Introduction

Multilateral development banks (MDBs) are international institutions that provide financial assistance, typically in the form of loans and grants, to developing countries in order to promote economic and social development. The United States is a member and donor to the World Bank and four smaller regional development banks: the African Development Bank (AfDB), the Asian Development Bank (AsDB), the European Bank for Reconstruction and Development (EBRD), and the Inter-American Development Bank (IDB).¹

Congress plays a critical role in shaping U.S. policy at these MDBs through funding and oversight of U.S. participation in the institutions. This report provides an overview of the MDBs, the role of Congress in formulating U.S. policy at the MDBs, and current MDB policy debates.

Creation and Evolution of the MDBs

The United States and allies created the World Bank after World War II to help finance the reconstruction of Europe and Japan. In the 1950s-1990s, governments in key regions created development banks to specialize in funding development projects in specific geographic regions. While the World Bank has a near global membership, the regional banks are smaller (Table 1). Their members include countries in the region, as well as some donor countries from outside the region.

World Bank

The World Bank is the oldest MDB as well as the largest (by lending volumes and member countries). The World Bank Group has three lending facilities. The first, the International Bank for Reconstruction and Development (IBRD), was created in 1944. The IBRD provides primarily market-based loans (often referred to as non-concessional financial assistance) to the governments of middle-income countries. The IBRD initially focused on providing financing for large infrastructure projects and has broadened to also include social projects and policy-based loans. IBRD membership has grown from 28 countries in 1944 to 189 countries today.

A second lending facility, the International Finance Corporation (IFC), was established in 1955 to extend loans and equity investments to private firms in developing countries. In 1960, at the suggestion of U.S. officials, the International Development Association (IDA) was created to make concessional loans (with low interest rates and long repayment periods) to the poorest countries. IDA also now provides grants to these countries.

Regional Development Banks

The Inter-American Development Bank (IDB) was created in 1959 in response to interest among Latin American governments for greater economic development financing and U.S. concerns about the spread of communism in the region.² Consequently, the IDB has tended to focus more on social projects than large infrastructure projects, although it began lending for infrastructure projects as well in the 1970s.³

The Organisation of African Unity, predecessor of the African Union, created the African Development Bank (AfDB) in 1964 and was for nearly two decades an African-only institution, reflecting the goal of African governments to promote stronger unity and cooperation among the countries of their region. In 1973, the AfDB created a concessional lending window, the African Development Fund (AfDF), to which nonregional countries could become members and contribute. The United States joined the AfDF in 1976. In 1982, membership in the AfDB non-concessional lending window was officially opened to nonregional members.

The Asian Development Bank (AsDB) was created in 1966 to promote regional cooperation. Similar to the World Bank, and unlike the IDB, the AsDB's original mandate focused on large infrastructure projects, rather than social projects or direct poverty alleviation. The AsDB's concessional lending facility, the Asian Development Fund (AsDF), was created in 1973. In 2017, concessional lending was transferred from the AsDF to the AsDB, although the AsDF still provides grants to low-income countries.

The European Bank for Reconstruction and Development (EBRD) was founded in 1991. The motivation for creating the EBRD was to ease the transition of the former communist countries of Central and Eastern Europe (CEE) and the former Soviet Union from planned economies to free-market economies. Unlike the other MDBs, the EBRD has an explicitly political mandate to support democracy-building activities. The EBRD's financial assistance is heavily targeted on the private sector, although the EBRD does also extend some loans to governments in CEE and the former Soviet Union. The EBRD does not have a concessional loan window. In 2011, following the "Arab Spring," the EBRD expanded its geographical mandate to the southern and eastern Mediterranean. Several countries have since joined the EBRD.⁴

Structure and Organization

The World Bank is a specialized agency of the United Nations. However, it is autonomous in its decisionmaking procedures and its sources of funds. It also has autonomous control over its administration and budget. The regional development banks are independent international agencies and are not affiliated with the United Nations system.

