What role does the environment play in the Bank's work?
How do poor people benefit from structural adjustment?
How does the Bank encourage "good governance"?
How does the Bank work?
The Bank's mission is to help developing countries reduce poverty and promote sustainable development. In that sense you could say that our goals are much the same as those of many governments' development assistance programs. But unlike such aid programs, we don't make grants. The Bank lends money to developing countries and the loans are repaid. Developing countries borrow from the Bank because they need capital, technical assistance, and policy advice. There are basically two types of Bank lending. The first type is for developing countries that are able to pay near-market interest rates. The money for these loans comes from investors around the world. These investors buy bonds issued by the World Bank.
The second type of loan goes to the poorest countries, which are usually not creditworthy in the international financial markets and are therefore unable to pay near-market interest rates on the money they borrow. The World Bank, therefore, cannot issue bonds to raise money that would finance lending to these countries. Lending to the poorest countries is done by a World Bank affiliate, the International Development Association (IDA). More than 30 member countries periodically contribute the money needed to finance "credits" to borrowers. IDA credits are free of interest, carry a low 0.75 percent annual administrative charge, and are very long term-35 or 40 years including 10 years grace. Countries with per capita incomes of less than $1,305 (in 1992 dollars) are eligible for IDA credits. In practice, most IDA credits go to countries which are much poorer than this. But, again, the credits are repaid. They are not grants. IDA lends about $6 billion a year to the world's poorest countries.
Who runs the Bank?
The Bank is comparable to a global cooperative, which is owned by member countries. The size of a country's shareholding is determined by the size of the country's economy relative to the world economy. Together, the largest industrial countries (the Group of Seven or G-7*) have about 45 percent of the shares in the World Bank and they carry great weight in international economic affairs generally. So it is true that the rich countries have a good deal of influence over the Bank's policies and practices. The United States has the largest shareholding-about 17 percent, which gives the United States the power to veto any changes in the Bank's capital base and Articles of Agreement (85 percent of the shares are needed to effect such changes). However, virtually all other matters, including the approval of loans, are decided by a majority of the votes cast by all members of the Bank.
The Bank's Board of Executive Directors, which is resident at the Bank's headquarters in Washington, DC, represents all the members. Policies and practices are regularly and frequently debated and decided upon by the Board, so every member's voice is heard. In fact, developing countries together have about half the votes in the Bank. And the Bank's cooperative spirit is reflected in the fact that voting is rare because consensus is the preferred way of making decisions.
Only developing countries can borrow from the Bank. But all members, including the richer nations, gain from economic growth in developing countries. A world increasingly divided between rich and poor is in no one's interest. We all benefit from higher incomes, fewer social tensions, better health and education, environmental protection and increased trade and investment. The Bank's member countries-particularly the industrial countries-also benefit from procurement opportunities derived from World Bank-financed projects. *The G-7 members are Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.
How open and accountable is the Bank?
The World Bank is an open partnership between more than 175 member countries. We publish a huge amount of information and are publicly accountable to our member countries.
The sharing of information is essential for effective and sustainable development: it stimulates debate and broadens understanding of development issues, and it facilitates coordination among the many parties involved in development. It serves to strengthen public support for efforts to improve the lives of people in developing countries. We believe that the quality of our work is enhanced when staff and government officials consult and share information with participants in development programs.
In 1993, the Bank substantially expanded the range of documents prepared for operational purposes that are made available to the public, including a new Project Information Document (PID), which describes projects at the early stages of development. The Bank established a Public Information Center, which anyone can visit or access on-line by computer, which helps the public obtain Bank documents with maximum ease. The Bank also issues about 400 research, policy, and other publications a year (including a detailed Annual Report) and produces numerous newsletters, fact sheets, press releases and video and audio materials. There are, of course, some constraints on the Bank's openness. The Bank cannot, for example, divulge information supplied by members in confidence, but this is now a very small portion of our material. To help get its material out and explain its work, the Bank has many direct links with public audiences. We're in contact with hundreds of journalists around the world through personal meetings, publications, telephone conversations, fax communications and frequent press conferences. We also have extensive connections with nongovernmental organizations ranging from "think tanks" to groups working in the field. Bank staff are encouraged to be open in their outside contacts. They frequently speak at conferences, address citizens' groups, and appear on radio and television.
