MULTILATERAL DEVELOPMENT BANK (MDB)
1. Context
In their joint statement, President Joe Biden and PM Modi underscored the need to strengthen and reform the multilateral system to reflect contemporary realities. Therefore, it was logical that under India’s G20 presidency, the Expert Group on Strengthening MDBs comprised finance ministers and central bank governors
Depending on the context, the term evokes mixed responses. The current debate on the reforms of multilateral development banks (MDBs) is a subset of the wider debate on the value, content and scope of multilateralism
2. What is a Multilateral development bank?
A multilateral development bank (MDB) is an international financial institution chartered by two or more countries for the purpose of encouraging economic development in poorer nations.
Multilateral development banks consist of member nations from developed and developing countries
MDBs provide loans and grants to member nations to fund projects that support social and economic development, such as the building of new roads or providing clean water to communities
3. History of International financial institutions
- At the end of WWII, delegates from 44 countries met in Bretton Woods 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)
- The latter was responsible for providing financial assistance for the post-war reconstruction and economic development of the less developed countries
- The role evolved over the years and as of date, the WBG comprises the International Bank for Reconstruction and Development (IBRD) which lends to low-and middle-income (LICs and MICs) countries, the International Development Association (IDA) that lends to LICs, the International Finance Corporation (IFC) that lends to the private sector, the Multilateral Investment Guarantee Agency (MIGA) that encourages private companies to invest in foreign countries and the International Centre for Settlement of Investment Disputes (ICSID) for dispute settlement
- While the WBG is the oldest and the largest MDB, over the years, several other MDBs and regional development banks (RDBs) have emerged. Today, there are about 15-16 prominent MDBs and RDBs
- Over the years, notwithstanding far-reaching geopolitical changes, economic crises and uncertainties, MDBs have remained relevant as credible institutions to support the development of both MICs and LICs
- Yet, it is widely believed that these institutions are no longer suited in terms of the resources, cultural ethos and methods to address the emerging challenges
4. Types of Multilateral development banks
- There are two main forms of multilateral development banks. The first, which includes the largest and best-known institutions, makes loans and grants
- These banks often distinguish between poorer, borrowing members and wealthier, non-borrowing members
- Examples include the World Bank, founded in 1945, and the Inter-American Development Bank (IDB), founded in 1959
- The second type of multilateral development bank is formed by governments of low-income countries that can then borrow collectively via the MDB in order to secure more favorable rates
- The Caribbean Development Bank (CDB), founded in 1969, is an example of this type
5. Way forward
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. We need to act with agility and speed
Source: Indianexpress, investopedia
