World Bank

In the years before World War II the major colonial powers undertook development of their possessions, mainly on a piecemeal basis. In general, this took the form of specific projects aimed at expanding their output of domestic products, such as agriculture and mining, or improving transport facilities to bring these products to ports to be shipped mainly to the developed world. For example, the railroads in Africa ran from the interior to the coastal ports, but intra-African roads were virtually nonexistent.

BEGINNING OF MODERN ECONOMIC DEVELOPMENT

World War II revolutionized attitudes on both sides. Objectives were broadened to include overall development in European colonies to benefit more of the local inhabitants. But meanwhile, the local people wanted to end the dominance of the colonial governments. Although political control shifted to many of the local populations, change came much more slowly in the economic and financial spheres because the emergence of globalization made it difficult to face down the large multinational banks and corporations, which were no longer offshoots of the ruling country. In brief, local populations felt that they had only changed masters.

Economic development by locals was also hindered by the lack of entrepreneurship, a maldistribution of income, and inadequate local markets. These obstacles were blamed by the locals on the developed world's high tariffs on native raw materials, which, they claimed, cost them more income than they received from direct-aid programs. Hence, other sources of help were needed.

ESTABLISHMENT OF THE WORLD BANK

A major part of the hoped-for assistance came from the World Bank, or, more formally, the International Bank for Reconstruction and Development, which, along with the International Monetary Fund, was set up by the Bretton Woods meeting in 1944. Emphasis was to be on low-cost loans, whereas gifts or grants were still on a country-by-country basis. This changed later with the setting up of two more international multicountry agencies, the International Development Agency and the International Finance Corporation, although the World Bank remained the main source of international funds.

Despite its name, the World Bank is not the ordinary commercial organization, accepting deposits from the public and financing private firms. Rather, it is a multilateral institution owned and governed by national governments. It is unique in that economic assistance in the form of loans below market rates of interest are extended on a multicountry basis, rather than aid being an obligation of a ruling country to a dependency. The bank is not an activist free-market advocate, although top management, originally drawn mainly from the United States and Great Britain, does favor the efficiency of self-adjusting markets. The bank's emphasis gradually shifted from the immediate postwar recovery of war-torn Europe to the need of the poorer members—denoted as "less-developed"—once the main reconstruction was accomplished.

This changeover was hindered by the poorer areas' inferior administrative abilities and financial probity. As a result, the bank had to give both technical assistance and help in establishing the necessary administrative authorities. In 1956 the International Development Agency was created to augment the World Bank's lending powers. This was followed in 1960 by the addition of the International Finance Corporation to help would-be borrowers whose creditworthiness was not up to World Bank standards. This called for a careful assessment, because if land reform were initiated with a shocking maldistribution of income and wealth, it would threaten the country's ruling government, which would likely sabotage the reforms.

In the 1980s the bank tried to speed up the agriculture programs, concentrating on loans for irrigation and drainage, and hoping that the peasant farmers would respond to economic incentives. Later, the efforts went more to growth and equity, such as improving rice yields for the poor. This raised the problem of whether to focus on specific projects, such as rice production, or on developing an entire country.

DEVELOPMENT PROBLEMS

Considering the magnitude of the World Bank's resources, it would appear that as a major creditor the bank could dictate terms to any borrower. Yet, this has not always been the case. For example, having already committed large sums to Brazil over several years, exiting was an impracticality. As the bank's then-president Robert McNamara (b. 1916) put it pithily, Brazil is so big that it could tell the bank to "go to hell," especially because at that time Brazil's annual payments to the bank exceeded the remaining World Bank's income, which was worrisome if Brazil were to default.

After 1986 extensive aid requirements in various parts of the world drained the bank's resources. In famine-struck Africa, the bank had to make emergency loans to avert social instability. Meanwhile, a new group of competitors for bank finance came on the scene following the fall of the Berlin Wall and the splintering of the Soviet Union. Eastern Europe started to press for assistance, asking for 50 percent or more than had been allocated to sub-Saharan Africa. And then there were the debt crises, which were so widespread that they shook even the U.S. economy. Possible widespread defaults by debtor nations threaten even the solvency of the hitherto invincible U.S. megabanks.

While the winds of political change were gathering force after 1960, the economic aspects reached hurricane power after 1990. Before then, and especially before 1977 to 1980, the nations of the developing world were either poverty-stricken or else somewhat better-off, but still poor. But then a new dynamic entered the picture. In effect, the West discovered the developing areas, and since then we can categorize the countries into three groups: the very poor who continued to be very poor, that is, the so-called "basket cases"; the middle group, which had made some economic progress, but still had far to go to reach reasonable well-being; and the "tigers"—mainly East Asian countries whose economies had been among the poorest but now rivaled and in some sectors even surpassed Western nations. The boom in the tiger nations was fed by foreign loans and investments, thanks in part to the low-interest environments in the lending countries.

