The World Bank Group’s Role in Global Development

A woman wades through water in Chittagong, Bangladesh. KM Asad/NurPhoto via Getty Images

Since its founding in 1944, the World Bank has evolved from a lender focused on European reconstruction to the preeminent international institution for economic development and poverty reduction.

Last updated April 9, 2019

A woman wades through water in Chittagong, Bangladesh. KM Asad/NurPhoto via Getty Images
Backgrounder
Current political and economic issues succinctly explained.

The World Bank Group is a family of five multilateral institutions focused on economic development whose overarching mission is global poverty reduction. Established by Western powers in 1944, the World Bank was originally tasked with rebuilding the economies of postwar Europe. More than seventy years later, it has expanded its reach into nearly all of the world’s developing countries. Today the bank maintains more than 2,600 projects.

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Since April 2019, the bank has been led by former U.S. Treasury Department official and Wall Street economist David Malpass. A longtime critic of the bank, Malpass took over after the previous president, American public health expert Jim Yong Kim, unexpectedly stepped down. By tradition, an American has always led the bank, leading some observers to argue that the institution, which largely serves the developing world, is too dominated by the West. Others, including Malpass himself at times, suggest the bank has outlived its usefulness altogether, citing the increase in private capital flows available to developing countries. Supporters of the bank contend that it contributes to global economic development as an arbiter of best practices.

Bretton Woods

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The World Bank, along with its sister organization, the International Monetary Fund (IMF), was created at the Bretton Woods Conference in New Hampshire in 1944. The Allied powers, led by the United States and the United Kingdom, sought to restore European prosperity and prevent a recurrence of the economic malaise of the 1920s and 1930s, which helped fuel the rise of totalitarianism. The IMF, which by tacit agreement would be led by a European, was charged with managing the global regime of exchange rates and balance of payments. The World Bank, to be led by an American, would provide member countries with postwar reconstruction loans. While the IMF would focus on “firefighting” immediate macroeconomic problems, the World Bank would concentrate on the longer task of development.   

In recent decades, the bank’s primary focus has shifted from partnering with middle-income nations on growth-related programs and trade liberalization toward an emphasis on global poverty alleviation.

In recent decades, the bank’s primary focus has shifted from partnering with middle-income nations on growth-related programs and trade liberalization toward global poverty alleviation. These efforts take place in the world’s poorest countries—particularly those in Africa—and in middle-income countries, such as China and India, where many of the world’s poor reside. In 2013, the bank set a goal to end extreme poverty, experienced by people living on $1.25 or less per day, by 2030. Other priorities for the bank include reconstruction in postconflict nations and transnational issues, including public health and environmental concerns.

Organization and Operations

The World Bank Group is composed of five separate institutions: the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation, the Multilateral Investment Guarantee Agency, and the International Center for Settlement of Investment Disputes. Each of these agencies is owned and operated as a cooperative by its member countries.

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Together, the IBRD and the IDA are commonly referred to as the World Bank. The bank’s six largest shareholders—out of its 189 members—were the United States, Japan, China, Germany, France, and the United Kingdom.

Ultimate policymaking authority at the bank rests with the board of governors, mostly made up of senior finance or development officials from member countries. The board of governors, in turn, delegates certain powers to the board of directors, which is composed of twenty-five executives and the World Bank’s president.

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The International Bank for Reconstruction and Development­. The IBRD was established in 1944 as the World Bank’s charter institution. Through loans, guarantees, and other services, the IBRD works with middle-income and creditworthy low-income nations to fight poverty. Projects span the globe and vary from digitizing health systems in Belarus to reducing air pollution in Colombia to generating solar power in Pakistan.

The International Development Association. As a complement to the IBRD, the IDA was established in 1960 to promote broad-based development work in the world’s poorest countries by offering interest-free credits and grants. The IDA currently has programs in sixty-nine countries, of which thirty-seven are in Africa, with a focus on education, health, and sustainable environmental practices.

Criticism of the ‘Washington Consensus’

The World Bank, like the IMF, has been the subject of much criticism over the years. In his 2006 book, The White Man’s Burden, former World Bank economist William Easterly delivers a broad indictment of Western efforts at poverty reduction. “The plan to end world poverty shows all the pretensions of utopian social engineering,” he writes. The bank’s attempts to rapidly impose free markets on developing countries in the 1980s and 1990s, known as economic “shock therapy,” produced a “record of failure” in Latin America, Africa, and former Soviet countries, Easterly writes, saying client nations would be better served by homegrown, piecemeal reforms.

The World Bank, like the IMF, has been the subject of much criticism over the years.

Joseph Stiglitz, one of the most vocal critics of the World Bank, resigned from his position as the institution’s chief economist in 1999, criticizing the bank’s advocacy of what he calls free-market fundamentalism for many developing countries. Stiglitz argued the economic reforms the IMF and World Bank often required as conditions for their lending—the so-called Washington Consensus of fiscal austerity, high interest rates, trade liberalization, privatization, and open capital markets—have often been counterproductive for target economies and devastating for their populations. In particular, he links indiscriminate lending conditionality to the onset of financial crises in East Asia in 1997 and Argentina in 1999.

Postconflict Success Stories

The World Bank is, at the same time, revered by many as the preeminent brain trust in development economics. “You could certainly find brilliant development economists outside the Bank,” writes CFR’s Sebastian Mallaby in his book The World’s Banker, but “nobody could match the Bank’s concentration of talent.” As a result, he says, the bank’s annual World Development Report often establishes the accepted wisdom on any given development topic.