Board of Governors

The MDBs have similar internal organizational structures. Run by their own management and staffed by international civil servants, each MDB is supervised by a Board of Governors and a Board of Executive Directors. The Board of Governors is the highest decisionmaking authority, and each member country has its own governor. Countries are usually represented by their Secretary of the Treasury, Minister of Finance, or Central Bank Governor. The United States has always been represented by the Treasury Secretary. The Board of Governors meets annually, though it may act more frequently through mail-in votes on key decisions.

Board of Directors

While the Boards of Governors in each of the banks retain power over major policy decisions, such as amending the founding documents of the organization, they have delegated day-to-day authority over operational policy, lending, and other matters to their institutions' Board of Executive Directors. The Board of Executive Directors in each institution is smaller than the Board of Governors. There are 25 members on the World Bank's Board of Executive Directors, and fewer for some of the regional development banks.

Some major donors, including the United States, are represented by their own Executive Director. Other Executive Directors represent groups of member countries. Each MDB Executive Board has its own schedule, but they generally meet at least weekly to consider MDB loan and policy proposals and oversee bank activities.

Weighted Voting

Decisions are reached in the MDBs through voting. Each member country's voting share is generally weighted on the basis of its cumulative financial contributions and commitments to the organization. The voting power of the United States is large enough to veto major policy decisions at the World Bank and the IDB (Figure 1). However, the United States cannot unilaterally veto more day-to-day decisions, such the approval of individual loans.

Figure 1. U.S. Voting Power

Source: Figure created by CRS using MDB annual reports and financial statements.

Donor Commitments and Contributions

MDBs are able to extend financial assistance to developing countries due to the financial commitments of their more prosperous member countries.

Non-Concessional Lending Facilities

To offer non-concessional financial assistance, the MDBs borrow money from international capital markets and then relend the money to developing countries. MDBs are able to borrow from international capital markets because they are backed by the guarantees of their member governments. This backing is provided through the ownership shares that countries subscribe to as a consequence of their membership in each bank.

Donors typically provide 5%-10% of the value of these capital share as actual payments to the MDBs, called "paid-in capital." They provide the rest of these shares in the form of a guarantee that the donor stands ready to provide to the bank if needed. This is called "callable capital," because the money is not actually transferred from the donor to the MDB unless the bank needs to call on its members' callable subscriptions. Banks may call upon their members' callable subscriptions only if their resources are exhausted and they still need funds to repay bondholders. To date, no MDB has ever had to draw on its callable capital.

The financial backing of their member country governments enables the MDBs to borrow money in world capital markets at the lowest available market rates, generally the same rates at which developed country governments borrow funds inside their own borders. The banks are able to relend this money to their borrowers at much lower interest rates than the borrowers would generally have to pay for commercial loans, if, indeed, such loans were available to them. As such, the MDBs' non-concessional lending windows are self-financing and even generate net income.

U.S. Contributions

The United States is the largest donor at the IBRD, IFC, EBRD, and IDB. The United States is the second-largest donor to the AfDB (after Nigeria) and the AsDB (after Japan). U.S. financial commitments to the non-concessional lending facilities varies by bank, from less than $5.0 billion at the IFC and the EBRD to over $50 billion at the World Bank and the IDB (Figure 2).

Figure 2. Non-Concessional Lending Windows: U.S. Financial Commitments 2022

Source: Figure created by CRS using MDB annual reports and financial statements.

Concessional Lending Facilities

Concessional lending windows have generally been funded directly from the financial contributions of their member countries. Most of the money comes from the more prosperous countries, while the contributions from borrowing countries are generally more symbolic than substantive. The MDBs have also transferred some of the net income from their non-concessional windows to their concessional lending windows in order to help fund concessional loans and grants. In 2018, IDA started issuing some bonds to finance its programs, similar to the bonds issued by the non-concessional windows.

As the MDB extends concessional loans and grants to low-income countries, the window's resources become depleted. The donor countries meet together periodically, usually every three to five years, to replenish those resources. These increases in resources are called replenishments. If these facilities are not replenished on time, they will run out of lendable resources and have to reduce their levels of aid to poor countries.

U.S. Contributions

The United States is the largest donor at IDA and the AfDF, and the second-largest donor to the AsDB (after Japan). The United States has contributed more than $55 billion to IDA since it was created, $5 billion to the AfDF, and $4.7 billion to the AsDF (Figure 3).

