A Short History of IFC and its Role in the Emerging Markets

Following World War II, the concept that private enterprise could power the rise of poor nations was, at best, an afterthought for those who created the Bretton Woods institutions and other key international organizations.

Postwar economic planners created the United Nations to foster geopolitical stability, the International Monetary Fund to ensure a stable currency exchange regime, and the World Bank to help rebuild war-torn nations and develop poorer nations through lending to governments. Promotion of an open trading regime was to be fostered through the Global Agreement on Tariffs and Trade, the forerunner of the World Trade Organization.

It was not until the mid-1950s that encouraging direct investment in the private sector of developing nations became a key part of the postwar economic agenda. In the wake of U.S. President Harry Truman’s famous “Point Four” foreign policy agenda, the need for an institution like IFC was promoted as a highly experimental but pioneering “Point Five” by the New York Times on November 13, 1954. Since its creation less than two years later, IFC has mirrored the growth of the emerging markets:

• During the 1960s, IFC struggled to survive but began slowly pioneering small direct investments, primarily in heavy industries (extractive industries, cement, paper, and manufacturing).
  
  
• During the 1970s, IFC pioneered the use of syndicated loans, which allowed commercial banks in Europe and the United States to begin diversifying their investment portfolios into the emerging markets. The Corporation also began to introduce new sources of capital to enterprises in developing countries.
  
  
• During the 1980s, through the creation of emerging market equity funds, stock markets, and the first emerging market index, IFC helped found and grow the equity industry in the developing countries, in the process coining the term “emerging markets.” From a minuscule base, the capitalization of stock markets in developing countries has grown to nearly $5 trillion today, according to the ratings agency Standard and Poor’s.
  
  
• During the 1990s, IFC was a leader in fostering privatization of formerly state-owned enterprises across the former Soviet Union and in encouraging private sector investors to invest in the infrastructure of many developing regions, especially Latin America.
  
  
• In recent years, IFC’s role has broadened significantly, to include:
  • Issuance of a diverse array of local currency bonds that deepen domestic capital markets. These help provide long-term instruments for infrastructure investment.
    
    
  • Introduction of derivatives and other risk management securities into emerging markets.
    
    
  • Creation of a global benchmark for environmental and social standards in emerging market finance (the Equator Principles), innovative public-private partnerships to preserve biodiversity, transactions allowing emerging market companies to tap into the carbon credits market, and initiatives supporting renewable energy and energy efficiency.
    
    
  • Ground-breaking research on improving the investment climate for small and medium entrepreneurs in the emerging markets, published in the annual “Doing Business” report.
    
    
  • IFC’s annual investments in Africa have risen 77 percent over the past three years, to $445 million in FY05.
    
    
  • During FY05, IFC’s investments in microfinance projects increased to $323 million, representing 69 projects across 43 countries and reaching 1.2 million clients in low-income households.
    
    
  • IFC has played a leading role in fostering the development of small and medium businesses through its technical assistance programs around the globe. It has also pioneered new methods of monitoring and evaluating development impact.