What Is the World Bank?

What Is the World Bank Group?

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). It is one of a variety of organizations seeking to shape the world economy.

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 (WBG), there are complementary institutions that aid in its goals to provide assistance.

Key Takeaways

  • The World Bank is an international organization that offers developmental assistance to middle-income and low-income countries. 
  • Founded in 1944, the World Back has 189 member nations and aims to reduce poverty in the developing world.
  • While WBG strives to create a poverty-free world, there are groups that are passionately opposed to the international patron as critics feel that its efforts actually make things worse.

Membership in the World Bank

There are 189 member countries that are shareholders in the IBRD, 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.

Joining the IMF comes with a variety of responsibilities that help it carry out its functions. There is an obligatory subscription fee, based on a percentage of the quota that a country has to pay to the IMF. In addition, a country is obligated to buy a determined amount of World Bank shares. Of these shares, part must be paid in cash in U.S. dollars, while the rest can be paid in a country's local currency, in U.S. dollars, or in gold. The balance of the World Bank 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 to more shares, which do not require payment at the time of membership but are left as "callable capital."

The IMF uses the quota formula agreed upon in 2008 which has four factors: 50% GDP, 30% openness, 15% variability, 5% reserves with a compression factor of 0.95 applied to the sum. Every few years, the formula is reviewed.

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 25 executive directors (EDs). The six largest shareholders—the U.S., U.K., China, 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, Saudi Arabia has opted to be a single-country constituency, which means that they have one representative within the 19 EDs. This decision is based on the fact that the country has a large, influential economy, requiring 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 World Bank serves two mandates:

  • To end extreme poverty, by reducing the share of the global population that lives in extreme poverty to 3% by 2030.
  • To promote shared prosperity, by increasing the incomes of the poorest 40% of people in every country.

The Parts That Make Up the Whole

The IBRD offers assistance to middle-income and poor, but creditworthy, countries. 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 Development Association, the International Finance Corporation, the Multilateral Investment Guarantee Agency, and the International Centre for Settlement of Investment Disputes), a country must be a member of the IBRD.

The International Development Association (IDA) offers loans to the world's poorest countries. These loans come in the form of "credits" and are essentially interest-free. They offer up to a 10-year grace period and hold a maturity of 30 years to 40 years.

The International Finance Corporation (IFC) works to promote private sector investments in developing countries 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 Centre for Settlement of Investment Disputes (ICSID) facilitates and works toward a settlement in the event of a dispute between a foreign investor and a local country.

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 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. These opponents believe that the fundamental structure of the Bank only exacerbates the already existing imbalance between the world's rich and poor. 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 receiving assistance, 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, developing countries may still have to choose between paying back their loans instead of investing in health, education, and other social programs.

The Bottom Line

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.

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