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Asia & the Pacific Policy Studies, vol. 1, no. 1, pp. 251–256
doi: 10.1002/app5.8
Policy Forum Article
The World Bank and China: Future Prospects
Ralph W. Huenemann*
Abstract
The time has come (is arguably long overdue)
to develop a new basis for the World Bank’s
work in China. For nearly two decades, the
Bank and China have been engaged in a
mutual game of ‘let’s pretend’, because the
annual increments to China’s foreign
exchange reserves have been larger than the
Bank’s annual loans to China since about
1994. Now China’s national income per capita
measured on the purchasing power parity
basis is rapidly approaching the high-income
level at which China will ‘graduate’ (receive
no further World Bank loans). In this context,
two alternatives may usefully be discussed.
First possibility: shift the qualification for
Bank lending from national units to subunits
like provinces. Second possibility: continue the
Bank’s analytical and advisory activities even
after the lending ceases.
Key words: World Bank, China, graduation,
make-believe, pro-poor
* Peter B. Gustavson School of Business, PO Box
1700 STN CSC, University of Victoria, Victoria,
British Columbia, Canada V8W 2Y2; email
⬍[email protected]⬎.
The World Bank’s work in China is rapidly
approaching a major turning point. In this
context, it is useful to review the World Bank’s
role in China’s economic development and
then explore the possible future paths for their
collaboration. To date, International Development Agency (IDA) soft-money credits and
International Bank for Reconstruction and
Development (IBRD) hard money loans to
China, taken together, have reached about
US$47.0 billion, of which about US$40.9
billion has been disbursed and US$6.4 billion
remains in the pipeline. Of this money, about
US$22.5 billion has already been repaid
(World Bank 2012a). An illuminating survey
of the Bank’s work in China can be found in
Bottelier (2007).
In recent years, the overall relationship
between the World Bank and the Government
of China (GoC) has been shaped by three key
documents: the Country Partnership Strategy
(CPS) for 2006–10, the mutually developed
document ‘China 2030: Building a Modern,
Harmonious, and Creative High-Income
Society’ (issued in early 2012), and the new
CPS covering 2012–16. The earlier CPS
expressed a clear desire on both sides for a
continuing role for the Bank in China, despite
China’s graduation from IDA soft money in
1999, and suggested that IBRD hard money
loans are a necessary component for this continuing partnership (World Bank 2006, p. 17).
However, this argument seems unpersuasive.
Indeed, the reality is that since about 1994, this
has been a game of mutual ‘make believe’. The
World Bank pretends to lend money to China,
and China pretends to borrow money from the
© 2013 The Author. Asia and the Pacific Policy Studies
published by Wiley Publishing Asia Pty Ltd and Crawford School of Public Policy at The Australian National University.
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252
Asia & the Pacific Policy Studies
January 2014
Table 1 China’s Projected Graduation from World Bank Lending in 2017
Year
Real GDP
growth rate (%)
Population
growth rate (‰)
Per capita
growth rate (%)
Real per capita GNI on US$
PPP basis (2010 Prices)
2010
2011
2012
2013
2014
2015
2016
2017
9.2
7.8
8.6
8.6
8.6
7.0
7.0
4.79
4.95
4.0
3.6
3.2
2.8
2.4
8.68
7.27
8.17
8.21
8.25
6.70
6.74
7,570
8,227
8,825
9,593
10,381
11,237
11,990
12,798
Notes: In World Bank publications, China’s aggregate economy is sometimes reported as gross domestic product (GDP)
and sometimes as gross national income (GNI). The two concepts are not precisely the same, but the growth rates are
indistinguishable for present purposes. For purposes of assigning a country to a World Bank income category, GNI is
converted to US$ from local currency on a purchasing power parity (PPP) basis. Real GDP growth rates for 2011 and 2012
are those reported by China; projected GDP growth rates are taken from ‘China 2030,’ p. 9, for 2013–17. Population growth
rates are taken from actual data for 2010–12 (National Bureau of Statistics of China 2013, p. 40), projected to taper off to
reach zero population growth in 2025. If the projected GDP growth rates from ‘China 2030’ are replaced by 7.8 per cent
for 2013–15, which is probably more realistic in terms of the continuing global economic slowdown, the conclusion
remains the same. Real per capita GNI reaches a slightly lower $12,555 in 2017 but still exceeds the ‘graduation’ minimum
of $12,276 that year.
