The World Bank of the Unheard - Essay Example

The World Bank of the Unheard World Bank (WB) has over the years become known to some of its proponents as a credit world club (Birdsall 50). It resembles a type of a credit union where its members are countries (Birdsall 50). Since its inception, WB has turned into a union where Western countries contribute to transfers from Western to the developing countries (Birdsall 51). Based in Washington D.C., it is comprised of developed and developing countries. All have a say, though an unequal one. Though first created to assist the Western European countries after the World War II, WB has become involved in a wide array of development projects. Despite the criticism and relatively powerless voices of the poor countries, WB will continue to service the poorest of this planet. WB architects envisioned a system that would benefit the poor. John Maynard Keynes, Harry Dexter White, and others at Bretton Woods in 1944 designed this institution to fully include the Western world into its functioning. They envisioned that the Western countries would be full members and partners in helping the developing countries. WB was not conceived as a development agency (Birdsall 51). However, WB became a global credit club, where developing countries rely on contributions from the wealthy (Birdsall 51). Later, another club for the rich was created: the International Development Association (IDA), where only rich countries can contribute and become members (Birdsall 51). WB was intended for the “war -ravaged countries of Europe—and the poorer countries of Latin America, and Africa” (Birdsall 51). WB was supposed to finance investments that would enable these countries to “prosper as partners in this open system, in the interests of global stability and security” (Birdsall 52). The idea was that all countries should have a say. The architects believed that the voting power should be related to the members’ deposits and guarantees, which would in turn be related to members’ financial capacity (Birdsall 53). They believed that “members taking greater risk ought to have a substantial say in the rules and practices of the club, if only to secure their continued financial commitment” (Birdsall 53). However, only a few countries were willing to undertake such great risk. Still, they wanted to avoid a system in which there would be a one-to-one relationship between financial capacity and influence in WB. As a result, the architects introduced basic votes. They were distributed equally to all WB members. Each member has 250 votes irrespective of shares. Additional shares are won through the amount of shares owned in WB (Birdsall 53). Double majority voting is required to get anything changed in the Articles of Agreement (Birdsall 53). The country taking the largest risk, which was the US at the time of the WB inception, was given the right to “define the key boundaries within which the club would operate” (Birdsall 53). The US also had a duty to ensure all WB members had a say, regardless of their political and economic influence. In the beginning, there were only a few debtors. In the 1947–48 period, WB made loans to only six countries. These were France, the Netherlands, Denmark, Luxembourg, Chile, and India (Birdsall 54). Now, the International Bank for Reconstruction and Development (IBRD) and the IDA alone have around 150 countries as their debtors (Birdsall 54). However, WB benefits the rich. WB capital comes from its wealthy contributors. Largest contributors are the U.S. government, and the United States, Japan, and Germany (Birdsall 51). They are also its guarantors. They back all of the borrowing from WB, regardless of the outcome of the loan (Birdsall 51). WB has had a history of very low default rate, implying that with low levels of the deposits, it can “can borrow outside at good rates and lend at good rates to its less wealthy members” (Birdsall 51). The type of a global credit agency envisioned by its architects never happened. Instead, the developed countries benefit from low credit rates. Despite its membership disadvantages, WB is a development agency. Its mission today is reduction of global poverty (Birdsall 52). It reduces poverty in borrowing countries, which is not the same as “supporting and encouraging global prosperity and security through trade and investment in an open, liberal global economy” (Birdsall 51). However, the two are not completely uncorrelated either. Market-led growth and poverty reduction reinforce each other (Birdsall 52). The main difference between the two is how wealthy countries perceive their role in the functioning of WB. The architects perceived the role of rich countries to be one of common benefit for everyone. Despite the vision of its creators, WB contributors see their presence and contribution as help to others, less fortunate ones (Birdsall 52). The World Bank, also known as the Bank Group, is composed of five institutions (The World Bank 2). The International Bank for Reconstruction and Development (IBRD) lends to governments of middle – income and creditworthy low-income countries. The International Development Association (IDA) provides interest-free loans, known as credits, and grants to governments of the poorest countries. The International Finance Corporation (IFC) supports the private sector investments; the Multilateral Investment Guarantee Agency (MIGA) provides guarantees against losses caused by noncommercial risks to investors and lastly, the International Centre for Settlement of Investment Disputes (ICSID) is in charge of investment disputes (The World Bank 2). In spite of the fact that WB is made of five institutions, only the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA) officially constitute the World Bank (The World Bank 2). Each of the five institutions has its own founding document or Articles of Agreement (The World Bank 7). A country willing to become a member must sign these documents and fulfill their requirements. Not all countries joined each of the five institutions. IBRD was joined by 185 countries and ICSID by only 143 by 2007 (The World Bank 7). Decisions are made by the Boards of Governors and the Boards of Directors, which are governed by the member – countries (The World Bank 7). The original institution was IBRD. IBRD was established in 1944, and it was the first WB institution (The World Bank 12). As mentioned previously, it has the largest number of countries as members, largest amount of staff members and the broadest mission. It was IBRD that was first in charge of reconstructing the war – torn Europe (The World Bank 