US considers partnership with China in developing world

US president Lyndon Johnson famously remarked of FBI director J Edgar Hoover that it was “probably better to have him inside the tent pissing out, than outside the tent pissing in”.

As the Obama administration welcomes leaders from close to 50 African nations to Washington this week, the US is grappling with a similar dilemma over its relationship with China in the developing world and the role of the Washington-based World Bank and IMF.

The proposal by Beijing for the two to work together on large infrastructure projects such as the Inga-3 hydroelectric dam in the Democratic Republic of Congo highlights two clear potential paths for the relationship.

For the US, a partnership with China on such projects could sustain long-term the central role of the World Bank and IMF, although it would also bring its own complications. If, on the other hand, the US and China do not find ways to work together, they could end up operating rival financial networks that compete for political influence.

The prospect of a new wave of Sino-US co-operation on infrastructure projects might seem surprising given that for the past few years Beijing has been putting in place a plan to slowly undermine Washington’s dominance of international finance.

In the aftermath of the global financial crisis, Chinese banks began to aggressively extend financing to other parts of the developing world, to the extent that they were soon lending more than the World Bank.

China is pushing the idea of an Asian infrastructure bank, which it would be likely to dominate. It is also one of the driving forces behind the launch by the five Brics nations of the New Development Bank and a parallel currency swap facility – two institutions which would have the potential to rival both the World Bank and the IMF.

At the same time, China has been introducing a series of reforms aimed at turning the renminbi gradually into an international currency that could rival the US dollar. Beijing is also angry that a US plan to expand its IMF quota has stalled in Congress.

Yet China has its own reasons to seek to work with Washington. Chinese companies and banks have made rapid inroads in the developing world over the past decade but they also want the credibility that a World Bank collaboration can bring.

Fairly or not, they have been accused of being lax on corruption and environmental and labour standards. Some have found themselves in political quagmires – including when Myanmar’s civilian government blocked planned construction of a huge dam by a Chinese group.

There is also concern in Beijing about the financial risks they are taking in countries about which they know little. China has lent more than $50bn to Venezuela despite its economic and political vulnerabilities. Beijing’s overseas loans are often backed by oil or another commodity, but that cannot completely insulate it from the risk of major defaults.

China prides itself on not imposing the sort of rigorous conditions that so irritate African leaders about the Washington institutions. Yet Beijing is realising that those conditions are not just a reflection of western ideology: they are also about getting repaid.

“Beijing is hedging,” says David Dollar, former head of the World Bank in China. “China has gone in pretty indiscriminately to many of these countries. They are now realising how hard it is to do projects in countries that are not well governed.”

The US and the Washington institutions have also reached their own inflection point. Having shunned big infrastructure projects over the past decade, there is a growing recognition that they can play a major role in propelling economic growth – China being a prime example.

Jim Yong Kim, the World Bank’s new president, has called for greater emphasis on infrastructure lending, including for hydropower. President Barack Obama’s administration is touting a $7bn Power Africa initiative to invest in energy projects.

US officials also fear the long-term corrosion of the influence of the World Bank and IMF as China’s financial tentacles spread ever-wider.

Yet even amid this strategic rethink, Inga-3 would pull the US into one of the most controversial areas in developing world finance – large hydropower projects.

Since the 1990s, the World Bank and western banks have largely withdrawn from funding big dam projects after coming under intense pressure from activists who believe they are often “white elephants” that enrich officials while providing little benefit to their societies.

China has been only too happy to fill the gap and is constructing major dams from Argentina to Uganda and Laos.

Activists are divided over the benefits of both the Inga-3 project and the idea of the US working together with China. Peter Bosshard, policy director of International Rivers, who has lobbied against investing in large dams, says Inga-3 is a “recipe for disaster” because of the potential for corruption and the likelihood that the economic benefits will bypass the local population.

However, Anneke Van Woudenberg, a Democratic Republic of Congo expert at Human Rights Watch, says: “China is helping to provide many of the things that African countries actually want, like roads, railways and dams.”

She adds: “US co-operation with China could be a good thing, reducing the scope for backroom deals.”