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Conceptualizing RFI’s versus GFI’s - Ravi Kanbur
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1. Introduction
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We see many levels of groupings of nations on the international institutional
landscape. Groups of countries that share borders often have semi-permanent cooperation
agreements on immigration and customs, and institutions that implement them. Other
groupings of countries come together on the basis of and to advance an ethnic, a
geographical and or a cultural identity—French speaking countries, Muslim countries,
Arab states, Organization of American States, etc. Others have very specific functional
purposes—NATO, ASEAN, AfDB, ADB, IADB. At the highest level of aggregation,
global institutions such as the U.N., the World Bank and the IMF, count on the
membership of virtually every nation in the world.
The focus of this paper is on a particular type of grouping that is relatively large
in terms of country coverage without being global, and one that deploys primarily
financial instruments to advance its objectives. These are the Regional Financial
Institutions (RFI’s)—the IADB, AfDB, ADB, EBRD, etc. A key feature of these
institutions is that they have both rich and poor countries as members, the former as
donors of financial resources, the latter as recipients. In other words, these institutions are
intended as vehicles of development assistance. Some of the specialized UN agencies
(such as UNDP) are also vehicles for transferring resources to poor countries, but they do
these only through grants and do not have loan instruments. To some extent, RFI’s are
smaller scale versions of fully global financial institutions (GFI’s, also known as IFI’s),
the World Bank in particular. The operations of the RFI’s and GFI’s overlap in many countries, raising questions of duplication of effort and even unhealthy competition for
“development business”. These tensions are immediately apparent to those with ground
level experience of development assistance.
Some human activities are best performed individually. But others are enhanced
when a group of individuals comes together to undertake a particular task. Underlying
features of the socio-economic environment determine these characteristics. There are
household economies of scale in eating from one cooking pot; exchange makes possible
specialization by productivity in different activities; common defense is cheaper than
individualized protection; and so on. But while grouping together can have definite scale
and cost advantages, increased size of group can also make some things more difficult—
for example, arriving at a decision in a potentially increasingly heterogeneous grouping.
These benefits and costs of size suggest that groups will typically be of intermediate size,
neither wholly individualistic nor wholly universalistic. But this still leaves an enormous
range. The size will be determined by where exactly the marginal costs and benefits of
size balance out, which will in turn depend on the specifics of the socioeconomic
situation being discussed.
While this is true for each activity, there are likely to be similar economies (of
“scope” rather than “scale”), in having the same group do more than one, related, activity.
Eating together and sharing living space has economies of scope; building roads for
defense and for economic transport has economies of scope; clean water and clean
sanitation has economies of scope. But, eventually, diseconomies of scope will also set in, as the activities become relatively unrelated to each other. There will thus be a similar
balance to be struck in this domain.
Individuals participate in a bewildering number and variety of groups, ranging
from households to nation states, from single activity groupings to associations that cover
a large range of activities. This is perhaps not surprising, given the range of cost and
benefits patterns present in the different activities. Nation states also participate in a large
number of different types of groupings, as discussed above. Taking the perspective of
costs and benefits, of scale and scope, will also help us understand these groupings and to
assess them. In particular, it will help us conceptualize RFI’s relative to GFI’s, especially
when, as seems often to be the case, both types of institutions are engaged in the same
activity.
What exactly is the rationale for the co-existence of RFI’s and GFI’s, especially in
a world in which development assistance resources are increasingly scarce? If there is
such a rationale, is the current mix of RFI’s and GFI’s as good as it gets, or could it be
better? And if it could be better, what specific reforms are needed to move in that
direction? These are the questions that are addressed in this paper.
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