Transcript The World Bank

The World Bank
CHAPTER 22
Reinert/Windows on the World Economy, 2005
Introduction
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The World Bank is as important as the IMF
 Both institutions grew out of the Bretton Woods
Conference
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Controversial institution
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Early History and
Administrative Structure
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Great Britain and the US entered into the Bretton Woods
conference in July 1944 to discuss the creation of a United
Nations Bank for Reconstruction and Development
Bretton Woods conference initially focused on the IMF
 In response to the concerns of countries damaged by the war (and
less developed countries) a group was finally constituted to work on
the Bank
• Under the supervision of John Maynard Keynes
 Focused on the relative roles of post-war reconstruction and
economic development
• Resulting Articles of Agreement of the International Bank for
Reconstruction and Development (IBRD) first focused on reconstruction
• IBRD was the first of five components of what was later to be called the
World Bank Group
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IBRD’s Articles of Agreement
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Purposes of the institution
 Promote loans to assist in the reconstruction and
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development of countries
Promote private foreign investment
Promote long-term balanced growth of international trade
and the maintenance of equilibrium in balances of
payments
Operate with due regard to the effects of international
investment on business conditions in the territories of
members
Membership is confined to countries that are
already members of the IMF
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IBRD’s Articles of Agreement
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Capital stock of the Bank is based on members’
subscription shares
 Based on the members’ quotas in the IMF
 Upon joining the Bank, a member pays 10% of its
subscription
• Remaining 90% is “callable” by the Bank
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The funds from which the Bank makes loans come
from a number of sources
 Members’ subscription shares
 Retained earnings on investments
 Bond issues (main source)
 Loan repayments
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Figure 22.1. The Components of
the World Bank Group
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IBRD
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Major decision-making body is its Board of Governors
 Each member appoints Governor and Alternate Governor
Executive Board conducts the day-to-day business of the
Bank
President chairs the Executive Board and is ultimately
subject to its control
 Traditionally, President is US citizen appointed by the executive
branch of US government
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Executive Director of IMF has traditionally been European
 Major Bretton Woods players ensured their subsequent control of the
Bretton Woods institutions
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Table 22.1. Administrative
Structure of the World Bank
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IBRD
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IBRD opened in June 1946 with an initial subscription
capitalization of $10 billion
 First set of loans went to France, the Netherlands, Denmark, and
Luxembourg
• Funded by the United States and were used primarily to purchase US
exports
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Tilt towards reconstruction was offset by the introduction of
the US Marshall Plan and European Recovery Program
 Surpassed the resources of the World Bank and IMF
Made loans to Chile, Mexico, and Brazil
First bond issue in July 1947 quickly traded at a premium
over the offer price
In September 1959, the Bank’s subscription capital more
than doubled to $21 billion
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International Finance
Corporation
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Created in 1956
 Purpose is to encourage productive private
enterprise in less developed countries
 Has its own staff, although some of these
individuals also hold positions in the Bank
 Initially encountered difficulties because it was
excluded from equity investments
• Later relaxed with an equity ceiling of 25 percent
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International Development
Association
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Created in 1960
“Soft loan” version of the IBRD
Share staff and officers with IBRD
 Together comprise what has come to be known as the World Bank
• Really a special fund or “window” of the World Bank
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Official purpose is to promote economic development and
raise living standards
 By providing loans on terms that are significantly more flexible than
the IBRD
• No-interest loans for long time periods (35-40 years) with significant
grace periods (10 years)
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Primarily dependent on contributions from high-income
member countries
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International Center for Settlement of
Investment Disputes
Provides arbitration between foreign
investors and host country governments
 Bank officials thought that the presence and
operation of the ICSID would support the
flow of FDI into developing countries
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Multilateral Investment
Guarantee Agency
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Purpose is to encourage the flow of FDI to
developing countries
Engages in three kinds of activities
 Issues guarantees against non-commercial risks in
recipient member countries
• Insures against transfer restriction, expropriation, breach of
