The World Bank: Catalyzing Economic Development

          The International Bank for Reconstruction and Development (IBRD), better known as the World Bank was established in 1946 as a twin institution with the IMF (International Monetary Fund) as a result of the Bretton Woods Conference. It assists reconstruction and development of the needy countries through long and medium term loans. It pays special attention to the development of under-developed countries. It not only grants loans out of its own funds, but it also assists private foreign investment by guaranteeing or participating in loans and investments made by private investors and coordinates the lending activities of the rich countries at a governmental level. It has thus helped in raising productivity and the living standards in developing countries.

          The World Bank, was established at the same time as the International Monetary Fund to tackle the problem of international investment. Since the IMF was designed to provide temporary assistance in correcting the balance of payments difficulties, an institution was also needed to assist long-­term investment purposes. Thus, IBRD was established for promoting long-term investment loans on reasonable terms.

          The World Bank (IBRD) is an inter-governmental institution, corporate in form, whose capital stock is entirely owned by its member-governments. Initially, only nations that were members of the IMF could be members of the World Bank; this restriction on membership was subsequently relaxed. IBRD is a AAA-rated financial institution—with some unusual characteristics. Its shareholders are sovereign governments. Its member borrowers have a voice in setting its policies. IBRD loans (and IDA credits) are typically accompanied by non-lending services to ensure more effective use of funds. Also, unlike commercial banks, IBRD is driven by development impact rather than profit maximization.

The Principal Functions of the World Bank is as follows:

1.     To assist in the reconstruction and development of the member countries by facilitating the investment of capital for productive purposes.

2.     To promote private foreign investment by means of guarantee of participation in loans and other investments made by private investors and when private capital is not available on reasonable terms, to make loans for productive purposes out of its own resources or from funds borrowed by it.

3.     To promote the long-term balanced growth of international trade and the maintenance of equilibrium in balance of payments by encouraging international investment for the development of the productive resources of members.

4.     To arrange loans made or guaranteed by it in relation to international loans through other channels so that more useful and urgent projects, large and small alike, are dealt with first. It appears that the World Bank was created to promote and not to replace private foreign investment. The Bank considers its role to be a marginal one, to supplement and assist foreign investment in the member countries.

          A little consideration will show that the objectives of the IMF and IBRD are complementary. Both aim at increasing the level of national income and standard of living of the member nations. Both serve as lending institutions, the IMF for short-term and the IBRD for long-term capital. Both aim at promoting the balanced growth of international trade.

Organisation:

          Like IMF, the Bank’s structure is organised on a three-tier basis; a Board of Governors, Executive Directors and a President. The Board of Governors is the supreme governing authority. It consists of one governor (usually the Finance Minister) and one alternate governor (usually the governor of a central bank), appointed for five years by each member.

          The Board is required to meet once every year. It reserves to itself the power to decide important matters such as new admissions, changes in the bank’s stock of capital, ways and means of distributing the net income, its ultimate liquidation, etc. For all technical purposes, however, the Board delegates its powers to the Executive Directors in the day-to-day administration.

          At present, the Executive Directors are 19 in number, of which five are nominated by the five largest shareholders — the USA, the UK, Germany, France and India. The rest are elected by the other members. The Executive Directors elect the President who becomes their Ex-officio Chairman holding office during their presence. He is the chief of the operating staff of the Bank and is subject to the direction of the Executive Directors on questions of policy and is responsible for the conduct of the ordinary business of the Bank and its organisation.

Capital Resources:

The World Bank, like any other corporation, has an authorised capital of $ 21 billion divided into 210,000 shares, each having a par value $ 1, 00,000. Initially, however, its authorised capital was $ 10 billion. Of the present authorised capital, $ 20.48 billion are subscribed by the issue of 204,848 shares. However, only 10 per cent of the par value, viz., $ 2.04 billion, has so far been called in as paid-up capital. The capital stock of the Bank can be increased if a three-fourths majority of the total voting power is cast in its favour. Of the paid-up capital, 2 per cent has to be subscribed in gold or US dollars, the remaining 98 per cent to be paid in the currency of the member.

Lending Operations:

          Loans are granted to member countries only after the Bank is fully satisfied about the economic position of the borrowing country as well as the soundness of the specified projects for which assistance is sought. In granting loans, the Bank is prepared to take reasonable risks but insists that funds obtained from it should be used for purposes which are constructive and practical. The Bank has powers of supervision and control to ensure that funds are used for the purposes for which the loan is granted. Normally, the Bank makes medium or long-term loans, the term being related to the estimated useful life of the equipment or plant being financed.

The Bank makes or facilitates loans in any one or more out of its own following ways:

(a) By making or participating in direct loans out of its own funds; or

(b) Out of the funds raised in the market of a member, or otherwise borrowed by the Bank; or

(c) By guaranteeing, in whole or in part, loans made by private investors through the investment channels.

