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Multilateral banks to emerge stronger

Multilateral banks to emerge stronger
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First Published: Thu, Mar 13 2008. 12 36 AM IST
Updated: Thu, Mar 13 2008. 12 36 AM IST
US senator Patrick Leahy and representative Barney Frank want the Asian Development Bank (ADB) to stick to tough environmental and social standards in its lending. But it’s thinking of relaxing them. It may not have to. While bilateral aid donors such as China currently provide money on easier conditions, tightening world liquidity may leave ADB and its sister multilateral banks—the World Bank, the European Bank for Reconstruction and Development and the IDB—with less competition. As lenders of last resort, they can be choosy.
ADB’s safeguard policies require bank-financed projects to safeguard the environment, provide proper facilities when involuntary resettlement occurs and ensure the preservation of the livelihoods of indigenous peoples. In practice, the cost of designing, implementing and monitoring ADB’s safeguard requirements can make the bank uncompetitive, particularly in low-income countries where the ability to manage complexity may be limited.
In times of high liquidity, borrowers that find ADB’s requirements onerous have a number of alternative finance sources available. The private sector will currently provide both debt and equity in many emerging markets that it would not touch a decade ago. Bilateral aid donors such as China, whose standards may be less rigorous than ADB’s, are cash-rich and prepared to spend money in poor countries in return for political favours or access to natural resources.
The multilateral banks will find life easier once money tightens. In such an environment, the private sector cuts back the countries to which it will lend, while bilateral aid donors find domestic claims on their resources more pressing. The multilateral banks then become the main providers of financing to poorer countries, fulfilling the aims of their founders, who designed them when development finance was less easily available.
That should not encourage ADB to entrench bureaucracy, whether or not encouraged by the US. Competition in development finance is healthy, and need not lead to a “race to the bottom” in terms of standards. Nevertheless, as AAA-rated financiers of emerging markets projects with liquid balance sheets and ample resources, the multilateral banks may soon find themselves in a strong position to impose their social and environmental wishes.
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First Published: Thu, Mar 13 2008. 12 36 AM IST
More Topics: ADB | Asia | Bank | Liquidity | Competition |