12). Today it provides less developed countries with loans, guarantees, and analytical and advisory services (The World Bank 12). These countries must be credit worthy in order to obtain loans. However, the loans provided are in larger volumes, “with longer maturities, and in a more sustainable manner than the market provides” (The World Bank 12). IBRD invests in areas in which the private sector will not. These areas are long-term human and social development needs, provision of support during crisis periods, creation of appropriate investment climate and institutional reforms which come as conditions on loans (The World Bank 12). IBRD functions like an investment bank. Most of its capital is raised on the global financial markets (The World Bank 13). It is an AAA-rated financial institution (The World Bank 13). But unlike ordinary financial institutions’, this one’s shareholders are sovereign governments. Unlike in financial institutions, its member borrowers can voice their opinion about the IBRD policies (The World Bank 13). Like the financial institutions, IBRD also “provides loans, guarantees, risk management products, and analytic and advisory services” (The World Bank 13). However, its objective is not profit maximization. On the contrary, its objective is development (The World Bank 13). Despite its objective, it has earned a positive net income since 1944 (The World Bank 16). The borrowers need to have at least some access to private markets in order to be credit worthy at IBRD. Some countries are very poor per capita and thus eligible for IDA funding, but because they are creditworthy, they are also eligible for funding under IBRD (The World Bank 13). Once countries reach per capita income above the middle income, as specified by the World Bank, the country is no longer eligible for aid from IBRD (The World Bank 13). The Bank Group is one of the largest sources of funding for the developing countries (The World Bank 1). The strategies for supporting the poor and reducing poverty are “supporting the creation of a favorable investment climate, and empowering poor people” (The World Bank 2). Since the last twenty years, its focus has changed on the weakest members of societies across the globe (The World Bank 3). According to the World Bank, “issues related to gender, community-driven development, and indigenous peoples are now integral to the Bank Group’s work” (The World Bank 3). WB has become “the world’s largest funder of education, the world’s largest external funder of the fight against HIV/AIDS” (The World Bank 3), as well as “a leader in the fight against corruption worldwide” (The World Bank 3), a supporter of debt relief, “the largest international financier of biodiversity projects, and the largest international financier of water supply and sanitation projects” (The World Bank 3). IDA is in charge of assisting the poorest countries. Unlike IBRD, IDA was started in the 1960’s (The World Bank 17). IDA provides credit and loans to the poorest countries. The interest is zero and a country is given a 10-year grace period before repayment of principal must be started (The World Bank 17). Loans are repaid over 20, 35, or 40 years (The World Bank 17). WB has been under attack. The leftists criticize it for promoting the interests of the financial and corporate sectors (Birdsall 52). They argue that WB does not promote the interests of the voiceless and doubt its legitimacy. Those on the right, on the other hand, criticize it for still existing, though its relevance has been lost (Birdsall 52). They argue that flows of private capital to the developing world have increased. China and India have become the world reserves of money. Thus, they question the “use of public resources to subsidize loans in those settings” (Birdsall 52). According to those on the right, private markets and private transfers are more efficient and effective than public (Birdsall 52). Then there are those at the center, as well as inside and outside the World Bank. They criticize WB: for its lack of effectiveness in attacking poverty in the poorest countries, for its lack of agility in responding to the real demands of its large- and middle-income borrowers (and thus its apparent loss of relevance), and for its loss of institutional focus as it responds to ever-expanding demands from (ironically, some would say) its more powerful members: demands to do everything from assessing needs in Gaza and Iraq, to managing a global program to “fast-track” education gains, to piloting cross-border trade in carbon emissions rights (Birdsall 52). WB is increasingly seen as a channel for expression of Western goals, which sometimes conflict with the needs and goals of the developing countries. However, Gilpin claims that the fault lies with the member countries and not WB, as they control this institution (230). Some argue that some developing countries no longer need loans. Developing countries such as China and India, as well as many middle - income countries, have developed capital markets (Birdsall 56). Their needs for WB loans are not as great as in case of countries with no capital markets. Moreover, not only are these countries able to finance their own projects, they are also sometimes sources of capital for contributors to the WB capital. China transfers a lot of its reserves to the US. It is not a net receiver of capital. However, these markets are not developed enough. They cannot withstand business cycles as well as they should. In an event of a global crisis, borrowers in middle income countries are at a great risk (Birdsall 56). The poor lose access to needed funds. Global movements for justice have increasingly been requiring justice and representation on behalf of WB. Representation and voice in democracies and in international clubs such as WB are seen as powerful instruments for “promoting sustainable growth and reducing poverty because they demand accountability and provide checks on abuses of power” (Birsdall 54). Political freedom in a democracy has become associated with the economic model of open markets, which is more in line with the original mission of the WB architects (Birsdall 54). These pressures are real, and WB has acknowledged their existence (Birsdall 54). WB has been considering reforms. A demand for reforms at the bank has increased. Reforms in terms of larger representation have been called for. Greater representation is meant in terms of “voting power, board membership, staffing, and so on—of developing country borrowers, who are the members most affected by bank policies and practices” (Birdsall 54). The president of WB in 