World Bank: Functions, Organisation, Operations and Criticism

The World Bank: Functions, Organisation, Operations and Criticism

By Smriti Chand

The International Bank for Reconstruction and Development (IBRD), better known as the World Bank, was established at the same time as the International Monetary Fund to tackle the problem of international investment.

Since the IMF was designed to provide temporary assistance in correcting the balance of payments difficulties, an institution was also needed to assist long-­term investment purposes. Thus, IBRD was established for promoting long-term investment loans on reasonable terms.
The World Bank (IBRD) is an inter-governmental institution, corporate in form, whose capital stock is entirely owned by its member-governments. Initially, only nations that were members of the IMF could be members of the World Bank; this restriction on membership was subsequently relaxed.

Functions:

The principal functions of the IBRD are set forth in Article I of the agreement as follows:
1. To assist in the reconstruction and development of the territories of its members by facilitating the investment of capital for productive purposes.
2. To promote private foreign investment by means of guarantee of participation in loans and other investments made by private investors and when private capital is not available on reasonable terms, to make loans for productive purposes out of its own resources or from funds borrowed by it.
3. To promote the long-term balanced growth of international trade and the maintenance of equilibrium in balance of payments by encouraging international investment for the development of the productive resources of members.
4. To arrange loans made or guaranteed by it in relation to international loans through other channels so that more useful and urgent projects, large and small alike, will be dealt with first. It appears that the World Bank was created to promote and not to replace private foreign investment. The Bank considers its role to be a marginal one, to supplement and assist foreign investment in the member countries.
A little consideration will show that the objectives of the IMF and IBRD are complementary. Both aim at increasing the level of national income and standard of living of the member nations. Both serve as lending institutions, the IMF for short-term and the IBRD for long-term capital. Both aim at promoting the balanced growth of international trade.

Organisation:

Like the Fund, the Bank’s structure is organised on a three-tier basis; a Board of Governors, Executive Directors and a President. The Board of Governors is the supreme governing authority. It consists of one governor (usually the Finance Minister) and one alternate governor (usually the governor of a central bank), appointed for five years by each member.
The Board is required to meet once every year. It reserves to itself the power to decide important matters such as new admissions, changes in the bank’s stock of capital, ways and means of distributing the net income, its ultimate liquidation, etc. For all technical purposes, however, the Board delegates its powers to the Executive Directors in the day-to-day administration.
At present, the Executive Directors are 19 in number, of which five are nominated by the five largest shareholders — the USA, the UK, Germany, France and India. The rest are elected by the other members.
The Executive Directors elect the President who becomes their Ex-officio Chairman holding office during their presence. He is the chief of the operating staff of the Bank and is subject to the direction of the Executive Directors on questions of policy and is responsible for the conduct of the ordinary business of the Bank and its organisation.

Capital Resources:

The World Bank, like any other corporation, has an authorised capital of $ 21 billion divided into 210,000 shares, each having a par value $ 1, 00,000. Initially, however, its authorised capital was $ 10 billion. Of the present authorised capital, $ 20.48 billion are subscribed by the issue of 204,848 shares.
However, only 10 per cent of the par value, viz., $ 2.04 billion, has so far been called in as paid-up capital. The capital stock of the Bank can be increased if a three-fourths majority of the total voting power is cast in its favour. Of the paid-up capital, 2 per cent has to be subscribed in gold or US dollars, the remaining 98 per cent to be paid in the currency of the member.

Lending Operations:

Loans are granted to member countries only after the Bank is fully satisfied about the economic position of the borrowing country as well as the soundness of the specified projects for which assistance is sought. In granting loans, the Bank is prepared to take reasonable risks but insists that funds obtained from it should be used for purposes which are constructive and practical.
The Bank has powers of supervision and control to ensure that funds are used for the purposes for which the loan is granted. Normally, the Bank makes medium or long-term loans, the term being related to the estimated useful life of the equipment or plant being financed.
The Bank makes or facilitates loans in any one or more out of its own following ways:
(a) By making or participating in direct loans out of its own funds; or
(b) Out of the funds raised in the market of a member, or otherwise borrowed by the Bank; or
(c) By guaranteeing, in whole or in part, loans made by private investors through the investment channels.
The total outstanding amount of the loans made or guaranteed by the Bank is not to exceed 100 per cent of its total unimpaired subscribed capital resources and surplus. The interest rate charged by the Bank on its loans is the estimated cost to the Bank of borrowing money for a comparable term in the market and is uniform without distinction among borrowers In addition to the rate of interest, the Bank charges on all loans a commission of 1 per cent for the purpose of creating a special reserve against losses and ½ per cent for administrative expenses.
In recent years, the Bank has made loans mainly for specific development projects in the field of agriculture, power, transport and industry. Most of the loans have been made to the underdeveloped countries. India is the Bank’s largest individual borrower.

Technical and Advisory Assistance:

In addition to providing financial assistance to member countries, the Bank has been rendering signal service to its members by providing them suitable technical assistance to assess their total economic resources and to set up priorities to be followed in their development programmes.
Technical assistance on a boarder scale has also been provided, for instance, in development programming through Survey Missions, which make intensive studies of national resources and formulate recommendations to serve as the basis of long-term development programmes.
In addition to the training programme, the Bank, with financial assistance from the Rockefeller and Ford Foundations, has set up in Washington an Economic Development Institute to provide an opportunity to selected groups of senior officials from the less developed countries to participate annually in an international course of studies designed to give them a broad perspective of the problems of economic development and to increase their efficiency.

Criticism:

The modus operandi of the Bank has been criticised on various counts from different quarters:
1. It is alleged that the Bank charges a very high rate of interest on loans. For example, some of the loans which India has received in recent years bear an interest of 53.4 per cent including the commission at 1 per cent which is credited to the Bank’s special reserves.
2. The Bank’s insistence, prior to the actual grant of loan, on the country having the capacity to transfer or repay, is open to criticism. The Bank should not apply orthodox standards to judge the transfer capacity of any borrowing country. Transfer capacity follows rather than precedes the loan.
3. The financial help given by the Bank does no) amount to more than a drop in the big ocean of financial requirement so essential for various development projects.

Conclusion:

It may be said that the World Bank has not come up to the expectations of many nations. Nevertheless, it has been instrumental to a very large extent in initiating and accelerating the work of economic reconstruction and development in different countries. No doubt, India has derived immense benefit from the World Bank.
The Bank may have failed to finance most of the development projects, but it should be remembered that it has financed quite a large number of them which have proved a notable success.
The Bank has also played a significant role outside financial matters by serving as a mediator between different countries on major economic and political issues. For instance, its help in the solution of the Indus Waters between India and Pakistan and the Suez Canal dispute between the U.K. and the U.A.R. has been invaluable.