MULTILATERAL donors and lenders are international financial institutions that provide loans and other forms of financial assistance along with policy support for developing countries. The institutions, known as multilateral development banks, are key players in global development, helping countries to pursue various economic and social goals. Organisations such as the World Bank, regional development banks eg, the African Development Bank and the Asian Development Bank, the International Monetary Fund and similar specialised institutions fall under this category.
Although the cold war has ended, the world today continues to grapple with severe economic crises, widespread military conflicts 鈥� more than 35 countries are experiencing active conflicts 鈥� and internal communal violence that impacts billions. According to the Global Peace Index 2024, the world stands at a crossroads.
Looking back over the past few decades can help to understand how we reached a point where neither the donor community nor recipient countries find the traditional approaches to development assistance fully effective. The simple question is: are these agencies uniquely equipped to address the development needs of today鈥檚 low-income nations? Such questions are pertinent as the institutions struggle to make economic growth environmentally sustainable, promote climate-resilient development and incorporate climate action into their already complex portfolios. There are valid reasons for scepticism. Over time, perceptions have evolved and the institutions are seen not only as agents of growth and development but also as instruments of political influence.
When the United States launched the Marshall Plan in 1948 to aid Europe鈥檚 economic recovery, the World Bank, which was created to help to reconstruct war-torn Europe, had to pivot its focus to developing countries outside Europe. Consequently, issues of its underdeveloped member countries began to occupy an increasing share of the agency鈥檚 attention. In 1960, the International Development Association was established as an arm of the World Bank to provide grants and low-interest loans for the world鈥檚 poorest countries. Today, the World Bank stands as one of the world鈥檚 foremost development institutions, a position maintained partly through its self-preservation efforts dating back to the 1940s.
A similar shift occurred with the International Monetary Fund. When president Nixon unilaterally abandoned the gold standard for foreign exchange reserves in 1971, replacing it with the US dollar, the International Monetary Fund had to redefine its purpose. From the 1980s onward, much of its lending focused on supporting long-term capacity-building and economic growth in poorer countries. Thus, the International Monetary Fund, too, embraced development as a central part of its mission.
The World Trade Organisation experienced a comparable evolution. In response to the anti-globalisation movement, it increasingly adopted development-oriented rhetoric to advance its core mission of regulating trade and tariffs.
The first issue that demands attention is whether these organisations have adapted their decision-making processes to reflect their pivot towards development. The answer is largely 鈥榥o.鈥� None of these organisations has fundamentally reformed its formal decision-making structures to elevate developing countries as primary clients or central decision-makers. The original system of weighted votes, where 鈥榙onor鈥� countries hold a larger share of votes than recipient countries, has changed little over time. Moreover, the funding that governments provide fir these institutions is still portrayed not as donations but as capital subscriptions or quotas. Neither the terminology nor the voting structure truly aligns with modern development priorities.
These institutions have been seen as instruments of western political and economic power. Their role and relevance have been continually debated, with this debate regaining momentum after the 2008 global financial crisis. The rise of China and the shift towards a more multi-polar world are often viewed as challenges to the perceived hegemony of these organisations. Over time, the World Bank鈥檚 role has evolved from a primary focus on infrastructure lending, epitomised by the Washington Consensus, to becoming a 鈥榢nowledge bank鈥�, positioning itself as a repository of development expertise.
Today, the World Bank鈥檚 work is framed by its twin goals, established in 2013:听 eliminating extreme poverty by 2030 and boosting shared prosperity. The International Monetary Fund鈥檚 stated aims include promoting international monetary cooperation, securing global financial stability, facilitating international trade and encouraging high employment and sustainable economic growth.
What, then, are the principal criticisms that question the effectiveness of these institutions in transforming the economies of recipient countries? The key points include:
Structural under-representation: The central critique concerns the political power imbalance within these institutions鈥� governance structures. Voting shares are based primarily on the size and openness of economies, leaving poorer countries, often those borrowing from these institutions, structurally under-represented in decision-making processes.
Policy conditionality: The economic policy conditions attached to loans and projects often undermine the sovereignty of borrowing nations, limiting their ability to shape policies in line with local priorities. This is particularly true for the International Monetary Fund, which acts as a lender of the last resort for countries facing balance-of-payment crises. Current examples include Pakistan and Bangladesh.
Political expediency: These institutions have at times prioritised the political interests of major shareholders over sound development practice. The International Monetary Fund鈥檚 controversial support of the Greek Loan Programme in 2010, which Brazil鈥檚 executive director criticised as a bailout for European banks rather than Greece itself, remains a stark example.
It is clear that for the World Bank and the International Monetary Fund, institutional self-preservation has influenced their continued focus on development. While donor states have resisted relinquishing their weighted voting power, they agree that these bodies still offer value in advancing development. However, there is now a growing consensus that significant reform is needed for these institutions to remain relevant in a changing global landscape.
Both the institutions acknowledge the need to demonstrate their added value amid increasing competition, not only from other multilateral bodies such as the United Nations and regional banks such as the Asian Development Bank but also from new development finance actors. Without a meaningful reform, the organisations risk duplicating or siphoning work that could be done by other entities with governance structures more responsive to recipient countries鈥� needs.
In summary, several persistent issues continue to shape debates about the effectiveness and relevance of multilateral development banks:
Dominance of traditional lending: Multilateral development banks primarily rely on project-focused investment loans, missing opportunities to adopt broader, programmatic approaches that support systemic reforms.
Risk management and capital adequacy: The need to maintain high credit ratings and capital buffers can make multilateral development banks overly cautious, limiting their ability to respond effectively to crises and support transformative initiatives. Bangladesh, for example, urgently needs transformative development support, not just traditional project-based assistance.
Conditionality and policy prescriptions: The practice of attaching conditions to loans has been widely criticised for imposing one-size-fits-all solutions that often fail to reflect local contexts and priorities. Greater flexibility and customisation could yield more sustainable development outcomes.
Environmental and social impact: Multilateral development bank-funded projects have faced criticism for prioritising economic growth and infrastructure at the expense of environmental conservation and community well-being. Large-scale projects such as dams and highways have been linked to environmental damage and the displacement of local communities.
Accountability and transparency: Multilateral development banks continue to face calls for stronger accountability and transparency, including concerns about their ability to prevent and address corruption and mismanagement.
Recognising the challenges, the World Bank鈥檚 2024 Results and Performance Report identified four levers for stronger performance and better development outcomes: enhancing the design of operations and country programs, adopting effective risk management, addressing client institutional and capacity challenges and improving results monitoring.
Multilateral development banks today acknowledge the need to align more closely with client countries鈥� priorities and expand their resource base to ensure timely and adequate responses to evolving development needs. Yet, multilateral development bank lending remains largely pro-cyclical, mirroring private capital flows, and there is little development of contingent financing instruments to respond flexibly to crises.
With a work force of 20,000 staff across 130 countries, working on a broad range of priorities under the umbrella of 鈥榙evelopment,鈥� there is now a pressing need to build a sustainable system that better matches the needs of recipient countries with the capabilities of future global lenders, whether they are multilateral development banks or new actors yet to emerge.
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Humayun Kabir ([email protected]) is a former senior official of the United Nations in New York.