July 31 2011 | Filed Under Bonds , Economics , Insurance
The World Bank Group (WBG) was established in 1944 to rebuild post-World War II
Europe under the International Bank for Reconstruction and Development (IBRD).
Today, the World Bank functions as an international organization that fights
poverty by offering developmental assistance to middle-income and low-income
countries. By giving loans and offering advice and training in both the private
and public sectors, the World Bank aims to eliminate poverty by helping people
help themselves. Under the World Bank Group, there are complimentary
institutions that aid in its goals to provide assistance.
Tutorial: Economics Basics
Membership
There are 184 member countries that are shareholders in the IBRD, which is the
primary arm of the WBG. To become a member, however, a country must first join
the International Monetary Fund (IMF). The size of the World Bank's
shareholders, like that of the IMF's shareholders, depends on the size of a
country's economy. Thus, the cost of a subscription to the World Bank is a
factor of the quota paid to the IMF.
There is an obligatory subscription fee, which is equivalent to 88.29% of the
quota that a country has to pay to the IMF. In addition, a country is obligated
to buy 195 World Bank shares (US$120,635 per share, reflecting a capital
increase made in 1988). Of these 195 shares, 0.60% must be paid in cash in U.S.
dollars while 5.40% can be paid in a country's local currency, in U.S. dollars,
or in non-negotiable non-interest bearing notes. The balance of the 195 shares
is left as "callable capital," meaning the World Bank reserves the right to ask
for the monetary value of these shares when and if necessary. A country can
subscribe a further 250 shares, which do not require payment at the time of
membership but are left as "callable capital." (Learn more about the IMF in An
Introduction To The International Monetary Fund.)
The president of the World Bank comes from the largest shareholder, which is
the United States, and members are represented by a Board of Governors.
Throughout the year, however, powers are delegated to a board of 24 executive
directors (EDs). The five largest shareholders - the U.S., U.K., France,
Germany and Japan - each have an individual ED, and the additional 19 EDs
represent the rest of the member states as groups of constituencies. Of these
19, however, China, Russia and Saudi Arabia have opted to be single country
constituencies, which means that they each have one representative within the
19 EDs. This decision is based on the fact that these countries have large,
influential economies, which requires that their interests be voiced
individually rather than diluted within a group. The World Bank gets its
funding from rich countries as well as from the issuance of bonds on the
world's capital markets.
The Parts That Make Up the Whole
The IBRD offers assistance to middle income and poor but credit worthy
countries, and it also works as an umbrella for more specialized bodies under
the World Bank. The IBRD was the original arm of the World Bank that was
responsible for the reconstruction of post-war Europe. Before gaining
membership in the WBG's affiliates (the International Finance Corporation, the
Multilateral Investment Guarantee Agency and the International Center For
Settlement of Investment Disputes), a country must be a member of the IBRD.
The International Development Association offers loans to the world's poorest
countries. These loans come in the form of "credits," and are essentially
interest-free. They offer a 10-year grace period and hold a maturity of 35
years to 40 years.
The International Finance Corporation (IFC) works to promote private sector
investments by both foreign and local investors. It provides advice to
investors and businesses, and it offers normalized financial market information
through its publications, which can be used to compare across markets. The IFC
also acts as an investor in capital markets and will help governments privatize
inefficient public enterprises.
The Multilateral Investment Guarantee Agency (MIGA) supports direct foreign
investment into a country by offering security against the investment in the
event of political turmoil. These guarantees come in the form of political risk
insurance, meaning that MIGA offers insurance against the political risk that
an investment in a developing country may bear.
Finally, the International Center for Settlement of Investment Dispute
facilitates and works towards a settlement in the event of a dispute between a
foreign investor and a local country. (Learn more in What Is An Emerging Market
Economy?)
Adapting to the Times
As mentioned earlier, the main function of the WBG is to eliminate poverty and
to provide assistance to the poor by offering loans, policy advice and
technical assistance. As such, the countries receiving aid are learning new
ways to function. Over time, however, it has been realized that sometimes as a
nation develops, it requires more aid to work its way through the development
process. This has resulted in some countries accumulating so much debt and debt
service that payments become impossible to meet. Many of the poorest countries
can receive accelerated debt relief through the Heavily Indebted Poor Countries
scheme, which reduces debt and debt service payments while encouraging social
expenditure.
Another issue on which the Bank has recently been focusing has presented itself
as an endangerment to a country's livelihood: support programs for HIV/AIDS.
The WBG has also been focusing on reducing the risk of projects by means of
better appraisal and supervision mechanisms as well as a multidimensional
approach to overall development. (This includes not only lending but also
support for legal reform, educational programs, environmental safety,
anti-corruption measures and other types of social development.)
The Bank encourages all of its clients, which number over 100, to implement
policies that promote sustainable growth, health, education, social development
programs focusing on governance and poverty reduction mechanisms, the
environment, private business and macroeconomic reform.
Opposition to the Bank
While the WBG strives to create a poverty-free world, there are groups that are
passionately opposed to the international patron. The opponents believe that,
due to the fundamental structure of the Bank, the already existing imbalance
between the world's rich and poor is only exacerbated. The system allows the
largest shareholders to dominate the vote, resulting in WBG policies being
decided by the rich but implemented by the poor. This can result in policies
that are not in the best interests of the developing country in question, whose
political, social and economic policies will often have to be molded around WBG
resolutions.
Moreover, even though the Bank provides training, assistance, information and
other means that may lead to sustainable development, opponents have observed
that developing countries often have to put health, education and other social
programs on hold in order to pay back their loans.
Opposition groups have protested by boycotting World Bank bonds. These are the
bonds that the WBG sells on global capital markets to raise money for some of
its activities. These opposition groups also call for an end to all practices
that require a country to implement structural adjustment programs - including
privatization and government austerity measures - an end to debt owed by the
poorest of the poor, and an end to environmentally damaging projects such as
mining or the building of dams.
Conclusion
It is not surprising that there is a clash of opinion over how aid is given.
Indeed, those that offer assistance are going to want to have a say in how the
loans are used and what kind of economic policies are fostered in a country's
developmental process. Many developing and poor nations, however, are stuck in
a quagmire of debt and impoverishment, no matter how much assistance they
receive. Given this, we may need to remember that the process of aid is also a
developing state, in which both the giver and the receiver should be helping
each other reach a poverty-free world.
by Reem Heakal