SOME DEVELOPMENT SUCCESSES

By the early twenty-first century the tigers—Taiwan, South Korea, Thailand, Hong Kong, and Malaysia—had apparently escaped the poverty trap, and India and mainland China, each with over a billion people, managed to improve economic conditions for a significant minority of their population. Their unspeakable poverty was now beginning to disappear.

By 2003 global liquidity increased enough to make for easy monetary conditions. International investors were now willing to take the risks associated with the less-developed countries, and memories of the recent adverse monetary experiences were fading. Net capital flows to the Asian tigers rose to about U.S.$170 billion, the highest level in seven years. Stocks, bonds, and bank loans all recovered. Only foreign direct investment—setting up production facilities owned and/or managed by foreign investors—declined. It was mainly the Asian economies that attracted these funds. The slower progress of privatization, however, was a stumbling block, as was the slowing of the economies of Brazil and Mexico, and the economic crisis in Argentina.

Aided by low interest rates in the developed countries, foreign investors in search of better yields moved in, especially to those countries with faster growth. Dollar reserves rose, and the developing world became a major player in Western financial markets. However, this inflow was towards more volatile investments in the developing countries, with the ever-present threat of a reversal if the economic climate deteriorated. Credit to individuals (mortgages and credit cards) was especially risky. A new world of hope had apparently opened up, and the rush to participate was on.

No longer was economic assistance needed for the tiger countries. Their living standards approached those of some of European countries, as did the more prosperous sectors of India and China. Some tigers, such as South Korea, Taiwan, and Singapore, had accumulated sizeable foreign-exchange reserves, and thus were able to withstand economic adversity. All of their economies were characterized by booms—until a large-scale economic crisis erupted.

DEVELOPMENT STUMBLES

In mid-1997 trouble started with the Thai currency, which then triggered adverse reactions for other hitherto prospering countries such as Brazil and Argentina. Once the threat of a downturn appeared, foreign lenders started pulling out their funds, aggravating the difficulties. Some currencies lost half their values. Many of the once prosperous, who had relied on borrowed funds, suddenly found that they could not pay, and bankruptcies spread. It took some five years, or even longer in some cases, for a reasonable growth rate to reappear. Meanwhile, widespread poverty again became the norm, dashing the hopes of many who had just tasted affluence.

Medium-poor countries, such as those in Latin America, felt the effects of the Asian difficulties too, as foreigners withdrew funds. There, too, borrowed money became flight capital, thereby threatening wholesale insolvency. Some help came from the Federal Reserve Bank of New York, although critics said that the help extended was mainly to avert default of U.S.-sponsored loans rather than to assist the besieged economies to turn back the storm. This feeling caused controversy on both sides, although the idea of default was not abhorrent to the Latins—Brazil had defaulted seven times, Argentina five, and Venezuela nine. The fear that default would close a defaulting nation's access to world credit was belied by history—even the wholesale repudiation of debt in the 1930s did not stop lending in the 1960s and 1970s. The more conservative Anglo-Americans, who were still wedded to free-market beliefs, feared that safety nets to alleviate the adverse turn of the financial sector would make the international agencies into soup kitchens. Fortunately for the debtor countries, the poverty advocates pressured for the rapid disbursement of funds, thereby mitigating the balance-of-payments and debt-repayment problems.

But the accompanying agony built up a backlash that exploded in violence. The barricades went up as activists stormed the World Bank's international meetings in an attempt to disrupt them and get a hearing of their complaints. This reaction was reinforced by the spreading threat of increasingly complex globalism, which would replace centuries of stable, traditional work habits by the "cash nexus" demanded by modernism, accompanied by the migration of businesses to other, foreign locations. Yet, opposing these shifts threatens to end the climb from poverty. As bank supporters point out, a Luddite mentality does not make for economic growth; the required transition will be painful.

SEE ALSO Bretton Woods; International Monetary Fund (IMF); Keynes, John Maynard.

BIBLIOGRAPHY

Kapur, Devesh; Lewis, John P.; and Webb, Richard. The World Bank: Its First Half Century, Vol. 1: History, and Vol. 2: Perspectives. Washington, DC: Brookings Institution Press, 1997.

Marcus, Edward. "The History of the World Bank." Royal Economic Society Economic Journal 112 (February 2002): 119–135.

Edward Marcus