The World Bank

1. The World Bank CHAPTER 22

2. Introduction • The World Bank is as important as the IMF • Both institutions grew out of the Bretton Woods Conference • Controversial institution

3. Early History and Administrative Structure • Great Britain and the US entered into the Bretton Woods conference in July 1944 to discuss the creation of a United Nations Bank for Reconstruction and Development • Bretton Woods conference initially focused on the IMF • In response to the concerns of countries damaged by the war (and less developed countries) a group was finally constituted to work on the Bank • Under the supervision of John Maynard Keynes • Focused on the relative roles of post-war reconstruction and economic development • Resulting Articles of Agreement of the International Bank for Reconstruction and Development (IBRD) first focused on reconstruction • IBRD was the first of five components of what was later to be called the World Bank Group

4. IBRD’s Articles of Agreement • Purposes of the institution • Promote loans to assist in the reconstruction and development of countries • Promote private foreign investment • Promote long-term balanced growth of international trade and the maintenance of equilibrium in balances of payments • Operate with due regard to the effects of international investment on business conditions in the territories of members • Membership is confined to countries that are already members of the IMF

5. IBRD’s Articles of Agreement • Capital stock of the Bank is based on members’ subscription shares • Based on the members’ quotas in the IMF • Upon joining the Bank, a member pays 10% of its subscription • Remaining 90% is “callable” by the Bank • The funds from which the Bank makes loans come from a number of sources • Members’ subscription shares • Retained earnings on investments • Bond issues (main source) • Loan repayments

6. Figure 22.1. The Components of the World Bank Group

7. IBRD • Major decision-making body is its Board of Governors • Each member appoints Governor and Alternate Governor • Executive Board conducts the day-to-day business of the Bank • President chairs the Executive Board and is ultimately subject to its control • Traditionally, President is US citizen appointed by the executive branch of US government • Executive Director of IMF has traditionally been European • Major Bretton Woods players ensured their subsequent control of the Bretton Woods institutions

8. Table 22.1. Administrative Structure of the World Bank

9. IBRD • IBRD opened in June 1946 with an initial subscription capitalization of $10 billion • First set of loans went to France, the Netherlands, Denmark, and Luxembourg • Funded by the United States and were used primarily to purchase US exports • Tilt towards reconstruction was offset by the introduction of the US Marshall Plan and European Recovery Program • Surpassed the resources of the World Bank and IMF • Made loans to Chile, Mexico, and Brazil • First bond issue in July 1947 quickly traded at a premium over the offer price • In September 1959, the Bank’s subscription capital more than doubled to $21 billion

10. International Finance Corporation • Created in 1956 • Purpose is to encourage productive private enterprise in less developed countries • Has its own staff, although some of these individuals also hold positions in the Bank • Initially encountered difficulties because it was excluded from equity investments • Later relaxed with an equity ceiling of 25 percent

11. International Development Association • Created in 1960 • “Soft loan” version of the IBRD • Share staff and officers with IBRD • Together comprise what has come to be known as the World Bank • Really a special fund or “window” of the World Bank • Official purpose is to promote economic development and raise living standards • By providing loans on terms that are significantly more flexible than the IBRD • No-interest loans for long time periods (35-40 years) with significant grace periods (10 years) • Primarily dependent on contributions from high-income member countries

12. International Center for Settlement of Investment Disputes • Provides arbitration between foreign investors and host country governments • Bank officials thought that the presence and operation of the ICSID would support the flow of FDI into developing countries

13. Multilateral Investment Guarantee Agency • Purpose is to encourage the flow of FDI to developing countries • Engages in three kinds of activities • Issues guarantees against non-commercial risks in recipient member countries • Insures against transfer restriction, expropriation, breach of contract, and war and civil disturbance • Engages in investment marketing through capacity building, information dissemination, and investment facilitation • Provides a host of legal services to World Bank member countries to support FDI

14. Infrastructure Project Lending and Poverty Alleviation Phases • In its early years, the IBRD directed its efforts toward large-scale infrastructure projects • Projects funded included ports, railways, flood-control, power plants, roads, telecommunications facilities, and dams • Project lending was often accompanied by “program lending” (or “non-project lending”) • Helped finance the importation of intermediate products necessary for infrastructure projects

15. Infrastructure Project Lending and Poverty Alleviation Phases • Lack of attention to the social realm • Some believed large-scale infrastructure was a prerequisite for development • Other believed there was a reluctance to disturb the capital markets with social-realm lending • Compromise the Bank’s triple-A bond rating • Bank observed that large capital investments would be unlikely to be made by private capital • Bank should fill in the gap

16. Infrastructure Project Lending and Poverty Alleviation Phases • Project-lending phase was tempered in the 1960s • Following severe droughts in South Asia, the Bank began to pay more attention to agriculture in cooperation with the United Nations Food and Agriculture Organization (FAO) • Began to venture into education in cooperation with the United Nations Educational, Scientific and Cultural Organization • Between 1961 and 1965, 76.8% of all Bank lending was for electric power or transportation • 6% was for agricultural development, and 1% for social service investment • From 1968 to 1981 Robert McNamara was World Bank President • Presidency coincided with the poverty alleviation phase for the World Bank

17. Poverty Alleviation Phase • Focused on the eradication of absolute poverty through rural and urban development • Operationalized via the concept of redistribution with growth • New sources of income to help the poor—avoided redistribution of existing incomes and assets • Concept is now called shared growth • Lending increased dramatically and channeled in new directions • Agriculture and rural development, education, health, and urban development took on increasing importance