Figure 3. Concessional Lending Windows: Cumulative U.S. Contributions FY2022 (World Bank) and 2022 (other MDBs)

Source: Figure created by CRS using MDB annual reports and financial statements.

Development Projects and Financing

The MDBs have evolved to provide an array of financial assistance for developing countries. MDB financing can address a range of development objectives, and can be utilized by a range of actors in developing countries.

Types of Financing

MDBs provide financial assistance to developing countries, typically in the form of loans and grants, for investment projects and budget support. Investment project financing includes large infrastructure projects, such as highways, power plants, port facilities, and dams, as well as social projects, including health and education initiatives. Development policy financing provides budget support to developing countries to help borrowers address actual or anticipated development financing requirements.

Types of Borrowers

Non-concessional and concessional assistance is generally targeted at different types of recipients (Table 2). Non-concessional assistance, typically in the form of loans but also through equity investments and loan guarantees, is generally extended to governments of middle-income countries, although some creditworthy low-income countries may be eligible. Non-concessional lending facilities are also referred to the bank's "ordinary capital resources." Some MDBs also provide non-concessional financial assistance to private-sector firms in developing countries, either from ordinary capital resources or a separate lending window. Concessional lending facilities provide financial assistance in the form of grants or low-cost loans to the governments of low-income countries.

Amount of Financing

In 2022, the MDBs provided more than $100 billion in financial assistance to developing countries (Figure 4). Of the total, about 80% was provided by the World Bank, and about 20% by the regional development banks. In 2022, about 40% of the assistance were concessional loans and grants, and about 60% were market-based loans and other types of non-concessional financial assistance.

Figure 4. Financial Assistance: New Commitments FY2022 (World Bank) and 2022 (other MDBs)

Source: Figure created by CRS using MDB annual reports and financial statements.

Effectiveness of MDB Financing

Some observers have raised questions about the effectiveness of foreign aid, including the aid provided by the MDBs. In the early 2000s, scholars conducted several broad assessments of the impact of foreign aid on economic growth in developing countries. These studies produced varying results, making it difficult to reach firm conclusions.⁵ Over the past two decades, it has become more common for academic studies to focus on more specific assessments of foreign aid projects and initiatives and their impact on a range of outcomes. For example, there are studies assessing the environmental effects of World Bank funded hydropower dams, the impact of cash transfers of educational impacts in Tanzania, the impact of World Bank policy loans on the quality of public sector governance, and the impact of foreign aid on maternal mortality, among numerous other studies.⁶

Each MDB also has an independent evaluation unit or department focused on evaluating its development effectiveness.⁷ These units, which report directly to the Board of Directors, evaluate the banks' development projects, strategies, and policies. In 2022, policy experts at the Center for Global Development called for more rigorous impact evaluation assessments, noting that less than 5% of World Bank projects have been subject to formal impact evaluation methods since 2010.⁸

Long-standing criticisms of the MDBs that some have expressed include, among others, that the MDBs are large international bureaucracies focused on getting money "out the door" to developing countries, rather than on delivering results in developing countries; that the MDBs emphasize short-term outputs like reports and frameworks but do not engage in long-term activities like the evaluation of projects after they are completed; and that they put enormous administrative demands on developing-country governments.⁹ Many of the MDBs were also created when developing countries had little access to private capital markets.

Proponents of the MDBs have argued that, despite some flaws, such aid at its core serves vital economic and political functions. With 1.8 billion people living on less than $3.65 a day in 2019 (most recent estimate available),¹⁰ they argue that not providing assistance is simply not an option; they argue it is the "right" thing to do and part of "the world's shared commitments to human dignity and survival."¹¹ These proponents typically point to the use of foreign aid to provide basic necessities, such as food supplements, vaccines, nurses, and access to education, to the world's poorest countries, which may not otherwise be financed by private investors. Proponents also argue that the MDBs provide a key role in generating and disseminating key economic data and "lessons learned" about development projects at country, regional, and global levels.¹²

The Role of Congress

Congress plays an important role in authorizing and appropriating U.S. contributions to the MDBs and exercising oversight of U.S. participation in these institutions.

