he Organization for Economic Cooperation and Development (OECD) recently released its eighth edition of Multilateral Development Finance. It recommends that a) a holistic vision is required to meet emerging global challenges; b) multilateral funding needs to be sustainable and predictable; c) closer coordination between multilaterals is essential; d) the poorest and the marginalized should be prioritized and d) multilateral funding should focus on climate and biodiversity. These are sound recommendations and three themes arise from the report.
The first theme is that multilateral aid faces constant competition from other aid channels. Multilateral aid is just one component in the global aid picture. Within the multilateral system, there are an increasing number of multilateral entities. The predominant multilaterals are multilateral development banks, regional development banks and the UN Development System. There are new multilateral entities such as vertical funds which focus on combating climate and heath. All these organizations already have hundreds of projects, many which duplicate each other.
Opposite the multilateral system is the bilateral system, where donor states disburse aid directly to recipients. The report notes that nearly 60% of global aid in 2020 was distributed by bilateral donors. This disbursement allows states to direct aid towards their strategic interests, solving any principal-agent challenges when delegating aid to multilateral organizations. Other official flows (OOFs) and private philanthropy are also alternative financial sources. It is not a race to provide the most amount of aid, however, the large numbers of multilateral and non-multilateral channels curtail the impact of aid and efforts to reform multilateral organizations.
A second theme from the report is that multilateral aid is insufficient to meet global requirements. The report’s first section indicates that multilateral funding is under pressure from evolving development priorities and geopolitical polarization. The rapid changing development priorities is not a new fact; the World Bank’s 2022 Annual Report similarly noted countries are rapidly lacking basic necessities and resources. Geopolitical polarization has recently been prevalent, with superpowers using multilateral organizations as a means to compete with each other. Aid through multilateral organizations is supposed to be politically neutral. Nevertheless, key donors have increasingly influenced multilaterals towards their own interests.
The unpredictable nature of funding to multilaterals is also due to an aid channel within many multilateral organizations, namely trust funds or multi-bi aid. Multi-bi aid allows donors to utilize the benefits of multilateral organizations while having some control over its activities. The report states that multi-bi aid has accounted for 15% of global aid in 2020 as opposed to 26% of core aid to multilaterals. While core contributions have remained constant between 2000 and 2020, multi-bi aid has risen at a steady pace. Multi-bi aid has advantages however. It can dilute the autonomy of multilateral organizations and create aid fragmentation. That is where there are many aid projects, resulting in unpredictable allocations to multilateral organizations. This is not the first report highlighting the adverse effects of multi-bi aid. The 2013 and 2015 report all signal concerns of the impact of multi-bi aid.
A third theme in the report is that multilateral finance risks being manipulated by donor states. The changing political climate has altered their aid allocation policies. The report gives the example of the UK, a prominent donor, having decreased their multilateral contributions between 2019 and 2020. UK aid to major multilaterals such as the International Development Association (IDA) was reduced. Although the UK still maintains influence over the IDA, the drop in allocations signifies how donor contributions can be volatile.
The manipulation of multilateral finance can be attributed to other factors. Data from 2020 showed middle-income countries received a slightly higher financing as opposed to low-income countries. Several low-income aid recipients will no longer qualify for aid under IDA rules, thus putting multilateral organizations into a dilemma on donor aid allocations and their aid policies. New donors also influence multilateral organizations and aid focus. China already is the sixth largest IDA shareholder.
China’s Belt Road Initiative (BRI), a project focused on infrastructure complements yet also affects the global aid architecture. A World Bank study noted that the BRI might lift “32 million people out of moderate poverty.” Nevertheless, it requires reforms such as improving institutions, coordinating between countries and more importantly improving transparency in project planning. The report notes the BRI project would interface with “27 UN agencies and 6 major MDBs” aiming to enhance multilateral cooperation. It still notes BRI lacks transparency. It also risks creating more aid fragmentation by duplicating aid projects and deviating away from actual development needs. Its immense size would increasingly influence the investment decisions and modalities of individual multilateral organizations. New donors will continue to appear and shape organizations. Multilateral organizations should actively steer new donors to adhere to aid norms and should reform themselves if they wish to be relevant in the development community.
This OECD report highlights the achievements of multilateral aid organizations while the three interconnected themes indicate the challenges that the multilateral aid community faces. This will not be the only report warning what the multilateral aid architecture faces and organizations must quickly adapt so that they—and their aid disbursements—remain relevant.
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To Stay Relevant, Multilateral Aid Faces Challenges
Thamel, Kathmandu, Nepal. Photo by Adli Wahid via Unsplash.
