China-U.S. Cooperation for a More Effective Multilateral Development Bank System
By Ye Yu
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Multilateral Development Banks (MDBs) are crucial instruments for global development cooperation. They have the advantages of mobilizing and convening financial resources combined with technical knowledge, backed by political support. The Organization for Economic Cooperation and Development (OECD) has listed nine reasons for countries to engage with multilateral agencies: economies of scale; governance based on global development principles and standards; political neutrality and legitimacy; abundant capital and knowledge resources; advisory services and technical assistance; low transaction costs; contribution to global public goods; global presence; and effectiveness and efficiency.1 But they have suffered from irrelevance since the 1990s. It was after the global financial crisis (GFC) in 2008 that the MDB system was revitalized and even restructured by major shareholders under the G20 framework. The United States and China, as the largest traditional and emerging shareholders of the system respectively, had some frictions in the previous years, but are back on the right track exploring opportunities for cooperation now.
Major trends in the evolution of the MDB system
Resource mobilization: From capital increase to efficiency enhancement
Enhancing the role of MDBs for the world economy has been an important issue discussed by the G20 leaders since they first met at the end of 2008. The core issue is to increase financing resources for MDBs. In the first two years, the G20 focused on pushing forward quota reforms and mobilizing public resources from shareholder countries, including through general capital increases, selective capital increases, and replenishments for concessional lending facilities of MDBs. About $350 billion in capital increases was mobilized for the MDBs, allowing them to nearly double in size.2 The reform package approved by the World Bank Development Committee in April 2010 enabled an additional 3.13 percent of World Bank voting power to be transferred to developing and transition countries after the 1.46 percent adjustment in the first phase of reform in 2008. This is an unfinished journey toward the goal of an equitable voting power structure, however. According to the commitments made by the World Bank governors in Istanbul in 2009, the new round of review of World Bank voice based on a dynamic formula was due in 2015.
In recent years, the focus was shifted to leveraging market resources by better utilizing the existing balance sheets. The 2015 Antalya Summit endorsed the Multilateral Development Banks Action Plan to Optimize Balance Sheets, calling for MDBs to consider the following five measures:
- Increasing developing lending for higher capital efficiency;
- Deploying exposure exchanges to reduce concentration risks;
- Developing financial innovations of concessional windows for improved use of liquidity (at the World Bank, African Development Bank, and Inter-American Development Bank);
- Evaluating structured instruments for sharing risks with private investors in nonsovereign operations;
- Considering net income measures for improved capital position.
This Action Plan laid down the basic framework for the past two years’ G20 priorities for the MDBs. The 2016 G20 Hangzhou Summit reviewed its progress.3 But as Helmut Reisen rightly noted, the MDBs’ balance sheet optimization needs to be approached carefully, case by case.4 The African Development Bank, for example, has less potential to increase its leverage ratio compared to the World Bank.
However, we have witnessed an even more dramatic evolution of the MDBs. While the traditional MDBs continue to evolve, a new set of MDBs have been initiated by emerging economies, such as the Asian Infrastructure Investment Bank (AIIB) and the BRICS New Development Bank (NDB). Different from the last set of South-South MDBs led by oil-exporting countries in 1960s–1970s, this new set of MDBs has more technical grounding as they are led by emerging economies that have achieved development through industrialization. While new resources and knowledge will be mobilized for the benefit of global development, new competition and coordination challenges also inevitably arise.
Resource allocation and priorities: From crisis response to infrastructure financing and sustainable development
MDBs played an important role in responding to the crisis in the early years after the GFC. This can be seen from the dramatic increase in the International Bank for Reconstruction and Development’s (IBRD) commitments from 2009 to 2010. However, with the crisis having eased, MDB lending also shifted toward more long-term projects. The G20 leaders called for a comprehensive reform of the mission, mandate, and governance of MDBs in Pittsburgh in September 2009, including strengthening support for food security, human development and security in poorest countries, private-sector-led growth, and infrastructure and transition to a green economy.5
Probably most significantly, infrastructure financing became an important priority for the G20 development agenda and for MDBs as well. In Seoul in 2010, the G20 leaders endorsed the multiyear “Action Plan on Development” asking MDBs to “work jointly to prepare action plans that increase public, semi-public and private finance and improve implementation of national and regional infrastructure projects, including in energy, transport, communications and water, in developing countries, Low Income Countries (LICs) in particular.”6 The MDB Working Group on Infrastructure was established by the World Bank, Asian Development Bank, African Development Bank, European Investment Bank, Inter-American Development Bank, and Islamic Development Bank. One background analysis and one action plan were agreed to at Cannes in 2011.7 The Action Plan listed eight measures:
- Improving project preparation funds (PPFs) effectiveness;
- Developing catalytic regional projects;
- Expanding technical assistance through expanded PPP practitioners’ networks;
- Increasing incentives for MDB staff to engage in PPP transactions and regional projects;
- Piloting an Africa infrastructure marketplace;
- Improving procurement practices to facilitate collaboration with the private sector;
- Launching a global infrastructure benchmarking initiative;
- Scaling up the construction sector transparency initiative (CoST).
With the launching of the two new MDBs focusing on infrastructure financing, this MDBs-infrastructure nexus was further strengthened. Two relevant platforms were established: the Global Infrastructure Facility (GIF) under the World Bank,8 and the Global Infrastructure Hub (GIH) in Sydney in 2014.9 The G20 Hangzhou Summit in 2016 asked the MDBs to provide a joint declaration to increase financing for infrastructure,10 though the quantitative targets they gave were not mandatory.
