WORLD BANK
The World Bank Group, originated as a result of the Bretton Woods Conference of 1944, is one of the world’s largest sources of development assistance and it has extended assistance to more than 100 developing economies, bringing a mix of finance and ideas to improve living standards and eliminate the worst forms of poverty. For each of its clients, the Bank works with government agencies, non-governmental organisations, and the private sector to formulate assistance strategies.
The World Bank Group consists of five closely associated institutions, each institution playing a distinct role in the mission to fight poverty and improve living standards for people in the developing world. The term World Bank refers specifically to two of the five, The International Bank for Reconstruction and development (IBRD) and The International Development Association (IDA). Other institutions are: The international Finance Corporation (IFC), The Multilateral Investment Guarantee Agency (MIGA), and The International Centre for Settlement of Investment Disputes (ICSID). While all five specialize in different aspects of development, they use their comparative advantages to work collaboratively towards the same overarching goal- poverty reduction.
The IBRD, whose capital is subscribed by its member countries, finances its lending operation primarily from its own borrowings in the world capital markets. A substantial contribution to the Bank’s resources also comes from its retained earnings and the flow of repayments on its loans. IBRD loans generally have grace period of five years and are repayable over twenty years, or less. They are directed towards developing countries at more advanced stages of economic and social growth. The interest rate that IBRD charges on its loans is calculated in accordance with a guideline related to its cost of borrowing.
The World Bank is owned by the member countries whose views and interests are represented by a Board of Governors and a Washington-based Board of Directors. Member countries are shareholders who carry ultimate decision-making power in the World Bank.
Under the Articles of Agreement of the Bank, all powers are vested in the Bank’s Board of Governors, consisting of the Governor for each member country. With the exception of certain powers specifically reserved for them by the Articles of Agreement, the Governors of the Bank have delegated their powers to a Board of Executive Directors that performs its duties on a full time basis at the Bank’s headquarters. There are twenty one Executive Directors, each Director selects an Alternate Director. As provided in the Articles of Agreement, five Directors are appointed by the five members having the largest number of shares of capital stock, and the rest are elected by the Governors representing other member countries.
The Executive Directors are responsible for the conduct of the general operations of the Bank. They decide on Bank policy in the framework of the Articles of Agreement. They also decide on all loan and credit proposals. In practice they reach most of their decisions by consensus.
The Bank’s President is, by tradition, a national of the largest shareholder, the
PURPOSES
· To assist in the reconstruction and development of the territories of the members, by facilitating the investment of capital for productive purposes, including the restoration of economies destroyed or disrupted by war, the reconversion of productive facilities to peace time needs, and the encouragement of the development of productive facilities and resources in less developed countries.
· To promote private foreign investment by means of guarantees or participation in loans and other investments made by private investors, and when private capital is not available on reasonable terms, to supplement private investment by providing, on suitable conditions, finance for productive purposes out of its own capital funds raise by it and other resources.
· To promote the long – range balanced growth of international trade and the maintenance of equilibrium in the balance of payments, by encouraging international investment of the productive resources of members, thereby assisting in raising productivity, the standards of living and conditions of labour in their territories.
ORIENTATIONS
World Bank policies are oriented towards achieving certain desired socio–economic development.
The main focus on helping the poorest people and the poorest countries, but for all its clients the Bank emphasizes the need for:
· Investing in people, particularly through basic health and education.
· Focusing on social development, inclusion, governance and institution-building as key elements of poverty reduction.
· Strengthening the ability of the governance to deliver quality services efficiently and transparency.
· Protecting the environment.
· Supporting and encouraging private business development.
· Promoting reforms to create a stable macroeconomic environment, conducive to investment and long-term planning.
Through its loans, policy advice and technical assistance, the World Bank supports broad range of programmes aimed at reducing poverty and improving living standards in the developing world.
The global fight against poverty is aimed at ensuring that people everywhere in this world have a chance for a better life for themselves and for their children. Over the past generation, more progress has been made in reducing poverty and raising living standards than during any other period in history in developing countries.
Guiding Principles:
In its lending operations, the Bank is guided by certain policies which have been formulated on the basis of the Articles of Agreement.
1. The Bank should properly assess the repayment prospectus of the loans. For this purpose, it should consider the availability of natural resources and existing productive plant capacity to exploit the resources, and operate the plant and the country’s past debt record.
