THE WORLD BANK IN THE WORLD OF BANKS: CHALLENGE FOR DEVELOPMENT

'By 2025, 37 of 68 currently IDA-eligible countries will graduated out', Center for Global Development predicts. Decreasing demand for long-term debts raises the necessity of Bank's structure review.

Proposing 'soft lending' tool, Todd Moss strongly recommends to adapt the current structure of IDA to the changing environment. CGD's expert advises World Bank to focus its mission on 'poor people' rather than 'poor countries'. In words, it is reasonable to reduce loans to governments and increase those to individuals. More than 2.5 billion people are without bank accounts and insurance. Focusing on the safety of people and their properties, the programs such as IFC Microinsurance aim to diminish the scale of these issues. Expanding insurance and private lending rather than funding some 'suspicious' unstable regimes, the World Bank will encourage small business' growth in the poorest countries. Simon Maxwell stresses the increasing role of International Finance Corporation (IFC) since it targets private sector development. While investigating, I found out that the expansion of IFC programs in the low-income countries have the following benefits:

1. World Bank will retain the status quo in the financial world. Displacement of IDA projects beyond IFC will enable focus on perspective and high-demanding sectors such as small business, insurance and financial services. Reforming the client base and tools might be compulsory in the future since the Bank will:

• recover the balance sheet that has been skewed by heavy IDA and IBRD debts 
• be able to restructure the governance gradually. 
• obtain competitiveness against private banks. 

2. The major benefit for developing countries will be the implementation of the economical strategies on the 'bottom' or on an individual level. Empirical evidence has illustrated the efforts to realize policies and strategies on state level. It can be suggested that an 'individual approach' is the least risky for both banks and governments. Moreover, it creates opportunities for entrepreneurs to be familiar with financial services and benefits. Consequently, domestic markets will:

• be more competitive. Low-interest loans provided by IFC will stop the outrage of foreign banks on domestic markets. It also creates opportunities for local banking to improve performance through partnership with World Bank branches. As a result, governments will be able to establish a robust financial system, and thus, maintain a balance in internal economies deriving maximum benefit. 
• improve efficiency. Unlike state borrowing that obligates to comply with fixed policies, individual borrowing encourages innovation and promotion of the wide range of independent business ideas. 
• be more secure. Nowadays, the most poor countries are those that suffer from civil wars. Insuring properties and businesses, the World Bank will be more motivated in political stability. It will likely prevent the lawlessness pushing on governments or military regimes in these countries. 
• be more transparent. It is obviously easier to detect/prevent event of corruption on the individual level than on state level. 

THE WORLD BANK IN THE WORLD OF BANKS: MATTER OF CHOICE

We discussed the negative consequences of heavy lending strategy of IBRD and IDA before. Nowadays, looking for alternative ways to develop, governments create regional trusts as EFiNA and/or attract foreign banks. Is it a good evidence?

J. Bhattacharya (1994) argued that basically foreign banks do not dominate in domestic markets, and their local commitments are strong. B. Fathi (2010) remarks that foreign banks looking for efficient synergy in emerging markets produce competition for domestic banks that encourages the latter to modify performance. However, the author also argues that huge differences in performance quality leads to deterioration, not to improvement of local banks. According to OECD researchers, Basel Two rules complicate access of small enterprises to funds, since it obliges foreign banks to use risk sensitive models to define the amount of credit. It is worth noticing, small businesses provide jobs for 45% employees in developing countries (gov.uk). Obviously, foreign banking plays a vital role in providing needed loans for private entrepreneurs. However, enormous international banks may ruin local competition due to the weak domestic financial system. Thus, dominating in emerging markets, foreign banks might freely speculate with interest rates and act in their own interests.

The table illustrates the overwhelming share of foreign banks in Balkan countries in 2008 

Unsurprisingly, most of the developing countries still prefer to pose barriers against foreign banks to avoid such kind of 'development'.

