The World Bank was created along with its sister institution, the International Monetary Fund (IMF), at Bretton Woods, New Hampshire, in 1944. World leaders gathered at the Bretton Woods conference to ensure the economic recovery and economic stabilization of a world economy ravaged by World War II. They created the World Bank, which over the decades has evolved into a lending institution working to foster the long-term growth of less-developed countries while integrating their economies into the global economy. The IMF, on the other hand, works to stabilize currency exchange rates and provides aid for countries with balance of payment problems.
The World Bank is more formally known as the International Bank for Reconstruction and Development (IBRD). It is affiliated with four other organizations: the International Development Association, the International Finance Corporation, the International Centre for the Settlement of Investment Dispute, and the Multi-Lateral Investment Guarantee Agency. The World Bank Group is an umbrella organization comprised of these four institutions and the IBRD. Although "World Bank" and "International Bank for Reconstruction and Development" are often used interchangeably, the term "World Bank" more properly describes an organization jointly comprising the IBRD and the International Development Association. The IBRD is also a designated "special agency" of the United Nations.
The immediate purpose of the Bretton Woods conference was to formulate a plan for post-World War II international economic cooperation. President Franklin Roosevelt and U.S. Treasury Secretary Henry Morgenthau Jr. both believed that a stabilized world economy would be invaluable in preventing a reoccurrence of the Great Depression of the 1930s and perhaps an ensuing global war. Establishment of the IBRD was an integral part of their plan.
Over the decades, the emphasis of the IBRD has shifted from its immediate and short-term purpose of rebuilding war-ravaged economies to the promotion of economic growth in developing countries. In fact the IBRD makes loans only to developing or transitional countries, unlike the IMF which makes no such distinction amongst its client nations. The IBRD makes loans directly to governments of member nations and to large private development projects that are backed by guarantees of member nation governments. Loans made directly to governments are generally to ease balance of payment problems, promote trade, and solve social sector problems related to such things as primary education, nutrition, and programs targeting the rural poor. The IBRD also helps governments in the promotion of "social safety nets" such as social security and pension systems. Private loans have traditionally been made for large building projects of high productivity and employment that will benefit the citizens of the host country. Environmental quality also figures in the IBRD's scheme of things; in 1998 it had a portfolio of 166 environmental projects totaling approximately $11 billion. To all of these ends the IBRD commits about $20 billion in new loans to approximately 100 developing countries annually. Although these loans are made at low interest rates, the IBRD is often criticized by the borrowing countries for imposing severe austerity measures as a condition of the loan.
The IBRD raises capital by borrowing from world capital markets and from members' subscriptions to capital shares. The IBRD, which regards itself as a fiscally conservative and prudent institution, accounts for nearly three-fourths of monies lent by the World Bank. Most of this money is raised by selling AAA-rated bonds and other debt securities to individuals and institutional investors such as corporations, insurance companies, and pension funds. The IBRD lends money at three-quarters of a percent above what its own borrowing rate is. Loans are financed for 15 to 20 years with a three-to-five-year grace period before repayment of principal must begin. A borrowing country has never defaulted on a loan, because of the IBRD's rule requiring that outstanding loans and disbursements not exceed the combined capital and reserves of the borrowing country.
In order to better align itself with the economic needs of a changing world, the IBRD has instituted a Strategic Compact designed to carry the institution well into the 21st century. The Strategic Compact will, it is hoped, make the IBRD more efficient by lowering costs, improving products and processes, and impacting more on its customer countries.
The 1997 Asian monetary crisis, which began with currency turmoil in Thailand and quickly grew to global proportions, has been the World Bank's greatest challenge. Between January and March 1997, however, the IBRD was able to quickly and with much efficiency raise $14.9 billion through 69 bond offerings in 17 different currencies. This speaks to the sophistication and ease with which the IBRD is able to move through world financial markets. Some of this is due to World Bank President James Wolfensohn who has held that position since 1995. Wolfensohn, in an effort to make the governments of developing countries politically as well as economically responsible, is changing the emphasis of the World Bank's lending priorities. Wolfensohn is shifting the exclusivity of lending policies away from such civil engineering projects as big dams and superhighways and more towards projects that will implement educational institutions, political reform, effective tax collection systems, and environmental regulation. Wolfensohn feels that such programs, if implemented, will encourage private-sector investment.
The chief governing authority of the IBRD is the Board of Governors, with one governor being appointed by each member country. The appointed governor is usually a finance minister or a person holding a comparable office in the represented country. Daily operations of the IBRD are administered by 24 executive directors who represent the interests of their respective countries while overseeing the implementation of IBRD policy and project management.
SEE ALSO: Development Banks
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World Bank. "World Bank." Washington: International Bank for Reconstruction and Development, 1998. Available from www.worldbank.org.
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