The World Bank Group’s Role in Global Development | Forum

Summary

• The World Bank is a group of five multilateral institutions that aim to eradicate global poverty.
• Recent challenges, including climate change, the COVID-19 pandemic, and the Russian invasion of Ukraine, have renewed debate about the bank’s role in international development.
• As rival institutions grow in popularity, some experts say the World Bank cannot deliver on its goals without overarching reform.

The World Bank Group is a family of five multilateral institutions focused on economic development whose overarching mission is global poverty reduction. Established by Western powers in 1944, the World Bank was originally tasked with rebuilding the economies of postwar Europe. Almost eighty years later, it has funded more than twelve thousand projects and expanded its reach into nearly all of the world’s developing countries. 

Since June 2023, the bank has been led by former Mastercard CEO Ajay Banga, the first Indian American to lead the institution. But the long-standing tradition of U.S. leadership of the World Bank has led some observers to argue that the bank is too dominated by the West, particularly given the bank’s primary focus on the developing world and the rise of alternative institutions. Others suggest the bank has outlived its usefulness altogether, citing the increase in private capital flows available to developing countries. Supporters of the bank contend that it contributes to global economic development as an arbiter of best practices.

When was the World Bank founded?

The World Bank, along with its sister organization, the International Monetary Fund (IMF), was created at the Bretton Woods Conference in New Hampshire in 1944. The Allied powers, led by the United States and the United Kingdom, sought to restore European prosperity and prevent a recurrence of the economic malaise of the 1920s and 1930s, which helped fuel the rise of totalitarianism. The IMF, which by tacit agreement would be led by a European, was charged with managing the global regime of exchange rates and balance of payments. The World Bank, to be led by an American, would provide member countries with postwar reconstruction loans. While the IMF would focus on “firefighting” immediate macroeconomic problems, the World Bank would concentrate on the longer task of development.

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In recent decades, the bank’s primary focus has shifted from partnering with middle-income nations on growth-related programs and trade liberalization toward global poverty alleviation. These efforts take place in the world’s poorest countries—particularly those in Africa—and in middle-income countries, such as China and India, where the majority of the world’s poor reside.

In 2013, the bank set a goal to end extreme poverty, experienced by people living on $2.15 or less per day, by 2030. World Bank officials have since said that the lender will not succeed in that timeframe: in 2022, senior bank officials wrote that “it is now clear that the global goal of ending extreme poverty by 2030 will not be achieved—absent a history-defying rate of progress over the next eight years.” Other priorities for the bank include transnational issues such as climate change and recovery from the COVID-19 pandemic, as well as reconstruction in postconflict nations.

RELATEDA Conversation With David Malpassby David R. Malpass and Michelle Caruso-CabreraWhy Washington Should Give Up the World Bank Presidencyby Benn SteilWhat does the World Bank do?

The World Bank Group is composed of five separate institutions: the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation, the Multilateral Investment Guarantee Agency, and the International Center for Settlement of Investment Disputes. Each of these agencies is owned and operated as a cooperative by its member countries.

Together, the IBRD and the IDA are commonly referred to as the World Bank. As of 2023, the bank’s 6 largest [PDF] shareholders—out of its 189 members—are the United States, Japan, China, Germany, France, and the United Kingdom.

Ultimate policymaking authority at the bank rests with the board of governors, mostly made up of senior finance or development officials from member countries. The board of governors, in turn, delegates certain powers to the board of directors, which is composed of twenty-five executives and the World Bank’s president.

The International Bank for Reconstruction and Development­. Delegates at Bretton Woods established the IBRD in 1944 as the World Bank’s charter institution. Through loans, guarantees, and other services, the IBRD works with middle-income and creditworthy low-income nations to fight poverty. Projects span the globe and include digitizing health systems in Belarus, reducing air pollution in Colombia, and generating solar power in Pakistan.

The International Development Association. As a complement to the IBRD, the IDA was established in 1960 to promote broad-based development work in the world’s poorest countries by offering interest-free credits and grants. The IDA currently considers seventy-five countries, including thirty-nine in Africa, eligible for its programs, which focus on education, health, and sustainable environmental practices.

