Evolution of the World Bank - Case Study Example

EVOLUTION OF THE WORLD BANK Introduction The World Bank is a fundamental source of financial and technical assistance to developing countries. Conceptualized during World War II, the Bank began its initial functions on 27 December 1945 soon after the international ratification of the Bretton Woods agreements that resulted from the United Nations Monetary and Financial Conference which was held during 1 July to 22 July 1944 and 43 countries participated (Wikipedia, 2007a). The World Bank initially helped rebuild Europe after the war by providing its first loan on 9 May 1947 of $250 million to France for post-war reconstruction. Reconstruction has been one of the main focuses of the World Bank's work, besides they also fund for restoration activities after natural disasters, humanitarian emergencies, and post-conflict rehabilitation needs that affect developing and transition economies (The World Bank Group, 2007). The World Bank is a group of five closely associated international organizations responsible for providing finance and advice to countries for the purposes of economic development and eliminating poverty. Its five agencies are: International Bank for Reconstruction and Development (IBRD); International Finance Corporation (IFC); International Development Association (IDA); Multilateral Investment Guarantee Agency (MIGA); and International Centre for Settlement of Investment Disputes (ICSID). The World Bank's activities are particularly focused on economically backward developing countries. These activities are in fields such as agriculture and rural development (e.g. irrigation, rural services), human development (e.g. education, health), infrastructure (e.g. roads, urban regeneration, electricity), governance (e.g. anti-corruption, legal institutions development) and environmental protection (e.g. pollution reduction, establishing and enforcing regulations). Each of these organizations has their own aims and objectives. The International Bank for Reconstruction and Development (IBRD) aims to reduce poverty in middle-income and creditworthy poorer countries by promoting sustainable development through loans, guarantees, risk management products, and analytical and advisory services. The IBRD and IDA provide loans at preferential rates to member countries, as well as grants to the poorest countries for developmental activities. Most of the times loans or grants for specific projects that may result in improvement of policy changes. For instance, loans to improve coastal environmental management that may be linked to development of new environmental institutions at national and local levels and to implementation of new regulations to limit pollution. The main activities of the IFC and MIGA include investment in the private sector and capitalizing insurance respectively (Wikipedia, 2007a). The IBRD was established in 1944 as the original institution of the World Bank Group. It is structured like a cooperative that is owned and operated for the benefit of its'185 member countries (web.worldbank.org, 2007). IBRD raises most of its funds on the world's financial markets. In 1946 the Bank had an authorized capital of $10 bi11ion, worth about 20 times as much today. However, all through its development it has been singularly garnered more controversy and criticism than any other international financial or development institution. In 1993 the Bank's total callable capital was almost $166 billion, though of that only $10.53 was paid in (Rich, 1994). The income that IBRD has been generated from the time of its inception has allowed it to fund development activities and to ensure its financial strength. As a result of this it is enabled to borrow at low cost and offer clients good borrowing terms (web.worldbank.org, 2007). From mid 1946 to mid 1986 the World Bank lent a total of $160 billion for 4,000 different projects in around 100 countries, and has even more increased in the last few decades. By any reckoning the Bank's resources are huge (Hardy, N.D.). Till date IBRD has not suffered any losses and has been generating profits because of the fact that it makes loans only to creditworthy borrowers. The international Bank for Reconstruction and Development (IBRD) was, in accordance to Article 1 which stated that "assist in the reconstruction and development of territories of member nations by facilitating the investment of capital for productive purposes and to promote the long-range balanced growth of international trade". Unfortunately, European reconstruction was mostly effected by the Marshall Plan where interest was low or non-existent. As a result of this, the World Bank made only four loans, to France, Netherlands, Denmark and Luxembourg, totaling $497million (Rich, 1994). Now with the new role of leading development financing institution, the bank has started to grow in power and has a great influence on recipient countries. In fact it can be said without any doubt that its investments has began to give good returns and it was posting profits for its major shareholders each year since 1948. Not surprisingly, there were also years when the annual returns raised above the annual amount of loans disbursed. Though the Bank in this period stressed investments in the social sector, the results mainly came from the traditional sectors such as the infrastructure development (World Bank 1992, BIC, 1990). Unfortunately, this trend changed with the international debt crisis in the early 1980's. As a result the World Bank shifted from the traditional project lending approach to a more invasive role of bringing economies of developing countries under its control to ensure that its loans were paid back. By the end