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The AIIB Strategy

The AIIB and the ADB are both development banks in Asia. It is important that they come to a multilateral understanding in order to deliver the best to the needy communities.

The World Bank and the International Monetary Fund are institutions of great importance in the 20th and 21st century. The end of the world wars created a bipolar political arena across the world which was further complicated by the addition of the “third world”. The Marshall plan worked well in Japan and Europe, but could this “one fits all” model ‘help’ the rest of the world too? This was the question for world leaders, the west and developed countries. They certainly were convinced and hence that stood as a justification for the agenda carried out by the World Bank and the IMF. Today China justifies the creation of the Asian Infrastructure Invest Bank (AIIB) by stating that the developing countries have inadequate access to capital for infrastructure in existing international institutions. China has taken the lead to represent the voice of the developing countries. But is there another agenda behind the AIIB?

World Bank and the IMF

Since inception in 1944, the World Bank has carried out tasks of post war reconstruction and today is the leading donor for projects of poverty elevation. It would be partial to not acknowledge that this institution has been responsible for many successful development projects across the world. From 2000 to 2013 the Pakistan Poverty Elevation fund has utilized a cumulative of $885 million to empower the most vulnerable groups in the country. As per 2009 an approximate 10 million people have been benefited by this initiative. The World Bank has channeled the funds necessary to make this project happen. The World Bank invested $120 million to establish a power grid in Rwanda and 270,000 households are benefited through this initiative since 2009. These are two examples out of the many.

Similarly, the IMF too was initiated in 1944 and was intended to stabilize the international monetary system including exchange rates and international payment. Today there are 188 member nation states in the IMF and its funds come directly through these nations. Countries contribute with relation to the size of their economy and this system structurally makes nations like the United States more dominant within the system with their high value contribution. As per today countries like Greece and Portugal are its biggest borrowers. The international monetary fund provides loans to resolve balance of payment problems however does not lend for specific projects.

AIIB

AIIB has taken headlines in many media reports across Asia and in fact, the west. It surely will grab more attention in the months to come as the bank is yet to finalize governance details and voting rights. The idea of an “Asian Infrastructure Invest Bank” was put forward by the Chinese President Xi Jingping in 2013. With 21 founding members this initiative was put to action in October 2014. The Chinese president justified the need for the AIIB by stating that it is “to support the process of interconnectedness and of the economic development in the region”. China has doubled the initial investment from a previously planned $50 billion to $100 billion as an effort to secure the controlling seat in the bank. This can be linked with the one might say ‘unexpected’ members and attention it got from the west. The United Kingdom, France, Germany and Italy and even Israel are some of these western nation states that are now members of the AIIB. The US Treasury under Secretary for International Affairs, Nathan Sheets said “The US would welcome new multilateral institutions that strengthen the international financial architecture”. The formation of the AIIB results in two multilateral regional developmental banks in the region as the U.S. and Japan backed Asian Development Bank (ADB) already exists.

The politics

The creation of the AIIB has sparked controversy. It is mainly based on two questions. The first, who controls the global economic governance? The second, how will the AIIB cooperate with the Asian Development bank when operating in the region?

The first question can be rephrased to: ‘how is the AIIB going to affect the US hegemony in controlling the global economic system?’ To answer this, I would like to bring the argument between ‘multilateralism vs fragmentation’. What the world needs in multilateral understanding between the super power and the emerging power. Let’s face it; no one takes China lightly anymore. It is the next best contender to becoming a super power but again on the other hand sometimes we over estimate that fact. The AIIB acting as an opposite force to the existing balance would create an unfortunate situation. It is understood that the existing economic system is dominated by the west. It is in fact the biggest criticism against the existing international institutions and was capitalized as the reason behind the formation of the AIIB. “The risk now is the creation of two blocs of economic influence in Asia: China and the other by the United States and Japan” (Foreignpolicy.com). Professor Andrew Sheng and Professor Xiao Geng stated in an article that is the west really believes in innovation, competition and meritocracy, they should welcome the AIIB.

Now the second question, ‘how will the AIIB and ADB relation hold up?’ First of all the reason each of these development banks were created was to elevate people out of poverty and create suitable measures for sustainable development in the region. Statistically there is enough work for both these banks, as Asia’s infrastructure financing gap is estimated to be about $8 trillion between 2010 to 2020. So to achieve this, both these institutions should work hand in hand.

The President of the ADB Takehiko Nakao does not believe that this would bring a “major change for the world of development finances”. As per the ADB factsheet (April 2015) on China, loans worth $31.58 billion have been granted to the country. This makes China the second largest borrower of the ADB. To put the numbers into perspective China is investing $100 billion initially to the AIIB while being the second largest borrower from the ADB. The ADB surely has the experience on its side. It was established in 1966 and since then it has established a wide range of networks and carried out many projects across the region. The AIIB is yet to prove its capacity to the entire world.

Japan surely is not happy with the attention that the AIIB is getting. Japanese Prime Minister Shinzo Abe and the Japanese government have not decided yet whether they would participate in the AIIB, as the prime minister states “there is no rush”. China has a voting share of 5.5% in the ADB and the United States and Japan have 12.8% and 12.8% respectively. China is turning the tide with the AIIB. It plays a similar role to ‘the United States in the World Bank’.

Whether the AIIB is good or bad is subjective and it is important to remember that it is yet to perform its role. It is clear that the existence of another multinational financial institution of this scale is a bit out of the comfort zone of the U.S. and Japan. Perhaps what would ease things up for both sides in remembering the reason behind it all; to help people, unless it was always just about politics.

 

Reference

  • Asian Development Bank & People’s Republic of China. Rep. N.p.: Asian Development Bank, 2015. Print.
  • Koike, Yuriko. “The AIIB and Chinese Strategy.”Project Syndicate. N.p., 27 May 2015. Web. 15 July 2015. <http://www.project-syndicate.org/commentary/aiib-chinese-strategy-by-yuriko-koike-2015-05>.
  • Sheng, Andrew, and Xiao Geng. “The AIIB and Global Governance.”Project Syndicate. N.p., 27 Apr. 2015. Web. 15 July 2015. <http://www.project-syndicate.org/commentary/aiib-china-global-leadership-by-andrew-sheng-and-geng-xiao-2015-04>.
  • Subacchi, Paola. “The AIIB Is a Threat to Global Economic Governance.”Foreign Policy. N.p., 31 Mar. 2015. Web. 16 July 2015. <http://foreignpolicy.com/2015/03/31/the-aiib-is-a-threat-to-global-economic-governance-china/?wp_login_redirect=0>.
  • Wa, Lee Jong. “China’s New World Order.”Project Syndicate. N.p., 12 Nov. 2014. Web. 17 July 2015. <https://www.project-syndicate.org/commentary/china-global-governance-by-lee-jong-wha-2014-11>.
  • Corbett, James. “China’s AIIB: What You Need to Know.” The Corbett Report. N.p., 25 Mar. 2015. Web. 17 July 2015. <https://www.corbettreport.com/chinas-aiib-what-you-need-to-kn
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