The AIIB and global gov­er­nance

Financial Mirror (Cyprus) - - FRONT PAGE -

De­spite of­fi­cial Amer­i­can and Ja­panese op­po­si­tion, 57 coun­tries have opted to be among the found­ing mem­bers of the China-led Asian In­fra­struc­ture In­vest­ment Bank (AIIB). Re­gard­less of what naysay­ers be­lieve, this re­mark­able turn of events can only ben­e­fit global eco­nomic gov­er­nance.

Ac­cord­ing to for­mer US Trea­sury Sec­re­tary Larry Sum­mers, the AIIB’s estab­lish­ment “may be re­mem­bered as the mo­ment the United States lost its role as the un­der­writer of the global eco­nomic sys­tem.” Asia Devel­op­ment Bank (ADB) Pres­i­dent Takehiko Nakao, by con­trast, does not be­lieve that there will be a “ma­jor change to the world of devel­op­ment fi­nance,” though he con­ceded that “there can be in­ter­pre­ta­tions as to the sym­bolic mean­ing of this.”

Who is right will de­pend largely on the de­ci­sions that the AIIB’s top share­hold­ers make re­gard­ing its op­er­at­ing struc­ture. So far, the AIIB has not sought to amend the prin­ci­ple that the largest con­trib­u­tor to a mul­ti­lat­eral or­gan­i­sa­tion gets the largest say in run­ning it. Just as the US dom­i­nates the World Bank and Europe leads the In­ter­na­tional Mon­e­tary Fund, China will head the AIIB.

This im­plies a larger global lead­er­ship role for China – which the world, in­clud­ing its tra­di­tional pow­ers, should wel­come. Af­ter all, global lead­er­ship is not just a mat­ter of might; it also re­flects the pro­vi­sion of global public goods.

When World War II ended, the US, aside from be­ing the world’s lead­ing mil­i­tary and eco­nomic power, was the largest provider of such goods, through the Mar­shall Plan, sup­port for the United Na­tions, and con­tri­bu­tions to the Bret­ton Woods in­sti­tu­tions (the In­ter­na­tional Mon­e­tary Fund and the World Bank). But mas­sive debts have lately un­der­mined the abil­ity of the US – not to men­tion Europe and Ja­pan – to con­tinue mak­ing such large con­tri­bu­tions. For­tu­nately, China is will­ing and able to fill the gap.

In fact, China might have done so within the Bret­ton Woods in­sti­tu­tions, were the dis­tri­bu­tion of vot­ing rights within them not skewed so heav­ily to­ward the in­cum­bents, who still en­joy veto power. For ex­am­ple, China has a 3.8% vot­ing share in the IMF and World Bank, even though it ac­counts for more than 12% of world GDP. The United King­dom and France – which are one-third the size of China – each have a 4.3% share. With the in­cum­bents un­will­ing to bring China’s vot­ing share in line with its eco­nomic might, China had lit­tle choice but to launch its own in­sti­tu­tion.

But the AIIB has its own ob­jec­tives, which do not align pre­cisely with those of, say, the World Bank. Specif­i­cally, the bank is a crit­i­cal el­e­ment of China’s “one belt, one road” strat­egy, which en­com­passes two ini­tia­tives: the over­land Silk Road Eco­nomic Belt, con­nect­ing China to Europe, and the 21st Cen­tury Mar­itime Silk Road, link­ing China to Southeast Asia, the Mid­dle East, and Europe. While the US “piv­ots” to the east, China is pirou­et­ting west, ap­ply­ing the lessons of its devel­op­ment to its trad­ing part­ners across Eura­sia and be­yond.

Per­haps the most im­por­tant of th­ese lessons is that con­nec­tiv­ity is vi­tal to eco­nomic growth. Over the last three decades, the con­struc­tion of roads, rail­ways, ports, air­ports, and telecom­mu­ni­ca­tions sys­tems in China has fos­tered trade, at­tracted in­vest­ment, and, by link­ing the coun­try’s land-locked west­ern and south­ern prov­inces to its more pros­per­ous coastal ar­eas, helped to re­duce re­gional dis­par­i­ties.

China’s Silk Road ini­tia­tive, which aims to boost pros­per­ity among China’s trad­ing part­ners largely through in­fra­struc­ture in­vest­ment, is a log­i­cal next step – one on which China is spend­ing sig­nif­i­cantly. In ad­di­tion to its ini­tial con­tri­bu­tion of up to $50 bln to the AIIB, China has com­mit­ted $40 bln to its Silk Road Fund, $32 bln to the China Devel­op­ment Bank, and $30 bln to the Ex­port-Im­port Bank of China.

Ac­cord­ing to es­ti­mates by HSBC, the “one belt, one road” ini­tia­tive could end up cost­ing as much as $232 bln – just un­der two-thirds of the World Bank’s bal­ance sheet in 2014. The $100 bln AIIB will play a cen­tral role in this ef­fort.

Given mas­sive global de­mand for in­fra­struc­ture fi­nance – which, ac­cord­ing to ADB es­ti­mates, will amount to $8 trln in Asia alone over the next decade – the AIIB should not be con­sid­ered a threat to the World Bank, the ADB, or other mul­ti­lat­eral lenders. Nonethe­less, it will com­pete with them, ow­ing to its dis­tinc­tive – and prob­a­bly more ef­fi­cient – ap­proach to lend­ing.

In fact, the AIIB’s op­er­a­tions will most likely re­sem­ble those of the World Bank in the 1960s, when en­gi­neers with hands-on devel­op­ment ex­pe­ri­ence dom­i­nated the staff and could de­sign lend­ing con­di­tions that worked for bor­row­ers. In the late 1980s, the World Bank be­gan to im­ple­ment the Wash­ing­ton Con­sen­sus, push­ing for eco­nomic and po­lit­i­cal lib­er­al­i­sa­tion, with­out suf­fi­cient re­gard for lo­cal po­lit­i­cal or eco­nomic re­al­i­ties. The re­sult was con­di­tional lend­ing, with terms – cre­ated mostly by pol­icy wonks – that many de­vel­op­ing-coun­try bor­row­ers could not meet (at least not with­out hir­ing con­sul­tants to ad­just their of­fi­cial re­port­ing).

The acid test of the AIIB’s ef­fec­tive­ness will be its gov­er­nance model. One fail­ing of the Bret­ton Wood in­sti­tu­tions is their full-time share­holder boards of di­rec­tors, which tend to un­der­mine ef­fec­tive­ness by mi­cro-man­ag­ing and of­ten re­quest­ing con­flict­ing lend­ing con­di­tions. The World Bank has wasted far too much time re-or­gan­is­ing it­self un­der var­i­ous pres­i­dents, with­out recog­nis­ing the fun­da­men­tal prob­lem with its own gov­er­nance struc­ture.

Even if the AIIB does not de­liver as promised, its estab­lish­ment is an im­por­tant re­minder that in a fastchang­ing world, eco­nomic gov­er­nance can­not re­main stag­nant. If West­ern lead­ers re­ally do be­lieve in in­no­va­tion, com­pe­ti­tion, and mer­i­toc­racy, they should wel­come the AIIB.

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