IFI Law - Book Chapter 7

Question 1

Post Bretton Woods, there were three generations of IFIs. Which?

Answer 1

First Generation (1950s-1960s)

Examples: Inter-American Development Bank (IDB), African Development Bank (AfDB), Asian Development Bank (ADB), sub-regional banks like Corporación Andina de Fomento (CAF), East African Development Bank, Caribbean Development Bank.
Characteristics: Formed in the late 1950s to 1960s, these banks were initiated by regional groupings of developing countries. The primary goal was to create institutions more responsive to the specific needs of the regions they served. These banks aimed to give member countries greater influence over governance, voice, and voting rights.

Second Generation (Post-Cold War - 1990s)

Example: European Bank for Reconstruction and Development (EBRD).
Characteristics: Triggered by the end of the Cold War, the second generation saw the establishment of the EBRD in 1991. Proposed by the French President, its original purpose was to foster market economies and promote private sector development, especially in former Soviet bloc states embracing democratic principles and market economies.

Third Generation (21st Century)

Examples: New Development Bank (NDB), Asian Infrastructure Investment Bank (AIIB).
Characteristics: The third generation emerged in the 21st century, marked by China’s active involvement. The BRICS nations (Brazil, Russia, India, China, and South Africa) established the New Development Bank (NDB) in 2014, focusing on sustainable development. Additionally, China led the establishment of the Asian Infrastructure Investment Bank (AIIB) in 2016, with a regional focus and a broad membership.

Question 2

Which first-generation development banks were modeled after the World Bank?

Answer 2

The first-generation development banks that were modeled after the World Bank include the African Development Bank (AfDB), Asian Development Bank (ADB), and Inter-American Development Bank (IDB).

Question 3

What is the European Investment Bank (EIB) and when was it established?

Answer 3

The European Investment Bank (EIB) was established in 1957 by the Treaty of Rome. Its primary purpose was to promote investment in the less developed regions of the member states of the European Economic Community.

Question 4

What expansion in mandate did the EIB undergo after its establishment?

Answer 4

Subsequent to its establishment, the EIB acquired a mandate to invest some of its funds outside the member states of the European Union. This expansion allowed the EIB to finance projects in developing countries.

Question 5

How have the operations of the European Investment Bank (EIB) in developing countries been perceived?

Answer 5

The operations of the EIB in developing countries have sometimes been controversial, similar to other development banks.

Question 6

Who can file complaints against the European Investment Bank (EIB), and to whom can they complain?

Answer 6

Non-state actors who allege harm from the operations of the EIB can file complaints to the European Ombudsman. Complaints must meet the requirements for submission to the European Ombudsman.

Question 7

Regional development banks, such as the AfDB, ADB, and IDB, share several common aspects with the World Bank Group (WBG). Name eight of them.

Answer 7

Capital Structure: Both regional development banks and the WBG have a capital structure based on a mix of paid-in and callable capital.

Governance Structure: They have a governance structure where member states are allocated shares based on the size of their economies, resulting in weighted voting.

Regional and Non-Regional Members: Both types of banks have both regional and non-regional member states. Non-regional members may not borrow but can compete for procurement contracts.

Concessional Financing Window: Regional development banks, like the WBG, have both non-concessional and concessional financing windows. Concessional financing is provided to low-income countries through special funds or facilities. Non-concessional financing is provided to countries across a wider income spectrum, including middle-income and higher-income countries. Both have different terms.

Public and Private Sector Financing: They provide financing to both public and private sector borrowers. While the World Bank has separate entities for this, some regional banks provide it through their general operations.

Technocratic Institution: These banks are designed to be technocratic financial institutions, expected to base lending decisions on economic rather than political criteria.

Political Prohibition Clause: Similar to the WBG, these banks have a political prohibition clause in their Articles of Agreement, emphasizing the technocratic nature of their lending decisions.

Independent Accountability Mechanisms: Both regional development banks and the WBG have independent accountability mechanisms, such as inspection panels, to address complaints and enhance accountability to affected communities.

Question 8

Why did the AfDB decide to expand its membership to non-regional states?

Answer 8

The exclusion of non-regional members proved to be financially unsustainable for the AfDB. As a result, the bank decided to offer membership to non-regional states that were willing to contribute capital.

Question 9

What provision in the Articles of the AfDB ensures Africa’s significant representation in the bank’s affairs?

Answer 9

The Articles of the AfDB state that more than 50 percent of the members of the Board of Executive Directors must represent African states, aiming to preserve Africa’s voice in the governance of the bank.

Question 10

What is the common approach among regional development banks, such as the AfDB, the ADB, and the IDB, regarding the governance role of regional member states?

Answer 10

Analogous efforts were made at the African Development Bank (AfDB), the Asian Development Bank (ADB), and the Inter-American Development Bank (IDB) to ensure that regional member states have a leading voice in the governance of their respective institutions.

Question 11

What provision in the Articles of the AfDB ensures Africa’s significant representation in the bank’s affairs?

