Global Policy Forum

By Sree Kumar

The World Bank was born out of a necessity to rebuild the destroyed economies of Western Europe after World War II. Together with the International Monetary Fund (IMF), it was set up to nurse the global economy back to health.

The Bank refocused its attention on development in the Third World once its role in Europe came to an end. Subsequently, several other multilateral development institutions came into being -- the Inter-American Development Bank, the Asian Development Bank and the African Development Bank. Member governments, with voting rights in proportion to their financial commitment, funded the capital of these institutions. This has inevitably meant that governments with the largest contributions have dictated institutional policy.

The US government has been an important contributor in these institutions and in the Asian Development Bank, the US and Japan are the major providers. These institutions lend at both market as well as concessionary rates. However, in both cases, the lending horizon and repayment terms are highly generous compared with commercial practices. And it is this capability that differentiates these institutions from commercial banks. The mechanics of lending is based on the ability to raise funds through bond issuances, or from money markets, backed by the sovereign guarantees of the shareholders. In effect, then, these institutions have triple A ratings because there is no perceived risk of default.

This comparative advantage has allowed these multilateral institutions to lend to governments for public infrastructure from the early years. The long gestation periods of many of these projects also allowed inefficiencies to be masked. As a result, these organisations built large bureaucracies, made worse by conditions such as staff quotas in proportion to the contribution by each country.

The theatre of lending to developing countries, however, is changing. Commercial banks have also begun to lend to governments for projects which are financially feasible. The trend towards privatisation and the private provision of public services has meant that commercial financial institutions can now muscle in on areas traditionally occupied by multilateral agencies.

It is in these circumstances that the multilateral institutions seem to be seeking a new raison d'etre, poverty alleviation and sustainable development. Both these areas, they believe, are outside the ambit of commercial institutions. But they need not be so since the multilateral institutions continue to seek and fund public infrastructure as the basis for poverty alleviation or sustainable development. This is sophistry at its best.

There is also no reason to believe that these institutions are better at pricing risk than their commercial counterparts. The reason for this state of affairs is the asymmetry of information between developing country governments and financial institutions.

Developing countries continue to believe that only the multilateral institutions have the capacity to fund public infrastructure, while commercial financial institutions have shied away from inept, and often corrupt, governments. This has left the multilateral institutions to continue to monopolise the market.

Do these multilateral institutions still have the comparative advantage that they had at the beginning of their lives? Not if the commercial institutions begin to see through the fog of contrived measures for poverty alleviation or sustainable development. The ability of commercial institutions to reduce their cost of funds through active treasury and money market operations, improve their pricing margins through efficiency gains, and apply sophisticated risk-management techniques can place them on a more aggressive platform to compete with multilateral institutions. It also requires a rethink of what poverty alleviation and sustainable development really mean in practice, and a move to force a level playing field by reducing information asymmetries. There cannot be a strong rationale for retaining the monopoly, and inefficiency, of these multilateral institutions in a more enlightened political environment.

The writer is a development economist and partner in a consulting firm.

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