The proposed Asian infrastructure bank could galvanize growth in emerging Asia and boost lingering global recovery.
According to Western media, the Asian Infrastructure Investment Bank (AIIB) is to rival the World Bank and the Asian Development Bank (ADB).
In reality, the idea of the AIIB was put forward more than a year ago; not to undermine either the World Bank or the ADB, but to deliver the promise that both have failed to deliver – sustained growth in emerging Asia.
The AIIB proposal was first presented in public by Premier Li Keqiang in the prestigious Boao Forum for Asia in early April. The goal was to roll out an intergovernmental memorandum of understanding this fall and thereafter to quickly launch the bank.
The new multilateral institution would help fund infrastructure projects in Asia.
By June, China proposed doubling the registered capital of the bank from $50 billion to $100 billion, with half from Beijing and the rest from the other founding members.
China has invited India to participate in the founding of the bank and, despite some concerns; New Delhi is expected to join in as the second largest shareholder.
The idea of the bank was first put forward by Chinese leaders, including Chinese President Xi Jinping and Premier Li, during their visits to southeastern Asian countries in October 2013. In particular, Xi underscored the economic opportunities for cooperation between China and the 10 member nations of the ASEAN, including setting up an Asian investment bank to support regional connectivity for transportation, telecom and energy projects across the region.
As Beijing set out to promote the idea of a regional infrastructure bank, Washington not only took an opposing view but began to lobby against the bank. These activities began in low-profile backroom talks with AIIB’s proposed founding partners and then more openly in a forceful campaign to persuade important allies to reject the initiative.
While President Xi is expected to formally announce the AIIB initiative at a summit meeting of Asian leaders in November, Beijing’s mistrust in Washington has deepened. In August, Jin Liqun, the proposed Chinese leader of the AIIB and former head of China’s sovereign wealth fund (CICC), told U.S. Ambassador to China, Max Baucus, to soften opposition to the bank.
The bluntness of the reaction surprised Americans. But it did not surprise Asians. Some applauded it.
Asia desperately needs infrastructure investments. Many fail to understand why that would be against Washington’s interests. American business has long advocated such investments.
Pros and cons
In the past few months, the Obama administration has used three sets of arguments to lobby its allies and friends in Asia to reject the AIIB.
First, U.S. Treasury Department has criticized the bank as a deliberate attempt to rival the World Bank and the Asian Development Bank.
In reality, neither bank has the funds to support real infrastructure progress in Asia. For its part, the ADB estimated in 2009 that the region would need some $8 trillion in investments in physical infrastructure by 2020. It was a de facto plea for greater funding because the huge amount far exceeded what ADB or the World Bank could gather.
Not only could Beijing’s effort attract Asian countries to cooperate on the region’s significant capital needs. It would focus regional allocations to economic development in which existing international financial institutions have proved woefully inadequate.
Second, U.S. officials have portrayed the AIIB as Beijing’s geopolitical instrument to attract countries in Southeast, East and South Asia closer to its sphere of influence. It is a soft-power play, U.S. officials have warned.
This geopolitical argument is reminiscent of the one Stalin used in the late 1940s to insulate Eastern Europe from the Marshall Plan, which proved critical in re-energizing recovery in the devastated postwar Europe. That aid came hand in hand with membership in the North Atlantic Treaty Organization (NATO), which did strengthen the transatlantic axis between Washington and Brussels. In contrast, China is not pushing membership in a security-driven Asian Treaty Organization.
Instead, Beijing is offering to share the benefits of its development with the rest of Asia as Japan once did with Singapore, Hong Kong, South Korea and Taiwan, which subsequently became the high growth “Asian tigers.” Ironically, there was similar hesitation in the 1960s when Tokyo moved to establish the ADB.
Third, U.S. Treasury Department has argued that the proposed bank would not meet environmental standards, procurement requirements and other safeguards embraced by the World Bank and the ADB.
This argument is flawed because it presumes that the proposed bank would (or could) extend the adverse side-effects of past Chinese industrialization across the entire region. It is also seen as hypocritical in Asia. The existing multilateral institutions are dominated by the advanced West, which continues to cause 4-5 times more pollution than the emerging Asian nations on a per capita basis.
Time to walk the talk
Left on the devices of the World Bank and the ADB, the populous nations of emerging Asia would not be able to complete their industrialization. What these two mighty institutions have failed to deliver in the past half a century, the proposed AIIB could galvanize in a decade.
Today, the ADB has an estimated $78 billion in capital, including retained earnings and borrowings. It is dominated by Japan and the U.S. which have larger shareholding than China. ADB has begun to restructure its operations, while seeking greater funds from the West. But even a highly efficient and recapitalized ADB could offer only a fraction of the real needs in Asia.
What about the World Bank? It is, in theory, owned by 188 member countries that have subscribed to $223 billion of subscribed capital (paid in capital plus callable capital). In practice, the bank can loan some $50 billion per year, which barely covers the annual financing gap for Indonesia’s infrastructure requirements alone between 2015 and 2019.
The distribution of loans, in turn, rests on the distribution of power within these institutions, which are controlled by the advanced West. Since its birth, the chief of the World Bank has been an American, while the ADB has been led by the Japanese (and the IMF by Europeans). The three financial institutions are ridden by a moral hazard. They are led, owned and controlled by Western nations, which enjoy high living standards but low growth that no longer justifies those prosperity levels.
Haunted by debt and stagnation, the Western nations are not likely to adequately support emerging Asia – not to speak of emerging Latin America, Africa and the Middle East – that suffers from low living standards but enjoys higher growth. Seen in this context, the most recent promises by the World Bank and the ADB (or the IMF) to take steps to increase their lending capacity is seen as too little too late in Asia.
Not only China but most of Asia and the rest of the emerging world are justifiably skeptical about existing international institutions in which they feel a lack of ownership.
Regional bank, global blueprint
The U.S. lobbying campaign has pushed its vital allies – including Australia and South Korea – in a difficult spot. While both continue to benefit from economic cooperation with China, each also relies on U.S. support in defense. In public, both have praised the proposal and promised to consider it; behind the façade, each is being pressured to shun the AIIB. In contrast, Singapore has already signed up with the bank initiative.
Overall, the AIIB could comprise some 22 countries in East, Southeast and South Asia, including several oil-rich nations in the Middle East, which China sees as Western Asia.
Despite half a century of lofty pledges, neither Washington nor Brussels has been too eager to live up to their promises to allow greater Chinese and emerging-economy participation in the existing multilateral institutions.
That’s why the proposed AIIB is a great experiment to boost prosperity and hope not just in Asia but in all emerging and developing countries. It could provide a blueprint for emerging and developing economies in other world regions – even within advanced regions.
The proposed regional infrastructure bank is not an effort to overthrow the existing multilateral institutions, a geopolitical power play, or an attempt at a race to the bottom. It is an initiative of the emerging Asia to augment the existing institutions, to deliver the promise of the region, and to offer an example for the rest of the world, including the advanced West.
Dr Dan Steinbock is the research director of international business at the India, China and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China) and EU Center (Singapore). For more, see http://www.differencegroup.net
The original version was published by China-US Focus on October 22, 2014