The Global Architecture of Multilateral Development Banks

A System of Debt or Development?

Adrian Robert Bazbauers, Susan Engel

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000361339
• Edition: 1
• Topic: Volkswirtschaftslehre
• Subtopic: Banken & Bankwesen

This book explores the evolution of the 30 functioning multilateral development banks (MDBs). MDBs have their roots in the growing system of international finance and multilateral cooperation, with the first recognisable MDB being proposed by Latin America in financial cooperation with the US in the late 1930s. That Inter-American Bank did not eventuate but was a precursor to the World Bank being negotiated at Bretton Woods in 1944. Since then, a complex network of regional, sub-regional, and specialised development banks has progressively emerged across the globe, including two significant recent entrants established by China and the BRICS.

MDBs arrange loans, credits, and guarantees for investment in member states, generally with the stated aim of fostering economic growth. They operate in both the Global North and South, though there are more MDBs focusing on emerging and developing states. While the World Bank and some of the larger regional banks have been scrutinised, little attention has been paid to the smaller banks or the overall system. This book provides the first study of all 30 MDBs and it evaluates their interrelationships. It analyses the emergence of the MDBs in relation to geopolitics, development paradigms and debt. It includes sections on each of the banks as well as on how MDBs have approached the key sectors of infrastructure, human development, and climate.

This book will be of particular interest to researchers of development finance, global governance, and international political economy.

1 Introduction

When we started this book, our major motivator was to understand the role of the system of multilateral development banks (MDBs) in promoting both debt and development. Despite the 2007–8 Global Financial Crisis (GFC), it was clear that debt was again rapidly building in many countries and that the development paradigm was shifting, partly thanks to Chinese influence. While scholars had written about the impact of some of the MDBs, it seemed odd to us that there was no comprehensive picture or analysis of the MDB system; and in this work, we identify 30 of them. Since commencing the book, COVID-19 emerged, which added a whole new level of urgency to our task because multilateral development finance (MDF) is a major source of finance for many Global South countries in their response to the health, social, and economic consequences of the pandemic. Debt build-up was a global concern prior to COVID-19, with the World Bank calling the build-up in emerging markets and developing economies (EMDEs) between 2010 and 2018, the ‘largest, fastest and most broad-based increase’ in the past half century (Kose et al. 2020, 111). Yet, states around the world, especially the poorest, need additional resources to limit the scale of the pandemic’s human tragedy.

As the saying goes, we have seen this film before, and we know how it ends – with another debt crisis. In just the past four decades, the major crises have been the 1982 Developing World Debt Crisis, 1997 Asian Financial Crisis, and 2007–8 GFC. Of course, history does not repeat itself and each crisis had specific drivers, features, and triggers but all involved a significant debt build-up, unregulated financial ‘innovations,’ and a trigger – often a banking or financial crisis, though this time it may be a virus.

The MDBs were key building blocks of the post-Second World War financial order and they have multiple ways they operate in that system (Culpeper 1997). They:

1. Provide states with increased access to finance;
2. Signal a state’s creditworthiness to private financiers and thus promote the expansion of private sector lending across the globe;
3. ‘De-risk’ projects to bring in private finance;
4. Advocate financial liberalisation by persuasively ‘educating’ policymakers and, when that fails by attaching coercive policy conditionalities to loans;
5. Develop ‘innovative’ (i.e., risky) financial instruments to underpin their loans and encourage EMDEs to utilise them; and
6. Expand debt relations within countries via policy diffusion, loans to governments and financial intermediaries, and projects supporting the financialisation of households.

The MDBs have been players in the handling of each new debt crisis. Yet, the building blocks analogy is problematic because the international financial system does not have a solid foundation. The regulatory regime relies, on the one hand, on inter-state cooperation, which is increasingly hard to achieve, and, on the other hand, on rules for private finance that they have themselves established to suit their own interests. There is no orderly default mechanism for states.

The development banks have shaped thinking about what development means and how to go about it. The World Bank is a leader in this field. Over 25 years ago, George and Sabelli (1994, 5) compared the Bank’s role in development discourse to the medieval Christian church, arguing that it ‘has a doctrine, a rigidly structured hierarchy preaching and imposing this doctrine and a quasi-religious model of self-justification.’ There is still truth in that comparison; core elements of the neoliberal banking doctrine remain, though the Bank has evolved its thinking in a range of areas and understanding the detail is vital. What is less understood is how the 29 other MDBs operate: what are their similarities and differences? It is our hope to shed some light on these questions by exploring the system of MDBs.

MDF is a mechanism through which regional and international organisations arrange loans, credits, and guarantees for investments in countries, generally with the aim of fostering economic growth. The MDBs are a key source of MDF. All MDBs follow the mould of the World Bank, which commenced operations in 1946. Since then, their number and type have flourished. Regional, sub-regional, and specialised MDBs have emerged across the globe. While the flow of MDB creation turned to a trickle in the late 1970s, it did not stop, even in the neoliberal age of the 1980s on, which was seemingly hostile to the public facilitation of capital. Some banks have faced near-catastrophic challenges, but we have found only one MDB not currently operating, though it still exists on paper. So, here are further important questions: why do new MDBs keep getting created and why have they persisted? The two most recent MDBs established in the mid-2010s – the BRICS-led New Development Bank (NDB) and China-led Asian Infrastructure Investment Bank (AIIB) – reignited debate on the MDBs and their role in the global order. And yet there is still no book-length study of the MDB system.

