MCom I Semester Business Environment world Bank study Material Notes

MCom I Semester Business Environment world Bank study Material Notes: Objectives and functions of the world bank Importance of the Bank Future of the Bank Membership of the world bank Capital and Resources of the world bank Management of the world bank Progress of the functions of the world bank Criticism of the world bank India and World bank Long Answer Question Short Answer Questions Objectives Question :

CTET Paper Level 2 Set X Model Paper Multiple Questions Answer in English

World Bank

The International Bank for Reconstruction and Development (IBRD), known popularly as the World Bank, was set up at the same time as the International Monetary Fund (IMF) at the United Nations Monetary and Financial Conference held at Bretten woods, New Hampshire, in July 1944. It began its operations in June 1946. The World Bank (IBRD) is an international agency, owned by governments, which operates primarily by making long-term loans to finance productive investments in member countries. It functions as an intermediary for the transfer of financial resources from the more developed to the less developed countries.

OBJECTIVES AND FUNCTIONS OF THE WORLD BANK

The World Bank provides long-term loans to the countries for the purpose of liquidating their war time obligations and to finance economic growth and productivity in the developing countries. The objectives of the World Bank as set out in Article I of the Agreements are as follows:

1 Providing facilities for capital investment : To promote foreign investment by means of (a) guarantees or participations in loans and other investments made by private investors, and (b) to supplement private investment when private capital is not available on reasonable terms, by providing on suitable conditions, finance for productive purposes out of its own capital, funds raised by it and its other resources.

2. Reconstruction and economic development of countries: To assist in the reconstruction and development of territories of member countries by facilitating the investment of capital for productive purposes, including (a) the restoration of economies destroyed or disrupted by war, (b) the reconservation of productive facilities to peace-time needs; and (c) the encouragement of the development of productive facilities and resources in less-developed countries.

3. Conditions of peace time : To conduct such operations as to bring about a smooth transference from a war time to peace-time economy.

4. Encouragement to long-term international trade : To promote the long range balanced growth of international trade and the maintenance of equilibrium in balance of payments by encouraging long-term international investment thereby assisting in raising productivity, the standard of living and conditions of labour in these territories.

MEMBERSHIP OF THE WORLD BANK

All the countries which had joined the IMF in the beginning became the original members of the IBRD, any country acquiring the membership of the Fund, automatically becomes the member of the World Bank. In case a country ceases to become the member of the IMF, it can retain the membership of the Bank only when it can secure a support of 75 percent of the voting power of the countries in the Bank in its favour. Any country holding the membership of the World Bank must subscribe to the charter of the Bank. Any member can withdraw at any time its membership through a written notice to the Bank. At present 188 countries are members of the Bank.

CAPITAL AND RESOURCES OF THE WORLD BANK

The World Bank was started in 1946 with an authorised capital of $ 11 billion, divided into 1,00,000 shares of $ 1,00,000 each. The member countries subscribed to it in accordance with their economic position and the size of their quotas in the IMF. In September 1959, capital subscriptions were doubled for most countries. The subscription of 17 countries were increased by more than 100 percent. The total authorised capital of the Bank was thus, raised to $ 21 billion, but there was hardly any increase in the paid up portion. Those countries whose subscriptions were raised by 100 percent, were not required to make any payments to the Bank.

As a consequence of increases in members’ subscriptions from time to time and as a result of the increase in the World Bank’s membership, the bank’s subscribed capital on June 30, 1984 was equivalent to about 56 billion in current US dollars. On December 30, 2009 the authorised capital was equivalent to $ 18,800 crore and paid up capital was $ 18,283.09 crore.

A member’s total subscription in the capital of the bank was originally divided into three parts:

(a) 2 percent of the subscription to be paid in gold or U.S. dollars. (b) 18 percent of the subscription to be paid in member’s own currency; and (c) remaining 80 percent subject to call if and only when required to meet the bank’s obligations. The bank now expresses the value of its capital stock on the basis of the SDR in terms of the U.S. dollars.

MANAGEMENT OF THE WORLD BANK

Management of the World Bank comprises Board of Governors, Board of Executive Directors, Advisory Committee, Loan Committee and other workers.