2. The Bank should lend only for specific projects which are economically and technically sound and of a high priority nature. As a matter of general policy, it concentrates on lending for projects which are designed to contribute directly to productive capacity, and normally does not finance projects which are primarily of social character, such as education, housing, etc. Most bank loans have been made for basic utilities, such as power and transport, which are prerequisites for economic development. Besides, the bank places considerable emphasis upon the proper management of the projects.
3. The Bank lends only to enable a country to meet the foreign exchange content of any project cost; it normally expects the borrowing country to mobilize its domestic resources.
4. The Bank does not expect the borrowing country to spend the loan in particular country; in fact, it encourages the borrowers to procure machinery and goods for bank financed projects in the cheapest possible market consistent with satisfactory performance.
5. It is the Bank’s policy to maintain continuing relations with borrowers with a view to check the progress of projects and keep in touch with financial and economic developments in borrowing countries. This also helps in the solution of any problem which might arise in the technical and administrative fields.
6. The Bank indirectly attaches special importance to the promotion of local private enterprise.
Lending Programmes
| Infrastructure is the major focus of World Bank Lending. |
While the World Bank has traditionally financed all kinds of capital infrastructure such as roads and railways, telecommunications, and ports and power facilities, its development strategy also places an emphasis on investments that can directly affect the well-being of the masses of poor people of developing countries by integrating them as active partners in the development process. Some time back, the Bank stepped up its lending for energy development; lending for power forms the largest part of the Bank’s energy programme, but commitments for oil and gas developments have shown the greatest increase
Structural adjustment lending
The Bank, in response to the deteriorated prospects for the developing countries during the 1980s, inaugurated a programme of Structural Adjustment Lending (SAL). This lending supports programmes of specific policy changes and institutional reforms in developing countries designed to achieve a more efficient use of resources and thereby: (a) contribute to a more sustainable balance of payments in the medium and long-term and to the maintenance of growth in the face of severe constraints: and (b) lay the basis for regaining momentum for future growth.
Special action programme
In 1983, the Bank initiated its Special Action Programme (SAP), designed to increase assistance to countries that were making efforts to cope with the exceptionally difficult economic environment brought on by a global recession. The SAP, established for a two year period, was composed of financial measures, combined with policy advice, to help countries implement adjustment measures and high- priority projects needed to restore credit worthiness and growth. According to the Bank, the SAP had been highly successful in meeting its objectives, surpassing in most respects, the expectations set for it.
B-loan and export credit
In January 1983, the Executive Directors authorized the establishment of a new set of co-financing instruments to help the Bank’s borrowers increase and stabilize flows of private capital on approved terms by linking part of commercial bank flows to IBRD operations. These instruments, which comprise the B-loan pilot programme, include three options: (a) direct Bank participation in the late maturities of a B-loan; (b) bank guarantee of the late maturities, with the possibility of release from all or a part of its share; and (c) bank acceptance of a contingent obligation to finance an element of deferred principal at final maturity of a loan with level debt-service payments with floating – rate interest and variable amounts of principle repayment. A fourth approach was also approval by the Board- the prearranged sale of participations in Bank loans arranged on commercial terms.
INTERNATIONAL DEVELOPMENT ASSOCIATION
The International Development Association (IDA), a member of the World Bank group, was established in 1960 to provide concessional assistance to countries that are too poor to borrow at commercial rates. IDA helps to promote growth and reduce poverty in the same ways as does the IBRD, but IDA uses interest-free loans (which are known as IDA ‘credits’), technical assistance, and policy advice. IDA credits account for about one-fourth of all Bank lending. Borrowers pay a fee of less than 1 percent of the loan to cover administrative costs. Repayment is required in 35 or 40 years with a 10-year grace period. IDA’s assistance is concentrated on the very poor countries.
The funds of the IDA come mostly in the form of subscriptions, general replenishments from IDA’s more industrialized and developed members, and transfer from the net earnings of the IBRD.
Developing countries can avail themselves of IDA loans on very liberal terms for projects which are not eligible for assistance from the World Bank either because loans for such projects do not carry the guarantee of the government of the borrowing country or because such project do not contribute directly and immediately to the productive capacity of the borrowing country. Examples of such projects are water supply, urban development, housing, slum clearance, education, sanitation and health facilities, etc.
In approving an IDA credit are observed.
Poverty test: - IDA’s assistance is limited to the poorest countries and which continue to face such severe handicap as excessive dependence on volatile primary products markets, heavy debt servicing burdens, and often, rates of population growth that outweigh the gains of production.
