When does multilateral development finance provide better value-for-money?

AidData's Brad Parks, Mike Tierney, and Daniel Nielson highlight insights from their co-edited special issue of the Review of International Organizations.

May 15, 2017

As nationalist forces take hold in the U.S. and Europe, policymakers are asking fundamental questions about the value of multilateral institutions that provide development finance. Do these institutions provide good value-for-money? What are their comparative strengths and weaknesses? How do they compare to their bilateral counterparts?

Cover art by the Review of International Organizations. Image by Springer Science+Business Media (Springer Heidelberg), via Wikimedia Commons.

Working through national aid agencies is attractive for a number of reasons. Whereas multilateral giving and lending involves the pooling of financial resources and requires that governments negotiate their collective policy preferences, the provision of bilateral grants and loans eliminates much of this complexity and allows governments to use aid as they see fit to pursue their own commercial or foreign policy objectives. Bilateral aid also makes it easier for governments to claim credit for their contributions and their successes. So it’s not too surprising that approximately two-thirds of all official development finance is delivered through bilateral channels.

But governments still delegate substantial authority and resources to multilateral institutions and ask them to perform a wide array of complex activities, which begs the question: when and why are multilateral institutions better positioned than bilateral institutions to perform certain types of tasks?

Special Issue: International Organizations and Development Finance

To help shed light on this question, we agreed to serve as the co-editors of a new special issue on multilateral development finance for the Review of International Organizations (RIO). This special issue addresses some of the most important topics confronting those who make international development policy in Western capitals: Are the underlying motivations of multilateral institutions truly distinct from their bilateral counterparts? Does multilateral development finance have different effects than bilateral development finance? And how are changing governance arrangements at multilateral agencies, such as the use of trust funds and the increased voting power of non-Western governments and non-state actors, likely to influence the allocation and the effects of multilateral development finance going forward?

There are six substantive papers published in the special issue and we encourage readers to read all of them, but here we highlight just a few of the empirical insights from the special issue:

  1. Sam Brazys, Johan A. Elkink, and Gina Kelly use sub-nationally georeferenced data to estimate and compare the effects of World Bank and Chinese development projects on local corruption. Whereas the arrival of Chinese projects to localities is associated with higher levels of citizen-reported experiences of corruption, the arrival of World Bank projects correlates with lower levels of citizen-reported experiences of corruption. Interestingly, the latter effect vanishes when World Bank projects are physically co-located with Chinese projects. These findings complement those reported in a 2016 AidData working paper, where Axel Dreher and his collaborators show that Chinese development projects are significantly more vulnerable to domestic political manipulation than World Bank development projects. Both of these studies call attention to the apparently distinctive strength of World Bank due diligence procedures and projects.
  2. Mike Findley, Helen Milner, and Dan Nielson report new evidence from an experiment in Uganda that included more than 3,000 citizens and 300 Members of Parliament. They find little evidence that multilateral and bilateral development projects are substantially different in the eyes of developing country elites and citizens. However, they do find some evidence that the general public has greater confidence in multilateral institutions. These findings relate primarily to the roles that bilateral and multilateral institutions play during downstream stages of the development policymaking and programming process in partner countries. In this respect, they complement those reported in a 2016 AidData working paper, where Brad Parks, Taka Masaki, Jörg Faust, and Stefan Leiderer provide evidence that governing elites in developing countries have a strong preference for engaging with multilateral institutions during upstream policymaking and programming processes (e.g. at the agenda-setting stage when advice is being solicited and priorities are being established).
  3. Vera Eichenauer and Bernhard Reinsberg collect and analyze a new source of evidenceon so-called “multi-bi” development finance, which is funding that individual governments or groups of like-minded governments channel through trust funds that are managed by multilateral institutions. Typically, these trust funds are earmarked for specific purposes and allow donor governments to work around traditional governance arrangements of multilateral institutions. Interestingly, Eichenauer and Reinsberg find that when the general public in a donor country holds its own government in low regard, such governments tend to provide more “multi-bi” development finance, suggesting a possible efficiency rationale for supranational delegation.

These short summaries provide a small sampling of the new insights about multilateral development finance that have recently come online. In addition to these three papers, Elena McLean shows how informal power is exercised within international organizations with predictable effects on the allocation of contracts to implement projects; Bernard Reinsberg explores the politics of organizational reforms within the World Bank that made the expansion of trust funds possible; and finally, Chris Humphrey accounts for the surprising influence of private credit rating agencies on lending decisions of the World Bank.

We encourage interested readers of The First Tranche to read the full set of contributions to the June 2017 special issue of RIO, which can now be accessed online here.

We’ll also be highlighting new research on multilateral development finance on The First Tranche over the course of the next year.

Cover art by the Review of International Organizations. Image by Springer Science+Business Media (Springer Heidelberg), via Wikimedia Commons.