The role of multilateral development Banks
Thus far we have reviewed the main development challenges of the past and future for the region. It is clear that coordinated efforts among nations are required, particularly in the context of emissions reduction and energy transition, to address tasks that are extremely important.
There are other intertemporal challenges, since, as we have mentioned, periods of Government often prevent public policies from lasting over time, limiting their sustainability and preventing verification of their long-term effectiveness. The challenge of financing development is complicated by the risk rating of LAC countries, which forces them to assume a relatively short debt profile: 60 % of the region’s financing needs are associated with debt repayments, equivalent to 7.9 % of GDP (see figure 5.10).
Figure 5.10 Percentage of financing needs associated with debt repayments
While there are important differences in the capital structure and governance of the multilateral development banks (MDBs) that serve developing countries, these agencies pursue a common goal: to invest in projects that no one else can or will invest in. Projects that are also critical to the social, economic and environmental sustainability of our planet (Humphrey, 2022). The global environment has changed markedly in recent decades, which has led the MDBs to face their own transformation process to better meet the demands of Governments and other stakeholders.
The direct financing that the MDBs provide to the region’s Governments is the most notorious action. Today, however, the MDBs have gone beyond the provision of concessional financing to offer financial instruments in line with the region’s development trends and the needs of their clients. However, the provision of multilateral financing is relatively limited in the region: only 9 % of the countries’ financing needs come from external sources, and multilateral banks contribute half of this share1.
The greatest transformative potential of these organizations lies in their ability to address market and coordination failures. This is possible thanks to their supranational authority and their long-term strategies, beyond political cycles. In addition to the power of preferential, scaled and long-term financing, multilaterals complement their supply of monetary resources with technical support to Governments. MDBs are key public policy tools with global expertise, a mandate to contribute to development and the capacity to invest in public goods at scale. In addition to support and cooperation with sovereign States, the role of the MDBs in promoting private sector development has been growing rapidly in recent years. It has also been important in terms of financial innovation, as multilateral banks have pioneered solutions focused on addressing complex global challenges, especially in emerging markets and developing economies. Through the implementation of new financial tools such as social impact bonds, green investment funds and results-based financing mechanisms, these organizations have demonstrated their ability to mobilize private capital and channel it to projects that generate a positive social and environmental impact.
The MDBs also provide the region with global and regional public goods. Two of the most important cases in this regard are the provision of a coordination platform and the generation and dissemination of knowledge.
Development banks have clear medium-term objectives and can assume risks that international banks are sometimes unwilling to take. And helping countries to overcome negative shocks is a fundamental role, as well as providing long-term financing for projects where the risk, for example, in terms of climate change and renewable energies, is something that is difficult for the market to measure accurately. But another equally fundamental role of development banking is to help countries not only in the generation of knowledge, but also in something that is sometimes underestimated. The Governments of the regions are constantly changing, every four or five years there is a change of Government and, on occasions, this instability means that public policies do not have the necessary presence or stability to be able to bear the fruits expected of them.
Based on an interview with Santiago Levy
Multilateral banks thus serve as an enabling and supervisory body for coordinated action within and between countries. Its leadership, together with its financing and technical support capacity, is essential to guide the policy efforts required for the pending agenda in LAC. However, the magnitude of the challenge also demands that the multilateral agencies themselves coordinate their efforts to maximize their joint impact. By aligning their efforts, these institutions can avoid duplication of resources and efforts, maximize the impact of interventions and generate synergies that enhance results. Recently, collaboration between the IMF and CAF was key in the economic stabilization of Argentina and Ecuador at critical times. CAF provided very short-term temporary financing to both countries to help them meet their immediate obligations, avoiding a default that would have had serious consequences for their economies. Through these bridge loans, both countries were able to access larger, more structured financing programs from the IMF. CAF’s financing provided the time needed for negotiations with the IMF to be completed without the countries defaulting, which would have further compromised their economic stability and resilience.
In terms of knowledge generation, the range of activities is very broad and covers from data collection and impact assessment of projects and interventions, to the production of academic articles, technical notes, policy briefs and working papers, among others. In some countries of our region, the contribution of the MDBs to the production of primary data is fundamental. For example, in the Caribbean sub-region, where not all countries have an annual household survey, the support of organizations such as the Inter-American Development Bank (IDB) has been decisive in advancing the design and implementation of such efforts2. Within the financial inclusion agenda, CAF, for its part, has been developing the financial capabilities survey since 2013. This survey provides a comprehensive assessment of financial capabilities, including measures of knowledge, financial behavior and attitudes towards money. By applying the same methodology in different countries, the survey also allows comparisons between countries and regions, which facilitates the identification of best practices and areas where more intervention is needed3.
Beyond data collection, the vast majority of MDBs have a research team, centralized or decentralized throughout the institution, that produces original knowledge. The generation of this knowledge from multilateral banks has at least three advantages. The first is that, unlike the knowledge produced by academia, the MDBs operating in LAC have much more direct and frequent connections with the region’s activities. This allows for a better understanding of the context and problems of the countries, and also provides the opportunity to generate research questions that are much more closely connected to reality and that will guide future operations.
The second advantage is that the MDBs serve as excellent platforms for the dissemination of knowledge. The connection of these organizations with policy makers is very close and this facilitates the arrival of the different knowledge products to the forums that matter for evidence to guide public policies. This advantage is even more tangible in the case of CAF thanks to the governance model that governs it, with a board of directors made up of the finance ministers of the member countries.
Multilateralism, I think, has been effectively consolidated. Many multilateral organizations play a role in educational processes, bringing knowledge, for example, in public management. In Latin America, for many years, multilateral organizations have financed courses, and very important courses, for example, on budgets, the capacity of Governments to develop personnel trained to manage public budgets, implement public budget systems, implement cultural management systems, museology and important things in terms of national identity, the historical vision of a given country and its cultural elements, its cultural heritage.
Based on an interview with Bianor Cavalcanti
And the third advantage is that rigorous evaluation of operations allows MDBs to replicate and scale cost-effective solutions to the region’s problems. This is why, over the past two decades, MDBs have placed greater emphasis on generating evidence and measuring the impact of their operations. It is the evaluation of programs and/or operations that enables MDBs to generate evidence-based policy prescriptions.
As we face the challenges of the future, cooperation and innovation will be vital. That is why we insist that MDBs, with their accumulated experience and ability to mobilize resources, must be seen not only as sources of funding, but as strategic allies in building a more equitable and sustainable future. The transformation of the region depends on our ability to learn from past challenges, implement evidence-based solutions, and create an environment in which citizen participation and constructive dialogue are an integral part of decision-making processes. This is the best path to development that meets economic goals, while also ensuring social well-being and environmental preservation for future generations.
The MDBs need to walk this path supported by a knowledge agenda connected to the region’s activities and highly coordinated with the capacity for action on the ground. Accompanying the region in the triple transition—social, digital and energy—in a context of limited fiscal space requires cost-effective and innovative investments and policies. And it is on this path that the role of knowledge generation and dissemination from the multilaterals, with a supranational vision, but from the region and for the region, can have important multiplier effects. It has been established that a single approach is not effective in a region as diverse as LAC. Knowledge at the service of development is key to identifying the precise and timely measures for each country.