AIIB
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Why China is creating a new "World Bank" for Asia
TO THE alphabet soup of international development banks (ADB, AfDB, CAF, EBRD, IADB), add one more set of initials: AIIB, or for the uninitiated, the Asian Infrastructure Investment Bank. On October 24th, representatives from 21 Asian nations (pictured above) signed an agreement to establish the AIIB, which, as its name suggests, will lend money to build roads, mobile phone towers and other forms of infrastructure in poorer parts of Asia. China spearheaded the bank and hopes to formally launch it by the end of next year. More money for critical projects might seem unambiguously good, but the AIIB has stoked controversy because Asia already has a multilateral lender, the Asian Development Bank (ADB). Why is China creating a new development bank for Asia? China’s official answer is that Asia has a massive infrastructure funding gap. The ADB has pegged the hole at some $8 trillion between 2010 and 2020. Existing institutions cannot hope to fill it: the ADB has a capital base (money both paid-in and pledged by member nations) of just over $160 billion and the World Bank has $223 billion. The AIIB will start with $50 billion in capital—hardly enough for what is needed but still a helpful boost. Moreover, while ADB and World Bank loans support everything from environmental protection to gender equality, the AIIB will concentrate its firepower on infrastructure. Officially at least, ADB and World Bank officials have extended a cautious welcome to the new China-led bank, saying they see room for collaboration. Behind the scenes, though, the Chinese initiative has set off a heated diplomatic battle. America has lobbied allies not to join the AIIB, while Jin Liqun, the Chinese official who will head the bank, has shuttled between countries to persuade them to sign up. At the bank’s inauguration ceremony, Australia, Indonesia and South Korea were conspicuously absent. In public, the concern cited by America and some of the hold-outs has been a lack of clarity about AIIB’s governance. Critics warn that the China-led bank may fail to live up to the environmental, labour and procurement standards that are essential to the mission of development lenders. However, China has insisted that AIIB will be rigorous in adopting the best practices of institutions such as the World Bank. Given that the bank will be placed under such a close microscope, there is good reason to believe China on this. But the real, unstated tension stems from a deeper shift: China will use the new bank to expand its influence at the expense of America and Japan, Asia's established powers. China’s decision to fund a new multilateral bank rather than give more to existing ones reflects its exasperation with the glacial pace of global economic governance reform. The same motivation lies behind the New Development Bank established by the BRICS (Brazil, Russia, India, China and South Africa). Although China is the biggest economy in Asia, the ADB is dominated by Japan; Japan’s voting share is more than twice China’s and the bank’s president has always been Japanese. Reforms to give China a little more say at the International Monetary Fund have been delayed for years, and even if they go through America will still retain far more power. China is, understandably, impatient for change. It is therefore taking matters into its own hands.
Why US Allies Are Happy to Join China’s AIIB
On June 29, representatives of 50 countries gathered in Beijing to sign the legal framework agreement to establish the $100 billion Asian Infrastructure Investment Bank (AIIB). Seven more countries are expected to sign, bringing the total number of founding AIIB members to 57. The institution will launch with China having a 30.4 percent share of the AIIB’s equity, followed by India (8.5 percent) and Russia (6.7 percent). The two notable absentees are the United States and Japan. Key NATO allies of the U.S., like Germany, France and the United Kingdom, have opted to join the AIIB. Germany will have the largest non-Asian stake (4.1 percent). Of all its allies, why did only Japan stand with the United States on an issue with strategic implications? The new AIIB will symbolize China’s rise as a financial superpower, guiding the world’s biggest infrastructure financing institution. Whatever their reservations about China’s financial rise, most countries see it as a fact of life that cannot be stalled by staying out of the AIIB. They would rather be inside it, getting a share of the infrastructure orders that the AIIB will finance. U.S. President Barack Obama says China may steer AIIB loans to meet political or strategic considerations rather than economic. So, the AIIB will have lower lending standards than existing multilateral institutions like the World Bank and Asian Development Bank, and undercut their effectiveness. Japan echoes this sentiment. Enjoying this article? Click here to subscribe for full access. Just $5 a month. Why have other major donors shrugged away this objection? Because their diplomats smile at the notion that the World Bank or ADB have always had the highest lending standards. The U.S. as chief shareholder of the World Bank has always viewed it as a foreign policy tool. Ditto for Japan, chief shareholder of the ADB. Besides, as a development institution, the World Bank measures its success by its top line—lending volume—and not the bottom line. It has financed huge public sector undertakings of dubious quality across developing