1 Board of Executive Directors: The Bank has 24 Executive Directors. They supervise the entire operations of the bank. Out of these 24 Directors, 5 are appointed by U.S.A., U.K., Germany, France and Japan. The remaining 19 Directors are elected by the remaining member countries. The Executive Directors normally meet regularly once in a month. The 24 directors elect the President of the Bank who presides over the meetings of the Board of Executive Directors.

The Executive Directors elect a president who becomes ex-official chairman holding office during their pleasure. He is the chief of the operating staff of the Bank and subject to the direction of the Executive Directors on questions of policy and is responsible for the conduct of the ordinary business of the Bank and its organisation.

2. Board of Governors: The Board of Governors is the supreme governing authority. It consists of one governor (usually the Finance Minister) and one alternate governor (usually the governor of the central bank) appointed for five by each member. The board is required to meet once every year.

The board enjoys the following rights:

(i) Admission of new members

(ii) Termination of membership

(iii) Change in the capital

(iv) Distribution of the income of the board

(v) Agreements with the international institutions, and

(vi) Liquidation of the bank,

3. Loan Committees : Whenever the member countries apply for loans, the Board of Executive Directors appoints a Loan Committee. This Committee scrutinizes loan applications and gives its report to the Board of Executive Directors.

4. Advisory Committee : It consists of minimum 7 members. Their appointment is made by the Board of Executive Directors. Members of this council are expert on different subjects like banking, foreign trade, industry, labour, agriculture etc. It meets once a year. The council gives its advice on different issues to the bank.

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IMPORTANCE OF THE BANK

1 The Bank stimulates the feeling of mutual cooperation between the borrower and lender countries.

2. The Bank helps the member countries to attain economic stability, development, and progress.

3. The Bank provides resources to the member countries for economic development and reconstruction.

4. Bank has sent Missions to India, Iran, Philippines, Lebnan etc. to fulfil its objectives. These missions study the economic problems of the countries and give suggestions.

5. The Bank helps the underdeveloped and developing countries in their industrial development.

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FUTURE OF THE BANK

The future and success of the World Bank depend on the success of the IMF. The World Bank was intended to serve as an essential adjunct to the IMF and in particular to ensure a high and stable level of international investment with a view to promoting the maintenance of a high level of international trade and thus of production and employment. While one of the early objects of the World Bank was to aid reconstruction of war-torn nations, the job is now a matter of history. After an initial period of two years in which the Bank concentrated its loan disbursement on Europe’s reconstruction needs, the Bank has now turned its attention to developing countries.

Criticism or disadvantages of Bank: As one surveys the international development scene today, it is clear that there are two fundamental objectives, one is to accelerate economic growth in the developing countries and the other is to reduce the massive poverty. The Bank has made some progress in addressing the problems of poverty, but we should clearly admit that the financial assistance provided by the World Bank does not amount to more than a drop in the vast ocean of financial requirements so essential for the elimination of absolute poverty. Some shortcomings of bank are as follows:

 (i) Loan work by personal investor : Bank gives loans to member government or to private enterprises where the government involved is willing to guarantee repayment. The Bank gives more importance to private sector rather than to other sectors. The Bank in accordance with some basic rules governing its operations imposes strict conditions on borrowing countries.

(ii) Basis of the bank is pro-debtor and anti-creditor : The method of lending adopted by the Bank favours debtor country and against the creditor country. Further, there is little direct relation between the lender and recipient countries. The country providing the loan is ignorant of the manner in which the loans are employed while the borrowing country is not aware of the source of loan. It is argued that the bank charges a very high rate of interest on loans, as also an annual commitment charge on undistributed balances and a front-end fee

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PROGRESS OF THE FUNCTIONS OF THE WORLD BANK

The Bank was designed to provide long-term loans to the countries for the purpose of liquidating their war-time obligations and to finance economic growth and productivity in the developing countries. The World Bank has functioned as a development institution, assisting the developing countries through expanded lending operations, policy advice, technical assistance and proposal for institutional reforms. Progress of the functions of the world bank are as follows:

1 Progress of Loan : Presently the World Bank is playing the main role of providing loans to member countries or to private enterprises. The Bank provides long term loans of 20 years or for less duration. Over 90 percent of the Bank’s loan are committed to the financing of specific development projects. The Bank does not lend in support of military or political objectives. Loans are granted on a basis of sound financial and economic analysis. The Bank’s concern has led to the development of better project evaluation techniques, a process which is still going on.