Bank. But the reality is different. From about
1994, when China’s annual increments to its
foreign exchange reserves—primarily the purchase of US Treasurys—exceeded the annual
inflow of IDA credits and IBRD loans, the
Bank stopped financing economic development in China and shifted to indirect, and
presumably inadvertent, financing of the
American government’s budgetary deficit
instead (State Administration of Foreign
Exchange 2012).
One manifestation of the make-believe
nature of Bank lending to China can be seen in
the railways sector. Spread over three decades,
the Bank has lent about US$3.7 billion to
China’s Ministry of Railways, most recently US$200 million for the high-speed
Zhangjiakou-Huhehaote railway in Inner
Mongolia (World Bank 2012c, p.3). However,
in 2010, China announced that it would lend
US$10 billion to Argentina to improve the railways in that country (WSJA 2010), and in
2012, it was reported that China would finance
a US$7 billion railway project in Laos (WSJA
2012). Thus, recent Chinese aid to railway
projects in other countries significantly outweighs Bank lending to China in this sector.
Of course, an interesting question is whether a
‘bullet train’ in China actually constitutes a
pro-poor project, vague assertions in the
Zhang-Hu Project Appraisal Document notwithstanding. The reasons underlying the
Bank’s long-standing reluctance to finance airlines projects would seem to apply to highspeed trains as well, which with realistic fares
should be commercially viable (thus Bank
financing not needed) and do not bring help to
poor, isolated villages (thus Bank financing
not justified).
‘China 2030: Building a Modern, Harmonious, and Creative High-Income Society’,
written jointly by the World Bank and the
Development Research Center of the State
Council, argues that ‘in the next 15 to 20 years,
China is well-positioned to join the ranks of
the world’s high-income countries’ (World
Bank 2012b, p. vii), implying that China will
continue to qualify for World Bank lending for
some time to come—perhaps for as much as
two decades. However, the data and projections published by the Bank in that document
and elsewhere suggest a different picture. By
World Bank calculations, China’s national
income per capita in 2010 on the purchasing
power parity (PPP) basis is estimated at
US$7,570 in 2010 prices, and the entry level
into the ‘high income’ group is US$12,276
(World Bank 2011). In Table 1, I have com-
© 2013 The Author. Asia and the Pacific Policy Studies
published by Wiley Publishing Asia Pty Ltd and Crawford School of Public Policy at The Australian National University
Huenemann: World Bank and China
bined this information with the actual growth
rates of gross domestic product (GDP)
reported for 2011 and 2012 and the projected
GDP growth rates shown in ‘China 2030’ for
later years, converted to a per capita basis.
These calculations suggest that China will
reach mandatory graduation in 2017, which is
only three years away. This conclusion is
clearly implicit in the ‘China 2030’ data, yet
that document remains silent on the question
of China’s impending graduation.
The new CPS, covering 2012–16, explicitly
repeats the argument put forward by the earlier
CPS that ‘there is synergy between projects
and AAA [Analytical and Advisory Activities].
Lending helps establish trust and credibility
conducive to effective AAA’ (World Bank
2012d, p. 14). Given this repeated assertion
that lending and AAA should go together, it is
no surprise that the new CPS, like ‘China
2030’, remains silent on China’s impending
graduation.
I believe the time has come to think beyond
the era of World Bank lending to China,
despite ‘China 2030’ and CPS silence on this
topic. What might the new era look like? Let
me suggest two possible visions for consideration. But before I do that, let me highlight
some background information about difficulties inherent in the Bank’s structure and
mandate.
