Asia’s mul­ti­lat­er­al­ism

Financial Mirror (Cyprus) - - FRONT PAGE -

The In­ter­na­tional Mon­e­tary Fund and the World Bank are poised to hold their an­nual meet­ings, but the big news in global eco­nomic gov­er­nance will not be made in Wash­ing­ton DC in the com­ing days. In­deed, that news was made last month, when the United King­dom, Ger­many, France, and Italy joined more than 30 other coun­tries as found­ing mem­bers of the Asian In­fra­struc­ture In­vest­ment Bank (AIIB). The $50 bln AIIB, launched by China, will help meet Asia’s enor­mous in­fra­struc­ture needs, which are well be­yond the ca­pac­ity of to­day’s in­sti­tu­tional ar­range­ments to fi­nance.

One would have thought that the AIIB’s launch, and the de­ci­sion of so many gov­ern­ments to sup­port it, would be a cause for uni­ver­sal cel­e­bra­tion. And for the IMF, the World Bank, and many oth­ers, it was. But, puz­zlingly, wealthy Euro­pean coun­tries’ de­ci­sion to join pro­voked the ire of Amer­i­can of­fi­cials. In­deed, one un­named Amer­i­can source ac­cused the UK of “con­stant ac­com­mo­da­tion” of China. Covertly, the United States put pres­sure on coun­tries around the world to stay away.

In fact, Amer­ica’s op­po­si­tion to the AIIB is in­con­sis­tent with its stated eco­nomic pri­or­i­ties in Asia. Sadly, it seems to be an­other case of Amer­ica’s in­se­cu­rity about its global in­flu­ence trump­ing its ide­al­is­tic rhetoric – this time pos­si­bly un­der­min­ing an im­por­tant op­por­tu­nity to strengthen Asia’s de­vel­op­ing economies.

China it­self is a tes­ta­ment to the ex­tent to which in­fra­struc­ture in­vest­ment can con­trib­ute to devel­op­ment. Last month, I vis­ited for­merly re­mote ar­eas of the coun­try that are now pros­per­ous as a re­sult of the con­nec­tiv­ity – and thus the freer flow of peo­ple, goods, and ideas – that such in­vest­ments have de­liv­ered.

The AIIB would bring sim­i­lar benefits to other parts of Asia, which deep­ens the irony of US op­po­si­tion. Pres­i­dent Barack Obama’s ad­min­is­tra­tion is cham­pi­oning the virtues of trade; but, in de­vel­op­ing coun­tries, lack of in­fra­struc­ture is a far more se­ri­ous bar­rier to trade than tar­iffs.

There is a fur­ther ma­jor global ad­van­tage to a fund like the AIIB: right now, the world suf­fers from in­suf­fi­cient ag­gre­gate de­mand. Fi­nan­cial mar­kets have proven un­equal to the task of re­cy­cling sav­ings from places where in­comes ex­ceed con­sump­tion to places where in­vest­ment is needed.

When he was Chair of the US Fed­eral Re­serve, Ben Ber­nanke mis­tak­enly de­scribed the prob­lem as a “global sav­ing glut.” But in a world with such huge in­fra­struc­ture needs, the prob­lem is not a sur­plus of sav­ings or a de­fi­ciency of good in­vest­ment op­por­tu­ni­ties. The prob­lem is a fi­nan­cial sys­tem that has ex­celled at en­abling mar­ket ma­nip­u­la­tion, spec­u­la­tion, and in­sider trad­ing, but has failed at its core task: in­ter­me­di­at­ing sav­ings and in­vest­ment on a global scale. That is why the AIIB could bring a small but badly needed boost to global ag­gre­gate de­mand.

So we should wel­come China’s ini­tia­tive to mul­ti­lat­er­alise the flow of funds. In­deed, it repli­cates Amer­i­can pol­icy in the pe­riod fol­low­ing World War II, when the World Bank was founded to mul­ti­la­terise devel­op­ment funds that were over­whelm­ingly com­ing from the US (a move that also helped to cre­ate a cadre of first-class in­ter­na­tional civil ser­vants and devel­op­ment pro­fes­sion­als).

The World Bank’s as­sis­tance was some­times over­bur­dened by pre­vail­ing ide­ol­ogy; for ex­am­ple, the free-mar­ket Wash­ing­ton Con­sen­sus poli­cies foisted on re­cip­i­ents ac­tu­ally led to dein­dus­tri­al­i­sa­tion and de­clin­ing in­come in Sub-Sa­ha­ran Africa. Nonethe­less, US as­sis­tance was, over­all, far more ef­fec­tive than it would have been had it not been mul­ti­lat­er­alised. Had th­ese re­sources been chan­neled through Amer­ica’s own aid agency, pol­i­cy­mak­ing would have been sub­ject to the va­garies of devel­op­ment think­ing (or the ab­sence of re­flec­tion) from one ad­min­is­tra­tion to an­other.

New at­tempts to mul­ti­lat­er­alise flows of as­sis­tance (in­clud­ing the BRICS coun­tries’ launch of the New Devel­op­ment Bank last July) are sim­i­larly likely to con­trib­ute sig­nif­i­cantly to global devel­op­ment. Some years ago, the Asian Devel­op­ment Bank de­fended the virtues of com­pet­i­tive plu­ral­ism. The AIIB of­fers a chance to test that idea in devel­op­ment fi­nance it­self.

Per­haps Amer­ica’s op­po­si­tion to the AIIB is an ex­am­ple of an eco­nomic phe­nom­e­non that I have of­ten ob­served: firms want greater com­pe­ti­tion ev­ery­where ex­cept in their own in­dus­try. This po­si­tion has al­ready ex­acted a heavy price: had there been a more com­pet­i­tive mar­ket­place of ideas, the flawed Wash­ing­ton Con­sen­sus might never have be­come a con­sen­sus at all.

Amer­ica’s op­po­si­tion to the AIIB is not un­prece­dented; in fact, it is akin to the suc­cess­ful US op­po­si­tion to Ja­pan’s gen­er­ous New Miyazawa Ini­tia­tive of the late 1990s, which of­fered $80 bln to help coun­tries in the East Asian cri­sis. Then, as now, it was not as if the US were of­fer­ing an al­ter­na­tive source of fund­ing. It sim­ply wanted hege­mony. In an in­creas­ingly mul­ti­po­lar world, it wanted to re­main the G-1. The lack of money, com­bined with Amer­ica’s in­sis­tence on flawed ideas about how to re­spond to the cri­sis, caused the down­turn to be far deeper and longer than it should have been.

That said, US op­po­si­tion to AIIB is harder to fathom, given that in­fra­struc­ture pol­icy is much less sub­ject to the in­flu­ence of ide­ol­ogy and spe­cial in­ter­ests than other pol­i­cy­mak­ing ar­eas, such as those dom­i­nated by the US at the World Bank. More­over, the need for en­vi­ron­men­tal and so­cial safe­guards in in­fra­struc­ture in­vest­ment is more likely to be ad­dressed ef­fec­tively within a mul­ti­lat­eral frame­work.

The UK, France, Italy, Ger­many, and the oth­ers who have de­cided to join the AIIB should be con­grat­u­lated. One hopes that other coun­tries, both in Europe and Asia, will join as well, help­ing to ful­fill the am­bi­tion that in­fra­struc­ture im­prove­ments can raise living stan­dards in other parts of the re­gion, as they have al­ready done in China.

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