How Does the World Bank Work?

The Outlook of Iran’s Economic Interactions

By providing financial opportunities and technical assistance to developing countries, the World Bank can play a significant role in the development of various projects. Iran, too, can leverage the capacities of this institution for financing projects and utilizing international experiences in economic, financial, and managerial fields. These interactions, especially under the current circumstances and the presence of the Fourteenth Government, create extensive opportunities to strengthen the country’s economic position on a global scale.

The two institutions, the World Bank and the International Monetary Fund (IMF), as key entities in the global economy, have always sparked different and even conflicting opinions. On one hand, these institutions are valued for providing the necessary infrastructure and capacities for the development of countries, and many nations seek to benefit from interacting and cooperating with them. The analyses and recommendations of these institutions have been frequently referenced in the international arena and used as a basis for planning and policymaking.

On the other hand, these institutions have also faced considerable criticism. Some believe that instead of aiding development, their actions may contradict the interests of developing countries. These contrasting perspectives are particularly evident in Iran. On one hand, reports such as the Iran Economic Monitor published by the World Bank are referenced by domestic institutions and even the government for evaluating economic conditions, inflation, and employment. On the other hand, skeptical criticisms of these reports question the competence and impartiality of these institutions in assisting countries’ development.

Nevertheless, analyzing the capacities, limitations, and impacts of these international institutions can help us better understand their role in the global economy and how to use them for national interests.

In Iran, some groups immediately blame institutions like the World Bank and the IMF whenever economic challenges arise. These groups argue that Iran’s economic problems stem from recommendations made by these institutions during periods when the country followed their analyses and suggestions. More skeptical views accuse these institutions of interfering in the internal affairs of countries and sometimes even allege espionage and the transfer of information to hostile nations. Such perspectives underscore the need for a more precise understanding of the capacities and limitations of these international institutions.

Since the establishment of the World Bank and the IMF, which are now in their eightieth year, these institutions have undergone numerous transformations and changes. Their performance has varied at different historical periods and across different countries. Additionally, the way the World Bank and the IMF interact with countries has differed, although these differences are often overlooked. These factors have led to diverse and sometimes contradictory views on their role and impact on the global economy.

The World Bank and the IMF, as two key institutions in the global economic arena, have complex structures and diverse impacts on different countries. Their operations have evolved over time through numerous changes and transformations, and understanding them correctly requires a detailed and multidimensional perspective. Various judgments about these institutions largely stem from ignoring their functional differences and failing to consider the historical and social contexts in which they have operated.

These institutions have various departments, each with specific roles and missions. Therefore, their operations cannot be evaluated in all countries and time periods with a simplistic and generalized approach. The broad structure of these institutions, which includes 15,000 members and operations in nearly 189 countries, highlights their complex and international dimensions.

Structure and History of the World Bank

The World Bank was established in 1944 after World War II. The negotiations leading to the formation of this institution took place before the war ended, among the warring nations, but its official establishment was postponed until after the war. Over the years, the World Bank gradually expanded by adding various departments, transforming into a group consisting of five subsidiaries. This multi-tiered structure was designed to address diverse economic and developmental needs globally.

A more detailed understanding of these structures and their functions can help us better comprehend the capacities and limitations of the World Bank and the IMF, paving the way for better interaction and optimal utilization of their capabilities.

As one of the most significant international economic institutions, the World Bank consists of five entities, each with its own missions and managerial structures:

These institutions include the International Bank for Reconstruction and Development (IBRD) as well as the International Development Association (IDA). The World Bank Group (WBG), in addition to these two institutions, includes the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), and the International Centre for Settlement of Investment Disputes (ICSID).

Although these institutions operate under the overall supervision of the World Bank’s Board of Directors, each has independent boards responsible for decision-making within their respective specialized areas.

