International Bank for Reconstruction and Development

International Bank for Reconstruction and Development

International Bank for Reconstruction and Development

I INTRODUCTION

International Bank for Reconstruction and Development, also known as the World Bank, specialized United Nations agency established at the Bretton Woods Conference in 1944. A related institution, the International Monetary Fund (IMF), was created at the same time. The chief objectives of the bank, as stated in the articles of agreement, are “to assist in the reconstruction and development of territories of members by facilitating the investment of capital for productive purposes [and] to promote private foreign investment by means of guarantees or participations in loans [and] to supplement private investment by providing, under suitable conditions, finance for productive purposes out of its own capital …”.

International Bank for Reconstruction and Development

The bank grants loans only to member nations, for the purpose of financing specific projects (at the start of the 21st century it had 183 members and operated in 100 countries). Before a nation can secure a loan, advisers and experts representing the bank must determine that the prospective borrower can meet conditions stipulated by the bank. Most of these conditions are designed to ensure that loans will be used productively and that they will be repaid. The bank requires that the borrower be unable to secure a loan for the particular project from any other source on reasonable terms and that the prospective project be technically feasible and economically sound. To ensure repayment, member governments must guarantee loans made to private concerns within their territories. After the loan has been made, the bank requires periodic reports both from the borrower and from its own observers on the use of the loan and on the progress of the project.

In the early period of the World Bank’s existence, loans were granted chiefly to European countries and were used for the reconstruction of industries damaged or destroyed during World War II. Since the late 1960s, however, most loans have been granted to economically developing countries in Africa, Asia, and Latin America. The bank gave particular attention to projects that could directly benefit the poorest people in developing nations by helping them to raise their productivity and to gain access to such necessities as safe water and waste-disposal facilities, health care, family-planning assistance, nutrition, education, and housing. Direct involvement of the poorest people in economic activity was being promoted by providing loans for agriculture and rural development, small-scale enterprises, and urban development. The bank also was expanding its assistance to energy development and ecological concerns.

II SOURCES OF FUNDS

World Bank funds are provided primarily by subscriptions to, or purchase of, capital shares. The minimum number of shares that a member nation must purchase varies according to the relative strength of its national economy. Not all the funds subscribed are immediately available to the bank; only about 8.5 percent of the capital subscription of each member nation actually is paid into the bank. The remainder is to be deposited only if, and to the extent that, the bank calls for the money in order to pay its own obligations to creditors. There has never been a need to call in the capital. The bank’s working funds are derived from sales of its interest-bearing bonds and notes in capital markets of the world, from the repayment of earlier loans, and from profits on its own operations. It has earned profits every year since 1947.

All powers of the bank are vested in a board of governors, comprising one governor appointed by each member nation. The board meets at least once annually. The governors delegate most of their powers to 24 executive directors, who meet regularly at the central headquarters of the bank in Washington, D.C. Five of the executive directors are appointed by the five member states that hold the largest number of capital shares in the bank. The remaining 19 directors are elected by the governors from the other member nations and serve 2-year terms. The executive directors are headed by the president of the World Bank, whom they elect for a 5-year term, and who must be neither a governor nor a director.

III AFFILIATES

The bank has two affiliates: the International Finance Corporation (IFC), established in 1956; and the International Development Association (IDA), established in 1960. Membership in the bank is a prerequisite for membership in either the IFC or the IDA. All three institutions share the same president and boards of governors and executive directors.

IDA is the bank’s concessionary lending affiliate, designed to provide development finance for those countries that do not qualify for loans at market-based interest rates. IDA soft loans, or “credits”, are longer term than those of the bank and bear no interest; only an annual service charge of 0.75 percent is made. The IDA depends for its funds on subscriptions from its most prosperous members and on transfers of income from the bank.

All three institutions are legally and financially separate, but the bank and IDA share the same staff; IFC has its own operating and legal staff but uses administrative and other services of the bank. Membership in the International Monetary Fund is a prerequisite for membership in the World Bank and its affiliates.

IV RECORD

The World Bank has been heavily criticized in recent years for its poor performance in development economics, especially with regard to the social and environmental consequences of the projects it supported in developing countries. The bank itself has admitted considerable wrongdoing. Resulting reforms were embodied in the Strategic Compact of 1997, which decentralized the bank’s operations. However, it is arguable that it is less at fault than many of the corrupt or incompetent regimes whose schemes it is called on to fund. The bank’s role in development has in any case diminished with the vast influx of private capital into profitable projects in developing countries. Health, education, and other fields unlikely to yield profits remain in need of an institution such as the World Bank.

International Bank for Reconstruction and Development

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