Multilateral development banks

Getting the balance right between ideas and operations in Multilateral Development Banks

By Rabah Arezki, director of research at the French National Center for Scientific Research (CNRS), senior fellow at the Foundation for Studies and Research on International Development (FERDI) and Harvard Kennedy School, former Chief Economist and Vice President at the African Development Bank and former Chief Economist at the World Bank’s Middle East and North Africa region.

Multilateral Development Banks (MDBs) have been in the news a lot lately. Leaders have called upon them to step up and help solve some of the world’s most pressing problems such as climate change, the debt crisis and fragility. The discussion on increasing the lending volume committed by MDBs has been at the centre of the policy agenda. But to achieve impact, MDBs must get the balance right between ideas and operations. 

If operations dominate ideas, as is often the case, MDBs will miss out on emerging challenges and the need to pivot early. That is clear when considering how long it took MDBs to bring the fight against climate change to the fore of their agenda. Conversely, if ideas were to start dominating operations, MDBs may fail to implement and deliver projects. Heads of MDBs must therefore simultaneously ring fence research and analytical work from influence of operations, and build bridges between ideas and operations to enable feedback loops, i.e. the use of feedback from project stakeholders to inform project preparation and design.

MDBs have a role to play as catalysts of ‘knowledge for development’. They have historically brought in innovations in the development market – for instance, Panda bonds and climate change accounting. That role has lagged lately but can be encouraged through continuous attention to research.

When MDBs generate ideas about what is good for development, they need to ensure they are also good in practice – that is, that development strategy produces good development projects. MDBs have mechanisms to evaluate their projects (both ex ante and ex post) and learn about what works and what does not – both in terms of the project itself and in terms of the organisation’s strategy. But it is unclear whether these mechanisms offer needed feedback loops to promote the right balance between ideas and operations, so that project design and strategy are informed by development ideas, and that those ideas in turn are modified by evaluations of projects and operations.

There are two overlapping feedback loops MDBs need to pay attention to. The first, the project level loop, is where much learning and self-correction is set to happen. The feedback of project leaders and various stakeholders are documented and used in project preparation and design. Yet, the degree of transparency and reliability of that data has been called out, and much can be done to improve on that. Most development banks evaluate project outcomes using result frameworks that set targets. Independent evaluation offices have also been set up in most, if not all, development banks to conduct programmatic and thematic evaluation and draw lessons. The other is the project-strategy level loop. That is when lessons learned at the project level are aggregated to inform the global strategy either to shift direction or to do more. Indeed, the frustration with MDBs has often been that projects take too long to be implemented and that projects are too small to make a difference. This is a bigger challenge for development institutions, often because scaling up has been limited. The glass thus appears half full when it comes to learning at the project level, but half empty when it comes to aggregating up these lessons to inform the global strategy of MDBs.

The project level loop

The first loop is more straightforward because it involves a specific project. An integrated ex-ante and ex-post evaluation framework allows for feedback between knowledge and operations at the individual project level. Most development banks have long had these frameworks in place, and they have improved them over time. Academics and think tanks have played a role in those improvements, including through randomised control experiments. So have development bank staff members pushing new analytical work, pressing the authorities, and gaining access to new data and techniques, such as satellite imaging and phone surveys. Yet, MDBs need to be more transparent on their evaluation of impact considering the tendency to paint a rosier picture. Indeed, several MDBs have been criticised for alleged greenwashing in presenting their lending volumes destined toward the fight against climate change.

The project-strategy level loop

The second loop is less straightforward because it requires ‘aggregation’ of many loops at the project level. Aggregation requires weighting each loop at the project level to enable a holistic assessment of replicability and, most importantly, scalability. The aggregation of project feedback allows to examine whether a project can be successfully redone and whether it can serve as a template for a much bigger operation. That is a difficult process and MDBs are struggling to extract the big ideas from the evaluation of individual projects.

The aggregation of project feedback needs more work to balance knowledge and operation. MDBs must think more systematically about the complementarity of macro-structural policies and project-level interventions. We often see development institutions pushing staff to not go for ‘small’ projects and conduct large operations in quest to deliver on lending volumes. But to be successful, the institutions need to dig deeper into the scaling-up challenge. We often refer to “absorptive capacity” as the main impediment to scaling up, but absorption issues remain a black box. Little work is done to unpack and address them effectively.

As mentioned above, MDBs must balance operations and the kind of upstream policy reforms that promote private sector, promote regional integration and fix financial systems to improve the channelling of domestic and foreign saving into investment.

Scaling up solar power is a telling example of the issues. The large foreign direct investment needed can occur only if a country’s financial system offers investors access to instruments such as currency swaps to hedge against risk. Moreover, important constraints linked to financial repression – actions taken by government borrowing from the financial system at low rates – also prevent scalability by limiting access to domestic financial system for would-be private sector actors.

The internal issues of the organisational structure of development banks encourage them to work in silos, which works against a broad aggregation of information between operations and strategy. Issues related to the organisational structure and incentives also often dissuade staff from pushing forward disruptive ideas. As a result, very few bold initiatives have come from MDBs. Academia has a role to play even though its ‘internal logic’ –to improve on the state of the art in the discipline—may seem opposed to the ‘external logic’ of development banks – to solve the world’s contemporaneous problem. Indeed, several important contributions of development economics have, for good or bad, greatly influenced the direction of travel of MDBs, including the big push theory, the importance of institutions, or the impact evaluation methods. 

Going forward

Given the global challenges ahead, MDBs must step up their ability to deliver on projects, but they must also help stimulate more policy-relevant, micro–macro research in order to enhance our understanding on building state capabilities in low-income and fragile contexts, and achieve scale in the arena of climate change. The demand for bold initiatives to resolve the world’s biggest challenges require that MDBs invest in a better balance between their ideas and operations.