18. Poverty Alleviation Phase • In the case of rural development, the notion of “projects” changed, moving towards what was called integrated rural development • Included agricultural credit, roads, agricultural support services, irrigation, rural education, agricultural research and extension, and social services such as health clinics • Goal was to increase the productivity of the rural poor, but the targeted population was the small-scale, owner-operator farmer • Strategy was a significant change from Bank agricultural lending under the infrastructure project-lending phase • Had primarily benefited the owners of large farms • Began to recognize the growing importance of urban areas in developing countries • Began to focus on urban poverty • Housing for the poor, small-scale enterprises, water supply, sewerage, transportation, and community services

19. Policy-Based Lending • In 1981, the Reagan administration replaced McNamara with A.W. Clausen—a banking executive • The Reagan administration took a dim view of the poverty alleviation phase of World Bank lending • As the largest Bank donor, began to demand a change • Clausen introduced the policy-based lending phase of the Bank

20. Policy-Based Lending • Co-financing • World Bank joins with private commercial banks in making loans • World Bank provides information to the commercial banks and encourages them to make loans that they may not have made without World Bank participation • Often been restricted to middle-income countries • Expanded role of the IFC • IFC’s purpose is to make debt and equity investments in private enterprises in developing countries • Clausen began to emphasize the role of the IFC relative to the other members of the World Bank Group • Conditionality or “macro-conditionality” • Ties Bank lending to prescribed policy changes on the part of the recipient government • World Bank loans always carried limited conditions • In the 1980s these conditions were broadened from the sectoral or sub-sectoral level to the national, macroeconomic level • Some loan agreements involve a hundred or more conditions • Meeting this number of conditions has often been beyond the capacity of borrowing countries

21. Policy-Based Lending • Structural adjustment lending • Involves non-project lending to support adjustment in the face of balance of payments difficulties and includes the conditionality component • Currently accounts for approximately 1/4 of Bank lending despite an initial plan to limit it to 10% • Has been controversial for a number of reasons • Begins to encroach upon the work of the IMF • Bargaining over conditionality • Some argue that those countries in greatest need of SAL support are in the weakest bargaining position • Growth of SAL has come at the expense of rural development • Tends to hurt the poor • Two sides of this debate tend not to listen to one another

22. Engaging with Ghana • The policy-based lending phase of the World Bank coincided with the coming to power of the Rawlings regime in Ghana in the early 1980s • Initially, Rawlings and his PNDC were anti-capitalist and anti-market • However, economic conditions continued to worsen • Fixed value of the currency (the cedi) was so overvalued that most currency transactions were undertaken at black-market rates • Debate over economic policy emerged within the PNDC itself • An Economic Recovery Program was negotiated with the World Bank in 1983

23. Engaging with Ghana • In April 1983, a large de facto nominal devaluation was effected through import taxes and export subsidies • In October 1983, the nominal rate itself was adjusted from 2.75 cedi per US dollar to 30 cedi per dollar • Further devaluations followed in 1984-1986 • Subsequently, the value of the cedi was market-determined • Import restrictions were reduced • Ghanaian government began to place an emphasis on revenue generation to address central government deficits • However, there were substantial lay-offs of public-sector workers, particularly in state-owned enterprises, although retained public-sector workers were rewarded with raises

24. Engaging with Ghana • Both GDP growth and manufacturing value added (MVA) growth rebounded quickly • Inflation slowed and exports expanded • Subsequently, economic conditions began to take a turn for the worse • Inflows of FDI never appeared • MVA growth became very unsteady after 1987 • Inflation returned • Unemployment remained stuck at approximately 25% of the labor force • Internal and external debt increased substantially to over US$5 billion by 1995

25. Figure 22.2. Growth Rates in GDP and Manufacturing Value Added in Ghana

26. Ghana’s Missing Ingredients • In a country study published in 1984, the World Bank emphasized Ghana’s constraints on long-term growth • Population growth • Inadequate supply of skilled and educated personnel • Lack of diversification of the economic base

27. Recent Shifts in Direction • In 1983 the environmental issue rose to the surface • Bruce Rich, then an attorney with the Natural Resources Defense Council (later with the Environmental Defense Fund), launched an attack on the World Bank supported Polonoroeste project in Brazil • Criticized the project on environmental grounds in articles and appearances before committees of the US Congress • Project was canceled in 1986 • Resulted in a change in the Bank’s policy toward the environment

28. Recent Shifts in Direction • Conable began to speak publicly on the Bank’s role with regard to the environment in 1987 • Conable committed the Bank to • Increasing its environmental staff • Beginning a series of environmental issue papers • Financing environmental programs • Involving grass-roots environmental organizations in decision making • Some are uncertain as to whether these changes will be implemented in a meaningful way

29. Recent Shifts in Direction • One change introduced at the World Bank under the McNamara Presidency was the use of loan volumes as a measure of success • Evidence quality of Bank lending suffered as a result • Might explain some of the Bank’s lack of attention to environmental matters • More fundamentally, there has been a lack of attention to process and results that appears to have plagued the Bank

30. Recent Shifts in Direction • Broad themes emerging • Need to focus on people • Education and health lending • Private sector entrepreneurship • How the environment affects the poor • Participation • Partnerships with other agencies • Results • Recently, World Bank President James Wolfensohn appears to have taken these matters on board

31. Poverty Reduction Strategy • Initiative launched in 1999 • Closely related to Wofensohn’s development framework • Guiding principles are that PRS should be • Country driven • Led to controversy in the case of Ghana as key elements of the PRS were kept secret by the government • Results oriented • Comprehensive • Prioritized • Partnership oriented • Long term • IMF supports the PRS with a Poverty Reduction and Growth Facility • PRS has become a prerequisite for debt relief