An Analysis of the World Bank Approach to Reducing Global Poverty

Rapid technological development during the last several decades coupled with a series of breakthroughs in information technology has immensely contributed to the development of national economies for a wide range of countries with positive implications on standards of life of people. At the same time, global poverty still remains one the most pressing issues with almost half of the world – more than 3 billion people living on less than $2.50 a day (Shah, 2016, online).

The issue of global poverty is periodically addressed by a set of organisations such as World Bank, One International, WHO, CARE and others, as well as, within the framework of The Group of Twenty (G20) forum.

This article represents a critical assessment of the role of World Bank in particular in dealing with global poverty. The article starts with the general discussions about the World Bank and its current contribution in eliminating global poverty. This is followed by analysis of criticism of World Bank performance in dealing with global poverty. Moreover, this article identifies potentials for World Bank to deal with global poverty more effectively.

The World Bank Group is an international financial institution that pursues its mission of ‘Help Reduce Poverty’ with the participation of 188 countries. The World Bank Group consists of five organisations that are The International Bank for Reconstruction and Development (IBRD), The International Development Association (IDA), The International Finance Corporation (IFC), The Multilateral Investment Guarantee Agency (MIGA), and The International Centre for Settlement of Investment Disputes (ICSID). Each of these organisations contributes to World Bank mission in a unique way.

It is important to clarify that generally the term ‘World Bank’ refers to only IBRD and IDA, and these two organisations along with IFC, MIGA, and ICSID are incorporated within the World Bank Group. Within the scope of this paper in particular, ‘World Bank Group’ is referred to as the World Bank, thus incorporating all five organisations.

World Bank in its Role in Global Poverty

It is important to note that defining the term of poverty is not a straightforward task. Scholars distinguish between an absolute and relative poverty. The definition of absolute poverty can be proposed as “a per capita income of less than one US dollar a day” (Geyndt, 1996, p.1).

The adoption of definition of absolute poverty offers the advantages of clarity and a high level of applicability; however the disadvantages are failure in considering the differences in cost of living across countries and not taking into account changes in society over time.

Relative poverty, on the other hand, is “not being able to afford the standard of living considered acceptable by the majority of people” (Moore, 2001, p.382). The advantages of relative poverty definition relate to taking into account the characteristics of social settings, and disadvantages include room for arguments due to the absence of fixed standards.

The World Bank has adopted a simplistic definition of poverty that is proposed as ‘pronounced deprivation in well-being’ (World Bank, 2000), thus it can be stated that the approach adopted by the World Bank comprises certain elements of both approaches, relative and absolute.

Generally, estimations indicate that the level of global poverty as been sharply declining during the last two decades, partially contributed to organisations such as the World Bank. Specifically, it has been estimated that “the proportion of people living on less than $1.25 a day fell from 43.1 per cent in 1990 to 22.2 per cent in 2008” (World Development Indicators, 2012, p.2)

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Figure 1 Changes in global poverty for the last two decades

Source: World Bank (2012)

 Nevertheless, the current level of global poverty with more than 3 billion people living on less than $2.50 a day (Shah, 2016, online) is still an unacceptable figure taking into account a wide range of potentials available to people belonging to this category in terms of increasing the standard of their life.

The International Bank for Reconstruction and Development 

The primary aim of The International Bank for Reconstruction and Development (IBRD) is poverty reduction in “middle-income and creditworthy poorer countries by promoting sustainable development through loans, guarantees, risk management products, and analytical advisory services” (International Bank for Reconstruction and Development, 2016, online).

As an original World Bank institution, IBRD was established in 1944 and its initiatives are sponsored by funds generated from global financial markets. Figure 2 illustrates the distribution of IBRD-IDA lending by region for the fiscal year of 2012.

