World Bank Reform Issues: Where do the World Bank group agencies get money to operate? Describe the various agencies of the World Bank Group and their missions. Under what conditions can countries utilize the services of each of these? How is power distributed within the World Bank (e.g., among the Board of Governors, Executive Board, President, etc.)? What is the basis of voting power? What are some arguments against the World Bank? How do Bank supporters respond to these criticisms (i.e. what arguments do they make in favor of the Bank)?

 

World Bank

 

Ironically the world bank is not actually a bank. It is actually a fund manager. It borrows money at a low percentage rate, and then reinvests that money at a higher percentage rate. One criticism of the bank is that it is too profit oriented, and not charitible enough. But, since it must pay back all of the money that it borrows (with interest), it therefor must invest only in projects that can also generate profits. Note: however, there is one part of the World Bank group that does give consessional loans (interest free) to very poor countries. The World Bank does not make money on these loans.

 

 

Reform Issues:

 

2012:

 

 

Does Kim's Appointment Signal Change? Oliver Stuenkel, Sook Jong Lee, Daniel Bradlow, Stewart M. Patrick Four experts from Brazil, South Korea, South Africa, and the United States assess the challenges in Jim Yong Kim's appointment as World Bank president and examine whether the institution needs governance reform. Read the Expert Roundup »   The Bank Needs a Post-G20 Worldview Laurie Garrett An examination of Jim Yong Kim's career in public health gives clues about how he will handle the role of president. Read the Expert Brief »     Reform the Bank Thomas Bollyky For the first time since the World Bank's creation at the end of World War II, the United States faced a real challenge over the bank's leadership. The United States should use this controversy to reform how the institution is governed. Read the op-ed » Examining the World Bank's History Since its founding in 1944, the World Bank has evolved from a lender focused on European reconstruction into the preeminent international institution for economic development and poverty reduction. Read the Backgrounder »

 

Banker, Tailor, Soldier, Spy Benn Steil's New York Times op-ed reveals the spy-thriller history of America's claim on the World Bank's top job. Read More » How to Fix the World Bank Thomas Bollyky writes that the United States should use the controversy over the World Bank's presidential selection process as an impetus to reform the institution. Read More » Obama’s Blunder at the Bank Jagdish Bhagwati criticizes President Obama for nominating Jim Yong Kim to the World Bank presidency over candidates who would pursue macroeconomic reforms that promote growth. Read More »

 

 

 

 

 

 

Where do the World Bank group agencies get money to operate?

 

 

The World Bank is funded by contributions from its 184 member nations (shareholders), and also from bonds sold in the financial markets.

 

The IBRD sells AAA-rated bonds in the world's financial markets. The basic business model of the IBRD is to borrow money on the international markets at a low interest rate, and then loan out those funds to member nations at a slightly higher rate. They make money on the spread between the two rates. From the individual countries perspective, they can get access to cash in lower rates, bigger volumes and with longer periods of time than could be otherwise obtained by themselves on the international financial markets.

 

The World Bank has a large pool of reserves which it can loan out or invest. It makes a lot of money though its own equity investments.

 

The main income from the IBRD is used to pay for the World Bank’s operating expenses, and then also to help pay for the IDA and other debt relief.

 

The IDA has a slightly different model. Since they do not charge interest on their loans, the IDA is reliant upon donor nations to pledge money. These donor contributions pay over 50% of the annual budget of the IDA. The remaining balance of the budget comes from the IBRD and from repayment of previous loans. When countries pay back their zero-interest loans (paying back the principle), that money is then used to loan to other countries.

 

The IFC is funded in a similar fashion as the IBRD in that member donations may have helped it get started, but ongoing operations are mostly funded by borrowing money at a cheap rate and lending it out at a higher rate, and making money on the spread.

 

 

Describe the various agencies of the World Bank Group and their missions.

