World Bank: A Primer

The World Bank and the International Monetary Fund (IMF) were founded by the Allies at a conference in Bretton Woods, N.H., in 1944. They were established to help rebuild economies and regulate world finance, investment, and development after World War II. Each is collectively owned by its member governments, from which it receives its budget or guarantees that allow it to raise money in capital markets.

The IMF is best known for its economic-rescue packages - huge loans to countries in with serious economic crises. The loans are made with the agreement that the borrowing government adopt economic policies ordered by the IMF.

The World Bank Group consists of four institutions. The first two, the International Bank for Reconstruction and Development (IBRD) and the International Development Agency (IDA), operate as one organization. A third, the International Finance Corporation (IFC), has an independent staff and procedures. A fourth agency provides insurance for investors against political risks in the developing world.

The IBRD makes loans to governments in developing countries for projects and reforms the bank deems useful in alleviating poverty and encouraging development. Most of its capital comes from borrowing on the commercial bond market, where its bonds are guaranteed by the US and other members.

In theory, if a borrowing government were to default on its loans, money from member countries would repay bondholders. But no country has ever defaulted on a World Bank loan, even though the bank has identified more than 40 countries that have unsustainable debt levels and require relief.

Critics blame the bank and IMF for this debt crisis, alleging that when a country was in danger of defaulting these institutions gave it new loans to pay back the old ones. Many of the countries with this problem are in sub-Saharan Africa.

The IDA makes long-term low- or no-interest loans to governments of extremely poor countries. Most of its capital comes from the contributions of member governments.

The IFC makes loans and investments in private companies and financial institutions in developing countries. Most of its working capital is raised on the open market and from its investment earnings.