2007 called for an implementation of greater representation among member countries and as a result also more legitimate system (Birdsall 54). He also wanted the “bank governors to call for an independent assessment, to be made public, of voting shares and board representation, including options for changes” (Birdsall 54). He wanted current presidents to commit to open and transparent process for selection of a successor; use of double majority voting on more issues to create an incentive for borrowers to become active in debating institutional issues; a trust fund for global public goods in which developing countries would have at least 50 percent of the votes in order to make them owners of their debts; and a new framework for IDA to increase the feeling of ownership of poor countries (Birdsall 54 – 55). These reforms would return WB to the framework envisioned by its architects. Borrowers and lenders would become more equal members, and loans would be seen as ventures and not help to the needy. However, these reforms would not imply an equal say in determining whether loans would be given out and to whom (Birdsall 55). This would be decided by the wealthy countries who are the largest depositors. WB is not to be blamed for all its failures. WB oftentimes imposed policies along with loans it gave out. However, these policies turned out to be inefficient. Policies were not implemented, or they disintegrated as soon as the donors stopped supervising the project. As a result WB is now committed to increasing country ownership of policies and reforms. However, since WB is in many cases not seen as legitimate and something they have a share in as well, developing countries leaders find it hard to implement WB policies and convince their own populations that they are the true owners of these projects (Birdsall 55). Many voters in developing countries dislike WB as its policies always create losers, and not only winners (Birdsall 56). Though imperfect, the world needs institutions like WB. According to the WB Report, an average person in some countries earns $110 a day (The World Bank 1). However, in others, the situation is gloomy. An estimated 2.6 billion people or almost 50 percent of the developing world’s population, earn less than $2 a day (The World Bank 1). Among these, almost 1 billion earn less than $1 a day (The World Bank 1). Though some might argue that living expenses are also much lower in these countries, the fact is that $1 a day is still not enough. In developing countries, around 33,000 children die every day from diseases which are usually avoided in wealthy families in these same counties, or among average persons in the Western world (The World Bank 1). Moreover, every minute at least one woman dies in childbirth (The World Bank 1). In the Western world, only a few women die in childbirth every year. An estimated 100 million children, mostly girls, are kept out of school because of poverty (The World Bank 1). WB funds some of the projects directed at these groups. Without WB, the vulnerable groups above would most likely not be able to help themselves. The poor cannot escape poverty because they no longer want to be poor. The process is too complicated and only a few manage to overcome the obstacles. The World Bank named some obstacles: Inadequate infrastructure hinders access to health care, education, jobs, and trade; poor health and lack of education, in turn, deprive people of productive employment; and corruption, conflict, and poor governance waste public resources and private investment. In the face of such obstacles, the challenge of reducing poverty is both enormous and complex (The World Bank 1). To make things worse, WB will be needed by an ever larger number of persons, as the world population is supposed to increase by another 3 billion over the next 50 years (The World Bank 1). Most of these people will be born in developing countries. To address the future needs, WB has designed the Millennium Development Goals. These are: eradication of extreme poverty and hunger; universal primary education; gender equality and empowerment of women; reduction of child mortality; improved maternal health; HIV/AIDS, malaria, and other diseases reduction or elimination; and environmental sustainability and development of a global partnership for development (The World Bank 3). Activities are diverse. They include support for sound governance, sustainable development, and inclusive delivery of social services, improved infrastructure, private sector development, and job creation (The World Bank 3). Success so far must not be forgotten in light of many weaknesses an organization such as WB is faced with. Its size, institutional organization and objectives sometimes conflict with each other. Because of its size, it is hard to ensure all countries are heard. Because of its dependence on rich countries, WB is weak when faced with interests of these countries. Objectives are more generous than objectives of any commercial bank, but sometimes they cannot be fulfilled as transparently as the poor populations would like. It must not be forgotten that some of these countries and projects WB has invested in would have never received funding from commercial banks. Projects sponsored by IDA would most likely never be eligible for funding at Bank of America or Erste Bank. It must also not be forgotten that WB is trying to improve. Transparency and legitimacy are issues WB has been trying to deal with. WB is trying to include the powerless in the process. Its agencies are trying to give ownership of projects over to the beneficiaries of these projects, so that chances of projects’ success increase. In the future, WB will continue playing a significant role in the developing world. The world population is expected to keep on increasing. However, the planet’s resources will not. Thus, WB will need to step in and provide creative and humane projects to assist the poor who, as already mentioned, in most cases need help in order to escape poverty. To summarize everything, WB has since its inception moved away from helping Western Europe to helping the poor. Though oftentimes criticized, WB has been undergoing changes, which have made it relevant for us and the future generations. Works cited Birdsall, Nancy. “The World Bank: Toward a Global Club.” Center for Global Development, May 2007. Web. 26 Apr 2012. Gilpin, Robert. Global Political Economy: Understanding the International Economic Order. Princeton: Princeton University Press, 2001. Print. The World Bank. A Guide to the World Bank. Washington D.C.: The World Bank, 2007. Print. Read More