The World Bank was created at Bretton Woods, New Hamshire (USA) in 1944. The goals of this financial institution were to promote global trade, and initially, the reconstruction of post-war-Europe, through simulation of the international flow of the capital.
Since its funding, the World Bank has grown in size and influence as independent numbers of the UN system. Although the World Bank played a marginal role in the rebuilding of Europe; it soon started providing credit to poor countries and has made from them $ 380 billion in loans to nations of the world.
Financing and Lending to and by the World Bank:
In the beginning, the World Bank started as a relatively conservative institution lending under a strict set of criteria intended to support viable investment projects in a world where international capital market was undeveloped. The bank lended money specifically to support development projects, particularly infrastructure.
The World Bank has been financed by governments since its inception. It has lent only to governments, primarily in the developing world. The transfer of wealth from Government to Government was inspired by the belief that the private sector could not bring economic progress to developing countries. It was also believed that the poor countries were poor because they lacked capital.
In 1950, the World Bank stated, “The Bank would prefer to base it’s financing on a national development programme, provided that it is properly worked out in terms of projects by which the objectives of the programme are to be attained”.
Broadening of Activities by the World Bank:
In 1960s, the World Bank began broadening of its activities. In 1960, for example, it created the International Development Association. The Association provided highly concessional credits to the World’s poorest countries. Robert McNamara, who became the President of the Bank in 1968, greatly increased the activities of the Bank.
During his tenure of 13 years as the President of the Bank, a 13-fold rise in bank lending took place. During the 1970s, when the international system of fixed exchanges collapsed, instead of closing down, it doubted its lending from 1970 to 1975, and has been funding new missions for itself ever since.
Problems that Plagued the World Bank:
A serious problem plagues the World Bank. It provides financing to countries whose economic policies are inimical to growth. The multinationals provided generous subsidies to the regimes that impose an extensive range of harmful measures such as price controls, capital controls, trade protectionism,’ state-run-agricultural marketing boards, byzantine licensing schemes, and nationalization of industries. Under such conditions no amount of aid can lead to self-sustaining economic growth.
Economic Growth and Development:
In 1980s, the Third World debt crisis reached an alarming height. It became clear that the developing countries needed to reform their economies. The 33 most indebted countries had accumulated a debt of more than half a trillion dollars. It became clear that the lack of capital was not a problem for poor countries. The World Bank moved to provide countries resolve their crisis by providing more credit based on more conditionality.
The bank stepped up its structural adjustment lending programmes, initiated in 1980, but was intended to induce macroeconomic policy changes in highly indebted recipient nations.
At this, many observers felt that Bank’s functions overlapped those of the International Monetary Fund (IMF). Many critics opened that the Bank’s policy based lending has been ineffective because of its own institutional incentives. The Bank cannot afford to allow countries to reform without its intervention numerous studies have found that economic growth is related to other factors than investment.
Two economists tracked the level of economic freedom in 102 countries from 1975 to 1995. They examined 17 variables ranging from inflation variability to openness of the economy in each country as an empirical measure of economic freedom. They found that “increases in economic freedom and the maintenance of a high level of freedom will positively influence growth”, and that countries “that achieve and sustain high levels of economic freedom over a long period of time will tend to be high income countries.”
In recent years, the Bank has received record lending rates. This pattern has occurred despite the fact that official aid flows to the developing world are now dwarfed by private capital flows. In 1996, more than $ 240 billion was given to poor countries. This was more than four times the amount disbursed by all officials and agencies. It has been observed that most of that private money is going to approximately 12 countries that have done the most to reform their economics.