And the financial pressures they endure

Photo by Melchior Damu on Unsplash

Ioriginally did not know much about the World Bank, and I am by no means an expert now, but I became more familiar with the organization after living in D.C. for a few years. I identified with their mission, which served as motivation to come back to school:

“to reduce poverty, and improve living standards by promoting sustainable growth and investment in people” [1]

This past quarter I took a class on sustainability and resiliency in water resource development. We were required to pick a paper to present to the rest of the class. I was excited that Multilateral Development Banks (MDBs) were one of the available topics as it gave me a chance to dive deeper into the inner workings of the World Bank.

The paper I chose was The Invisible Hand: Financial Pressures and Organisational Convergence in Multilateral Development Banks by Chris Humphrey (2016) [2]. The paper explains how financial pressures have shaped the organizational development of MDBs.

I’ve condensed the information from my presentation on the paper below, enjoy!

Humphrey’s goal of the paper is:

To examine the change in development practices of MDB’s arising from the need to secure financing from capital markets

To understand this it is helpful to know what exactly MDBs are. Investopedia provides a nice definition:

A multilateral development bank (MDB) is an international financial institution chartered by two or more countries for the purpose of encouraging economic development in poorer nations. [3]

There are many of these institutions like the World Bank, the Asian Development Bank, and the African Development Bank.

For my presentation I focused explicitly on the section of the Humphrey’s paper about the World Bank, which happened to be the first MDB. It was founded in 1944 as the International Bank for Reconstruction and Development (IBRD) at the Bretton Woods Conference [4]. It was originally created out of the need for capital in countries rebuilding after WWII. The assumption at the conference was that the World Bank would offer guarantees for governments borrowing from private sources as opposed to providing direct loans. However investors and management at the World Bank disliked this idea and preferred to provide loans. The main problem with lending directly was the shortage of capital raised from member countries compared to the rebuilding effort needed from WWII. $727 million was raised and France and the Netherlands alone needed $1.035 billion.

What happened next?

Out of necessity, they turned to the U.S. capital markets to raise the money. With this shift came recruitment for new leadership and a change in strategy.

The World Bank looked to Wall Street to fill executive-level positions. This led to John J McCloy becoming President, Robert Garner becoming Vice President, and Eugene Black becoming US Executive Director.

With the new team in place, they issued two bonds worth $250 million on July 15, 1947. Their efforts were successful in raising more capital, but they knew they needed to prove their financial credibility if they were to continue this strategy long-term.

New principals were developed as a result. McCloy, with his financial background, knew the importance of making the World Bank appear a sound investment to the investor. This lead to a (1) focus on projects that would generate income and (2) focusing more on borrowing country’s credit risk than issue of need.

Humphrey provides statistics for the changes this caused during the period of 1947–1961. Of the $5.7 billion provided in loans from the World Bank, 70% went to Europe, Australia, and advanced developing nations while only 30% went to poorer developing nations. The graph below shows a breakdown of spending by project type where it is clear to see financially lucrative projects like electric power were prioritized.