The World Bank was established in 1946 to provide long-term assistance for economic development. It mobilizes funds contributed by member governments and raised in capital markets to lend to developing countries.
Although the World Bank is technically an agency of the United Nations system, in reality it is independent and has separate sources of finance. The World Bank provides loans while other UN agencies generally provide grants.
The World Bank is the world’s largest multilateral development agency. In 1996, the World Bank made approximately 250 new loan commitments to low- and middle-income nations, for a total of $21.4 billion. By comparison, the U.S. Agency for International Development provided $5.8 billion in development and humanitarian assistance to such countries.
What is generally known as the World Bank consists of two institutions with different lending programs: the International Bank for Reconstruction and Development (IBRD), and the International Development Association (IDA). The IBRD provides about two-thirds of total loans to middle-income countries at near-market interest rates. IDA provides the remaining loans at very low interest rates to low-income countries.
The World Bank makes two types of loans: those for projects ranging from infrastructure, agriculture and industrial development, and health and educational services, and others for reform of economic policies, or “structural adjustment.” Neither category is sufficiently focused on poverty reduction.
In addition to providing loans, the World Bank’s assessment of a member government’s economic performance significantly influences the borrower’s access to other donor aid and private capital.
Poverty Reduction and IDA
The World Bank currently carries out poverty assessments for borrowing countries. However, a 1996 World Bank internal evaluation found that poverty assessments are of poor quality, lack strategic recommendations, and are not adequately incorporated into policy and lending programs.
The International Development Association (IDA) was founded in 1960 to assist the poorest developing countries which could not afford to borrow capital at market rates. The 79 countries which receive IDA funds, including 41 in Sub-Saharan Africa, are home to 80 percent of the world’s people living in absolute poverty.
IDA provides long-term “soft” loans at 0.5 percent interest over 40 years. IDA lends mainly to countries that have a per capita income of less than US$905. The average income of IDA borrowers is less than $400 per year.
Of the World Bank’s $21.4 billion in fiscal 1996 loan commitments, $6.9 billion was through IDA.
IDA is funded largely by contributions from approximately 30 richer countries which are members of the World Bank. Every three years donors are asked to replenish IDA funds.
IDA is now the single largest source of donor funds for basic social services in the poorest countries. In fiscal 1996, $1.48 billion, or 21 percent of IDA funds, was spent on education, population, health and nutrition, water supply and sanitation, and social protection. This is three times the fiscal 1989 level.
Debt and Structural Adjustment
In fiscal years 1994-96, 25 percent of World Bank lending supported economic reform, or “structural adjustment” programs (SAPs). These loans are made on the basis of progress toward free-market economic reforms. However, 39 percent of lending to Africa goes toward structural adjustment, with some African countries’ adjustment shares as high as 90 percent.
The World Bank and other international financial institutions insist that borrowing governments service their debts first, before any other creditors are repaid.
As the major lender to poor countries, the World Bank is one of poor countries’ biggest creditors. In 1994, for every $3 lent to poor countries through IDA, $2 was repaid to the World Bank in debt service.
The World Bank has 180 member governments. In contrast to the UN’s one-nation, one-vote decision-making, power in the World Bank is related to a country’s financial contribution, or “shares.”
The five major shareholders of the World Bank are the United States, Japan, Germany, France, and the United Kingdom. Each has its own seat on a 24-member Board of Executive Directors and together they control 39 percent of the votes. The remaining 175 countries have 19 Executive Directors on the board.
The President of the World Bank is selected by the Bank’s Board of Executive Directors. By custom, the President is a U.S. citizen and is nominated by the Secretary of the Treasury, who represents the United States on the board.
In 1993, the Bank revised its disclosure policy to allow more information to be made publicly available. It has established Public Information Centers in four major cities which make documents available according to the revised policy. Documents are also available through a library program in every borrowing country.
Many World Bank documents are still not publicly available. For example, the Bank’s Country Assistance Strategy (CAS), a multi-year development plan that guides World Bank lending to each country, is a confidential document.
In 1993, the World Bank established an Inspections Panel. Any group of individuals who believe that they are adversely affected by a Bank-supported project can now ask the Panel to investigate complaints that the Bank has failed to abide by its own policies and procedures.
The United States has traditionally been the largest World Bank shareholder, but is now second to Japan. The United States contributes 15 percent of total shares, while Japan contributes 22 percent. Other donors set their contribution in relation to the U.S. contribution.
The U.S. Congress must appropriate funds for IDA annually to fulfill U.S. commitments made through international negotiations. Because the U.S. Congress has not honored these commitments recently, the United States is currently $235 million in arrears for IDA payments.
The U.S. Congress cannot mandate changes in World Bank policy. It can, however, direct the U.S. Executive Director to the Bank to use her/his vote and influence to achieve reforms within the Bank.