forward because either the risk is too high or the return too low.
• De-risking approaches such as blended finance and guarantees aimed at tilting the balance do exist. However, they imply a more intensive recourse to public and donor support.
• Concerns about unlocking private sector investments using public resources inevitably arise.
• Therefore, financial channels for capital mobilisation need to be strengthened.
• MDBs have a central role to play in securing the scale and affordability of finance and private capital can meet the largest share of the $1 trillion in external finance needed by 2030.

Importance of Reforming MDBs under India’s G20 Presidency

• For India, reforming MDBs would mean advocating the voice of the Global South.
• It is the first attempt to give consistency to a variety of initiatives and efforts aimed at bolstering the MDBs.
• The Expert Group of G20 is expected to take a holistic approach on a wide range of issues and outline a pragmatic implementable programme.
• The Expert Group proposes to submit two reports.
  • The first focuses on issues of vision, financial capacity, and modalities of funding the MDBs.
  • The second deals with issues related to harnessing private capital, risk mitigation, optimally using guarantees to leverage private capital and hybrid innovative financing.

Way Forward

• Deeper integration with multiple stakeholders is crucial for reforming MDBs.
• They must serve all clients, low-income and middle-income alike.
• MDBs must play a much more purposive and proactive role in helping countries identify, enable, and foster green investments, moving beyond a project-by-project approach to support system change. 
• These banks must address the challenges of climate change and developmental aspirations of the Global South.

Conclusion

• Making MDBs more relevant for addressing 21st-century challenges would contribute towards enhancing human welfare.
• If MDBs do not respond to these new challenges, they will become increasingly irrelevant and be substituted by other forms of cooperation.