The EconomistDecember 14th 2019 611T
he caribbeanislands 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 Ameri-
cans 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 discuss-
ed 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 offi-
cial. In 2017 he argued that “it doesn’t make
sense to have money borrowed...using the
us government guarantee, going into lend-
ing in China”. Steven Mnuchin, the trea-
sury 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 subsidis-
ing the Chinese growth model,” said a Re-
publican. On this question, at least, Ameri-
ca’s legislature is almost as harmonious as
its Chinese counterpart.
America had objected to the new frame-
work, 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 inter-
est 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: nei-
ther 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 in-
stitutions. 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 Moroc-
can think-tank. South Korea left in 1995,
then needed the bank’s help in the Asian fi-
nancial crisis. It remained eligible for fur-
ther loans until 2016, when its income per
person was almost three times China’s cur-
rent 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 re-
forms, private enterprise, social spending
and environmental improvements. If the
bank can help nudge China towards clean-
er growth that will benefit everyone, in-
cluding 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 irriga-
tion 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 poorAmerica v China
A profitable student
HONG KONG
Should the World Bank still lend to China?
Finance & economics
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