Multilateral development banks must evolve to meet urgent need for climate finance and fund other public goods

These banks are the only institutions that provide the combination of expertise, staying power, low-cost financing, leverage and knowledge-sharing capabilities needed to assist developing countries. But to help transform these countries’ future, these banks must first transform themselves

Lawrence H. SummersandN.K. Singh

Published: 4:30pm, 25 Jul 2023

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The world is on fire this summer. Experts estimate that another Covid-level public health threat is likely to emerge in the next generation. Rising interest rates have left dozens of countries with unmanageable debt burdens. And for the first time in nearly half a century, the global economy is fracturing rather than coming together.

These realities shaped the recommendations that we have just made to the Group of 20 through a special expert group on development financing, which we co-chair. Our central conclusion is that this uniquely challenging moment requires a dramatic transformation of the operations of the multilateral development banks, starting with the World Bank.

Even as developing countries face much larger financing needs to meet development and climate goals, multilateral development banks’ disbursements have not kept pace. The degree to which they now transfer resources to developing countries is unacceptably low.

While most institutions, most of the time, aim for a gradual strengthening of their scale and effectiveness, multilateral development banks have been stuck in place. We must move past sterile debates about whether we need more money or better policy, more green initiatives or more development spending, more public-sector programmes or more private lending, more leverage or more capital. The language of “both/and” must replace that of “either/or.” To that end, we are calling for action on three fronts.

First, multilateral development banks should embrace a triple mandate by adding global public goods to their current goals of eliminating extreme poverty and boosting shared prosperity. That will mean fleshing out the policies and procedures needed to integrate their climate and development agendas.

By clarifying and formally committing to these objectives, these banks can better design and execute programmes to address global public goods – such as climate mitigation and adaptation, biodiversity, water security and pandemic preparedness – rapidly and at scale.

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Second, stakeholders should provide multilateral development banks with the requisite resources. By our calculations, sustainable lending levels at these banks need to triple by 2030, rising to about US$400 billion annually. This includes grants and concessional finance for the poorest countries, non-concessional funding for creditworthy middle-income countries and resources for mobilising private finance.

A top priority is to persuade donors to provide an additional US$30 billion per year in grants and concessional funding for low-income countries. That would allow for a threefold increase in the International Development Association’s funding by 2030, which is essential for helping low-income countries fulfil their development goals, manage global shocks and pursue strong adaptation and resilience plans within sustainable debt frameworks.

It would also alleviate low-income countries’ concerns that an expanded mandate for multilateral development banks would come at the expense of the support they need to pursue economic and human development.

Turning to middle-income countries, about half of the amount needed to support a tripling of lending levels can be generated by the multilateral development banks themselves through more efficient use of existing capital. But the other half will require a new round of general capital increases.

Fortunately, this mechanism requires that donors pay in only a few cents on the dollar, offering excellent value for money. Every donor dollar could yield US$7 in new sovereign lending and another US$8 in the direct and indirect mobilisation of private capital.

But even with a major increase in multilateral development bank lending, official assistance will fall far short of what is needed. Private capital must fill the gap. The good news is that most of these banks have departments designed to catalyse private finance in a range of sectors, including energy, health, agriculture, financial inclusion and infrastructure.

The bad news is that their track record has been disappointing: on average, multilateral development banks leverage only 60 cents of private capital for every dollar they commit, well below their potential. Their collective direct and indirect mobilisation of private finance has been stuck at US$60 billion to US$70 billion per year.

Contrast that sum with the half-trillion dollars needed from the private sector to help close financing gaps. MDBs should aim at least to double their mobilisation and commitment ratios by addressing key challenges such as local-currency risk, policy and regulatory risk, a lack of bankable projects and insufficient risk capital. Above all, stronger risk appetites at the MDBs will be key to success.

Premier Li Qiang attends a working session with French Prime Minister Elisabeth Borne in Paris on June 22. The aim of the climate and finance summit in Paris was to set up concrete measures to help poor and developing countries better tackle issues such as poverty and climate change. Photo: AP

Third, a coalition of funders, including governments, philanthropies and the private sector, should establish a new “global challenges mechanism” that offers a range of financing options, such as guarantees, equity and other risk-sharing instruments. This is needed to address a pervasive shortcoming for multilateral development banks: the underuse of non-lending instruments like guarantees for sovereign and non-sovereign borrowers. Such tools have become especially relevant in today’s volatile economic climate.

The multilateral development banks are the right vehicles for supporting our planet and its people. They alone provide the necessary combination of expertise, staying power, low-cost financing, leverage and knowledge-sharing capabilities. But to help transform the future for developing countries, they must first transform themselves. That means embracing a wholesale culture of change to become more client-responsive and to operate better together, including through joint financing, risk-sharing and standard-setting.

We recognise that implementing our proposed agenda demands strong political leadership and the ability to stay the course. But we would point out that there is no other choice. The future of our planet and its people is at stake.

Lawrence H. Summers was chief economist of the World Bank (1991-93), US secretary of the Treasury (1999-2001), director of the US National Economic Council (2009-10), and president of Harvard University (2001-06), where he is currently University Professor

N.K. Singh, chairman of India’s Fifteenth Finance Commission, is president of the Institute of Economic Growth, a former member of parliament, and former secretary to Prime Minister Narendra Modi

Copyright: Project Syndicate

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