 

When most people talk about the World Bank, they are normally just referring to its two main agencies; the International Bank for Reconstruction and Development (IBRD), and the International Development Association (IDA). But the World Bank Group also includes the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), and the International Center for Settlement of Investment Disputes (ICSID).

 

In general, the World Bank Groups’ mission is to help with long-term growth in developing countries. They focus on various areas such as infrastructure (building roads, electricity, etc), on environmental protection, agriculture development, education, health and good governance (anti corruption, etc). The World Bank is different than the IMF in that it focuses on longer term projects, development, and on poverty reduction.

 

Of the various agencies in the World Bank, the IBRD is perhaps the most well known and most important. The International Bank for Reconstruction and Development (IBRD) was founded after WWII to help finance reconstruction of Europe and Japan. Since then, the IBRD has shifted its purposed and focused on alleviating poverty.

 

The IBRD provides debt financing to medium-income and credit-worthy countries. The IBRD focuses on projects that the private sector is unwilling or unable to service. The goal of the IBRD is to reduce poverty by allowing governments in developing nations to borrow money at an affordable rate for the purpose of investing in necessary infrastructure. The loans are often tied to specific policy changes that donor nations feel are necessary to promote long term growth in a country.

 

In addition to the loans, the IBRD also offers financial guarantees which help developing countries to obtain capital on the open markets. They also offer in depth analysis of countries various development projects. For example, you can go to the World Bank and find detailed analysis of the developmental issues confronting a debtor nation. In addition to the analysis, the IBRD also offers advisory services.

 

The world banks other important division (affiliate) is the International Development Association (IDA), which provides interest-free loans to the world’s poorest countries. The purpose of the IDA is to promote economic growth by investing in necessary infrastructure, agriculture, health, education and other areas in the world’s poorest countries. Most of the IDA investment in recent years has gone into Africa. Unlike the IBRD loans, the IDA lends money on concessional terms, which means that the there is not any interest on the loans and the term of the loan can be stretched out to over 40 years.

 

Another affiliate that was set up by the World Bank is called the International Finance Corporation (IFC), which works with the private sector in granting loans without government guarantees. The main function of the IFC is to invest in the private sector in developing countries. The goal is to finance projects that the private sector is not, and to use those investments as a leverage tool to encourage more private sectors lending in the future. My guess is that the IFC was set up because the World Bank (and the IMF) wanted to encourage countries to “privatize” key industries, and so they created the IFC as an investment fund to encourage privatizations in the borrowing countries (a policy tool).

 

 

 

The International Center for Settlement of Investment Disputes (ICSID) works with governments and private lenders to help settle disputes.

 

 

Under what conditions can countries utilize the services of each of these?

The various agencies of the World Bank are designed to assist different types of countries and different types of projects.

The IDA, for example, is only set up to give long term loans to the poorest countries on Earth. The World Bank defines this level of poverty by GNP per person of less than US$1025. They also look for countries that have low levels of international credit worthiness and are therefore having difficulty borrowing money on the international capital markets. They also require that countries be willing to implement sound economic and social programs to create the foundation for economic development. The policies will then be monitored over the course of the loan to make sure that they are implemented and that the structural policies are enacted according to the predetermined schedule. If progress is not made in implementing the policies, the installments of the loans (grants) may be withheld.

The IDA has approximately 81 eligible borrowers, with a majority of them coming from Africa. In the past, there have been IDA eligible nations that “graduate” and are no longer eligible for IDA loans (but they will be eligible for IBRD loans). Some nations are in between and are called “blend” countries in that they are eligible for both IDA and IBRD funds.

 

The International Bank for Reconstruction and Development (IBRD) has a wider variety of financial instruments available to its members. There are also fewer restrictions about who can qualify to be a borrower. In order to borrow money from the IBRD, you must first be a member in good credit standing in the international markets, and you have to be good about paying back your previous IBRD loans.

 

In order to qualify for an IBRD loan, you have to be either a sovereign nations, or have a loan guarantee from one. Also, the IBRD will conduct research in an effort not to compete with private banks money (if private banks will fund the project, then the IBRD typically will not).

