The World Bank: Is 50 Years Enough? A Child of War, a Parent of Prosperity

Henry Owen

From Foreign Affairs, September/October 1994

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Summary:  The World Bank Group was a child of World War II, conceived to help developing countries build infrastructure, establish the foundations of economic self- sufficiency, and indirectly nurture political stability. But it should not retire at the age of 50. The bank?s mission should be revised to benefit from the colossal growth of private sector financial resources and to help coordinate the work of nongovern­mental organizations. A good first step would be more openness about its work.

Henry Owen has served as Ambassador-at-Large in charge of U.S. Economic Summit preparations. He is now a Senior Consultant to Salomon Brothers, and Co-Chairman of the U.S. Bretton Woods Committee, and a member of the international Bretton Woods Commission, which recently published a report on the future of the Bretton Woods institutions. The views in this article are his own.

Of great service in its first 50 years, the World Bank Group will render even greater benefits in its next 50 years if, unlike most institutions, it can adjust to the vast changes that have occurred since its founding. These changes require the World Bank Group to make substantial policy and posture shifts. To examine such shifts wisely, one must first look at the record.

In country after country, the World Bank has made a difference. To take but one example, its aid has been a major factor in making India agriculturally self-sufficient. When that vast realm became independent after World War II, it had endured a tragic wartime famine, which was renewed evidence of the fragility and inadequacy of its agricultural system. Since then, large-scale financial and technical assistance by the World Bank has greatly strengthened Indian agriculture by increasing food production, expanding reserves, and improving distribution. It has transformed the lives of hundreds of millions of people on the Indian subcontinent. And by relieving the pressure of India’s food purchases on world supply, the World Bank has improved the global food situation and, as a result, international economic prospects.

This sequence of events illustrates a broader point. The world economy went forward after World War II, rather than receding as it did after World War I, in part because the Bretton Woods institutions, the World Bank 1 and the International Monetary Fund, met the need for international banks of last resort. The absence of such institutions in the 1930s prolonged and deepened the Great Depression. After World War II, most of the world lacked investment capital. Governments, except for the United States, could not provide that capital; they were too poor. Private financial markets were small and cautious. The World Bank filled some of the gap. With guarantees from its founding governments, the Bank was able to raise substantial funds, which it put to good use in restoring a devastated world. Then it took on the greater and longer-term task of spurring economic development. The Bank’s operations grew in scale and diversity, and the benefits of its work spread around the globe.

NEW CHALLENGES

Over time, two deficiencies in this work became evident. Since the Bank’s money was largely raised in private markets at market rates of interest, its loans were necessarily extended to borrowers at those same rates. Such rates could not be paid by certain poor countries, particularly in South Asia and Africa. The International Development Association was created as a remedy in 1958. Its loans were subsidized by donor government grants to the IDA, and thus could be made at below-market rates. The IDA’s success is reflected in the fact that the number of countries requiring such "soft" loans has steadily declined, due in part to the development assistance received from the IDA.

Moreover, the World Bank was founded at a time when governments were the main economic actors in the world. The fact that the Bank was prohibited by its articles from making ...

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