At the same time, the Bank's staff and management are held directly accountable by its members, who in turn report to their parliaments and publics. Members are represented at the Bank's headquarters in Washington D.C. by a resident Board of Executive Directors. The Board usually meets several times a week and oversees the Bank's business. A Board committee oversees regular audits of the Bank's work. The Board itself is answerable to a Board of Governors made up primarily of finance ministers and heads of central banks from member countries. The Governors meet once a year.
The Bank also has an independent Operations Evaluation Department, which reviews Bank-financed projects and reports directly to the Board on the results of these evaluations. Moreover, the Bank was the first multilateral organization to establish an independent Inspection Panel to consider outside complaints that the Bank has not followed its own policies and practices. Does the Bank work exclusively with governments? The World Bank does deal extensively with governments. But we also work closely with people and private enterprise in developing countries.
The Bank deals extensively with governments for two main reasons. First, under the Bank's Articles of Agreement, the Bank can only lend to a member government or under a member government's guarantee. Second, governments have much of the information the Bank needs to carry out its work, and their laws apply to Bank operations in their jurisdictions. But successful development requires that governments and communities "own" their projects and programs. We encourage governments to work closely with nongovernmental organizations (NGOs) to strengthen participation by people affected by Bank-financed projects. NGOs, particularly NGOs based in borrowing countries, collaborate in about a third of Bank-supported projects (and in about half of Bank-supported projects in Africa). At the same time, one of the Bank's priorities is to help stimulate the private sector. That's because the private sector is the main source of economic growth-of jobs and higher incomes. The Bank encourages the private sector by advocating stable economic policies, sound government finances, and open, honest, accountable, and consistent governance. Our Articles of Agreement prohibit the Bank from lending directly to the private sector. But a Bank affiliate-the International Finance Corporation-exists expressly to invest in private sector enterprises without such a guarantee. The IFC invests more than $2 billion a year. It also helps governments privatize state-owned enterprises, raises private finance for ventures and advises on legal and regulatory issues.
How does the Bank follow-up on its lending?
Decisions to loan money for a project are but one part of an intensive dialogue between the Bank and the country on a wide range of development issues. In the end, the member countries themselves must decide whether a project (or program) is worthy of their support. These are their projects, and if they are to work, the countries themselves must "own them." Moreover, although lending is certainly a fundamental part of the World Bank's work, the Bank does a lot more than just lend money. The Bank also routinely includes technical assistance in projects. This might cover advice on issues such as the overall size of a country's budget and where the money should be allocated, or how to set up village health clinics, or what sort of equipment is needed to build a road. The Bank funds a few projects each year devoted exclusively to providing expert advice and training. In addition, the Bank's Economic Development Institute trains people from borrowing countries how to create and carry out development programs.
The Bank closely monitors its projects and tries to learn from its mistakes. A 1992 report concluded that in a small number of cases, Bank-supported projects had run into difficulties. The report, which was written by an independent group headed by a former vice-president of the Bank, Willi Wapenhans, said one source of these difficulties was a "culture" within the Bank that placed too much value on approving loans and not enough on following up on the loans that had been approved. Since then, however, the Bank has taken steps to encourage staff to devote more time to supervising projects that are being implemented. The Bank is taking other steps to strengthen the impact of its lending on the poorest people, to involve nongovernmental organizations and those most directly affected by a project in its planning and to better monitor the performance of all projects in the Bank's portfolio.
How are Bank loans evaluated?