Answer 11

The provision in the Articles of the AfDB that ensures Africa’s significant representation is the requirement that more than 50 percent of the members of the Board of Executive Directors must represent African states. This provision emphasizes a structured and explicit approach to regional representation.

Question 12

What are examples of Multilateral Development Banks (MDBs) that fall into the category of having a political or ideological purpose, in addition to an economic one?

Answer 12

The European Bank for Reconstruction and Development (EBRD) and the Islamic Development Bank (IsDB).

The EBRD, as per its Articles of Agreement, is mandated to promote market-based economies and has a focus on private sector development. It also has the authority to promote multi-party democracies, although this aspect is not a clear and substantial part of its operations.

The IsDB, established in 1975, has an Islamic focus and operates with the goal of fostering economic and social development in Islamic member countries.

Question 13

How does the European Bank for Reconstruction and Development (EBRD) differ from the first category of regional development banks?

Answer 13

The European Bank for Reconstruction and Development (EBRD) differs from the first category of regional development banks in that it has a political as well as an economic agenda. While it shares similarities with the International Bank for Reconstruction and Development (IBRD) in terms of members’ contributions to capital and a weighted governance structure, the EBRD’s mandate includes promoting market-based economies and private sector development. Unlike the first category, the EBRD does not have a concessional financing window but does have an independent accountability mechanism.

Question 14

How did the European Bank for Reconstruction and Development (EBRD) demonstrate its political agenda following the Arab Spring in 2011?

Answer 14

Following the Arab Spring in 2011, the European Bank for Reconstruction and Development (EBRD) amended its Articles to allow it to accept states in the Middle East as member states. This modification enabled the EBRD to fund projects and provide technical support in the Middle East, indicating a political dimension to its operations.

Question 15

How does the Islamic Development Bank (IsDB) differ from traditional MDBs in terms of financing arrangements?

Answer 15

The Islamic Development Bank (IsDB) differs from traditional Multilateral Development Banks (MDBs) in its financing arrangements due to its adherence to Islamic banking principles.

Unlike traditional MDBs, the IsDB only funds projects compatible with risk and profit-sharing arrangements, making it a conservative lender.

Additionally, the legal contracts in IsDB financing arrangements are Sharia-compliant, resulting in differences, especially in provisions related to security arrangements and events of default. The absence of an obligation to pay interest by the borrower further distinguishes IsDB contracts from those of standard MDBs.

Question 16

What is the objective behind the creation of the Asian Infrastructure Investment Bank (AIIB)?

Answer 16

China intended the AIIB to serve as both a new source of funding for infrastructure in Asia and an alternative development financing model compared to Western-led institutions like the World Bank and the Asian Development Bank (ADB).

The AIIB aimed to reduce upfront costs and lead time associated with development bank financing.

Question 17

How has the membership and scope of operations of the AIIB evolved since its inception in 2016?

Answer 17

Since it began operations in 2016, the AIIB has expanded both its membership and the scope of its operations. It now has 105 member states, including Western countries and emerging markets outside the Asian region. The AIIB has also broadened its financing operations to include projects in non-Asian countries.

Question 18

What measures are in place to preserve the Asian character of the AIIB?

Answer 18

To preserve the Asian character of the AIIB, its Articles specify that non-regional members cannot own more than one-third of the shares in the bank, and regional members will always have at least 75 percent of the total vote in the bank.

Question 19

What is the initial focus and mission of the New Development Bank (NDB)?

Answer 19

The NDB was initially established to fund development in the five BRICS member states—Brazil, Russia, India, China, and South Africa. However, its Articles allow member states to invite other countries to join the bank.

Question 20

How does the New Development Bank (NDB) address concerns about global economic governance, particularly from the BRICS and other countries in the Global South?

Answer 20

The NDB, created as a BRICS institution, has an implicit mission to promote reform of global economic governance arrangements. It seeks to advocate for global governance structures that are more responsive to the concerns and interests of the BRICS and other countries in the Global South. The Articles also provide that the five founding BRICS states will always collectively have a controlling vote of 55 percent in the affairs of the bank.

Question 21

How do the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (NDB) differ from Western-backed development banks in terms of board structure?

Answer 21

Unlike Western-backed development banks and the first two categories of development banks, the AIIB and the NDB do not have a resident board of directors. Their directors serve the banks on a part-time basis and only meet periodically during the year, playing a less active role in the banks’ affairs.

Question 22

What issue were the AIIB and the NDB created to address regarding the pace of transactions with earlier multilateral development banks?

Answer 22

The AIIB and the NDB were created to respond to concerns from their member states about the slow pace of transactions with earlier multilateral development banks. The traditional timeline between a country approaching a multilateral development bank for financing and the disbursement of funds, and the start of the project, could take up to two years in the case of the earlier banks.

Question 23

How do the AIIB and the NDB aim to differentiate themselves in terms of financing speed compared to traditional multilateral development banks?

Answer 23

The AIIB and the NDB seek to be much quicker in providing financing compared to traditional multilateral development banks. They aim to expedite the process of approving and disbursing funds for projects, addressing the concerns about the time lag associated with earlier banks.