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Figure 2 IBRD-IDA Lending by region for the fiscal year of 2012

Source: World Bank Annual Report (2012)

The provision of loans by IBRD is facilitated in relation to specific projects in middle-income and creditworthy poorer countries such as modernising water supply system in Costa Rica and developing revenues administration system in Romania.

The International Development Association

Established in 1960, The International Development Association (IDA) is a branch of the World Bank that provides long-term funds free of interest to the governments of 79 countries considered to be the poorest.

Countries within this category such as Angola, Benin, Chad, Congo, Bangladesh, Papua New Guinea, and Mogolia have a per capita income below $1,135 and are unable to borrow funds for development initiatives on the basis of market terms.

Donations made by wealthy countries every three years are the main source of fund for IDA. Specifically, “for IDA 15, the 15th replenishment of IDA funds, $41 billion was made available for 2008 – 2011” (IDA, 2010, online)

 

The International Finance Corporation

The International Finance Corporation is the World Bank private sector division that engages in providing long-term loans, creating jobs, and promoting open and competitive markets in developing countries through its programs, initiatives and services.

The IFC operates in more than 130 countries and maintains offices in more than 80 countries worldwide. Moreover, the organisation employs more than 3,400 people worldwide and boasts with a massive investment portfolio of more than $32.4 billion (Corporate Overview, 2009).

The IFC has initiated a range of crisis response programs such as Global Trade Finance Program and Global Trade Liquidity Program, whereas the facility services of the organisation include Infrastructure Crisis Facility, Microfinance Enhancement Facility and advisory services.

 

The Multilateral Investment Guarantee Agency

The Multilateral Investment Guarantee Agency (MIGA) aims to promote foreign direct investment (FDI) into developing countries in order to assist with economic growth, poverty reduction, and increasing standard of life of people in general. In achieving these aims MIGA utilises its main instrument of providing risk insurance guarantees to investors, as well as lenders within private sector.

During the fiscal year of 2012 alone a total of $2.7 billion guarantees for projects within developing countries and further $10.6 billion for trust funds have been generated by MIGA (Annual Report, 2012).

 

The International Centre for Settlement of Investment Disputes

As an autonomous international institution established in 1966, The International Centre for Settlement of Investment Disputes (ICSID) has a purpose of providing facilities and arbitration of international investment disputes. The ranges of investment disputes administered by ICSID Secretariat cover cases that do not belong to the scope of ICSID Convention or the ICSID Additional Facility.

As it is illustrated in Figure 3 the numbers of international investment disputes administered by ICSID has been constantly rising during the last ten years owing to intensifying levels of economic globalisation. However, this specific World Bank arm has the least impact on global poverty reduction in direct manner compared to other organisations within the World Bank Group.

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Figure 3 Rise in numbers of ICSID cases administered by the Secretariat

Source: Annual Report (2012)

Criticism of World Bank Performance in Dealing with Global Poverty

Various aspects of the World Bank performance have been subjected to criticism by official representatives of governments, non-governmental organisations, and independent experts. Broadly, criticism attracted by World Bank performance can be divided into the following categories: ineffective strategy in dealing with global poverty, ineffective governance structure, bias and a high level of politisation, ineffective auditing system, and a lack of cooperation with other organisations.

Ineffective Strategy in Dealing with Global Poverty

The practice of intensive promotion of an economic strategy known as a ‘shock therapy’ that involved rapidly imposing the implementation of free market principles on developing countries in Africa, Latin America and former Soviet states is blamed for creating economic chaos in some countries. Moreover, it has been argued that “client nations would be better served by homegrown, piecemeal reforms developed from bottom-up” (Masters, 2012, online).

The World Bank is also criticised for promoting ‘free market fundamentalism’ (Sarfaty, 2012), and for the promotion of unquestioned belief that achievement of economic growth for any country is closely associated with the implementation of core principles of free market with disregard to unique cultural and other differences associated with any given country (Cisse et al., 2011).