contract, and war and civil disturbance
 Engages in investment marketing through capacity
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building, information dissemination, and investment
facilitation
Provides a host of legal services to World Bank member
countries to support FDI
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Infrastructure Project Lending
and Poverty Alleviation Phases
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its early years, the IBRD directed its
efforts toward large-scale infrastructure
projects
 Projects funded included ports, railways,
flood-control, power plants, roads,
telecommunications facilities, and dams
 Project lending was often accompanied by
“program lending” (or “non-project
lending”)
• Helped finance the importation of intermediate
products necessary for infrastructure projects
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Infrastructure Project Lending
and Poverty Alleviation Phases
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Lack of attention to the social realm
 Some believed large-scale infrastructure was a
prerequisite for development
 Other believed there was a reluctance to disturb
the capital markets with social-realm lending
• Compromise the Bank’s triple-A bond rating
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Bank observed that large capital investments
would be unlikely to be made by private
capital
 Bank should fill in the gap
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Infrastructure Project Lending
and Poverty Alleviation Phases
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Project-lending phase was tempered in the 1960s
Following severe droughts in South Asia, the Bank began to
pay more attention to agriculture in cooperation with the
United Nations Food and Agriculture Organization (FAO)
Began to venture into education in cooperation with the
United Nations Educational, Scientific and Cultural
Organization
Between 1961 and 1965, 76.8% of all Bank lending was for
electric power or transportation
 6% was for agricultural development, and 1% for social service
investment
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From 1968 to 1981 Robert McNamara was World Bank
President
 Presidency coincided with the poverty alleviation phase for the World
Bank
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Poverty Alleviation Phase
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Focused on the eradication of absolute poverty
through rural and urban development
 Operationalized via the concept of redistribution with
growth
• New sources of income to help the poor—avoided redistribution
of existing incomes and assets
• Concept is now called shared growth
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Lending increased dramatically and channeled in
new directions
Agriculture and rural development, education,
health, and urban development took on increasing
importance
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Poverty Alleviation Phase
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In the case of rural development, the notion of “projects”
changed, moving towards what was called integrated rural
development
 Included agricultural credit, roads, agricultural support services,
irrigation, rural education, agricultural research and extension, and
social services such as health clinics
 Goal was to increase the productivity of the rural poor, but the
targeted population was the small-scale, owner-operator farmer
 Strategy was a significant change from Bank agricultural lending
under the infrastructure project-lending phase
• Had primarily benefited the owners of large farms
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Began to recognize the growing importance of urban areas
in developing countries
 Began to focus on urban poverty
• Housing for the poor, small-scale enterprises, water supply, sewerage,
transportation, and community services
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Policy-Based Lending
In 1981, the Reagan administration replaced
McNamara with A.W. Clausen—a banking
executive
 The Reagan administration took a dim view
of the poverty alleviation phase of World
Bank lending
 As the largest Bank donor, began to demand a
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change
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Clausen introduced the policy-based lending
phase of the Bank
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Policy-Based Lending
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Co-financing
 World Bank joins with private commercial banks in making loans
• World Bank provides information to the commercial banks and encourages them
to make loans that they may not have made without World Bank participation
 Often been restricted to middle-income countries
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Expanded role of the IFC
 IFC’s purpose is to make debt and equity investments in private enterprises
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in developing countries
Clausen began to emphasize the role of the IFC relative to the other
members of the World Bank Group
Conditionality or “macro-conditionality”
 Ties Bank lending to prescribed policy changes on the part of the recipient
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government
World Bank loans always carried limited conditions
• In the 1980s these conditions were broadened from the sectoral or sub-sectoral
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level to the national, macroeconomic level
Some loan agreements involve a hundred or more conditions
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Meeting this number of conditions has often been beyond the capacity of borrowing
countries
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Policy-Based Lending
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Structural adjustment lending
 Involves non-project lending to support adjustment in the
