What Is the World Bank? Definition & History

What Is the World Bank?

The World Bank is an international organization whose dual mandate is to end extreme poverty and to promote shared prosperity through long-term economic development. Its members include 189 countries, each of which has a stake in the bank, and the staff come from 170 nations who work in offices at more than 130 locations globally.

Its predecessor, the International Bank for Reconstruction and Development, was founded in 1944 during the Bretton Woods conference, which convened to establish a new economic system following the end of World War II. In its formative years, the bank aided in the reconstruction of Europe but eventually transformed itself with an aim to reduce poverty worldwide.

Why Is the World Bank Important? What Does It Do?

Officially known as the World Bank Group, the World Bank is a holding group made up of five development institutions: 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.

The World Bank offers financial and technical support to countries in implementing their reforms or projects. Large-scale projects including highways, power generation, and schools, while assistance to small businesses can range from macro loans to financial education.

Sometimes offering loans at no interest, the World Bank is the biggest financier to developing nations.

A Brief History of the World Bank

In 1944, Allied nations convened in what became the Bretton Woods conference to establish—officially a year later—the International Bank for Reconstruction and Development, as well as the International Monetary Fund (IMF). The bank’s first members in 1945 were 26 countries, including the U.S., the U.K., Mexico, France, and China. To become a member of the World Bank, a nation must first be a part of the IMF.

The bank’s first annual meeting was held in 1946, and in the following year, it made its first loan—amounting to $250 million—to Credit National of France for that nation’s reconstruction. Also, in 1947 the World Bank formalized its relationship with the United Nations, which was also in its formative years as a cooperative league of countries worldwide. In 1963, 18 newly independent African countries joined the World Bank.

By the late 1960s, lending had increased significantly since the formative years, and European economies were gaining strength post-World War II. But other countries—notably in Asia, Africa, and Latin America—weren’t keeping pace. The World Bank had to adapt to the changing global economic landscape, and its agenda shifted toward accelerating economic growth and reducing poverty. These concepts helped shift the bank’s focus toward development, which it continues to prioritize this day. The World Bank soon expanded into other sectors of development, including environment, rural development, water, sanitation and education.

In the 1980s and 1990s, worldwide events sent shocks into the global economy and financial system. In 1980, the World Bank set its first structural development loan, in the form of $200 million to Turkey—the beginning of austerity measures for many countries. This type of loan had certain conditions that a borrowing government must adhere to, such as setting fiscal controls, enacting tax reform, and liberalizing foreign direct investment.

In the late 1990s, during which East Asia experienced a deep financial crisis and Indonesia’s dictatorial leadership ended, the World Bank said it “moved back into the areas of conflict prevention, post-conflict reconstruction, and assistance for countries to redirect their economies after major political change.” Into the 21st century, the bank focused on sustainable development projects, many involving the creation of renewable energy infrastructure.

What Are the Five Institutions of the World Bank?

The International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA) represent the core of the World Bank Group’s focus on financing, policy advice, and technical help to developing countries.

The International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), and the International Centre for Settlement of Investment Disputes (ICSID) focus on helping the private sector with investing in developing nations. Through these three institutions, the World Bank says it provides financing, technical assistance, political risk insurance, and settlement of disputes to private enterprises, including financial institutions.

Of the World Bank’s five internal organizations, the IFC is best known for extending loans for large-scale projects, to small and medium-sized businesses, and for education initiatives, such as student loan programs. It was founded in 1956, and its first investment—$2 million to the Brazilian affiliate of Siemens, a global electrical-equipment manufacturer corporation based in Germany—followed a year later.

Frequently Asked Questions (FAQ)

The following are answers to some of the most common questions investors ask about the World Bank.

How Is the World Bank Funded?

The World Bank makes money from the interest on loans extended to borrowing nations. It also receives contributions from wealthier member countries through the IDA.

Are the World Bank and the International Monetary Fund the Same?

The World Bank and the International Monetary Fund (IMF) are separate financial institutions. Both were created during the Bretton Woods conference and share similar goals in terms of raising living standards worldwide. While the World Bank focuses on reducing poverty and economic development, the IMF focuses on macroeconomic and financial stability.

How Is the President of the World Bank Selected?

The U.S., which at about 17% has the largest stake in the World Bank, traditionally gets to nominate the president. The president typically serves a five-year, renewable term.

Where Is the World Bank’s Headquarters?

The bank is based in Washington, D.C. However, because of its global reach, it has offices in 130 locations around the world.