An Independent Expert Group (IEG), comprising economics stalwarts under the auspices of the India G20 Presidency, has called upon the Multilateral Development Banks (MDB) to transform themselves with a Triple Agenda "to address the immense global challenges in today's world". The technocratic rationale for adding global public goods to the twin goals (ending extreme poverty, shared prosperity) is beyond debate. However, if the delivery mechanisms are blind sighted, as they seem to be, to the salient obstructions to poverty reduction and shared prosperity, we may see replay of the same song and dance without any cigar.
The globe is well behind all the sustainable development goals (SDGs). External support for SDGs is pathetically off track. Gross disbursements by the Multilateral Development Banks (MDBs) relative to GDP are down to half as large as they were in 1990. Large amounts of external assistance went into propping up ineffective institutions and obscuring dysfunctional policies. MDBs as a system are shrinking at a time when an estimated additional of some $3 trillion per year in SDG spending is needed by 2030.
The global financial crisis in 2008-09, the pandemic, supply disruptions, hot war, cold war and the early arrival of climate change are fertilising reconsideration of the role of development assistance in keeping the world safe from systemic risks and hazards. The New Delhi Leaders' Declaration last weekend agreed on the need for bigger and more effective MDBs and boosting their financing capacity without endorsing the expert group report on MDB reforms.
The IEG will meet in person in Delhi in the third week of September to finalise its second report. This will be submitted to the fourth Finance Ministers and Central Bank Governors' meeting on the sidelines of the annual meetings of the International Monetary Fund and World Bank in Morocco's Marrakesh in mid-October.
Get support rolling
IEG estimates the international development finance system can provide $500 billion annually, one-third in concessional non-debt-creating financing and two-thirds in the form of non-concessional official lending. If the MDBs add 0.4 to the current 0.6 dollars in private capital for each dollar they lend on their own account, the additional external financing package could double to $1 trillion per year. The rest $2 trillion must come from domestic resource mobilisation.
Uplifting a scale of this magnitude is not possible without stronger collective action at the global level. The IEG has recommended a three-some package for MDBs. Their mission must have a third dimension – contributing to global public goods. Their sustainable lending levels must triple by 2030. Investors willing to support elements of the MDB agenda can be a third funding mechanism complementing grants and loans.
The MDBs have to carry the load by concurrently reforming themselves as they leaven lending, knowledge, and policy advice. Investments by MDB clients cannot wait. The scaling up process itself should drive internal operational reform. MDBs will need to do a lot better in integrating the agenda for development and preservation of this planet by reducing, sharing and managing risks.
Global public goods
The report conceives Global Public Goods (GPG) broadly, focusing especially on climate change, biodiversity, the global water cycle, pandemic preparedness and response. These go hand in hand with addressing conflict and food, energy, and cyber fragilities. IEG may have nailed the collective actions needed at the global level to boost GPG provision but looks critically short on nipping the problem in the bud. Consider the following:
"We are, nevertheless, convinced that at this time there is an urgent need to strengthen the impact and the volumes of the system of international development finance as a necessary, albeit insufficient, step."
A sufficient step in their view is to improve alignment of domestic budgetary revenues and expenditures towards SDG and climate goals. MDBs can combine finance, knowledge, technical assistance, and policy advice to ensure that national investment programs are properly developed, impactful and scalable. One might assume they would like governments to be accountable for these investment programmes. But they are short on recommending measures such as adhering to the International Public Sector Accounting Standards (IPSAS). Only New Zealand uses the IPSAS as the basis for its financial-management system.
The question they do not address is why this mixture of services they have been providing for decades has not produced the desired fiscal alignment with development and protection of the earth. Underfunding is at best only a naively narrated part of the answer. The report alludes to factors that will determine the appropriate pace of transition, underlining access to and affordability of domestic and external finance, and the capacity to program and implement effective investments. "Success depends on the collective willingness of all countries to move speedily in a new direction". Fine and dandy!
