World Bank Group Business Information, Profile, and History

Company Perspectives:

The World Bank is the world's largest source of development assistance, providing nearly $30 billion in loans annually to its client countries. The Bank uses its financial resources, its highly trained staff, and its extensive knowledge base to individually help each developing country onto a path of stable, sustainable, and equitable growth. The main focus is on helping the poorest people and the poorest countries, but for all its clients the Bank emphasizes the need for: investing in people, particularly through basic health and education; protecting the environment; supporting and encouraging private business development; strengthening the ability of the government to deliver quality services, efficiently and transparently; promoting reforms to create a stable macroeconomic environment that is conducive to investment and long-term planning; focusing on social development, inclusion, governance, and institution building as key elements of poverty reduction.

The Bank is also helping countries to strengthen and sustain the fundamental conditions they need to attract and retain private investment. With Bank support--both lending and advice--governments are reforming their overall economies and strengthening banking systems. They are investing in human resources, infrastructure, and environmental protection, and thus enhancing the attractiveness and productivity of private investment. Through World Bank guarantees and MIGA's political risk insurance, and in partnership with IFC's equity investments, investors are minimizing their risks and finding the comfort to invest in developing countries and countries undergoing transition to a market-based economy.

History of World Bank Group

The World Bank Group, created towards the end of World War II, provides loans, soft loans, and guarantees for development projects around the world. A multilateral institution, it calls five billion people its clients; most of them live on less than two dollars a day. Its mix of financial support and advice is credited, for example, with saving India's agriculture system after World War II. The World Bank derives its support from 180 member nations and pitches bond offerings to the world's capital markets. Critics question the necessity of its leagues of highly-paid advisers and the social and environmental responsibility of some of its development projects. At the beginning of the millennium, the group was concentrating on harmonizing its private and public sector efforts into comprehensive 'Country Assistance Strategies.'

World War II Origins

The International Bank for Reconstruction and Development was the first 'Multilateral Development Bank.' Before World War II had ended, Harry Dexter White, assistant secretary of the U.S. Treasury, and the eminent British economist John Maynard Keynes had been among those conceptualizing an international institution to stabilize exchange rates and provide a source of financing for reconstruction and development among countries ravaged by the war.

Forty-four countries sent representatives to Bretton Woods, New Hampshire, to discuss the bank in July 1944. The bank's sister institution, the International Monetary Fund (IMF) was also created at Bretton Woods. The new bank received most of its funds from the New York investment community. However, at United States insistence, the bank was headquartered in Washington, D.C. The United States also insisted that executive directors have full-time, competitively salaried positions. The United States dominated the multilateral institution from the beginning: it provided one-third of the start-up capital.

Thirty-eight countries were members of the bank, which had an initial staff of 72. The U.S. government picked Eugene Meyer, a 70-year-old retired investment banker, to lead the new institution, which officially opened on June 25, 1946. Meyer had previously been involved in European famine relief and had extensive government experience. However, he resigned six months later after a dispute with U.S. executive director Emilio Collada, who was pressing for a stronger board. New York lawyer John J. McCloy succeeded Meyer as president. He emasculated the board and staffed management with New York cronies, like Chase Bank's Eugene Black, who replaced Collada.

The bank made its first, general reconstruction loans to France, the Netherlands, Denmark, and Luxembourg in 1947. The French loan of $250 million was the largest it would ever make, in real terms. As the U.S. government shouldered more of the burden for reconstruction under the Marshall Plan, launched in June 1947, the IBRD looked towards lending development funds to Third World countries. Physical infrastructure accounted for most of its lending in this area. The IRBD's bond issues began showing consistent profits in 1948, earning the bank an outstanding credit rating. That year also marked the first loan to a developing country--$13.5 million for a hydroelectric project in Chile.

When McCloy left the bank after two years to accept an ambassador's post in Germany, Black was named president. Robert Garner, whom McCloy had recruited from General Foods, remained vice-president. Under Black, the bank specialized in more focused project lending. It was then lending about $400 million a year.

The bank's first bond offering abroad, worth £5 million, came in London in 1951. That year, the bank negotiated with the British and Iranian governments over oil issues. Later, it helped resolve the Indus water dispute between India and Pakistan. It also unsuccessfully attempted to secure Western funding for the Aswan Dam project in Egypt. This type of involvement led to the creation of the International Center for the Settlement of International Disputes (ICSID) in 1966.