The majority of projects the Bank finances perform well. The Bank's criteria for "success" are exceptionally strict, however. For instance, before a project can be considered successful, it must have at least a 10 percent rate of economic return. This rate is far higher than the minimum demanded by many bilateral donors, which require that their investments in development projects show a rate of economic return of half that amount-between 5 percent and 6 percent. Economic development and risk are often two sides of the same coin. If investments to raise living standards in developing countries were always free of problems, there would be little need for a World Bank or for other national and international development agencies. Indeed, the projects that are most needed often involve higher risks because they break new ground. Another inevitable source of uncertainty is that the Bank lends for the long term; its loans are disbursed to borrowers over as many as 40 years.
Further proof of the Bank's strict lending criteria is that all Bank's lending for projects is now evaluated after the Bank finishes its loan disbursements. This evaluation enhances the Bank's internal and external accountability and "transparency." It provides a systematic, objective and accessible track record and supplies lessons from experience. Results and recommendations are reported to the Bank's Executive Directors and fed back into the design and implementation of policies and lending operations.
The evaluation is done in two stages: first, every operation is evaluated, on completion, by the staff who were responsible for its implementation; and second, a representative sample of completed operations is independently evaluated by the Bank's Operations Evaluation Department (OED). The OED enjoys full independence in judging the outcomes of completed operations, their sustainability, and their development impact.
Overall performance is then rated either satisfactory or unsatisfactory. Satisfactory performance means that an operation has achieved most of its major relevant goals and has achieved or is likely to achieve satisfactory development results, without major shortcomings. Whenever possible, the economic rate of return is reestimated; the 10 percent minimum rate of return, already mentioned, is the level the Bank normally uses as the benchmark for new projects. Sustainability, from the point of view of evaluation, is the extent to which an operation is likely to maintain the achievements it has generated or those that are expected to be generated in the operational plan. To assess whether an operation is sustainable, evaluators examine the same economic, social, financial, institutional, or environmental factors that were evaluated during appraisal and make a judgment about the project's resilience in the face of changing circumstances.
Some projects aren't considered successes because they don't post a 10 percent rate of return. But even these projects are often at least partly successful because they've met many of the stated goals and have improved people's lives.
Despite this generally solid record, the Bank recognizes that in recent years the design and implementation of projects has become more complex. We are therefore taking measures to improve the management of the projects we finance. An action plan, which builds on "best practices" already in use in the Bank, is introducing more efficient and client-oriented business practices and processes. It is also designed to shift the Bank's own institutional culture toward more consistent emphasis on the management of the operations under implementation. The plan recognizes that the ultimate test of the Bank's programs is their long-term effects on people and the environment. This means, for example, addressing effectively the issues of participation, project ownership, involvement of nongovernmental organizations and better ways of monitoring performance. The Bank's commitment to this action plan will help directly to make the Bank's operations more effective in promoting sustainable development. To be effective, development must benefit as many people as possible. It must also be lasting and take into account the needs of tomorrow's generations as well as today's. In short: it must be sustainable.
What role does the environment play in the Bank's work?
Environmental protection is a key component of sustainable development. Without this, long-term development is undermined. Conversely, without development, it is difficult to generate the resources needed for environmental protection.
The World Bank seeks to build upon this linkage by supporting projects for reforestation, pollution control, and land management; by investing in water, sanitation, and agricultural extension to help combat the environmental problems which affect the poor; by promoting national environmental action plans and economic policies which help to conserve natural resources; and by working with its partners-through the Global Environmental Facility-to help address international environmental issues such as ozone depletion and biodiversity loss. While environmental protection is a priority, the concept of "sustainability" also encompasses a concern for human well-being in the broadest sense. Consequently, the Bank's approach to sustainable development includes support for:
Programs for family planning to slow the rapid population growth which undermines economic growth and contributes to environmental degradation in many of the poorest countries;
More participation by poor people-especially women-in economic decision making and in the design and implementation of development programs;
The strengthening of institutions so that countries have the needed capacity to manage their own development programs; and more transparent and open forms of governance.
