HONG KONG – Despite official American and Japanese opposition, 57 countries
have opted to be among the founding members of the China-led Asian Infrastructure
Investment Bank (AIIB). Regardless of what naysayers believe, this remarkable turn
of events can only benefit global economic governance.
According to former US Treasury Secretary Larry Summers, the AIIB’s establishment
“may be remembered as the moment the United States lost its role as the underwriter
of the global economic system.” Asia Development Bank (ADB) President Takehiko
Nakao, by contrast, does not believe that there will be a “major change to the world
of development finance,” though he conceded that “there can be interpretations as to
the symbolic meaning of this.”
Who is right will depend largely on the decisions that the AIIB’s top shareholders
make regarding its operating structure. So far, the AIIB has not sought to amend the
principle that the largest contributor to a multilateral organization gets the largest say
in running it. Just as the U.S. dominates the World Bank and Europe leads the
International Monetary Fund, China will head the AIIB.
This implies a larger global leadership role for China – which the world, including its
traditional powers, should welcome. After all, global leadership is not just a matter of
might; it also reflects the provision of global public goods.
When World War II ended, the U.S., aside from being the world’s leading military and
economic power, was the largest provider of such goods, through the Marshall Plan,
support for the United Nations, and contributions to the Bretton Woods institutions
(the International Monetary Fund and the World Bank). But massive debts have lately
undermined the ability of the U.S. – not to mention Europe and Japan – to continue
making such large contributions. Fortunately, China is willing and able to fill the gap.
In fact, China might have done so within the Bretton Woods institutions, were the
distribution of voting rights within them not skewed so heavily toward the incumbents,
who still enjoy veto power. For example, China has a 3.8% voting share in the IMF
and World Bank, even though it accounts for more than 12% of world GDP. The
United Kingdom and France – which are one-third the size of China – each have a
4.3% share. With the incumbents unwilling to bring China’s voting share in line with
its economic might, China had little choice but to launch its own institution.
But the AIIB has its own objectives, which do not align precisely with those of, say,
the World Bank. Specifically, the bank is a critical element of China’s “one belt, one
road” strategy, which encompasses two initiatives: the overland Silk Road Economic
Belt, connecting China to Europe, and the 21st Century Maritime Silk Road, linking
China to Southeast Asia, the Middle East, and Europe. While the U.S. “pivots” to the
east, China is pirouetting west, applying the lessons of its development to its trading
partners across Eurasia and beyond.
Perhaps the most important of these lessons is that connectivity is vital to economic
growth. Over the last three decades, the construction of roads, railways, ports,
airports, and telecommunications systems in China has fostered trade, attracted
investment, and, by linking the country’s land-locked western and southern provinces
to its more prosperous coastal areas, helped to reduce regional disparities.
China’s Silk Road initiative, which aims to boost prosperity among China’s trading
partners largely through infrastructure investment, is a logical next step – one on
which China is spending significantly. In addition to its initial contribution of up to
US$50 billion to the AIIB, China has committed US$40 billion to its Silk Road Fund,
US$32 billion to the China Development Bank, and US$30 billion to the Export-Import
Bank of China.
According to estimates by HSBC, the “one belt, one road” initiative could end up
costing as much as US$232 billion – just under two-thirds of the World Bank’s
balance sheet in 2014. The US$100 billion AIIB will play a central role in this effort.
Given massive global demand for infrastructure finance – which, according to ADB
estimates, will amount to US$8 trillion in Asia alone over the next decade – the AIIB
should not be considered a threat to the World Bank, the ADB, or other multilateral
lenders. Nonetheless, it will compete with them, owing to its distinctive – and
probably more efficient – approach to lending.
In fact, the AIIB’s operations will most likely resemble those of the World Bank in the
1960s, when engineers with hands-on development experience dominated the staff
and could design lending conditions that worked for borrowers. In the late 1980s, the
World Bank began to implement the Washington Consensus, pushing for economic
and political liberalization, without sufficient regard for local political or economic
realities. The result was conditional lending, with terms – created mostly by policy
wonks – that many developing-country borrowers could not meet (at least not without
hiring consultants to adjust their official reporting).
The acid test of the AIIB’s effectiveness will be its governance model. One failing of
the Bretton Wood institutions is their full-time shareholder boards of directors, which
tend to undermine effectiveness by micro-managing and often requesting conflicting
lending conditions. The World Bank has wasted far too much time re-organizing itself
under various presidents, without recognizing the fundamental problem with its own
governance structure.
Even if the AIIB does not deliver as promised, its establishment is an important
reminder that in a fast-changing world, economic governance cannot remain
stagnant. If Western leaders really do believe in innovation, competition, and
meritocracy, they should welcome the AIIB.
A version of this article appeared in Project Syndicate, 27 April 2015
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