The World Bank Group. World Bank and IMF: Differences. World Bank and IMF: Differences. What Does the World Bank Do?

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1 The World Bank Group Axel Dreher Konjunkturforschungsstelle Swiss Institute for Business Cycle Research What is the World Bank? Founded in 1944, the Bank is the world s largest source of development assistance Owned by 184 member countries Operates in 100 country offices with approximately 10,600 staff World Bank and IMF: Differences Bank promotes long-term growth that reduces poverty IMF is the monitor of the world s currencies Bank lends only to developing and transition countries IMF lends to member countries both rich and poor that have short-term problems in meeting their foreign payment obligations World Bank and IMF: Differences The International Monetary Fund (IMF) maintains international monetary cooperation among its members The World Bank aids in the development and reconstruction of it members What Does the World Bank Do? Helps countries implement programs to raise quality of people s lives Works in partnership to design assistance strategies tailored to the needs of each country Offers a mix of money and knowledge to implement these strategies $18.5 billion in new lending commitments in the last FY, financing 99 IBRD and 141 IDA projects Why borrowing from the World Bank? Interest rates on World Bank loans are always lower than those of commercial banks It lends to countries that cannot find any other source of financing at zero interest Longer period to repay loans No repayments for 10 years for some loans 1

2 Where does the World Bank get the money to make loans? World Bank Bonds Donor Funds Trust Funds Investors Repayments How is a World Bank loan made? Bank offers two types of loans: investment and development policy loans Bank and borrower agree on objectives, components and outputs After loan approval and effectiveness, borrower begins implementation Bank monitors implementation and evaluates results Who are the World Bank Partners? Client country governments Civil society representatives (?) Private sector Multilateral development banks Bilateral donors United Nations agencies World Bank Group Composition International Bank for Reconstruction and Development (IBRD) International Development Association (IDA) International Finance Corporation (IFC) Multilateral Investment Guarantee Agency (MIGA) International Center for Settlement of Investment Disputes (ICSID) International Bank for Reconstruction and Development (IBRD) Founded in 1944 at the Bretton Woods Conference to finance the reconstruction of countries affected by WWII help with development of impoverished nations World Bank s central institution 181 member countries IBRD (continued) Lends to countries with relatively high per capita incomes Money is used for: development projects (i.e. highways, schools) programs to help governments change the way they manage their economies Provides technical assistance in projects 2

3 International Development Association (IDA) Established in 1960 assist the poorest developing countries Lends to countries with annual per capita incomes of about $800 or less It s loans are knows as credits 161 members International Finance Corporation (IFC) Established in 1956 to reduce poverty and improve people's lives in an environmentally and socially responsible manner (174 members) finances private sector investments, mobilizes capital in international financial markets, and provides technical assistance and advice to governments and businesses provides both loan and equity finance for business ventures in developing countries Multilateral Investment Guarantee Agency Established in 1988 provides guarantees to foreign investors against loss caused by non-commercial risks helps developing countries attract foreign investment provides investment marketing services and legal advisory services to its members 152 members International Center for the Settlement of Investment Disputes Established in 1966 to promote increased flow of international investment Provides facilities for the reconciliation of disputes between governments and foreign investors 131 members Where the IBRD gets its money from through the sale of its bonds in international capital markets Members subscriptions to its capital stock only 10% of the subscriptions is used by the Bank Callable Capital portion of the subscriptions that the Bank borrows the Bank charges a rate of interest rate on its loans to pay this back Where the IDA gets its money Mostly from governments voluntary contributions Replenishments additional contributions which are needed every few years 3

4 Differences between the IBRD and the IDA IBRD charges an interest rate on loans loans must be repaid within years with a 5 year grace period IDA does not charge an interest rate, only a 0.75% service charge repayment period is years with a 10 grace period Konjunkturforschungsstelle Swiss Institute for Business Cycle Research Who controls the World Bank? Political influences on the Bank US frequently influences the World Bank s interests in certain loans (Schoulz 1982). Distribution of Bank loans dominated by political considerations (Schneider et al., 1985; Frey and Schneider, 1986). World Bank lending reflects US influence (Fleck and Kilby 2006). World Bank lending is influenced by US and EU (Faini and Grilli 2004). Political influences on the Bank Andersen, Hansen and Markussen (2006) Panel of 60 countries; ; countries voting with the US on important votes in UNGA are significantly more likely to receive IDA loans. Dreher and Sturm (2006) Panel of 188 countries; ; countries receiving adjustment programs and larger non-concessional loans from the World Bank vote more frequently in line with the average G7 country. Regarding voting coincidence with the US, World Bank (concessional and non-concessional) loans have a significant impact. Political influences on the Bank US interferes with World Bank policies when its national interests are at stake (Gwin 1997). US is largest shareholder of Bank US is largest contributor to IDA Bank depends on US capital ($) market (and requires permission of any country to borrow in its currency) Bank president is US citizen by tradition U.S. has paid closer attention to the Bank than any other major shareholder (Bank s headquarters close to White house) U.S. has privileged access to the World Bank, far more so than other shareholder countries (Gwin 1997) World Bank Conditionality Konjunkturforschungsstelle Swiss Institute for Business Cycle Research 4