The quantum of loans, interest rate and terms and conditions are determined by the Bank itself. The debtor nation has to repay either in reserve currencies or in the currency in which the loan was sanctioned.

2. Technical Assistance : The World Bank has been rendering valuable technical assistance to the member countries on matters relating to loan operations. It helps them in identifying the technical, administrative and financial difficulties that might arise in execution of their projects and suggests appropriate steps to solve them. The Bank modifies the technical plan for a project in order to reduce its costs or to make it more efficient. The staff of the Bank carefully appraises all projects for which loan is proposed. The Bank is very much involved in ascertaining that the loan proceeds are spent efficiently and economically and for the purpose intended.

Technical assistance on a broader scale has also been provided, for instance, in development programmes through survey missions, which make intensive studies of national resources and formulate recommendations to serve as the basis of long-term development programmes. The bank’s technical assistance is directed towards solving the scarcity of expertise to undertake the extensive analysis of project fromulation in the developing countries. In 1975 the Bank created project preparation facility (PPF) for meeting gaps in project preparation and for institution building. The Bank also acts as executing agency for project financed by the United Nations Development Programmes.

3. Providing Guarantee : Bank gives guarantee to the private investors and thus helps them to give loans to member countries. After 1965, the Bank has not given any guarantee for loans, now International Development Association (IDA) and International Finance Corporation (IFC) are providing loans to the developing countries. These are affiliates of the World Bank and designed to make investment in private sector enterprises in member countries in association with private investors and without government guarantee of repayments.

4. Aid co-ordination : The Bank provides help to various organisations and institutions of the developing countries. The help is provided under bilateral and multilateral agreements. The IBRD is also engaged in inter-organisation cooperation. The cooperation between the Bank and other international organisations is based on formal agreements such as co-operative programme between it and FAO, the UNESCO, the WHO, the GATT, the UNCTAD, the UNIDO (United Nations Industrial Development Organisation), the ILO, the International Fund for Agriculture Development (IFAD) etc.

5. Economic research and studies : In the field of economic and social research the Bank conducts research projects and undertakes smaller research studies. World Bank staff working papers and books originating from the research programme generate considerable interest among professional audiences. The Bank devotes roughly 3% of its administrative budget to economic social research. It provides leadership in the guidance, co-ordination and evaluation of all research. The Bank’s own research staff undertakes research activities and also in collaboration with outside researchers.

6. Establishment of Aid-clubs : The bank had taken the lead for many years in organising aid coordination mechanism for a number of developing countries which receive assistance from several bilateral and multilateral sources, ‘Aid India Club’ (Comprising of the U.K., U.S.A., West Germany, Japan, France, Canada, Italy, Sweden, Austria, Belgium-Luxembourg and Netherlands) and ‘Help Pakistan Club’ (Comprising of the U.S.A, Japan, U.K. and other West European countries) owe their origin to the sincere efforts of the World Bank.

7. Co-operation in establishment of international institutions: The World Bank established International Finance Corporation in 1956. Its objective is to encourage private enterprises of member countries particularly in lessdeveloped countries, in association with private investors and without government guarantee of repayments, in cases where sufficient private capital is not available on reasonable terms. International Development Association was founded in 1960 with the objective of providing loans to underdeveloped countries at low rate of interest.

8. Settlement of disputes of member countries : The bank has also promoted international peace by successfully resolving certain difficult international disputes. The International Centre for Settlement of Investment Disputes (ICSID), established in 1966, provides facilities for the settlement of investment disputes between contracting states and foreign investors. The Bank Bottled the dispute between the United Kingdom and United Arab Republic on the nationalisation of the Suez Canal. It also helped in resolving the dispute between India and Pakistan over the sharing of the waters of I rivers.

