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The deeper questions about China and the multilateral banks underneath the Doing Business controversy

Written by Chris Humphrey

Image credit:World Bank/Flickr Image license:CC BY-NC-ND 2.0

Recent accusations that Kristalina Georgieva boosted China’s ranking in the World Bank Doing Business Indicators has highlighted a broader issue around how China engages with multilateral institutions.

As Jeffrey Sachs pointed out in a recent Financial Times op-ed, many in the political establishment in Washington D.C. (and beyond, although he doesn’t say so) are deeply suspicious that China is gaining undue power in a set of institutions that the US and western powers are accustomed to controlling.

Is that fair? Is China slyly burrowing its way into the World Bank and other multilateral institutions? Will the G7 nations suddenly wake up one day and realise they have lost control, and the World Bank and IMF headquarters are set to decamp to Beijing?

Obviously not. A just-released ODI study by Yunnan Chen and myself on China and the multilateral development banks (MDBs) shows that China has for many years openly requested that their voting power – as well as that of other developing nations – be increased at the World Bank, in line with the changing global economic panorama.

China's limited voting power at the World Bank

Looking at the numbers, it’s hard to fault China. As of June 2021, China had 5.03% of voting power at the World Bank’s main lending wing, while its GDP accounted for 17% of the global economy. The US has a 16% voting share at the Bank, which is almost exactly aligned with its share of the global economy. The other G7 nations – Canada, France, Germany, Italy, Japan and the UK – combine for 25% of Bank voting, compared to only a 16% share of world GDP.

The reality is that the major powers have not wanted to give up their power at the World Bank to accommodate China — and that weakens the multilateral legitimacy of the institution. The under-representation of China at the major regional MDBs in Africa, Asia, Europe and Latin America, despite its willingness to cooperate on regional development, is even more stark.

From the point of view of China and many developing countries, this situation is all the more galling because China has repeatedly said it is in favour of contributing greater capital to these MDBs, which would substantially increase their ability to lend for development projects. But the major shareholders are much less willing to agree to more MDB capital, and refuse to allow China to contribute more by itself as this would dilute their voting power.

The dangers of shutting China out

In the face of this, China has come up with creative solutions that we detail in the paper, notably establishing several very large co-financing funds at the large MDBs. These funds increase MDB lending capacity (although not as much as if this money had been put into share capital), without giving China any greater voting power.

At the same time, China has evidently realised that it can only go so far with the World Bank and regional MDBs, and has diversified — first through their shareholding stake in several smaller MDBs controlled by borrowing countries in Africa and Latin America, and more recently by helping establish the Asian Infrastructure Investment Bank and New Development Bank.

This highlights the dangers of shutting China out from the World Bank and regional MDBs, in the interests of the G7 nations holding onto their legacy power: it chips away at the legitimacy and financial capacity of these institutions. That poses dangers for the entire international system.

If Georgieva or others did push to manipulate Doing Business in favour of China, that should be criticised — just as any type of back-channel political pressure brought to bear on multilateral institutions should be condemned, including by the US. But the deeper issue that this episode highlights is the challenge of how to manage a rising global power in a set of institutions long dominated by the G7.

China is far from an angel. Its government is ruthlessly pursuing its own national interest, including at times through the MDBs and other international institutions. But China has also shown an openness to cooperate in facing global problems, and a willingness to put up financial resources to do so.

Multilateral institutions need China on board. The countries that have dominated the world economy since World War II have to find a way to incorporate China’s legitimate aspirations. Not doing so could fragment global governance and dangerously undermine our ability to face the tremendous challenges of the coming decades, like getting the Sustainable Development Goals back on track after the Covid-19 crisis and facing the climate emergency.