Performance test:-Within the range of difficulties of establishing objective standards of performance, these factors serve as the yardstick for an adequate performance test: Satisfactory overall economic policies and past success in project execution.
Project test: - The purpose of the IDA is to advance soft loans, not finance soft projects. IDA projects are appraised according to the same standard as that applied to the Bank projects-the essentially requires that the proposed projects yield financial and economic returns which are adequate to justify the use of scarce capital.
WORLD BANK ASSISTANCE TO
Over the years, the roles of the World Bank and the IDA almost as regards the assistance to
Apart from the resource crunch IDA has been facing.
AN EVALUATION OF IMF – WORLD BANK
The contribution made by IMF and World Bank in helping the member countries in different ways cannot be ignored. Studies show that the projects assisted by the World Bank group could make significant impact in the respective countries. IMF has played an important role in providing international liquidity and in the structural adjustment programmes. There is, however, a wide gap between the aspirations and achievements. A criticism often made is that these institutions, which are dominated by the developed countries, have not being paying adequate attention to the needs of the developing countries.
The objective of the Bretton Woods conference was to establish a global monetary and financial system to promote stable exchange rates, foster the growth of world trade, and international movement of capital in the, desired directions.
At the time of establishments of these institutions, most of the developing countries were colonies and, therefore, not represented at the Bretton Woods. The major concern of these institutions was, naturally, the major problems of the main participants, i.e., the developed countries, and “… there was an almost inevitable lack of concern for the interests of the developing countries.” Even after the developing countries have far outnumbered the developed ones in the total membership of these institutions, the dominance of the developed countries continues because of the voting system which gives clear control to the large contributors.
However, as the South Commission observes, concern for developing countries was not completely absent; the mandate of the World Bank included the provision of development assistance. But in the early post-war years financing the reconstructions of war-devastated Europe and Japan received much more attention than the crying developing needs of the developing countries. The proposal for a Special United Nations Fund for Economic Development (SUNFED), which would offer large-scale aid on easy terms to developing countries, was rejected in the 1950s mainly because developed countries objected to the United Nations becoming involved in financial aid to developing countries. The view that in the international management of balance of payments disequilibria, there should be pressure to adjust on both surplus countries and deficit countries, rather than only on those in deficit, was also ignored. In fact, Keynes’ original proposal for an International Clearing Union (the prototype for the IMF) included the possibility of a penalty on surplus countries-one percent of the surplus per month to encourage them to make adjustments, too.
Again, only very little could be done by the IMF in solving the International liquidity problem of the developing countries in comparison with those of the developed countries. Indeed developing countries need much larger attention of the multilateral institutions than the developed countries for various reasons. The developed countries have the capability for, and ready access to commercial borrowing, whenever their reserves run short. The United States, which has had the largest deficit among the developed countries, has also had option of running permanent deficit since other countries have been content to hold dollars.
The situation for the developing countries is quite different. Due to their poor economic conditions, the relative burden of their payments deficit is much more than that of the absolute burden; the absolute deficit itself has been huge. Not only that the commercial borrowing capability of these nations is limited, the accessibility is also being limited because of their poor credit worthiness. It may be recalled here that, in the early 1990s when India’s foreign exchange reserves position became very critical, the sources of short-term commercial borrowings dried up due to the fall in the credit rating. To make matters worse, because of the poor credit ratings, the developing countries have had to pay an average rate of interest which was about four times the rate applied to the developed countries on commercial borrowings.
Against this background, the IMF system has been ironic as far as the developing countries are concerned. The unconditional borrowing rights based on the quota highly discriminate against the developing countries. What is more draconic has been the allocation of the SDRs, the created liquid assets, in proportion to the quota. This is like giving away the lion’s share of a cake received as a gift to the fairy well fed, ignoring the severe hunger of those who have been in abject starvation.
One of the important problems of the developing countries is the increase in the debt service due to the payment commitments of the past debt. There has been a transfer of large amounts of funds from the developing countries to the creditors as debt service. This has not been compensated by an increased flow from the IMF to the developing countries. During certain periods, IMF was actually withdrawing funds from the developing countries. “The Bretton Woods institutions thus failed many developing countries at their times of great need.”
BIBLIOGRAPHY
Cherunilam. Francis,(2007), “International Business”, text and cases, Prentice Hall of India Pvt Ltd,
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