Should Multilaterals be Contractors or Collectives? A Case Study of World Bank Trust Funds

Do we want our multilateral institutions to be effective contractors, responsive to the priorities of their richest donors? Or do we want them to be cooperatives of nations working together: addressing shared problems by pooling resources, risk, and knowledge, to resolve what Kofi Annan memorably dubbed “problems without passports?”

In a new policy paper, we warn of a new “tragedy of the commons” arising from donors’ use of trust funds. These are vehicles used to manage funds contributed by donors for specific purposes, and administered by a multilateral (mainly the World Bank – our focus here). Some donors spend aid through trust funds because this enables them to show that their taxpayers’ money has been spent directly on their priorities. Others use trust funds as vehicles to deliver the donors’ priorities without breaking their own limits on staff numbers. Though many of these programmes are individually small, they soon add up. We find that World Bank core concessional funding could be increased by 40 percent if donors redirected their money from the trust funds they finance. Because donors bypass the systems of multilateral institutions, they risk hollowing out the organisations they need to solve collective problems. If the richest donors treat multilaterals instrumentally, as their contractors rather than clubs of nations of which they are a member, those institutions are starved of both resources and legitimacy.

Trust funds are often regarded within donor agencies, such as DFID, as a useful mechanism to bypass lack of consensus within the multilateral, or to circumvent bureaucratic obstacles. But trust funds should properly be regarded as second or third best solutions—as they represent a failure to persuade others to commit multilateral resources to the programme, and an inability to shift the priorities and processes of the multilateral system. Rather than concede defeat by setting up a trust fund, donors should redouble their efforts to build a multilateral consensus for what they are trying to achieve.

Choices that seem individually rational to each donor, at least in the short term, can add up to a collectively undesirable outcome by undermining shared institutions.

Our paper uses data compiled from the World Bank and the Development Assistance Committee to rank donors. According to this index, the countries who tend to resort most to trust funds rather than core multilateral funding—and when doing so tend to “go it alone” more often than combining with others—are the UK, Switzerland, the United States, and Canada. France, Spain, Belgium, and Italy are among the most civic minded of the global citizens, in this respect. This might surprise keen aid-watchers who probably associate the latter group with less effective behaviours, on the whole, than the former. But this is one aspect of national “generosity” which can have perverse effects.
 

Figure 1. Responsible Multi-bi index

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Note: Calculation of the index also included the EU Commission. See paper for full details.

Sources: OECD DAC, “Directory of Programs Supported by Trust Funds and FIFs” (World Bank 2019), authors’ elaborations.

To nudge the international system towards a more full-throated commitment to multilateral institutions, we suggest two modest changes in the way the multilaterals are organised. First, they should do a better job of “virtual earmarking”—enabling particular donors to describe how their contributions have been used by the collective to achieve results that their citizens care about. That would remove an incentive for donors to put their money through an earmarked fund solely to show how the money was spent. Second, any new trust funds should be considered by the institution’s main board—who should usually insist that all activities consistent with the institution’s overall objectives are managed through core systems, while weeding out activities that are not.

You can read the full paper here.