Regional development banks (RDBs) are public regional financial organizations established by governments of countries in a region with an aim to spur economic development in a region (or continent). They are, to a large extent, the result of mimicking the International Bank for Reconstruction and Development (IBRD), better known as the World Bank. However, the focus of the regional development banks is somewhat narrower, and they usually do not have as large a portfolio of services. Regional development banks are the product of the 20th-century trend of promotion of multilateral diplomacy.

The era of multilateral diplomacy basically started with the end of World War I and the attempts to create a long-lasting peace in Europe. Although the United States actively participated in World War I (from 1917) the U.S. Senate did not look favorably at further U.S. involvement in European affairs and full U.S. participation in the League of Nations. So, although the Bank for International Settlements (BIS) was created to support financial stability in Europe, acting as the “bank of the central banks,” it has, to a large extent, failed to play the role that it was supposed to play.

The end of World War II brought another attempt to create a more efficient and stable world order, where the basic ideals of democracy and universal freedom would be upheld. With the establishment of the Organization of United Nations (OUN), a large part of the political infrastructure has been set up, while the Bretton Woods institutions (IBRD and the International Monetary Fund, or IMF) were created to cover the economic sphere. The IBRD had more or less universal coverage, operating in the majority of the countries. However, already in the late 1950s, there was dissatisfaction with the World Bank, and a series of regional financial organizations were set up. Although they are regionally based, some founding members are not countries from the region, but are the leading countries in the world (most Organisation for Economic Co-operation and Development [OECD] countries are founding members of regional development banks).

Regional development banks share the same broad objective with the IBRD, which is to promote the social and economic development of the population of their beneficiary member countries through the provision of financial assistance. However, over time, most of the regional development banks are providing, increasingly, technical assistance in the implementation of the project, as well. Although regional development banks are regarded as regional (public) financial institutions, they are still banks. They may not be profit-driven organizations, but they have to ensure that their operations have some surpluses that can be reinvested in the bank. These banks are characterized by a broad membership, including both borrowing developing countries and developed donor countries, and are not limited to member countries from the region.

All regional development banks are multilateral organizations that are established by both countries that are beneficiaries (clients) and those countries that have interests in promoting economic development, and are usually providers of finance, rather than users of the banks’ funds. All the banks have a separate legal structure, although a closer look at their internal organization and modus operandi suggests that IBRD was the blueprint for designing their internal infrastructure.

Banks operate through loan support to the beneficiary member governments for a specific project and/or program. They are lending institutions, not the donor agencies. Their loans focus on one of three areas: works, supplies, or services. In the first area, the focus is on infrastructure projects, especially those that can promote sustainable development and spur economic growth. Financing for acquiring supplies usually focuses on particular goods (for instance, medical supplies), while services focus on technical knowledge—consultancy and/or other various technical assistance projects.

Banks will grant short to medium-term credit at market rates, and one of the advantages is that usually what the regional development banks may finance, some purely commercial banks/entities would not consider economically viable and would not extend credit at regular market rates. Long-term credits are often granted to less developed countries (LDCs) to support development in a particular area. Often these credits may be given with a generous grace period, or very easy terms for servicing, compared to the usual market rates and conditions.

Some regional development banks have a private (finance) arm, which supports economically viable projects that come from private persons/entrepreneurs. Increasingly, both international and regional development banks are looking for new ventures in the near future and to improve the visibility of these projects.

Examples

At present the most well-known regional development banks are the Asian Development Bank (ADB), the African Development Bank (AfDB), the InterAmerican Development Bank (IADB), and the European Bank for Reconstruction and Development (EBRD). There also are the Caribbean Development Bank, Central Asian Development Bank (CADB), Black Sea Trade and Development Bank (BSTDB), Islamic Development Bank (IDB), Central American Bank for Economic Integration (CABEI), East African Development Bank (EADB), West African Development Bank (BOAD), and others. There are also other organizations that are genuinely multilateral and promote development in third world countries. Those are the International Fund for Agricultural Development (IFAD), Nordic Development Fund (NDF), and OPEC Fund for International Development. There are also two banks that are regional but that have more than a classical development function, because they operate primarily in highly developed Western countries: the European Investment Bank (EIB) and the Nordic Development Bank (NDB).

ADB, AfDB, IADB, and EBRD are “real” multilateral development banks that focus on a particular region but that have in their membership both regional and nonregional members, and the membership is rather wide. In other cases, the membership is usually regional, and the countries that own the bank are, at the same time, the beneficiaries. Often the creation of these regional banks has been connected with the discovery of oil and significant inflow of oil money and the desire to support sustainable development from mineral extracting revenues. Regional development banks that are less multilateral and do not have any or significant numbers of regional members are often referred to in the World Bank parlance as “subregional development banks.”

Regional development banks have primarily been organized to serve developing countries and only in the case of the EIB is there a quasi-development bank operating in the advanced industrialized economies (and new member states that have graduated in the process of economic, political, and social transition). The target countries are often subjected to serious economic and financial crises, and there is relatively little that can be done about their stability from the global level. The provision of financial and economic stability may be a task for the national governments, but a longer view is also needed to see to what extent the regional policies may assist in development of financial stability.

Regional development banks have been serving and will probably continue to serve not only as a source of financial resources for worthwhile projects that the governments of member states cannot fund or are not within their immediate priorities, but they will also continue providing technical assistance and sound development advice. Even the EIB is an active investor that offers assistance in management of the projects and provides necessary advice. RDBs are expected to continue supporting, along with the World Bank, the implementation of so-called second generation reforms to create an institutional setting adequate for a modern market economy, encompassing the rule of law, promoting property rights and adequate enforcing mechanisms, giving transparency to economic and political activities, improving financial regulations and supervision, strengthening the financial institutions (banks, microfinancial institutions, financial markets, and so on), and furthering similar structural reforms.

Overall, the role of RDBs is important, because they primarily operate through financing projects in the real sectors of economy and therefore could provide stabilization behavior ex ante. They are also active in the long-term end of finance provision, and therefore they can offer long-term solutions in securing stability and holding off occasional systemic shocks. And, finally, they are, as a rule, in a “coterminosity” position with the Bretton Woods institutions (World Bank and IMF) when it comes to promotion and enforcement of far-reaching structural reforms. These reforms are much needed in countries in the process of building a modern, vibrant, functioning market economy and addressing adverse remnants of past (state-dominated) economic behavior.

Bibliography:

  1. Lalit Kumar Bansal, Regional Development Banks and Development (Deep ; Deep Publications, 1988);
  2. Aron Cronin and James McLeod, Winning Aid-Funded Business: The Regional Development Banks ([UK] Department of Trade and Industry, 2005);
  3. James M. Cypher and James L. Dietz, The Process of Economic Development (Routledge, 2009);
  4. Maurice Schiff and L. Alan Winters, Regional Integration and Development (World Bank, 2003);
  5. John White, Regional Development Banks: The Asian, African and Inter-American Development Banks (Praeger Publishers, 1972);
  6. John White, Regional Development Banks: A Study of Institutional Style (Overseas Development Institute, 1971);
  7. World Bank, Evaluation of World Bank Support of Regional Development Programs (World Bank, 2007).