Do As I Say Not As I Do: A Critique Of G-7 Proposals On Reforming The Multilateral Development Banks

The paper addresses three key issues raised by the G-7 in its proposals in 2001 to reform the multilateral development banks: (i) the restructuring of the International Development Association (IDA), with a part of its lending in the form of grants rather than loans; (ii) the harmonization of procedures, policies and overlapping mandates among multilateral development banks (MDBs;) and (iii) the volume of support by MDBs for global public goods (GPGs) and the rankings and priorities among them. The paper argues that while in principle shifting a fraction of IDA´s resources to grants can address some of the problems associated with loans, these gains are limited. At the same time it poses long-term political risks for the World Bank. Moreover, the paper cautions that the more fundamental problem with IDA is the manner in which the IDA Deputies - the representatives of the donor countries - have been making policy decisions relating not just to IDA but also to the institution as a whole. The result has been a creeping constitutional coup that has fundamentally subverted the role of the Executive Board in the institution´s governance. The paper also questions whether developing countries in their quest for a larger IDA may not be sacrificing their larger interests in the global system. With regard to GPGs, the paper questions the degree to which the Bank´s research contributes to GPGs. It argues that there is little analytical and empirical evidence that the G-7´s priorities for GPGs would maximize the well-being of the poor relative to a host of notional alternatives. With regard to the harmonization of procedures and policies among the MDBs, the paper supports the harmonization of procedures, especially those related to procurement and financial reporting, while arguing that harmonization of policies and overlapping of jurisdictions should not be formalized. The paper further argues that increasingly stringent compliance standards of the international financial institutions are imposing high financial and opportunity costs on their borrowers. It is easy for the major shareholders to insist on standards whose costs they do not bear. The most inimical aspect of this pressure is that it has forced the Bank to shift lending towards sectors where it has little comparative advantage and away from the very sectors where it does have comparative advantage.