# **1. Introduction**

Multilateral trust funds at the World Bank and at other international organizations are increasingly popular with donors of foreign aid. These new funding modalities allow donor governments to cooperate with like‐minded donors only, and to earmark their aid for specific countries, sectors or objectives (as with other bilateral aid), while using the financial and implementation infrastructure of the multilateral organization hosting them.<sup>1</sup> The increasing importance of this “multi‐bi” aid channel raises questions about its distinctiveness in relation to unearmarked multilateral aid and other bilateral aid, particularly with respect to country allocation patterns. Trust funds could potentially undermine the policy‐ and poverty‐selectivity of the World Bank’s IDA (International Development Association) aid, if donors’ earmarked contributions come partly at the expense of their core contributions to IDA, and if trust fund allocations are not sensitive to recipients’ quality of governance or income levels.

In this paper, we exploit a novel and rich data set on World Bank trust fund disbursements from 2002 to 2012 to analyze the determinants of trust fund allocations across countries, differentiating trust funds by type and sector. We specifically compare the policy‐ and poverty‐ selectivity of multi‐bi aid to that of other bilateral aid and of the World Bank’s IDA disbursements. We find that trust funds are similar to IDA, and different from other bilateral aid, in being highly sensitive to recipient’s income and quality of governance. Multi‐bi funds administered by the World Bank thus do not appear to undermine IDA’s allocation criteria, even if donors’ contributions to them partially crowd out their IDA contributions. We leave for future research the question of whether the increase in trust funds has had an impact on core contributions to IDA,<sup>2</sup> their potential effects on other aspects of World Bank operational policies,<sup>3</sup> and the effectiveness of trust funds relative to traditional bilateral and multilateral core aid.

The remainder of the paper is structured as follows. Section 2 provides background information on World Bank trust funds and reviews related literature. Section 3 presents some theoretical arguments concerning donor motives on allocation of trust funds. Section 4 describes the data, while section 5 discusses the methods and presents the main results for aggregate and sector‐ specific disbursements. Section 6 concludes.

> 1 Because trust fund contributions are earmarked, they are officially classified by the OECD DAC as bilateral aid, although multilaterals are the implementing agencies.

> 2 Eichenauer and Hug (2014) propose a model with a multilateral agent governed by multiple principals with heterogeneous preferences to better understand the tradeoffs donors face when choosing bilateral, multilateral or trust fund aid. Assuming a fixed aid budget, their findings suggest that the possibility of trust fund contributions decreases bilateral and multilateral ‘core’ aid in most cases. During recent IDA replenishment negotiations, the World Bank has placed a moratorium on solicitations of trust funds from donors by its staff members, indicating that it believes trust funds can (partially) displace core contributions.

> 3 Reinsberg (2015) discusses implications for the World Bank.

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