Final answer:
The IBRD finances capital projects in member countries using a combination of loans, grants, and co-financing, with conditions to ensure efficient use of capital for productivity and development. Past experiences show the importance of investing borrowed funds productively to avoid repayment issues. Government borrowing can also impact financial markets by potentially crowding out private investment through higher interest rates.
Step-by-step explanation:
The International Bank for Reconstruction and Development (IBRD), part of the World Bank Group, finances capital projects in member countries to support development and economic progress. Partner governments typically fund these projects through a mix of borrowing, grants, and co-financing. Approximately 31% of capital comes from borrowing, usually facilitated by the IBRD, while around 25% can be attributed to grants from various sources including the Global Environment Facility (GEF) and carbon financing initiatives. The remaining finances are covered through multipartner cooperation, including global initiatives like the IFC Small and Medium Enterprise Fund and the World Bank-Netherlands Partnership Program.
Countries must often comply with certain conditions set by international financial institutions like the IBRD, to ensure that the borrowed capital is aimed at boosting productivity and development. In some historical cases, such as those in Latin America and Africa during the 1970s and 1980s, countries that borrowed heavily from global capital markets without sufficiently increasing productivity faced difficulties in repaying their debts. It is crucial that invested capital from these loans contributes to economic growth to avert such situations.
Financial markets are sensitive to government borrowing because it can crowd out private investment by increasing interest rates. For instance, when the government's demand for financial capital increases, it can shift the demand curve rightward resulting in a higher equilibrium interest rate, thus making it more expensive for the private sector to access capital.