The enticement of what is seen as China’s relatively suddenly developing huge market and its infrastructure investment rampage around the world is pulling U.S. policy off course.
The latest evidence is a quiet struggle inside the World Bank group.
One of the holy of holies of U.S. management, in effect, of that international institution since it was created as part of the monetary and current settlement of World II, was its advocacy of free markets. True, the bank itself was a centralized run operation with delegates from the various countries as stockholders ands guarantors of its loans, in effect on a government to government basis.
But early on, the Bank established the International Finance Corp. [IFC] as its “free enterprise” window. The IFC’s function was to partner in otherwise too risky joint investments between foreign lenders and local developing market capitalists in the Afro-Asian world and Latin America. Its activities have been relatively modest these five decades compared to the massive lending of The World Bank itself on its government to government basis. Still though its operation have been limited through the years, it was seen as an effective device for encouraging private investment and market operations in countries whose former colonial regimes favored government enterprise
But now, ironically, the IFC has strayed from what the world generally accepts as “the Washington consensus” – a set of 10 economic policy prescriptions constituting the “standard” reform package for crisis-wracked countries by Washington, the D.C.–based International Monetary Fund (IMF), World Bank, and the US Treasury Department. Under the hand of a former Goldman Sachs banker, Jin-Yong Cai, now leaving 10 months before the expiration of his term after a turbulent three years, to return to Asia and the private sector, the IFC has had a large number of deals involving Chinese-state companies.
The last straw for some critics has been a $300 million IFC investment in China’s Postal Savings Bank, a paltry sum compared to the state-owned China Life paying $2.5bn or its 5 per cent stake. But it continues a pattern in which the IFC’s dedication to private enterprise has gone awry. Some World Bank old hands are asking how this particular investment conforms to the IFC’s mandate to lend to private companies where capital was either unavailable or too expensive and other investment options were not available.
Cai has argued the investment in the Postal Savings Bank will help bring financial services to many of China’s “unbanked” in the hinterland away from the largest cities. That’s certainly a worthy objective, and he says it will bring a healthy investment return as well. But while all that may be true, it seems to be just one more example of how policy, often led by the U.S. government, has been bending the rules to accommodate the Chinese.
That issue could become a major one if the current sudden reduction in growth of the Chinese economy continues to fall as there seems every evidence it will. The world commodity markets, already suffering from the impact of slowing economies in Europe and India as well as China, have already been hit. More bad news seems to be on its way from Beijing even though there is a persistent hope in all quarters that the miraculous high rates of growth of the last two decades will, somehow, return. That isn’t likely.
And as crisis arises in a number of African and Latin American countries where huge Chinese infrastructure investments were committed, in reality tied to high commodity prices for Beijing’s imports, we get wind of how far the Chinese have snuggled into relationships with Western institutions. There will be a price to pay for that, and Western policymakers – above all those in the U.S. – had better be alert to it.