Moreover, there are documented evidences that indicate that following the recommendations proposed by the World Bank has caused decline in real income for Russian Federation during 1990’s, whereas China has been able to achieve impressive economic growth by refusing to implement the World Bank recommendations (Weaver, 2008)

This criticism may represent a valid point taking into account the fact that unquestioned obedience to free market principles with no government intervention is often shown by economists as one of the primary reasons of the recent global economic crisis of 2007-2010.

Critics also argue that World Bank rankings “promote a neo-liberal agenda of privatisations, welfare cuts, limited employment rights and low wages to please and entice foreign immigrants” (Inman, 2012), thus the World Bank might be applying double standards in formulation and implementation of its programs.

A lack of concern by the World Bank for social implications of its projects can be specified as another front where the organisation is faced with criticism. For example, the World Bank projects of building hydroelectric dams in a range of countries have caused displacement of many local indigenous people (Collins, 2012)

 

Ineffective Governance Structure 

Critiques argue that ineffectiveness associated with the World Bank governance structure proves to be a major obstruction to achieve poverty reduction in more effective ways. Specifically, the World Bank governance is mainly concentrated on the hands of highly industrialised countries within G7 group, and no intake is reflected from poorer countries in decision-making (Klees et al., 2011).

In general, the World Bank governance structure has been criticised as undemocratic (Kirk, 2011) and this factor has been stated to contribute to priority given to private sector in implementation of programs associated with Climate Investment Fund causing much speculation and controversies (Hollander, 2012).

Moreover, in the present form of the World Bank governance structure the President is aided by only two vice-presidents. The first vice-president deals with institutional integrity, whereas the second vice-president is Auditor-General at the same time, and accordingly she is responsible for internal audit as well. Only two vice-presidents to assist the World Bank President to coordinate the activities of the organisation can be criticised as insufficient taking into account a high level of variety in scope of programs initiated by the World Bank.

The current voting structure in the World Bank according to which votes are distributed on the basis of ‘one share one vote’ system in relation to the Bank’s capital stock  does not contribute to the achievement of the World Bank organisational objectives in the most effective manner (Sarfaty, 2012)

Bias and High Level of Politisation

The existence of bias to a significant extent within the World Bank practices and official reports is voiced in many publications. For example, The World Bank The Best Places in the World to Start and Run Business for 2013 list places former USSR member state Georgia and African country Zambia as the places with the best environments to conduct business.

Sceptics argue that the reason for Georgia being awarded the 9th best place in the world in terms of starting and running the business is directly related to the willingness of the US to increase the level of its presence and influence in the former Soviet country (Inman, 2012).

There is also a convincing argument that much advertised independency of The International Centre for Settlement of Investment Disputes (ICSID) arm of the World Bank is highly compromised in reality due to the fact that it is funded by the World Bank and its member countries, and therefore this organisation is inclined to serve the interests of G7 countries.

Generally, the World Bank is criticised of becoming a tool to impose the political wills of The USA, the UK, Germany, France, and Japan that are the largest shareholders in the Bank. A high level of ‘conditionality’ associated with the provision of loans by the Bank to developing countries is an additional popular point of criticism within the World Bank practices. It has been stated that these ‘conditionality’ does not necessarily fit with macroeconomic and political realities of relevant states, and in some occasion the implementation of ‘conditions’ may even involve the loss of control over the key aspects of national economies (Weaver, 2008).

 

Lack of Cooperation with Other Organisation

The World Bank is sometimes accused of being a ‘stand-alone’ organisation with no expressed initiatives to synergise its activities with other organisations in order to increase the level of efficiency of achieving its objectives (Weaver, 2008).

There are many non-governmental organisations and campaigns such as The Global Poverty Action Fund (GPAF), Make Poverty History, CARE and ATD Fourth World that attempt to deal with the same problem – reducing the level of global poverty, albeit there are differences in strategies of these organisations.

