During the closing days of World War II, the United States and its allies created the original “World Bank”—the International Bank for Reconstruction and Development (IBRD)—as well as the International Monetary Fund and the General Agreement on Tariffs and Trade—to provide the underpinnings for a new international economic order. The economic and political leaders of the time developed these multilateral mechanisms to prevent a return to the destructive trade and investment isolationism of the 1930s. Among other concerns, these leaders feared that private capital markets would not provide the investment capital needed to stimulate growth, raise living standards, and promote political stability in war-torn and underdeveloped countries. Creation of a new public sector institution was deemed necessary to supplement private lending and investment in these countries. By guaranteeing the financial integrity of the institution, the member countries would enable it to borrow private capital on the open market to lend to needy countries at reasonable rates. To expand the potential impact of IBRD, the member countries subsequently created three affiliated institutions: the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA), created specifically to encourage private investment in developing countries, and the International Development Association (IDA), which lends to the poorest countries in the world at concessional rates. Operationally, IBRD and IDA are one organization. Similar procedures are followed by the Bank’s core staff to generate, administer, and evaluate IBRD and IDA loans. IFC and MIGA have independent staffs and procedures.Collectively, these four institutions are known as the World Bank Group.Figure 1.1 and table 1.1 provide additional information on each institution. The Bank is the world’s single largest official source of investment capital for developing countries. While data published by the Organization for Economic Cooperation and Development show that other donors frequently provide more resources in individual countries, the Bank is generally acknowledged as a focal point in the world community’s official efforts to facilitate economic growth and development in poor countries. As explained in figure 1.1, three of the four Bank Group institutions do not rely primarily on annual donor contributions for support. The one exception is IDA, which has absorbed about 88 percent of the approximately $8 billion appropriated by the Congress for the Bank Group in fiscal years 1990-96. Table 1.2 provides detailed information on annual appropriations for Bank Group institutions during the 1990s. As the largest provider of financial support to the Bank and a recognized leader in the international community, the United States has exercised leadership within the Bank Group since its creation. The United States proposed the basic design of IBRD and provided much of the impetus for the subsequent creation of IDA. Much of these institutions’ management and staff comprise Americans or foreign nationals educated in U.S. universities, and the Bank President has traditionally been a U.S. citizen. Support for the Bank has been the subject of periodic controversy in the United States, and the Congress has enacted a number of measures directing the U.S. Executive Director to vote against certain categories of loans (e.g., for countries that have expropriated U.S. property without compensation). Nonetheless, the Bank continued to receive support from the executive branch and the Congress through the Cold War era. The need to continue U.S. participation was challenged during the early 1980s. Even then, however, a comprehensive executive branch review of the World Bank and the regional development banks concluded that these banks continued to serve U.S. foreign policy interests and that the United States should, with some qualifications, continue to support them. (App. I explains how Bank projects are developed and approved.) In the years immediately following World War II, the U.S. government and financial markets were the primary sources of capital for the Bank. The U.S. contribution to support the Bank has declined substantially over the years as other member countries have increased their contributions and the Bank’s financial dealings have diversified. For example, the U.S. share of donor contributions to IDA declined from about 42 percent when the association was formed to about 21 percent during the first half of the 1990s. Nonetheless, as of June 30, 1995, the United States still held the greatest share of the votes in each Bank Group institution’s Board of Executive Directors. This preserves the U.S. leadership position and allows the United States to keep the Bank’s headquarters in Washington, D.C. The United States retains sufficient votes to veto changes in IBRD’s basic articles of agreement. Table 1.3 lists the percentage of voting share the United States has in each Bank Group institution, along with the relative voting share of the four other largest donors. U.S. policymakers have supported participation in the World Bank as a means for advancing U.S. humanitarian, economic, and security interests through alleviating poverty and encouraging economic growth and political stability in developing countries. However, much of the impetus behind U.S. participation in the Bank during the Cold War era was derived from the perceived utility of the Bank in containing communist expansionism in the developing world. One Bank official commented, for example, that because of U.S. concern about communist insurgency in the area, the Bank remained active in several sub-Saharan African countries long after the corrupt nature of these countries’ governments became evident. The fall of the Berlin Wall in 1989 and the subsequent collapse of the Soviet bloc have dramatically altered the international status quo. In the post-Cold War environment, the need to actively oppose communist expansionism no longer serves as an underlying rationale for U.S. foreign policy activities. Virtually all traditional U.S. foreign policy assumptions and instrumentalities, including support for the Bank, have come under increased scrutiny. Mounting government budget deficits in the United States (and other donor countries) have lent added urgency to scrutiny regarding the effectiveness of foreign operations spending. A variety of critics have opposed the continuation of traditional levels of U.S. support for the Bank, stressing that the Bank is not an effective agent for economic development. The critics argue that, good intentions aside, the Bank has not effectively facilitated real economic growth in the developing world or made progress toward reducing poverty. They point out, for example, that the number of impoverished persons in the world continues to rise despite the efforts of the Bank and other multilateral and bilateral assistance agencies. Some of the harshest criticism of Bank intervention has been leveled at the Bank’s activities in sub-Saharan Africa, where the gross domestic product per capita continues to decline. Some critics argue that the availability of Bank financing permits developing countries to avoid tough choices that, if made, would lead to a better investment climate and, hence, increased private investment. Some critics point out that the Bank’s own data show significant shortfalls in the ability of IBRD and IDA to achieve their objectives. In fact, as shown in figure 1.2, the Bank’s evaluation results showed a significant decline during the 1980s in the portion of IBRD/IDA projects achieving satisfactory results. Concern about the performance of the Bank’s portfolio led the President of the Bank to establish a Portfolio Management Task Force in February 1992. The Task Force’s report concluded that the Bank needed to adopt a comprehensive plan of action to remedy problems with project design, management, and implementation. It emphasized that a contributing factor was the Bank staff’s preoccupation with getting loan funds committed rather than with effectively managing existing projects. In June 1993 the Bank adopted a plan of action to remedy the problems identified by the Task Force. We reported on two occasions on the Bank’s progress toward implementing these reforms. Our review of the World Bank was requested by the Chairmen of the House Committees on the Budget and on Banking and Financial Services. On the basis of our preliminary examination of the issues, the results of an expert panel on the Bank that we convened in September 1995, and discussion with the staffs of the requesters’ committees, we focused our review on the Bank’s role in enhancing the flow of international private investment capital into developing countries, the extent to which Bank projects achieve their development objectives, the Bank’s progress in reforming its operations to improve effectiveness, and the extent to which Bank activities are aligned with U.S. foreign policy goals. To obtain official U.S. views on these issues, we met with representatives of the Department of the Treasury, which has the lead role within the executive branch regarding U.S. policy toward the Bank, and with officials from the Department of State and the U.S. Agency for International Development. We also obtained the views of academic experts and representatives of nongovernmental organizations on relevant topics. As an agency of the United States, we have no direct authority to review the operations of multilateral institutions such as the World Bank. However, we obtained broad access to Bank officials (including the President) and information through the staff of the U.S. member of the Bank’s Board of Executive Directors. We also met with a number of other Executive Directors to broaden our understanding of member country views on Bank operations. We met with appropriate Bank officials, including representatives of IBRD, IDA, IFC, and MIGA, with a concentration on those offices that are particularly concerned with private sector development, such as the Vice-Presidency for Finance and Private Sector Development, the International Economics Department, and the Foreign Investment Advisory Service. To assist us in assessing the Bank’s role in providing international financial flows to developing countries, we examined data on the composition of these flows compiled by the Bank, the International Monetary Fund (IMF), and the Organization for Economic Cooperation and Development.