Authorizing and Appropriating U.S. Financial Contributions

Authorizing and appropriations legislation is required for U.S. contributions to the MDBs. The Senate Committee on Foreign Relations and the House Committee on Financial Services are responsible for managing MDB authorization legislation. During the past several decades, authorization legislation for the MDBs has not passed as freestanding legislation. Instead, it has been included through other legislative vehicles, such as the annual foreign operations appropriations act, a larger omnibus appropriations act, or a budget reconciliation bill.

The Foreign Operations Subcommittees of the House and Senate Committees on Appropriations manage the relevant appropriations legislation. MDB appropriations are included in the annual foreign operations appropriations act or a larger omnibus appropriations act.

Since at least the past decade, each Administration's budget requests for the MDBs has included three major components: funds to replenish the concessional lending windows, funds to increase the size of the World Bank's non-concessional lending windows (a "general capital increase," or GCI), and funds for more targeted funds administered by the MDBs, particularly those focused on climate change and food security. Replenishments of the MDB concessional windows happen regularly, while capital increases for the MDB non-concessional windows occur more infrequently.

Congressional Oversight of U.S. Participation

Since the MDBs were created, the President has delegated the authority to manage and instruct U.S. participation in the MDBs to the Secretary of the Treasury. Within the Department of the Treasury, the Office of International Affairs has the lead role in managing day-to-day U.S. participation in the MDBs.

Congress exercises oversight over U.S. policy at the MDBs through the confirmation process. The President appoints the U.S. Governors and Executive Directors, and their alternates, with the advice and consent of the Senate (Table 3).

Congress also holds hearings on a range of MDB issues. The Treasury Secretary testifies annually before the appropriations committees on the Treasury Department's budget request for the international financial institutions (IFIs), which includes the MDBs.¹⁹ By law, the Treasury Secretary also testifies before the House Financial Services Committee and the Senate Foreign Relations Committee on the state of the international financial system, which often includes discussion of the MDBs. The House Financial Services Committee and the Senate Foreign Relations Committee also periodically hold hearings on specific MDB topics with Administration officials and policy experts. For example, in 2023, the House Financial Services Committee held a hearing on the role of the IFIs in an era of great power competition.²⁰

Congress also shapes U.S. policy at the MDBs through legislation (see the text box below). For example, Congress has passed legislation that directs U.S. representatives at the MDBs to advocate for specific policies and vote specific ways at the MDBs.²¹ Congress has also mandated reporting requirements, which require the Treasury Secretary to submit reports on various MDB issues.²² Congress has also attempted to influence policies at the MDBs through the power of the purse—withholding funding from the MDBs until certain reforms are enacted.²³ Members also meet, consult, and correspond with MDB officials directly.

Selected Policy Issues

The United States has historically played a strong leadership role at the MDBs, including a key role in creating the institutions and shaping their policies and lending to developing countries. There are a number of MDB policy issues that Members are actively considering or might consider during the 118^th Congress, particularly as it considers U.S. funding levels for the MDBs and confirmations for U.S. representatives at the MDBs. Some of these issues are highlighted below.

U.S. Leadership

World Bank reform agenda. Treasury Secretary Janet Yellen supports a reform agenda at the World Bank that would increase funding to combat climate change, among other objectives. Should the World Bank do more to address global issues like climate change? How in practice would the reform agenda operate? Would it require additional financing? Would the reform agenda serve as a model for the regional banks?

Confirmation of U.S. representatives to the MDBs. Several nominations for U.S. representatives to the MDB are pending before the Senate. How is U.S. leadership at the MDBs affected when U.S. positions are vacant and/or filled with officials serving on an acting basis?

Selection process for MDB leadership. By convention, the President of the World Bank has always been a U.S. citizen and the head of the International Monetary Fund (IMF) has always been European.²⁴ While some criticism of this convention has been growing over the past decade,²⁵ the U.S. nominee (Ajay Banga) was unopposed in the most recent World Bank President election in 2023. What are the ideal characteristics for the heads of MDBs, and do selection processes need reform?

