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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?
The tragedy of foreign aid is not that it didn't work; it was never really tried. A group of well-meaning national and international bureaucracies dispensed foreign aid under conditions in which bureaucracy does not work well. The hostile environment under which such aid agencies functioned induced them to organize a cartel that increased inefficiency and reduced effective supply of development services, frustrating the good intentions and dedication of development professionals. The cartel of good intentions allows rich country politicians to feel that they are doing all in their power to help the world's poor, supports rich nations' foreign policy goals, preserves a panoply of large national and international institutions, and provides resources to poor country politicians with which to buy political support; in short, foreign aid works for everyone except for those whom it was intended to help.
Do we still need the World Bank, given how much the global financial sector has expanded since the institution was founded? The paper argues that there is a continuing role for the Bank and that it is complementary to private finance.