Reinert/Windows on the World Economy, 2005 The World Bank CHAPTER 22

Reinert/Windows on the World Economy, 2005

The World Bank

CHAPTER 22


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Introduction

The World Bank is as important as the IMF Both institutions grew out of the Bretton Woods

Conference Controversial institution


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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


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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


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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


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Figure 22.1. The Components of the World Bank Group


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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


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Table 22.1. Administrative Structure of the World Bank


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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


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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


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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


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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


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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


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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


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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

Documents

Reinert/Windows on the World Economy, 2005 The World Bank CHAPTER 22