Over the course of the loan, the IBRD will monitor and receive feedback to determine if the necessary policy and structural changes are being implemented. Much like the IDA process; if the changes are not happening fast enough, then future installment of the loans may be withheld.

To qualify for an IFC (International Finance Corporation) you must be a private enterprise with a project that meets certain criteria. The project must be located in a developing country that is a member of the IFC. In addition to location, the project must also economically sound, and adhere to the IFCs standards of environment and social development. The main consideration, however, is whether or not the individual project has the potential of benefiting the local community in which it is located. The IFC limits their exposure to 25% of the total dept of any new projects.

 

 

How is power distributed within the World Bank (e.g., among the Board of Governors, Executive Board, President, etc.)? What is the basis of voting power?

 

The organizational structure of the World Bank is often described as a cooperative. The individual member countries are like the shareholders (owners) and they supply the money. In order to make sure that the organization keeps the owners (countries) interests in mind, they set up a Board of Governors to manage the fund and issue reports.

 

Each member country has one Governor who is typically the finance minister of that country. Because these individuals are busy, they select an Executive Board to run the day to day operations. On that Executive Board, there are 24 Executive Directors. The five largest shareholders (USA, France, Germany, Japan and the UK) each get to select one Executive Director, while the remaining 19 are shared among the other countries.

 

In the World Bank, a President is nominated by the largest shareholder of the Bank, in this case the USA (Paul Wolfowitz). The President then has to be elected by the Board of Governors for a 5 year renewable term.

 

Each agency of the World Bank is owned by the member governments in proportion to the amount to their respective donations to the Bank. Every nation member will have basic voting rights, but there are additional voting rights depending upon the level of financial contributions that have been given. As of the end of 2006, the USA had the most votes (16%) followed by Japan (8%), Germany (5%), United Kingdom (4%) and France (4%).

 

In order to pass any radical new rules, there would need to be an 85% majority vote, which the USA could block with their 16% voting rights.

 

 

 

What are some arguments against the World Bank? How do Bank supporters respond to these criticisms (i.e. what arguments do they make in favor of the Bank)?

 

 

The World Bank was formed in the end of WWII out of the Breton Woods conference with the express purpose of funding the development and reconstruction of Europe (and Japan) after the war. The main division, the IBRD was formed for this purpose. Over time, and after both Europe and Japan had been redeveloped, the World Bank changed their focus on the development and poverty reduction goals of today. With a goal of reducing poverty in developing nations, the World Bank of today offers low interest loans to developing nations through the IBRD, and concessionary loans through the IDA. The Bank is often criticized by people that wonder if this new role of poverty reduction and economic development is really best served by the same Breton Woods institution hat was formed to rebuild Europe. In defense of the Bank, it has shown that it ahs been very good at making the transition and has proven to be an excellent resource of information, advice, and lending for the developing world today.

 

The criticisms of the World Bank come from many different perspectives. On the one hand, the economic liberals often criticize the World Bank for being irrelevant in today’s global international finance environment. With the growth of the private international finance system, there is no longer a monopoly that the Bank once had in this area. The liberals criticize the Bank for crowding out private money that might be willing to fund the same projects. “If private lenders are willing to finance these projects, then why should the bank continue to operate in this area?” In defense of this criticism, bank supporters respond that they only fund projects that other private lenders are unwilling or unable to service. Also, they notice that a majority of private money only goes to a handful of countries, and that World Bank money can act like leverage in attracting more money from the private sector. Funds from the IFC, for example, are available to private borrowers, but the IFC will not lend money to fund the entire project. The loans and other financial instruments (such as guarantees, and insurance) give private international investors the confidence to piggy-back on top of these loans. In this way, the Bank is meant to be a compliment to the private business.

