World Bank Overview

The World Bank is really a collection of institutions. It began as the International Bank for Reconstruction and Development and it was developed at the same time as the International Monetary Fund at the end of the Second World War. The purpose of the Bank initially was geared towards the twin concepts of reconstruction in the war-torn countries, primarily of Europe, but also with a view to the future in terms of subsequent development requirements in the rest of the world. So there was that twin element of it. The reconstruction side quickly disappeared because the Marshall Plan supplanted it in the European context, and it quickly became focused on the development efforts within the developing world as it was then, primarily countries which either were or had recently been colonies of the major European powers.

It was designed to channel finances from the private sector into useful development projects. It relied as a financing mechanism on the use of the guarantee of the credit-worthiness of its primary stakeholder states, the developed industrialized countries. It would use their credit rating, borrow from the private markets and lend at a rate that was still favourable from the perspective of a developing country – because if they had gone directly to the capital markets they would have been charged a higher rate of interest. So this was the arbitraging if you will that allowed the International Bank for Reconstruction and Development to operate.

That IBRD component, which we frequently refer to as the World Bank, was the mainstay of the World Bank Group. The World Bank Group has four other institutions involved with it. The two other main ones are the International Finance Corporation, which is there to promote private investment, along the lines of foreign direct investment into developing countries. The third of the five key pillars of the World Bank system is the International Development Association, which is the soft lending arm of the World Bank. They provide loans to developing countries, to the poorest developing countries, at concessional rates of interest for long periods of time. That is the arm of the World Bank that deals directly with the poorest developing countries and gives them the most concessional terms. The World Bank does so as well, but they have a broader range of client countries that they deal with.

In terms of the kinds of operations of the World Bank, they’ve gone through different phases. Their initial phase, for a long period of time up until the late 60s, for example, would be a focus on major infrastructure development – roads, transportation, energy, etc. The Bank really had strong focus on that kind of large infrastructure project. That was the understanding of the development process at the time.

In the late 60s and over the 70s, with a new President, Robert McNamara, they began to focus more on poverty alleviation and basic needs that the development literature crafted to the World Bank mandate. This meant that they began to focus more on projects like education and health in accompanying the infrastructure projects. So that was a switch in direction for them and that direction was maintained for a number of years.

It switched again later on in the 80s when the focus began to be put on structural adjustment. This was one of the more controversial periods in the World Bank’s history, where they began to effectively -  in conjunction with or in parallel with the International Monetary Fund - impose relatively strict policy conditions on borrowing countries. Their lending was tied not so much with direct projects as it was to programmes within countries. They began to support budgetary efforts by the country in question, not on a project basis but basically on large programmatic themes. So it wasn’t tied to building a bridge or building a dam; it could be much more general kind of programmes and policies that they were supporting.

But, as I said, the cost of that, in some sense, was the lost of policy autonomy by those countries - to a degree. Whether this is a good or bad thing depends on what side of the structural adjustment policy debate you come down on. But they were controversial, and the World Bank admitted that on occasion they had gone too far, or not gone far enough, and they would modify these agreements. Nonetheless, it was seen as a violation – to an extent – of the policy-making capacity of the borrowing states.

The World Bank today

What has come along with the Bank’s operations over the years has been an acknowledgement of the importance of participation and an acknowledgement of the concerns of NGOs - environmental concerns, the need for participatory structures in their lending programmes, the need for more integration and cohesion between lenders and donors who are providing financial resources for developing countries.

There is still a debate as to the extent to which they’ve actually embraced some of these concerns and criticisms in their actual operations or the extent to which they’ve absorbed them, but are paying primarily lip service to it and not really following through. There is still an open debate on the extent to which the Bank has actually  transformed itself into a more responsive instrument of development.

Is it needed?

Do we need a World Bank? If we didn’t have a World Bank, would we want one? It’s an interesting question. We have certainly seen comments recently to the effect that the Bank probably should not exist in the form that it is. I think that’s a little bit revolutionary. People have been saying that the real value of the World Bank is embedded in its people, in the sense of the development expertise that they have. And that means that they should really become a conduit of knowledge of development for developing countries, a resource developing countries could call on for knowledge, but not necessarily for money.

I still think that the original mandate of the IBRD, the IDA and the IFC, the three key components of the World Bank, is important. I think there is room for lending to occur. But I think that they have to be more careful with it, in the sense that they should not be using that to drive government policy to the extent that people have suggested Bank programmes and policies have. But it’s a fine line to walk. So I think that the Bank does need those financial resources to make itself relevant, and I would be hesitant to recommend that we remove that component of their mandate.