The World Bank was founded following negotiations held after World War II with the aim of economic reconstruction and stabilization in the international financial system. At that time, the IMF was created to focus on monetary policies and stabilizing war-affected economies. However, beyond financial stabilization, extensive infrastructural damages in Europe made reconstruction and development another priority for member countries. This necessity led to the allocation of special financial resources to assist war-affected countries.

Objectives and Functions of the World Bank’s Subsidiaries

Each of the World Bank’s subsidiaries serves specific purposes:

• IBRD and IDA: Provide financing for reconstruction and development projects in member countries.
• IFC: Invests in private sector projects and supports private sector development.
• MIGA: Provides investment guarantees to mitigate political risks in developing countries.
• ICSID: Settles investment-related disputes between governments and investors.

This comprehensive and specialized structure enables the World Bank to cover a wide range of development and reconstruction activities worldwide and respond effectively to the economic challenges of member countries.

During post-war negotiations, primarily led by the United States and the United Kingdom, the idea of establishing a development-focused institution alongside the IMF emerged. The goal of this institution, in addition to stabilizing the financial system and reforming monetary policies through central banks, was to aid the reconstruction of war-affected countries. Consequently, the International Bank for Reconstruction and Development (IBRD) was established as the core of the World Bank Group, mainly providing loans to governments for development projects.

However, over time, it became evident that government funds alone were insufficient for national development. This realization led to the creation of the International Finance Corporation (IFC) in 1956. The IFC was established to assist the private sector in developing countries. This entity operates under government oversight but utilizes private sector capital, providing loans and investments in private projects while also supporting governmental initiatives. This initiative has played a crucial role in attracting private sector investments to development projects.

Countries that participate in this process and provide financial resources become shareholders of the World Bank. The World Bank’s structure requires membership in IBRD as a prerequisite for joining its other subsidiaries. Within this framework, Iran has been an investor in the World Bank since its inception and remains a shareholder of both the World Bank and the IMF. This shareholding grants Iran rights and responsibilities in these international institutions, allowing participation in their major decision-making processes.

The World Bank Group operates as an international corporation, with its shareholders gradually increasing over the years. This corporate structure enables member countries to utilize the World Bank’s resources and facilities for infrastructure reconstruction and development while also having a role in decision-making and policy formulation within the institution.

In the World Bank Group’s structure, the United States holds 15% of the shares, making it the largest shareholder, while the United Kingdom, Germany, France, and Japan also hold significant shares. This distribution grants them substantial voting power in key decisions. According to the World Bank’s charter, major decisions require at least 85% of the voting rights, effectively giving the U.S. a de facto veto power, while European countries can form coalitions to influence decision-making processes.

The World Bank provides financial services to the governments of developing countries, but the differences in the developmental needs of middle-income and low-income countries have diversified its operational structure. For low-income countries that are unable to provide sufficient financial guarantees and where investments in their projects come with a high risk of capital and return, the International Development Association (IDA) was established. This institution, formed in 1960, specializes in providing low-interest loans, grants, and concessional funds to low-income countries, with the primary goal of supporting these nations. In contrast, the International Bank for Reconstruction and Development (IBRD) also offers its services to middle-income countries.

With the expansion of the World Bank’s activities and the increasing importance of investment in developing countries, the Multilateral Investment Guarantee Agency (MIGA) was also established. The primary role of this agency is to provide financial guarantees to reduce investment risks in private sector projects. MIGA and the International Finance Corporation (IFC) act as the two wings of the World Bank for collaboration with the private sector, while the IBRD and IDA primarily provide services to governments.

Additionally, due to disputes and conflicts that sometimes arise as a result of the World Bank’s investments in various countries, the International Centre for Settlement of Investment Disputes (ICSID) was established. This center plays a key role in mediating and resolving investment disputes quickly and effectively, contributing to stability and trust in international investment projects.

