Noting that a major purpose of multilateral institutions is to deliver international public goods, this paper applies the theory and practice of public economics, as well as papers in this section, to the potential and challenges facing these institutions. First, I show that deviations from the standard model of fiscal decentralization are reflected in the experience of multilateral institutions. Next, I consider the case of one of the largest of such institutions, the World Bank, and show how the nature of the international public good it was originally designed to produce—the pooling of investment risk in developing countries—has changed to those of climate change, peace, and knowledge. I suggest that, in order to deliver on this new set of public goods, the World Bank needs to change the way it is organized—away from the country-based model to regional and subnational groupings—and shift its strategy to one where knowledge leads lending rather than the other way around.

Why do we need multilateral institutions? While there are many answers to this question, including in Ngaire Woods’s paper in this volume, I will start with simple, economic reasoning. Multilateral institutions exist to provide international public goods. This statement implies that the goods (or services) should be public goods. In the strictest definition, this means that the good should be nonrival and nonexcludable, such as clean air or national defense. The definition could be broadened to include goods with externalities, such as education or immunization, where public intervention leads to a better outcome for society than what private actors would have achieved. In the case of multilateral institutions, the public goods should be international. That is, the externalities should cross borders, or the goods should be nonrival and nonexcludable among countries.

This public-economics perspective on multilateralism is illustrated in several of the papers in this volume. The regulation of multinational corporations (Maha Rafi Atal’s paper) is an example of an international public good since no single country can capture the benefits of such regulation, nor will the private sector self-regulate to the socially desirable extent. Similarly, the European Union and the World Trade Organization (WTO) provide a set of rules under which countries that are open to trade can operate (Begg 2021). Incidentally, the additional benefit mentioned in Begg (2021)—namely, that the rules of the European Union help countries overcome domestic resistance to trade opening—while important, is a national public good.

I use the term international, as opposed to global, public goods because not all multilateral institutions cover the planet. Some cover regions such as Latin America or Africa, and others subregions. This is an application of the principle of subsidiarity (Oates 1972). The jurisdiction governing a public good should be the smallest one that captures the effects of that good. For instance, a sanitation program should cover the area where the waste is generated. Leslie Elliott Armijo’s paper in this volume applies this principle to the management of debt in Latin America, suggesting that “clubs,” especially of smaller countries in the region, may be a productive counterpoint to the larger countries as well as to multilateral institutions.

The principle of subsidiarity could be useful in designing strategies to mitigate climate change, the quintessential global public good. Climate change affects the whole planet. Therefore, individual countries have a weak incentive to curb carbon emissions, which is why a global climate mitigation agreement has been elusive. However, three economies –China, the United States, and the European Union—account for 42 percent of greenhouse gas emissions (IPCC 2022). A cooperative agreement among these three would go a long way toward achieving a lower increase in the earth’s temperature in the coming decades.

While the public-economics perspective is useful in analyzing the management of public goods, it has at least two limitations. First, even if you apply the subsidiarity principle and design an institution to encompass the public good, the incentives within the institution may not lead to that public good being delivered. In the area of fiscal decentralization, devolving primary education to local districts in Pakistan did not lead to improved education outcomes because, among other things, teachers remained unaccountable to the local political leader (Ahmad et al. 2006). Secondly, most decisions about decentralizing power are political, and those who stand to lose power (usually the central government bureaucrats) will resist the change (Devarajan, Khemani, and Shah 2009).

Multilateral institutions suffer from the same problems. If multilateralism is about providing international public goods, then voters in individual countries are unlikely to support it especially if it comes at the expense of national public goods. As a result, as Omar Dumdum observes in his paper in this special collection, international cooperative agreements are forged among political elites with little regard for public opinion. Yet, as Dumdum points out, public opinion, in the absence of a global government, can be a powerful way of holding elites accountable, on the one hand, and providing legitimacy to multilateralism, on the other. We can speculate whether present-day multilateral institutions would have done better in delivering a classic international public good—COVID-19 vaccines—had they been more subject to real-time public opinion.

Similarly, even if a multilateral institution is appropriately designed to deliver an international public good, simply staffing it with people who know the most about that good is not sufficient. The diversity of the staff and how they interact will affect the performance of that institution, as the paper by Catherine Weaver and colleagues in this volume points out in the context of the IMF and the World Bank.

Perhaps the most useful application of the public-economics approach is in understanding the contemporary problems of certain multilateral institutions such as the WTO and the World Bank. Quite simply, the nature of the international public good that these organizations were designed to provide has changed. When China joined the WTO in 2001, it came under the same rules as other low-income countries (China had just graduated from IDA, the World Bank’s concessional assistance window to poor countries). Twenty years later, China is the world’s second-largest economy and a major trading power. These changes call for a revision of the rules under which China operates. The original rules—the international public good that the WTO provides—no longer apply to China.