Question 24

What are the negative implications of the AIIB and the NDB’s focus on quicker financing for the social and environmental impacts of funded projects?

Answer 24

The quicker financing approach of the AIIB and the NDB has implications for the social and environmental impacts of the projects they fund. The expedited timeline may influence how effectively social and environmental considerations are addressed in the planning and implementation of projects.

Question 25

How does the Asian Infrastructure Investment Bank (AIIB) address accountability concerns, and to whom does its accountability mechanism report?

Answer 25

The AIIB has established an accountability mechanism that reports to the presidents of the bank. This mechanism is designed to address concerns related to accountability in the bank’s operations.

Question 26

Why are the privileges and immunities of MDBs only necessarily recognized in their member states?

Answer 26

The privileges and immunities of MDBs are only necessarily recognized in their member states because they have less than universal membership. In non-member states, their legal status and privileges and immunities will depend on the domestic law of those non-member states.

Question 27

Where do the legal status and privileges and immunities of MDBs stand in non-member states?

Answer 27

In non-member states, the legal status and privileges and immunities of MDBs depend on the domestic law of those non-member states. MDBs do not necessarily enjoy the same recognition and immunity in non-member states as they do in their member states.

Question 28

What is the ‘country systems’ approach adopted by the AIIB and the NDB, and what principle does it operate on?

Answer 28

The ‘country systems’ approach is premised on the principle that, whenever possible, the development banks should defer to the borrowing country’s own regulatory regimes, particularly in environmental and social issues related to the projects they finance.

This approach involves utilizing the country’s own laws and regulations (the ‘country system’) rather than the bank’s own policies in the assessment and management of the project’s environmental and social impacts.

Question 29

What are the arguments in favor of the ‘country systems’ approach in development banking?

Answer 29

Proponents of the ‘country systems’ approach argue that it is more respectful of the country’s sovereignty and its environmental and social policy choices. They contend that this approach promotes development by incentivizing the country to improve and implement its own management and regulatory approaches to these issues. Additionally, they suggest that projects following this approach are more consistent with local conditions.

Question 30

What challenges and risks does the ‘country systems’ approach raise for development banks, such as the AIIB and the NDB?

Answer 30

The ‘country systems’ approach raises several challenges for development banks. Questions arise, for example, about what happens if the domestic law is less rigorous than the bank’s policies, or if the domestic law would lead to the lenders assuming less responsibility for social and environmental aspects. Additionally, concerns arise about complaints regarding non-compliance with applicable law, exposing MDBs to reputational damage and increased risk.

Question 31

How do the risks associated with the ‘country systems’ approach impact the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (NDB)?

Answer 31

The risks associated with the ‘country systems’ approach expose the AIIB and the NDB to a greater risk of reputational damage if serious social or environmental problems arise in a financed project. Given the relatively recent inception of these banks and ongoing learning processes, it remains unclear how they will manage these risks and respond if challenges materialize, causing operational, reputational, or financial difficulties.

Question 32

What challenge has arisen concerning the European Bank for Reconstruction and Development (EBRD) and its political mandate?

Answer 32

The EBRD has faced a challenge regarding its political mandate, specifically in its reluctance to discipline countries that are not complying with this mandate. The hesitation is often justified on the grounds that each country has the sovereign right to determine the structure of its internal politics, and external actors, such as the EBRD, should respect these decisions.

Question 33

How did the Bretton Woods system contribute to the IMF’s ability to provide a financial safety net to member states?

Answer 33

During the period when the Bretton Woods system was in place, the IMF could effectively provide a financial safety net to member states worldwide. This was due to the constraints imposed by the par value system on the macroeconomic policies of member states and the limitations on the size of imbalances between countries. The IMF, as a result, was able to meet the financing needs of most countries facing payments challenges.

Question 34

What changed in the international monetary system after the end of the Bretton Woods system, and how did it affect the IMF’s role?

Answer 34

After the end of the Bretton Woods system, the international monetary system became more volatile, leading to increased unpredictability in the international monetary situations of states. Countries became less confident that the IMF would have sufficient resources to meet their needs in case of a crisis. Additionally, the policies adopted by the IMF in the post-Bretton Woods era and the conditionalities attached to its financing became more controversial.

Question 35

What were some of the reasons that led states to establish alternate sources of financial support after the end of the Bretton Woods system?

Answer 35

After the Bretton Woods system ended, states became less confident in the IMF’s ability to meet their financial needs in a crisis. The controversial policies and conditionalities attached to IMF financing also contributed to this skepticism. As a result, some states decided that establishing alternate sources of financial support during payments crises would be desirable.

Question 36

When did the Bretton Woods System end?

Answer 36

The Bretton Woods system effectively came to an end in August 1971 when U.S. President Richard Nixon announced the suspension of the convertibility of the U.S. dollar into gold. This decision, known as the Nixon Shock, marked the de facto collapse of the Bretton Woods fixed exchange rate system. Subsequent attempts were made to salvage aspects of the system, but ultimately, it led to the adoption of more flexible exchange rate arrangements and the transition to the current era of floating exchange rates.