Capital Account: A Bigger World Bank Takes on China.

 

"For the past year, Treasury Secretary Janet Yellen has been circling the world seeking to breathe new life into a 79-year-old pillar of the U.S.-led international order: the World Bank.

Those efforts stem from a genuine desire to help developing countries end poverty, recover from Covid and adapt to climate change. But there's another motive: persuading those countries that this global order is still superior to one led by China.

That many members of the "Global South" might not necessarily see it that way became painfully clear last year when they refused to condemn Russia's actions in Ukraine or join Western sanctions against Russia.

"The biggest success of the response to the events in Ukraine has been the unity shown by advanced democracies," Jeremy Hunt, Britain's chancellor of the exchequer, told me in April. "What has been the biggest disappointment has been the lack of support from the Global South."

That lack of support in some cases reflected historical ties to Russia. But in other cases, it stemmed from frustration with the West for, developing nations thought, treating their problems with less urgency and generosity than Ukraine's. Some resented the U.S. for imposing its national security agenda on the world via its control of the dollar while insisting everyone else play by international rules.

Finally, money talks, and in the past decade, China was offering more of it than the World Bank.

 Addressing that imbalance is one of Yellen's goals."These countries certainly have the attention of the advanced countries," Yellen said in an interview last month. "We hear them loud and clear."

The bank's shareholders, of which the U.S. is the largest, have endorsed steps to boost the bank's lending capacity by $50 billion over the next decade. At the bank's annual meeting in Morocco this week, they are discussing measures to add roughly another $100 billion. (In June, the bank and its affiliates had $460 billion in loans outstanding.)

The bank and the International Monetary Fund were conceived in 1944 in Bretton Woods, N.H. The IMF would make short-term loans to alleviate temporary financial difficulties; the bank would make long-term loans to accelerate economic development.

In the 1970s and 1980s, many developing nations became heavily indebted to Western lenders. Their debts ended up being restructured. In 1996, the two institutions launched an initiative to wipe out the poorest countries' debts altogether.

The idea thereafter was that most aid would come in the form of grants and concessionary loans -- that is, with relatively easy repayment terms.

"The World Bank didn't have the balance sheet [to lend more] and no longer saw its policy mission as financing infrastructure across the poorest parts of the world," said Brad Setser, an expert in international finance at the Council on Foreign Relations. "It wanted to fund health-sector strengthening and strategies for inclusive development, more than good old-fashioned highways."

China stepped into the vacuum. Setser calculates that from 2011 to 2019, the World Bank and other multilateral banks lent low- and middle-income countries $241 billion. In the same period, Chinese banks lent other countries $473 billion.

Unlike the World Bank and its regional counterparts, Chinese banks mostly lend on commercial terms, usually to benefit Chinese companies. They are also less likely to ask awkward questions about corruption, human rights or environmental impacts.

"Somebody from a developing country said to me, 'What we get from China is an airport. What we get from the United States is a lecture,' " former Treasury Secretary Larry Summers tweeted this year.

Things have begun to change. The multilateral lenders stepped up lending during the pandemic. Setser's data shows Chinese banks, meanwhile, have pulled back as many past loans went bad. Some poor countries' efforts to restructure debts are being held up by Chinese banks' reluctance to take a haircut.

Meanwhile, for the past year, the Biden administration and Ajay Banga, the India-born U.S. financial executive installed as World Bank president in June, have pushed to expand the bank's capacity by increasing its leverage, issuing hybrid capital or enabling shareholder nations to guarantee more loans.

While China is a member of the World Bank, it has been working to build up competing platforms such as the BRICS, a forum for Brazil, Russia, India, China and South Africa, intended as a counterweight to the G-20.

It was thus with some satisfaction that Biden administration officials point to a photo from last month's G-20 summit in New Delhi of Biden and Banga with the leaders of India, Brazil and South Africa. Notable for their absence: China and Russia." [1]

 

Photos are fine. Lectures about how we love the global south are great. But an additional 50 billion dollars, compared to China's 473 billion dollars, is nothing.

 

1. U.S. News -- Capital Account: A Bigger World Bank Takes on China. Ip, Greg.  Wall Street Journal, Eastern edition; New York, N.Y.. 12 Oct 2023: A.2.