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The World Bank at work.

THE WORLD BANK AT WORK

It's got the right name--"World." The name is a proper reflection of the size and reach of a financial institution with assets comparable to Citibank or Bank of America. On an international scale, the World Bank, AAA rated by Moody's, makes loans, earns a profit, and borrows to re-lend at market rates.

In short, the World Bank appears to be exactly what a bank is supposed to be--something particularly reassuring in these days of concern and confusion about bank failures and high-risk highfliers on Wall Street. The World Bank, large and stable, is headed by a highly respected president in Barber Conable, and its professional workforce is the envy of the financial world. But there is a wrinkle in this picture of a bank.

"We are not a bank," Barber Conable says. "We are a development agency."

And in 1989, as it has for the past three years, this "development agency" turned a profit of $1 billion--an enviable record for any financial institution these days, bank or otherwise.

What Is the World Bank?

The World Bank was established in 1945 as the International Bank for Reconstruction and Development (IBRD). The bank's first postwar loan was to France, for the obvious purpose of rebuilding after the ravages of World War II. Other war-torn nations were also numbered among the first borrowers from the bank. And as one might suspect, the United States was the largest of the 38 original member-shareholders of the bank; it remains so today.

Over the years, the bank has grown substantially, diversified by new divisions that provide concessional loans to the world's poorest countries, and undergone a name change. But it has held steadfast to its mission of developmental lending to countries where there is promise for long-term economic growth.

The bank supports such infrastructure projects as irrigation and road building--projects that are familiar features in Peace Corps brochures and annual reports from the Agency for International Development. But the bank also lends to poor countries to promote industry, education, commerce, and finance--the vital tools of modern free-market economies.

Conable says perhaps the best measure of success of the World Bank's lending mission is in its "conversions"--when a borrowing nation develops the internal economic strength to become a lender. France and Japan, former recipients of World Bank loans, now join the United States, Germany, and the United Kingdom as the five largest shareholders of the bank. Three countries that once used to qualify for zero interest loans, which go to only the poorest countries, have advanced to the point that they contribute to that fund. They are Turkey, South Korea, and Colombia. Members of the bank--rich and poor--now total 151 countries. All have a stake in the lending activities. This makes for lively loan discussions in the bank's executive board, where all the member countries are represented by 22 directors.

During the past four decades, the bank has steadily expanded its developmental lending by borrowing in the world capital markets and reinvesting its retained earnings--much in the same way that commercial banks borrow from the Fed and then lend at market rates for consumer loans.

So is the World Bank a bank? Ultimately, the classic diagnostic tool--"If it looks like a duck, sounds like a duck, walks like a duck, then it is a duck!"--must be applied.

The World Bank doesn't issue credit cards, have ATMs, clear checks, or have teller windows. But it does have a special mission remarkably similar to the community "building and loans" that organized in America in the 1840s. In the 19th century, neighbors in a community would pool their savings so some of them could leverage that savings pool into building a home. The building of that home would then create jobs and wealth for other neighbors, who in turn would invest savings in that same community pool to provide yet another family with the capital to build a home.

The concept was to invest in one's own community and stimulate economic development, to the benefit of the whole community. It has worked very nicely to build America's neighborhoods and towns. And it is the best concept yet developed to help developing nations build their own wealth.

If the World Bank is not a bank, according to Conable's definition, then it is a global building and loan association; the world, its community.

The World Bank's Global

Community

The home office of the World Bank is in Washington, D.C. This is no coincidence. The United States is the major shareholder in the World Bank. Further, it is no coincidence that Barber Conable is an American, appointed to serve a five-year term as bank president. In the case of the bank's charter, governance of the bank is based upon a weighted voting, which is little more than the political version of the Golden Rule--"He who contributes the most gold gets to make the rules." The United States holds an 18 percent share of the World Bank; Japan is the next largest shareholder with 9 percent.

The World Bank's charter requires that its headquarters be in Washington, but there is no stipulation that an American be its president. Other World Bank offices are situated in major international centers of trade and finance, such as Paris and Tokyo, as well as small offices in many developing countries.

Conable agrees with the global community model as being analogous to the World Bank's development interests, yet offers a more geopolitical view to the concept. "The World Bank is actually a working paradigm for a post-Cold War world order," he says. "Our mission and structure are shaped around the concept of mutual benefit in a world of increasing interdependence--where economics more than political ideology will steer international behavior."

Layman's translation? "We're already doing what should be done in the future with respect for international cooperation." Just as in America's first neighborhoods, in the end, all parties benefit.