 

Economic Nationalists (mercantilists) often criticize the Bank. When looking at mercantilists, its important to differentiate between those perspectives of the borrowing and lending nations. The mercantilists from the borrowing nations are the ones that often have the loudest criticisms of the World Bank (and their sister institution the IMF). The main issue is that of national sovereignty. From this perspective, the loans that come from the Bank with policy requirements are in effect challenging the national sovereignty. The Bank loans typically have requirements that countries must make structural changes that might include privatizations of industries, the lowering of trade barriers, floating of exchange rates. They might also have requirements that a country must cut spending from the government or raise taxes, in order to get their fiscal house in order. These might all be prerequisites or conditions that are attached to the loan. Mercantilists criticize the bank for limiting their sovereignty by reducing their ability to exercise total control over their internal national interests. Mercantilists from the borrowing nations criticize the Bank for attaching liberal economic policy requirements to the developmental loans.

 

In response to these criticisms, the Bank is offering loans to developing nations at rates that are lower than they could otherwise obtain on the market. No-one is forcing the borrowing nations to come to the Bank looking for money. In this respect, the Bank is not forcing their way into the developing nation’s private business. Since the Bank is a commercial entity, the supports argue that the Bank will only loan money to a borrower if they feel relatively certain that the money will be paid back. For this reason, the bank attaches its requirements which will increase the probability of repayment.

 

Structuralists often criticize the Bank for being a tool of western imperialism. They see the bank as serving the needs of the US and other Northern countries. The bank, in according to this perspective, offers these low interest loans to developing nations in exchange for their commitments to adopt policies that structuralists believe increase these countries dependency on the developed nations. The Bank is seen a just another form of neocolonialism. A second criticism is that they believe that if the purposes of the Bank were really just for the noble purposes of development, then the Bank should not charge interest, and should not further the indebtedness of developing nations. By charging interest to countries that are already in debt, the structuralists accuse the Bank of creating a cycle of indebtedness that the developing world is unable to break. This all ties back to the theories that the core is subjugating the periphery, and is only interested in exploitation.

 

In response to these criticisms, the Bank defenders note that international development is not easy, but that the main goal of the Bank is to really help developing nations to build the necessary conditions (infrastructure, health, social) that are necessary for a country to bridge the gap and to develop their economies. Also, they note that the Bank does have one division (IDA) that offers no-interest, concessionary loans to the worlds least developed nations, often for terms up to 40 years. The bank uses the funds received from rich nations, plus the money they make from IBRD to fund this activity.

 

A third criticism of the structuralists is that the Bank is more interested in infrastructure development than in projects that involve social or environmental needs. In response to this, the Bank has become much more active in including social and environmental groups, and in addressing their needs. They have developed the “comprehensive development framework” and the “partnership initiative” to try and address many of the structuralist concerns. They are also very active in including many NGOs in their analysis and development teams.

 

Another criticism that has come to the Bank has to do with their structure of governance. Many of the developing nations criticize the fact that the president has always been an American, and is directly appointed by the president of the larges shareholder (the USA). They see this as further evidence that the WB is in control of the US, and is only serving the needs of the developed world. In response to this criticism, it should be noted that the voting rights at the WB are determined in direct proportion to the amount of money that is given to the fund. In the end, the country that contributes the most money should have the biggest say in how that money is spent.

 

Another criticism of the WB is that of corruption. Liberals often criticize the way in which the Bank loans out the money. If the WB decides to invest in the construction of an airport in Brazil for example, that money is given to the Brazilian government, who in turn administers the funds and selects the contractors for the job. Liberals criticize the bank for not doing a better job in monitoring corruption. In defense, the bank is well aware of the potential for a corruption, and has recently been very active in monitoring the administration of the loans. The bank has been very good recently about decentralizing their bureaucracy by moving many of their agents out to the field offices. They have also been involved in increasing transparency of the Bank.

 

The final criticism (that I have time to talk about) is that loans from the World Bank often do not “trickle down” to entrepreneurs in developing nations, who are often the ones best able to contribute to the economies.