In the case of the World Bank, which was formed at the end of the Second World War, the original rationale was that neither the war-torn countries of Europe nor the newly independent countries of Asia and Latin America could attract private capital because they were considered too risky investments. But a global institution with collateral resources from the world’s richest countries could pool that risk and provide much-needed capital to these recovering and developing economies (Kapur, Lewis, and Webb 1997). Risk pooling was the international public good.

To deliver on this mandate, the World Bank was organized around a country-based model. Each country department converted a share of the pooled financing into projects in that country. When they realized that some of the projects were not productive because of poor policies and institutions in the country, the bank started providing finance for policy and institutional reforms. Finally, because it worked in almost all countries and sectors, the bank accumulated a sizable knowledge base from which it provided knowledge assistance to countries.

Today, over a trillion dollars of private capital flows to developing countries, dwarfing the bank’s $100 billion of lending. Private capital markets no longer see developing countries as a risky investment. The original rationale for a multilateral lending institution—risk pooling—may not be relevant anymore.

At the same time, there are global public goods that are chronically undersupplied because no multilateral institution is currently mandated to supply them (Birdsall and Subramanian 2007). The most high profile of these is mitigating climate change. Another is addressing fragility, conflict, and violence (FCV). Traditionally, FCV has been seen as a national issue. But recent experience shows that, alongside trade and capital flows, conflict has been globalized. A civil war in Syria spills over not just to neighboring countries through refugees in Lebanon, Jordan, and Turkey, but also via terrorism to France and the United States (World Bank 2020). Peace in Syria is therefore a global public good. A third undersupplied global public good is knowledge about developing countries. Even if incentives for producing knowledge in general are reasonably aligned, through patents, prestige, and career advancement, these apply mainly to knowledge about developed countries; knowledge of poor countries is underprovided (Das et al. 2013).

Can the World Bank be transformed into the multilateral institution that provides these international public goods? The qualified answer is yes, but there will have to be major changes to the bank’s governance structure, which is a legacy of its earlier rationale. As mentioned above, to provide investment to developing countries, the bank was organized according to a country-based model. The country director for India, say, was supposed to maximize the development of India. But if the mandate is to mitigate climate change, then the India country director’s interest should be to maximize global welfare with India bearing some of the costs. The only way to make this transition is to move from a country-based model to one that is regional or global.

Addressing fragility requires a different change to the country model. In some countries, the fragility is at the subnational level. While India is not a fragile state, some Indian states such as Bihar have all the characteristics of fragile states. Southern Egypt shares similar indicators with fragile states in Africa, while the northern part of the country around Cairo and Alexandria is completely different. With the country-based model, the bank works with the central government, which may not wish to accept that there are fragile regions within the country. Yet the most important contribution the bank can make is to reduce fragility at the subnational level.

In short, if the World Bank is to deliver on the international public goods of climate mitigation and fragility reduction, it will have to abandon the country-based model. This is more than just a reorganization of the staff. It involves changes in the governance structure, which currently consists of representatives of the member countries, with an executive board whose voting structure reflects the size of the paid-in capital of the original shareholders in 1947. Such a governance arrangement made sense when the international public good was risk pooling to deliver investment in developing countries. The shareholders would advocate for the interests of individual countries, which was consistent with the bank’s mandate of promoting the development of those countries. But when the mandate is mitigating climate change, there should be a governance structure that maximizes global welfare rather than any individual country’s welfare. Likewise, complementary with Ngaire Woods’s paper, the leader of the institution should be chosen based not on their nationality but on their role as a global citizen.

Although the World Bank is a major producer of knowledge about development, the role of knowledge in the institution will have to change if the bank is to be the major provider of this international public good. Within the organization, knowledge plays a secondary role to the lending program, which, as mentioned above, is no longer an international public good (World Bank 2011). The roles have to be reversed. There is still a role for lending, as a way of facilitating the policy and institutional change needed to deliver on the global public goods of climate mitigation and fragility reduction. But the lending should be guided by the knowledge rather than the other way around.

If multilateral institutions exist to deliver international public goods, then their design must be tailored to the public good that is their mandate. In particular, the scope of the institution should reflect the scope of the public good—the subsidiarity principle. Moreover, even if the institution is properly designed around a genuine international public good, it will not be able to deliver unless the incentives and politics are addressed. Finally, when the nature of the original international public good changes, so should the institution. The world has too many pressing problems to have multilateral institutions that are not fit for purpose.

The author has no competing interests to declare in the preparation of this paper.

Shantayanan Devarajan is professor of the practice of international development at Georgetown University’s Walsh School of Foreign Service. He spent twenty-eight years at the World Bank, where he was the senior director for development economics; the chief economist of the South Asia, Africa, and Middle East and North Africa regions and of the Human Development Network; and research manager for public economics. Before joining the World Bank, he was on the faculty of Harvard Kennedy School. The author or coauthor of over 150 publications, his research covers public economics, trade policy, natural resources and the environment, political economy, and general-equilibrium modeling of developing countries. Born in Sri Lanka, Devarajan received his AB in mathematics from Princeton University and his PhD in economics from the University of California, Berkeley.

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