IBE/U4 Topic 2 World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programs. It comprises two institutions: the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The World Bank is a component of the World Bank Group, and a member of the United Nations Development Group.
The World Bank’s official goal is the reduction of poverty. According to its Articles of Agreement, all its decisions must be guided by a commitment to the promotion of foreign investment and international trade and to the facilitation of Capital investment.
During World War II, in the year 1944, a decision for the establishment of two institutions was taken in a Conference held at Bretton Woods in America. The institutions to be established were
(1) International Monetary Fund and
(2) International Bank for Reconstruction and Development or World Bank.
The objective of IMF was to stabilize exchange rates by removing temporary balance of payments deficits. On the other hand, the objective of the International Bank for Reconstruction and Development (IBRD) or the World Bank was the reconstruction of war-ravaged economies and provision of necessary capital for the economic development of underdeveloped countries. The bank was established in 1945 and started its function in June 1945. The World Bank is an inter-governmental institution and corporate in form. Its capital is wholly owned by its member countries.
Objectives of the World Bank
The main objectives of the World Bank are:
(1) Reconstruction and Development
The main objective of the bank is to reconstruct the war devastated economies like Britain, France, Holland etc. and to provide economic assistance to underdeveloped countries like India, Pakistan, Sri Lanka, Burma etc.
(2) Encouragement to Capital Investment
An other important objective of the Bank is to encourage private investors to invest capital underdeveloped countries, by means of guarantee of participation in loans and other investment made by private investors and when private capital is not available on reasonable terms, to supplement private investment by providing on suitable conditions finance for productive purposes out of its own capital, funds raised by it and its other resources.
(3) Encouragement to International Trade
The third objective of the bank is to encourage international trade. It aims at promoting long-range growth of international trade and maintenance of equilibrium in member’s international balance of payments, so that standard of living of the people of member-countries is raised.
(4) Establishment of Peace Time Economy
The fourth objective of the Bank is to help the member-countries changeover from war-time economy to peace-time economy.
(5) Environmental Protection
Global environmental protection is also an objective of Bank. To this end, World Bank gives substantial financial assistance to those underdeveloped countries which are engaged in the task of environmental protection.
(6) Maintenance of equilibrium in balance of payment
To promote long term balanced growth of international trade and the maintenance of equilibrium in balance of payments of member countries by encouraging long term international investment so as to develop productive resources of members and thereby raising its productivity, the standard of living and labor conditions.
Capital of the World Bank
Initially, the authorized capital of the World Bank was to the tune of $ 10,000 million, which was divided into 1,00,000 shares of $ 1,00,000 each. All these shares were made available to member countries only. As per the system of the Bank, out of each share.
(a) 2 per cent in payable in gold or U.S. dollars;
(b) 18 per cent of the subscription is to be paid in terms of member’s own currency;
(c) The remaining 80 per cent of the subscription is not immediately collected from the members but can be called up by the Bank as a Callabh fund whenever it requires to meet its obligation. Thus it is observed that only 20 per cent of the total capital is called by the Bank and the same is available for its lending purposes.
The capital of the World Bank has also been increased time to time with the consent of its members. After the admission of new members, the authorized capital of the Bank has been increased to $ 171 billion. In its annual meeting held in September 1983, the World Bank decided to go in for a selective capital increase of 8.4 billion dollars and accordingly the share holding of different member countries were suitably adjusted.
The following are the major achievements of World Bank:
The total membership of the Bank has increased from a mere 30 countries initially to 68 countries in 1960 and then to 151 countries in 1988.
(ii) Increase in Working Capital
The bank has been increasing its Working Capital from time to time. Accordingly, it has raised its capital by selling its securities and bonds at different times to different countries like USA, UK etc. Accordingly, its capital has trebled during the past 40 years. In September, 1987, the Bank approved on increase in general of 74.8 billion dollars in its capital and thereby raised its lendable resources to 170 billion dollars.
(iii) Increase in Subscribed Capital
The Bank has also raised its subscribed capital from $ 10,000 million initially to $ 19,300 million in 1960 and then to $ 91,436 million in 1988. As a result of following such process, the lending capacity of the Bank has expanded.
(iv) Loan Approval
The amount of approval of loan to the member countries has been increasing and accordingly the amount increased from $ 659 million in 1960 to $ 14,762 million in 1988.
(v) Loan Disbursement
The volume of loan disbursement by the Bank among its members has also been increasing and accordingly the volume of loan disbursement has increased from $ 544 million in 1960 to $ 11,636 million in 1988.
(vi) Total Loan
The World Bank has advanced a significant amount of loan to its member countries. During the past 40 years of its existence since inception (up to June, 1989) the Bank had lent to the extent of $ 1,36,596 million to 115 member countries for various developmental projects.
(vii) Loans for Productive Purposes
The World Bank is granting loans to member countries for productive purposes, especially for the development of agriculture, irrigation, electricity and transportation projects. Economic development of a country depends on the basic infrastructure. Therefore, the Bank is lending for these aforesaid projects for this rapid economic development.
(viii) Technical Assistance
As per provisions of the Bank, the World Bank has been sending technical missions to member countries for collecting necessary information regarding the functioning of their economies. The Bank has been giving technical assistance to its member countries in order to solve their complicated economic problems and for assessing economic resources of the country and setting up of priorities for development programmes.
(ix) New Loan Strategy
In recent years, the Bank has introduced new loan strategy for giving more emphasis of financing different schemes for influencing the well being of the poor masses of member developing countries, especially for the purpose of agricultural marketing, forestry, fishery, development of feeder roads in rural areas, rural electrification, spread of education in rural areas etc. In respect of industry, the Bank made provision for direct lending to industries, more emphasis on heavy industries, fertilizer industry, labour intensive small scale industry etc.
(x) Assistance to Underdeveloped Countries
(a) Financial assistance for the promotion of development;
(b) Developing ‘third window’ to advance loan at lower rate of interest to the underdeveloped countries;
(c) Providing technical assistance;
(d) Organizing meetings of creditor countries for providing loan to developing countries such as Aid India Club etc.;
(e) Setting up of subsidiary financial institutions like International Finance Corporation (IFC), International Development Association (IDA) for providing soft and concessional finance to developing countries etc.
(xi) Settlement of Disputes
The World Bank has been playing an important role in the settlement of international disputes successfully for the promotion of world peace. Accordingly it has resolved Indus river water dispute between India and Pakistan and Suez Canal dispute between England and Egypt.