The World Bank critics argue that with its vast resources and experience the organisation could contribute to poverty reduction at a global scale more effectively if cooperation with other organisation with the same objective was achieved.

Potentials for World Bank to Deal with Global Poverty More Effectively

A wide range of inefficiencies associated with the World Bank performance as discussed above can be effectively addressed in order to increase the level of efficiency of the World Bank in reducing the scale of global poverty.

This paper identifies these potentials as improving the governance structure of the World Bank, minimising the role of politics, improving the strategy for dealing with global poverty, improving the accountability system of the organisation, and achieving a greater level of cooperation with other organisations.

 

Improving World Bank Governance Structure

Large-scale reforms need to be introduced within the World Bank governance structure in order to improve the level of its performance. First of all, decision-making powers in the World Bank need to be extended to beyond G7 countries so that the stance of other countries in relation to the issues of poverty reduction can be taken into account in decision making.

Greater level of representation of other countries apart from G7 members in the World Bank decision making can be achieved through modernising the organisation’s voting system. Specifically, a set of additional criteria such as the numbers of population along with the share ownership of the Bank need to be taken into account in distribution of votes amongst member states.

There is a potential for the World Bank to contribute to the level of its effectiveness by introducing the posts of two more vice-presidents to assist the President to conduct his duties. These vice-presidents need to be made responsible for achieving greater level of cooperation with other organisations and consistently searching for and ensuring the adoption of innovative approaches in poverty reduction.

 

Minimising the Role of Politics in World Bank Performance

Reducing the role of politics within the World Bank decision making practices is the most difficult task to achieve, yet it is critically important (Cisse et al., 2011). One of the most realistic ways of achieving this objective relates to increasing the level of participation of other countries apart from G7 in decision making as discussed above, so that a balance can be achieved.

Additionally, influence channels to the members of World Bank management team from powerful states need to be minimised so that decisions can me made with a higher level of objectivity. This can be achieved through imposing a set of conditions that need to be met in order to be elected or appointed as an official with the World Bank. Such conditions might include personal income report of the World Bank official and family members to be submitted annually specifying the sources of income, and specification of economic or political alliances the World Bank officials are members of.

Improving the Strategy for Dealing with Global Poverty

As it has been discussed above, the World Bank current strategy of dealing with the issues of global poverty is associated with a set of flaws and inefficiencies in various levels. Strategy modification to enhance the level of the World Bank effectiveness would include the implementation of proposals discussed below.

The current practice of the World Bank Group in general, and IDA in particular that involve providing a vast amount of financial resources to poor countries mainly in African continent is occasionally proving to be a counter-productive through fuelling bribery and ‘feeding’ local officials (Collins, 2012)

Therefore, the World Bank Group may reform its lending strategy and focus more on providing micro-financing for local small businesses in direct manner, thus eliminating the chances of funds being misused by local officials.

A huge success of Grameen Bank, a microfinance provider in Bangladesh can be mentioned to illustrate the effectiveness of micro-financing offered directly to consumers in terms of achieving poverty reduction (Collins, 2012). Currently, the World Bank offers micro-financing  through its IBRD and IFC arms, however, the potential of micro-financing is far from being fully utilised by the organisation to contribute to the achievement of its objectives.

At the same time, it needs to be acknowledged that the provision of micro-financing to be offered by World Bank directly to consumers in undeveloped and developing countries can be associated with a set of difficulties impractical levels. Specifically, this practice might contradict with financial jurisdictions of these countries or there may be intervention from the government in many other ways. This challenge can be dealt with through achieving cooperation with the government officials in relevant undeveloped and developing countries at the highest levels.

Moreover, World Bank organisations need to address the root of the problem by eliminating the culture of poverty. Culture of poverty “refers to people who have a particular culture which prevents them being successful in society so keeps them in poverty” (Moore, 2001, p.980). Culture of poverty can be eliminated through educating the individuals involved about the opportunities available to them in terms of increasing the level of their income.

