The World Bank Group is one of the largest, oldest and best known international institutions today, yet few people can tell you what it does. So what actually is it and why should non-policy members of the public care?
The World Bank is an agency headquartered in Washington DC, which was founded after World War Two. While it is frequently referred to as “The World Bank”, this also adds to the confusion around what the institution is and does. The “World Bank Group”, is a body of financial institutions whose job is to provide financial solutions and consulting services to the banks shareholders. It’s shareholders are sovereign nations who commit financial support to the bank in exchange for shares. The greater the financial commitment, the greater the shareholding and voting rights held.
It is not a “bank” in the classical sense, nor does it provide services to the “world”.
The World Bank was originally created as one entity, the International Bank for Reconstruction and Development (IBRD). This remains the core entity when people talk about “The World Bank”. When the IBRD was created, its aim was to help rebuild nations (largely European) who had been devastated by World War Two, whilst also providing financing for the worlds poorest countries to support economic development. To achieve these roles, the bank tried to solve a single issue for these two categories of nations: the lack of international finance available.
While most of the original financing was from the American government, the banks day-to-day lending is actually financed by institutional investors such as pension funds, insurance companies, endowments and central banks. The bank provides loans to its country members, by raising debt itself in the form of loan notes (aka bonds). As all the country members of the World Bank provide a guarantee to investors that any bond issued by the bank will always be repaid, the World Bank notes are consistently AAA rated (which indicates that default is theoretically close to 0%). This allows the bank to borrow money at the same rate as the US federal government.
The IBRD uses the money that it raises in financial markets to provide “concessionary loans” to the banks members. These loans are concessionary because they are at a lower interest rate than the country would be able to secure for itself in the global market (assuming it could even raise the money). But in order to access this much cheaper source of financing, the country which receives the financing must agree to a series of conditions about how the money can be used. In recent years, the World Bank has been criticized heavily for these “conditions” which it sets on borrowers, especially given that most countries that currently borrow from the Bank are seen as developing, post-colonial nations. But this has not always been so. In fact, one of the earliest and largest bank loans actually went to France, shortly followed by Belgium and other European nations who desperately needed US dollars in order to import food and basic goods from the USA after WWII. The Banks first ever loan went to Chile.
The second entity referred to as the “World Bank” is called IDA, the International Development Agency. Founded after the IBRD, the aim of IDA is to provide loans on an even more generous set of financing terms than the IBRD can. Understandably this makes IDA a very attractive option for impoverished governments and so its financing is restricted to only the world’s poorest countries.
As a further contrast between the work of IDA and the IBRD, the loans made by IDA can be considered “loss making”. This is because the interest paid is so low, and the duration of the bond is so long, that when counting for inflation the loan is effectively a grant (i.e. free money). The IBRD is totally different. The loans from the IBRD will all generate a profit for the Bank (i.e. the return exceeds the cost of the IBRD’s own borrowing, plus staffing costs for the project). Therefore, the IBRD provides a subsidy to IDA, so that all the money made by the bank is re-invested in providing either grants to the poorest nations in the world or more low-cost financing for other developing nations.
While the IBRD and IDA represent the core of what we call “The World Bank” today, there are three other entities that are also “World Bank Group” and which deserve a brief explanation.
The first is the International Finance Corporation (IFC). This entity provides direct investment into companies, not to governments. Its sole purpose is to promote the creation of a dynamic private sector inside developing world economies. It does this by issuing loans to companies in emerging markets, sometimes making direct equity investments in funds and even providing what is called “anchor financing” for private equity/venture capital funds, who solely invest in these markets.
The second is the Multilateral Investment Guarantee Agency (MIGA). MIGA’s job is not to make investments of any kind. Rather, its job is to provide guarantees to banks and investors who are looking at projects and businesses in developing markets. The most famous of MIGA’s products is its political risk insurance. This is where MIGA will guarantee that a company’s asset or investment, will not be taken (“appropriated”) once it has been made/brought to the developing country. As an example, if Rio Tinto builds a mine in the Democratic Republic of Congo for $1bn, MIGA will ensure that if the Congolese government nationalises the mine, Rio Tinto will get all of its investment back.
The last is the International Centre for Settlement of Investment. This body acts as a negotiation tool between developing countries and large multinationals, where there may be a disagreement over the implementation of a pre-agreed contract or a concern that either party is not acting in good faith.
While these descriptions are probably too long already, they provide only a snapshot of what the bank itself does.
In sum, the Banks various entities ensure that over $60bn a year is directly invested in developing countries. But that is only the Banks direct contribution. Given that the Bank usually co-invests with the private sector and host governments, the true figure is likely to be between $100-$200bn, depending on which assumptions one makes. All together Multilateral Development Banks, including the EBRD, IDB, ADB, AfRD and the World Bank, provide over $300bn of financial assistance to help countries develop.
Today global investment in emerging markets is roughly 1/3rd of what is is needed annually ($1trn funded against $3trn required in Asia alone). The World Bank clearly cannot do all of that on its own. But for all of its challenges and the valid criticisms raised, the bank is one of the most valuable assets for fighting poverty in the International system.
Hopefully you can now say you know a little more about it.