Last week was a Trifecta in terms of the U.S. undermining friendships. First there was the pullout from UNESCO over old grips long resolved. (Disclosure, I was once a Senior Advisor in that entity.) Next was President Trump’s castigating of poor Puerto Rico, which will hardly endear the U.S. to the global Hispanic community. And third, and less focused on was the Administration’s scuttling of the planned capital increase of the World Bank. That one needs some explanation.
The World Bank has been an important leader in helping countries to reduce and, in many cases, eliminate the worst forms of poverty. Its success along with other sources of development aid, the huge motor of China’s economy, and prodigious efforts by most developing countries themselves, has helped the majority of the world’s countries to move into middle income status. This means that most developing countries now have expanded abilities to grow even more to meet the needs of their poor and their middle class, to increase their social services and their infrastructure for growth. So the very success of groups like the World Bank means that the demand for development finance has actually increased quite a bit. Indeed, a Center for Global Development blue ribbon panel last year recommended a $200 billion increase in capital for The World Bank and the African Development Bank.
Because the middle income countries have upped their demand for World Bank loans, the World Bank asked for a $75 billion increase in its capital. This doesn’t mean the taxpayers of the wealthy countries and other Bank members must pony up $75 billion, it means that countries like the U.S. must stand behind the World Bank when it borrows money in the world’s financial markets. As the country holding the largest share in the World Bank, the U.S. share of this guarantee would be about $13 billion. And if history is any guide, not a penny of that money would have to come from the U.S. Treasury, as the World Bank has the highest credit standing and has never been anywhere close to defaulting on any of its borrowing.
Last Thursday, World Bank President Jim Kim, said he was optimistic about getting approval from the Bank’s members for the capital increase. But on Friday, U.S. Treasury Secretary Steven Mnuchin dashed those hopes by saying the World Bank should kick out many of the middle income countries instead of raising new capital. Secretary Mnuchin has a point when it comes to China, a country with lots of money that borrows money from the World Bank in order to benefit from its technical expertise. Clearly the Bank should open a new window to allow wealthier countries to buy such services. But most middle income countries have real financial needs and big opportunities – if they get the financial underpinning.
The U.S. has a huge stake in the success of these countries as they are the largest source of future purchasers of U.S. goods and services, and are by far the most promising areas for U.S. business investment.
What will these countries now do? Nobel Prize Economist Joseph Stiglitz recently said that he felt these middle income countries would migrate to the new international development banks founded by China and a few other countries. Thus they would move from the World Bank, an institution long seen as a credit to U.S. leadership, to institutions run by China.
So let us recap: We have last week’s trifecta of pulling out of UNESCO, a group many countries hold in high esteem; we have attacked Puerto Rico, alienating Hispanic peoples; and we scuttled the capital campaign of the World Bank. This comes on top of our loss of numerous friends in the Pacific Basin by pulling out of the TPP trade agreement; the loss of friends throughout the world by our pulling out of the Climate pact; and the loss of lots of support in Europe by praising Brexit and bad-mouthing NATO. Now, with our challenge in the World Bank we have told the most promising trade and investment prospects our country has that they can go fly a kite. And who will pick up the pieces? The long-range player, China, that will work to make sure we never regain any ground we lose.