By Michael Igoe // 02 November 2018
WASHINGTON — In the 18 months since the World Bank signed on as a partner to China’s Belt and Road Initiative, the risks associated with the massive infrastructure investment effort have begun to crystalize, prompting some observers to ask just what kind of a partner the World Bank plans to be.
In a handful of countries — including Kenya, Pakistan, Sri Lanka, and others — concerns about debt sustainability in the face of massive Chinese lending are on the rise. Officials from United States President Trump’s administration have flatly stated they will advise U.S. development partner countries against accepting Chinese financing, while other experts continue to point to the potential environmental and social harms this infrastructure-heavy campaign could bring about.
The World Bank is currently undertaking a study of the economics of the Belt and Road Initiative, which acknowledges both the potential positives and negatives of the effort, according to a bank representative who shared some initial findings during a session at last month’s annual meetings.
Yet the institution’s primary role, bank leaders say, is to work directly with countries involved in the Belt and Road Initiative to ensure they are prepared to maximize upside benefits of Chinese investment while minimizing downside risks.
“It’s basically very simple for us. We are a country-based kind of organization,” said Mahmoud Mohieldin, the bank’s senior vice president for the 2030 development agenda, United Nations relations, and partnerships.
“It’s all about the capacity and the understanding and the articulation of your own national policy to maximize the benefits of all of these initiatives,” he said.
Mohieldin said that in a meeting with Arab and African finance ministers during the bank’s annual meetings in Indonesia, he sympathized that they must feel overwhelmed by the onslaught of initiatives — each with their own policy and investment requirements — that have descended on developing countries in recent years. From the Sustainable Development Goals, to the Paris Agreement on climate change, to the Belt and Road Initiative, to the variety of “old ties with the conventional economic powers,” government ministries are tasked with a massive coordination and prioritization challenge.
Part of the bank’s role, he said, is to help ministers figure out “how to harness and manage all of that,” according to Mohieldin.
In the case of Belt and Road, the benefits will not be realized unless countries have already developed their own national policies for transport, national policies for infrastructure, and national policies for maximizing export returns and foreign direct investment, he said.
“Our job is basically for the client countries to understand the possibilities of maximization of benefits from these different initiatives,” Mohieldin said.
A constructive critic
In May 2017, World Bank President Jim Kim addressed the opening plenary of the Belt and Road Forum for International Cooperation in Beijing. He began with a few words of thanks in Chinese, before quoting China’s President Xi Jinping: “Asian countries are just like a cluster of bright lanterns. Only when we link them together, can we light up the night sky in our continent.”
“As someone who was born in Korea, I’m inspired by the Belt and Road Initiative,” Kim said. “And the World Bank Group very proudly supports the government of China’s ambitious, unprecedented effort to light up that night sky.”
Later that afternoon, Kim and the heads of other multilateral development banks signed a memorandum of understanding to mark their participation in the Belt and Road Initiative, which aims to spur infrastructure investment across at least 64 countries that account for 62 percent of the world’s population. Kim described the bank’s willingness to support countries to ensure they reap the maximum benefits and minimize the risks associated with China’s grand vision.
“Our decades of experience with large infrastructure projects suggest that project preparation and appropriate risk allocation will be critical for success,” Kim said.
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In 2019, the bank plans to release the results of its research into the economics of the massive initiative. Based on the information the bank has shared publicly so far, it seems to have a clearer picture of the potential benefits than it does of the potential risks of the initiative, said Scott Morris, senior fellow at the Center for Global Development.
“They’re doing some very good detailed data work, which will ultimately be helpful to the Chinese and to the countries that are participating. At a higher level, their overarching framing of it leans toward being too friendly to the initiative and isn’t playing the role of constructive critic as much as I would like them to be,” Morris said.
What would be more helpful, according to Morris, would be for the bank to look more closely and more critically at the principal lending institutions involved in Belt and Road.
“There are official lenders, and we know them — China Development Bank, China [Export-Import Bank] — these are the big ones. And if we simply made a priority of focusing on their priorities and practices, I think we would get a long way toward fixing problems,” he said.
Morris noted that representatives from these Chinese financial institutions rarely seem to participate in the public panel discussions about the initiatives, such as the one that took place during the World Bank’s Annual Meetings in Bali, Indonesia. Procurement policies, data transparency, and environmental and social safeguards frameworks remain difficult to ascertain when it comes to these Belt and Road financiers, Morris said. He hopes the bank is working behind the scenes to ensure the Chinese are developing and articulating these necessary components of a responsible global initiative.
“Until we see more concrete steps from the Chinese government to address the policy framework for these very issues, it doesn’t instill a lot of confidence that they are proceeding in good faith, frankly,” he said.
A multilateral Belt and Road?
In the annual meetings session, China’s Vice Finance Minister Zou Jiayi said China takes issues of debt sustainability in the Belt and Road Initiative seriously, since loan defaults would have negative impacts for China too.
“I think we need to closely watch this issue in an analytical way … It’s a complicated issue, but we’ll take care of it,” she said.
Danny Leipziger, managing director of the Growth Dialogue and a former World Bank vice president, asked Zou if it would make sense for China “to multilateralize further the BRI,” so when problems do occur, both borrowing countries and lending institutions can look to an international system for support.
“It may be in your own interest — if one is looking five, 10, 15 years out — to be part of the international system, whether it’s the Paris Club or whatever. Because there are going to be a number of these countries that are going to run into debt problems,” Leipziger said.
Zou responded that China has envisaged Belt and Road not as a centralized initiative, but as a network based on countries’ own investment needs and broad participation from development banks.
“We would encourage the BRI participating countries to approach the [multilateral development banks] and to ask for their help in terms of the project selection and project design,” Zou said.
“We are also thinking about and exploring the possibility of trying to develop a kind of mechanism which could more integrate the expertise of the MDBs and better serve the needs of the BRI participating countries,” she added.