Governance and Decision-Making Structure of the World Bank

The World Bank, as a joint-stock company, has a structure composed of 189 shareholder countries, with its shareholders’ assembly considered the highest decision-making authority. The shareholders include countries with varying levels of shares; some have a significant share, while others hold a smaller stake. To facilitate decision-making among its numerous members, the World Bank is divided into 25 constituencies. Each constituency consists of 8 to 20 countries that form a group together.

At the top of the World Bank’s decision-making structure is the Development Committee, which comprises 25 ministers from member countries. These ministers, often finance or economy ministers, act as the Governors of the Bank and represent their respective constituencies in major bank decisions.

The Development Committee leads the World Bank and makes many key decisions. While in some cases, written voting by ministers suffices for decision-making, most major policies and decisions are discussed and determined within this committee. Additionally, the committee coordinates with the Board of Governors, which consists of ministerial representatives from member countries.

The most significant gatherings of the World Bank are the Spring and Annual Meetings, held every six months. These two sessions serve as the primary platform for deciding major World Bank issues, such as new country memberships, changes in investments, and new policies. These meetings are not only crucial for determining the bank’s future direction but also for strengthening international cooperation and member country engagement.

Within the World Bank’s structure, each of the 25 country groups has 25 Executive Directors, grouped based on historical agreements among different nations. These Executive Directors represent the other member countries within their group, while the other members of each group serve as Senior Advisors or Advisors alongside them. The Development Committee is responsible for policymaking and holds no executive responsibilities. Executive matters are transferred from the Board of Governors to the Board of Executive Directors, which consists of 200 members. This board meets twice a week, where all executive decisions, coordination, and voting take place.

Iran is grouped with seven other countries, including Algeria, Pakistan, Afghanistan, Tunisia, Ghana, Libya, and Morocco. The Executive Director of this group is selected alternately every two years between Algeria and Pakistan. Iran holds only a Senior Advisor position in the World Bank. In the World Bank’s central meetings, where Executive Directors decide on projects, Iran’s interventions are conveyed to the bank’s management structure through the Executive Director.

Political Relations in the World Bank

Although the World Bank’s charter states that it is primarily an economic institution with no political involvement, in practice, decisions—especially regarding investment projects—are influenced by political positions and relationships. Voting on projects often follows considerations beyond pure economic logic. This situation leads to complex processes such as negotiations, bargaining, lobbying, and pre-coordination to approve projects. As a result, countries wishing to propose projects must secure the necessary political agreements beforehand to obtain the required votes for approval.

Amid the analytical and technical activities of the Executive Board, political activities also occur simultaneously. For example, in recent years, the situation in Gaza has led to global political solidarity, making it difficult even for countries like the United States, which generally supports Israel, to ignore the issue. Accordingly, at the end of the 2023-2024 fiscal year, the World Bank decided to allocate approximately $2 billion of its revenues across various sectors, with a portion designated for developing countries and another portion allocated to Trust Funds. These funds were specifically directed toward humanitarian aid in Gaza and the West Bank.

Given the World Bank’s shareholder structure and the United States’ decisive role in selecting the president of the institution, many bank decisions are often influenced by political negotiations. This year, the World Bank president initially proposed $100 million in aid to Palestine. However, through extensive negotiations by Arab and Islamic countries within the World Bank’s board, a relative consensus was reached, increasing the amount to $300 million. This decision was accepted even by countries that typically support Israel, such as the United States, in a manner that prevented any serious opposition from them.

Although stronger opposition typically arises from the U.S. and other nations when political red lines are crossed, in this specific case, given the existence of international agreements, no significant opposition emerged. Even the member group that includes Israel approved the increase in aid, provided that the funds were not transferred to terrorist groups and were solely used to assist the Palestinian people.

Following the completion of the European reconstruction project under the Marshall Plan, the World Bank expanded its mission toward the development and reconstruction of developing countries, considering global challenges. Over the past eight decades, the bank has played a key role in crises such as epidemics and climate change, focusing on development-related issues in each period. Today, the World Bank pursues two primary goals. The first goal is to reduce absolute poverty to below three percent, requiring all projects in low- and middle-income countries to align with this objective. The second goal is to increase the income of the bottom 40 percent of the population in developing countries to reduce income disparity and improve living conditions. This goal is contingent on environmental protection and adherence to sustainable development principles.

