At China's initiative an Asian Infrastructure Investment Bank (AIIB) was set up on 24 October 2014. On that date, 21 Asian countries became founder members and participated in a memorandum of understanding signing ceremony in Beijing. China's president chaired the event and most participating countries were represented by their finance ministers. India was represented by a joint secretary in the ministry of finance. The decision to send a joint secretary was preceded by a turf battle between the ministry of external affairs (MEA) and the ministry of finance (MOF). MEA pushed for an official from the Indian Embassy in Beijing to represent the government. MOF staked its claim as the nodal ministry for multilateral development banks and won that tussle. AIIB could provide long-term funds for India's infrastructure needs and going forward India should pay considered attention to this institution.
In the past one week, first the UK and then France, Germany and Italy have confirmed that they will become founding members of AIIB. As per media reports, South Korea and Australia may also decide to become AIIB members. The US tried to dissuade its Western friends from joining AIIB but even its closest ally the UK decided to break ranks with it. This is the first time that three out of five permanent members of the UN Security Council (China, UK and France) and four out of seven G7 members (UK, France, Germany and Italy) have defied the US in the setting up a new multilateral development bank. It is curious that Indian print media has barely covered this novel development.
As of now, there is no similar interest among developed Western countries in becoming members of the New Development Bank (NDB) or the Contingent Reserve Arrangement (CRA) to be set up by the five BRICS nations. China appears to be more focussed on getting AIIB up and running. The $50 billion AIIB will be headquartered in Shanghai like the NDB but China will be the dominant share-holder with 49 per cent equity unlike the $10 billion NDB in which the five founder countries have 20 per cent stakes each.
India's relations with China are complicated by sensitive bilateral and wider strategic issues. And, there is not much that India can do if China goes slow in making NDB operational since it is China's economic size and hard currency reserves which could enable NDB to be a major lender. China may prefer to begin with AIIB lending to countries in central Asia and perhaps later use NDB to lend to African or Latin American nations. However, the resulting loan portfolios would raise the exposure of these two institutions to high concentrations of country creditworthiness risk. India could keep its interactions with AIIB and NDB tied closely to its obvious strength as the potentially largest creditworthy borrower.
The World Bank and the ADB have flourished so long because they targeted their cost plus IBRD type lending initially to larger creditworthy borrowers such as India and subsequently China. The poorest countries have mostly received concessional IDA loans which are funded out of grants from developed countries. Borrowers usually baulk at defaulting to Bretton-Woods institutions as even short-term credit from Western commercial sources would not be rolled over, if they did.
China, with a one-party totalitarian communist system, has shown remarkable flexibility and competence in becoming the world's largest economy in purchasing power parity terms (China GDP: $17.6 trillion; US GDP: $17.4 trillion in 2014. Source: IMF). Although China's economic weight continues to grow its clout in Asia is tempered by its territorial and other differences with several neighbouring nations. A counterpoint is that most Asian countries have higher volumes of trade with China than the US.
The immediately relevant issue for the US is an erosion in the dominance of the IMF, World Bank and ADB if the CRA, AIIB and NDB grow in size over time. After former IMF managing director Dominique Strauss-Kahn left in disgrace in mid-2011, it was apparent that there were several non-G7 country candidates who were well qualified to replace him. However, yet another European (French) national was appointed. Since then, the US Congress has persistently stood in the way of IMF quota reforms. The principal shareholders of these multilateral institutions refuse to acknowledge that Asian nations are appalled by the lack of transparency in appointments at senior levels and the way these institutions are managed at times. For instance, the World Bank violated its Articles of Agreement in denying India fresh loans after India tested nuclear weapons in May 1998. As per its Articles, political issues should not influence the World Bank's lending policies.
The US has suggested that the AIIB will not follow the high lending standards of existing multilaterals. The World Bank's lending policies were covered in full page advertisements in Washington DC based newspapers about 15 years back when the bank felt it was under unfavourable scrutiny of the US Congress. These advertisements stressed that IBRD loans are used by borrower countries for imports from the US. As for the IMF, it has announced loans to Ukraine and earlier to EU countries somewhat hurriedly. Irrespective of whether these lending decisions were justified or not the IMF should follow the same procedures as it did for Asian nations in the late 1990s.
The World Bank has moved far away from when it used to proactively fund long gestation infrastructure projects. Consequently, AIIB would try to step into that role. The World Bank and ADB now seem to be too driven by the sensibilities of NGOs in developed countries on sustainable development issues. This is not to suggest that such considerations should be ignored. However, should multilateral development banks unilaterally refuse to fund projects in the hydroelectricity-irrigation, thermal and nuclear power sectors? To conclude, any initiative taken by AIIB or NDB to be open-minded about loans for projects in such sectors, in consultation with borrower countries, is likely to be welcomed.
j.bhagwati@gmail.com
The author is the RBI Chair Professor at ICRIER
The author is the RBI Chair Professor at ICRIER