However, it has to be warned that the elimination of culture of poverty, like any other cultural transformation can prove to be a lengthy process.

Furthermore, unique cultural differences and other specific characteristics associated with any given country need to be taken into account by the World Bank when developing programs aimed at reducing the level of poverty within the country.

 

Achieving a Greater Level of Cooperation with other Organisations and Parties

The World Bank can focus in engaging in cooperation with a wide range of organisations in private and public sectors so that the level of effectiveness of its poverty reduction initiatives could be enhanced.

Particularly, initiating cooperation with the organisers of G20 forums that are scheduled to take place on July 2013 in Moscow and on September 2013 in St Petersburg, Russia, and on November 2014 on Brisbane, Australia can prove to be highly effective in terms of contributing to global poverty reduction. In other to achieve this contribution, the World Bank needs to share its findings with the organisers of G20 forums and achieve the inclusion of global poverty discussions G20 forum aiming to generate concrete outcomes from discussions.

The World Bank can also provide practical assistance to increasing numbers of philanthropists among rich people worldwide aiming to contribute to the cause of poverty reduction. This assistance can be offered in forms of developing joint-programs where the World Bank expertise can be coupled with the financial and other resources of philanthropists in dealing with the cause of poverty reduction.

Moreover, it is argued that leading economic theorists and institutions associate the solution of poverty issues with increasing the level of economic prosperity within a country in general, without focusing on the causes of poverty in particular (Klees et al., 2011). From this perspective, there is a potential for the World Bank to deal with global poverty more effectively by aiming to address the roots of the issue. Again, the achievement of this specific objective can be facilitated through achieving a greater level of cooperation with other organisations in public and private sectors.

It is important to note that during the implementation of this specific opportunity the World Bank officials should be careful not to compromise independency of the organisation by forming strategic partnership with other organisations and individual philanthropists. In other words, cooperation with organisations and individual philanthropists should not come for the World Bank for the price of its strategic decision making being influenced by third parties.

Conclusions

There have been tremendous advancements in the level of improvement of standard of life of people in global scale during the last several decades. This has been achieved mainly by increasing the level of effectiveness of utilisation of resources enabled by technological development.

Nevertheless, there are still hundreds of millions of people worldwide who fit the definition of absolute poverty as it has been explained in this paper. Today, the World Bank is the largest organisation in the world by the numbers of its members and employees, and the size of its budget that engages in poverty reduction with a certain level of effectiveness.

The World Bank strategy involves dealing with poverty reduction through its five individual member organisations that are The International Bank for Reconstruction and Development, The International Development Association, The International Finance Corporation, The Multilateral Investment Guarantee Agency, and The International Centre for Settlement of Investment Disputes (ICSID).

In recent years the criticism of the World Bank has intensified from various parties, and the aspects of the World Bank that tend to attract the most criticism include ineffective strategy in dealing with global poverty, ineffective governance structure, bias and a high level of politisation, ineffective auditing system, and a lack of cooperation with other organisations.

A brief analysis of these issues provided in this paper has led to the identification of potentials to improve the World Bank performance in terms of engaging in poverty reduction in more effective ways. These potentials include improving the governance structure of the World Bank, minimising the role of politics, improving the strategy for dealing with global poverty, improving the accountability system of the organisation, and achieving a greater level of cooperation with other organisations.

Importantly, it is fully acknowledged that using the potentials for World Bank to deal with global poverty more effectively as proposed in this paper is associated with great difficulty. The reason of this difficulty, however, is quite simple. And this relates to the source of funding of the World Bank in a way that as a general rule the funds provided major donors of the organisation such as the USA, the UK, Germany, France, and Japan need to contribute to the advancement of interests of these states in the first place.

In other words, proposed changes need to be agreed with the major World Bank sponsors before they are implemented, and this is difficult to be achieved because the proposed changes do not promote geopolitical interests of these states.

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