The politics of loan pricing in multilateral development banks

Abstract

This paper explores the political factors that determine the price of loans offered to borrowing countries by multilateral development banks (MDBs). The reasons why MDBs set their prices at a given level and why those prices might vary from one MDB to another has received scant attention in academia, even though inexpensive loan costs are the primary reason countries borrow from MDBs. The paper explores these issues in three MDBs, each with a different composition of shareholding countries – the World Bank (controlled by wealthy non-borrowing countries), the Inter-American Development Bank (IADB) (more evenly balanced between non-borrowing and borrowing countries) and the Andean Development Corporation (CAF) (controlled by borrowing countries). Evidence indicates that MDB shareholder composition has a major impact on loan prices, in sometimes unexpected ways. While the backing of wealthy countries allows the World Bank and IADB to raise resources on capital markets more cheaply than the CAF, the interests of those same non-borrowing countries in using MDB net income make loan costs significantly higher at those MDBs – especially the World Bank – than they would be otherwise. These results provide support to an institutionalist approach in focusing on the importance of shareholding and voting rules to better understand MDB activities.