World Bank Lending And Other Financial Flows: Is There a Connection?

Abstract

At a time when there is a serious debate about reforming the international financial architecture, it is important to understand how existing multilateral agencies affect financial flows to emerging and less-developed countries. This paper extends past research - which has focused on the International Monetary Fund - by examining the various mechanisms through which the World Bank may be associated with other financial flows, and by presenting new empirical evidence based on regression analysis. Little support is found for a positive connection. The implications of this finding for effective reform of the Bank and its various activities are then discussed.Financial Flows, World Bank, IMF, Capital, Conditionality, Lending, Trade, Mechanisms,

Impact of World Bank lending in an adjustment-led growth model

“…Mosley et al (1991) In the country-specific case studies, the SALs have had only a weak effect on real GDP growth, and it has had a negative effect on investment. Bird and Rowlands (2001) There is no statistical significance of the effectiveness of the SALs on growth by comparing countries with Bank programs and those without such programs. Easterly (2004) Controlling the selection bias in sample countries, none of the top 20 recipients of repeated adjustment lending are able to achieve reasonable growth.…”

“…In general, this type of policy was intended to reduce the level of government intervention in the economy. SAL conditionality covers wide-ranging policies, including trade, exchange rate, fiscal, industrial and competition policies, tax reform, energy and agricultural policy, financial sector reform, labour market policy, public sector efficiency and institutional reform (Bird and Rowlands, 2001;and Easterly, 2004). In addition to the SALs, the Bank introduced Trade Policy Adjustment Loans (TPALs) and Sectoral Adjustment Loans (SECALs) focusing on trade or any sector of the economy.…”

“…Table 1 summarises the selective empirical literature on the effectiveness of aid on several aspects, which are directly or indirectly linked with growth. Note that "aid" used here implies multilateral lending, which generally includes all loans from the World Bank, the IMF and all continental Development Banks (Bird and Rowlands, 2001) unless otherwise stated. Boone (1996) Aid has no impact on investment or growth with the panel data of more than 90 countries.…”

“…Burnside and Dollar, 2000;Collier and Dollar, 2001). Bird and Rowlands (2001) examine the various mechanisms through which the World Bank loans may be associated with other financial flows, and find little support for a positive connection, but they did not look at the impact on economic growth. This paper specifically demonstrates the growth impact of increases in World Bank lending and explores the channels through which macroeconomic policies influence long-run growth in developing countries.…”

Basic analytics of multilateral lending and surveillance

“…The major shareholders of the IMF and the World Bank are home to the most important international investors and lenders, so it is not obvious that they have an interest in misleading them. Moreover, while officials of the 7 Naturally, not all observers take such a strong position. While noting that surveillance activities account for 42% of the IMF's budget, Bordo and James (2000: 9) claim that "The IMF is primarily a financial institution."…”