Reform of the Multilateral Development System: Call for a High-Level Commission

At this weekend’s annual meetings of the International Monetary Fund and the World Bank, and at the upcoming G-20 Summit in November, there will be a lot of discussion on how to reform the governance, operations and funding of these two multilateral development institutions. However, the problems of the IMF and World Bank are only a fraction of the much larger challenge facing the international community.

The multilateral development system is broken. According to estimates from the OECD-DAC, the number of multilateral agencies engaged in providing development support increased from 30 in 1950 to 196 in 1980 and further to 263 in 2008. However, in terms of financial flows of official development assistance (ODA), multilateral development assistance has lost ground relative to bilateral aid flows over the last 30 years. And among multilateral aid agencies, the traditional leaders—the World Bank’s International Development Association (IDA) and the United Nations and its agencies—have faced a reduced share. At the time of its creation in 1960, IDA was the only multilateral soft-loan window. It was set up to bundle the resource flows to poor countries, reaping the benefits of scale, concentration and burden sharing. Today, IDA’s share in multilateral concessional resource flows is below 25 percent and its share in total concessional official aid recorded by the OECD-DAC is only about 5 percent.

While clearly there are benefits from having new donors on the scene—in particular, more money and new ideas—there are also serious drawbacks when a large number of donors crowd in on the limited absorptive capacity of poor recipient countries. Lack of coordination, high transactions costs, and a jungle of different fiduciary and safeguard (environmental, social and legal) requirements contribute to the ineffectiveness of aid flows.

This issue was recognized some years ago by the Paris Declaration on Aid Effectiveness, under which donor and recipient countries committed themselves to improve the effectiveness of aid through pursuit of five principles: ownership, alignment, harmonization, results and mutual accountability. However, implementation of this agenda has turned out to be difficult, especially in regards to effective in-country coordination. In the absence of a transparent and accepted leadership, by either the recipient government or a lead donor, there remains the key issue of how to overcome the coordination challenges that donors face on the ground. In the past, the World Bank, and to a lesser degree the United Nations Development Programme (UNDP), played the lead role in aid coordination in the absence of a strong government capacity; but in recent years, these two institutions have played the leadership role less and less, reflecting their declining roles as key players in the evolving aid architecture.

Of particular concern over the last decade has been the creation of many specialized multilateral funding windows. They have been effective in pursuing a strong results orientation and scaling up of interventions in narrow areas of their mandates, especially in the health sector. They therefore have proven to be attractive to donors. But they also have added a new dimension to the fragmentation process. The global (or “vertical”) funds, with their application of overwhelming financial resources and strong advocacy, have been accused of biasing recipient governments’ priorities in the direction of the particular fund’s objective. Scarce national resources, both financial and managerial, are at risk of being diverted away from important systemic challenges as a result of the vertical funds’ high-powered intervention. Again, a key constraint in assuring a balanced approach toward global development challenges is the fact that the World Bank and UNDP, which have traditionally provided the resources for dealing with the “horizontal” or systemic issues, play a relatively much weaker role today than they did three or four decades ago.

With the current international focus on climate change, new vertical funding mechanisms are being set up, risking a repeat of the problems of vertical funds in the health sector. Especially in the area of funding the costs of adaptation to climate change, separate funding mechanisms would duplicate the capacity of the multilateral development banks (MDBs), in particular the World Bank, since interventions in support of adaptation are in many ways, if not all, identical to traditional development interventions, which traditionally have been the mandate of the MDBs.

But the problem is not only a matter of the rapidly rising number of multilateral agencies. The number of development projects funded by external official sources is on the rise, while their average size is on the decline. The median project size now falls well below $100,000. Multilateral donors follow the general trend, with a three-fold increase in the project numbers (from about 6,000 to about 18,000 over 10 years) and a precipitous drop in median project size. With a rising number of ever-smaller projects, the risks of aid fragmentation, a lack of focus on scaling up development impact, and rising transactions costs are reinforced.

Finally, the effectiveness and legitimacy of the traditional multilateral development organizations have been increasingly called into question. The complexity and costs of their operations have risen with increased burdens of fiduciary and environmental and social safeguard requirements; and their governance structures have not adapted to the rapidly changing global economic conditions.

The time has come for a fundamental reform of the multilateral development architecture. The only international body which can credibly take on this task is the G-20. Therefore the G-20 should set up a high-level commission to review the existing framework of multilateral development institutions and prepare recommendations for their reform. Such a commission would, inter alia, address the following questions:

1. What should be the mandate for multilateral development agencies?
2. What is the appropriate division of labor and resources between multilateral and bilateral aid, and among multilateral agencies?
3. Should existing multilateral organizations be consolidated and/or a moratorium be placed on the creation of new multilateral agencies?
4. What are the right principles for the governance of multilateral agencies that will help ensure their legitimacy in terms of representativeness, effectiveness and accountability?
5. How can the processes and procedures of the multilateral agencies be streamlined and harmonized to minimize their administrative costs and the burdens placed on recipient countries?