World Bank Poverty Loans Bestowing Billions on Prospering India, China

By JIM MANN

Feb. 5, 1996 12 AM PT

WASHINGTON —

This is the story of what may well be the biggest sweetheart deal in the world today.

It is the tale of how billions of dollars in World Bank interest-free loans, designed to help the poorest countries of the world, are instead going to two countries--China and India--that are, to their credit, increasingly able to help themselves.

The World Bank’s interest-free loans to China, in particular, verge on the ridiculous. At the moment, China has more than $70 billion in foreign-exchange reserves, among the largest in the world.

In 1994, China attracted more than $33 billion in foreign investment, an amount so huge that it has prompted the jealous and embittered Russian ambassador to Washington, Yuli M. Vorontsov, to remind American audiences that China is “still a Communist country.”

And yet, in that same year, China obtained $925 million in interest-free loans from the World Bank’s International Development Assn., which was designed to lend money to countries so impoverished that they can’t borrow from anywhere else.

That figure made China tops in the world in getting these poor-nation loans. And in 1995, its loan amounts ranked second, behind India.

These two countries are taking up loans that might be directed to those who most need the money today. In particular, the money might be directed to Africa, the only region of the world where the numbers of poor people are expected to increase over the next decade. Or more of it might go to some of the struggling new countries of the former Soviet Union.

The World Bank’s IDA loans are for periods of 35 to 40 years, with no interest and a 10-year grace period. The money comes from contributions from wealthier countries, led by the United States, Japan, Germany, France and Britain. The loans go only to countries where the per-capita income is less than $835 a year.

For many nations, getting these loans is of critical significance. Americans like to believe that world leaders tend to flock to Washington because of the power of the U.S. government.

In fact, however, for many of these leaders, the White House and Congress are not even the most important stops in Washington. That distinction belongs to the World Bank and its companion institution, the International Monetary Fund.

There are, to be sure, still plenty of poor people in China and India, the two most populous countries in the world. Americans should not fall into the common mistake of judging these countries solely by the dynamism and sophistication of their leading cities, or the polish of their scientists and diplomats, or the brilliance and talent of the students they send to the United States.

Out in rural areas are tens of millions of Chinese, and perhaps hundreds of millions of Indians, still living on less than $1 a day.

Yet the curious international politics of poverty also creates a strange dynamic, giving a country like China strong economic incentives to exaggerate the degree to which it is poor.

China’s per capita income was $530 in 1994, well above the world average of $382 for countries receiving the IDA loans. For African countries as a whole, the income figure was $307.

When a new study showed three years ago that, by different economic measurements based on purchasing power, China was much richer than previously thought, China didn’t rejoice at the news. On the contrary, it debunked the report. After all, any international perception that China is no longer so poor could jeopardize its access to the World Bank’s IDA loans.

Moreover, in its efforts to join the new World Trade Organization, China is arguing that because it is still a backward, developing country, it should be given more lenient treatment and greater time before it has to open its markets. That gives China still another incentive to cling to its image as an impoverished land.

Despite China’s claims, the real issue is not whether there are still poor people in China, but whether it is, as a whole, one of the poorest countries in the world. It isn’t. The IDA loans were supposed to go to nations that can’t obtain money anywhere else. China certainly can.

Congress has been pressing the World Bank to end these loans to China. In Washington, the dynamics of this World Bank issue extend far beyond the usual ones of critics and defenders of China’s human rights practices. Some members of Congress who have strongly supported the continuation of China’s trading privileges in this country are questioning why it should qualify for the poverty loans.

“If China, India and Pakistan are classified among the poorest countries in the world . . . then how do they have the cash for nuclear weapons programs?” moderate Republican Sen. Richard G. Lugar of Indiana asked last fall.

Why does the World Bank keep giving China these poverty loans? For several reasons, it appears.

One is that the World Bank has had, over the last 15 years, a special relationship with China. During the 1980s, the bank became the unheralded patron of China’s economic reforms, the advisor to such top Chinese leaders as Deng Xiaoping and former Premier Zhao Ziyang. China was one country that usually did what the World Bank recommended in its economic policies, and with successful results.

Another factor is Japan: Among the major donors of the World Bank, Japan has been the strongest supporter of the poverty loans to China.

Behind the scenes, the World Bank sometimes operates on principles that smack of neocolonialism.

France is said to lobby shamelessly for loans to its former colonies in West Africa. The British warn against too quick a cutoff in loans to India, which was its former colony. And Japan, viewing itself as the patron and spokesman for Asia, seeks to preserve bank loans to China. Within limits, the more prosperous and stable China is, the better that is for Japan. Furthermore, the more Japan supports these loans, the more China may use the money to buy Japanese goods.

The third factor behind the China loans is sheer momentum. The World Bank is a big bureaucracy and bureaucracies don’t change quickly.

Indeed, World Bank officials now acknowledge that the justification for giving China the anti-poverty loans is becoming increasingly thin. They believe that India deserves the interest-free loans for another decade, but they say they hope to phase out China from the IDA around the year 2000.

Yet between now and then, over the next three years, they want to lend China another $300 million a year or so. That adds up to the World Bank version of a golden parachute--nearly $1-billion worth of goodbye money that China, now eminently credit-worthy, could borrow elsewhere.

World Bank officials say they would really like to give more of these IDA loans to Africa, but that unfortunately, all too often the money isn’t used as well it is in more efficient countries like China. The percentage of the IDA loans to Africa has actually dropped a bit in the last few years because the bank has become tougher in judging how countries will perform after getting the loans.

That’s sensible. The money shouldn’t be wasted. But it’s not a good argument for continuing loans to a booming economy like China’s.

Maybe the bank ought to try harder to find worthy recipients in Africa. Maybe it ought to redirect money to governments in Eastern Europe or Central Asia. Or perhaps the World Bank should simply reduce its loan program by the $1 billion it is hoping to give to China over the next three years.

The IDA loans have been under attack in Congress for the last year. Conservative Republicans are now reexamining the whole idea of an international program designed to help the poorest of the poor, even if that World Bank program was started by the United States under President Dwight D. Eisenhower.

In a plea to Congress last week, French President Jacques Chirac observed that these IDA loans are “an irreplaceable instrument in the fight against hunger, against extreme poverty and underdevelopment.”

He’s right. And giving China these interest-free loans undermines support in Congress for the whole, broader program. The World Bank ought to pat China, its star pupil, on the back and tell it to go out and get its own loans. It’s graduation time.

The International Outlook column appears here every other Monday.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Poorest of the Poor

India surpassed China in 1995 in the amount of interest-free loans from the World Bank’s International Development Assn., the fund aimed at poor nations that cannot borrow money anywhere else.

WHERE THE MONEY COMES FROM

The largest donors to the World Bank IDA fund for the three fiscal years from July 1, 1993 to June 30, 1996.*

(in billions)

1. U. S.: $3.75

2. Japan: $3.60

3. Germany: $1.98

4. France: $1.31

5. Britain: $1.11

****

WHERE THE MONEY GOES

1994 (in millions)

1. China: $925