World Bank loans to China may have killed U.S. jobs

World Bank loans to China may have killed U.S. jobs

Luis de Guindos (C), Minister of Economy and Competitiveness of Spain, speaks alongside Yi Gang (L), Deputy Governor of the Peoples Bank of China, and Christine Lagarde, Managing Director of the International Monetary Fund (IMF) during the annual World Bank - IMF meetings in Washington. (Saul Loeb/AFP/Getty Images)

Howard Schneider 
October 14, 2013

As investment in alternative energy rebounded in 2011, U.S. wind and solar companies found stiff new competition — Chinese firms dominating the green industries that American officials looked to for growth.

Supporting those Chinese companies was a surprising patron: the World Bank, a Washington-based development agency whose steady counsel and financing have helped China challenge U.S. economic dominance, and in this case may have cost the United States jobs.

Sometimes criticized as a tool of U.S. foreign influence, the bank’s 30-year engagement in China may actually tell an opposite tale — of an institution that helped lay the foundation for some of the policies and industries cited by the United States as unfair to its firms and workers, and corrosive to the global economic system. Bank programs have provided Chinese companies with direct loans to build their expertise and become more competitive; separately, World Bank contracts have provided tens of billions of dollars in business for Chinese firms that have won work from the bank at a pace unmatched by other countries.

For U.S. firms such as Solar World, the impact of bank programs in China became obvious as they watched imports from the world’s second-largest economy gobble U.S. market share.

“What you see is a serious problem when these loans go to fund massive overcapacity [in China] that ends up harming U.S. industries and U.S. workers as a result,” said Tim Brightbill, a lawyer at the Wiley Rein law firm who represented a coalition of U.S. solar companies that won penalties against Chinese manufacturers for “dumping” products in the United States at unfair prices.

One of those manufacturers, Suntech, received a $100 million loan in 2009 from the International Finance Corp., the World Bank’s investment arm. Wind-power company Sinovel also received direct World Bank support — and was later penalized in the United States for dumping its products.

U.S. officials have questioned some individual bank projects in China over the years but have generally been supportive of the bank’s continued involvement there.

David Dollar, the American who led the World Bank’s China program from 2004 to 2009 and was later the U.S. Treasury representative in the country, said the bank was looking for places where its relatively small investments would allow China to “scale up.” That is a strategy that U.S., European and private investors follow when they build plants or locate businesses in the country, he said.

Any foreign investor in China “knows they are stimulating domestic industry to compete with them,” Dollar said.

Bank President Jim Yong Kim, selected by President Obama, is poised to deepen the bank’s relationship with China.

He spoke recently of detailing 100 bank employees to speed work on an urbanization study that China requested. He appointed a Chinese national, former Goldman Sachs banker Jin-Yong Cai, to run the bank’s investment arm.

Among his first initiatives is a program that will funnel $3 billion in Chinese funds to investments in other developing nations. It may help the recipient countries, and it will benefit the World Bank with potential profits. It also will probably help Chinese firms that have become adept at winning World Bank work in Africa and elsewhere.

An analysis of internationally bid World Bank contracts awarded since 2000 shows that when the bank issues loans for projects in China, almost all of the contract work goes to Chinese firms. The pattern is similar in many other countries that borrow from the World Bank, with locally registered companies winning a large share of bank contract dollars.

But Chinese firms also do well outside their borders. According to bank data, Chinese registered companies have won more than 20 percent of the bank’s internationally bid business — more than double that of any other country.

The bank’s 30-year engagement with China began soon after the United States restored diplomatic ties with the communist nation in 1979. It is often trumpeted by bank officials as one of their more important success stories. China’s rapid development has been central to the drop in extreme poverty around the world. Bank officials, including Kim, say that they are uniquely positioned to help China with ongoing problems such as pollution and climate change — and that China’s success on those fronts is important to the world.

But as China has become more powerful and sophisticated, the bank’s role there has occupied an increasingly gray area.

Is the World Bank there because China needs help? Or because loans to China provide a hefty profit that pays the bank’s salaries and administrative costs? Does helping China reduce its carbon use justify bank support for programs that may have damaged industries in other countries? Are Chinese contractors simply more willing than most to work in difficult parts of the world for a cheaper price?

China is the bank’s third-
largest borrower, with nearly $56 billion in loans since 1980, and 107 programs underway. In the early years, that included support from the International Development Association (IDA), the branch of the bank that provides low-interest loans or grants to the poorest countries, and whose lending is subsidized by contributions from wealthier nations, including the United States.

That cut-rate lending stopped more than a decade ago when China passed the income threshold set by the bank for IDA borrowers. But some in the United States argue that China — a nuclear power with a space program and $3 trillion in cash reserves — should not get any help from an organization whose money and energy could be better directed at countries with less ability to help themselves.

In the drive to encourage growth, the bank “doesn’t care if you do that in a zero-sum or negative way . . . by dumping products around the world,” said Robert Atkinson, president of the Information Technology and Innovation Foundation. Atkinson has been particularly critical of World Bank loans to China’s Export-Import Bank, which financed energy-efficiency improvements so Chinese companies could be more competitive exporters.

The dynamic between China, the United States and the World Bank is complex. The United States is the largest capital contributor to the institution, has the largest voting share on the bank’s board and has traditionally appointed the bank’s president. Along with being a major borrower, China over time has occupied a large share of the bank’s intellectual attention as it grapples with issues such as climate change and how to build more efficient cities.

At times, the bank has been critical of Chinese policy, agreeing with the United States that the country needs to more quickly open its economy, decrease the role of the state and make other changes so it becomes a more efficient and fairer place to do business.

Those criticisms, however, have been largely delivered in high-level policy documents such as the voluminous China 2030 report, which called for major changes in China’s economic direction.

At the project level — in the nuts-and-bolts programs where the bank lends and invests the world’s money — documents dating to the early 1980s show an agency that helped lay the groundwork for the country’s model of “capitalism with Chinese characteristics.”

The World Bank helped China develop its systems for financing state-owned enterprises — a practice now criticized for providing cheap credit to help drive exports. It helped the country import a “mini-supercomputer” that boosted the country’s research expertise and that Chinese engineers promptly learned to replicate; it encouraged China to retool certain industries, such as the manufacturing of auto parts, so it could“dominate the domestic market and use it as a base to develop export markets.”

Chinese auto-parts policies, which displaced exports from the United States and elsewhere, were the subject of a successful U.S. complaint at the World Trade Organization.

Given China’s massive population, resources and organization, its economy may have evolved in the same way with or without World Bank involvement.

Current and former bank officials familiar with the organization’s work in China said that early on it was obvious what the country needed. The Chinese economy in the 1980s and 1990s was so behind the times and disorganized that, for example, bank officials had to set up basic credit institutions to handle foreign exchange, even if those institutions largely served as conduits for loans to state-owned companies.

“We were busy just trying to create basic conditions for growth in education, health and industry,” said Pieter Bottelier, the bank’s China country director in the 1990s and now a professor at the Johns Hopkins School of Advanced International Studies. “The question at some later point of whether the beneficiaries might become subject to antitrust or international scrutiny was simply not on the horizon.”

Bank program documents are blunt about the aim and outcome of later efforts, such as the China Renewable Energy Scale-up Program: “Scale-up of [renewable energy] in China during the last five years has been unprecedented. The country has become the world’s leader.”