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Will Trump's nominee turn the World Bank against China ?

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10th-Feb-2019       
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Michael Igoe :
In the wake of U.S. President Donald Trump's announcement on Wednesday that he will nominate David Malpass to be the next president of the World Bank, Malpass' record as a critic of the bank - and particularly of its relationship with China - has some staffers and development experts worried.
As the United States trade war with China continues, and as the administration's global development leaders increasingly describe their missions as part of a battle for influence with Beijing, many have interpreted Malpass' nomination as a signal that the White House might enlist the World Bank in this economic and geopolitical struggle. Whether Malpass approaches his nomination as an opportunity to forward this part of the Trump agenda, or with a commitment to the best interests of an international institution could mean the difference between his success or rejection.
"As a Treasury official, Malpass has sought to unwind seemingly every aspect of the World Bank's relationship with China. As bank president, this would not be a viable posture toward his third-largest shareholder. Presumably, the Chinese will be seeking assurances about which Malpass they're going to get," Scott Morris, senior fellow at the Center for Global Development, wrote in an email to Devex. Currently under secretary of the treasury for international affairs, Malpass has repeatedly criticized World Bank lending to China and China's role as a development actor in general.
Speaking at the Council on Foreign Relations in 2017, he said, "the World Bank's biggest borrower is China. Well, China has plenty of resources. And it doesn't make sense to have money borrowed in the U.S., using the U.S. government guarantee, going into lending in China for a country that's got other resources and access to capital markets."
In written testimony to a Senate Foreign Relationship Subcommittee in November, Malpass said, "we are working with allies and like-minded countries to guide the MDBs [multilateral development banks] away from what could be viewed as endorsement of China's geopolitical ambitions."
That guidance includes convincing countries to endorse standards for transparency in procurement, financing, and safeguards, which the Trump administration says Chinese financing fails to deliver. Former World Bank President Jim Kim adopted a mostly collaborative stance with Beijing, welcoming China's massive Belt and Road Initiative as another source of badly needed infrastructure finance and frequently quoting Chinese President Xi Jinping on the inevitability and potential of globalization.
Despite his grievances, Malpass played a key role in negotiations over the World Bank's $13 billion capital increase that shareholders agreed to last April. That deal included a commitment from the bank to curtail costs, particularly by limiting staff salary growth, and it introduced lending reforms that include higher rates for developing countries with higher incomes, such as China. Many viewed the agreement as an unlikely victory for the bank in the face of skeptical Trump administration officials such as Malpass, who have labeled the institution's growth a symptom of bureaucratic multilateral sprawl.
"I was a bit surprised actually that that agreement allowed lending at the amounts indicated … I think it's a reasonable compromise," said Yukon Huang, a senior fellow at the Carnegie Endowment for International Peace and former World Bank country director for China, noting that the issue of lending rules for emerging economies appears to have been mostly settled in that agreement.
Some inside the World Bank are worried Malpass could seek to drive a bigger wedge between the World Bank and China at the Trump administration's behest. American representatives to the bank already "try to block any lending to the country," one World Bank official told Devex on the condition of anonymity, calling these efforts by the U.S. executive director "ridiculous," "shortsighted," and "extremely counterproductive."
"If it has become difficult with simply trying to get the board to approve projects in China, what will happen if there is a president tasked with advancing Trump's bidding rather than having purely the interest of development in mind?" the official said in an email.
The official was not sure what a World Bank president with an aggressive stance toward China would actually attempt to do to influence the bank's position, but noted that it seems unlikely the administration would be so "brazen" as to try to pursue policies directed solely at China.
More likely, according to the official, would be "changes to terms and conditions of borrowing for [International Bank for Reconstruction and Development] countries as well as safeguard requirements and the expectations of the types of projects."
The governance structure of the World Bank could provide some reassurance. While changes such as these would have wider-reaching consequences, they would likely also require board approval, the official noted.
When the bank was created - and the agreement with Europe ensured its president would be an American for the foreseeable future - the purpose of establishing a sitting board of directors was partly to offset the American president's power, Huang said. If the president appeared to be acting in the interests of the administration that nominated him instead of in the interests of the institution, it would be the board's responsibility to do something about it.
"Can the president do what he wants on behalf of the administration? If he actually went down that route it would create a real problem within the institution," Huang said. Given that the capital increase deal - which was negotiated over the course of many months and represented a consensus view among the executive directors - already put new lending rules in place, additional changes seem unlikely at this point, according to Huang.
"Is something going to change in terms of the bank's approach to China? ... Probably not in the short term," he said. "They've already reached an understanding as to what that lending program will be."
In Huang's view, the argument that the bank shouldn't lend to China is based on several misunderstandings - the first being that China is somehow taking advantage of the World Bank and its shareholders by borrowing money from it.
As a financial institution, the bank's solvency depends on lending to creditable borrowers like China, Huang said, adding that loans to China tend to return better than average results - which can generate lessons for other borrowers - and are routinely paid back ahead of schedule.
"In some ways, you could say that the World Bank needs China more than China needs the World Bank," Huang said. China's interest in keeping an open line to World Bank finance is largely related to the institutional, technological, and knowledge transfer that accompanies these long-term projects, he said.
Malpass made a similar observation in his testimony last year. "China is absorbing decades of financial know-how into its institutions in a few short years, a similar pattern to its absorption of manufacturing technology," he told Congress. While that statement sounds like a criticism or complaint, it also reflects a basic mission of the World Bank and a key reason it was created in the first place. "The whole precept for the World Bank rested on the proposition that developing countries, to grow faster, need to learn from developed countries," Huang said. That raises a fundamental question about how well Trump's nominee understands the institution's purpose - and whether that purpose aligns with America's interests.
"What is the objective of the Trump administration? Do they support the transfer of knowledge and strengthening of institutions from rich countries to poor countries? Because that was the purpose of the World Bank. That's why it was created," Huang said.
"If it doesn't, then, of course, the whole institution is nonsensical. It doesn't make any sense," he added.
(Michael Igoe is a Senior Reporter with Devex, based in Washington, D.C).

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