How do poor people benefit from structural adjustment?
World Bank programs are designed to help the poor, and the record is good. The Bank has lent more than $300 billion since it started 50 years ago. During that time developing countries, with the help of the international community, including the Bank, have doubled their incomes, halved infant mortality rates and increased life expectancy. The absolute number of poor people is still rising, largely because of rapid population growth. But as a percentage of the world's population, the number of poor is falling. Economic progress has been faster than during any similar period in history.
Structural adjustment is part of that progress. The economic shocks of the 1970s and early 1980s-high interest rates, low commodity prices, and sluggish growth in the world economy-hit many developing countries hard. Countries needed to make reforms in the way they ran their economies to encourage long term and sustainable development: not spending more than a country can afford; ensuring that policy benefits the whole country rather than the elite; investing where scarce resources have most impact-for example, in basic education and health instead of excessive military spending; and in encouraging a productive private sector. Far from being the victims of adjustment, the poor suffer most when countries don't adjust. What benefits the poor the most is rapid and broad-based growth. This comes from having sound macroeconomic policies and a strategy that favors investment in basic human capital-primary health care and universal primary education.
Reform is not unique to developing countries. The long struggle to reduce the United States budget deficit, a struggle mirrored in many other industrial countries, is also a form of structural adjustment. Such changes can be painful. In the short-term, unemployment may rise. Workers in loss-making state enterprises may lose their jobs. Civil servants may be made redundant as a consequence of cuts in government spending. Groups of poor people are also particularly vulnerable-for instance, poor pregnant women and nursing mothers, young children, and poor elderly people.
So, not surprisingly, Bank support for these developing countries carrying out structural reforms generally includes social safety nets and other measures to ease the temporary pain that poor people may experience. The Bank helps governments finance unemployment compensation, job- creation schemes and retraining programs. In addition, it helps governments target health and nutrition spending on the neediest people and also finances investments that are specifically designed to attack deep-seated poverty.
But poor people can also benefit quickly from adjustment; farmers get higher prices for their crops and currency devaluation helps workers in export industries. And in the long run, these adjustments lead to higher incomes, strengthen civil institutions and create a climate more favorable to private enterprise-all of which benefit the poor. One example: in Indonesia, a country which has successfully adjusted to global economic changes, the proportion of people living in poverty has fallen over the last 30 years from about 60 percent to about 15 percent.
How does the Bank encourage "good governance"?
The World Bank's mandate from the international community is to help reduce poverty and promote sustainable development. Our Articles of Agreement explicitly prohibit the Bank from interfering in a country's political affairs and require it to take only economic considerations into account in its decisions. Under this context, the Bank encourages governments to create the legal and institutional framework for transparency, predictability and competence in the conduct of public affairs and the management of economic development. Our concern with accountability, transparency and the rule of law focuses on the contribution they make to social and economic development and to the Bank's fundamental objectives of sustainable growth and poverty reduction in the developing world.
A basic concern for the Bank is a country's efficiency and effectiveness-whether resources, including Bank loans, are put to good use. "Good governance" is a key to efficiency and effectiveness. Experience suggests that good governance has four essential elements: improving public sector management (in the civil service, for example), ensuring economic and financial accountability, maintaining predictability in applying rules and regulations and ensuring the availability of and access to information about the economy. Bank policy is to take these governance factors into account when considering a loan and to encourage borrowers to be as efficient as possible. The Bank's own lending is subject to international competitive bidding and other open systems so as to prevent any misuse of these funds.
Where it is not satisfied that resources are well spent, the Bank may limit or stop lending, cease offering advice, and withdraw staff. But even if the Bank halts all activity in a country, the country may continue to be a member of the Bank and have a voice in its affairs. Sometimes remaining engaged with a borrower may be more constructive than disengaging. The poor may suffer more if the Bank withdraws or sharply curtails its activities than if it stays involved.
From the United Nations Department of Public Information.
