A petty and short-sighted hissy fit
The UK’s decision to join China’s new Asian Infrastructure Investment Bank is turning into a diplomatic triumph for Beijing and a disaster for Washington. France, Germany and Italy say they will follow the UK’s lead. South Korea and Australia, which the US urged not to sign up when the bank was established last October, are reconsidering. Even Japan, the most stalwart US ally in Asia, is rumored to be wavering.
Washington fears that China is trying to reshape the economic architecture of Asia. It rightly views the AIIB as a potential competitor to the Asian Development Bank and World Bank, and is concerned about China’s willingness to adhere to rules of good governance and environmental protection. But US attempts to undermine an institution that could improve lives across Asia are both petty and short-sighted. Far from dissuading its friends from joining a multilateral institution it does not trust, Washington should welcome their ability to influence it from the inside. This would be positive not only for the US but for China, too, which is struggling to convince its neighbors that it can be trusted to deliver regional development.
For its ‘New Silk Road’ to be a success, Beijing needs to rethink its policy of offering loans to corrupt regimes. From Zambia to Liberia, South Sudan to Myanmar, its policy of working with unsavory governments has backfired. The latest example is Sri Lanka, a key link in the ‘Maritime Silk Road’, where voters recently threw out the thuggish government of Mahinda Rajapaksa. Under Rajapaksa’s nineyear administration, China financed investments of more than $5 bln. It built a much-needed highway and power station, but also a port and airport in Rajapaksa’s hometown that have proved expensive white elephants. Worse, these investments were financed at extortionate interest rates with a cut of the funds apparently siphoned off to Rajapaksa and his cronies.
The new government, a coalition of the main opposition and other parties, has been elected on a mandate to clean up government. Last week senior ministers told us they are revaluating several Chinese-funded projects and that it has suspended work on a $1.5 bln land reclamation and real estate development next to Colombo port. It says it will renegotiate a number of hefty loan repayments due to Chinese banks, some with an interest rate as high as 9%.
“The high costs come from nothing other than corruption, but we do not want taxpayers to pay for the past decisions of a corrupt regime,” Ravi Karunanayake, Sri Lanka’s finance minister, told us at his home in Colombo. “What we’re saying to the Chinese is this: ‘We’re in a tough spot. Please help us by taking a haircut on our debt’.”
Officials in Sri Lanka’s new government insist they blame Rajapaksa’s government for creating an environment in which Chinese companies were obliged to pay massive backhanders to secure deals. But they recognise that Sri Lanka became too reliant on Chinese dollars and that this was an important factor in the country’s general governance deficit. Now, in addition to seeking to restructure its Chinese debts, they are actively inviting other countries to play a greater role. Last week Narendra Modi visited the island—the first state visit by an Indian prime minister for a remarkable 27 years—and Colombo is normalising economic relations with Europe and the US.
As Beijing found in Myanmar—where Chinese investment has collapsed since the military junta dissolved itself in 2011—the willingness of China’s state-owned firms to work with corrupt elites and ignore international codes of conduct can be self-defeating. Ill-advised lending by Chinese policy banks also undermines international attempts to support good governance in developing countries where legal infrastructure and state capacity are often weak. So, as China steps up its policy of ‘going global’, it is clearly in the interests of both Washington and Beijing to help Chinese companies and banks improve their record overseas.
Just how much influence the UK and other western countries will wield within the Chinese-led AIIB remains to be seen. London’s decision to sign up is primarily motivated by commercial considerations, despite its po-faced protestations about ensuring the bank is ethical, transparent and environmentally sound. But if the presence of the UK and other allies can prod China to respect international lending standards, then the US should throw its weight behind their membership. Rather than seeking to contain China, Washington should accept Beijing’s legitimate attempts to carve out a global role—and help it to do so in a constructive way. Perhaps it could start by applying to join the AIIB itself.