The World Bank Group (WBG) was established in 1944 to rebuild post-World War II Europe under the International Bank for Reconstruction and Development (IBRD). Today, the World Bank functions as an international organization that fights poverty by offering developmental assistance to middle-income and low-income countries. By giving loans and offering advice and training in both the private and public sectors, the World Bank aims to eliminate poverty by helping people help themselves. Under the World Bank Group, there are complimentary institutions that aid in its goals to provide assistance.
Membership in the World Bank
There are 189 member countries that are shareholders in the IBRD, which is the primary arm of the WBG. To become a member, however, a country must first join the International Monetary Fund (IMF). The size of the World Bank's shareholders, like that of the IMF's shareholders, depends on the size of a country's economy. Thus, the cost of a subscription to the World Bank is a factor of the quota paid to the IMF.
There is an obligatory subscription fee, which is equivalent to 88.29% of the quota that a country has to pay to the IMF. In addition, a country is obligated to buy 195 World Bank shares (US$120,635 per share, reflecting a capital increase made in 1988). Of these 195 shares, 0.60% must be paid in cash in U.S. dollars while 5.40% can be paid in a country's local currency, in U.S. dollars, or in non-negotiable non-interest bearing notes. The balance of the 195 shares is left as "callable capital," meaning the World Bank reserves the right to ask for the monetary value of these shares when and if necessary. A country can subscribe a further 250 shares, which do not require payment at the time of membership but are left as "callable capital." (Learn more about the IMF in An Introduction To The International Monetary Fund.)
The president of the World Bank comes from the largest shareholder, which is the United States, and members are represented by a Board of Governors. Throughout the year, however, powers are delegated to a board of 24 executive directors (EDs). The five largest shareholders - the U.S., U.K., France, Germany and Japan - each have an individual ED, and the additional 19 EDs represent the rest of the member states as groups of constituencies. Of these 19, however, China, Russia and Saudi Arabia have opted to be single country constituencies, which means that they each have one representative within the 19 EDs. This decision is based on the fact that these countries have large, influential economies, which requires that their interests be voiced individually rather than diluted within a group. The World Bank gets its funding from rich countries as well as from the issuance of bonds on the world's capital markets.
The Parts That Make Up the Whole
The IBRD offers assistance to middle income and poor but credit worthy countries, and it also works as an umbrella for more specialized bodies under the World Bank. The IBRD was the original arm of the World Bank that was responsible for the reconstruction of post-war Europe. Before gaining membership in the WBG's affiliates (the International Finance Corporation, the Multilateral Investment Guarantee Agency and the International Center For Settlement of Investment Disputes), a country must be a member of the IBRD.
The International Development Association offers loans to the world's poorest countries. These loans come in the form of "credits," and are essentially interest-free. They offer a 10-year grace period and hold a maturity of 35 years to 40 years.
The International Finance Corporation (IFC) works to promote private sector investments by both foreign and local investors. It provides advice to investors and businesses, and it offers normalized financial market information through its publications, which can be used to compare across markets. The IFC also acts as an investor in capital markets and will help governments privatize inefficient public enterprises.
The Multilateral Investment Guarantee Agency (MIGA) supports direct foreign investment into a country by offering security against the investment in the event of political turmoil. These guarantees come in the form of political risk insurance, meaning that MIGA offers insurance against the political risk that an investment in a developing country may bear.
Finally, the International Center for Settlement of Investment Disputes facilitates and works towards a settlement in the event of a dispute between a foreign investor and a local country. (Learn more in What Is An Emerging Market Economy?)
Adapting to the Times
As mentioned earlier, the main function of the WBG is to eliminate poverty and to provide assistance to the poor by offering loans, policy advice and technical assistance. As such, the countries receiving aid are learning new ways to function. Over time, however, it has been realized that sometimes as a nation develops, it requires more aid to work its way through the development process. This has resulted in some countries accumulating so much debt and debt service that payments become impossible to meet. Many of the poorest countries can receive accelerated debt relief through the Heavily Indebted Poor Countries scheme, which reduces debt and debt service payments while encouraging social expenditure.