MDB Operations and Structure

Proliferation of MDB trust funds. In addition to their main lending facilities, the MDBs operate a number of trust funds, whereby one or more donors contribute funds for a specific purpose. Trust funds at the MDBs have proliferated in recent decades. Currently, the World Bank has more than 100, the AsDB has more than 60, and the IDB has more than 50.²⁶ To what extent does the current structure of trust funds serve the interests of donors and affect the delivery of financial assistance to developing countries? Could or should they be consolidated?

Alternative sources of financing. The World Bank was created to address shortages of capital after WWII. In subsequent decades, private international capital markets developed and donor countries created new multilateral aid organizations, including the China-led Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (created by the BRICS countries [Brazil, Russia, India, China, and South America]). How, if at all, has the development of private capital markets affected MDB operations, and do the MDBs crowd out private investment? What is the impact of new development banks of which the United States is not a member?

China's Role in the MDBs

China's eligibility for financial assistance from the MDBs. The World Bank and the AsDB have policies on the "graduation" of countries from financial assistance. Although China has exceeded the threshold for initiating graduation negotiations since 2016 (Figure 5), China continues to receive financial assistance from these banks. China also has significant resources it could tap to self-fund development projects and provides significant financing to other developing countries. What are the conditions under which China should graduate as a recipient of MDB financial assistance? What are the potential implications of China's graduation?

Figure 5. China and World Bank Graduation

Source: World Bank.

China's membership in the EBRD and IDB. China joined the IDB in 2009 and the EBRD in 2016 as a non-borrowing (donor) member country. What have been the implications of China's membership in these institutions? Has China's membership increased the financial resources available for membership projects? What types of policies has China advocated for at these banks?

MDB Energy Policies

MDB financing for fossil fuels. U.S. policy on MDB financing of fossil fuel projects has shifted over the past decade. Currently, U.S. policy under the Biden Administration is to advocate for MDB investments in clean energy and limit support for MDB fossil fuel projects to exceptional circumstances.²⁷ Under what conditions should the MDBs support fossil fuel projects? How affordable are alternative energy sources?

MDB financing for nuclear energy. For decades, the MDBs have not financed the construction of nuclear power plants, although some MDBs provide financing for safety improvements of operating plants and radioactive waste management. Some policymakers and analysts have called for MDBs to finance nuclear projects, particularly to help developing countries reduce their reliance on Russian energy and expand access to affordable energy.²⁸ Would developing countries be interested in nuclear power projects? How do the potential benefits of nuclear power compare with the risks?

Procurement for MDB Projects

MDB procurement contracts and U.S. firms. Billions of contracts are awarded to carry out investment projects financed by the MDBs each year; in 2021, U.S. firms were awarded about 1%.²⁹ As directed by U.S. law, the Commerce Department assigns procurement officers to each of the MDBs to assist U.S. companies working with the MDBs, advocate on procurement and contracting issues to ensure fair and equal treatment, and work to increase the proportion of MDB projects won by U.S. firms.³⁰ What obstacles do U.S. firms face when bidding on MDB contracts? Should the U.S. government be doing more to support U.S. firms bidding on these contracts?

Intersection off MDB procurement policies and U.S. sanctions. The World Bank does not disqualify businesses that are subject to U.S. sanctions or similar restrictions (such as foreign businesses subject to export controls) from bidding on and winning procurement contracts. According to a 2023 U.S. Government Accountability Organization (GAO) report, at least a small fraction of contracts between 2017 and 2021 appear to have been awarded to businesses on U.S. sanctions and similar lists of concern.³¹ How should MDB procurement policies interact with the sanction policies of member countries? Should the United States seek to block MDB projects from being awarded to firms that are subject to U.S. sanctions or are on other lists of concern?

State-owned enterprises (SOEs), MDB procurement policies, and China. Chinese firms win about 40% of World Bank civil works contracts.³² SOEs are common in China and may benefit from implicit and/or explicit subsidies from the Chinese government. When bidding on MDB contracts, do private U.S. firms compete on a level playing field against SOEs, including Chinese SOEs?