The World Bank and the Global Financial Crisis: The Reemergence of Lending to Middle-Income Countries
Winters, Matthew S., Seton Hall Journal of Diplomacy and International Relations
By the time the subprime mortgage crisis in the United States began to have serious global ramifications in mid-2008, the developing world already had, since the beginning of the year, been dealing with the twin crises of rising food and fuel prices. As of June 2008, Argentina, Brazil, China, Egypt, and Vietnam had all put in place export limitations on agricultural goods, and Burkina Faso, Cameroon, Cote d'Ivoire, Egypt, Haiti, Mozambique, Senegal, and Yemen had all experienced protests and riots related to rising food prices. In June 2008, the price of oil hit an all-time nominal high of $126 per barrel - a price more than double what it had been one year before. This caused the cost of imported goods and agricultural inputs (e.g. fertilizer, fuel for farm machinery) to rise appreciably across the developing world. The spread of the financial crisis beyond the United States led the World Bank to declare "a sudden convergence of food, fuel and financial crises," and World Bank President Robert Zoellick warned that the September 2008 collapse of the US financial industry could represent a "tipping point for many developing countries," as they would now have to "prepare for a drop in trade, capital flows, remittances, and domestic investment, as well as a slowdown in growth."1 Given the World Bank's status as the world's preeminent development institution, it was natural for the organization to assume a leading role in helping the poorest countries of the world respond to the economic crisis. The Bank had already designed special initiatives and reoriented some of its lending to help poor countries respond to the food and fuel crises which predated the spread of the global financial crisis. Beginning in the fall of 2008, the World Bank undertook a number of additional initiatives aimed at helping poor and middle-income countries weather the crisis.
In this article, I analyze the World Bank's response to the global financial crisis. I show that the World Bank significantiy increased lending after the crisis began, and the majority of this lending went to middle-income countries rather than to the poorest countries of the world. At first glance, it might seem like the Bank was in dereliction of its duty to help the world's poorest countries. In reality, addressing the credit constraint problems of middle-income countries was perhaps the most appropriate pattern of lending for promoting the health of the overall global economy, given the potential for these countries to become drivers of global trade and finance. Additionally, the thematic character of Bank lending (i.e. the distribution of Bank lending across economic sectors) did not change significantly in comparison with the years before the crisis. I also show how the International Finance Corporation (IFC), a branch of the World Bank that typically receives less attention than its two main lending arms, the International Development Association (IDA) and the International Bank for Reconstruction and Development (IBRD), positioned itself to act as a substitute for sources of private capital that were drying up around the world, yet did not substantially increase lending beyond its preexisting trend. Finally, I provide evidence of the World Bank's rhetorical advocacy on behalf of the developing world during the period of the financial crisis, and I argue that the promotion of new financing flows for the developing world ultimately produced at best mixed results.
As compared to research on the International Monetary Fund (IMF), which necessarily involves the role of that institution as a responder to economic crisis, much less has been written about the role that the World Bank plays in addressing economic crises. This article, therefore, offers a novel accounting of World Bank behavior in a crisis period, expanding our knowledge of World Bank decision making and the role, more generally, of international financial institutions in supporting global financial stability. …