World Bank (WB): Origin, Functions, Objectives and Critical Evaluation

Let us make an in-depth study of the origin, functions, objectives and critical evaluation of world bank.

Origin:

The World Bank (WB) was originally created as the International Bank for Reconstruction and Development (IBRD) in 1944 along with its twin, the IMF. Together they came to be known as the ‘Bretton Woods’ twin sisters’. When it was set up it was decided that this international bank would assist in the economic reconstruction of the World War II-damaged European economies. In early 1946 this international bank launched its carrier as the multilateral development bank and since then the IBRD came to be known as the World Bank. Its headquarters is located in Washington, opposite the IMF building, and it lies as the next door neighbour of the White House.

Functions:

Being twin sisters, membership in the IMF is a prerequisite for membership in World Bank (188 countries in May, 2012).

The Bank performs the following functions:

I. To assist in the construction and develop­ment of the territories of its members by facilitating investment of capital for productive purposes, including the ‘restoration of economies destroyed or disrupted by war’, and the encouragement of the “development” of productive facilities and resources in less developed countries.

II. To promote private investment and long run balanced growth of international trade and BOP equilibrium by means of guarantees or partici­pation in international loans and investments.

III. To arrange loans made or guaranteed by it. so that more useful and urgent projects receive preference.

IV. To provide finance to projects from its own capital, funds raised by it and by participating with other members.

In addition, the Bank provides advice and expertise. It now puts more emphasis on institutional technical assistance and infrastructure assistance. Over the years, it has been able to generate and disseminate policy relevant knowledge. Today, it has been concentrating more on this asset rather than financial resources. This organisation is now called the ‘knowledge bank’.

Objectives:

The purposes and objectives are constantly changing. For instance, in the early years, the Bank’s investment concentrated on infrastructural build-up like power, transport, communications and irrigation. During the late 1960s and 1970s, the Bank went on financing agricultural projects more actively—particularly in the promotion of cash crops. However, in the 1980s, agricultural lending declined drastically.

Meanwhile, the WB decided to put emphasis on the alleviation of poverty in less developed countries in the late 1960s and 1970s. During Robert McNamara’s Presidency (1968-81), the WB made a radical change in emphasis—the reduction of rural poverty as well as urban poverty. Since then all the Presidents reiterated the commitment to fight poverty, enhance growth with sustainability.

It also introduced structural adjustment programmes (SAPs) in developing countries so that not only macroeconomic stability can be attained but also structural reforms aimed at accelerating growth can be undertaken. It has shifted its emphasis from the financing on specific projects towards non-project linked programmes. It works in developing economies with the focus of helping the poorest people and the poorest countries.

For all its clients, the Bank emphasises the need for:

(i) Investing in people, particularly through basic health and education;

(ii) Focusing on social development, gover­nance and institution-building as the major elements of poverty alleviation;

(iii) Strengthening the ability of the govern­ments to deliver quality services with greater efficiency and transparency;

(iv) Protecting the environment;

(v) Supporting and encouraging private business development and long-term planning.

Through its loans, policy advice, and technical assistance, the WB supports a broad range of programmes aimed at reducing poverty and improving living standards in the developing world including the achievement of the Millennium Development Goals (MDGs) by helping countries develop an environment for investment, jobs, and sustainable growth. The WB works with govern­ment agencies, non-governmental organisations (NGOs), and the private sector to formulate various assistance strategies.

A Critical Evaluation of the World Bank Activities:

The WB offers two basic types of loans investment loans for the support of economic and social development projects, and development policy loans to support countries’ policy and institutional reforms. The WB grants loans only to the developing countries (and not all the 188 members) annually at nearly $ 20 billion a year usually for a period of 15 to 20 years for the purpose of building roads, dams, and other physical capital that contribute to their economic develop­ment. Its lending rate is somewhat low and is fixed every six months.

The Bank offers hard currency loans. It accepts hard currency at the time of repayment. The Bank functions as an agent on the international capital markets for countries which are unable to obtain sufficient loans on concessional terms.

Its loan provisions are:

(i) Project loans,

(ii) Sectoral loans, and

(iii) Struc­tural adjustments loans (SALs).

The Bank provided $ 24.7 billion loans in the fiscal year 2008, with Africa receiving 23 p.c. of the total; Latin America and the Caribbean 19 p.c.; East Asia and Pacific 18 p.c.; South Asia 17 p.c.; Europe and Central Asia 17.4 p.c.; and Middle East and North Africa 6 p.c. With Bank support— both lending and advice—governments are refor­ming their economies and strengthening the entire financial and banking systems.

The World Bank has made remarkable success in achieving its basic objectives over the last 65 years or so. Its concern for developing countries deserves special attention. It has taken up various poverty-reduction strategies and poverty-focused lending. Bank programmes give high priority to sustainable, social and human development and strengthened economic management.

Latin American experience suggest that, during the 1980s and 1990s, inflation rate declined in Mexico, Panama, Costa Rica, Bolivia, Argentina, except Brazil. Further, because of trade liberalisation programme, the share of exports to GDP in these countries rose to 21.3 p.c. in 1993 from 14 p.c. in 1980. Still then, the modus operandi of the Bank has come in for sharp criticisms.

One of the serious charges against the WB loan is its structural adjustment lending or policy- based lending. The essence of SAL is loans disbursed in exchange for policy reforms like trade liberalisation, privatisation, financial sector reforms, tax reforms, etc. But various studies have shown that SALs have failed miserably in estab­lishing a basis for healthy economic and social development in debtor countries.

In most of the developing countries, average incomes, invest­ment, import, etc., have fallen drastically. Unem­ployment and inflation have become major problems. Number of people living below the poverty line does not show any declining trend in these countries. On the contrary, global poverty has increased and its activities are alleged to be detrimental to the environment, public health, and cultural diversity. It seems two institutions now need urgent reforms.

Among the developing countries, the Latin American experience is too hard to digest. After the adoption of SAPs, average incomes fell by 10 p. c. and investment declined from 23 p. c to 16 p.c. of national income during the 1980s. According to a WB estimate, the poverty ratio increased marginally from 15.53 p.c.. to 15.67 p.c. and the number of poor people rose from nearly 64 million to 78 million. Many of the Latin American countries experienced the process of deindustrialisation—causing a massive increase in the number of unemployed. Import liberalisation policy resulted in an Increase in imports of stable food like rice, com, etc. These costly imports lowered the living standards of masses. The case of sub- Saharan Africa is worst where nearly all children under-5 are malnourished.

A final word about the social and environ­mental damage caused by the WB project lending is a matter of grave concern. The ‘Sobradinho Dam’ in Brazil displaced quite a good number of poor families from their homes and livelihoods, but they had never been compensated.

The ‘Singrauli Super Thermal Power Plant’ in central India resulted in a massive displacement of the local population from their places—about 49,000 in 1994. During a visit of a WB study team in the Singrauli region in 1993, a number of houses in Nimidam were bulldozed and ousters were forced to move without adequate arrangement.

The gigantic investment in this project has resulted in a variety of problems in the area: severe air pollu­tion from coal and ash dust leading to high rates of pulmonary diseases, unemployment, inadequate compensation, inadequate housing, pollution of drinking water, etc. Thus adjustment with a human face’ has come under strict scrutiny.

It is also said that the World Bank is an instrument that serves the interests of the USA as well as the Western countries. Its functioning lacks transparency.

Thus, the World Bank has not come up to the expectations of many of the developing countries.