The world was a different place 50 years ago. No one spoke of emerging markets. There was no worldwide trend toward privatization, no communications revolution, no globalized economy. World population was less than half of what it is today. It was into this environment that the International Finance Corporation was born in 1956.

Introduction

The world was a different place when the International Finance Corporation (IFC) was established in 1956. No one spoke of emerging markets. There was no worldwide trend toward privatization, no communications revolution, no globalized economy. World population was less than half of what it is today.

The economies of poor countries were still in very early stages of development, lacking the human resources, physical infrastructure and sound institutions needed to raise incomes and improve living standards. The responsibility for development was almost universally assigned to the public sector. Private sector investment in developing countries was small, and not much thought was given to increasing it. It was into this environment that IFC was born.

For several years officials of the World Bank had been supporting the creation of a new and different entity to complement their own. The Bank had been founded to finance post-World War II reconstruction and development projects by lending money to member governments, and had been doing so effectively. Yet in its initial years, some senior staff had seen the need for creating a related institution to spur greater private sector investment in poor countries.

Major international corporations and commercial financial institutions at the time showed relatively little interest in working in Africa, Asia, Latin America or the Middle East. Entrepreneurs in these regions had few domestic sources of capital to draw upon and even less from abroad. They needed a catalyst.

At the 1944 Bretton Woods Conference that led to the creation of the Bank and the International Monetary Fund, initial proposals for this kind of support had been made—and rejected. These proposals would have given the Bank the ability to meet some of these goals by lending to private companies without government guarantees. Then, in the late 1940s, the concept was greatly refined by Bank President Eugene R. Black and his Vice President, former U.S. banker and General Foods Corporation executive Robert L. Garner.

Garner was an ardent believer in the role of private enterprise. Addressing the Inaugural Meeting of IFC’s Board of Governors on November 15, 1956, he said, "I believe deeply that the most dynamic force in producing a better life for people, and a more worthy life, comes from the initiative of the individual—the opportunity to create, to produce, to achieve for himself and his family—each to the best of his individual talents. And this is the essence of the system of competitive private enterprise—20th century model—as it has been developed by the most enlightened and successful business concerns. It holds the promise of rewards according to what the individual accomplishes. It is based on the concept that it will benefit most its owners and managers if it best satisfies its customers; if it promotes the legitimate interests of its employees; if in all regards it acts as a good citizen of the community. It is moved by the desire to earn a profit—a most respectable and important motive, so long as profit comes from providing useful and desirable goods and services. It is my belief that the best services and the best profits result from a competitive system wherein skill and efficiency get their just reward."

Garner worked with his assistant Richard Demuth and others to create a new private sector investment arm affiliated with the Bank, rather than having it lend directly from its own resources to the private sector. This new multilateral entity, at first internally termed the International Development Corporation, would be owned by governments but act like a corporation and be equally comfortable interacting with the public and private sectors. It would lend money, take equity positions and provide the technical expertise in appraising private investment proposals in developing countries, as the Bank was doing for public sector projects. It also would work alongside private investors, assuming equal commercial risks. In the process of removing some of the major barriers to new private investment in developing countries, it would encourage the domestic capital formation needed to create jobs, increase foreign exchange earnings and tax revenues, and transfer knowledge and technology from north to south.

The idea received its first official backing in the March 1951 report of a U.S. development policy advisory board headed by Nelson Rockefeller. This panel conceived of a package to add considerable value to the Bank’s own product by encouraging the growth of productive private enterprises that would contribute many key components to development.

One such component, Garner wrote, was entrepreneurship—"that elusive combination of imagination to see an opportunity and to mobilize the necessary resources to seize it." Another was the mobilization of new capital from private investors willing to take substantial risks in return for potentially large rewards. Others included job creation, new labor skills, management capacity and technological advances. In the process business owners in developing countries would "successfully transmute machines, labor and capital into a dynamic going concern, producing at a competitive cost goods of a quality that the market will accept."

Garner actively marketed the concept. After the 1952 presidential elections, the United States reduced its support for the idea, eventually endorsing a modified proposal two years later that left IFC to start business with no equity investment powers (this provision was changed in 1961). Other nations then came aboard, and the formal Articles of Agreement were drafted by the Bank in 1955.