These policies reflect the World Bank’s commitment to reducing poverty and social inequality, improving living standards, and preserving natural resources. The bank’s approach underscores that economic development and social justice are interconnected with environmental protection and must be pursued in a coordinated and harmonious manner.

World Bank’s Decision-Making Process for Granting Loans

Over the past decade, the World Bank and the International Development Association have invested an average of $40 to $45 billion annually in various countries. In recent years, these investments have increased through different methods, reaching approximately $60 to $70 billion. These funds support low- and middle-income countries. The World Bank operates through 130 offices worldwide, with around 15,000 experts managing investment operations.

The World Bank offers two main types of products: financial and knowledge-based. Besides financial assistance, the bank provides extensive technical and knowledge-based support, with a significant portion of its workforce engaged in research, studies, and economic trend analysis across various countries. Consequently, the bank’s decisions on loan approvals follow a specialized organizational model that includes evaluating countries’ needs and economic conditions.

For investments, the World Bank employs a Country Engagement model, comprising four types of reports initiated by the bank’s analytical teams. Initially, if a government or the bank is unable to conduct a full assessment of a country’s situation, a preliminary evaluation called the Country Engagement Note is conducted over 12 to 24 months. If relations with the bank are favorable and a more comprehensive review is possible, a Systematic Country Diagnostic (SCD) is performed.

Subsequently, an analytical team is stationed in the country to conduct detailed assessments. These assessments utilize national development documents combined with diagnostic analyses. Ultimately, a Country Partnership Framework (CPF) is established, outlining the country’s development priorities for the next four to six years. Within this framework, development projects are identified as investment priorities, forming the basis of the bank’s collaboration with various countries.

Following the determination of the SCD and CPF, projects are defined. Given that some projects may take up to seven years, independent teams assess their progress every two years and submit a Performance and Learning Review (PLR) to the World Bank, evaluating whether projects are advancing according to the defined timeline. After the first CPF cycle, a Compilation and Learning Review (CLR) is prepared, assessing the extent to which development projects have met their intended goals. If projects are deemed successful, the CPF is extended for another cycle or two. This cycle applies to all countries receiving loans.

While most global projects operate within the CPF framework, some countries with limited interactions with the World Bank are exceptions. Iran is among these countries. In recent years, due to various reasons, Iran has been unable to reach the CPF stage, and its interactions with the World Bank have been largely non-loan-based. During the COVID-19 pandemic, Iran received limited loans, mainly for purchasing healthcare equipment, with approximately $130 million of active loans remaining from that period. Aside from this, Iran has not received any significant active loans in recent years.

Previously, Iran engaged in investment projects related to water and wastewater management in collaboration with the World Bank. However, in general, upper-middle-income countries often do not rely on World Bank loans and instead utilize its knowledge-based services. Nonetheless, in recent years, due to declining per capita income, Iran has entered negotiations to access the World Bank’s financial facilities, although this depends on the policies of the new government.

Provision of World Bank Technical Assistance to the Country

Regarding technical services, after determining the CPF, different countries can request Technical Assistance or Capacity Building from the World Bank. The World Bank emphasizes that its services are not limited to financial resources but are specifically focused on technical and educational assistance so that developing countries can acquire the necessary capacities to implement their projects or reforms. Iran’s cooperation with the World Bank has been more in the field of technical assistance and capacity building rather than receiving financial loans.

Compared to the International Monetary Fund (IMF), the World Bank typically defines projects in collaboration with governments or the private sector in various countries. The World Bank does not engage in macroeconomic reforms, as this responsibility lies with the IMF. Instead, the World Bank invests in development projects such as water, sewage, and sustainable energy initiatives. These projects are implemented in middle-income countries or even in unstable conditions such as Afghanistan or Gaza.