          The total outstanding amount of the loans made or guaranteed by the Bank is not to exceed 100 per cent of its total unimpaired subscribed capital resources and surplus. The interest rate charged by the Bank on its loans is the estimated cost to the Bank of borrowing money for a comparable term in the market and is uniform without distinction among borrowers. In addition to the rate of interest, the Bank charges on all loans a commission of 1 per cent for the purpose of creating a special reserve against losses and ½ per cent for administrative expenses.

          In recent years, the Bank has made loans mainly for specific development projects in the field of agriculture, power, transport and industry. Most of the loans have been made to the underdeveloped countries. India is the Bank’s largest individual borrower.

Technical and Advisory Assistance:

          In addition to providing financial assistance to member countries, the Bank has been rendering signal service to its members by providing them suitable technical assistance to assess their total economic resources and to set up priorities to be followed in their development programmes. Technical assistance on a broader scale has also been provided, for instance, in development programming through Survey Missions, which make intensive studies of national resources and formulate recommendations to serve as the basis of long-term development programmes.

          In addition to the training programme, the Bank, with financial assistance from the Rockefeller and Ford Foundations, has set up in Washington an Economic Development Institute to provide an opportunity to selected groups of senior officials from the less developed countries to participate annually in an international course of studies designed to give them a broad perspective of the problems of economic development and to increase their efficiency.

The World Bank advances loans to the developing countries subject to the following conditions:

(a) The overall economy of the borrowing country is soundly operated.

(b) If the overall economic plans would reinforce the basic soundness of economy, and

(c) The projects which the bank is asked to finance have been carefully prepared and are economically and financially justified.

          Poverty reduction is at the core of lending from both IDA and IBRD, through investments that support growth as well as investments in basic public services. The Bank offers an array of customized services through IBRD and IDA – including loans, technical assistance, and advice – to its developing and in-transition member countries.

The World Bank uses two basic types of lending instruments: investment loans and adjustment loans.

Investment Loans:

          Investment loans provide finance for goods, works, and services in support of economic and social development projects in a broad range of sectors. The nature of the Bank’s investment lending has evolved over time. Originally focused on hardware, engineering services, and bricks and mortar, investment lending has come to focus more on institution building, social development, and the public policy infrastructure needed to facilitate private sector activity as the Bank’s priorities have changed.

Adjustment Loans:

          Adjustment loans provide quick-disbursing external financing to support policy and institutional reforms. Adjustment loans were originally designed to provide short-term balance of payments support for macro-economic policy reforms, including reforms in trade policy. Over time, they have evolved to focus more on medium-term structural and institutional reforms in the financial sector, social policy and public sector resource management. Both investment and adjustment loans are used flexibly to suit a range of purposes.

How a Loan is made:

          Lending by the World Bank is developed in several phases. On the basis of economic and sector work, often supported by the Bank, the borrower identifies and prepares the project, and the Bank reviews its viability. During loan negotiations, the Bank and borrower agree on the development objective, components, outputs, performance indicators, an implementation plan, and a schedule for disbursing loan funds. Once the Bank approves the loan and it becomes effective, the borrower implements the project or programme according to terms agreed on with the Bank.

          All loans are governed by the World Bank’s operational policies which aim to ensure that Bank-financed operations are economically, financially, socially, and environmentally sound. Fiduciary policies and procedures govern the use of project-related funds, particularly for the procurement of goods and services. Safeguard policies help to prevent unintended adverse effects on third parties and the environment. The Bank, therefore, supervises the implementation of each loan and evaluates its results. Three-fourth of outstanding loans is managed by country directors located away from the Bank’s Washington, D.C., headquarters. Nearly 30 per cent of World Bank’s staff is based in nearly 100 country offices worldwide.

Co-financing:

          Co-financing describes funds committed by official bilateral partners, multilateral partners, export credit agencies, or private sources to specific Bank-funded projects. Co-financing enables the World Bank to increase its resources with additional financing to benefit the recipient country. Financing provided by multiple sources in support of individual projects also allows harmonization of policies and procedures, thus reducing the administrative burden on the recipient country and improving effectiveness.

Trust Funds:

          A number of industrial countries, a few larger developing countries, the private sector, and non-governmental organizations maintain trust funds with the World Bank that can be used to supplement Bank resources for specific agreed-on initiatives. The trust funds available cover areas that facilitate providing grants for high-priority development needs, including technical assistance and advisory services, debt relief, and post conflict transition.

          Borrowings, along with shareholder equity, fund IBRD’s loans and investments. Its financial strength is based on the support it receives from its shareholders and on its financial policies and practices, which are designed to maintain a high credit standing in the international markets. In order to obtain IBRD loans, it is necessary for a developing country to keep a constantly critical eye on the soundness of its budget structure, on healthy relationship between wages and prices, on the effective utilisation of its available productive resources, on the flow of goods within its borders and the volume and character of its imports and exports; and on all the diverse aspects of national life which reflect the health of its economy.

