Why development banks are still relevant
Development banking became a mainstay of global economics and development after the end of World War II in Europe, in a bid to stabilise a global financial system and rebuild Europe – both of which were ravaged by war. The creation of the World Bank in 1944 at the Bretton Woods Conference marked the beginning of truly global development finance institutions. Almost seven decades since the establishment of the World Bank, other multilateral development banks (MDBs) have been established, including institutions such as the New Development Bank, the European Investment Bank, the African Development Bank and the Development Bank of Latin America. Whereas commercial banks seek to make a profit off the financial services they provide, development banks issue loans and grants to developing countries and regions in order to improve economic conditions. Although there are other categories of development finance institutions such as national and regional development banks, the membership, size and global significance of MDBs have elicited strong opinions across political, socioeconomic and cultural spectrums, from praise and appreciation to cynicism and hostility.
Global Poverty and Shocks
The need for such institutions remains as long as there is global poverty and unequal development. While there have been significant improvements in reducing global poverty rates (as highlighted by the United Nations Development Programme), it's estimated that 1 billion people still live in multidimensional poverty, with an extra 165 million pushed into poverty between 2020 and 2023. Global shocks such as the COVID-19 pandemic jeopardised the gains towards zero poverty and sustainable development. MDBs such as the European Investment Bank (EIB) mobilised resources to support businesses and communities hardest hit by the pandemic and ensuing lockdowns. The EIB created the Europe Guarantee Fund to support small to medium enterprises, a fund that complemented other initiatives aimed at bridging loans, credit and liquidity. Among many other interventions, the World Bank also increased their lending during the pandemic to developing countries hardest hit by the pandemic.
MDBs have also increasingly played a role in financing a green transition. From loss and damage finance to climate funds, development finance banks have pledged support for a global green recovery. The World Bank is the biggest multilateral financer of climate finance, dispensing over $31 billion in climate funding to developing countries. Established as the financial arm of the United Nations Framework Convention on Climate Change, the Green Climate Fund’s mission is “to support developing countries raise and realize their Nationally Determined Contributions (NDC) ambitions towards low-emissions, climate-resilient pathways.” The New Development Bank funds projects that promote development in member countries while enhancing sustainability practices and methods. MDBs can leverage their resource pool and diversity of membership to fund a range of projects and initiatives. The range of multilateral climate financing means that countries, regions and communities have options to different kinds of financing and supports for immediate and long-term projects.
Reconstruction and rebuilding
Development finance institutions became prominent because of the destruction in post World War II Europe. The focus on reconstruction and post-war recovery is thus a defining part of multilateral banks and their connection to the global financial system. The need for areas affected by war to access investment, loans and grants to rebuild and restore key areas such as infrastructure and cities remains a top priority, especially as armed conflicts continue across the globe. In Ukraine, the European Union’s financial institutions (which includes the EIB) have already pledged to support the country’s post-war reconstruction efforts and boost resilience. This pledge echoes initiatives such as the Marshall Plan and the creation of the World Bank. The understanding is that holistic reconstruction and recovery work best with a multilateral approach, a system that benefits all the stakeholders involved in the process.
Development banks still play a significant role in global finance, trade, climate action and development. As the world becomes increasingly interconnected, they will continue to play an active role on their respective spheres.