of the 1980s, approximately 25 percent of the Bank's lending redirected to restructuring of economies of developing countries through its structural adjustment programmes (Nath, 2000). The development of other agencies within the Bank Though IBRD still remains the largest agency within the World Bank, over the years it has been joined by others. This has not only helped to strengthen IBRD but was also beneficial to other agencies. For instance in 1956, the Economic Development Institute (EDI) was set up with considerable financial assistance from the Ford and Rockefeller foundations. The main objective of EDI is to offers 6 month training courses in the theory and practice of development for senior officials from developing countries. "By 1971, more than 1,300 officials had passed through EDI, a number of them already having risen to the position of prime minister or minister of planning or finance in their respective countries" (ibid). Even today this trend continues. The International Development Association (IDA) came into being in 1960 as a result of increasing pressure from developing countries for accessing more financial support without interest or at very low interest to the poorest nations. A substantial part of the IBRD income goes to strengthen its reserves, and to fund the International Development Association (IDA), the Agency set up within the World Bank in the 1960s to lend to developing countries. IDA aims mainly to reduce poverty by providing interest-free loans and grants for programs that enhance economic growth, reduce inequalities and improve people's living conditions especially in the poor countries (web.worldbank.org, 2007). The 1993 publication IDA states that the aim of IDA is "to market human vision, experience, energy and capital to build the wealth of nations" and that its story is one of "how the 'haves' help the 'have-nots'". The loans are only avai1able to the poorer countries and loans are given for 30-40 years, with, a 10 year grace period for repayment, with no interest but with a service charge. Since its inception in 1960, the IDA has spent $75 billions "to promote development in some 90 countries". However it is estimated that almost half the money has been given to Africa (Hardy, N.D.). The International Finance Corporation (IFC) is the private sector arm of the World Bank Group. It was set up in 1956, lends to the private sector, unlike the IBRD and the IDA which deal with governments. The main aim of IFC is to promote sustainable private sector development especially in developing countries. IFC provides loans, equity, structured finance and risk management products, and advisory services to build the private sector in developing countries (web.worldbank.org, 2007). In 1988 the Multilateral Investment Guarantee Agency (MIGA) was established. As a member of the World Bank Group, MIGA's duty is to promote foreign direct investment (FDI) into developing countries to help support economic growth, reduce poverty, and improve people's lives. Besides, MIGA has issued nearly 850 guarantees worth more than $16 billion for projects in 92 developing countries (web.worldbank.org, 2007). The main objective of this organization is to work for the flow of private capital, work against protectionist and other related po1icies, and offers guarantees to private capital against non-commercial risks (Hardy, N.D.). Functioning of the World Bank The powers of the Bank are held by the Board of Governors, who play the role of policy makers at the World Bank. Each of the member country is represented by a Governor, generally the Finance Minister or President of the Central bank. In order to discuss the new projects and also to assess the progress of on going projects, they meet every year at the Annual Meetings'of the Boards of Governors of the World Bank Group'and the International Monetary Fund. Since the governors only meet annually, they hand over specific duties to 24 Executive Directors, who work on-site at the bank. Today around 10,000 development professionals from nearly every country in the world work at the World Bank in Washington, or in over 100 country offices around the world. There is a concentration of economists, educators, environmental scientists, financial analysts, anthropologists, engineers and many others. Approximately 3,000 of World Bank officials work in country offices in the developing world (web.worldbank.org, 2007). Evolution of World Bank policies One of the significant changes that have affected the World Bank since its inception has been the shift to a more 'pure' neo-liberal system, advocated by Hayek and Friedman among others. Hayek's The Road to Serfdom, protesting against government intervention in the market, was published in 1944, but it was not fully taken up until the late 1970s and early 1980s both international1y, and most predominantly nationally by the governments of U.S.A. and U.K. under Ronald Reagan and Margaret Thatcher (Hardy, N.D.). The policy of the World Bank has increasingly followed the Free Trade model in the past few years. The free trade model presumes that maximum profits can be made if the private sector is large, and can operate freely, without protectionist measures. Besides it is important for goods to pass freely internationally, without the hazels of tariff barriers or restrictions, between all countries. It also emphasizes upon the national indicators of wealth i.e. the Gross National Product (GNP) or the Gross Domestic product (GDP), as a measure of a country's economic health. Last but not the least foreign capital should move round the world easily, and should be free to invest in countries which are on their way to industrial development. According to the Liberal economic