The World Bank: What it is and how it operates

16 July 2020 | Inside the institutions

This article provides an overview of how the Bank’s systems are designed to operate. The information is presented with the understanding that in practice divergences are likely and that political considerations influence decision-making and practice within the Bank (see Inside the Institutions, What are the main criticisms of the World Bank and the IMF?; Briefing, Bretton Woods at 75 and the future of multilateralism)

What is the World Bank?

The World Bank Group is one of the largest public development institutions in the world, with funding commitments totalling $59.5 billion in FY 2019. The main purpose of the Bank, as outlined in Article One of its Articles of Agreement is, “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 World Bank comprises five institutions managed by its country members: The International Bank for Reconstruction and Development (IBRD), which provides loans to middle-income and creditworthy lower-income countries; the International Development Association (IDA), which provides interest-free long-term loans, grants, technical assistance, and policy advice to low-income developing countries; the International Finance Corporation (IFC), which provides loans and loan guarantees and equity financing to the private sector in developing countries; the Multilateral Investment Guarantee Agency (MIGA), which provides loan guarantees and insurance to foreign investors against loss caused by non-commercial risks in developing countries; and the International Centre for Settlement of Investment Disputes (ICSID), which does not provide finance and is responsible for the settlement of investment disputes between foreign investors and their clients.

The Bank´s 189 member countries share ownership, and while votes are allocated differently in IBRD, IDA, IFC and MIGA, their voting power is based on the members’ capital subscriptions, with 25 executive directors representing different constituencies. This means the members with the greatest financial contributions have the greatest say in the Bank’s decision-making processes. Currently, the United States holds 15.78 per cent of the votes, followed by Japan, China, Germany, the UK and France. The top five shareholders, and Saudi Arabia, are represented by a single executive director, whereas sub-Saharan Africa, for instance, is divided into three constituencies, and many Asian constituencies are crowded, for example, in comparison to European counterparts (see Inside the Institutions, IMF and World Bank decision-making and governance, What are the main criticisms of the World Bank and the IMF?).

Each member of the Bank contributes two per cent of its subscription, calculated by a formula, in gold or US dollars and 18 per cent in its national currency. Members pay in 20 per cent of the Bank’s 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. In the case of IDA, though, its funds rely largely on the voluntary donor contributions through periodic replenishments, which typically take place every three years. Historically, additional contributions have been made by the IBRD and the IFC’s income from borrowers’ repayments of earlier IDA credits. However, the IFC’s contributions have reversed over the past few years, under the assumption that IDA countries need more private investment in order to meet the UN Sustainable Development Goals (SDGs), turning the IFC into a recipient of IDA funds rather than a contributor.

Interest rates charged by the Bank are adjusted periodically with capital accumulated from the interest charged above its borrowing costs, and are used to pay the Bank’s operating costs and to add to reserves (see IDA and IBRD interest rates).

How does the World Bank operate?

The Bank aims to achieve its goals through the provision of long-term loans, and in the case of IDA, grants, to governments to finance development projects and structural reform in areas such as education, health, public administration, infrastructure, financial and private sector development, agriculture, environment, technical support and natural resource management. The World Bank Group can also be seen as the provider of a number of products and services to states and, in the case of the IFC, private sector actors.

In 2014, the Bank established its twin goals, aimed at measuring success in promoting sustainable economic development: To end extreme poverty by 2030, by decreasing the percentage of people living on less than $1.90 day (increased from $1.25 in 2015) to less than 3 per cent of the global population, and to promote shared prosperity, by improving the living standards of the bottom 40 per cent of the population in every country. The poverty rate has been criticised as being too low to be meaningful by critics and the shared prosperity approach has also been challenged as significantly flawed.

The World Bank also presents itself as a ‘solutions bank’, combining its clout as a lender with global development knowledge and experience. It does this through research publications, policy advice and technical assistance. It is well-known for its influential annual flagship publication, the World Development Report, which provides research and recommendations on a specific aspect of economic development (see Observer Winter 2018, Winter 2017, Winter 2011). The Bank also produces several publications which monitor and rank its members countries on different policies, such as the Doing Business ReportWomen, Business and the Law, and the Human Capital Index (see Observer Winter 2019Spring 2015). It conducts a range of research and analysis on global economic trends, development policy data and impact evaluation. However, it has been criticised for being self-referential, favouring its own research over critical learning and independent evaluations that question its approach (see Update 54).

The Bank´s country programmes are reviewed, guided and analysed by its Country Partnership Frameworks (CPF). The CPF guides the actions the Bank implements over a five-year period to support a member country in its efforts to achieve the twin goals by identifying key objectives and analysing development results. A CPF starts with a poverty focused national development strategy drafted by the country. The country and the Bank then undertake a Systematic Country Diagnostic (SCD) to identify the challenges country faces. This SCD helps develop the CPF objectives, which will outline the Bank’s proposed actions ­– which often include leveraging the private sector for development outcomes – and their alignment with the Bank’s twin goals (see Observer Summer 2017). From this the CPF outlines a programme to help the country achieve the CFP objectives.

An important source for development finance and partnership within the Bank are the so-called trust funds. These complement IDA and IBRD and are designed to provide support for global public goods, fragile and conflict-affected states, disaster prevention and relief, global partnerships, knowledge and innovation. The amount of WBG funds held in trust as of the end of FY2019 was estimated at $12.1 billion, of which over $11 billion were disbursed to IDA and blend countries, which are “IDA-eligible based on per capita income levels and are also creditworthy for some IBRD borrowing.”

There are also IFC trust funds and Financial Intermediary funds (FIFs). IFC trust funds seek to create market opportunities, principally by unlocking private investment, through advisory services and concessional lending (blended finance). The Bank implements large global or regional projects through FIFs, which are developed through partnership with other organisations such as multilateral development banks and UN agencies. FIFs provide large-scale funding for broad, coordinated interventions, usually focused on themes, and typically aimed at achieving global public goods. The financialisation of development assistance inherent in FIFs and the World Bank’s Maximizing Finance for Development approach (see Observer Summer 2017) has been criticised as representing a new “Wall Street consensus”.

After the global debt crisis in the early 1980s, the Bank introduced adjustment lending under structural adjustment programmes (SAPs) to provide financing to countries experiencing balance of payments problems while stabilisation measures took effect. These loans were provided to countries for social, structural and sectoral reforms, for example for the development of national financial and judicial institutions. The World Bank attached conditions to its loans with the stated aims of ensuring the country’s economy is structured towards loan repayment. SAPs have been heavily criticised for decades for their negative impact on developing economies, including increasing dependency on existing unequitable international trade and financial systems. While the Bank no longer associates itself with SAPs, this type of lending continues today through Development Policy Financing, by which the Bank provides financing to borrowers in the form of loans, grants and credits. These contain a series of conditions (i.e. ‘prior actions’ which require specific legislative changes), which the Bank claims are aimed at the maintenance of an adequate macroeconomic policy framework ­ – as determined by the Bank with inputs from IMF assessments.

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