The World Bank, like most other international organisations, has nation states as its
members. Thus, these organisations in form
and function are clubs, not parliaments. By
their nature, these organisations must function
largely by consensus. This arrangement can
be quite frustrating at times, but there is no
obvious alternative basis for governance. For
the World Bank, this creates a deep structural
problem. The Bank’s mandate is to combat
poverty, but poverty is an important problem in
all countries, rich or poor, and raising GDP
overall is an imperfect proxy for directly
attacking poverty. In the Bank’s categories,
China is already ‘upper middle income’ and
(as the numbers in Table 1 suggest) will probably graduate to ‘high income’ in another three
years. Yet, there will still be many millions of
desperately poor people in China. As an
253
important Bank report (World Bank 2009, pp.
80–7) has pointed out, as poverty is reduced
overall it becomes more dispersed and harder
to target. Even targeting anti-poverty measures
township by township is too coarse a filter for
fully effective resource allocation, because
many residents of China’s poor townships are
not poor, and at the same time many poor
people live in non-poor townships. But if ‘rich
township/poor township’ is too coarse a filter
for fully effective anti-poverty work in China,
think how much worse the ‘rich country/poor
country’ distinction is for the World Bank itself
in its resource allocation.
The difficulty with targeting anti-poverty
programs country by country (the World
Bank’s traditional, but I think increasingly outdated, way of doing business) has recently
been highlighted by Andy Sumner’s World
Development paper entitled ‘Where Do the
Poor People Live?’ As Sumner (2012, p. 865)
writes, ‘most of the world’s poor no longer live
in countries officially classified as low-income
countries’. In this context, a fundamental question is whether the Bank needs to make major
changes in how it targets its anti-poverty
programs.
A second structural frustration for the
Bank’s anti-poverty work is that residents of
poor villages have trouble repaying loans at
commercial interest rates. In pro-poor programs, hard money is an imperfect substitute
for soft money, and China has been disqualified from the IDA soft money since 1999. To
some extent, the Bank tries to circumvent this
difficulty by burying soft money projects
within hard-money lending, but there are distinct limits to this solution. For example, under
the Bank’s recent Ningxia Highway Project,
US$224 million of IBRD money will be
put into the four-lane Guyaozi-Qingtongxia
expressway, but only US$8 million will be put
into the improvement of local roads in poor
isolated villages (World Bank 2010). And, as
the Project Appraisal Document hints (para.
29, p. 5), the Ningxia authorities were reluctant to allocate even that US$8 million pittance
to non-revenue roads.
With these structural difficulties in mind, let
me return to my earlier question—namely,
© 2013 The Author. Asia and the Pacific Policy Studies
published by Wiley Publishing Asia Pty Ltd and Crawford School of Public Policy at The Australian National University
254
Asia & the Pacific Policy Studies
January 2014
Table 2 Province-by-Province Potential for World Bank Graduation by the Year 2017
Province-level unit
Scaling factor
Estimated income per
capita in 2010 (US$7,570
x scaling factor)
Shanghai
Beijing
Zhejiang
Tianjin
Guangdong
Jiangsu
Liaoning
Fujian
Shandong
Inner Mongolia
Chongqing
Jilin
Ningxia
Hubei
Hunan
Heilongjiang
Shaanxi
Anhui
Sichuan
Shanxi
Hebei
Jiangxi
Henan
Guangxi
Hainan
Xinjiang
Qinghai
Yunnan
Gansu
Guizhou
Tibet
3.237
2.510
1.816
1.784
1.727
1.408
1.298
1.291
1.165
1.112
0.975
0.917
0.902
0.901
0.895
0.893
0.830
0.826
0.821
0.819
0.808
0.800
0.786
0.776
0.758
0.730
0.726
0.675
0.605
0.590
0.453
$24,504
$19,001
$13,747
$13,505
$13,073
$10,659
$9,826
$9,773
$8,819
$8,418
$7,381
$6,942
$6,828
$6,821
$6,775
$6,760
$6,283
$6,253
$6,215
$6,200
$6,117
$6,056
$5,590
$5,874
$5,738
$5,526
$5,496
$5,110
$4,580
$4,466
$3,429
Compound real growth
rate (%) needed to reach
US$12,276 by 2017
n/a
n/a
n/a
n/a
n/a
2.0
3.2
3.3
4.8
5.5
7.5
8.5
8.7
8.8
8.9
8.9
10.0
10.1
10.2
10.3
10.5
10.6
10.9
11.1
11.5
12.1
12.2
13.3
15.1
15.5
20.0
Note: I have calculated the scaling factor from province-by-province household consumption expenditures divided by the
national average (underlying data drawn from National Bureau of Statistics of China 2011, pp. 67–8).
how should the Bank and the GoC think about
their CPS for the future? Let me explore two
different visions for serious consideration.
