MULTILATERAL DEVELOPMENT BANKS AS CONDUITS FOR SOUTH-SOUTH COOPERATION.

• Author: Rosero, Kristen Hudak
• Position: Report

INTRODUCTION

As emerging markets continue to assert themselves in the international financial system, there are increasing possibilities for South-South Cooperation (SSC) in the area of development finance. Countries such as China and Brazil, themselves recipients of aid, have over the past few decades become donors. Indeed, there has been a substantial increase in South-South bilateral development assistance. Yet to some extent, SSC has been around in the area of development finance for some time. Multilateral development banks (MDBs) have served as financial intermediaries for development finance since the mid-twentieth century. Here, we take a historical approach to ask To what extent have these organizations served as conduits for South-South Cooperation? In what way is this shaped by the makeup and distribution of power of their member states?

This article asserts that borrower-dominated MDBs are more likely to be (though not alone in) engaging in lending practices that constitute South-South Cooperation. We highlight how the SSC goals of promoting a stronger voice for poor countries and providing assistance that is designed to meet local needs are often echoed in the normative literature on regional and subregional development banks. We then argue that the extent of SSC activities is a reflection of the interests of the voting membership majority. Our analysis looks at how the distribution of voting shares among member states is related to the extent to which the portfolios of MDBs reflect SSC goals. Given the paucity of precise quantitative indicators, we estimated SSC by looking at the degree of support for regional or multicountry projects and the degree to which a financial institution mobilized or matched foreign and domestic financial resources for development. To do this, we used a dataset of over 34,000 projects that twelve MDBs implemented from 1968 to 2006. This historic data enabled us to illustrate that these activities were present well before the recent resurgence of interest in SSC. Furthermore, the large number of projects included in the data enabled us to generalize across a large sample of institutions--in contrast to many studies that focus on a small set of case studies--and thus to make a unique contribution to the literature on MDBs and South-South Cooperation.

South-South Cooperation

With the demise of the former Soviet Union and the change in the prevalent world order, the term "Global South" gained popularity in the international development literature. Most countries in the Global South share a past of colonial oppression and a reliance on exporting primary commodities. This history has shaped their present geopolitical and economic standing. In absolute and relative terms, countries in the Global South continue to be poorer and less politically stable than countries in the Global North and are largely underrepresented in the multilateral institutions that guide global policy. The term "Global South" itself arguably emerged as a post-World War II shorthand description of countries that did not neatly align and/or succeed under the modern frameworks of capitalism or socialism. (1) The notion of South-South Cooperation in practice is often traced back to the 1950s, most notably to the Bandung Conference of 1955, which brought together leaders from twenty-nine Asian and African countries to promote economic and cultural cooperation.

Efforts to promote solidarity among countries in the Global South have been advanced by institutions like the United Nations Office for South-South Cooperation (UNOSSC) for decades. Established in 1974, the UNOSSC defines South-South Cooperation (SSC) as "a broad framework of collaboration among countries of the South in the political, economic, social, cultural, environmental and technical domains." (2) SSC is based on the acknowledgement that countries at similar stages of development have much to learn from each other about tackling present and future challenges to their development agendas and can thus engage in mutually beneficial transactions that are in line with their national goals. The UNOSSC lists some of the goals of South-South Cooperation:

* To promote and strengthen collective self-reliance among developing countries through the exchange of experiences; the pooling, sharing and use of their technical and other resources; and the development of their complementary capacities

* To increase the quantity and enhance the quality of international development cooperation through the pooling of capacities to improve the effectiveness of the resources devoted to such cooperation

* To enable developing countries to achieve a greater degree of participation in international economic activities and to expand international cooperation for development (3)

First among the benefits of this cooperation is the ability to strengthen the voice and bargaining power of developing countries in multilateral negotiations.

Until recently, the SSC efforts that received the most attention were confined to the areas of South-South trade promotion and domestic institutional building. Some have argued that until the 1980s, even the notion of greater South-South trade and economic coordination was primarily a political aspiration. (1) During this period, regional organizations for trade and economic cooperation such as the Central American Common Market and the Association of South East Asian Nations (ASEAN) were formed. Additionally, UN-sponsored programs such as UNCTAD (the UN Conference on Trade and Development) and the Fund for Science and Technology and Development were established to promote not only trade but also technical cooperation among developing states.

More recently, the rise of emerging economies from the Global South (e.g., Brazil, Russia, India, China, and South Africa) has significantly changed the dynamics of development finance by refocusing attention toward the role of SSC in development finance. Improved economic performance and temporarily favorable terms of trade have resulted in significant financial resources and know-how that are increasingly funneled back into the development of the Global South. With the rise of these powers, we have seen an increase in SSC cooperation in several areas. For example, Barbara Fritz and Laurissa Muhlich outline three ways we have seen cooperation in monetary and financial areas: regional pooling of international reserves to address short-term imbalances in balance of payments; regional payment systems that reduce exposure to volatility in exchange rates and promote interregional trade; and macroeconomic cooperation and integration to promote structural transformation. (5) It is important to note that SSC in these areas had been around for some time (for example, the Latin American Reserve Fund was founded in 1976). (6) Additionally, there has been an increase in bilateral assistance from regional hegemons and rising powers. Felix Zimmerman and Kimberly Smith identify the providers of this particular type of South-South development cooperation as developing countries that deliver expertise and financial support to other developing countries to foster their economic and social growth. (7)

Multilateral Development Banks

Development finance is the provision of finance to market segments that are underserved by the financial system. Generally, these underserved areas include projects that might be considered especially risky (such as investments in the development of new technologies), long-term projects that may require a lengthy lead time, small or medium-sized enterprises that may lack collateral, and projects for which social payoffs exceed private payoffs. (8) Alternative financial institutions for development are important because of the instability and procyclicality of private flows to these sectors. Relying solely on foreign private flows is not a sensible approach for developing countries, as volatility can impede a country's access to financing for development. (9) In addition, because the credit ratings of many multilateral institutions are better than those of the individual member countries, MDBs can lend at better terms and provide a mechanism for mobilizing additional financial resources among other regional development banks (RDBs) and domestic agencies. Thus, development finance institutions are distinctive within the financial system because they serve unique segments of the market.

At the global level, the World Bank provides multilateral development banking, while at the regional level, RDBs have been part of the international financial architecture since the late 1950s. Since that time, the volume of lending by RDBs has increased substantially, due not only to the increase in the number of players but also to increases in the capitalization of these banks. Today, RDBs such as the Inter-American Development Bank and the Asian Development Bank surpass World Bank lending in their respective regions. Even subregional banks have proven quite prolific. For example, in recent years, lending activity by the Andean Development Corporation (CAF) neared that of the Inter-American Development Bank and the World Bank in Latin America.

While some argue that a system of multiple MDBs can be complex and unwieldy, many critics of global institutions such as the World Bank and the International Monetary Fund argue that regional arrangements offer an important supplement to global development finance. (10) For example, Fernando Prada argues that having a "decentralized and financially healthy" network of MDBs allows for competition and collaboration at different levels determined by their comparative advantages. (11) Moreover, Amar Bhattacharya, Mattia Romani, and Nicholas Stern find that in order to meet infrastructure needs in the developing world, spending will need to more than double by 2020. (12) While most funding for infrastructure projects comes from private financial flows and...