The bank was reorganized on geographical lines in 1952. Three years later, it founded the Economic Development Institute, a staff college. By this time the bank had 500 employees.

Although the IBRD's managers sought to promote private enterprise, they needed to obtain government guarantees of any loans they made to the private sector. The International Finance Corporation (IFC) was created in 1956 specifically to make private sector loans. Robert Garner served as its first president.

Soft Loans in the 1960s

The 'World Bank Group' first came into being in the 1960s. Although the success of the IBRD allowed it to more than double its authorized capital to $25 billion in 1959, its services were out of reach of the many developing nations unable to pay commercial rates. The International Development Association (IDA) was established in 1960 specifically to handle assistance to such high-risk borrowers. This program of concessional lending had been brewing for several years before Senator Mike Monroney was able to sell the Eisenhower administration on it. It gave its first credit to Honduras for highway construction. (The IDA's funds are periodically replenished by more than 30 of the richest nations and by World Bank profits.)

George Woods, another New York banker, became president in January 1963. His prime interest was macroeconomics, and he favored intervention in the politics of recipient nations. However, agricultural (land ownership) reform was a touchy subject among such newly-established governments, and remained a stumbling block in efforts to reduce poverty in the mostly rural Third World. Under Woods, the IFC became responsible for industrial loans. He also led the IFC to cooperate with United Nations agricultural and educational agencies as never before.

Robert McNamara--the former auto executive who had helped shaped U.S. policy during the Vietnam War&mdashøok over the IBRD presidency on April 1, 1968. He greatly increased the rate of the bank's lending and focused efforts on finding ways to help owners of small farms become more productive; such agricultural improvements proved more successful in Asia than in Africa. McNamara also boosted the bank's search for capital beyond the U.S. market and increased support for research activities. An early 1970s reorganization was also on McNamara's agenda.

Oil Crises in the 1970s

With the Yom Kippur War and the corresponding quadrupling of oil prices by the Organization of Petroleum Exporting Countries (OPEC), 1973 was a year that shaped economic policies around the world. OPEC nations, newly flush with cash, set up their own sources of development financing. Further, the World Bank felt impelled to take measures to offset higher fuel prices in oil-importing developing countries while the Ford administration capped its loans at $5.8 billion.

Population control and pollution control were two new areas of funding in the early 1970s. In the last half of the decade, the bank became more involved in urban development. It also softened its reluctance to deal with government-owned businesses, instead evaluating the independence of management as a criterion for investment.

However, by this time, the People's Republic of China had become involved in World Bank programs. The bank's low-key approach produced much success in that country, which used IDA loans for agriculture and education projects while oil wells were financed with IBRD loans. Nations eligible for IDA loans were those with per capita incomes of less than $750 per year (the majority of this population was concentrated in China and India). Agricultural loans, called 'the key to improving the living standards of the bulk of the poor,' accounted for a third of IBRD/IDA loans. Unfortunately, inflation reduced the real value of IDA loans by nearly 25 percent in 1977.

After another round of oil price increases, interest rates rose dramatically at the end of 1979, trapping the bank in fixed rates set when credit was relatively inexpensive. The bank moved to issue loans with floating interest rates in 1982. Otherwise, its terms remained inflexible, fortified with cross-default clauses. The bank began to press for more reforms among borrowing nations through structural adjustment loans (SALs), mostly in Africa and Latin America.

Debt Crisis in the 1980s

The Reagan years were ones of heavy defense buildup and deficit spending. Commercial banker A.W. Clausen succeeded McNamara upon his retirement in 1981. He was soon confronted with the Latin American debt crisis. A few years later, former U.S. Senator Barber Conable became the first professional politician to lead the World Bank in 1986. One of his first tasks was to trim the budget and streamline the staff somewhat. However, managers were then freed to hire their subordinates right back. Some 300 workers received 'golden handshakes' in an exercise that cost the bank $200 million. In spite of the uncertainty these measures produced, Conable won the support of both employees and shareholders: in 1988, the IBRD landed its largest ever general capital increase (GCI) from the U.S. government.

