MDBs have had a leading role in supporting developing countries and in setting the global development agenda. However, since the financial crisis in 2008–09, the global economic and social situation has weakened considerably as new global challenges arose—climate change, the pandemic, new technologies—placing new pressures on development agencies to maintain their relevance and effectiveness. Responses to future global crises must be collaborative and coordinated, which the MDBs are well designed to do but still have limited experience.
PBOs in their various forms present MDBs with a versatile instrument for financing or cofinancing that can help facilitate collaboration and coordinated responses. PBOs provide predictable, low-cost financial support for LICs, and they provide countercyclical financing during economic crises offsetting private financial downswings. Together these fill gaps in access to financial markets at more favorable costs, while adding support for institutional reform and sometimes helping to catalyze private investment flows.
Complementary private investment and direct support for public goods, both local and global, will be increasingly necessary in the future, as will increased innovation that is inclusive and builds human capital and labor mobility to respond with agility to shifting needs. Investments with large externalities—pandemic relief, adapting to climate change, preventing natural disasters—will be more urgent and require more resources in the interest of both developing countries and rich countries. These need to be envisioned and integrated as central tasks of the development banks, in coordination with the IMF.20
The international agency response to the economic shock of the COVID-19 pandemic has not yet been independently evaluated.21
Based on preliminary information, some MDBs responded differently to the turbulence caused by the pandemic than they did during the global financial crisis of 2008–09. Moreover, the G-20 did not call for an increase in capital for the MDBs, as it had done in response to the 2008–09 crisis. The extent of the MDBs’ responses has been limited by their capital constraints.22
While some MDBs, including ADB and AfDB, have prioritized infrastructure financing, their programs have focused on middle-income countries. The World Bank and IDB have prioritized social spending (health, education, and social protection), much of it through PBOs, as well as conditional cash transfers and Program-for-Results (PforR at the World Bank). Based on lessons learned and emerging challenges, the MDBs need to reprioritize portfolio allocation to substantially expand support for sustainable infrastructure to low-income and fragile and post-conflict countries. While the MDBs have increased their support for climate change mitigation and adaptation and clean energy, the scale of financing is still far from meeting the $100 billion annual commitment set under the Paris Agreement.23
Continuing cooperation and coordination of support to developing countries on global challenges, such as climate change and pandemics, will be crucial. Coordination should cover lending, technical assistance, research, and analytical work among MDBs, the European Union, and the IMF (and between them and national development banks). Despite its importance, no systematic evaluation of cooperation or coordination has been conducted. Greater cooperation and coordination among MDBs will likely result in more efficient operations and in scaling up their financial support.
Support for capacity building and institutional reforms, as well as humanitarian assistance, for fragile and conflict-affected states (FCSs) will also benefit from greater coordination. While ADB has not widely used PBOs in FCS countries (but has in small islands countries), AfDB, the EU, and World Bank have.24
Their experience, based on recently conducted evaluation results, will be valuable.
Evaluation evidence offers eight takeaways and propositions that should inform future PBOs:
- MDBs are expected to continue using PBOs as a countercyclical instrument during crises, such as the COVID-19 pandemic and the food and fuel crisis caused by the Russian Federation’s invasion of Ukraine, to mitigate the adverse effects on developing economies and their growth prospects.
- Consecutive crises and their prolonged aftereffects are likely to reduce MDB’s lending capacity and their ability to respond.
- Economic recovery needs to be supported by policies aligned with the SDGs and aligned with the investment goals of developing countries, to the extent possible, to help their economies recover; to bring poverty reduction back on track; and support greater resilience to future pandemics, climate change, and financial crises.
- MDBs can operate more as an interconnected and cooperative financial and development system, including in operational knowledge creation and policy research and analytical work. The complementarity of their activities is important, given the complexity of issues and the diversity of regional priorities and clients.
- Given the urgency of development challenges facing both emerging economies and LICs, the MDBs should prioritize collaboration with other relevant global funds, financing efforts to adapt to and mitigate climate change, respond to pandemics, and conduct research, and analytical work on key issues concerning regional and global public goods.
- MDBs to enhance their deployment of guarantees and other credit enhancements to mobilize private funds (through policy-based guarantees and de-risking through blended finance, for example). Common definitions and methodologies will be critical for improving coordination and collaboration and reducing confusion and duplication of effort.
- MDBs need to consider the implications of the G-20-sponsored independent review of their capital adequacy and the recommendations for increasing their lending headroom, which may affect their leverage ratios and credit ratings.
- All MDBs need to evaluate their response to the recent crisis through their use of the PBO instrument. Evaluation departments should together explore new and different ways of assessing PBL. Work in this area has not progressed much since the development of the “three-step approach” by OECD.25
New work in this area could be undertaken jointly by MDBs’ evaluation departments and the OECD.
- 20
As recommended by the G-20 report of 2017. See https://www.imf.org/external/np/g20/pdf/2018/082918.pdf. - 21
Independent evaluations are under way in some MDBs, such as ADB https://www.adb.org/sites/default/files/evaluation-document/652326/files/eap-rte-adb-response-covid-19-pandemic.pdf; and the World Bank https://ieg.worldbankgroup.org/sites/default/files/Data/reports/ap_covid19economicimplications.pdf. An early assessment of the response by ADB was undertaken by the Center for Global Development https://www.cgdev.org/sites/default/files/how-effectively-asian-development-bank-responding-covid-19-early-assessment.pdf - 22
The World Bank was recapitalized in 2018 and AfDB in 2019, leaving them in a stronger position to respond than other MDBs (the most recent capital increase for ADB was in 2009 and for IDB in 2010). The continuing impacts of COVID-19 and the massive shock of the Russian invasion of Ukraine in 2022 suggests that demand for large PBOs remains very high. - 23
Under the Paris Agreement, MDBs pledged to mobilize $100 billion a year from advanced countries by 2020 to support developing countries’ adaptation to climate change and mitigation of further rises in temperature. - 24
Jeff Chelsky and Mees van der Werf. 2022. A closer look at World Bank Development Policy Financing in fragile states: Revaluating what “good” looks like in volatile and uncertain situations to promote more informed risk-taking. March 9. https://ieg.worldbankgroup.org/blog/closer-look-world-bank-development-policy-financing-fragile-states - 25
Step one is assessment of the inputs, direct outputs, and induced outputs of budget support (levels 1, 2, and 3 of the Comprehensive Evaluation Framework (CEF), including analysis of the causal relations between these three levels. Step two is assessment of the outcomes and impact of the government’s policies, strategies, and spending actions that donors supported and promoted with budget support, and identification of the main determining factors of those outcomes and impact (levels 4 and 5 of the CEF), through policy impact evaluation techniques. Step three explores the contribution of budget support to the government’s policies, strategies, and spending actions, which have produced the outcomes and impact identified in step two, to be carried out by combining and comparing the results of steps one and two. See OECD. 2012. Evaluating Budget Support. Paris.