Reinert/Windows on the World Economy, 2005 The World Bank CHAPTER 22

Reinert/Windows on the World Economy, Introduction The World Bank is as important as the IMF  Both institutions grew out of the Bretton Woods Conference Controversial institution

Reinert/Windows on the World Economy, Early History and Administrative Structure 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

Reinert/Windows on the World Economy, IBRD’s Articles of Agreement Purposes of the institution  Promote loans to assist in the reconstruction and 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

Reinert/Windows on the World Economy, IBRD’s Articles of Agreement 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 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

Reinert/Windows on the World Economy, Figure The Components of the World Bank Group

Reinert/Windows on the World Economy, IBRD 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 Executive Director of IMF has traditionally been European  Major Bretton Woods players ensured their subsequent control of the Bretton Woods institutions

Reinert/Windows on the World Economy, Table Administrative Structure of the World Bank

Reinert/Windows on the World Economy, IBRD 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 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

Reinert/Windows on the World Economy, International Finance Corporation 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

Reinert/Windows on the World Economy, International Development Association 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 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) Primarily dependent on contributions from high-income member countries

Reinert/Windows on the World Economy, 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

Reinert/Windows on the World Economy, Multilateral Investment Guarantee Agency 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 building, information dissemination, and investment facilitation  Provides a host of legal services to World Bank member countries to support FDI

Reinert/Windows on the World Economy, Infrastructure Project Lending and Poverty Alleviation Phases In 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

Reinert/Windows on the World Economy, Infrastructure Project Lending and Poverty Alleviation Phases 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 Bank observed that large capital investments would be unlikely to be made by private capital  Bank should fill in the gap

Reinert/Windows on the World Economy, Infrastructure Project Lending and Poverty Alleviation Phases 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 From 1968 to 1981 Robert McNamara was World Bank President  Presidency coincided with the poverty alleviation phase for the World Bank

Reinert/Windows on the World Economy, Poverty Alleviation Phase 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 Lending increased dramatically and channeled in new directions Agriculture and rural development, education, health, and urban development took on increasing importance

Reinert/Windows on the World Economy, Poverty Alleviation Phase 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 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

Reinert/Windows on the World Economy, 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 change Clausen introduced the policy-based lending phase of the Bank

Reinert/Windows on the World Economy, Policy-Based Lending 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 Expanded role of the IFC  IFC’s purpose is to make debt and equity investments in private enterprises 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 government  World Bank loans always carried limited conditions In the 1980s these conditions were broadened from the sectoral or sub-sectoral level to the national, macroeconomic level Some loan agreements involve a hundred or more conditions  Meeting this number of conditions has often been beyond the capacity of borrowing countries

Reinert/Windows on the World Economy, Policy-Based Lending Structural adjustment lending  Involves non-project lending to support adjustment in the 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  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  Two sides of this debate tend not to listen to one another

Reinert/Windows on the World Economy, Engaging with Ghana 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 An Economic Recovery Program was negotiated with the World Bank in 1983

Reinert/Windows on the World Economy, Engaging with Ghana 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  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

Reinert/Windows on the World Economy, Engaging with Ghana 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 the labor force  Internal and external debt increased substantially to over US$5 billion by 1995

Reinert/Windows on the World Economy, Figure Growth Rates in GDP and Manufacturing Value Added in Ghana

Reinert/Windows on the World Economy, Ghana’s Missing Ingredients 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

Reinert/Windows on the World Economy, Recent Shifts in Direction 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 Resulted in a change in the Bank’s policy toward the environment

Reinert/Windows on the World Economy, Recent Shifts in Direction 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

Reinert/Windows on the World Economy, Recent Shifts in Direction 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

Reinert/Windows on the World Economy, Recent Shifts in Direction 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

Reinert/Windows on the World Economy, Poverty Reduction Strategy 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  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