What do the World Bank’s proponents say?

The World Bank has been revered by many as the preeminent brain trust in development economics. “You could certainly find brilliant development economists outside the bank,” writes CFR’s Sebastian Mallaby in his book The World’s Banker, but “nobody could match the Bank’s concentration of talent.” As a result, he says, the bank’s annual World Development Report often establishes the accepted wisdom on any given development topic.

The World Bank has had several successful interventions, in the estimation of many observers. With bank support, Bosnia went from being a war-torn, low-income economy in 1995 to becoming an upper-middle-income economy today. The World Bank also provided almost half of the public funding of South Korea in the high-growth years of the 1970s and 1980s, paving the way for the country to become the eleventh-largest economy by gross domestic product (GDP) today (up from the thirtieth-largest in 1975). Most recently, the World Bank introduced several initiatives to keep low-income economies from collapsing during the pandemic, including measures to increase lending and defer payments on existing external debt. After the Russian invasion of Ukraine in 2022, the bank formed a fund to finance the country’s recovery, though experts note that an end to the war could still be years away. 

What do critics say about the World Bank?

“The plan to end world poverty shows all the pretensions of utopian social engineering.”

William Easterly, former World Bank economist

The bank’s perceived shortcomings have come under scrutiny for decades, including from former bank officials. “The plan to end world poverty shows all the pretensions of utopian social engineering,” former World Bank economist William Easterly wrote in 2006. And since resigning from the World Bank in 1999, former Chief Economist Joseph Stiglitz has argued that the economic reforms the IMF and World Bank frequently require as conditions for their lending have often been counterproductive for recipient economies and devastating for those countries’ populations.

The economic consequences of the COVID-19 pandemic and the war in Ukraine have battered many developing economies, reinvigorating criticism of the bank and other Western lenders. Some experts say the global nature of these crises has laid bare the bank’s limitations and its “obsolete” rules. While rich countries issued stimulus packages to fight deteriorating economic conditions during the pandemic, low-income countries had to borrow vast sums of money to stay afloat. Yet even with historic levels of lending from the World Bank, low-income countries could afford to mobilize just a small fraction of their economies toward pandemic response, compared to over a quarter of GDP in the United States. And after the war in Ukraine sparked skyrocketing inflation, poverty and hunger increased around the world. Global education and health outcomes also suffered. In 2023, the World Bank warned of a “lost decade,” projecting average global economic output through 2030 would fall to a thirty-year low.

Worsening climate change could deepen those challenges. The World Bank estimated in 2021 that a warming planet could push an additional 132 million people into poverty. That same year, a senior UN official said the World Bank was “fiddling while the developing world burns,” citing its “underperformance” on climate action. The World Bank is the largest source of financing for climate change mitigation and adaptation projects in developing countries, yet the $31.7 billion it spent on such programs in fiscal year 2022 (FY 2022) fell far short of estimates of the funding required; a report published by economists at the London School of Economics and Political Science estimated [PDF] in 2022 that emerging markets and developing countries (excluding China) will need to collectively spend $1.3–$1.7 trillion per year on climate needs by 2030. These include investments in renewable energy, upgrades to already-strained power grids, and the phaseout of coal plants.

Still other critics argue that geopolitical considerations have made development finance more challenging. After Russia invaded Ukraine in 2022, the World Bank cut ties with both Russia and its ally Belarus, pausing all programs in the two countries. Meanwhile, rival investment programs, such as those affiliated with China’s Belt and Road Initiative, have gained popularity as a way of financing infrastructure projects. “It is increasingly difficult for the bank to fund large infrastructure projects without becoming embroiled in geopolitical rivalry, nor can it compete with massive infrastructure loans subsidized by governments motivated by geopolitical objectives,” writes Scott M. Moore, a China expert and former World Bank analyst.

Are there alternatives?

Skeptics question whether there is still a niche for the World Bank in the modern architecture of global finance, particularly given the availability of private lending and the growth of emerging economies over the past two decades.