In a perfect world, the World Bank would put itself out of business. Conable's goal is to turn all of the bank's client borrowers into client lenders. He is a hopeful man with enormous energy and enthusiasm for his job. "I love this job," Conable says. "It's the best job in town." But he is a seasoned public servant, and he holds out no expectations for Utopia in his lifetime. Conable spent 20 years as a U.S. congressman from New York and retired from Congress as the ranking minority member of House Ways and Means Committee. He knows finance, and he is certainly no stranger to politics. He is also no stranger to the condition of the world. "There is an enormous amount of crushing poverty in the world," Conable says.

The Politics of Developmental

Lending

How could anyone disagree with supporting a financial institution that is in business to lend to poorer nations, raise standards of living, and show consistent profits that exceed $1 billion a year?

Easy. With all of the domestic turmoil of the savings and loan crisis, commercial banks teetering on the brink of insolvency, and a continuing need to support America's own developing industries, many in Washington would prefer to see funds that would otherwise expand World Bank activities remain in the United States.

That is the argument used by opponents of a scheduled $3 billion U.S. "replenishment" contribution to the International Development Association (IDA), the window of the World Bank which loans funds--interest free--for development to the very poorest countries where per capita incomes are less than $400 per year.

Another argument against financial developmental assistance: Why should the United States subsidize infant industries in foreign countries when that support can return to haunt our own industries with increased competition? Conable responds with a hint of agitation to this line of thinking:

"Forty percent of U.S. exports are to World Bank borrower nations. It is a fallacy that development in other countries will hurt developed countries such as the United States. World Bank-supported projects in the developing world generate business for U.S. companies that produce machinery and other goods and those that provide services. Everybody benefits from global development."

Nevertheless, there will likely be some Congressional opposition to expanding the work of the International Development Association. The United State's proposed contribution is made once every three years. Other developed nations, such as Japan and Germany, are also making contributions at the $3 billion and $2 billion level, respectively.

It is important to note that the IDA is the division of the World Bank that truly performs the United Nations' financial missionary work. IDA lends only to the world's poorest countries. But this is no giveaway program (such as grants from the Agency for International Development). Loans to IDA-qualifying countries must meet the same rigid standards as the bank's other market-rate lending and private-sector loan guarantee programs. Further, the loans come wrapped in World Bank supervisory expertise, technical assistance, and requirements for structural economic reforms that will help ensure funds will be well-managed and the principle repaid. This sort of carrot-and-stick lending concept is referred to as "adjustment lending."

Targeting Global Needs

and Opportunity

The World Bank has 6,400 employees. Only about 20 percent of them are American. So it is no surprise that the World Bank, keenly attuned to global needs and opportunities, is well underway in developing strategies to capitalize on economic opportunities and address developing crises. Conable stresses the World Bank's global responsibilities--the tremendous challenge of Africa, Latin America with its debt burden, and Asia with half the world's poor--but Eastern Europe and the environment are now attracting a great deal of attention.

Eastern Europe urgently needs capital to develop free economies and jump-start entrepreneurship. The World Bank is there with IBRD loans to help. But it is also there with financial expertise to teach basic banking and financial management skills that have been absent in the controlled economies of Communist Eastern Europe since World War II.

Clearly, this is what Conable has in mind when he talks about economic alliances replacing military alliances as the best means of preserving the fragile democracies of Eastern Europe.

The Environment

"There is an important nexus between development and environmental needs," Conable says, "and at the World Bank, we have targeted the environment for special lending programs--not because it is politically attractive, but because we are a development agency, and you cannot sustain development that is environmentally unsound."

That is Conable's economic reasoning behind the lending for the environment. But the wisdom for global investment in the environment is even simpler. Air and water do not recognize national boundaries. The nations of the world are interdependent when it comes to what we breathe and the quality of the water and atmosphere that likewise sustain life on this planet.

"We have always had environmentalists here at the World Bank. But recently we have institutionalized the inputs and organized them to a much greater degree than we ever have before," Conable says. The World Bank now identifies environmental components for most of its developmental lending projects, and it has even established an environmental department in its policy office. Examples of free-standing projects include a major partnership with the European investment bank to try to reduce the pollution in the Mediterranean.

Conable's goal this year is to establish an environmental lending fund. We should all wish him godspeed on that mission and say bravo to the balance of the World Bank's developmental lending. Regardless of whether the World Bank is really a bank performing economic mission work, or a development agency of mercy that happens to show a billion-dollar annual profit, it is sure to play an increasingly vital role in the emerging world of the 1990s.
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Author:Gibson, Tom
Publication:Saturday Evening Post
Date:Sep 1, 1990
Words:1954
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