In addition to infrastructure, there are many more challenges for the MDBs to respond to. Poverty will continue to stay with us as a big challenge for an extended period of time, while new challenges have also received more attention: inequality, the infrastructure gap, food security, climate change, and fragile and conflict affected states (FCS), to name a few. The 2030 Sustainable Development Agenda newly endorsed by the United Nations covers 17 goals and 169 indicators for the 5Ps (people, planet, prosperity, peace and partnership). The MDBs must adapt themselves to better respond to these new demands. More importantly, how MDBs engage on the ground to respond effectively to the needs of developing countries at different stages of development will also need to evolve.
Not surprisingly we have seen competition and collisions between the United States and China on the MDBs. First is about ownership. China believes its voting power in the World Bank is not representative of its position in the world economy, while on the other hand, the United States is not ready to join in the AIIB launched by China. Second, the two countries also hold relatively different views regarding the priorities of the MDBs. While China favors more resources allocated to infrastructure financing, the United States puts more emphasis on social sectors. But differences are not that fundamental as it appears, since China is ready to approach a much more diversified agenda when its overseas interests are getting more comprehensive. The United States does not question the legitimacy of the infrastructure agenda either. But the United States is indeed very critical about the social and environmental standards of the two new MDBs backed by China in infrastructure financing.
Fortunately, confrontations between the two countries are much fewer now. The two countries signed a strategic agreement on development cooperation during President Xi Jinping’s visit to the United States in September 2015. The two leaders committed to meaningfully increasing investment in the existing MDBs while supporting the new initiatives. They also reached a political compromise on MDB standards.
China has kept its promises and consistently increased its contributions to the legacy MDBs, such as the International Development Association (IDA) and African Development Fund (ADF), the World Bank and Asian Development Bank’s soft loan windows. But the U.S. commitment to multilateralism was put in serious question when President Trump came to office. He is expected to cut spending on international organizations, including the MDBs. But the U.S. retreat on financial contributions for the MDBs has been a long process historically without harming its influence on the MDBs’ policies. MDBs remain an even more important platform for China and the United States to coordinate on policies dealing with global challenges when China’s global position keeps rising. Here are several possible choices.
First is on infrastructure financing, where the two countries should constructively engage with each other to improve standards and guiding principles for the MDBs. In addition to the MDBs themselves, they can also strengthen bilateral engagement. At the Belt and Road Forum on May 14, 2017, President Xi announced his decision to establish a multilateral development financing cooperative center to enhance complementarities between China’s bilateral financing mechanisms and the MDBs.11 This is a perfect platform for MDBs and Chinese bilateral agencies such as the China Development Bank and China Ex-Im Bank to have regular dialogues on standards, among other things.
Second, on the “Women Entrepreneurship Fund” jointly proposed by Ivanka Trump and World Bank President Jim Yong Kim for the G20, the United States and China should actively support its launch by making the primary financial commitments.12 Third, China and the United States can also have more strategic coordination on other global challenges, such as climate change financing, fragile states, and refugee issues, even though the Trump administration has turned its back on some of these.
 OECD Development Assistance Committee, What do we know about multilateral aid? The 54 billion dollar questio, http://www.oecd.org/development/aid-architecture/13_03_18%20Policy%20Briefing%20on%20Multilateral%20Aid.pdf.
 G20 Research Group, The G20 Toronto Summit Declaration: June 26–27, 2010, 5.
 G20 Research Group, MDB Response to the G20 Action Plan for MDB Balance Sheet Optimisation: July 2016, http://www.g20chn.org/English/Documents/Current/201608/P020160815361155807206.pdf.
 Helmut Reisen, On the G20 call for MDB Balance-Sheet ´Optimization´, T20 Germany, April 11, 2017, http://blog.t20germany.org/2017/04/11/on-the-g20-call-for-mdb-balance-sheet-optimization/#more-1323.
 G20 Research Group,Leaders’ Statement: The Pittsburgh Summit September 24–25, 2009, 3, 4, https://www.treasury.gov/resource-center/international/g7-.
 G20 Research Group, G20 Seoul Summit Leaders’ Declaration: November 12, 2010, http://www.g20.utoronto.ca/2010/g20seoul/html.
 MDB Working Group on Infrastructure, Supporting Infrastructure in Developing Countries, June 2011, http://documents.worldbank.org/curated/en/297061468343728311/pdf/655610BR0v20Se0Official0Use0Only090.pdf; MDB Working Group on Infrastructure, Infrastructure Action Plan, October 2011, http://www.g20dwg.org/documents/pdf/view/19/.
 “Global Infrastructure Facility: Update for G20 Leaders,” November 2014, http://www.g20.utoronto.ca/2014/GIF_update_g20_leaders.pdf.
 “G20 Global Infrastructure Initiative,” http://www.g20.utoronto.ca/2014/g20_note_global_infrastructure_initiative_hub.pdf.
 “MDBS Joint Declaration of Aspirations on Actions to Support Infrastructure Investment,” http://www.g20chn.org/English/Documents/Current/201608/P020160815360318908738.pdf.
 “Full text of President Xi's speech at opening of Belt and Road forum,” Xinhua News, May 14, 2017, http://news.xinhuanet.com/english/2017-05/14/c_136282982.htm.
 “Ivanka Trump, “World Bank Discuss Women Entrepreneur Fund,” Associated Press, April 26, 2017, https://www.voanews.com/a/ivanka-trump-world-bank-women-entrepreneur-fund/3827085.html/.