Chapter 23. The World Bank. - An Introduction to International

Chapter 23: The World Bank

An Introduction to International Economics: New Perspectives on the World Economy

© Kenneth A. Reinert, Cambridge University Press 2012

Analytical Elements   

Countries Currencies Financial assets

© Kenneth A. Reinert, Cambridge University Press 2012

Early History: Founding 

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The International Bank for Reconstruction and Development (IBRD), what we now call the World Bank, emerged out of Bretton Woods conference in 1944 Its Articles of Agreement allowed for activities in both (post-war) reconstruction and development The IBRD was the first of five components of what was later to be called the World Bank Group (see Figure 23.1) The World Bank’s organization and management are summarized in Table 23.1 

Note that the President has always been a US citizen appointed by the executive branch of the US government © Kenneth A. Reinert, Cambridge University Press 2012

Figure 23.1: Components of the World Bank

© Kenneth A. Reinert, Cambridge University Press 2012

Table 23.1: Administrative Structure of the World Bank Body

Composition

Function

Board of Governors

One Governor and one Alternate Governor for each member

Meets annually; highest decisionmaking body

Executive Board

25 Executive Directors plus President

Day-to-day operations; approve loans and bond issues

President

Traditionally U.S. citizen

Chair of Executive Board; responsible for staffing and general business

Vice President

Assists President

Advisor Council

Appointed by Board of Governors

Advises on general policy matters

Staff

Citizens of members

Run departments of Bank

© Kenneth A. Reinert, Cambridge University Press 2012

World Bank Administration 

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The World Bank has a plethora of Vice Presidencies These are structured around 

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Regions (Africa, East Asia and Pacific, Europe and Central Asia, Latin America and the Caribbean, Middle East and North Africa, South Asia) Networks (financial and private sector development, human development, operations policy and country services, poverty reduction and economic management, and sustainable development) Functions (external relations and development economics)

The World Bank has over 10,000 staff members who work both in the head office in Washington, DC as well as in over 100 country offices around the world © Kenneth A. Reinert, Cambridge University Press 2012

Early History 

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The IBRD opened in 1946 with the balance between post-war reconstruction and development tilting quickly towards reconstruction In 1956, the IBRD Executive Directors created the International Finance Corporation (IFC) to promote private enterprise in developing countries In 1960, the Executive Directors created the International Development Association (IDA), a “soft loan” version of the IBRD

© Kenneth A. Reinert, Cambridge University Press 2012

Early History 

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In 1966, the International Center for Settlement of Investment Disputes (ICSID) was introduced to provide arbitration between foreign investors and host country governments In 1988, the Multilateral Investment Guarantee Agency (MIGA) was introduced to encourage the flow of FDI to developing countries With MIGA, the structure of the World Bank Group illustrated in Figure 23.1 was complete

© Kenneth A. Reinert, Cambridge University Press 2012

Infrastructure Project Lending Phase 

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In its early years, the IBRD directed its efforts toward large-scale infrastructure projects This could be called its infrastructure project lending phase 

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The projects funded by the Bank included ports, railways, floodcontrol, power plants, roads, telecommunications facilities, and dams

Additionally, project lending was often accompanied by “program lending” (or “non-project lending”), which helped to finance the importation of intermediate products necessary for infrastructure projects © Kenneth A. Reinert, Cambridge University Press 2012

Poverty Alleviation Phase 

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In 1968, Robert McNamara took over as World Bank President, a position he held until 1981 The McNamara presidency coincided with a second phase for the World Bank, one we can call the poverty alleviation phase The poverty alleviation phase was characterized by a focus on the eradication of absolute poverty (defined in terms of minimum incomes) through rural and urban development Within the Bank, these new ideas were operationalized via the concept of redistribution with growth 

Redistribution with growth was subsequently replace with propoor growth © Kenneth A. Reinert, Cambridge University Press 2012

Policy-Based Lending Phase 

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The policy-based lending phase began in In 1981 with the appointment of A.W. Clausen as World Bank President This phase involved structural adjustment lending and policy conditionality Structural adjustment lending involved non-project lending to support adjustment in the face of balance of payments and other macroeconomic difficulties Policy conditionality ties Bank lending to prescribed policy changes on the part of the recipient government

© Kenneth A. Reinert, Cambridge University Press 2012

Concerns with Structural Adjustment 

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The Bank’s structural adjustment lending began to encroach on the work of the IMF There were valid claims that the Bank demonstrated an inability to set priorities in its conditionality, with some loan agreements involving a hundred or more conditions Structural adjustment lending took attention away from poverty alleviation and rural development 

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Ironically, the 2008 World Development Report of the Bank concluded that the rural sector was crucial for poverty alleviation

Structural adjustment placed heavy burdens on the poor

© Kenneth A. Reinert, Cambridge University Press 2012

The Washington Consensus 

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fiscal discipline a redirection of government expenditures to primary health care, primary education, and infrastructure tax reform financial and interest rate liberalization competitive exchange rate trade liberalization liberalization of foreign direct investment privatization deregulation secure property rights © Kenneth A. Reinert, Cambridge University Press 2012

Challenges and Responses 

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In the 1990s, the World Bank came under increasing criticism From the political left, there was ardent criticism of both for the Bank’s structural adjustment policies and its neglect of environmental issues From the political right, members of the US Congress set up the International Financial Institutions Advisory Commission (IFIAC) that became known as the Meltzer Commission after its chair, Allan Meltzer 

The Meltzer Commission’s report was highly critical of the Bank, suggesting that it be substantially downsized, its lending to middle income countries be phased out, and that it shift away from loans to grants © Kenneth A. Reinert, Cambridge University Press 2012

Challenges and Responses 

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These challenges were addressed by World Bank President Paul Wolfensohn Wolfensohn ponsored what was known as the Strategic Compact with the aim of making the Bank for efficient and less bureaucratic To implement the Strategic Compact, he pushed through an internal reorganization of the Bank He also proposed a Comprehensive Development Framework (CDF) that emphasized   

Good governance and institutions Social inclusion, participation and “ownership” Attention to public goods and environmental sustainability © Kenneth A. Reinert, Cambridge University Press 2012

Recent Shifts 

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As with the International Monetary Fund, voting shares at the World Bank have recently shifted in favor of some large emerging countries (e.g., Argentina, Brazil, China, India, Russia and Vietnam) There has also been an increase in proposed lending towards a set of middle-income countries and towards IBRD lending rather than IDA loans and grants This followed a long-term pattern illustrated in Figure 23.3 In response to this, some observers have questioned a “neglect” of the poorest countries in the world © Kenneth A. Reinert, Cambridge University Press 2012

Figure 23.3: World Bank Loans and Grants to Low- and Middle-Income Countries

© Kenneth A. Reinert, Cambridge University Press 2012