Former IMF chief economist Kenneth Rogoff says “far too little attention has been devoted to understanding why multilateral development lending has so often failed”. In his experience, MDBs are most valuable as “knowledge” banks — sharing soft development infrastructure such as experience and best practices rather than financial muscle. The latter, he says, has led to their “greatest failures”.
In “Here’s how China’s infrastructure bank could fail miserably,” former IMF chief economist Kenneth Rogoff refocuses the pros and cons debate over the Chinese-led Asian Infrastructure Investment Bank (AIIB) to ask why yet another MDB is needed. [For more on this, see: Answerable to no one: beware of multilateral development banks in general, by Probe International]
Rogoff’s misgivings concern what he describes as the “greatest failures” of multilateral development lending — white elephant projects funded by multilateral loans that “benefit the current elite, but do not properly balance environmental, social and development priorities”.
“Dam construction is a leading historical example,” he says. “In general, there is a tendency to overestimate the economic benefits of big infrastructure projects in countries riddled by poor governance and corruption, and to underestimate the long-run social costs of having to repay loans whether or not promised revenues materialize. Obviously, the AIIB runs this risk.” [For more on the destructive impacts of big dam technology, see: Dam fools and Back to the future for the World Bank and hydropower]
On the other hand, Rogoff reasons, China as a growing, global influence ought to be given the space to develop its own approach to economic leadership and “a relatively small infrastructure bank seems as good a place as any to start.” He considers one benefit of the AIIB, the oversight major member countries can direct to Chinese development assistance, which is already pouring into the developing world, he says, “often through highly opaque channels”.
“While the world should generally welcome China’s [AIIB] initiative, the real question is what kind of aid developing Asia needs,” continues Rogoff. “Anyone who has worked in developing countries understands that weak institutions and poor governance are often far bigger obstacles to growth than a lack of funds. And, however great a project looks on paper, practical implementation is often a sobering experience. Costs invariably far exceed initial estimates, and planners often woefully underestimate the skills and funding needed to ensure maintenance and repairs.
My interpretation of the World Bank’s record is that its role has been most consistently positive when it helps countries with ‘soft’ development infrastructure: technical assistance and serving as a global knowledge bank. When its main role has been to provide financial muscle, the results have been less impressive. In China itself, for example, World Bank money has not been so important quantitatively, yet the Chinese generally credit the Bank for having helpful blueprints and information.”
Go here to read Kenneth Rogoff’s commentary, published by MarketWatch, in full
Patricia Adams’ Written Statement to the U.S. Senate Committee on Foreign Relations: Multilateral Development Bank Corruption
Probe International’s executive director, Patricia Adams, described the World Bank, and MDBs in general, as “answerable to no one” in her 2004 address to a U.S. Senate Foreign Relations Committee roundtable discussion on corruption and MDBs.
Why does the world need another development bank?
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