World Bank

What It Means

The World Bank Group, commonly called the World Bank, is an international organization that helps poor and developing countries build their economies. It makes loans to these countries and provides financial assistance and supervision, with the overall goal of reducing poverty through the promotion of free-market capitalism (an economic system in which private individuals own most businesses and the economy operates with little government interference).

The World Bank is related to the United Nations (an organization of countries that promotes friendly international relations, peace, and security), but it is not directly accountable to it. As with the United Nations (UN), the World Bank consists of member countries, and each has some voting power in the organization. Most countries in the world belong to the World Bank, but it is dominated by the wealthiest countries.

There are two main components of the World Bank, the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The first focuses on helping middle-income countries, primarily through loans, and the second focuses on helping the world’s poorest countries through no-interest loans (interest is a fee charged for borrowing money) and other forms of assistance.

While the World Bank is the largest source of financial assistance for the developing world, it is also one of the main forces (along with the International Monetary Fund and the World Trade Organization) responsible for shaping global economic priorities. It is sometimes criticized for serving the interests of the United States and other powerful countries rather than the interests of the countries it is supposed to be helping.

When Did It Begin

The World Bank was established in 1944, during the United Nations Monetary and Financial Conference at Bretton Woods, New Hampshire. This conference, commonly called the Bretton Woods Conference, was a meeting of 44 representatives of different states or governments that took place as World War II (1939–45) was winding down. The purpose of the meeting was to discuss solutions to the financial problems that the world would face once the war had concluded. In addition to deciding on the establishment of what would become the World Bank, the Bretton Woods talks led to the formation of the International Monetary Fund, which oversees exchange rates (how much one country’s currency is worth compared to that of other countries) and debts between different countries, among other financial matters. Together the World Bank and the International Monetary Fund are often called the Bretton Woods Institutions, or BWIs.

In its early years the World Bank was primarily focused on helping Western European countries rebuild after the devastation of the war. In the 1950s it began to focus more on the needs of developing countries. Initially it helped with constructing important public systems such as roads, dams, airports, and water and sewage systems. In subsequent decades the World Bank became more concerned with sustainable development (that is, promoting economic development that creates businesses, institutions, and infrastructure that allow for both long-term economic growth and a healthy natural environment) and with reducing the enormous income gap between rich and poor countries.

More Detailed Information

The World Bank generates money for its projects in three main ways: through contributions of capital (money and other resources) from member countries, by collecting interest on the loans it makes, and by selling government-issued securities on various world financial markets. (When people buy such securities, they are loaning their money to the government, which guarantees to pay back the original amount plus interest.) It uses this money to make loans, give grants, and provide a various types of consultation and assistance to developing countries. In its capacity as a lender to poor countries, it often has the power to make its loans conditional, requiring that the country make specific governmental changes that promote free-market capitalism.

The World Bank’s two main components are the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The IBRD offers loans to countries that qualify for credit (which means they have the means to pay back loans). These are nations of middle-income levels rather than the poorest of the world’s countries. The IDA is responsible for helping the poorest countries, which would not otherwise qualify for loans. Countries served by the IDA often have access to no-interest loans and assistance in the areas of education, health care, and development of infrastructure (large-scale public projects such as roads and dams) and communications capabilities.

The World Bank Group includes three other agencies: one that helps businesses in developing countries, another that provides guarantees for the investors who contribute money to the World Bank, and a third that helps settle disagreements between investors and the countries to which they lend money.

There are more than 180 member countries of the World Bank, and each country is represented equally in the organization’s governing body, the board of governors. The governing body does not dictate the majority of the World Bank’s policies, however. This is done by 24 executive directors, who are appointed according to global influence. The United States, the United Kingdom, Germany, France, and Japan are each represented by one executive director, while other countries are grouped together into regions, each of which is represented by an executive director. The president of the World Bank, furthermore, has always been a U.S. citizen (often a former official of the U.S. government), and the organization’s headquarters are in Washington, D.C.

Additionally, while some votes are held in which all member countries have an equal say, many of the important votes about World Bank policy are conducted in proportion to each country’s financial contribution to the organization. In this arena the United States outstrips all other member countries by a wide margin. At the beginning of the twenty-first century, the United States controlled more than double the votes of the second most influential country, Japan, and it held enough voting power to block most major decisions on its own. Because poor countries, which receive most of the aid, do not contribute much financially to the World Bank’s operations, they have little influence over its policies.

World Bank staff members in many developing countries work closely with government advisers to shape policy (plans and procedures for achieving certain goals) and make other financial decisions. The World Bank also has ties with the various financial markets in the world, and it serves as a liaison between organizations in developed and developing countries.

Recent Trends

Some analysts claim that the World Bank is partially responsible for economic stagnation in much of the developing world. In the 1980s difficult world-economic conditions made many poor countries unable to repay the loans made to them by the World Bank. In an attempt to create economic growth and make these countries solvent (which means having enough money to pay back debts), the World Bank forced the countries’ governments to enact spending limits and cuts, including cuts in the areas of education and health care. The World Bank also typically forced these countries to adopt free-market mechanisms such as the deregulation of the financial industry (that is, cutting down on government regulation of business), the transfer of government-controlled businesses into private hands, and the discontinuation of price controls (limits on the prices of certain goods). Often conditions worsened as a result of these measures.

Similarly, after the collapse of the Soviet Union in 1991, the World Bank played a major role in helping Central and Eastern Europe with the transition from communism (in which the government controls the economy) to capitalism (in which private individuals own most businesses). In many cases the World Bank forced state-run industries to close, but when this happened, unemployment rose dramatically. The World Bank’s free-market reforms increased inflation and reduced the quality of life in several of these countries.