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The overlapping mandates of existing IFIs and the emergence of new development finance institutions raises the question of whether the current development finance system is effectively working together to target scarce global aid resources towards areas of greatest impact. Nations face shared problems–such as climate change, recovery from the COVID-19 crisis and the threat of future pandemics, and unregulated cross-border movements of people–that can only be addressed through international cooperation. Economic prosperity has led to an increasing number of middle-income countries, bringing with it a need to examine the role of development finance institutions in relatively wealthier economies. Rising debt levels in vulnerable countries is also a growing concern in the development community, leading to a greater need for coordination on norms and standards among development lenders.
With aid representing a declining share of development finance, CGD is asking what institutional changes are needed within the multilateral development banks and other international financial institutions to reflect new realities and rise to the challenge of a resilient and sustainable recovery that resets the world on a path to achieving the SDGs? How should bilateral donors be most effective in the more complex development finance system? And how can those changes be made most effectively?
It is sometimes claimed that big surges in aid might cause Dutch Disease--an appreciation of the real exchange rate which can slow the growth of a country's exports--and that aid increases might thereby harm a country's long-term growth prospects. In this new working paper CGD senior program associate Owen Barder argues that it is unlikely that a long-term, sustained and predictable increase in aid would, through the impact on the real exchange rate, do more harm than good. Learn more