Along with the International Monetary Fund, the International Bank for Reconstruction and Development (IBRD or World Bank) was established in 1944 and began operations in 1946. It is essentially an international development agency whose primary role is to make long-term development project loans in foreign currency to member governments. It is the largest of all official development agencies. Since its creation its role has changed substantially.
Its original role (as suggested by its original name) was to facilitate the reconstruction of European economies after the Second World War. It originally had 45 members compared with around 150 in the mid-1990s. The bulk of its early lending was to Europe and even by the mid-1950s lending to Europe accounted for two-thirds of its total. As the post-war reconstruction of the European economies was rapid (due partly to biliteral Marshall Plan assistance rather than the activities of the IBRD) the World Bank’s focus changed. It was in this process that it emerged as the world’s leading economic development agency making loans to developing countries. Its focus remains the making of loans to foster economic development. It has become the world’s largest official lender for the development of low-income countries. As well as finance, the Bank also provides substantial technical assistance on the projects it finances.
In 1956 the Bank was expanded by the establishment of the International Finance Corporation whose purpose is to provide and facilitate finance exclusively for the development of private enterprise in member countries. A further extension was made in 1960 with the creation of the International Development Agency focused on low-income borrowers with loans made on more concessionary terms. In 1988 the Multilateral Investment Guarantee Agency was established as part of the World Bank group to facilitate and encourage foreign direct investment in developing countries. It does this partly by an insurance programme to alleviate perceived political risks by potential investors. The World Bank group is, therefore, a bank, a broker, a consultant, and an insurance agency.
Its loans are usually for large-scale projects in the area of energy, transportation, infrastructure, communications and public utilities. Such loans alleviate domestic savings and foreign currency constraints to borrowing countries’ economic development. A characteristic of developing countries is that the optimum level of capital formation exceeds the capacity of the country to generate domestic savings, and foreign currency reserves are insufficient to fill the gap on a continuing basis. The World Bank acts as an intermediary by channelling savings generated in the developed world towards investment in developing countries. All loans of the World Bank are made to either governments or to entities guaranteed by governments (e.g. public utilities).
Typically, loans are repayable over a period of ten to fifteen years and carry interest rates which reflect the cost of funds to the Bank. The Bank has never suffered a default on a loan and it has never had to call on any part of its capital. The World Bank has the highest possible credit-rating in the world’s capital markets.
While historically development projects have dominated its lending, priorities and focus have changed over time. Increasing emphasis has been given to alleviating poverty per se and this is reflected in the expansion of lending to the rural sector. In its 1991 Annual Report it stated that ‘the eradication of poverty remains the World Bank’s top priority’. This shift in emphasis, a reflection also of the ability of higher-income developing countries to tap international banking and capital markets directly, is seen in the increasing proportion of lending to low-income countries. Thus, in 1981, 35 per cent of loans were made to this group of countries while by 1991 the proportion had risen to over 40 per cent. Lending has been directed to health and nutrition projects as well as to education. Environmental issues have also been given an increased priority.
Since 1988, the Bank has also participated in debt-reduction and debt-restructuring programmes of those developing countries which encountered severe debt-servicing problems following many years of massive private market borrowing.
The Bank is owned by its member governments who provide the Bank’s capital. Its main lending operations, however, are financed by its own borrowing on the international capital markets. It has become one of the world’s largest single issuers of bonds. It can borrow on very fine terms not only because of its untarnished record of repayments and debt-servicing, but also because it has never borrowed amounts in excess of its own capital. This gearing ratio of 1:1 makes it the most cautious and prudent bank in the world. In effect, the World Bank borrows in its own name and makes loans to countries which are unable to gain direct access to private markets or can do so only on less advantageous terms than the World Bank.
The World Bank inevitably has its critics from across the political spectrum. It is criticized from one end of the spectrum for being an agent of capitalism and imperialism and for creating conditions on its lending that unduly interfere with governments’ social and political priorities. This alleged bias arises because it is controlled by wealthy developed countries with poorer borrowing nations having little voice in its decision-making progress. At the other end of the spectrum the criticism is that it is too passive, and not sufficiently responsive to market forces in economic development. This school also argues that it has a bias towards public sector rather than private enterprise projects and has not been sufficiently vigorous in fostering de-regulation.
Whatever the merits of the conflicting criticisms, the fact remains that the World Bank has become both the world’s largest development agency and one of the largest borrowers in international capital markets.
David T.Llewellyn
Loughborough University
Further reading
Baum, W.C. and Tolbert, S.M. (1985) Investing in Development: Lessons of World Bank Experience. New York.
de Vries, B.A. (1987) Remaking the World Bank, Washington, DC.
Fried, E.R. and Owen, H.D. (eds) (1982) The Future of the World Bank, Washington, DC.
Mason, E.S. and Asher, R.E. (1973) The World Bank since Bretton Woods, Washington, DC.
World Bank, Annual Reports, Washington, DC.
World Bank, World Development Reports, Washington, DC.
