Policy Brief: Securing the Future of Multilateral Development Finance: Time for Europe to take the Initiative

The governance structures of multilateral development banks are out of step with economic and political realities. Multilateral development finance is critical for achieving development objectives, including the post-2015 sustainable development goals. Yet many of the ‘old’ multilateral institutions are under strain. Many traditional donors are unwilling and unable to increase funding in the context of budget constraints. Meanwhile, rising powers are not stepping up their support in line with their rapid economic growth. Instead they have promoted new competing institutions, the BRICS’ New Development Bank and the Asian Infrastructure Investment Bank. 

This preference reflects well-justified concerns about the governance of traditional development banks. Yet there is therefore a danger that soft finance from the multilateral development system will atrophy. While increased competition in the area of less-concessional lending is not itself unwelcome, there are concerns that it could easily lead to undue weakening of safeguards designed to protect sustainability and fairness. A mutual learning approach between traditional and new institutions is much to be preferred to political gaming on either side. 

Europe in particular has an opportunity and responsibility to live up to its long-standing support of multilateral development assistance in ways that will increase the banks’ legitimacy and gain buy-in from the rising powers. 

European countries should: 

• Signal support for initiatives that would allow rising powers to increase their shares and votes in the traditional development banks in line with their growing economic weight, accepting reductions in relative European shares. 
• Radically consolidate the currently fragmented and excessive number of European Chairs. 

Rising powers, as the major shareholders of new development banks, need to signal their support for cooperation by taking seriously the importance of appropriate ‘safeguards’ in new institutions that they are bringing into operation. 

Rising powers should: 

• Ensure that new banks use appropriate, evidence-based, technical, economic, institutional, environmental and social appraisal to ensure loans support sustainable development. 

Development banks, old and new, should: 

• Give priority to mutual lesson learning about approaches which improve their value to the sustainable development of their borrowers.