To understand what the MDBs do, one need look no further than their name (Babb 2009, 6): their ownership is multilateral, in contrast to national development finance institutions (DFIs); they focus on development, taking a predominantly economic approach; and, they are banks, mainly providing loans and not grants like some other aid agencies. Most of the MDBs have charters – or Articles of Agreement, as they tend to be called – modelled upon the World Bank. They are organised as shareholding corporations, with the size of their capital bases determining their lending capacity. They originally prioritised lending for infrastructure but have come to work in a range of sectors. Our approach covers all MDBs. We do not make artificial distinctions between those working in the Global North and South as some research has done.

The staff of the World Bank and five regional development banks (RDBs) number over 24,000. If we add in the 24 sub-regional and specialised development banks, that number would be closer to 30,000, which compares to the United Nation’s 44,000 employees but with a narrower field of operations. The MDBs also contract thousands of consultants and indirectly influence tens of thousands of recruits on the projects they fund. In 2018, the 30 MDBs in our study had a total capitalisation of over $1.3 trillion and some $222.7 billion in new lending commitments.¹ Many commentators like to point out that the scale of MDB loans relative to private markets is low (see Ahluwalia et al. 2016). There is some truth in that. According to the International Monetary Fund (IMF), total global public and private debt reached $188 trillion in 2018. Still, the MDBs and other public DFIs ‘are the pin on which the upside down pyramid of investment is crowded in from the rest of the private sector and bilaterals, who are reassured that their risk is controllable because of the presence of IFI capital in a country, sector, project, company or bank. It is the underwriting function’ of MDBs that is vital to bilateral and private finance (Bracking 2009, 54).

Investments can often be beneficial to a state’s development, but debt-based operations are more complicated. Debt is a ‘matter of morality’ (Graeber 2014, 8). Debt predated money but as bullion money became the basis for daily human relations, debt became something else, something unlike any other obligation thanks to the fact that it ‘can be precisely quantified. This allows debts to become simple, cold, and impersonal – which, in turn, allows them to be transferable’ (Graeber 2014, 13). Yet, despite often horrific and violent consequences, debt relations have expanded at an incredible pace since the Second World War and particularly since the financial liberalisation of the 1970s that went along with the rise of neoliberalism. The rapidity with which debt was again pushed on states and people and hailed as the solution to poverty, low growth rates, and even climate adaptation after the GFC was astonishing. Financial innovation and financialisation are again on the rise, with the latter being ‘where the financial sector grows faster, or appropriates a larger share of profits than, manufacturing or trading in goods and services’ (Gabor 2018, 1).

The rest of this chapter is occupied, first, with outlining our somewhat eclectic theoretical framework, which is influenced by both Critical Theory and Constructivism. Our book is deeply informed by our theoretical engagement, but as a text on the entire MDB system we have a lot of material to cover, thus we keep our theoretical musings short. The second part of this chapter defines what we mean by MDF and the MDBs and explains how we have categorised the MDB system. In this process, we outline the structure of the book and the key questions driving it.

1.1 Theorising the MDBs: Critical Theory and Constructivism

The MDBs embody a set of theoretical ideas and their work is framed by sets of beliefs and ideas too. As John Maynard Keynes (1973, 383), the lead theoretical architect of the MDB system, famously put it, even ‘[p]ractical men [and women] who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.’ This book is a collaboration of two scholars of International Relations (IR), or more precisely from the field of International Political Economy (IPE), meaning we have a strong focus on the international level and the intersection of politics and economics. The MDBs are important case studies in this regard. Indeed, there are only a handful of other formal international organisations (IOs) that are as important to this intersection as the MDBs.

While the authors of this book share an overarching IPE framework, we diverge in theoretical approach. Susan Engel adopts a neo-Gramscian/Critical Theory lens and Adrian Robert Bazbauers draws on Constructivism and Organisational Sociology. Both of us have seriously engaged with each other’s approach and we consider there is overlap between the two approaches but equally that theoretical eclecticism is a strength.

The three core tenets broadly uniting Constructivist IR (see Copeland 2006, Park 2018, Wendt 1995) can be explored to reveal commonalities and differences with neo-Gramscian scholarship. First, Constructivism seeks to understand global social relations. While mainstream IR/IPE theories Neo-realism and Neo-liberalism attempt to predict causal outcomes, Constructivism seeks to understand social interactions. The Italian neo-Marxist Antonio Gramsci (1971) does have moments in his writing where he tends to determinism (Anderson 1976), but, as with contemporary neo-Gramscian scholarship, Susan focusses on Gramsci’s historicist mode (Engel 2010). Thus both approaches share a focus on social relations, but a neo-Gramscian account interrogates how elites construct hegemonic power and how working classes might progress positive social change and human well-being (Engel 2010, Rupert 1998).

The second core tenet uniting Constructivism is the view that the world is socially constructed through the social relations of actors sharing intersubjective meanings; ideas, rules, and norms are constitutive and shape actor behaviour appropriate for their fields, a point explored by Adrian in analyses of the World Bank (Bazbauers 2016, 2018, 2019a, 2019b). Gramsci had similar concerns in his analysis of hegemony, focussing on leadership, alliances, and networks as well as ideas and ideology, which not only organise human action and thought but frequently produce a reductionist ‘common sense’ (Gramsci 1971, Simon 1991). Norms, which Constructivists label standards ‘of appropriate behavior for actors with a given identity’ (Finnemore and Sikkink 1998, 891), certainly have much overlap with Gramscian scholarship, although neo-Gramscians contend that this literature lacks sufficient engagement with power and does not give enough attention to the social relations of production (Will...