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Friday, November 11, 2011

Multilateral Development Banks: General Capital Increases

Martin A. Weiss
Specialist in International Trade and Finance

For the first time in the history of the institutions, each of the major Multilateral Development Banks (MDBs) are simultaneously seeking increases in their capital bases to fund the continued expansion of their development lending programs. The requests come after several years of increased lending by the banks. If the increases are fully funded, the resources of the World Bank, African Development Bank (AfDB), European Bank for Reconstruction and Development (EBRD), Asian Development Bank (AsDB), and Inter-American Development Bank (IDB) would increase by between 31% and 200%. Collectively, the requested capital increases are worth around $348 billion. President Obama has included authorizations and appropriations for U.S. participation in the capital increases at the MDBs in his FY2011 and FY2012 requests.

U.S. participation in any funding request for the MDBs requires authorization and appropriations from Congress. In addition to the MDBs’ role in furthering broad U.S. foreign policy interests, the 112
th Congress may choose to consider whether increasing the size of the MDBs is necessary to meet developing country needs and whether sufficient progress has been made on MDB reform to justify fully funding the President’s request. Members’ views on the following policy issues may also affect their decision on whether to support or oppose increasing the size of the MDBs and the scale of their operations. These issues include:
  • Comparative effectiveness of bilateral and multilateral aid. Compared to other advanced economies, the United States provides a smaller proportion of development assistance through multilateral organizations, such as the MDBs, than other countries. Is multilateral assistance more effective, and if so, should greater amounts of U.S. foreign aid be channeled through the MDBs by supporting the capital increases?
  • Scope of MDB activity. The MDBs have expanded the range of activities that they engage in to include issues such as climate change and food security. Members may wish to evaluate whether the benefits of MDB engagement on these issues outweigh potential costs. Some argue that a consequence of working through the MDBs is duplication of efforts across a range of multilateral institutions, which can be costly and inefficient. Others argue that this approach leverages resources and provides common approaches.
  • Role of emerging economic powers. Many rapidly growing economies, including Brazil, China, and India, among others, borrow from the MDBs despite having access to international capital markets and substantial holdings of foreign exchange reserves. Supporting capital increases at the MDBs would allow higher rates of lending to these quickly growing economies. Members may assess whether the development-impact of increased MDB lending to credit-worthy countries outweighs any potential crowding-out effect. At the same time, these countries are increasing their shares and leadership roles in the institutions, with important implications for the United States.
  • U.S. bidding for MDB-funded projects. Firms located in large emerging economies are winning a larger share of MDB procurement projects. Are U.S. firms competing effectively for MDB projects? If not, since the general capital increases (GCIs) would increase the amount of MDB projects, are policy options available to better position U.S. firms to capture a larger share of MDB projects, creating additional jobs for U.S. workers?
  • Anti-corruption policies. The MDBs have different approaches to anticorruption measures. In procurement, for example, these range from international best practices to country-based approaches, which, some analysts argue, may increase the risk of monies being diverted for corrupt purposes. Congressional legislation on capital increases may be seen as a potential opportunity for seeking further reform.

Date of Report: October 28, 2011
Number of Pages: 18
Order Number: R41672
Price: $29.95

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