countries. When I first worked for the Bank in 1985, one staffer explained to me the pressures to lend. “In the first quarter of the year, we promise to be really tough. By the second quarter, we worry that disbursements are behind schedule. By the last quarter, we are shoveling money as fast as possible. If we don’t meet disbursement targets, we risk losing allocations and staff next year.” The Economist gave a delightful example of Bank lending as it really was in its issue of August 19, 1995: Over the past few years, Kenya has performed a curious mating ritual with its aid donors. The steps are: One, Kenya wins its yearly pledges of foreign aid. Two, the government begins to misbehave, backtracking on economic reform and behaving in an authoritarian manner. Three, a new meeting of donor counties looms with exasperated foreign governments preparing their sharp rebukes. Four, Kenya pulls a placatory rabbit out of its hat. Five, the donors are mollified and the aid is pledged. The whole dance then starts again. During the Cold War, the U.S. happily backed loans to Third World kleptocrats willing to toe U.S. foreign policy. One U.S. diplomat said of the Democratic Republic of the Congo’s odious ruler and kleptocrat, General Mobutu, “He’s a son of a bitch, but he’s our son of a bitch.” Bank projects in the Congo failed consistently. Why? Because aid to that country mostly ended up in Mobutu’s Swiss bank accounts. Many Third World dictators stole vast sums, yet in evaluating project performance, Bank staff were prohibited from mentioning corruption as a reason. Only after the Cold War ended was this taboo lifted. Bank President Wolfensohn (1995-2005) admitted that corruption had long been a major cause of failed loans, and pledged to curb it in future. Will China similarly use its dominant position in the AIIB to promote its foreign policy aims, and wink at the peccadilloes of friendly governments? Of course. But this will be no more distortionary than World Bank behavior during the Cold War. That’s why so many countries are unworried about the AIIB’s lending standards, and have happily signed up. They acknowledge the emergence of China as a new financial power, and seek a slice of the economic action financed by that new power. Obama sees the AIIB as a lending rival that will reduce the leverage the United States gets through domination of the World Bank. Japan has kept out of AIIB for the same reason: it too will suffer erosion of its leverage as chief financier of the Asian Development Bank. But other donor countries, long used to playing second fiddle to the U.S. and Japan in these two institutions, are just as willing to play second fiddle to China in the AIIB. Nothing personal, they will tell Obama, it’s just business. The author is a Research Fellow at the Cato Institute.
AIIB president says US under Trump may join bank
The president of the young Asian Infrastructure Investment Bank (AIIB), Jin Liqun, is an exciting personality with sure words and mastery of the details of his office and firm. The former top chief of the World Bank exudes firmness in his grasp of what the bank is and targets. It was a delight interviewing him at the AIIB headquarters in Beijing last weekend. The bank was created last year mainly at the behest of China on Christmas Day and commenced operation on January 17 this year. Apart from the founding member states, new members have joined including Canada that came in September after China hosted the G20 Summit. Egypt and South Africa are the only two African countries currently in the AIIB. "The letter 'A' in AIIB can stand for Asia, Africa or America" He hinted that irrespective of the phobia for the AIIB by the US at its inception, the possibility of the country joining the bank when the president-elect, Donald Trump, is in power cannot be ruled out. He said: "I have heard a certain senior official of the President Barack Obama speak good of the AIIB and after Donald Trump won, I was told that many in his team have an opinion that Obama was not right not to join the AIIB, especially after Canada joined, which was a very loud endorsement of the bank. So we can't rule out the new government in US endorsing the AIIB or indicating interest to join as member." Canada's membership became the 22nd non-Asian state member among the present 57 members. However, the test of the bank's popularity that started with a capital base of $100 billion, some 50 percent of that of the World Bank, is the line-up of close to 20 new countries intending to be part of the bank and most of them from outside Asia. At least, five of the new applicants are African countries. The Bank in October appointed Nigerian renowned economist, Dr Ngozi Okonjo-Iweala an adviser among nine others from all over the world. The president restated the bank's willing to welcome new members as the old members with higher shareholding would drop more of their stakes to allow the new members have some shares, but after the next batch of members are admitted, Jin said there would hardly be any shares left for more countries to join. Very soon, the curtain would be drawn on the shortlist of the new members whose membership will take effect from January next year. But the bank chief wants more African countries to join as he assured that the objectives of the AIIB includes assisting in the development of the smaller economies of the world no matter where located. To underscore the openness and overrule the phobia for it by US, Jin joked that "the letter 'A' in AIIB can stand for Asia, Africa or America. They all