Angling for Influence: Institutional Proliferation in Development Banking Tyler Pratt∗ Yale University December 6, 2019 ∗Assistant Professor, Department of Political Science, Yale University. Email: [email protected]. I am grateful to Eric Arias, Sarah Bush, Christina Davis, Julia Gray, Kosuke Imai, Robert Keohane, Amanda Ken- nard, James Lee, Melissa Lee, Christoph Mikulaschek, Julia Morse, and Kelsey Pratt for valuable feedback on this project. Abstract Why do states build new international organizations (IOs) in issue areas where many institutions already exist? Prevailing theories of institutional creation emphasize their ability to resolve market failures, but adding new IOs can increase state uncertainty and rule inconsistency. I argue that institutional proliferation can be explained by the failure of existing IOs to adapt to shifts in the distribution of state power. States expect decision-making rules within IOs to reflect their material power; when it does not, they construct new organizations that provide them with greater institutional control. To test this argument, I examine the proliferation of multilateral development banks since 1944. I leverage a natural experiment rooted in the allocation of World Bank votes at Bretton Woods to show that the probability of institutional proliferation is higher when power is misaligned in existing institutions. My results suggest that conflict over shifts in global power contribute to the fragmentation of global governance. 1 Introduction Since the end of the World War II, states have constructed international institutions at a breakneck pace. The number of formal international organizations (IOs) grew from less than a hundred in 1950 to over 300 by the year 2000. In the same time period, the volume of multilateral treaties registered with the United Nations increased from roughly 500 to 4,000. This growth has generated significant crowding of governance institutions in issue areas like trade, human rights, and finance, where multiple IOs compete for authority to regulate state behavior. Recently, the proliferation of multilateral development banks has drawn particular scrutiny, as new organizations like the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (NDB) challenge the primacy of established institutions. The proliferation of IOs is meaningful because it has the potential to undermine inter- national cooperation. International institutions are believed to play an important role in world politics, managing interdependence and facilitating bargaining among states. But the fragmentation of global governance across multiple IOs often leads to coordination prob- lems, redundancy, and rule conflict (Raustiala & Victor, 2004; Alter & Meunier, 2009).1 Lamenting the proliferation of development aid institutions, a large conference of develop- ment ministers argued that \the effectiveness of aid is reduced when there are too many duplicating initiatives" and cautioned against \creating separate new channels that risk fur- ther fragmentation" (Accra Agenda for Action, 2008). Given the challenges associated with overlapping IOs, why do states continue to construct them? Classic theories of IO formation argue that states build IOs to reduce transaction costs, overcome market failures, and capture gains from cooperation (Keohane, 1984). This rational institutionalist account provides a convincing explanation of IO construction when 1While some argue that institutional crowding does not necessarily undermine cooperation, at the very least sustained proliferation demands a high level of policy coordination among IOs (Gehring & Faude, 2014; Abbott et al. , 2015; Pratt, 2018). 1 few prior institutions exist (such as the formation of the World Bank in 1944), but is less compelling when many institutions are already present (e.g., the creation of the AIIB in 2015). In the latter context, institutional proliferation raises transaction costs by increasing uncertainty and introducing multiple bargaining venues. Rather than a rational response to an underlying cooperation problem, I argue that insti- tutional proliferation often stems from a contest for bargaining power among states. States seek decision-making power in IOs because cooperation involves distributional conflicts. Con- trol over institutions allows states to push negotiations toward their favored outcome. States that are dissatisfied with their influence | often because existing institutions have failed to adapt to changes in the global distribution of power | build new institutions in which they have greater control. Overlapping IOs are a byproduct of state attempts to increase their influence over multilateral outcomes. This argument suggests that institutional proliferation is often rooted in contestation associated with power transitions. When IOs are created, member states typically design formal and informal rules so that multilateral influence reflects states' underlying material power (Gruber, 2000; Odell, 2000; Stone, 2011). As the distribution of state power shifts, however, institutions do not smoothly adapt (Kaya, 2015; Lipscy, 2017). A power misalign- ment emerges when a state's influence within the institution is not commensurate with its unilateral power. States engage in institutional proliferation as part of a strategy to rectify these misalignments. To test the link between power misalignment and institutional proliferation, I examine the creation of multilateral development banks. This regime grew from a single development bank in 1944 (the World Bank) to at least twenty-eight overlapping institutions in 2019. These organizations are important actors in world politics, disbursing over $400 billion in development finance since the year 2000.2 The issue area has a clear functional rationale for 2Calculations reflect OECD data on total flows from international financial institutions. 2 institutionalized cooperation: the coordination of global development finance efforts. It has also experience a substantial amount of proliferation that is difficult to explain on purely functional grounds.3 The power misalignment argument suggests that states are more likely to construct devel- opment banks when their influence in existing bodies { and especially the central institution (the World Bank) | falls short of their underlying material power. This very logic was prevalent in media and policy debates surrounding the creation of the Chinese-led AIIB in 2015, which frequently cited Chinese under-representation in the World Bank and IMF. Systematic testing of the argument, however, has been limited. Here, I examine whether the historical pattern of development bank proliferation is consistent with such an explanation. To do so, I collect an original data set on power misalignment in the World Bank and state participation in the founding of alternative development banks. Estimating the effect of power misalignment presents a difficult identification challenge, since state influence in international institutions is politically determined. States' decision- making power in IOs is shaped by confounding variables like alliance commitments and state preferences over the policy domain governed by the IO. I adopt two approaches to mitigate endogeneity. First, I leverage a natural experiment that occurred during negotiations pre- ceding the World Bank's creation. To satisfy a political promise to its wartime allies, the United States made an abrupt change to the formula used to allocate vote shares at the 1944 Bretton Woods conference. The formula change represents an exogenous shock to the influence of some World Bank member states, which I use to identify the causal effect of power misalignment on the creation of new development banks. In a second set of tests, I examine dynamic shifts in power misalignment that emerged after the World Bank's founding. These specifications assess whether a state is more likely 3In a recent paper examining growth in multilateral development banks (MDBs), Kellerman (2019) argues that \the proliferation of MDBs has resulted in an inefficient duplication of international institutions with overlapping functions" (107). 3 to participate in development bank proliferation as its economic growth outpaces its formal vote share in the World Bank. To minimize differences between over- and under-represented states, I employ covariate balancing propensity score matching (Imai & Ratkovic, 2014). Both sets of tests support the theory: states are more likely to construct new banks when power is misaligned in the World Bank. Under-representation in the World Bank by a single percentage point makes a state 6.8% more likely to participate in the creation of new development banks. These results establish the importance of power misalignment in spurring networks of overlapping IOs. The paper contributes to at least two distinct literatures in international relations. By tying IO proliferation to misalignments in power, I build on scholarship examining power transitions and conflict over adaptation of the international order. Over fifty years ago, Or- ganski (1968) highlighted the potential for shifts in state power to engender dissatisfaction and interstate conflict. Gilpin (1981) similarly examined how changes in the distribution of power generate disequilibrium and the potential for systemic war. Subsequent work illumi- nates how power shifts affect the survival and vitality of existing international institutions (Ikenberry, 2001). Recent studies detail how power transitions are manifested in prominent economic IOs, including