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Wednesday, April 14, 2010

Multilateral Development Banks: Overview and Issues for Congress

Rebecca M. Nelson
Analyst in International Trade and Finance

Overview: The multilateral development banks (MDBs) include the World Bank and four smaller regional development banks: the African Development Bank (AfDB), the Asian Development Bank (AsDB), the European Bank for Reconstruction and Development (EBRD), and the Inter- American Development Bank (IDB). The United States is a member of each of the MDBs. The MDBs provide financial assistance to developing countries to promote economic and social development. They primarily fund large infrastructure and other development projects and, increasingly, provide loans tied to policy reforms by the government. Most of the MDBs have two facilities from which they make loans (loan windows): a non-concessional lending window that provides loans to middle-income countries at market-based interest rates, and a concessional lending window that provides loans at below-market interest rates and grants to low-income countries. 

Debate over the effectiveness of MDB financial assistance is contentious. Critics argue that the MDBs focus on "getting money out the door" (rather than delivering results in developing countries), are not transparent, and lack a clear division of labor. They also argue that providing aid multilaterally relinquishes U.S. control over where and how the money is spent. Proponents argue that providing aid to poor countries is the "right" thing to do and has been successful in helping developing countries make strides in health and education over the past four decades. They also argue that providing foreign aid to the MDBs is important for leveraging funds from other donors, tying policy reforms to financial assistance, and enhancing U.S. leadership. Most U.S. aid for economic and social development is provided directly to projects and programs in developing countries (bilateral aid) rather than to multilateral organizations, like the MDBs (multilateral aid). 

Issues for Congress:
Congressional legislation is required for U.S. financial contributions to the MDBs. Replenishments of the concessional windows occur regularly; capital increases for the non-concessional windows happen more infrequently. Unusually, all the MDBs have currently requested capital increases, generally because MDB lending has increased following the global financial crisis. Any U.S. participation in capital increases are likely to be included in the FY2011 (for the AsDB) and FY2012 (for the other MDBs) budgets. See also CRS Report RS20792, Multilateral Development Banks: U.S. Contributions FY1998-FY2009<, by Jonathan E. Sanford.  In addition to congressional hearings on the MDBs, Congress exercises oversight over U.S. participation in the MDBs through legislative mandates. These mandates direct the U.S. Executive Directors to the MDBs to advocate certain policies and how they should vote at the MDBs on various issues. Congress also issues reporting requirements for the Treasury Department on issues related to MDB activities. Finally, Congress can withhold funding for the MDBs unless certain institutional reforms are met ("power of the purse").  More than $30 billion in contracts are awarded each year to complete projects financed by the MDBs. Some of these contracts are awarded to U.S. companies. Major changes are underway at the World Bank, the biggest MDB, that would alter how companies bid on World Bank projects. The World Bank argues that these changes will strengthen national institutions, while opponents argue that they will weaken existing procurement standards. Finally, the G-20 has proposed voting reform at the World Bank to reflect the increased role of emerging-markets in the world economy. While the voting power of the United States is unlikely to be affected, these proposals are likely to be a focus of discussion about the World Bank moving forward.

Date of Report: April 9, 2010
Number of Pages: 37
Order Number: R41170
Price: $29.95

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