97 Pages Posted: 15 Jul 2011 Last revised: 28 Aug 2011
Date Written: July 13, 2011
Recent development challenges highlight a pressing need to reevaluate whether the post-World War II behemoths of international development finance are up to the tasks being demanded of them today. These challenges include both the problems to be addressed (climate change, HIV/AIDS, and abject poverty among them) and a change in attitude about the desired modalities for addressing them (financing via inclusive, participatory, partnerships rather than intergovernmental organizational fiat).The institutions that dominate the current order, the United Nations (“U.N.”) and the World Bank, have undergone a crisis of legitimacy. The U.N., though originally charged with protecting the global welfare, has not played a central role in the design and financial administration of the more recent innovations in development finance, such as carbon finance, microfinance, and public-private financing initiatives. Instead, it has ceded primary responsibility for innovative international development financing to the World Bank. However the World Bank, tasked with the responsibility of being the developing world’s primary source of multilateral development finance, struggles with the inherently schizophrenic nature of its role as a development institution on throne hand, and a bank on the other. Repeatedly, its banking id prevails, too often to the detriment of the development agenda.
Recognizing these inadequacies, the world’s development aid donors are engaged in an ongoing quest to find alternatives to these institutions. This quest takes the form of setting up numerous funds narrowly tailored to finance specific, narrowly defined needs. Examples of these funds include the Global Environment Trust Fund (“GEF”) and the Global Fund to Fight HIV Aids, Malaria and Tuberculosis. The Climate Change Fund, proposed in the December 2009 Copenhagen Accord (and recently renamed the Green Climate Fund), is poised to follow this approach. This ad hoc special-purpose fund approach is reactive and lacks a coherent, unifying vision of how to meet today’s development challenges. The funds that have been created fill a need but are a fragmented, sub-optimal response to that need. They suffer from several deficits, ranging from governance gaps and lacunae in accountability, to uncertain status in the international political and legal order. These deficits generate new risks and costs for the international aid architecture.
In this Article, I argue that the time has come to redesign the interrelationship between these special-purpose funds and the U.N. and the World Bank so that these funds operate in sync with, rather than as bypasses to, those institutions. I propose that this redesign occur in two stages. In the immediate term, I argue that the contributions that the special-fund phenomenon makes to the design of international development finance should be strengthened by addressing the governance and other deficits apparent in these funds’ structures. Efforts to strengthen these funds should be informed by an understanding of the task at hand, drawn from principles of principal-agent and accountability theory, as applied to third party financing arrangements. In the longer term, I argue, the popularity of these special purpose funds as a form of collective finance points to a need to re-design key aspects of the way the U.N. and the World Bank do business so that those institutions can serve as effective facilitators and vehicles of such finance, rather than as pillars of an out-dated model that has to be circumvented. In furtherance of these arguments, I make some preliminary suggestions for the kind of short-term and long-term changes I advocate.
Keywords: International Development, International Institutions, International Organizations, Agency Costs, Accountability, Institutional Design, Trust Funds, World Bank
JEL Classification: K32, K33, K00, K19
Suggested Citation: Suggested Citation
Smyth, Sophie E., Collective Action for Development Finance (July 13, 2011). University of Pennsylvania Journal of International Law, Vol. 32, p. 961, 2011 ; Temple University Legal Studies Research Paper No. 2011-28. Available at SSRN: https://ssrn.com/abstract=1885600