The creation of new multilateral development banks (MDBs) increases competitive pressure within the system. How does such competition affect MDBs' performance? Bernhard Reinsberg and Benjamin Faude show that while pressure improves the quality of newly approved World Bank projects, it has no significant effect on ongoing ones
Since 1945, a new MDB has been created approximately every three years. This growth has led to a crowded institutional space for development finance in which new entrants like the Asian Infrastructure Investment Bank (AIIB) challenge legacy institutions, such as the World Bank. The performance and continued relevance of established Western banks thus depends on their ability to respond effectively to increasing competitive pressure.
In a recent article, we study how competition among MDBs affects their performance. Our key finding is that competitive pressure improves the quality of newly approved World Bank projects, while ongoing projects remain unaffected. To explain this effect, we argue that the creation of a new MDB incentivises World Bank staff to develop new high-quality projects for borrowing countries that can also be served by the new competitor. Ongoing projects, by contrast, are unaffected by competitive pressures as they have already been set up and are thus subject to path dependencies. In a nutshell, while it is difficult to adjust ongoing projects, it is easier for banks to design new projects in a way that takes new competitors into account.
From the World Bank’s perspective, the creation of a new MDB represents a 'competitive entry': a newcomer challenging its turf by competing for a finite pool of 'bankable projects' in borrowing countries. This competition matters because the World Bank depends not only on funding from donor states, but on the willingness of borrowing states to work with it. If borrowers begin turning to rival lenders, the World Bank risks losing market share and relevance.
The World Bank depends not only on funding from donor states, but on the willingness of borrowing states to work with it
Thus, the World Bank is no longer guaranteed clients simply because it is an established and well-resourced MDB. Borrowing countries can compare MDBs based on loan conditions, speed, political requirements, and technical expertise. In fact, they have become increasingly adept at 'forum shopping.'
We argue that competition changes the incentives of World Bank staff. When a new competitor emerges, World Bank staff have stronger incentives to design attractive, high-quality projects that align closely with the priorities of borrowing countries. If they fail to do so, those countries may simply take their business elsewhere. In a nutshell, competition acts as a performance incentive.
Importantly, this performance incentive applies only to new projects and not to ongoing ones. Once a project is already underway, contracts are signed, timelines are fixed, and implementation structures are in place. Redesigning an existing project is thus much harder than building a better one from scratch. There is also a practical resource constraint. World Bank staff have limited time and attention. If competition pushes them to focus on developing strong new projects, they may have fewer resources available to improve projects already under implementation.
Our country-level analysis uses the IEG Project Evaluation Database, covering average evaluation ratings of World Bank projects across 109 countries between 1994 and 2013. We find that World Bank projects approved during periods of competitive entry perform significantly better than comparable projects approved during non-competitive periods.
World Bank projects approved during periods of competitive entry perform significantly better than comparable projects approved during non-competitive periods
Projects launched when competition intensified scored up to 0.18 points higher on the World Bank’s six-point evaluation scale. Importantly, ongoing projects did not experience similar improvements in performance. Thus, competition generates significant performance differences across projects within the same MDB.
Drawing on the Project Performance Database, we reveal that these positive effects do not generalise to other banks. When examining other MDBs with available project evaluation data, we found no comparable performance boost. In some cases, competition is even associated with worse outcomes.
However, capacity matters! The World Bank possesses enormous technical expertise, deep staffing resources, and decades of institutional experience. It can expand lending while still maintaining project quality. Smaller MDBs often lack this capacity. When competition intensifies, they may stretch limited personnel too thin in an effort to defend market share. Pursuing more projects without sufficient technical capacity can thus reduce, rather than improve, project performance.
Under the right conditions, competition can produce positive outcomes by pushing MDBs to become more borrower oriented. Yet competition can also overload weaker MDBs and fragment resources.
A key lesson, therefore, is that MDB performance depends heavily on organisational capacity: skilled staff, project supervision, technical expertise, and institutional learning. By implication, if lending grows faster than institutional capacity, the effectiveness of development finance may ultimately deteriorate. For the World Bank, competition improves performance. For other MDBs, it may expose institutional limits.
Multilateral development bank performance depends heavily on skilled staff, project supervision, technical expertise, and institutional learning
These findings are especially relevant to current debates about expanding ‘lending headroom’ in multilateral development banks. To remain effective vehicles for development finance, MDBs need sustained investment in staff and technical expertise. In other words, financial resources only translate into impact when institutions have the human capacity to deploy them well.
Finally, it is important to highlight that not all institutional proliferation creates competitive pressure. Over time, the global governance of development finance has evolved into a Hybrid Institutional Complex (HIC) which comprises diverse institutional forms that provide solutions beyond traditional sovereign loans. Crucially, trust funds, concessional windows, and global funds often complement MDB operations rather than competing directly with them. These institutional forms often provide grants or highly targeted financing while relying on MDBs for implementation capacity and technical expertise. This suggests that policymakers need to think more carefully about the design of new development finance institutions, taking account of how different institutional forms interact in practice.
