The Trump administration is demanding the World Bank allocate less capital toward Chinese projects:
“The bottom line here is right now we’ve got too high a percentage of the World Bank’s balance sheet that’s going to countries and to projects that already have ample borrowing capacity,” a senior Treasury official told Reuters, which noted that China is the IBRD’s biggest recipient of development loans, totaling $2.4 billion.
As I understand it, the World Bank makes money on these loans and there is a cross-subsidy of other Bank activities, most of all aid. A World Bank that stopped such loans would be poorer and less skilled, and over time could devolve into one of the poorer, less effective poverty-fighting parts of the United Nations, without much of a political power base at that.
Yet China has several trillion dollars worth of reserves. They seem to like, and be willing to pay for, World Bank infrastructure expertise when bundled with the loans. Given the overall Chinese record in this area, it is hard to argue they don’t know how to build up an infrastructure. So why do they borrow then? I think of the Chinese leadership as like a university president who doesn’t want to spend down the endowment to boost immediate consumption.
It is bad if/when the current equilibrium goes away. Yet it also is unlikely that the United States will continue to underwrite the building up of its major geopolitical rival. We (in essence) guarantee some loans to them so they in turn can make loans to us, also guaranteed by us. That’s a lot of guaranteeing. In return we receive an out-sized role running and staffing the World Bank, which you can think of as a “soft power” endowment of sorts. In return the Chinese can hold onto a larger foreign currency endowment and receive some expertise.
That American lead WB role is worth less over time as multilateral capital flows continue to decline relative to private sector flows, and as more emerging economies require less aid. Furthermore China has set up its own development bank for Asia, namely the AIIB. More generally, we seem less interested in helping the Chinese maintain the size of their endowment, and perhaps they are not so favorably inclined toward our soft power endowment either. On top of that, receiving the infrastructure expertise continues to decline in value for the Chinese, as they develop more and more of their own expertise. At this point, they should be telling us how to build infrastructure.
And so the arrangement is likely to unravel. I don’t approve of Trump pulling the plug on this one, but more realistically that was the underlying trend in any case.
The biggest losers probably are the aid-receiving poorest African countries who currently free-ride upon the Bank’s indirectly American-guaranteed, China-funded staffing, higher expertise, and higher prestige.
China and America probably lose too, as each country will find it harder to maintain its chosen kind of endowment. And the pretense of cooperation will fade, which has good and bad effects but mostly bad.