The World Bank Group’s Role in Global Development

Villagers line up for cooking oil donated by local businessmen in Myanmar. (Adam Dean/Reuters)

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 November 19, 2018

Villagers line up for cooking oil donated by local businessmen in Myanmar. (Adam Dean/Reuters)
Backgrounder
Current political and economic issues succinctly explained.

Introduction

The World Bank Group is a family of five multilateral institutions engaged in various economic development activities, 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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Dr. Jim Yong Kim, a U.S. public health expert and former head of Dartmouth College, has served as president of the bank since July 2012. Some critics claim Kim’s appointment encapsulated the bank’s outmoded embrace of a Western-dominated order. Others suggest the bank may have outlived its usefulness altogether, citing the increase in private capital flows available to the developing world. Supporters of the bank contend that it can still make an enduring contribution 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, 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 30s that helped fuel the rise of totalitarianism. The IMF, which through 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 fund would focus on “firefighting” short-term macroeconomic problems, the bank would concentrate on long-term, on-the-ground 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 an emphasis on 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 postconflict nations and global commons issues, such as public health and the environment.

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 agency 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. As of 2017, the bank’s six largest shareholders—out of its 189 members—were the United States, Japan, China, Germany, France, and the UK, respectively.

Ultimate policymaking authority at the bank rests with the board of governors, often 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 president.

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The International Bank for Reconstruction and Development­. The IBRD was established in 1944 as the 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 ’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 the developing world in the 1980s and 90s, known as economic “shock therapy,” produced a “record of failure” in Latin America, Africa, and former Soviet countries. Easterly says 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, citing his growing opposition to the bank’s advocacy of 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 (1997) and Argentina (1999).

Post-Conflict 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 a 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 and deliver results for important clients. He writes that “Bosnia came to suggest a route out of the Bank’s deepest long-term difficulty”: the potential for a slow-moving bureaucracy to rob it of 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 80s. “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 recourse 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 said. “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’ 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 the terms as onerous. Second, emerging markets—China in particular—have been frustrated with their relative lack of influence at the bank and the IMF, despite their rising global statures. Liao explains, “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

Kim’s 2012 election exemplified this second complaint. Kim defeated candidates from Colombia and Nigeria—the first time in its history 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 an American World Bank head and a European at 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 reappointed Kim to a second term in September 2016.

To adapt to this new reality, the bank needs to reform its voting structure and adopt a competitive election process to increase its legitimacy, CFR’s Thomas Bollyky has argued. “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.” He recommends a voting system that requires leaders to win a majority of country votes, not simply those of the primary shareholders.

An Ideas Bank

The World Bank has argued that it continues to have a number of comparative advantages over other institutions: its global presence, its repository of best practices, its financial acumen, its leadership in global public goods, and its 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 by 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 with many of the world’s poor living in middle-income countries such as China, “at some point [those countries] will need to assume responsibility for their own people given their economic growth.” He notes 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 may be, rather, in providing advisory assistance based on its long experience of past successes—and 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.

This 2018 interview with World Bank President Jim Yong Kim discusses his early life and the prospects for bank reform.

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.