The World Bank has had several successful interventions, in the estimation of many observers. For Mallaby, the 1995 experience in Bosnia was a particular victory for the bank, which demonstrated its ability to move quickly into postcrisis reconstruction. He writes, “Bosnia came to suggest a route out of the Bank’s deepest long-term difficulty”: that its slow-moving bureaucracy might alienate big clients—namely China, India, Brazil, and South Africa—that increasingly have access to private capital markets.

In The World Bank: Its First Half Century, Mahn-Je Kim offers the bank’s multidecade involvement in South Korea as another triumph. The World Bank provided almost half of South Korea’s public funding in the high-growth years of the 1970s and 1980s. “Among the institutions and nations that provided public loans to Korea,” he writes, “the Bank was the most important.” He adds that the bank helped transfer valuable management techniques and was “critical” in the country’s ability to access other sources of foreign financing.

The Rise of Alternatives

Some critics question whether there is still a niche for the World Bank in the modern architecture of global finance, particularly given the increasingly global nature of private capital flows and the ascendance of large emerging economies such as the BRICS—Brazil, Russia, India, China, and South Africa. “The financial markets of today bear virtually no similarity to those of 1944,” writes Jessica Einhorn in Foreign Affairs. “The [World Bank] was created to provide credit to its member countries, and in those days, that credit was often the only kind available to them. Those days are over.”

This financial reality has led some to recommend that the bank narrow its focus to countries that lack access to private markets. “If the World Bank wants to have a significant role on the lending side, it’s going to have to be in the poorest of the poor countries or war-torn countries where the private sector has been effectively scared off,” said CFR’s Benn Steil.

Former World Bank President Robert Zoellick has offered a different take. “There is a view in some quarters in developed countries that the Bank should work with the poorest countries and not with developing countries. I’m an adamant opponent of that view,” Zoellick told the Telegraph in 2012. “If you believe in a multilateral system then India and Brazil are going to become more important over time and we need to draw from their knowledge and, in time, their finances.”

Nevertheless, the subsequent creation of the BRICS’s New Development Bank and the China-led Asian Infrastructure Investment Bank (AIIB) have presented developing countries with alternatives to the Bretton Woods institutions. Rebecca Liao, a China analyst, writes that the AIIB “was born out of two main grievances about the World Bank” that developing nations shared. First, developing countries have long complained about the conditionality of World Bank loans and have cast their terms as onerous. Second, emerging markets—China in particular—have been frustrated with their relative lack of influence at the World Bank and the IMF. Liao writes, “As the economies of these countries grew in the last 30 years, their voting powers within both organizations remained flat.”

There is a view in some quarters in developed countries that the Bank should work with the poorest countries and not with developing countries. I’m an adamant opponent of that view.
Robert Zoellick, Former World Bank President

Jim Yong Kim’s 2012 election as World Bank president exemplified this second complaint. Kim defeated candidates from Colombia and Nigeria—it was the first time that the board of governors even considered more than one candidate—despite his comparatively thin background in economics. At the time, the Economist wrote that the tradition of having an American lead the World Bank and a European the IMF “has persisted because it has not been worth picking a fight over,” but that Kim’s relative inexperience “gives others the chance to insist on the best candidate, not simply the American one.” Despite pointed complaints from many within the bank [PDF], the board unanimously appointed Kim to a second term in September 2016.

Kim’s sudden resignation in January 2019, nearly three years before the end of his term, and President Donald J. Trump’s subsequent nomination of U.S. Treasury undersecretary David Malpass to lead the bank, again highlighted these tensions. Malpass, formerly chief economist for the now-defunct Bear Stearns investment bank, had been a critic of the World Bank. He had argued that it has grown too large and redundant, since it continues to lend to countries with access to plenty of other lending resources, such as China and Brazil. Nevertheless, no challengers to Malpass’s candidacy emerged, and he was unanimously approved by the board. Malpass began his tenure as the thirteenth World Bank president on April 9, 2019.

To increase its legitimacy, the bank should reform its voting structure and adopt a competitive election process, CFR’s Thomas Bollyky argues. “Having an American at the helm of the bank partly served to reassure Wall Street, originally the main supplier of the bank’s capital,” he says. “With the globalization of capital markets, this justification . . . is long outdated.” Bollyky recommends a voting system that requires leaders to win over a majority of countries, not simply the votes of the primary shareholders.

An Ideas Bank

The World Bank argues that it has a number of comparative advantages over other institutions: a global presence, a repository of best practices, financial acumen, leadership in global public goods, and an established role as an international development catalyst. According to Vikram Nehru, a former World Bank chief economist for East Asia, while the bank has always represented a tiny share of public investment in most countries, its strength comes from leveraging its lending with ideas. For instance, he says, China has used the bank to finance a host of small projects with the sole intention of learning best practices.

Still, CFR’s Steil says that the middle-income countries, such as China, where many of the world’s poor live “at some point will need to assume responsibility for their own people, given their economic growth.” He echoes some of Malpass’s criticisms, noting that China’s more than $3 trillion in reserves “dwarfs anything the World Bank could ever bring to bear.” Instead of direct funding, he says, the bank’s future value could lie in the advisory assistance it provides, based on its long experience of successes, as well as failures.

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Resources

The World Bank Group unveiled a new strategy [PDF] in October 2013 to reposition itself as a “solutions” bank, providing both knowledge and financing.

The World Bank’s 2018 Annual Report [PDF] details its current scope of operations.

In a 2017 conversation at CFR, David Malpass says that the World Bank has grown too big in recent years.

In The Battle of Bretton Woods, CFR’s Benn Steil explains how the blueprint for the postwar economic order was drawn.

This CFR Backgrounder profiles the International Monetary Fund, the bank’s sister organization.

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