          The Bank charter provides that its loans must be for productive purposes and meant to finance foreign exchange requirements of specific projects. Before a loan is granted the merits of the projects to be financed are carefully studied and it is ensured that only the most urgent and useful projects are taken up first. Also, before making or guaranteeing any loan, the Bank must satisfy itself that the borrowing country cannot obtain the loans from private sources at reasonable terms. The Bank makes prudent assessment of the projects to make sure that the loans will be repaid. The broad aim is to help strengthening the economy of the borrowing country and stimulate production activity in general rather than help the production of particular goods. It does not engage in equity financing.

          The World Bank has become a part of a broadening stream of financial and technical assistance to the less developed countries. Although now other sources and institutions have also joined in the task which the Bank pioneered with such imagination and purposively, it has not detracted from the importance of the part which the Bank is playing in mobilizing international assistance to developing countries.

          However, there is a definite limit to the amounts that the Bank can lend. Its entire subscribed capital is not really available for lending. Additional funds are raised by issuing bonds and here also there is a limit to the total amount that the Bank can raise by issuing bonds. The capacity of the developing countries to absorb capital for really productive purposes also imposes a limit. The Bank has repeatedly made it clear that the main burden of international finance must fall on private investors or on loans at nominal interest or outright grants by rich countries. It cannot be expected to meet capital requirements of the developing countries in their entirety.

          There is thus need for other sources or organisations to undertake this all important task. The Bank can render a useful service by providing technical assistance in preparing development plans and by supplying relevant information to the other lenders. Above all, it can serve as a negotiation forum and provide mediation.

The Role of IBRD (World Bank):

          Countries with a per capita income of less than $ 5,225 that are not IDA-only borrowers are eligible to borrow from IBRD. Countries with higher per capita incomes may borrow under special circumstances or as part of a graduation strategy. It is important to note, however, that the amount that countries can borrow from IBRD depends on their creditworthiness. Thus, countries may be eligible to borrow but may not have access to IBRD resources because of poor creditworthiness. In addition, IBRD loans outstanding to any individual borrower, irrespective of its creditworthiness, may not exceed $ 13.5 billion.

          Seventy-five per cent of poor people who live on less than $1 per day live in countries that received IBRD lending. IBRD borrowers are typically middle-income countries that enjoy some access to private capital markets. Some countries are eligible for IDA lending due to their low per capita incomes, but they are also creditworthy for some IBRD borrowing. These countries are known as blend borrowers. Even excluding IBRD loans to the blend countries, a full 25 percent of those who live on less than $1 a day live in countries that are IBRD borrowers. IBRD provides important support for poverty reduction by facilitating access to capital in larger volumes on good terms, with longer maturities, and in a more sustainable manner than the market provides.

World Bank’s Strategy: Stronger Focus on Results:

          Development experience over the past 50 years has highlighted the importance of focusing on economic and social outcomes. Donors demand that funds provided by their taxpayers achieve results. The citizens of developing countries are impatient to see tangible improvements in their living conditions within a reasonable time frame.

          Both expect the World Bank and other development agencies to be able to demonstrate the results of joint efforts. Developing more accurate and timely data on social and economic outcomes and conducting independent evaluations of projects and country programs provide a basis for ensuring accountability and, more importantly, learning from experience.

          The Bank has, in the last few years, significantly increased its focus on monitoring the quality of implementation, sustainability, and development outcomes of the programs it finances. Its monitoring and evaluation systems have been strengthened to more comprehensively capture the poverty impact of its policy and investment lending as well as its advisory services. This will enable it to more closely track its progress toward meeting the Millennium Development Goals (MDG).

Financing the Poverty Removal: Efforts by World Bank:

          The World Bank is a cooperative institution that mobilizes financing by means of outright contributions from the richer member countries for IDA, and by borrowing from the international capital markets for IBRD. It channels these resources for the benefit of the poor in borrowing countries. The clients of IDA are the poorest countries, who usually cannot afford to borrow on commercial terms. IDA offers concessional, no-interest loans (or credits) to the poorest countries, repayable in 35 to 40 years after a 10-year grace period..

          The clients of IBRD, on the other hand, are generally the middle-income countries and, because of the limitation on IDA resources, some of the larger low-income countries that are deemed creditworthy for borrowing from World Bank. IBRD (World Bank) offers loans at near-market terms but with long maturities.

Role of World Bank in India:

          The World Bank has given a large financial assistance to India for economic development. Special mention may be made of the assistance World Bank has given to India in the development of infrastructure such as electric power, transport, communication, irrigation projects and steel industry. For a long period, India was the signal largest borrower from the World Bank.