Another issue on which the Bank has recently been focusing has presented itself as an endangerment to a country's livelihood: support programs for HIV/AIDS. The WBG has also been focusing on reducing the risk of projects by means of better appraisal and supervision mechanisms as well as a multidimensional approach to overall development. (This includes not only lending but also support for legal reform, educational programs, environmental safety, anti-corruption measures and other types of social development.)
The Bank encourages all of its clients to implement policies that promote sustainable growth, health, education, social development programs focusing on governance and poverty reduction mechanisms, the environment, private business, and macroeconomic reform.
Opposition to the Bank
While WBG strives to create a poverty-free world, there are groups that are passionately opposed to the international patron. The opponents believe that, due to the fundamental structure of the Bank, the already existing imbalance between the world's rich and poor is only exacerbated. The system allows the largest shareholders to dominate the vote, resulting in WBG policies being decided by the rich but implemented by the poor. This can result in policies that are not in the best interests of the developing country in question, whose political, social and economic policies will often have to be molded around WBG resolutions.
Moreover, even though the Bank provides training, assistance, information and other means that may lead to sustainable development, opponents have observed that developing countries often have to put health, education and other social programs on hold in order to pay back their loans.
Opposition groups have protested by boycotting World Bank bonds. These are the bonds that the WBG sells on global capital markets to raise money for some of its activities. These opposition groups also call for an end to all practices that require a country to implement structural adjustment programs (including privatization and government austerity measures), an end to debt owed by the poorest of the poor, and an end to environmentally damaging projects such as mining or the building of dams.
It is not surprising that there is a clash of opinion over how aid is given. Indeed, those that offer assistance are going to want to have a say in how the loans are used and what kind of economic policies are fostered in a country's developmental process. Many developing and poor nations, however, are stuck in a quagmire of debt and impoverishment, no matter how much assistance they receive. Given this, we may need to remember that the process of aid is also a developing state, in which both the giver and the receiver should be helping each other reach a poverty-free world. (For related reading, see: IMF, WTO and World Bank: How Do They Differ?)
The International Bank for Reconstruction and Development (IBRD) is an international financial institution that offers loans to middle-income developing countries. The IBRD is the first of five member institutions that compose the World Bank Group and is headquartered in Washington, D.C., United States. It was established in 1944 with the mission of financing the reconstruction of European nations devastated by World War II. The IBRD and its concessional lending arm, the International Development Association, are collectively known as the World Bank as they share the same leadership and staff. Following the reconstruction of Europe, the Bank's mandate expanded to advancing worldwide economic development and eradicating poverty. The IBRD provides commercial-grade or concessional financing to sovereign states to fund projects that seek to improve transportation and infrastructure, education, domestic policy, environmental consciousness, energy investments, healthcare, access to food and potable water, and access to improved sanitation.
The IBRD is owned and governed by its member states, but has its own executive leadership and staff which conduct its normal business operations. The Bank's member governments are shareholders which contribute paid-in capital and have the right to vote on its matters. In addition to contributions from its member nations, the IBRD acquires most of its capital by borrowing on international capital markets through bond issues. In 2011, it raised $29 billion USD in capital from bond issues made in 26 different currencies. The Bank offers a number of financial services and products, including flexible loans, grants, risk guarantees, financial derivatives, and catastrophic risk financing. It reported lending commitments of $26.7 billion made to 132 projects in 2011.
