The Alternate Bank
New economic exigencies facing the globe could find an answer in the Asian Infrastructure Investment Bank (AIIB).
On October 24, 2014, fifty seven nations became the founding members of the Asian Infrastructure Investment Bank (AIIB), the China-led regional development bank, launched in a formal ceremony at the Great Hall of the People at Beijing.
Before evaluating its pros and cons, it is imperative to mull over its need. Seventy one years ago at Bretton Woods, at the United Nations Monetary and Financial Conference, 730 delegates from all 44 Allied nations gathered from July 1 to 22 1944, to regulate the international monetary and financial order after the conclusion of the Second World War. As a result, the International Bank for Reconstruction and Development (IBRD), which is a part of today's World Bank group and the International Monetary Fund (IMF), emerged. Bretton Woods was not devoid of disagreements. Brilliant British economist John Maynard Keynes proposed the establishment of an International Clearance Unit (ICU) to regulate the balance of trade. His concern was that countries facing a trade deficit would be unable to climb out of it, paying ever more interest to service their ever greater debt and therefore stifling global growth. He proposed the ICU to bank with its own currency (bancor), exchangeable with national currencies at a fixed rate. The US, the world's biggest creditor, counter proposed an International Stabilization Fund (now the IMF), placing the burden of maintaining the balance of trade on the deficit nations and imposing no limit on the surplus that rich countries could accumulate.
As additional countries gained economic stability, there was an endeavor for creating a more regional framework. The 1966 establishment of the Asian Development Bank (ADB) dominated by Japan was an early example. The devolution process in Asia was accelerated by the Asian financial crisis of 1997-8 where the IMF’s failure
to comprehend the crisis acted as a catalyst for change. The Chiang Mai Initiative (CMI), a multilateral currency swap arrangement among the ten members of the Association of Southeast Asian Nations ( ASEAN), the People’s Republic of China (including Hong Kong), Japan, and South Korea, was a direct outcome. CMI manages regional short-term liquidity problems to facilitate the work of other international financial arrangements and organizations like the IMF.
In this backdrop, cries for a revamped international system to tackle the problem of unbridled capital flows grew louder while the global economic crunch of 2008 brought major politicians on board demanding economic reform. On September 26, 2008, French President Nicolas Sarkozy, then also the President of the European Union, called for rethinking a financial system from scratch, as at Bretton Woods. On October 13, 2008, British Prime Minister Gordon Brown echoed the same. Despite tensions between Brown and Sarkozy, EU leaders were united in calling for a "Bretton Woods II”, which culminated at the 2008 G-20 Washington summit. Agreement was achieved for the common adoption of the Keynesian fiscal stimulus, an area where the US and China were to emerge as the world's leading actors but there was no substantial progress towards reforming the international financial system.
The lack of progress prompted Zhou Xiaochuan, the Governor of the People’s Bank of China, to make a speech in March 2009 entitled Reform the International Monetary System in support of Keynes's idea of a centrally managed global reserve currency. Dr. Zhou argued that it was unfortunate that part of the reason for the Bretton Woods system breaking down was the failure to adopt Keynes's bancor since national currencies were unsuitable for use as global reserve currencies as a result of the Triffin Dilemma he difficulty faced by reserve currency issuers in trying to simultaneously achieve their domestic monetary policy goals and meet other countries' demand for a reserve currency.
In December 2011, the Bank of England published a paper arguing for reform, saying that the current International monetary system has performed poorly compared to the Bretton Woods system. In August 2012, in an International Herald Tribune oped, Harvard University professor wrote that two failures to address European problems around German power had led to world wars in the 20th century and that the current Euro zone crisis was also beyond the capacity of Europe.
In this milieu, leaders of newly industrialized nations like Brazil, Russia, India, China and South Africa met in St. Petersburg in September 2013 to evolve the BRICS Development Bank with a reserve currency pool worth over $100 billion. China committed $41 billion; Brazil, India and Russia $18 billion each; and South Africa $5 billion for enabling the countries to pool resources for infrastructure improvements, and serve as a financial institution for lending during global financial crises such as the one in Europe.
Soon, as the largest shareholder with a stake of up to 50 percent support, China launched the AIIB, aiming to provide project loans to developing nations. The US, apparently perceiving it as China’s extension of its influence and soft power in the region, strongly urged that AIIB meet international standards of governance and transparency. Refuting the reservations, Chinese President Xi Jinping, declared that the new bank would use the best practices of the World Bank and the ADB while AIIB operations will follow multilateral rules and procedures.
The advent of AIIB will have definite ramifications on the current global geopolitical dynamics. The contemporary unipolar world order, propped up by financial and military might, has created global conflicts. The BRICS Bank and AIIB are poised to provide an alternative world order, which would seek to resolve global and regional issues pragmatically. The unipolar world order attempted to gain access to or control the scarce energy sources of the developing world. Replacement of this order could have positive consequences like tackling the core issues through a collectivist approach, effect moderation in the use of natural resources and refining consumer appetites.
Although Group of Seven members Britain, Germany and France have jumped on board the AIIB bandwagon, notable omissions are the US and its close allies, Japan, South Korea and Australia. According to the Australian Financial Review, John Kerry had personally asked Australian Prime Minister Tony Abbott to keep Australia out of the AIIB. While South Korea is weighing its options and has sought rationality in areas such as governance and safeguard issues, Japan — guided more by politics than pragmatism — has stayed out so far because it perceives the China-led institution to be a rival to the US-dominated World Bank and the Japan-led Asian Development Bank. Japanese Prime Minister Shinzo Abe has announced a $110 billion (a slightly higher sum than the proposed AIIB founding capital) investment plan for infrastructure projects in Asia in an apparent move to counter the launch of the AIIB. The Japanese government party LDP, contrarily, is split over the AIIB; its members are still debating the pros and cons while the opposition is largely in favor of membership. Since New Zealand has joined AIIB, Australia is likely follow suit, not willing to let its closest neighbour take the lead in regional ties.
Most Asian countries have welcomed the AIIB but if the US and Japan have reservations regarding its processes, it would be better to have a say in its decision-making from inside rather than criticizing it from the fence. China, on the other hand, should ensure transparency and good practices and also consider giving the AIIB an AsiaPacific outlook while complementing the World Bank and IMF rather than making the AIIB their counterweight.
On June 24, Australia, which faced U.S. pressure not to join the bank, confirmed it will be a founding member while on June 29, AIIB was formally launched at a ceremony in Beijing.