          The World Bank has been aiding India with every possible incentive right since its inception. The World Bank works in collaboration with a number of development associates such as the government of India, the bilateral and multilateral donor organizations, nongovernmental organizations (NGOs), and the private sectors to bring about an overall welfare of the Indian economy. The World Bank operates with the help of eminent academics, scientists, economists, journalists, and teachers, all of those who are sincerely involved in the execution of various development projects designed to bring about improvement in the Gross Domestic Product of India.

          The World Bank not only implements its own developmental schemes but also finances various other programmes. One of the most effective and well-organized development plans formulated by the World Bank in collaboration with the Indian government and civil society is the Country Assistance Strategy (CAS), introduced in the year 2005. CAS was incorporated in order to explicit the nature of the assistance provided by the World Bank to the developmental programmes in India by offering finance in terms of various loans or credits, which are usually interest-free.

Country Assistance Strategy

          This plan has been successfully carried out for the past many years and is still in the process. The CAS plan of the World Bank focus upon certain facts like-

·         Ensuring a notable infrastructural development

·         Proper environment for the betterment of the industrial units

·         Providing special benefits to the poor and disadvantaged class of people

·         Ensuring a sustainable growth in India's economy

Research Study of the World Bank

          There are certain research studies conducted under the World Bank, which gives us a clear idea of the Role of World Bank in India. Some of these studies are:

1.     The World Bank presents study on the review of various policies designed for the economy of India by the Country Economic Memoranda.

2.     The public expenditure review, that is, the financial disbursement made by the development programmes in India is also reported by the research department of the World Bank.

3.     The World Bank is concerned about the environmental issues faced by the industrial units and other developing sectors in India and presents a study on that.

4.     The research study of the World Bank also depicts a report of various events organized by the government, media, and civil society organizations on the developmental issues of India.

The role of World Bank for India can be narrated as under:

Founder-Member:

India is a founder-member of the Britten Woods twins, i.e., the IMF and the World Bank. It has a permanent place on the Bank’s Executive Board.

Loans:

India has been the largest recipient of development finance from the World Bank. India’s shares in the Bank’s total lending to all countries in 1988, was 15%. In 1980-81, the World Bank granted loans worth Rs. 139 crore to India which increased to Rs. 395 crore in 1985-86 and to Rs. 1992 crore in 1999-2000, and it increasing every year.

 Assistance forms IDA:

World Bank’s subsidiary Institution International Development Association (IDA) provides loans from its soft window. In 1980-81, India received loans of Rs. 522 crore from IDA. This amount increased to Rs. 1198 crore in 1985-86 and to Rs. 3464 crore in 1999-2000, and it is increasing every year.

Purpose of Loans:

The World Bank’s assistance to India has been mainly for development purposes. The major projects financed by the Bank are railway, generation of power, multipurpose projects, development of aviation, iron and steel industry, coal, mining, agriculture, telecommunication, etc. Besides this, the World Bank has also extended loans to financial institutions like Industrial Development Bank of India (IDBI) and Industrial Credit and Investment Corporation of India (ICICI).

Assistance from Aid India Club:

The World founded Aid India Club in 1950, to provide massive assistance to finance India’s development plans. Aid India Club is a consortium of the major lending countries, such as, UK, USA. Germany, France, Japan Canada, etc. The Aid India Club provided financial assistance to India to the tune of Rs. 1999 crore in 1980-81, which increased to Rs. 2552 crore in 1985-86 and to Rs. 9208 crore in 1999-2000.

Technical Assistance:

The World Bank has also provided useful technical assistance in Indians development plans. It has sent a number of missions to India to evaluate the working and progress of her five year plans.

The World Bank: Criticism:

          It is alleged that the Bank charges a very high rate of interest on loans. For example, some of the loans which India has received in recent years bear an interest of 53.4 per cent including the commission at 1 per cent which is credited to the Bank’s special reserves.

          The Bank’s insistence, prior to the actual grant of loan, on the country having the capacity to transfer or repay, is open to criticism. The Bank should not apply orthodox standards to judge the transfer capacity of any borrowing country. Transfer capacity follows rather than precedes the loan. The financial help given by the Bank does no amount to more than a drop in the big ocean of financial requirement so essential for various development projects.

Conclusion:

          It may be said that the World Bank has not come up to the expectations of many nations. Nevertheless, it has been instrumental to a very large extent in initiating and accelerating the work of economic reconstruction and development in different countries. No doubt, India has derived immense benefit from the World Bank.

          The Bank may have failed to finance most of the development projects, but it should be remembered that it has financed quite a large number of them which have proved a notable success. The Bank has also played a significant role outside financial matters by serving as a mediator between different countries on major economic and political issues. For instance, its help in the solution of the Indus Waters between India and Pakistan and the Suez Canal dispute between the UK and the UAR has been invaluable.