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What should the multilateral development banks do?
Their name suggests that the multilateral development banks (MDBs) should
provide finance for investments in human and physical capital that promote
development. The interpretation of this broad mandate, however, has changed
significantly over time. One reassessment occurred when the European Bank for
Reconstruction and Development was established following the fall of the
Berlin Wall and given a mandate to foster the transition to a market economy
by investing primarily in private sector projects. Another is ongoing with the
strong focus on achieving the international development goals to reduce
extreme poverty to one-half its 1990 level by 2015. This paper assesses the
role of MDBs in fostering development or transition through the institutional
mechanisms that the MDBs possess for the selection, monitoring and enforcement
of loans and other financing agreements and through the use of subsidies that
they receive from their shareholders and other sources. We conclude that a
useful direction for MDB reform is to exploit more effectively the potential
complementarities between the public and private sector financing operations.
We disagree with the view that the MDBs should become at least in part fiscal
agencies for the allocation of grants either for the purpose of international
redistribution or for the financing of international public goods.
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