While the IMF conditions its assistance on the implementation of reforms, the World Bank, especially in its projects, is less inclined to impose political or economic reforms. However, during the 1960s and 1970s, the World Bank was involved in economic reforms in some countries, but today, the focus is primarily on development investment projects.

Areas of Cooperation Between Iran and the World Bank

Regarding cooperation with the World Bank, it must first be determined whether Iran intends to use the World Bank’s resources. Countries with similar income levels to Iran often do not take loans unless under special circumstances. If the decision is made to use these resources, the loan request process must be followed, and projects must be defined and reviewed to determine whether the World Bank can finance them. However, it should be noted that the volume of these facilities is not sufficient to cover the country’s total investment needs, as the World Bank’s annual global investment volume does not exceed $60 billion.

Another area of cooperation is the use of technical assistance. In this regard, the World Bank acts as a consultant, and countries can benefit from the experiences of other countries. For example, in tax system reform or government debt management, other countries have relevant experiences that can be leveraged to implement similar reforms domestically. These experiences are documented by World Bank experts and can be transferred to countries in need.

Regarding cooperation with the World Bank, countries have the freedom to decide which type of technical assistance they wish to utilize. This decision-making process is internal, and there is no imposition by the World Bank. Typically, the initiation of technical assistance requests is based on the needs and demands of the countries. Therefore, before requesting technical assistance, there must be a perceived need to utilize international experiences. Additionally, the World Bank does not have expertise and capabilities in all areas; therefore, it must be assessed whether this institution has the ability and advantage to provide assistance in specific fields.

Another important area that is often overlooked is providing an accurate and credible representation of the country’s economic and development status to the international community. This representation is particularly more credible when coming from the World Bank, as it is recognized as an international reference body. For instance, reports such as the Iran Economic Monitor, published by the World Bank, have a greater impact in depicting Iran’s economic situation. These reports are often prepared independently of the official data provided by countries, making them more credible at the international level compared to self-reported data from governments.

These reports provide insights into the economic conditions of different countries and serve as key resources for decision-making by countries seeking to make foreign investments. Therefore, maintaining and improving this representation is very important for countries. Often, countries undertake activities that receive little international attention. If these activities are properly reflected, they can have a positive impact and improve the country’s economic image. Additionally, the data published by the World Bank in its database serves as a reference for analyzing the economic status of various countries.

Another cooperation opportunity that is underutilized is participation in the World Bank’s Spring and Annual Meetings. These meetings are regular and significant economic events attended by all countries and economic officials such as finance ministers and central bank governors. During these meetings, the agenda for bilateral and multilateral economic cooperation is set, and high-level consultations take place. These opportunities can be leveraged to shape and strengthen economic cooperation among different countries.

For example, at the last Spring Meeting, the primary focus of various countries and senior officials was artificial intelligence (AI). Even within the IMF, which generally focuses on macroeconomic issues and policies, special attention was given to AI. Due to the role AI can play in increasing productivity and reducing economic disparities between countries, a significant portion of the sessions was dedicated to promoting investment in this field and exploring international cooperation in AI.

These capacities can be further utilized in Iran’s interaction with the World Bank. The establishment of a new government is also an opportunity for Iran to reassess its international economic relations with other countries, and the World Bank is one of the institutions that can be beneficial in this regard, considering the existing challenges and limitations in these interactions.

Conclusion

Iran can utilize its cooperation with the World Bank to advance its development goals. Taking advantage of the World Bank’s technical assistance enables the use of international experiences in areas such as tax system reform or debt management. Additionally, the World Bank, through its independent economic reports, can provide a more accurate depiction of Iran’s economic situation to the international community, which helps attract foreign investment. These measures, especially with the establishment of the 14th government, can be pursued with the goal of reducing poverty and strengthening sustainable development in the country.