Factsheet – Emerging Development Finance Institutions (DFIs) & India

The New Development Bank (NDB) and Asian Infrastructure Investment Bank (AIIB) are the world’s youngest development finance institutions and India possesses a significant stake in both banks. This factsheet provides an overview of the structure and operations of the two banks as well as the information on projects funded by them in India.

What are Development finance institutions (DFIs)?

Development finance institutions (DFIs) or multilateral development banks have been a feature of the global economic system since the early days of post-World War II reconstruction in Europe. Legacy DFIs, both global and regional, including the World Bank, Asian Development Bank, African Development Bank, Inter-American Development Bank and the European Bank for Reconstruction and Development, were initially established to address market failure in long-term capital flows to developing countries. They have since played a central role in low and middle income economies with regard to development and policy planning, programme implementation, and as repositories of technical knowledge to help such countries stimulate economic growth and reduce poverty.

Role of DFIs as advisors

Over these last seven decades, however, there has been a perceptible shift in the geopolitics and the global economic architecture. This is particularly evidenced in the share of the global economic pie commanded by developing countries such as China, India, Brazil and South Africa. There is a greater reliance on domestic resources for public investment across all these nations while professional expertise in the sphere of development and policy planning has been globalized. To that end, while still considerable, the advisory capacity of DFIs faces greater competition from indigenous public and development policy practitioners. However, many of the challenges facing the world – including climate change, humanitarian disaster, international migration flows, water scarcity etc. – require global collective action and financial pooling. Specifically, low income countries continue to require technical and financial support to address such challenges which inhibit inclusive growth, socio-political stability, and resilient communities.

It is important to note that the world economy has only recently begun to recover from the 2008-10 financial crisis and the European sovereign debt crisis. While severely impacting western economies, the twin crises exacted a toll in developing nations as well in terms of constraining fiscal appetite to increase public investment in critical infrastructure such as roads, ports, power etc. and welfare expansion. The timing was also unfortunate as many such countries had benefited from the commodity boom that lasted between 2000 and 2014 to cater primarily to Chinese demand.

The upswing had been advantageous in the reduction of poverty and inequality, as evidenced in Latin America where the IMF estimates a 15 percentage point reduction in poverty (to 12 per cent) and an 11 percentage point drop in inequality. Most of these low and middle income nations had also seemed primed to take advantage of a demographic divided within their borders with working age populations growing. Many of them continue to be saddled with high levels of debt, having borrowed generously during a period of low global interest rates soon after the crises. The risk of stalled growth, a consistent worry over the last two years, threatens to undo many of the development successes of the last 50 years including significant reductions in poverty, illiteracy, infant and maternal mortality.

Prioritizing Agenda 2030

It is against this backdrop that the role of DFIs should be assessed. There remains considerable scope for such institutions to help client countries meet their financial and technical needs. Prioritising and mainstreaming the globally agreed Sustainable Development Goals (SDGs) across their loan and grants portfolios should be at the heart of their contribution to the global economy. The 2030 Agenda for Sustainable Development, comprised of the SDGs, demands a combination of financial and technical approaches with country-level expertise and the capacity for international policy coordination.  The DFIs possess this unique capability given their geographical footprint and extant knowledge base.

Criticism of DFIs

The institutions, however, will have to progress by accommodating the contemporary dynamics of the global political economy. This is most relevant with regard to their recognition of the greater economic and political weight of large borrowers. They need to move beyond superficial adjustments in their corporate governance and leadership structures to accommodate such emerging players that rightfully seek a greater capacity to influence their policies and operations. Repeated flouting of environmental and social norms, despite long entrenched institutional socio-economic safeguards frameworks, has seen the banks face deserved public backlash. Further, DFIs have been criticized for having become unwieldy bureaucracies over time. There are frequent complaints of increasing delays and raised costs for borrowers. Such concerns, at least in part, pushed China and other major borrowers to establish new lending institutions, namely the BRICS-led New Development Bank and the Asian Infrastructure Investment Bank. Both banks have prioritized lending for sustainable infrastructure and emphasized flexibility in operations. 

Emergence of new lending institutions

The new institutions have chosen to be complementary to legacy DFIs. Therein lies a worthwhile value proposition in having both groups approach development effectively as a coherent system based on coordinated action instead of each tackling challenges piecemeal. While closer partnerships for financing and technical evaluation is a worthwhile exercise given each institution’s comparative advantage, what is equally important is for the new DFIs to at least adopt existing transparency and accountability standards and practices of the legacy institutions. Both sets of institutions must also focus on working more closely with newer and evolving centres of policy expertise and development experience. This includes civil society organisations, academics, think tanks, and the media.

It is pivotal that DFIs begin to play a leading role in the provisioning of public goods that are in the ambit of development with their shareholders. They need to increasingly focus on investments in sustainable infrastructure that takes into account low carbon footprints and climate-resilient technology to endorse and support the ambition of the 2030 Agenda and The Paris Agreement.

Their unique financial structure allows DFIs to leverage shareholder contributions to package low-cost financing and they must focus on crowding-in diverse financial sources, including from the private sector. The scale of their financial and non-financial activity i.e. their overall mandate needs a clearer signal which in turn can be used to address existing concerns on capital adequacy and appetite for risk. Finally, there is a moral case with long-run positive economic implications to be made for greater financial support offered to fragile and conflict-affected clients and increased policy engagement with highly indebted ones to reform their public investment planning processes.

The role DFIs can play in addressing the multiple challenges of poverty and inequality, through investments and technical support for sustainable infrastructure and human capital, are quite evident. Coordinated action and policy interoperability can take advantages of the new opportunities provided by the greater penetration of data, technology, and private capital flows to developing countries. In this context, the scope for such institutions to scale up their development impact over the next two decades is noteworthy.

By Tomojit Basu, Programme Co-ordinator, India And The World