Dismal Multilateral Development Finance

  The Dismal State of Multilateral Development Finance

In view of the tremendous funding needs for fighting global public bads - pandemics such as now the coronavirus, climate change, hunger, analphabetism or terrorism – multilateral development finance has since long been in bad shape. The multilateral development-finance system has become overly complex. One would like to think that the system is an orderly process guided by simple principles, but it is rather a non-system[1]. This non-system does not result from coherent design but is a child of spontaneous disorder. A rising treat is the rise of ´multilateralism à la carte` as large donors starve core budgets of UN agencies

Since the early 2000s, new actors, both public and private, have emerged as important sources of finance, in addition to MDBs, UN agencies and the bi-multilateral donor EU. The rise of emerging powers as new lenders (notably China), the creation of so-called vertical funds[2] to finance global health and other global commons, the growing role of non-governmental organisations and the increased presence of private philantropy are stressing the developing-country recipients. They complain about the administrative burdens imposed on them by donor missions, evaluation bureaucracies, policy dialogues and other strings attached to aid money.

The OECD has reviewed multilateral development finance since 2008; those reports have failed to capture the wide attention they deserve. Multilateral Development Finance 2020, a very infomative 140-pages report, has been published recently[3]. It provides a rich portrait of a system under stress. Its focus of attention are ODA-eligible international organisations, mostly UN agencies, multilateral development banks and “Vertical funds” - development financing mechanisms confined to single development domains (such as health) with mixed private and public funding sources.

In 2018, total funding to multilateral organisations covered by the OECD report reached a new all-time high, at USD 71.9 billion[4]. However, multilateral funding is now primarily driven by a rise in earmarked contributions – by some large countries cherrypicking the system. You could argue that this reflects bilateral funding disguised as multilateral.

In particular UN agencies (such as WFP, UNHCR or even UNCTAD) suffer from rising funding vulnerabilities, mostly a result of a drop in the share of core contributions to their budget. A high donor concentration (such as for IOM) can create such funding vulnerability as well. Figure 1 presents the 2016-18 data for UN agencies, MDBs and Vertical Funds[5].

 

Figure 1: Earmarking, Donor Concentration and Funding Vulnerability, 2016-18

Source: OECD, Multilateral Development Finance 2020

 

Who is responsible (among large DAC donors) for the dismal state of multilateral finance for ODA-eligible international organisations? Table 1 provides elements for an answer. Two large donors need to be singled out: Germany and the United States. The majority of their contributions to ODA-eligible multilaterals was increasingly earmarked for programmatic or project-type purposes rather than allocated to core budgets.

·       The United States has turned into an agressive cherrypicker of the multilateral system, rather unsurprisingly for the past Trump administration, but also before under Obama. During the period 2012 to 2018, the share of core multilateral contributions in ODA provided by the US fell from 18% to 11%. It will be worth watching whether President-elect Joe Biden is going to revert that trend.

·       Germany is now among the worst offenders, contrary to the country´s self image as the quintessential multilateralist. The share of core multilateral contributions in Germany´s ODA has dropped continuously over the 2010s, from 35% to round 20% of its ODA in 2017. Some may object that Germany is the biggest contributor to the EU, hence more multilateral than visible from country sources. But as shown in Table 1, the EU institutions don´t behave differently and contribute apparently little to the core budgets of ODA-eligible multilateral agencies.

·       By contrast, France and the United Kingdom have maintained their core budget funding as a share of ODA over the 2010s, France just below and the UK at around 40%. Italy, Spain and Portugal support multilateral core funding most, in relation to their ODA contributions (around 2/3).

 

Table 1: Top DAC Donors to ODA-Eligible Multilaterals, 2010s

Country	Total USD bn, 2018	Trend from 2016	% to Core 2018	Trend 2010s
United Kingdom	11.3	↗	36.3	→
United States	10.2	→	11.2	↘
Germany	10.0	↗	22.0	↘
France	6.1	↗	38.0	↗
Japan	5.0	↗	23.0	→
Italy	3.5	↗	56.8	↗
Canada	3.4	↘	24.4	↘
Memo: EU	4.4	↘	1.8	→

Source: OECD, Creditor Reporting System (database); own calculations.