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face of balance of payments difficulties and includes the
conditionality component
Currently accounts for approximately 1/4 of Bank lending
despite an initial plan to limit it to 10%
Has been controversial for a number of reasons
• Begins to encroach upon the work of the IMF
• Bargaining over conditionality
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Some argue that those countries in greatest need of SAL support
are in the weakest bargaining position
• Growth of SAL has come at the expense of rural development
• Tends to hurt the poor
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Two sides of this debate tend not to listen to one another
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Engaging with Ghana
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The policy-based lending phase of the World Bank
coincided with the coming to power of the Rawlings
regime in Ghana in the early 1980s
Initially, Rawlings and his PNDC were anti-capitalist
and anti-market
 However, economic conditions continued to worsen
• Fixed value of the currency (the cedi) was so overvalued that
most currency transactions were undertaken at black-market
rates
• Debate over economic policy emerged within the PNDC itself
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An Economic Recovery Program was negotiated
with the World Bank in 1983
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Engaging with Ghana
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In April 1983, a large de facto nominal devaluation was
effected through import taxes and export subsidies
In October 1983, the nominal rate itself was adjusted from
2.75 cedi per US dollar to 30 cedi per dollar
 Further devaluations followed in 1984-1986
 Subsequently, the value of the cedi was market-determined
Import restrictions were reduced
Ghanaian government began to place an emphasis on
revenue generation to address central government deficits
However, there were substantial lay-offs of public-sector
workers, particularly in state-owned enterprises, although
retained public-sector workers were rewarded with raises
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Engaging with Ghana
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Both GDP growth and manufacturing value added
(MVA) growth rebounded quickly
Inflation slowed and exports expanded
Subsequently, economic conditions began to take a
turn for the worse
 Inflows of FDI never appeared
 MVA growth became very unsteady after 1987
 Inflation returned
 Unemployment remained stuck at approximately 25% of
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the labor force
Internal and external debt increased substantially to over
US$5 billion by 1995
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Figure 22.2. Growth Rates in GDP and
Manufacturing Value Added in Ghana
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Ghana’s Missing Ingredients
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In a country study published in 1984, the
World Bank emphasized Ghana’s constraints
on long-term growth
 Population growth
 Inadequate supply of skilled and educated
personnel
 Lack of diversification of the economic base
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Recent Shifts in Direction
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In 1983 the environmental issue rose to the surface
Bruce Rich, then an attorney with the Natural
Resources Defense Council (later with the
Environmental Defense Fund), launched an attack
on the World Bank supported Polonoroeste project
in Brazil
 Criticized the project on environmental grounds in articles
and appearances before committees of the US Congress
Project was canceled in 1986
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Resulted in a change in the Bank’s policy toward
the environment
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Recent Shifts in Direction
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Conable began to speak publicly on the Bank’s role
with regard to the environment in 1987
Conable committed the Bank to
 Increasing its environmental staff
 Beginning a series of environmental issue papers
 Financing environmental programs
 Involving grass-roots environmental organizations in
decision making
• Some are uncertain as to whether these changes will be
implemented in a meaningful way
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Recent Shifts in Direction
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One change introduced at the World Bank
under the McNamara Presidency was the
use of loan volumes as a measure of
success
 Evidence quality of Bank lending suffered as a
result
• Might explain some of the Bank’s lack of attention to
environmental matters
 More fundamentally, there has been a lack of
attention to process and results that appears to
have plagued the Bank
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Recent Shifts in Direction
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Broad themes emerging
 Need to focus on people
• Education and health lending
• Private sector entrepreneurship
• How the environment affects the poor
 Participation
 Partnerships with other agencies
 Results
 Recently, World Bank President James
Wolfensohn appears to have taken these matters
on board
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Poverty Reduction Strategy
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Initiative launched in 1999
Closely related to Wofensohn’s development framework
Guiding principles are that PRS should be
 Country driven
• Led to controversy in the case of Ghana as key elements of the PRS
were kept secret by the government
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 Results oriented
 Comprehensive
 Prioritized
 Partnership oriented
 Long term
IMF supports the PRS with a Poverty Reduction and Growth
Facility
PRS has become a prerequisite for debt relief
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