Development Finance and the Paradox of “Crowding Out”
Multilateral Development Banks (MDBs) are often guided by what appears on its face to be a well-intentioned principle: the idea that such institutions, frequently funded through public monies or donor funds, ought not to compete against private sector institutions based on a fundamentally unfair advantage. Such institutions should not “crowd out” other players prepared to provide products, services or solutions on commercial terms, because they have access to lower-cost funds, do not face stringent and costly regulation, and are not required to hold capital in reserve against loans.
The intent of course is to ensure a level playing field, and to avoid unintended market distortions.
Does such an overarching constraint impose a limitation that goes against the core mission of international development? Does the application of a commercially-anchored discipline limit the scope of activities and impact of MDBs, perhaps away from beneficiaries that would most need an MDB’s support? How might this situation play out from a strategic communications perspective, given the broad range of audiences and objectives involved?
Developing market borrowers, including sovereigns and financial institutions complain with some justification, that the cost of borrowing form even a leading MDB can be prohibitively high. Senior specialists working to deploy MDB support can find themselves acting more like commercial bankers than development practitioners, with some even losing sight of the latter mission in pursuit of “the deal”.
This dichotomy creates a fundamental and underappreciated challenge in strategic communications.
How does an MDB effectively (and with necessary candour and transparency) communicate the balancing act of achieving development impact without creating market distortions that will reduce financing and investment capacity in the longer-term?
The art lies in the starting point of a communications strategy and approach.
Development and human impact must be at the heart of everything an MDB communicates, from the board to the relationship and risk teams and beyond. Culturally, MDBs must be clear in their internal dialogue that development impact comes first. While the avoidance of market distortion is important, it pales to insignificance – and arguably becomes the very purpose for MDB involvement – when a crisis arises, and private sector players exit a market at dizzying speeds. Relatedly, front-line relationship teams must let go of the illusion of being commercial deal makers. Even those whose background includes time in a commercial bank or investment firm, must make a clear shift in mindset and approach, that puts development impact – through transactions as well as through complementary initiatives – at the top of the priority pyramid.
With that core positioning, the apparent contradiction disappears, and the attention and messaging are focused where they belong, whilst the market protection objective becomes a secondary priority, but remains one that can be effectively managed and overseen, in markets where it is relevant.
In short, the concern about crowding out private sector or other potential providers of financing and investment activity has its place, but it ought not override the core mission of a development finance institution. Somewhat relatedly, and with the same lens of competitive posture, it is worth noting that the mandate of a risk management unit within a private bank is different at its heart, from the mission of a risk team in an MDB. While a zero-loss record for a private institution could be seen as a laudable objective, a similar outcome for an MDB program may be less appropriate, if it means that critical development objectives or opportunities – or indeed, crisis response – have been sacrificed to preserve a zero-loss record.
A senior banker said in passing some years back “If you haven’t lost money as a financier, you haven’t done any real lending or investing…” – a point strongly worded, but one that positions reasonable loss as a cost of doing business, even in a commercially focused organization. The reminder that risk management does not equate to risk elimination, voiced from a market player.
While a zero-loss story may play well at an MDB board meeting, it should be a legitimate point of debate, to explore whether this – like the focus on “crowding out” – is really in alignment with the ethos of a development organization. Even when that organization is supported through public funds.
From a communications perspective, the core thesis of putting human and development impact first, applies to both issues.
The most complex strategic communications challenges can sometimes be resolved by going back to first principles. What is the mission, and how do we best bring it to life?
Red Sangria. Human Powered. Every Time.
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