NCPA - National Center for Policy Analysis

World Bank Outlives Its Purpose

March 17, 1997

World Bank President James Wolfensohn recently announced yet another "reorganization" of the troubled international lender. And, like past such efforts, this one will cost plenty--some $150 million will be paid-out in benefits to laid-off staffers, with another $420 million set aside for retraining and other reorganization expenses. But the effort is not likely to be any more successful than past reorganizations, such as that carried out by former World Bank President Barber Conable in 1987. The reason is because the Bank has lost its reason for being.

Established as part of the United Nations after World War II, the World Bank's original purpose was to aid in postwar reconstruction. Thus most of its early loans were made to Europe and Japan. Hence at the beginning, the Bank tended to lend primarily to nations that were already industrialized, with established institutions and skills, lacking only capital for growth.

The Bank's first president, Eugene Meyer, viewed it as a supplement to private capital flows, not a substitute. Under the leadership of Meyer's successors, John J. McCloy and Eugene Black, the World Bank had very conservative lending policies. Black, in particular, emphasized that Bank loans were in fact loans, not gifts, and refused to lend to governments for projects that belonged in the private sector.

But by the 1960s, Europe and Japan were largely recovered from the war and the Bank moved toward lending to underdeveloped countries in Asia, Africa and Latin America. Under President Robert McNamara, the World Bank became less of a bank and more of a foreign aid distributor. Bank lending ballooned and loans were made on more and more concessionary terms for projects of dubious economic value.

McNamara's vision for the World Bank as the primary engine for Third World development was clearly not tenable. However subsequent Bank presidents have failed to define a new vision. They simply asked for more money to do the same things despite minuscule evidence of success.

Private capital flows to developing countries now vastly exceed those of all the international financial institutions, including the World Bank, International Monetary Fund and regional development banks. This led Professor Rudi Dornbusch of the Massachusetts Institute of Technology recently to ask, "If the capital market is perfectly capable of identifying worthy projects and readily finances private investment and public budgets around the world, who needs these remnants of foreign aid and statism?"

Increasingly, the answer to the question is that organizations like the World Bank have outlived their usefulness. They should be privatized or shut down.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, March 17, 1997.


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