A new source of funding, Asian Infrastructure Investment Bank shakes up old structures

China's President Xi Jinping's proposal of the AIIB has ruffled some feathers, especially in Japan and the US, which are likely to lose some power and influence.

Since his election, President Xi Jinping has sought the “establishment of a new type of more equal and balanced global development partnership, … ... strengthen coordination and cooperation within international and multilateral mechanisms, … … so as to win institutional power and rights of voice for developing countries”. 

 

In multilateral development banks (MDBs) like the World Bank, IMF and Asian Development Bank, emerging economic powers like China and India have been negotiating for a greater share of voting powers which would reflect their growing economic and political powers. China is now the world’s second largest economy but its voting power in the Bretton Wood institutions is only 4%, compared to 18% for the US. 

 

 

The present situation is frustrating for these emerging economic powers because with less voting power, they have less influence within these institutions and where the money from these organizations could go. In addition, many developing countries are fed up with – what they often consider unfair – conditions imposed on them by Western powers.  

 

After many years of negotiations, the US Congress rejected the legislation to reorganize the voting power of IMF member countries, even though it would not have required any new funds. 

 

Unwilling to accept that there will be any reform in governing structure of MDBs in the foreseeable future, President Xi recently surprised his Indonesian hosts by announcing the formation of the Asian Infrastructure Investment Bank. 

 

While the framework and modus operandi are still being worked on, the need for such a bank is beyond doubt. According to ADB, investments required between 2010 and 2020 are $8 trillion in terms of national infrastructure. This means $800 billion is needed annually just for national infrastructure investment. ADB currently lends only about 1.5% of this amount. Thus, any additional funding from the new bank would be welcomed by developing Asian countries. 

 

From a Chinese viewpoint such a bank makes eminent sense. A major feature of China’s miraculous economic progress has been its emphasis on infrastructure development. During the 20-year period of 1992-2011, the country spent nearly 8.5% of its GDP on infrastructure: corresponding figures for other Asian countries are between 2% and 4%. 

 

The bank will serve at least five objectives for China. First, it could invest part of its foreign reserves of $3.9 trillion on commercial terms. Second, it will contribute to the internationalization of the yuan. Third, it will help secure contracts for Chinese firms and thus boost employment potential at home. Fourth, China has funded numerous infrastructure projects all over the world through China Development Bank and Exim Bank. Some of these projects have created local resentments. These will probably be much less when the funds come from a regional bank. Finally, it will boost China’s influence internationally and enhance its soft power. 

 

Xi’s proposal of the AIIB has ruffled some feathers, especially in Japan and the US which are likely to lose some power and influence. Japan is not convinced that there is a need for such a bank. Tokyo and Washington have worked together to maintain the power structure in the 67-member ADB where both USA and Japan hold 15.7% of votes, while China only has 6.5%. Reports indicate that USA has put pressure on South Korea to not join the new bank.

 

Chinese Foreign Minister Wang Yi invited India to become a founding member of the Bank during his visit to Delhi in early June. Before his visit to Tokyo, Prime Minister Modi confirmed this invitation and said “India is considering this invitation”. Our expectation is that if Beijing can satisfy New Delhi that control of the Bank is reasonably equitable, India would join the Bank, especially given the country’s enormous infrastructural needs.

 

The Chinese proposal has also created turbulence in the cosy and smug world of the World Bank and ADB. ADB has already said that unless the Bank has the “highest standard of governance,” it will be “difficult to cooperate.” The Chinese may very well respond how good is governance and transparency at ADB when from its formation in 1966, its President has been consistently handpicked by Japan. 

 

Unnoticed by the world, and certainly by World Bank and ADB, China has already outflanked them very comprehensively in many areas. Take water infrastructure. No one really knows how many dams China is financially supporting outside the country. International Rivers, an anti-dam organization claims that Chinese companies are “involved in some 304 dams in 74 different countries.” Unquestionably it is a gross overestimate. Even if China is involved in 25% of the dams claimed, it would be more than four times the number of dams that World Bank and all regional development banks combined. With countries like India and Brazil joining the infrastructure financing outside their countries, MDBs will soon have to find a new business model: otherwise they would become marginalized within the next decade or two. 

 

AIIB is expected to be capitalized at $100 billion. ADB tripled its capital base only in 2009, from $55 to $165 billion. Thus, AIIB will start life with about 2/3rd of the current expanded capital base of ADB.   

 

The Chinese have considerable experience in planning and constructing infrastructure and financing projects outside China. As the Chinese Foreign Minister Lou Jiwei has noted, China Development Bank’s commercial infrastructure loan is now far bigger than those of World Bank and ADB combined. This has occurred only during the past 20 years. 

 

China’s lending to developing countries has often been accused of not having good governance and proper environmental and social safeguard. Projects within China have often suffered from similar shortcomings. China is learning fast as to how to rectify these problems both at home and abroad. Irrespective of these shortcomings, presence of China externally has been a net positive.

 

No one can foretell how effective AIIB will be. However, a massively financed new regional bank will shake up the cosy world of existing multi-lateral development banks by injecting healthy dose of competition. It would also create a financing institution that reflects the current multipolar world.   

 

(Cecilia Tortajada is a Senior Research Fellow in Lee Kuan Yew School of Public Policy, Singapore. Asit K. Biswas is Distinguished Visiting Professor at the same School. Both are co-founders of Third World Centre for Water Management, Mexico.)