ABUSE LEADING TO ABYSS

How it all began

"The extremes of poverty and deprivation are simply no longer acceptable. It is development's task to deal with them", World Bank president Robert McNamara assured in 1973 at the Bank annual meeting. The World Bank increased lending from $953 million in 1968 to $12.4 billion in 1981. In 1980, the Board of Directors launched structural adjustment loans to aid developing countries suffered from debt crisis and oil crisis. Meanwhile, dollar entrenched after 1979-1980 measurements and monetary policies in the US. Thus, the US started to compete aggressively on world capital markets attracting billions of investments in its economy. Consequently, developing countries dwindled dramatically with double pace demanding more debt. 

What was the aim to launch Structural Adjustment Loan?

SAL assumed low interest rates for the most suffering countries. However, this form of loan obligates the borrowers to comply specific conditions. Governments borrowed from World Bank were incurred by intervention of latter to their policy. Proposing and managing financial strategies, Bank literally limits national sovereignty."Putting external conditions on governments' behaviour through structural adjustment loans has not proven to be very effective in achieving widespread policy improvements or in raising growth potential (William Easterly,2003,20). Opponents of Bretton Wood system sharply criticize that World Bank applied the same one-sided policies such as privatization, free-trading promotion and market liberalization regardless of country and its ability to undergo these changes. I. B. Logan and K. Mengisteab(1993,22) remark: "There are several elements of adjustment (the manipulation of prices, interest rates, and exchange rates, for example) that are relevant for the Westernized enclaves, but these reforms cannot be implemented to the exclusion of their impacts on, and relationships with, critical domestic and international factors". In the 80s, World Bank widely launched austerity programs to mitigate the aftermath of crisis in developing countries. According to Rick Rowden (2009), World Bank forces governments to target low inflation and low budget deficits through cuttings in health, education and social aid. Survival International claimed that devastation of tribal’s areas in Ethiopia, Brazil and Ghana is the consequence of irrational agricultural reforms. 45 out of 82 implemented agricultural projects between 1975 and 1982 were assessed as unsatisfactory.

Who is guilty?

Being the president from 1968 to 1981, S. McNamara has raised the role of World Bank as a primary creditor. "Push to lend more" strategy masked by the high-moralistic idea of "poverty reduction" was successfully accomplished during his presidency. Although Structural adjustment loans had deepened the rate of poverty and unemployment in developing countries, World Bank maintained SALs as a quarter of its portfolio.

One can suggest that it was a great opportunity for developed countries to easily obtain the benefits of the 1979 crisis. Lending to developing countries during crises balanced the budget of the indebted developed countries. Moreover, the millions of capital flowed to distressed economies, since creditors obtained the access to the emerging markets. The effects of such cash inflows might be ambiguous for developing countries as it has been for Thailand in 1997. 

Perhaps, west companies and countries simply exploited World Bank as an intermediary to move their debts to the remaining world. While indebted countries start to struggle, there are two options for World Bank governors. If country has prospects, invest there. Otherwise, lend more.

What next?

One can suggest that debt crisis in the developing world arose as the consequence of stagnation in west economies. While debt/GDP ratio of developed countries reached the critical point during last financial crisis, World Bank lent $437billion to developing countries in 2010 only (theguardian.com). Currently, majority of developed countries are heavily indebted. Investors do not expect any high profits from west markets in 2014, greedily looking after trends of foreign 'fresh' prospects. The same scenario, is not it?

Hopefully, it is just a coincidence.

BRIDGE IS BREACHING

World Bank is international financial institution that provides loans to developing countries. The main purpose of the institution is the reduction of poverty worldwide. World Bank set 8 goals to achieve by 2015 but only 2 targets were reached with substantial doubts remaining. World Bank programs and policies favor economies of developing countries. However, through illusion of expected development and prosperity it might be seen as though such serious issues as enormous debts, conflicts of interests, obvious ignoring and indifference towards opportunities and constraints of economies. As a result, World Bank’s inefficient activity caused a great wave of criticism.

Perhaps, primary issue of efficiency is underlined in unfair governance. World Bank is run by 184 countries through Board of Governors and Board of Directors. Governors delegate their power to executives except of that mentioned in the Articles of Agreement. Executives represent Board of Directors which consists of a President and 25 members, 20 of which are elected and 5 appointed. Overwhelming majority of countries is represented by only 20 executives. It is worth noticing that the other 5 appointed directors are those with the highest economical power and have distinctive voting rights. The weighted voting system classifies countries by their economies enabling the biggest shareholders to dominate in decision making. Titus Alexander compares this system’s unfairness to apartheid in the South African Development Bank, assuming that unequal voting power of developed western countries leads to global apartheid.

