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Reforming Multilateral Development Banks

GS Paper 2

 Syllabus: Important International Institutions, agencies and fora – their Structure, Mandate

 

Source: IE

 Context: In his address to the US Congress, the Indian PM talked about the relevance of Multilateral Development Banks (MDBs) and the need to reform them.

 

The emergence of MDBs:

  • At the end of WWII, delegates from 44 countries met in Bretton Woods (US) to agree upon a series of new rules for international cooperation and reconstruction.
  • This led to the creation of the IMF and World Bank Group (WBG) in 1944.
  • The latter was responsible for providing financial assistance for the post-war reconstruction and economic development of the less developed countries.
  • While the WBG is the oldest and the largest MDB, there are ~15-16 prominent MDBs and Regional development banks (RDBs) today.

 

Relevance of MDBs:

  • Credible institutions to support the development of both MICs and LICs amid far-reaching geopolitical changes, economic crises and uncertainties.
  • The two traditional goals shared by all multilateral institutions have been the elimination of poverty and fostering of shared prosperity.

 

Challenges faced by MDBs:

  • No longer suited in terms of the resources, cultural ethos and methods to address the emerging challenges – global public goods, climate change and pandemics.
  • MDBs are in a state of stagnation, trapped in their procedures, approach and methods of work and resistant to structural changes.

 

Reforming MDBs:

  • In recent years, the restructuring of MDBs (to reflect contemporary realities) has received increasing attention.
  • The current debate on the reforms of MDBs is a subset of the wider debate on the value, content and scope of multilateralism.
    • Multilateralism refers to an alliance of multiple countries pursuing a common goal.
    • It is the most transparent and preferred mode of international cooperation and is based on founding principles such as consultation, inclusion and solidarity.

 

Need to reform MDBs:

  • To broaden the mandate and vision: To address the challenges of transboundary issues and the opportunities connected with climate change.
  • To expand the need for finance and the sources of finance: The WBG estimates that the average annual spending needed to address global challenges of climate change, conflict, and pandemics is $2.4 trillion per year between 2023 and 2030.
  • To mobilise private capital: The current system has failed to raise sufficient private finance.
    • On the demand side, there are concerns about moral hazards associated with private capital.
    • On the supply side, private capital is not immune to risks – such as those associated with foreign exchange.
  • For India, reforming MDBs would mean advocating the voice of the Global South.

 

Way ahead:

  • Expert Group on Strengthening MDBs: Under India’s G20 presidency, 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, hybrid innovative financing, etc.
  • Enhancing the lending capacities of multilateral institutions by optimising their current balance sheets to attract private capital.
  • Creating an incentive structure and bringing changes to the current operating model of the MDBs.

 

Conclusion:

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