Conable attempted to shift the bank's focus from infrastructure to business ventures. One area of concern was the relatively low levels of private sector investment of IFC-financed projects. China increased pressure on foreign investors in the mid-1980s and Yugoslavia, the IFC's largest borrower, saw its private sector production collapse. The Wall Street Journal reported that many borrowers that the IFC had reported as privately-owned in fact had substantial government ownership.

Poverty per se again became a leading part of the bank's agenda, as defined by such measurements as daily caloric intake. Broadly-defined environmental concerns also became increasingly important as the bank struggled to harmonize its efforts with nongovernmental organizations (NGOs). However these were difficult to square with development enterprises such as those in Thailand that critics alleged produced deforestation.

The Multinational Investment Guarantee Agency (MIGA) was established in 1988 to encourage private investment in the Third World by attenuating some of the risks of operating in politically and economically unstable environments. Although its charter stated it should be 'apolitical,' by this time the question of 'governance' issues dominated World Bank thinking about lending in Africa, and work in China was suspended following the Tiananmen Square massacre. The IBRD made nominally its largest ever loan to Mexico in 1990: $1.26 billion to support debt reduction. The debt crisis had finally subsided by this time, helped in part by falling interest rates.

Competing in the 1990s

Conable stepped down in 1991. His successor, Lewis Preston, was an eminent commercial banker. Upon taking over, Preston set up a management structure similar to the one at J.P. Morgan. By this time, the bank had begun lending to newly-liberated Eastern Europe and Russia itself.

As the bank approached its golden anniversary, a new headquarters was under construction. Meanwhile, pundits rallied under the slogan 'Fifty years is enough.' The Wapenhans Report in 1992 criticized the bank's bias towards project lending, while two years later a team of outside observers criticized one of the bank's dam projects on India's Narmada River. Many believed the World Bank was simply too rich and too bloated. It employed 6,000 high-paid staff (at $150,000 a head, according to The Economist) and 1,000 consultants, only a fraction of them based inside poor countries. By 1995, the World Bank had more than 9,000 employees and a $1 billion payroll. While administrative expenses grew 60 percent in the mid-1990s, loan disbursements were flat.

The United States considered changing the articles of the IBRD to allow it to lend directly to the private sector to help the group as a whole meet a target of making half its loans in the private sector, which was becoming more important in the post-Communist world. However, many at the World Bank were uneasy about making the institution's top credit rating susceptible to the additional commercial risks of lending to private enterprises. The IFC, led by Sir William Ryrie, was then calling for an additional $1.3 billion in capital to maintain its annual growth rate.

South Korea became the first country to progress from IDA borrowing all the way to becoming a donor. Emerging markets as a whole were attracting unprecedented amounts of private capital, $244 billion in 1996 versus 1990's $44 billion. This entrepreneurial interest in development provided some competition to the World Bank itself, which saw its market share fall from 50 percent to ten percent in just a few years.

The U.S. Congress resisted the IDA's requests for capital replenishment. Other rich countries followed suit, claiming hard times of their own. The political risk insurance of MIGA proved very popular, and that agency also strained for additional capital to meet demand. The IFC, however, saw its total financing nearly double to $8 billion between 1994 and 1996. It had a harder time obtaining sovereign guarantees on infrastructure projects as local governments were taking over more of them.

Savvy Australian-born investment banker James D. Wolfensohn became the bank's president in June 1995. He inherited a slew of challenges. At least one former World Bank executive criticized the institution for diluting its strengths in infrastructure development in favor of 'boutique' investments. By the late 1990s, the emerging markets investment bonanza was over, making private capital prohibitively expensive again for World Bank clientele.

Principal Operating Units: International Bank for Reconstruction and Development; International Development Association; International Finance Corporation; Multilateral Investment Guarantee Agency; International Centre for Settlement of Investment Disputes.

Principal Competitors: European Bank for Reconstruction and Development; J.P. Morgan & Co.; Salomon Brothers International; CS First Boston; Emerging Markets Partnerships; Darby Overseas Investments.

Chronology

• Key Dates:

• 1946: World Bank founded along with sister institution, the International Monetary Fund.
• 1956: International Finance Corporation created to support private ventures.
• 1960: International Development Association created to give 'soft loans' to very poor countries.
• 1988: The new Multilateral Investment Guarantee Agency insures against political risks.
• 1995: South Korea becomes the first to transform from IDA borrower to World Bank donor.