The International Bank for Reconstruction and Development (IBRD) and International Monetary Fund (IMF) were established by delegates at the Bretton Woods Conference in 1944 and became operational in 1946. The IBRD was established with the original mission of financing the reconstruction efforts of war-torn European nations following World War II, with goals shared by the later Marshall Plan. The Bank issued its inaugural loan of $250 million ($2.6 billion in 2012 dollars) to France in 1947 to finance infrastructure projects. The institution also established its first field offices in Paris, France, Copenhagen, Denmark, and Prague in the former Czechoslovakia. Throughout the remainder of the 1940s and 1950s, the Bank financed projects seeking to dam rivers, generate electricity, and improve access to water and sanitation. It also invested in France, Belgium, and Luxembourg's steel industry. Following the reconstruction of Europe, the Bank's mandate has transitioned to eradicating poverty around the world. In 1960, the International Development Association (IDA) was established to serve as the Bank's concessional lending arm and provide low and no-cost finance and grants to the poorest of the developing countries as measured by gross national income per capita.
The IBRD is governed by the World Bank's Board of Governors which meets annually and consists of one governor per member country (most often the country's finance minister or treasury secretary). The Board of Governors delegates most of its authority over daily matters such as lending and operations to the Board of Directors. The Board of Directors consists of 25 executive directors and is chaired by the President of the World Bank Group. The executive directors collectively represent all 189 member states of the World Bank. The president oversees the IBRD's overall direction and daily operations. As of July 2012[update], Jim Yong Kim serves as the President of the World Bank Group. The Bank and IDA operate with a staff of approximately 10,000 employees.
Although members contribute capital to the IBRD, the Bank acquires funds primarily by borrowing on international capital markets by issuing bonds. The Bank raised $29 billion USD worth of capital in 2011 from bonds issued in 26 different currencies. The IBRD has enjoyed a triple-A credit rating since 1959, which allows it to borrow capital at favorable rates. It offers benchmark and global benchmark bonds, bonds denominated in non-hard currencies, structured notes with custom-tailored yields and currencies, discount notes in U.S. dollars and eurodollars. In 2011, the IBRD sought an additional $86 billion USD (of which $5.1 billion would be paid-in capital) as part of a general capital increase to increase its lending capacity to middle-income countries. The IBRD expressed in February 2012 its intent to sell kangaroo bonds (bonds denominated in Australian dollars issued by external firms) with maturities lasting until 2017 and 2022.
The IBRD provides financial services as well as strategic coordination and information services to its borrowing member countries. The Bank only finances sovereign governments directly, or projects backed by sovereign governments. The World Bank Treasury is the division of the IBRD that manages the Bank's debt portfolio of over $100 billion and financial derivatives transactions of $20 billion.
The Bank offers flexible loans with maturities as long as 30 years and custom-tailored repayment scheduling. The IBRD also offers loans in local currencies. Through a joint effort between the IBRD and the International Finance Corporation, the Bank offers financing to subnational entities either with or without sovereign guarantees. For borrowers needing quick financing for an unexpected change, the IBRD operates a Deferred Drawdown Option which serves as a line of credit with features similar to the Bank's flexible loan program. Among the World Bank Group's credit enhancement and guarantee products, the IBRD offers policy-based guarantees to cover countries' sovereign default risk, partial credit guarantees to cover the credit risk of a sovereign government or subnational entity, and partial risk guarantees to private projects to cover a government's failure to meet its contractual obligations. The IBRD's Enclave Partial Risk Guarantee to cover private projects in member countries of the IDA against sovereign governments' failures to fulfill contractual obligations. The Bank provides an array of financial risk management products including foreign exchange swaps, currency conversions, interest rate swaps, interest rate caps and floors, and commodity swaps. To help borrowers protect against catastrophes and other special risks, the bank offers a Catastrophe Deferred Drawdown Option to provide financing after a natural disaster or declared state of emergency. It also issues catastrophe bonds which transfer catastrophic risks from borrowers to investors. The IBRD reported $26.7 billion in lending commitments for 132 projects in fiscal year 2011, significantly less than its $44.2 billion in commitments during fiscal year 2010.
Coordinates: 38°53′56″N77°02′33″W / 38.8990°N 77.0425°W / 38.8990; -77.0425
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