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 period of 1992-2011, the country spent nearly 8.5 per cent of its GDP on
infrastructure. The corresponding figures for other Asian countries were between 2 and 4
per cent.
The AIIB will serve at least five objectives for China. First, the country could invest part of
its foreign reserves of US$3.9 trillion on commercial terms rather than putting them in
US Treasuries where the real value is shrinking. Secondly, it will contribute to the
internationalisation of the yuan. Thirdly, it will help secure contracts for Chinese firms
and thus boost employment opportunities at home.
Fourthly, as China has funded numerous infrastructure projects all over the world
through China Development Bank and Exim Bank, some of which have created local
resentment, there will likely be much less such animosity when the funds come from a
regional multinational bank. And, fifthly, it will boost China's influence internationally
and significantly enhance its soft power.
The proposal has been badly received by the US, Japan and the ADB, three parties that
are likely to lose some power because of the new bank. This is likely to be compounded
when another new bank, the BRICS Bank, starts operating in Shanghai. Tokyo and
Washington have worked in tandem to maintain their power structure in the 67-member
ADB. China is now Asia's largest economic power. Yet, the US and Japan hold 15.7 per
cent of votes in the ADB, but China holds only 6.57 per cent.
The US has actively lobbied its close allies Australia and South Korea to not join the AIIB.
It is basically a power play to curtail China's growing soft power and economic influence
in the region. US Secretary of State John Kerry lobbied Australian Prime Minister John
Abbot to not join the AIIB when both met in Jakarta during the inauguration of President
Joko Widodo. Similarly, a senior South Korean diplomatic source observed that Korea
has "no reason not to join it", and that it is now "in a deep dilemma on what sort of
strategic choices it has to make as China challenges the US-led international order".
Over the medium term, the three important holdouts - Australia, South Korea and
Indonesia - simply cannot afford to antagonise Asia's most important economic power
and one of their largest trading partners. It would be surprising if they do not join within
the next two to three years because it would be in their national interests.
GOVERNANCE PRACTICES
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ADB and some unnamed senior Washington figures have questioned the likely
governance practices of the AIIB, including upholding good social, environmental and
labour conditions, transparency and sound economic principles. These in our view are
red herrings, primarily to preserve the status quo.
The AIIB is a new southern alternative to traditional sources of international
development funding. Properly structured, it could learn from and avoid the mistakes of
the World Bank and ADB. It could reflect broader and more appropriate mandates, and
adopt better governance practices. It would not be bound by tradition or historical
precedents and may even develop new and more effective financing mechanisms.
In 2007, then-Chinese president Hu Jintao made environmental protection one of the
seven pillars of foreign investment requirements. Anecdotal evidence indicates that
environmental and social impacts of Chinese finance are now about average. They are
more respectful and responsive to regulations of host governments, including oversights.
No one can beat China's record and experience in infrastructure, both within the country
and abroad. According to Chinese Foreign Minister Lou Jiwei, China Development Bank's
commercial infrastructure loan is now far bigger than that of the World Bank and ADB
combined. This has occurred only within the last 20 years.
Fred Hochberg, chairman of the US Export-Import Bank, has noted that his institution
has extended some US$590 billion in loans and guarantees over its 80 years of history. In
contrast, the Chinese institutions have provided some US$670 billion in only the last two
years. Thus, the sceptics are underestimating and misrepresenting the Chinese
knowledge and experience.
The AIIB will be a formidable competitor to the World Bank and ADB. It will shake up
their current modus operandi, and force them to rethink some of their unnecessary
lending restrictions and streamline their project approval, preparation and
implementation processes. The impact on the ADB is likely to be significant. It does not
have the same degree of expertise and intellectual prowess as the World Bank. Some of its
thinking, for example in the water area, is at least 15 years behind time. Unless it can
radically improve its performance, it would be increasingly marginalised by the AIIB and
BRICS Bank.
Over the medium to long term, the AIIB is likely to have a positive impact. It will provide
a new source of funding to Asian developing countries. For China, it will enhance its soft
power and bring considerable economic benefits. The competition will force the ADB and
World Bank to undertake serious reforms that have been long overdue.
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Cecilia Tortajada is a senior research fellow and Asit K Biswas a
distinguished visiting professor at the Lee Kuan Yew School of Public Policy,
Singapore. They are co-founders of the Third World Centre for Water
Management, Mexico