Some economists have argued that the increasingly global nature of private capital flows and the ascendance of large emerging economies such as the BRICS—Brazil, Russia, India, China, and South Africa—diminish the World Bank’s influence. These dynamics have led some to recommend that the bank narrow its focus to countries that lack access to private markets. “If the World Bank wants to have a significant role on the lending side, it’s going to have to be in the poorest of the poor countries or war-torn countries where the private sector has been effectively scared off,” CFR’s Benn Steil said.

The BRICS’s New Development Bank and the China-led Asian Infrastructure Investment Bank (AIIB) have presented developing countries with alternatives to the Bretton Woods institutions. Rebecca Liao, a China analyst, writes that the AIIB was born from developing-world grievances with what poor countries see as the bank’s onerous terms. Emerging markets—including China, which the World Bank classifies as an upper-middle-income country even though it is the world’s second-largest economy—have also been frustrated with their relative lack of influence at the World Bank and the IMF. But giving China in particular a greater voice in the Bretton Woods institutions is not without risks. “China is not seen any more in Congress as being a responsible player in the international financial community,” Steil said at a CFR media briefing. The last thing U.S. officials want to see, he argued, is the World Bank “turned into a global Belt and Road, pursuing China’s geostrategic gain.”

To this point, some experts say the bank should reform its voting structure to be more competitive, including for its presidential elections. The United States has double the voting share of Japan, the country with the next most votes. “Having an American at the helm of the bank partly served to reassure Wall Street, originally the main supplier of the bank’s capital,” CFR’s Thomas J. Bollyky wrote in 2012. “With the globalization of capital markets, this justification . . . is long outdated.” He recommends a voting system that requires leaders to win over a majority of countries, not simply the primary shareholders. The bank’s board of governors considered non-U.S. candidates in 2012, when U.S. citizen Jim Yong Kim ultimately defeated candidates from Colombia and Nigeria. However, it considered only Americans in the two subsequent nomination periods. Kim’s successor, David Malpass, drew criticism for his position on climate change and resigned one year before his term ended. 

Other experts go farther, arguing that the United States should relinquish its presidency of the World Bank, especially as the U.S. share of global economic output diminishes. By allowing someone else to lead the bank, Washington would “neutralize assertions from Beijing that alternative development institutions—such as its own creation, the Asian Infrastructure Investment Bank—are necessary to overcome unreasoned U.S. resistance to governance reform,” writes CFR’s Steil. Such reforms would ensure the United States picks a World Bank president based on its policy priorities and without the restriction of nationality, while still maintaining a veto over major institutional changes.

What lies ahead for the World Bank?

Despite its challenges, most economists say the World Bank still serves an important role in global development. The bank itself argues that it has a number of comparative advantages over other institutions: a global presence, a repository of best practices, financial acumen, leadership in global public goods, and an established role as an international development catalyst.

Several experts have proposed reforms to reorient the bank’s mission in the age of climate change. In 2022, Prime Minister of Barbados Mia Mottley proposed the Bridgetown Initiative, an overhaul of the World Bank and other financial institutions that calls on wealthy countries to provide $100 billion per year in foreign exchange guarantees to low-income countries for decarbonization efforts. The plan drew support from the head of the IMF in 2022, and high-level U.S. officials, including Secretary of the Treasury Janet Yellen, endorsed the need for World Bank reforms. Mottley says she has discussed the initiative with World Bank President Banga, but he has not officially backed it.

For his part, Banga has proposed plans to expand the World Bank’s lending by $100 billion over the next decade. His reforms would allow bank shareholders, including the United States and other wealthy countries, to guarantee loans if countries cannot repay them. At a CFR meeting in September 2023, Banga said he intends to stretch the bank's balance sheet with “all the financial engineering I can do.” The bank has previously said such maneuvers could increase lending sixfold over a ten-year period. 

Still, Steil says that China and other rapidly growing economies “at some point will need to assume responsibility for their own people, given their economic growth.” He argues that rather than loaning large sums of money, the World Bank’s primary role in the years ahead could instead lie in the advisory assistance it provides.