Donald Trump’s pick to head the World Bank means US-China rivalry has a new front: development aid
Daniel Wagner says China continues to take World Bank aid despite its growth and the founding of alternative institutions like the AIIB. Trump’s nominee to lead the bank, David Malpass, may have been chosen to stop that
US President Donald Trump and his nominee to lead the World Bank, David Malpass, have an issue with the manner in which the bank and other multilateral development banks do business. Specifically, Malpass objects to the size, intrusiveness and entrenched interests within these institutions, and the very idea that such banks, which are supposed to be all about promoting development and alleviating poverty, continue to lend to the world’s second-largest economy, with the world’s largest aggregation of foreign exchange: China.
While China has been busy becoming the leading de facto economic and political power, it has also been quietly establishing strong bilateral relations with regional governments, and even lending to them, while continuing to accept much-needed development help from multilateral development banks.
For many years, Beijing has also been busy within these development banks (and other international institutions) establishing its prominence and exerting its influence on how development loans are disbursed. Although China held just 4.5 per cent of the World Bank’s voting power (compared with 16 per cent by the US) in 2018, and contributed just 5 per cent towards the United Nations’ regular budget in 2015 (compared with 22 per cent by the US), Beijing is punching well above its weight in these and other multilateral organisations. Very little of consequence gets done at the World Bank, the UN or any number of other multilateral organisations without a nod from Beijing.
Apart from having become so influential in these post-war bastions of economic power, Beijing has been instrumental in creating two new development banks – the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank – both of which are based in China and are beginning to wield considerable clout in the global development arena. Both banks are starting to supplant the other multilateral development banks, yet they are doing it at times by bypassing conventional Western-created financial institutions and implementing a Chinese approach to development lending that can prompt recipient nations to fall into a debt trap.
Even as China increases its economic presence through investment and greater influence in multilateral institutions, it continues to reap benefits intended to accrue to the world’s truly needy nations. By all rights, China should be a donor nation to multilateral development banks, not a recipient of aid. That China continues to be the largest recipient of funds from some of the development banks is scandalous. At what point does China’s absolute strength count for more than its per capita development? And why do donor countries allow this double standard to continue?
According to the World Bank, more than 500 million people were lifted out of extreme poverty as China’s poverty rate fell from 88 per cent in 1981 to 6.5 per cent in 2012. Any legitimate argument in favour of lending based on need from multilateral development banks disappeared years ago, yet the World Bank’s former country director for China, Yukon Huang, has defended the bank’s continued lending to Beijing, arguing that provincial and local governments need the loans because structural impediments prevent domestic banks from providing sufficient credit to finance public projects.
In other words, the Chinese government cannot seem to manage its banking sector sufficiently to get credit where it is needed in the Chinese economy. If every country were to make such an argument, many developed countries would be going to the multilateral development banks, too.
There is another reason why the practice continues, however: the multilateral development banks need China to continue to absorb billions of dollars of loans, grants and technical help each year because many of the smaller and poorer countries do not have the capacity to do so. Without China, lending amounts would decline, which would call into question how these banks operate.
That is a subject few leaders of these institutions are inclined to tackle seriously, even though it is long overdue. In 2017, the Trump administration was reluctant to endorse a capital increase at the World Bank, with US Treasury Secretary Steven Mnuchin stating that “more capital is not the solution when existing capital is not allocated effectively”. This is what he was talking about. That argument has now been put on the front burner with Malpass’ nomination.
For Beijing to continue to receive development aid makes even less sense given that it has taken specific action to assume a more substantial role in lending to developing countries through the AIIB and its participation as a founding member of the New Development Bank. Beijing formed the AIIB to counter the absence of a more pronounced leadership role in other multilateral development banks, as well as help pick up the slack in infrastructure investment lending in Asia. Why does it not recognise the incongruity in taking a prominent leadership role in infrastructure-related lending institutions while continuing to accept development aid on a grand scale from the development banks it is now competing with?
It would be preferable if China were to become a global power as a member of the community of nations, to show it acknowledges and plays by internationally accepted rules and standards. How Beijing operates in international institutions is central to that. The Trump administration is challenging Beijing in a number of ways, but none is more important than ensuring that development aid gets to the countries and people that really need it. China is not one of those countries. If it takes a US-led battle within the multilateral development banks to ensure this practice stops, so be it.
Daniel Wagner is CEO of Country Risk Solutions. This is an edited excerpt of his soon-to-be-released book, China Vision
This article appeared in the South China Morning Post print edition as: World Bank battlefront