Multilateral development banks (MDBs), such as the World Bank and the various regional development banks, have been in existence for a number of decades now. Despite their obvious significance for both world capital markets and developing country borrowers, the provocative question whether MDBs are needed after all has usually been answered on either moral or political grounds, often with little economic foundation. This paper addresses the apparent lack of economic theory in the analysis of multilateral development banking by offering a simple comparative statics framework, adapted from the credit union literature, through which MDB lending behavior can be studied.
In the model, MDB members fall into two groups: “net contributors” (the industrial countries) and “net borrowers” (the developing countries). The benefits derived by each group are nonhomogeneous. Within each group, member countries try to channel the MDB’s financial resources into those uses that yield the highest expected benefit. The level of benefits member countries can expect to derive depends critically on a number of exogenous market parameters, institutional variables, and the preferences of other member countries. Although the MDB management has to trade off the interests of the two groups, once it has established its preferences, the preferred group of member countries usually has to absorb positive as well as negative exogenous shocks.
The model may be used to predict potential areas of conflict, agreement, and indifference between MDB member countries, analyze lending policy proposals against the background of distributional conflicts, and show how various institutional reforms may improve allocative efficiency and overall member benefits.