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According to a joint Multilateral Development Bank (MDB) report, in 2022, global MDBs provided $60.9 billion of climate financing to low and middle-income countries, and $38.8 billion for high-income economies, totalling nearly $100 billion.
This is just one example of the impact that MDBs have on the global economy. But how did they get to this point, and how else can MDBs impact international trade?
At the 56th Annual FCI Meeting in Seoul, Deepesh Patel, Editorial Director at Trade Finance Global, was joined on Trade Finance Talks by Steven Beck, Head of Trade and Supply Chain Finance, Asian Development Bank to discuss the role of MDBs in the facilitation of trade and supply chain finance.
Evolution of multilateral development banks
From a trade and supply chain finance perspective, the history and evolution of multilateral development banks (MDBs) is intriguing, especially as their roles have changed significantly in the post-Soviet era.
The first MDB was the International Bank for Reconstruction and Development – the predecessor of the World Bank. It was created in 1945 to assist Europe and Japan recover from the devastation of the Second World War.
Since the creation of the World Bank, governments have come together to create other MDBs, including the African Development Bank, the Inter-American Development Bank, as well as the European Bank for Reconstruction and Development (EBRD), formed in the 1990s to address the development needs of former Soviet countries.
This was motivated by concerns of these countries potentially backsliding into communism, with shareholder governments creating the EBRD to seek to ensure that democratic capitalism was fostered in these countries.
Beck said, “A lot of these countries had a long way to go. But if you look at places like Poland, Romania, and Hungary…today, needless to say, they are quite developed. They are full participants in Europe.” The EBRD’s mandate has since expanded, moving into North Africa, as well as recently adding Nigeria and Kenya to their countries of operations.
Shareholders’ key goals for multilateral development banks
With governments being the ultimate shareholders of MDBs, they need to agree on specific goals. As MDBs are not profit maximising, their mandate is not limited to commercial success, but focusses on development in order to improve people’s lives and drive prosperity – a more difficult task. This is particularly the case in the current environment, where concepts such as sustainable development are difficult to define. Beck said, “the development metrics and the corporate results frameworks are hotly debated. And in fact, the Asian Development Bank is in the process of developing a new corporate results framework.” The Asian Development Bank has 68 shareholder governments, having been created in 1966. Like other MDBs, it is AA-rated and has a mandate to support the reduction of poverty and foster development.
Using multilateral development banks to support the commercial sector
The conventional history of MDBs has been supporting large infrastructure projects through large loans to governments. However, this is now changing with a renewed focus on supporting the private sector in other ways.
Beck said, “Over time, multilateral development banks realised that the private sector has a very important role to play in development, arguably even more important than governments.” With this progression in terms of the role of MDBs, trade finance programmes also developed in the wake of the global financial crisis.
Korea is one example of how MDBs play a key role in facilitating trade to contribute to economic growth. Beck said, “If we look at the impact of trade, certainly in Korea, it is a country that has gone from being one of the poorest countries in the world to one of the richest countries in the world within one generation. The role that trade played in that development is amazing. You also see that throughout Asia, trade has lifted millions of people out of poverty.”
As MDBs have continued to cement themselves in the global economy, they looked for other ways to expand their impact. Since the 1990s, MDBs such as the EBRD, ADB, IFC and others have launched versions of trade and supply chain finance programmes, offering another product to benefit the global economy.
The Asian Development Bank’s efforts to address challenges in trade and supply chain finance
Trade and supply chain finance have experienced significant challenges, even prior to the COVID-19 pandemic. Whilst trade has lifted millions of people out of poverty and plays a crucial role in development, it is not without its issues. Notably, trade and associated supply chains account for approximately 25% of the global carbon footprint.
If trade and supply chains do not undergo a green transition, this will make achieving climate targets nearly impossible. Another issue often identified is the lack of transparency in trade, with significant issues relating to trade-based money laundering (TBML) in support of crime and terrorism.
Additionally, inclusivity is another vital factor in developing a better global trade system. Though trade has increased prosperity for many, other SMEs and individuals do not reap the current benefits.
Beck said, “We need to maximise the development potential from trade by ensuring more people are included in the benefits.”
Finally, the importance of resilience in trade and supply chains was made clear during the pandemic. Beck said, “We are very conscious of just how important it is to ensure that supply chains and global trade are resilient because we need critical goods when and where they are required.”
Importance of and prospects for trade digitalisation
During the pandemic, the ADB was instrumental in launching numerous digital tools and initiatives in efforts to ensure trade continued.
Several new exciting developments around trade digitalisation include the ongoing development and implementation of the UN Model Law on Electronic Transferable Records (MLETR). Beck said, “If we can digitalise trade, which is now a totally antiquated process involving mountains of paper; if we can take that paper and transfer it into data, it would be transformative.”
MLETR can also assist in tackling some of the previously mentioned issues in trade by fostering inclusion and driving better supply chain transparency and resilience. It also has the potential to build an additional layer on top of digitalisation and enable the ability to better monitor environmental and labour standards through trade and supply chains.
With the digitalisation of trade arguably being the most important priority in the sector, it requires agreement within the trade ecosystem amongst a wide range of stakeholders (exporters, shipping ports, customs authorities, warehousing and logistics, and importers) on the electronic form that paper documents should take. Secondly, governments need to align domestic legislation to transpose the recognition of electronic documents into law, as envisaged by the MLETR.
The ADB has brought together other MDBs to create a working group seeking to ramp up this work on digitalisation and the adoption of MLETR. Currently, the process of identifying countries and trade corridors of focus is underway in order to drive the MLETR project forward. Beck said, “It is so critical, and we are very excited about moving that much more quickly.”