At the present time, each new member in Board of Directors has 250 votes plus one vote for each share owned in Bank stock. Obviously, the biggest shareholders; US, UK, France, Japan and Germany have substantial voting rights in vital decisions as providing funds, choosing leadership and senior management.

The role of the US is substantial. As the biggest shareholder the US hold 15.85% of voting rights plus has veto status that enables to prevent Bank decisions against its interests. Practically, this kind of nominee promotes outrage in the form of cronyism. It can be approved by the fact that US proposed candidates have been unreservedly accepted by Board of Directors (FORBES.com). The most recent president Jim Yong Kim was elected in 2012 instead of Ngozi Okonjo-Iweala who was exceptionally qualified and experienced in working with developing countries (The Economist, 2012). 

It can be suggested that influential position of US and other G7 countries in the Board of Directors all in all determines the core strategy of World Bank. This was basically accepted by Washington consensus financial strategies such as free trade, floating exchange rates, macroeconomic stability and free markets have been widely used in Latin America and South East Asia. Despite this expected success Washington Consensus programs failed. I can suggest two main reasons of failure:

1. Theoretically, financial institutions provide financial advices and services if there is a demand for them. In practice, they intervene, intruding their policies and strategies. It basically occurs if the borrower defaults on debts which have been provided by World Bank before. The US Foreign Relations Committee accused World Bank since they had focused on providing loans to developing countries rather than targeting development of those countries.

2. Policies implemented in developing countries are frequently irrelevant for their economies and, hence, are harmful. As an opponent of Bretton Woods System, Henry Hazlitt argued that World Bank with its monetary policy promotes inflation. Moreover, he mentioned that World Bank strategies lead to state-domination in international trading which is threatening to private sector growth. According to Joseph Stiglitz, the former Chief Executive in World Bank, the majority of poor countries had not been ready for free-market policies that were implemented too quickly ("Shock Therapy") or in uncompetitive markets. Stiglitz strictly criticizes that World Bank recommends inflation targeting while necessary indices as financial incomes and financial markets are ignored. Considering Thailand crisis of 1997, he also claimed that austerity measures did not lead to positive results worsening the situation in the region. 

World Bank is a financial institution. Hence,it lends money and provides financial advices. However, the mission of this organization is to reduce poverty and inequality between developing and developed countries. Is it worth separating actual purposes and missions? It is NOT only if there is no place for abuse.

World Bank can be a bridge. 

But if the bridge is breaching really, it IS worth thinking about the consequences.

BRIDGE BETWEEN DEVELOPED AND DEVELOPING WORLD

"End extreme poverty within a generation and boost shared prosperity".These two goals World Bank has set to achieve by 2030. At the first glance it sounds good…

While investigating, it has been revealed that projects promoted by financial institutions such as World Bank and International Monetary Fund have both positive and negative effects. According to Boockmann and Dreher(2003), World Bank projects substantially increases economic freedom, while volume of credits may have reverse effect. World Bank provides not only financial assistance but also knowledge which makes governments likely to accept projects. However, historical data illustrates that policy of "Economic Medicine" and "Shock Therapy" aggravated economies of poor countries(www.globalresearch.ca). Perhaps, increasing debt is a key word in this story. For instance, abuse with debt providing has led to tragic consequences in late 90s. In 1998 poor countries owed $2.5trillion to World Bank. Devastating impact of enormous loans increased poverty in developing countries by 300 million people, up to $150billion from 1997. For instance, debt/GDP ratio of Chad, rose from 28 to 55 percent over 10 years (www.whirledbank.org). World Bank Group has a sovereign immunity that exempts the organization from any liability independently of consequences.

It would be no reasonable to blame only World Bank. One may suggest that developed countries use World Bank as an instrument to manage developing countries. On the other hand, developing countries might mimic that they are extremely "poor" to receive exclusively low interest credits.

So what kind of bridge is it?