5 Conditions in World Bank Adjustment Loans per sector ( ) number percent total number of conditions 7723 (100) I. Monetary and Financial Policies 1. Limit on credit expansion 67 (0.87) 2. Interest rate policy 150 (1.94) 3. Reform of the financial system 647 (8.38) II Public Sector Policies 1. Restraint on central government expenditures a. Ceiling on current expenditures 142 (1.84) b. Transfers and Subsidies 38 (0.49) c. Capital Expenditure and net lending 305 (3.95) 2. Tax Policy 315 (4.08) a. Privatisation 191 (2.47) b. Improve Price Structure c. Improve institutional efficiency 254 (3.29) 3. Reduction of Deficit as Percent of GDP 185 (2.4) 4. Raise Investment, design program or build 69 (0.89) institutional capacity III. Exchange and Trade Policies 1. Liberalisation and reform of exchange rate 188 (2.43) 2. Liberalisation and reform of trade system 1231 (15.94) a. Importsubstitution b. Liberalisation of imports 240 (3.11) c. Export promotion measures 339 (4.39) Source: World Bank (1990). Conditions in World Bank Adjustment Loans per sector ( ) number percent IV. Structural Adjustment Measures 1. Developing and restructuring of a subsector a. Energy 350 (4.53) Pricing and subsidies 139 (1.8) Entry, Exit, Expansion 5 (0.06) Other regulation 16 (0.21) Subsector/ Firm restructuring 37 (0.48) Investment promotion and incentives 39 (0.5) Technology 16 (0.21) Subsector planning (Supply and demand issues 60 (0.78) Marketing 4 (0.05) Other sector-specific policies 34 (0.44) b. Agriculture 1306 (16.91) Pricing and subsidies 436 (5.65) Entry, Exit, Expansion 39 (0.5) Other regulation 97 (1.26) Subsector/ Firm restructuring 212 (2.75) Investment promotion and incentives 86 (1.11) Technology 29 (0.38) Subsector planning (Supply and demand issues 193 (2.5) Source: World Bank (1990). Conditions in World Bank Adjustment Loans per sector ( ) num % Marketing 83 (1.07) Other sector-specific policies 131 (1.7) c. Industry 390 (5.05) Pricing and subsidies 83 (1.07) Entry, Exit, Expansion 32 (0.41) Other regulation 55 (0.71) Subsector/ Firm restructuring 71 (0.92) Investment promotion and incentives 69 (0.89) Technology 26 (0.34) Subsector planning (Supply and demand issues 26 (0.34) Marketing 8 (0.1) Other sector-specific policies 20 (0.26) 2. Labour market reform and liberalisation 30 (0.39) 3. Protection of the poor 74 (0.96) 4. Wages and Prices a. Wage guidelines or wage reform policies 160 (2.07) b. Reduction in price distortions 64 (0.83) Source: World Bank (1990). Distribution of World Bank Conditions ( ) num. % num. % num. % num. % % All Regions Africa Asia Europe, Latin All Middle Amer. East, & North Carib. Africa Supply Side, Growth Oriented Policy Trade Public Enterprises Public Institutions Financial Sector Agriculture Industry Energy Social Sector Other Sectors Absorbtion Reducing Policy Fiscal Policy Monetary Policy Switching Policies Exchange Rate Wage Policy All Number of Programs Average number of conditions Source: Kapur et al. (1997: 521), World Bank (1990: 7). Conditions in World Bank Programs ( ) percent Supply Side, Growth Oriented Policy Trade 79 Public Enterprises 76 Public Institutions 57 Financial Sector 52 Agriculture 63 Industry 46 Energy 28 Absorbtion Reducing Policy Fiscal Policy 80 Monetary Policy 44 Exchange Rates 48 Review of World Bank Conditionality Key Findings The operational policy introduced in 2004 is consistent with a view that conditionality is neither coercion to undertake reform, nor prescriptive of policy content. The Bank has fully recognized the importance of country ownership for development effectiveness, however, it is grappling with the practical challenges of assessing ownership and responding to changing policy environments. Source: World Bank (1990: 5). 5