9. Training facilities : Bank arranges training for officials of member tries in the area of economic planning, developmental policies, agricultural esearch, health care, power generation, water management, major irrigation projects, railways etc. The Bank started the plan to provide training in economie matters in 1949. In 1950, the Bank launched a public programme. In 1952-53. the bank broadened the scope of training and provided training in matters related to finance system, tax system, monetary system and industrial and banking development. The Economic Development Institute (EDI) established in 1955. as the Bank’s staff college, gives an opportunity to groups of senior and middle officials from the less developed countries to participate in course of studies designed to give them broad perspective of the problems of economic development and to increase their efficiencies. The EDI also organises seminars in Washington and in different regions of the world in cooperation with regional institutes.

We can conclude that the World Bank has made a significant contribution to the reconstruction and economic development of the member countries.

CRITICISM OF THE WORLD BANK

It must be admitted that the World Bank has contributed significantly to the economic development of the underdeveloped regions. The operative policies and the modus operandi’ of the World Bank has been critised on several grounds:

1 Delay in sanction of loans: There is considerable delay and elaborate procedure in sanctioning of loans by the World Bank. This is an impediment to underdeveloped countries in securing loans. However, we can not blame bank for this delay. The World Bank’s lending policies and procedures may be justified on the ground that it derives its financial strength mainly from its prudent financial policies. It must be clearly understood that the World Bank is not a social welfare agency committed to making transfer payments to solve the problem of misery. It is a development bank using the most sophisticated techniques available to facilitate development while providing unmatched protection and strength for creditors and shareholders.

2. More emphasis on paying capacity: The World Bank in accordance with some basic rules governing its operations, imposes strict conditions on borrowing countries. It must insist on the presence of repaying capacity of a borrowing country before granting the loan. This is faulty because the repaying capacity follows rather proceeds the utilisation of the loan. It is credited and enhanced as the projects financed by the loans are completed and the hitherto untapped resources are exploited. Thus, search for transfer capacity before the grant and utilisation of loans is a misnomer that falls considerably short of wisdom on the part of the World Bank.

3. Bank work is not superior in comparison to private assigner: It has been observed that the World Bank grants loans on a basis of sound financial and economic analysis. Bluntly, the bank has proven to be a tougher, harder lender than many commercial institutions.

4. High interest rates : It is alleged that the cost of World Bank loan is very high from the point of view of developing countries. In addition to the high rates of interest on loans, the borrowing countries have to pay fixed rate commitment charges on undistributed loan-balances and front-end fees on new loans. There is no harm in the bank being run on sound business principles, but it should not be completely devoid of a missionary spirit vis-a-vis the poor borrowing countries. The poor borrowing countries are justified to demand a reasonable cut in the lending rates.

5. Discrimination among members: As the World Bank is a non-political and non-partisan institution, it is enjoined not to discriminate against some countries in favour of certain other countries. In actual practice, the Bank has given loans not purely on merits and economic considerations. The countries of Asia and Africa taken together have the largest population area, and unexploited economic resources in the world. Their people suffer from immense poverty, notwithstanding the richness of their resources. The help given to them by the World Bank has been too inadequate. On the contrary, countries in Latin America and the Caribbean are smaller from population, area and other considerations, but even then they have received substantial amounts of loans.

6. Inadequate assistance: In the light of growing requirements of the member countries, the capital and other financial resources of the World Bank are not adequate. Besides the financial need of development, the less developed countries have to face the problem of repayment of old debts. The Bank has realised this problem and tried to solve this problem by opening the International Development Association, yet the underdeveloped countries still suffer from grinding poverty and low rate of economic growth as they are unable to obtain adequate resources at reasonable rates.

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INDIA AND WORLD BANK

India has been a member of the World Bank since its inception. The World Bank has not been merely a lending institution to India, but has also served as a worthy counsel whom India has approached for advice from time to time. The benefits that India has derived out of the membership of the World Bank are as follows:

1 Technical assistance: The World Bank has extended technical assistance to India. It has given to India the services of its experts from time to time on various matters related to water, electricity, education, railway, industrialisation etc.

2. Indo-Pak canal dispute : The Bank has played a mediator’s role in the canal water dispute between India and Pakistan and successfully settled the issue in 1960.

