Background

How does the World Bank operate?

23 August 2005

The World Bank is the largest public development institution in the world, lending around US$ 25 billion a year to developing countries. The main purposes of the Bank, as outlined in Article One of its Articles of Agreement, are: “to assist in the reconstruction and development of territories of members by facilitating the investment of capital for productive purposes” and “to promote the long-range balanced growth of international trade and the maintenance of equilibrium in balances of payments by encouraging international investment … thereby assisting in raising the productivity, the standard of living and conditions of labour in their territories”.

The Bank aims to achieve these goals through the provision of long-term loans to governments for the financing of development projects and economic reform. Voting power on the Bank’s board is based on the members’ capital subscriptions which means the members with the greatest financial contributions have the greatest say in the Bank’s decision-making process. The US government holds 20 per cent of the vote and is represented by a single Executive Director. The 47 sub-saharan African countries, in contrast, have two Executive Directors and hold only seven per cent of votes between them.

Each member of the Bank contributes two per cent of its subscription in gold or US dollars and 18 per cent in its national currency. Members pay in 20 per cent of the capital while the remaining 80 per cent is kept “callable” (to be paid in the event of a default). This guarantee allows the Bank to raise money for its lending purposes on international capital markets by the sale of its bonds.

Interest rates on World Bank loans are revised every six months and typically, the Bank charges borrowers a rate of interest 0.5 per cent above its own cost of borrowing on the international market, the proceeds going towards paying the Bank’s operating costs and to add to reserves.

Loans were originally supposed to be given only to “specific projects”—usually infrastructural projects, such as the construction of highways, dams, and telecommunications facilities, and social welfare projects, such as those in the health and education sector.

In 1980, the Bank introduced adjustment lending under its structural adjustment programme (SAP) to provide financing to countries experiencing balance of payments problems while stabilisation measures took effect. These loans are provided to countries for social, structural and sectoral reforms, for example for the development of national financial and judicial institutions. The World Bank attaches conditions to its loans with the stated aims of ensuring the country’s economy is structured towards loan repayment.