6 Review of World Bank Conditionality Key Findings (continued) The Bank has made important strides in adapting its policybased lending to complex reform programs and focusing on critical actions, but should try to using large and complex policy matrices especially in multi-sectoral operations. The Bank's conditions and expected prior actions (triggers) have typically been transparently disclosed and clearly defined. However, the flexibility of programmatic approaches needs to be exercised cautiously to balance predictability with performance. The Bank's approach is fully compatible with the goal of harmonizing financial support with other development partners while retaining the Bank s distinct accountability. Review of World Bank Conditionality Good Practice Principles Actively reinforce country ownership by relying on clear evidence of ownership informed by analytic work. Agree up-front with the government and other financial partners on a coordinated accountability framework which includes both policy actions and outcome indicators. Review of World Bank Conditionality Good Practice Principles (continued) Customize the accountability framework used to evaluate country performance under the program and modalities of Bank support to country circumstances. Do not use the framework to leverage additional reforms outside the government s agenda. Choose only actions critical for achieving results as conditions for disbursement. Conduct transparent progress reviews conducive to predictable and performance-based financial support. Konjunkturforschungsstelle Swiss Institute for Business Cycle Research Why do governments and the World Bank enter into agreements? Based on: Kevin M. Morrison, The Determinants of World Bank Flows to Africa, , 2004 Political vs. Economic determinants Morrison (2004) Panel of 37 SSA countries; ; countries share of IDA lending to Africa depends on economic factors and US influence. IDA is the largest single donor to Africa. IDA multilateral institution, Africa less strategically important > least likely case for political influence? Previous literature focuses on Recipient need Policy environment Institutional incentives Shareholder influence Recipient need need of recipient countries for aid as determinant of aid flows? benevolence of donors The way donors [have] spent their money cannot be explained on the basis of donor economic and political interests alone, though these [have] certainly played a part; concern for economic development and for helping people escape poverty clearly had a large influence as well. (Lumsdaine, 1997) 6

7 Recipient need Operationalization Income per capita, infant mortality, life expectancy Population ( Almost from the beginning, nations at the extremes of the population-size range of IDA-eligible countries have been treated as exceptions to the allocation norms (Kapur, Lewis, and Webb, 1997) Short-run investment requirements for growth ( financing gap ) Policy environment Countries which are expected to put the credits to the most effective use are expected to get most financial aid. (Frey and Schneider 1986) Bank and IDA lending involves an examination of past performance in borrowing countries Mason and Asher s (1973) The main factor that determines the allocation of IDA resources among developing countries is each country s performance in implementing policies that promote economic growth and poverty reduction. (IDA 2003) Policy environment Operationalization Democratic versus authoritarian regimes Economic policies Social criteria like respect for human rights Institutional incentives prestige desired by Bank staff as members of the international financial community (Frey and Schneider 1986) Bank and IDA lending involves an examination of past performance in borrowing countries Mason and Asher s (1973) The main factor that determines the allocation of IDA resources among developing countries is each country s performance in implementing policies that promote economic growth and poverty reduction. (IDA 2003) Maintain AAA bond rating Institutional incentives Operationalization conservative lending practices (low inflation, low government deficits) capitalist climate in place Low debt (avoid defaults of client country which threatens AAA) Shareholder influence countries dependent on important shareholder countries operationalized by either being colonies or receiving large amounts of trade received higher amounts of loans (Frey and Schneider 1986). 7

8 Morrison, 2004 Sub-Saharan Africa, , 33 countries Dependent variable: IDA disbursements in a given year, as a share of all IDA lending to Africa. Explanatory variables: GDP per capita, population, investment to GDP, Country Policy and Institutional Assessment Index (captures the Bank s evaluation of how much a country has progressed in implementing Bank policies. The CPIA is a measure from 1 to 6, higher scores indicating a better policy environment in the eyes of Bank staff), debt owed by the country to the IBRD, as a share of the country s GDP, U.S. bilateral aid flows. Morrison, 2004 Results Populous countries get more loans than less populous ones, Countries that rank higher in the World Bank s policy assessment index supposedly indicating better policies receive more loans than those that rank lower, political influence of the U.S. is important. 8

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