The leaky bucket problem
There is an abundance of financial engineering gymnastics and institutional naiveté all over the IEG report. It wants to leverage financing sustainable development without mentioning the word "corruption" even once in some 70 pages of text. The word "accountability" makes three appearances:
First, "MDBs must respond…in a context of growing demands for transparency, delivery of results, and heightened accountability" (p.45); second, "G20 members include MDB system collaboration in their evaluation and accountability of the leadership team of each MDB where they are shareholders" (p.48); and last as well as the least in the "Accountability and Timeline" column of Annex 6 listing financial and operational policy recommendations for the MDBs.
Why is addressing corruption not a GPG? Reducing corruption would generate positive spillovers for everyone in the world. These benefits could be enjoyed by anyone without being diminished by others' consumption. Corruption is a public bad such as Green House Gas emitted from the interaction of state and markets. The development impact of the proposed $1 trillion of additional financial assistance will depend critically on the bite corruption takes in the process of getting the money used for the intended purposes. It has been no small bite historically.
MDBs have long recognised that corruption is a global problem. Recent estimates from various sources provide evidence on the size of this global public bad. According to the World Economic Forum, corruption, bribery, theft, tax evasion, and other illicit financial flows cost developing countries $1.26 trillion per year. The World Bank estimates more than $1 trillion are paid in bribes each year in the global economy. High-level corruption hides overseas $20-$40 billion every year from public budgets in developing countries.
The G20 Leaders' Declaration reaffirms the importance of carrying out major infrastructure projects, especially in Africa. The IMF estimates that on average one third of infrastructure investment globally is lost through some combination of mismanagement, inefficiency, and corruption. How will governments clamp down on financial flows escaping tax systems if the global leaders refuse to read the writing on the wall?
A battle not worth picking?
The reform agenda for reducing corruption is yawningly long and wishful. These include improving the rule of law, increasing accountability of public institutions, using digital tools, enhancing market competition, empowering the civil society and the media to monitor and expose corruption and connecting the voice of citizens. All these without transforming the "rules of the game". They are easier said than done precisely because they ignore the rules of the game. Nations are stuck in the same kind of bad equilibrium (case in point: tax havens) as individuals and groups within nations. Global collective action can change this bad equilibrium.
While recognizing the need for global solutions, MDBs moved away from the unrealistic zero tolerance to strategic ambiguity on corruption under the guise of focusing on, to use Dani Rodrik's coinage, "governance writ small." Targeting "binding constraints" on growth became the buzz. The MDBs best-practice models of removing successive binding constraints (supply incentives in agriculture through land reforms, infrastructure, credit, skills, policy liberalisation, privatisation, decentralisation and so on) had the unintended consequence of short selling their mandate.
While zero tolerance is devoid of reality, looking the other way is a self-defeating assortment of Ostrich solutions. The playbook for unlocking binding constraints must include corruption so it gets a chance to be targeted for containment if not annihilation. The empirical evidence on the relationship between economic growth and corruption is not exact, but the general patterns observed from a vast and growing literature is a negative, nonlinear, and statistically significant relationship. The magnitude of the effect is contingent on historic and institutional factors.
Don't lose from the start
Development finance doled through corrupt systems is akin to trusting tigers to rear livestock. In an age of new disruptive technologies, rising inequalities, and globalisation, the specific conditions in which integrity can thrive is likely to narrow. The last two decades have provided conclusive evidence that technology can undermine institutions of accountability and empower elites to control their populations, as documented by Daron Acemoglu and many others.
The green transition may not be a clean transition, efforts to reduce extreme poverty may be impoverished, and shared prosperity may concentrate wealth shares if the triple agenda is pursued on the assumption that it can be ringfenced from corruption. Success may get a chance if a conscious effort is made to move beyond the superficial and consider the underlying drivers of behaviour drawing on the perspective not only of government but also the private sector and the intended users of public services.