The Al­ter­nate Bank

New eco­nomic ex­i­gen­cies fac­ing the globe could find an an­swer in the Asian In­fra­struc­ture In­vest­ment Bank (AIIB).

Southasia - - CONTENTS - By S.M.Hali The writer is a prac­tis­ing jour­nal­ist. He con­trib­utes to the print media, con­ducts a TV show and pro­duces doc­u­men­taries.

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.

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