 

Earmarking is not bad per se. The rise of earmarking may be attributable to the spike in humanitarian interventions of the past decade, for example. Those interventions account for a large share of the funding earmarked by DAC members through the multilateral development system. But there are significant cost of ´multilateralism à la carte´, i.e. multi-bi funding (earmarked bilateral aid routed via multilateral channels)[6]:

·       Multilateralism à la carte undermines universality, which affords every country a voice regardless its size. Earmarking may well imply less funding for so-called global public goods as it distorts the balance between supply and demand. This has been seen to slow responses to pandemics by UN agencies. Healing pandemics, such as the current coronavirus crisis or the former Ebola crisis in West Africa, or ending hunger in refugee camps (and elsewhere), are good examples of the need for a universal approach. Multilateral work programmes risk to become less needs driven and country choices distorted with rising donor domination.

·       The “tragedy of commons”[7] is reinforced by earmarking via institutional hollowing out. This hollowing out works in two related ways. First, staff and management attention and capacity are increasingly pulled away from original core activities approved by the broader membership. Second, power and accountability gradually shift away from the broader collective as multilateral institutions increasingly become viewed as a mere instrument to implement the spending choices of relatively few large donors, leaving smaller countries as passive bystanders.

·       Long debates on the reform of the Bretton Woods institutions have failed to restore representativeness to the system; the G7 countries still dominate decision making. The challenge to find ways to have small countries participate in global governance has not been resoved by the creation of the G20 bureaucracies.

The election of US President-elect Joe Biden gives some reason to hope for a return of the United States to some less conditional multilateralism. Germany, traditionally a close ally of the US, should step up contributions to core budgets of ODA-eligible agencies simultaneously. The United Nations need to be strengthened after a lost decade. A handle to speed up core contributions to the UN might be to link them to the widely demanded rise of budget contributuions to NATO. Alas, while NATO has a strong lobby with the arms industry, especially the American, the United Nations have not.

 

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[1] Helmut Reisen (2010), „The Multilateral Donor Non-System: Towards Accountability and Efficient Role Assignment”, http://www.economics-ejournal.org/economics/journalarticles/2010-5, February.

[2] Stephen Browne and Roberto Cordon (2015), “Vertical Funds: Lessons for Multilateralism and The UN”, Future United Nations Development System, CUNY Graduate Center, Briefing 25, January.

[3] OECD (2020), Multilateral Development Finance 2020, https://doi.org/10.1787/e61fdf00-en.

[4] Ignore for a moment that the DAC has recently changed ODA reporting rules to include transactions that require no financial sacrifice. This deprives ODA of its meaning as a gauge of aid effort, and vitiates the point of setting the U.N. ODA target. The changes have also rendered ODA incoherent as a statistical measure, making it a faulty tool for monitoring and analysis. ODA now fails to meet basic statistical quality standards. See Simon Scott (2018), “A note on current problems with ODA as a statistical measure”, Brookings, September.

[5] The list of ODA-eligible international organisations currently contains some 360 entries. It can be downloeaded as Excel file here https://www.oecd.org/dac/stats/annex2.htm.

[6] Owen Barder, Euan Ritchie, and Andrew Rogerson (2019), “Contractors or Collectives?” Earmarked Funding of

Multilaterals, Donor Needs, and Institutional Integrity: The World Bank as a Case Study, CGD Policy Paper 153, Center for Global Development, July.

[7] Hardin, Garrett (1968). "The Tragedy of the Commons",  Science,  Vol. 162 (3859), pp. 1243–1248. The “tragedy of the commons” denotes a situation in a shared-resource system where individual users, acting independently according to their own self-interest, behave contrary to the common good of all users by depleting or spoiling the shared resource through their collective action. The original concept referred to the effects of unregulated grazing on common land (also known as a "common") in Great Britain and Ireland.