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THE CARIBBEAN islands of St. Kitts and Nevis are known for luxury tourism (visitors include Meryl Streep and Oprah Winfrey), pricey citizenship (on sale for $150,000), and a sprint world champion (Kim Collins). But despite the country’s many assets (including a national income per person of over $18,000) it is eligible for loans from the World Bank, an institution dedicated to eradicating extreme poverty.
Because the islands are so small, this draws little comment. Not so for China. Its income per person is half that of St. Kitts and Nevis, and lower than that of Poland, Malaysia, Turkey and 15 other potential borrowers. But its eligibility to borrow from the World Bank strikes many Americans as anomalous, even scandalous.
One of them is President Donald Trump. “Why is the World Bank loaning money to China? Can this be possible?” he tweeted on December 6th, a day after the bank discussed a new five-year lending framework for America’s rival. Another used to be the World Bank’s president, David Malpass, in his former job as an American treasury official. In 2017 he argued that “it doesn’t make sense to have money borrowed…using the US government guarantee, going into lending in China”. Steven Mnuchin, the treasury secretary, heard similar sentiments in a congressional hearing on December 5th. “What are you doing to stop those loans?” asked a Democrat. “It’s unconscionable to me that our taxpayers should...be subsidising the Chinese growth model,” said a Republican. On this question, at least, America’s legislature is almost as harmonious as its Chinese counterpart.
America had objected to the new framework, Mr Mnuchin said. But it cannot have surprised him. In a deal struck last year, America agreed to an increase in the bank’s capital, in return for which the bank agreed to charge its richer borrowers higher interest rates, lend to them more sparingly and encourage more of them to “graduate” (ie, cease to be eligible for the bank’s loans).
But graduating from the bank is like graduating from a German university: neither brisk nor uniform; leaving behind many dauerstudenten (eternal students). Once a country reaches a national income of $6,975 per person, a “discussion” begins. The bank also considers a country’s access to capital markets and the quality of its institutions. Of the 17 countries that have graduated since 1973, five later sank back into eligibility, according to a study by the Policy Centre for the New South, a Moroccan think-tank. South Korea left in 1995, then needed the bank’s help in the Asian financial crisis. It remained eligible for further loans until 2016, when its income per person was almost three times China’s current level.
The bank will, however, lend to China more selectively. The country now owes it about $14.7bn. Over the next five years, it envisages lending $1bn-1.5bn a year, 15-40% less than it averaged in 2015-19. The new money aims to encourage fiscal reforms, private enterprise, social spending and environmental improvements. If the bank can help nudge China towards cleaner growth that will benefit everyone, including China’s geopolitical rivals. It also hopes to finance pilot projects that poorer countries can learn from. It has paid for Ethiopian officials to study China’s irrigation and Indian officials to study its trains.
But would the money not be better spent in poorer countries themselves? The bank’s friends point out that its lending to China earns a tidy profit (roughly $100m last year). It charges China a higher interest rate than it pays on its own borrowing. That is money that can then be used to help poor people who live elsewhere.
In theory, its donor governments could do all this more cheaply and simply themselves. They could issue an equivalent amount of low-yielding sovereign bonds, buy higher-yielding emerging-market securities and donate any profits to low-income countries. But that is not what critics of China’s lending are proposing.
Given the profits it can earn, the bank is eager to keep lending to China. Harder to explain is why China wants to keep borrowing from the bank. The sums are small (0.01% of GDP) and the process can be cumbersome. China may value the bank’s expertise. But if so, why not buy it without a loan attached?
There are examples of China doing just that. It bought advice on how to improve in the bank’s assessment of the ease of doing business. But China may feel a loan gives the bank more skin in the game. Consultants paid only for advice can always blame disappointments on poor implementation of their sound prescriptions. A lender has a greater stake in solving difficulties. Institutions like the bank and the IMF stress the importance of borrowers taking “ownership” of reform programmes. China may feel the same about the lenders it deigns to borrow from.■