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Why is there Multilateral Lending?

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  • Rodrik, Dani

Abstract

Why should multilateral lending exist in a world where private capital markets are well developed and governments have their own bilateral aid programmes? If lending by the World Bank, IMF, and regional development banks has an independent rationale, it must rest on advantages generated by the multilateral nature of these institutions. There are in principle two such advantages. First, since information on the quality of investment environments in different countries is in many ways a collective good, multilateral agencies are in a better position to internalize the externalities that may arise. This creates a rationale for multilateral lending in terms of information provision, and particularly in terms of monitoring government policies in recipient countries. Second, as long as multilateral agencies retain some degree of autonomy from the governments that own them, their interaction with recipient countries, while official in nature, can remain less politicized than inter-governmental links. This in turn endows multilateral agencies with an advantage in the exercise of conditionality, that is in lending that is conditional on changes in government policies. Neither of these two potential advantages of multilateral lending has much to do with lending, per se. Multilateral lending may be required to make these agencies tasks incentive compatible. The empirical analysis reveals little evidence that multilateral lending has acted as a catalyst for private capital flows. The paper concludes by discussing the implications for multilateral institutions.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1207.

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Date of creation: Jul 1995
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Handle: RePEc:cpr:ceprdp:1207

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Keywords: Foreign Aid; International Financial Institutions; Multilateral Lending;

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References

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  1. Michael P. Dooley, 1995. "A Retrospective on the Debt Crisis," NBER Working Papers 4963, National Bureau of Economic Research, Inc.
  2. Martin Feldstein, 1997. "Tax Policy and International Capital Flows," NBER Working Papers 4851, National Bureau of Economic Research, Inc.
  3. Gavin, Michael & Rodrik, Dani, 1995. "The World Bank in Historical Perspective," American Economic Review, American Economic Association, vol. 85(2), pages 329-34, May.
  4. Eichengreen, Barry, 1990. "Trends and Cycles in Foreign Lending," Department of Economics, Working Paper Series qt82z7083m, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  5. Claessens, S. & Gooptu, S., 1993. "Portfolio Investment in Developing Countries," World Bank - Discussion Papers 228, World Bank.
  6. Jeremy Bulow & Kenneth Rogoff & Afonso S. Bevilaqua, 1992. "Official Creditor Seniority and Burden-Sharing in the Former Soviet Bloc," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(1), pages 195-234.
  7. Diwan, I. & Rodrik, D., 1992. "External Debt, Adjustment, and Burden Sharing: A Unified Framework," Princeton Studies in International Economics 73, International Economics Section, Departement of Economics Princeton University,.
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