The World Bank: The Bank’s Role in the Global Economy and Why it Matters

The World Bank is the largest financial backer of international development, particularly of emerging nations.  Guest post by Angie Picardo.

World Bank Headquarters in Washington, D.C.

A supremely powerful institution, the World Bank is also frequently criticized for its policies, initiatives and operations. Framed with successes and shadowed by missteps, the Bank has generated significant fiscal and social change for countries around the world. But is its power doing more harm than good?

Founded in 1944, the World Bank was created to promote post-war reconstruction and development in Europe. (France received the very first loan of $250 million U.S. dollars.) Founded by 28 nations, the Bank’s membership today includes 187 countries.

Following its reconstruction efforts, the World Bank began a mission shift, ultimately redefining its goals to concentrate on the “world’s poorest.”

In the late 1940s, for example, India was given loans to build sanitation systems and to generate power. By 1960, the International Development Association was founded, providing grants and loans to the most impoverished countries around the world. In the 1970s, the Bank established research centers to boost agriculture and farming technologies to combat world hunger in areas with growing populations. Throughout the 1980s and up until today, the World Bank has helped stem health and environmental crises in hundreds of countries around the globe.

Those are the positives. The Japanese Bullet Train, numerous green technologies, the reduction of ozone-depleting chemicals – all can be attributed to the financial support of the World Bank. But actions taken by the organization have occasionally hindered progress in national and global initiatives.

Bank loan requirements for impoverished nations often put a country in severe debt. This debt worsens over years of inability to pay back  loans, along with accrued interest, and subsequently results in a state of perpetual debt. This shifts a country’s top priority from providing social services and necessary infrastructure to solely paying back the loan, which in turn results in a downward spiral for the poor. While money is  provided to strengthen a nation’s economy, management of the debt accelerates poverty.

World Bank loans protocols and oversight dictate how money is to be spent. This raises several issues. First, an external entity is often not  the best judge for how fiscal aid should be distributed within a nation; the government and citizens of that nation are more likely to understand the intricacies of their economy.

Compare this to how the United States partitions State and Federal governments. State governments are more capable of dealing with their smaller communities than the federal government; a panel of D.C. lawmakers is not properly suited to make decisions for a school board in Kansas City. A loan regulation might dictate that an African nation must spend its finances in a heavily-populated impoverished area, while greater long-term benefit would derive from helping poor citizens in the rural countryside.

Furthermore, such regulations remove control from countries that are in desperate need of gaining control. By restricting a nation’s decision-making powers over its economy, the Bank makes it harder for a country to stand on its own two feet. Independence and liberty are lost in the attempt to attain independence and liberty.

This is where “power” comes into play. Nations that fund the World Bank also leverage where  and how the money is spent. France, for example, in receiving the very first loan from the World Bank in 1944, complied with the organization’s requirement: to eliminate all involvement with the communist factions within their government. Since the World Bank is primarily under American and European influence, economic aid swings largely in their favor (and in the direction of their demands).

Some critics believe that global lending contributes to a “global inflation”  that damages economies worldwide, especially when money is poured into a country or region too quickly. Further, in order to sustain debt management, impoverished countries must increase their exports. Yet, fierce competition with other debt-riddled nations results in lower prices, decreasing salaries and steadily-increasing poverty.

The Bank’s loan-centered system digs these countries into deeper economic holes (and then buries them in the consequences). In many instances, citizens incur additional hardships because of the country’s debt.

The World Bank has also fallen short in establishing a clear mandate for universal economical concerns. Global warming, drug trafficking and access to natural resources are just three issues that cannot be contained and solved within the borders of one nation. Pouring money into one country to tackle such issues, while ignoring a global approach, is a major weak spot.

President Obama nominated Dr. Jim Yong Kim to be President of the World Bank in 2012. In recent months, Dr. Kim voiced support for a global approach to funding priorities. He also stated his intention to focus on initiatives that benefit areas of the world that need it the most. Let’s hope he will succeed.

Angie Picardo is a staff writer for NerdWallet, a website dedicated to helping consumers alleviate debt with the best balance transfer cards.