3. General loans : The World Bank acceded to the India’s seeking the option to utilise the loans issued to India in an untied way. Therefore India could obtain general aid from the Bank. In this way India obtained generous financial and other facilities from the Bank and the World Bank has been very sympathetic and considerate to the needs of India.

4. Meeting of the debtor nations : World Bank called the meeting of debtor-nations in Washington and presented the requirement of India and asked for help. As a result upto the end of Ninth Five Year Plan India obtained the loan of $ 600 million dollars. In the Eleventh Five Year Plan, India obtained the loan of $ 1500 million dollars.

Many decisions of the World Bank relating to India are criticised on the following counts:

(1) High rate of Interest: Bank has charged high rate of interest on its loans. In addition to the rate of interest, i.e., 2-5 to 4.78 percent on loans, India has to pay fixed rate commission to the bank. The critics argued that it is a burden on a developing country like India. This is the reason why Mr. John Mathai opined that India should search some other sources of debts at cheaper rates.

(ii) Loan for certain purposes : The lending policy of the World Bank is also criticised. The loans provided to India are mostly for specific purposes rather than for general development purposes. India has applied for the loan for the general purpose for the Eleventh Five Year Plan.

(iii) Less loan to India from bank : The World Bank has not provided adequate assistance to India to meet the requirements of the country. The Bank has provided only limited loans to India for the development of specific projects.

(iv) Less Loan to Asian countries : The World Bank has been discriminating against the countries of Asia and Africa. Asian and African countries have got only 31 percent of the total loan of the Bank. European and American countries have got 36 and 24 percent of loan respectively. The Bank has been quite indulgent with regard to the countries of Western Europe. Population-wise and area wise the countries of Asia and Africa are in a disadvantageous position. Yet the countries of Western Europe have received much larger amount of loans, which is clearly indefensible.

The Bank has approved the loan of $ 66.5 crore for four states – Andhra Pradesh, Karnataka, Mizoram and Kerala for various projects. These loans are provided for economic reforms and road and transport improvement.

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EXERCISE QUESTIONS

Long Answer Questions

1 Explain the objectives and functions of the Bank.

2. Explain in brief the role of World Bank in the economic development of India.

3. “The establishment of World Bank is boon to the underdeveloped countries.” Explain.

4. Throw light on the objectives of the World Bank and explain how far it has been successful in achieving those objectives.

5. Critically examine the objectives and progress of World Bank.

6. Explain the organization and functions of International Bank for Reconstruction and Development. Discuss how is India benefitted with it?

Short Answer Questions

1 Write the main objectives of World Bank.

2. Write the functions of World Bank.

3. Describe the importance of World Bank.

4. Write the advantages got by India from World Bank.

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Objective Questions

(I) Select the Correct Alternatives :

1 In the context of World Bank ‘lack of efficiency’ is the part of:

(a) criticism

(b) limitation

(c) demerit

(d) merit.

2. The success of World Bank is visible in:

(a) inadequate financial assistance

(b) functions of the World Bank

(c) More debt for development

(d) none of these.

3. Loan provided for specific projects :

(a) merit of the World Bank

(b) function of the World Bank

(c) limitation of the World Bank

(d) all of above.

4. The objective of the World Bank is:

(a) arrangement of capital

(b) peace-time economy

(c) to advise (d) all of above.

[Ans. 1. (a), 2. (c), 3. (b), 4. (b).]

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(II) Write True or False :

1 The World Bank can lend only up to the point where loans outstanding equal the total of subscribed capital, surplus and reserves.

2. The World Bank gives loan out of its own funds or itself borrows from the open market and gives the proceeds to the member countries as loan.

3. The Multinational Investment Guarentee Agency was established in 1989.

4. World Bank provides loan for share capital.

(Ans. (1) True (2) True (3) False (4) False.)

(III) Fill in the Blanks :

1 The Aid India Club was set up by the ………….

2. In the light of the ………… of the member countries, the financial resources of the World Bank are inadequate.

3. The World Bank has given loans to India to correct adverse ……..

4. The World Bank has provided loans to India for …………

[Ans. (1) World Bank (2) growing requirements, (3) balance of payment, (4) development purposes.]

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