The problem addressed by Research Fellow Dani Rodrik in Discussion Paper No. 1207 is the rationale for multilateral lending in a world where well developed private capital markets as well as bilateral government aid programmes are already well in place. There are in principle two advantages of multilateral institutions: first, information provision - the quality of international investment environments is in many ways a collective good, and multilateral agencies are in a better position to internalize the externalities that may arise; and second, conditionality - autonomous agencies can maintain less politicized contacts with recipient countries, which in turn makes it a somewhat less contentious issue to grant loans conditional on changes in recipient government policies.

The question whether multilateral lending has been productive and whether it has succeeded in playing its informational role is examined in the empirical part of the paper. Two topics are analysed: has multilateral lending acted as a catalyst for private capital flows, and has it been a leading indicator of future economic growth and private investment in borrowing countries? The results are mixed: there is no evidence of multilateral lending acting as a catalyst; if anything, there is some indication of the opposite being the case. There is some evidence, however, that IBRD lending has focused on countries with brighter economic futures.

Why is there Multilateral Lending?
Dani Rodrik

Discussion Paper No. 1207, July 1995 (IM/IT)