Why multilateralism? Foreign aid and domestic principal-agent problems

INTRODUCTION: Why do countries sometimes use multilateral strategies and institutions for pursuing their foreign policies? Since World War Two the advanced industrial countries – basically, the OECD countries – have chosen to distribute part of their foreign aid through multilateral organizations, such as the European Union (EU), World Bank, IMF, UN, and regional development banks (RDBs). In particular I want to understand why these countries have chosen to delegate varying amounts of aid to these international organizations over the past 40 years. The delegation of aid-giving to multilateral organizations is surprising; it reduces a country's control over its own foreign policy and has the potential to increase principal-agent problems associated with all spending programs. The other choice that these countries had was to use their own bilateral aid agencies to select projects and oversee aid expenditures, which was the traditional practice prior to the 1960s. So the question addressed is why delegate the provision of foreign aid to a multilateral organization instead of using traditional bilateral channels. The total amount of such multilateral aid is not inconsequential. For instance, the World Bank gives aid in two main forms. The International Bank for Reconstruction and Development (IBRD) uses its donor subscription base as collateral to borrow money on world capital markets, which it then lends at below market interest rates to developing countries. In 2001 the IBRD committed roughly $10.5 billion in low interest loans (World Bank 2001a).