start with and that means the bank is for all of them." "Our major consideration in extending facilities to governments or state members is whether such projects the fund would be used for will in any benefit of Asia and assist in bettering Asian economy and also that of the borrowing country. But we have a duty and obligation to ensure that we don't give impossible conditions to enable them utilize the funding and incentives of the bank. Every member state borrowing right is based not on the GDP but on shareholding and China has highest shareholding with 30 percent of the total volume. Right now, China is like a non-borrowing state member because if it does, it might crowd out other members that somehow need the fund more. But for the qualified borrower, the major plank for consent is on need and importance and not on shareholding capacity only. That implies that if a state needs to borrow and the AIIB is convinced that the need is compelling and there is prospect for profit in the targeted project the funding will be used for, the request would be granted as long as there is the collateral especially that of the economic potential of the project." AIIB funding of project is predicated on factors like the sustainability, the environmental friendliness which implies how the project would not cause a serious imbalance in environmental protection. But in situations where the importance would impact and encourage development and fight poverty, the environmental impact factor might be played down provided it is not so weighty to create another big problem. The last factor is the social acceptability - implying that the people of the community the project is to be sited must be ok with it and it must target to improve on their livelihood. "AIIB structure, projects and funding must be lean, clean and green. By these I mean that the membership must be manageable and not too bogus, and we believe that the more the better. The project funding must be clean and that means there must be no form of corruption in the process leading to the funding and in the execution. It has to be clean to the extent of encouraging a clean and non-polluted environment. As I said earlier, on this we also consider the benefits when the environmental impact is bearable. For instance, in the USA today, most of the states, or almost all the so-called 'Red States' still rely on coal power station for electricity and it is not foreseeable in the next 30 years that fossil fuel would be done away with because of the carbon emission. What is steadily done is ensuring its effect is minimized. So in a place we find that coal power plant for instance is needed as the only way the people would be assured of power supply enough to encourage economic growth, we will find a way of minimizing the emission effect and go ahead with the project to strike a balance." US initial fear Jin admitted that: "At the formation of the AIIB, the US, the base of the Bretton Wood Institutes that manage the world economy including the World Bank and the IMF, saw the new body as a threat to its dominance and importance in the world economic order. They raised issues on whether the bank's functions would be consistent with fundamental human and environmental rights of the borrowers or state members. We did our best to convince them that we were no threat or rivals or either naive as not to know the basic rules of operations. And moreover, we believe there is enough space in the global economic theatre for several bodies to operate, and many regional development banks operate side by side the World Bank and there is no reason the AIIB would be the violator. We rather need to work with and benefit each other to create a better world. "For instance, Asia alone needs as much as $1tr infrastructure funding every year and the World Bank hasn't such pool of money to pick the bills therefore the need for an alternative. Moreover, if the AIIB exists just like the World Bank, there is no time the new body would embark on a project of building a power plant, airports, roads or seaport to boost the economy of any country that the World Bank will still vote funds for the same project. So if the AIIB handles one project and the World Bank takes another that is a lot better for the world towards defeating poverty and hardship." On the management of the bank, the president stated that right now, the AIIB operates a lean workforce of about 90 workers and operates solely from the head office in Beijing as a strategy to save cost and may continue that way for a long time. He however hinted that with time as the need arises, the bank may operate little outlet offices just to handle needs as it would stick to the rule of cost effective management. To make its operations adapt to global best practice standards, he said the AIIB adopts universal procurement approach to get the best manpower and equipment and also recruits experts from everywhere in the world based on their competence irrespective of whether the country of origin of such expert is a member of the AIIB or not. That way, it is sure to harness the best hands to run its operations.
Knowledge Graph
Examples
1 After a swift start, the Asian Infrastructure Investment Bank (AIIB) has solid governance, good policies and good cooperation among members to take the challenge of building up more projects,
2 Joining the Asian Infrastructure Investment Bank (AIIB) would be a good investment for the United States.
3 The Asian Infrastructure Investment Bank will earn international trust and credibility through its performance.