January 8, 2023
The OECD recently released its eighth edition of Multilateral Development Finance. The report highlights the achievements of multilateral aid organizations but also the challenges they face to remain relevant, writes Jie Sheng Li.
T
he Organization for Economic Cooperation and Development (OECD) recently released its eighth edition of Multilateral Development Finance. It recommends that a) a holistic vision is required to meet emerging global challenges; b) multilateral funding needs to be sustainable and predictable; c) closer coordination between multilaterals is essential; d) the poorest and the marginalized should be prioritized and d) multilateral funding should focus on climate and biodiversity. These are sound recommendations and three themes arise from the report.
The first theme is that multilateral aid faces constant competition from other aid channels. Multilateral aid is just one component in the global aid picture. Within the multilateral system, there are an increasing number of multilateral entities. The predominant multilaterals are multilateral development banks, regional development banks and the UN Development System. There are new multilateral entities such as vertical funds which focus on combating climate and heath. All these organizations already have hundreds of projects, many which duplicate each other.
Opposite the multilateral system is the bilateral system, where donor states disburse aid directly to recipients. The report notes that nearly 60% of global aid in 2020 was distributed by bilateral donors. This disbursement allows states to direct aid towards their strategic interests, solving any principal-agent challenges when delegating aid to multilateral organizations. Other official flows (OOFs) and private philanthropy are also alternative financial sources. It is not a race to provide the most amount of aid, however, the large numbers of multilateral and non-multilateral channels curtail the impact of aid and efforts to reform multilateral organizations.
A second theme from the report is that multilateral aid is insufficient to meet global requirements. The report’s first section indicates that multilateral funding is under pressure from evolving development priorities and geopolitical polarization. The rapid changing development priorities is not a new fact; the World Bank’s 2022 Annual Report similarly noted countries are rapidly lacking basic necessities and resources. Geopolitical polarization has recently been prevalent, with superpowers using multilateral organizations as a means to compete with each other. Aid through multilateral organizations is supposed to be politically neutral. Nevertheless, key donors have increasingly influenced multilaterals towards their own interests.
The unpredictable nature of funding to multilaterals is also due to an aid channel within many multilateral organizations, namely trust funds or multi-bi aid. Multi-bi aid allows donors to utilize the benefits of multilateral organizations while having some control over its activities. The report states that multi-bi aid has accounted for 15% of global aid in 2020 as opposed to 26% of core aid to multilaterals. While core contributions have remained constant between 2000 and 2020, multi-bi aid has risen at a steady pace. Multi-bi aid has advantages however. It can dilute the autonomy of multilateral organizations and create aid fragmentation. That is where there are many aid projects, resulting in unpredictable allocations to multilateral organizations. This is not the first report highlighting the adverse effects of multi-bi aid. The 2013 and 2015 report all signal concerns of the impact of multi-bi aid.
A third theme in the report is that multilateral finance risks being manipulated by donor states. The changing political climate has altered their aid allocation policies. The report gives the example of the UK, a prominent donor, having decreased their multilateral contributions between 2019 and 2020. UK aid to major multilaterals such as the International Development Association (IDA) was reduced. Although the UK still maintains influence over the IDA, the drop in allocations signifies how donor contributions can be volatile.
The manipulation of multilateral finance can be attributed to other factors. Data from 2020 showed middle-income countries received a slightly higher financing as opposed to low-income countries. Several low-income aid recipients will no longer qualify for aid under IDA rules, thus putting multilateral organizations into a dilemma on donor aid allocations and their aid policies. New donors also influence multilateral organizations and aid focus. China already is the sixth largest IDA shareholder.
China’s Belt Road Initiative (BRI), a project focused on infrastructure complements yet also affects the global aid architecture. A World Bank study noted that the BRI might lift “32 million people out of moderate poverty.” Nevertheless, it requires reforms such as improving institutions, coordinating between countries and more importantly improving transparency in project planning. The report notes the BRI project would interface with “27 UN agencies and 6 major MDBs” aiming to enhance multilateral cooperation. It still notes BRI lacks transparency. It also risks creating more aid fragmentation by duplicating aid projects and deviating away from actual development needs. Its immense size would increasingly influence the investment decisions and modalities of individual multilateral organizations. New donors will continue to appear and shape organizations. Multilateral organizations should actively steer new donors to adhere to aid norms and should reform themselves if they wish to be relevant in the development community.
This OECD report highlights the achievements of multilateral aid organizations while the three interconnected themes indicate the challenges that the multilateral aid community faces. This will not be the only report warning what the multilateral aid architecture faces and organizations must quickly adapt so that they—and their aid disbursements—remain relevant.
