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

(1)

Datum Konjunkturforschungsstelle Swiss Institute for Business Cycle Research

The World Bank Group

Axel Dreher

Datum Axel Dreher/KOF, ETH Zurich/[email protected]

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

(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

(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

(4)

Differences between the IBRD and the IDA

IBRD charges an interest rate on loans

loans must be repaid within 15-20 years with a 5 year grace period

IDA does not charge an interest rate, only a 0.75%

service charge

repayment period is 30-45 years with a 10 grace period

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; 1991-2000; 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; 1970-2002; 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)

Æ U.S. has privileged access to the World Bank, far more so than other shareholder countries (Gwin 1997)

Konjunkturforschungsstelle Swiss Institute for Business Cycle Research

World Bank Conditionality

(5)

Conditions in World Bank Adjustment Loans per sector (1980-88)

Source: World Bank (1990).

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

institutional capacity

69 (0.89) 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)

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)

num %

Marketing 83 (1.07)

Other sector-specific policies 131 (1.7)

c. Industry 390 (5.05)

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)

Distribution of World Bank Conditions (1980-88)

1980-82 1983-86 1987-90 1991 1980-88 num. % num. % num. % num. % %

All Regions Africa Asia Europe, Middle East, North Africa

Latin Amer.

&

Carib.

All

Supply Side, Growth Oriented Policy

Trade 47 17 118 18 192 11 162 11 12 18 13 26 16 Public Enterprises 26 9 79 12 288 17 161 11 17 12 5 15 14 Public Institutions 21 7 49 7 202 12 219 15 11 3 5 4 7 Financial Sector 12 4 54 8 211 12 240 16 7 16 11 13 10 Agriculture 54 19 143 22 224 13 112 8 16 12 33 7 17 Industry 23 8 56 9 76 4 23 2 4 8 4 7 5 Energy 24 9 27 4 74 4 23 2 2 8 10 3 5 Social Sector 3 1 2 0 34 2 101 7 1 0 1 2 1 Other Sectors 2 1 8 1 42 2 68 5 3 1 1 0 2 Absorbtion

Reducing Policy

Fiscal Policy 57 20 98 15 287 17 298 20 22 17 13 16 18 Monetary Policy 2 1 5 1 13 1 25 2 2 2 3 4 3 Switching Policies

Exchange Rate 8 3 16 2 36 2 20 1 3 3 1 3 2 Wage Policy 2 1 5 1 47 3 31 2

All 282 100 657 100 1725 100 1483 100 100 100 100 100 100 Number of

Programs

8 19 31 31 Average number of

conditions

34 35 56 48 47

Source: Kapur et al. (1997: 521), World Bank (1990: 7).

Conditions in World Bank Programs (1980-88)

Source: World Bank (1990: 5).

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.

(6)

Review of World Bank Conditionality

Key Findings (continued)

The Bank has made important strides in adapting its policy- based 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.

Why do governments and the World Bank enter into agreements?

Based on: Kevin M. Morrison, The Determinants of World Bank Flows to Africa, 1977-1998, 2004

Political vs. Economic determinants

Morrison (2004)

Panel of 37 SSA countries; 1977-98; 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)

(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).

(8)

Morrison, 2004

Sub-Saharan Africa, 1977-1998, 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.

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