First Vision: Imagine a world in which the
lower income subunits of a country could
qualify for World Bank funding after the
country as a whole has graduated. Of course,
the Bank’s membership would presumably
remain on a nation-state basis, and therefore
any loans to localities would have to be
approved by the respective national government, to avoid stepping on sovereignty toes. As
suggested in Table 2, as many as 20 Chinese
provinces may remain eligible for IBRD
funding after China as a country ceases to
qualify—and, unsurprisingly, the most likely
persistent cases will be Xinjiang, Qinghai,
Yunnan, Gansu, Guizhou and Tibet. In terms
of Hollis Chenery and Alan Strout’s classic
two-gap development model (Chenery &
Strout 1966), China clearly does not suffer
from either a shortage of savings or a shortage
of foreign exchange, yet some of the provinces
may well suffer from such shortages, and
World Bank funding might help to close the
gap. Of course, this is a radical vision for the
Bank. But, as Deng Xiaoping’s reforms have
demonstrated, just because a reform is radical
doesn’t necessarily make it a bad idea. In an
ideal world, a country in the Bank’s ‘highincome group’ should have the resources to
solve its own internal poverty problems, but
© 2013 The Author. Asia and the Pacific Policy Studies
published by Wiley Publishing Asia Pty Ltd and Crawford School of Public Policy at The Australian National University
Huenemann: World Bank and China
sometimes that financial capacity is not
matched by political capacity. In this context,
the World Bank may have a constructive financial role to play even in high-income countries.
Second Vision: The World Bank encompasses five separate but interconnected functions: (i) an international commercial bank
(IBRD); (ii) an international concessional aid
agency (IDA); (iii) a research institute focused
on the unresolved global issues of development economics (AAA); (iv) an equity
operation—the International Finance Corporation (IFC); and (v) an insurance agency—the
Multilateral Investment Guaranty Agency
(MIGA). Although the recent CPS argues that
the think tank function cannot be effectively
delivered to China without a link to lending,
this argument seems unpersuasive. The Bank
could maintain an office in Beijing for other
purposes (including IFC and MIGA activities,
presumably), after the end of IBRD lending,
and AAA could continue to be supported by
this office.
Let me be clear. I think that some of the best
analytical research and policy advice that has
been done on China’s development challenges
has been provided by World Bank staff
members and consultants, and a strong case
can be made for continuing this contribution.
I would cite Alan Piazza’s work on many
aspects of rural poverty (for example, Piazza
et al. 2001), Shaohua Chen and Martin
Ravallion’s work on the accurate measure of
the poverty line and its meaning (Chen &
Ravallion 2008), and David Dollar’s work
with his colleague Shang-Jin Wei of Columbia
University on investment efficiency in China
(Dollar & Wei 2007), to name just a few of the
valuable Bank research contributions. At the
same time, however, it must be acknowledged
that an extensive community of excellent
research expertise, Chinese and non-Chinese,
now exists outside the Bank, both at universities and at independent institutions. Among
many, many others, I could cite Nicholas R.
Lardy 2012, Yi Yao and Xiaobo Zhang 2008,
Chenggang Xu 2011, Barry Naughton 2007,
Wei Chi et al. 2012, Ingvild Almås and
Auglænd Johnsen 2013, and Björn Gustafsson
and Ding Sai 2008—with sincere apologies to
255
all those omitted from this brief list. In this
context, we can perhaps summarise by suggesting that the Bank’s research on China
remains valuable but is no longer as indispensable as it once was.
In closing, as the Bank and Government of
China consider their future cooperation, let me
suggest that they would do well to abandon
their current charade and confront more
openly the challenges and opportunities that
lie ahead.
Final version accepted August 2013.
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