World Bank performance

The Bank, I think, is executing its function in a manner which is consistent with the dominant ideology of development. And that’s not a criticism. You see very clearly reflected in the programming and operations of the World Bank the kinds of thinking that evolve within the dominant literature, certainly economics literature, on what is needed for development to occur. So concerns about corruption in government and concerns about participation, all of these elements you see in the literature and you see it being reflected eventually in World Bank operations.

To that extent, if you were to say “what should the Bank have been doing differently?” I don’t think you can accuse it of maintaining a set of policies which would be inconsistent with the majority of development economists, for example. And economics does dominate, but isn’t the sole discipline in forming Bank policies. The understanding of development, from the economics perspective, and probably from wider disciplinary perspectives, is generally pretty well reflected in what the Bank does. So I think to accuse it of being engaged in inappropriate activities would equally be damning of a large body of literature which is underpinning it.

Obviously there will be distinctions between the theory and the actual practice the World Bank pursues. But I wouldn’t want to hold it guilty of being purposely an obstacle to development. I think they’re doing the best that they can under very difficult circumstances.

That’s not to say that you can’t question what they do, especially ex-post. Some of the programs that they have engaged in “ex-post” have been realized to be incorrect or inappropriate. That is true of the literature as well. So the realization that large infrastructure projects are not always the best way to go – I think they’ve realized after several failures that that was the case. They’re relatively good at self-criticism and self-evaluation, at least as much as you could expect any institution to be. In that sense, you can trace the evolution of their thinking. In the 1980s when they began to think that the big problem for developing countries is governance difficulties – problems of corruption, problems of political cohesion – that began to inform their policies afterwards. It was translated into a way people perceived has being politically intrusive. The kinds of policy requirements that they were imposing as part of their lending programmes were seen as being intrusive even though they were motivated by a recognition that without that kind of intrusion, you weren’t going to get appropriate development either.

So they’re wrestling with some difficult tasks here, and to that extent I think that they do a reasonable job, given the problems faced by any kind of large institution. Having said that, it’s clear that room for improvement exists at the Bank. They have made a lot of mistakes on specific projects; they recognized that, I think to a large extent. But it’s not clear how quickly they can adjust to improve their performance in that regard.

The World Bank and the IMF

The Bretton Woods institutions, the two key ones, the World Bank and the IMF, were reflections of the power structure at the time – at the end of the Second World War. That means that they have a power structure which is dominated by the wealthier countries. That, in some sense, is viewed as being essential because these are institutions that effectively now – though this wasn’t always the case – take money acquired in rich country markets or from rich country donors and send it to developing countries. So you have a bifurcation of the membership. You have the donors that provide resources for the IMF and the World Bank, and you have the poorer countries, which are recipients, or potential recipients of that money.

Therefore if you want to have reform at the IMF and the World Bank, I don’t think that targeting those two institutions necessarily is the most appropriate route. I think that the direction that lobbying should go is towards governments which make up the voting majority within the IMF and the World Bank. So if you want to condemn the World Bank or the IMF, I think the first place to look is who in the executive board are pushing the particular kind of policies you’re objecting to. Traditionally, this is the United States, as it leads as the major shareholder, but the Europeans too, Canada, as well to a lesser extent, Japan, etc. The richer countries certainly are the ones who generally call the shots at both institutions. And so when you’re thinking of reforms of those institutions, you have to direct your efforts towards those governments.

The IMF and the World Bank do not have the capacity to do much on their own in the absence of the support of the key players at the executive level of both institutions. So I think it’s the first thing to bear in mind. If you really want to be critical of the World Bank and the IMF, effectively you’re being critical of the development policies and financial policies of the major shareholder governments.

The second thing I think you need to be aware of is that it’s easy to criticize those two institutions because they are dealing with extremely difficult problems. And I think you have to realistically ask yourself the question of “what would happen in their absence?” It’s plausible to say that the world would be better off without them, but I don’t think that argument is as easy as some critics would make it out to be. They can certainly play a more constructive role than they have or are playing right now. But to attribute all, or a large portion of, the development ills to the World Bank and the IMF - as some critics do is, I think, incorrect. They’re doing a reasonable job given the level of knowledge that was available to them at the time of their operations – the operations that attracted criticism anyway. So it would be difficult to condemn either organization on the grounds of being purposely malicious in their interactions with developing countries.