theory, poverty is relieved when a whole society becomes well off. As a result the general increased wealth helps to elevate the economic conditions of the poorest nations. Unfortunately, frequent crises involving starvation of large numbers of population especially in African countries, have been a cause of concern for past several years within the Bank itself. Environmental preservation through sustainable development has been one of the main objectives of World Bang projects. When Liberal theory was developed in the eighteenth and nineteenth centuries, land was regarded as a possession, a 'good'. This is true even today. However global concerns over the indiscriminate use of land, ending up in the Summit of 1992, have pushed environmental factors onto the economic agenda and have begun to affect the economic policies of the Bank in such a way that loans are negotiated. Hence if we look at the developments of the World Bank over the last 50 years, a neo-liberal model has increasingly dominated. However, even today the issue of poverty and starvation continues to be a concern and cannot be ignored and has brought a new direct factor into consideration of the effect of loans on the countries concerned. The growing awareness of the effects of economic policies on the environment is questioning the assumption of continual economic and industrial growth and progress. Policy changes in 1980s Developing countries were given loan in the initial 20 for developing infrastructure of these countries, especially the electricity, gas, roads, water with stress on the growth of the Gross National Product. Later the fourth President, George Woods (1963-1968) with his innovative ideas initiated loans directly for education and primary health services. The more proactive nature of the World Bank policies was prominent in the 1970s and 80s. This change of role was not only pushed forward by the McNamara policy but was fuelled by the oil crises of 1973 and 1979-80, which were seen as a major threat to the world economic and political stability. The stress on world-wide free trade has intended that the Bank has more and more prepared only to lend to countries wishing to open up to world trade. Structural Adjustment Programmes (SAPs) Structural adjustment is a term used to enumerate the policy changes implemented by the International Monetary Fund (IMF) and the World Bank in developing countries. The World Bank developed its Structural Adjustment Programmes in response to the deteriorating economic conditions of developing countries in 1970s. By the end of the 1980s, roughly about 25 % of the Bank's lending redirected to restructuring of economies of developing countries through its structural adjustment programmes (SAPs) (Nath, 2000). Depending on the type of necessity, the borrowing country usually gets loan form the bank. Ever since the late 1990s, SAPs have been mainly focused towards poverty reduction. However, SAPs were often criticized for implementing generic free market policy, as well as the lack of involvement from the country. Therefore to increase the borrowing country's involvement, developing countries are now encouraged to draw up Poverty Reduction Strategy Papers. Critics point out that the similarities show that the banks, and the countries that fund them, are even today more involved in the policy making process (Wikipedia, 2007b). Today's Bank, however, has sharpened its focus on poverty reduction as the overarching goal of all its work. During the 1980s, the Bank was pushed in many directions: early in the decade, the Bank was brought face to face with macroeconomic and debt rescheduling issues; later in the decade, social and environmental issues assumed center stage, and an increasingly vocal civil society accused the Bank of not observing its own policies in some high profile projects (The World Bank Group, 2007). Besides, the World Bank is supposedly working against corruption both outside and within its organization. In conclusion, it should be noted that the World Bank has contributed immensely towards the development. Particularly it has been focusing on reducing the poverty especially in the developing countries. Through there have been criticism and challenges of various types, the World Bank has been an important aid after the World War II. The evolution of bank group was a slow but has shown a progressive growth over the years providing low-interest loans, interest-free credit and grants to developing countries for education, health, infrastructure, communications and many other purposes. References Bank Information Center (BIC), (1990). Funding Ecological and Social Destruction: The World Bank and International Monetary Fund. Washington: The Bank Information Center. Hardy, J. (N.D.) The history and changing objectives of the World Bank [Online]. Available from: [Accessed 5th May 2007]. ibid. Based on Mason E.C. and Asher R.E. The World bank since Bretton Woods, 9 Brookings Institute, Washington D.C. 19730, pp 326-330. Nath, V. (2000) World Bank: A Step Forward and a Step Backward Do We Need This Institution' [Online]. Available from: [Accessed 5th May 2007]. Rich, B (1994) A cuckoo in the nest. The Ecologist, Vol. 24. No 1 Jan/Feb 1994. p.8. The World Bank Group, (2007) World Bank History [Online]. Available from: [Accessed 5th May 2007]. web.worldbank.org, (2007) The World Bank [Online]. Available from: [Accessed 5th May 2007]. Wikipedia, (2007a) World Bank Group [Online]. 4 May 2007 Wikimedia Foundation, Inc., Available from: [Accessed 5th May 2007]. Wikipedia, (2007b) Structural adjustment [Online]. 2 May 2007 Wikimedia Foundation, Inc., Available from: [Accessed 5th May 2007]. World Bank. (1992). Annual Report 1992. Washington. Read More