Winds of change start blow­ing through Asia

The China Post - - COMMENTARY - BY MARTIN KHOR

In the last month, the in­ter­na­tional me­dia has been car­ry­ing ar­ti­cles on the fight be­tween the United States and China over the for­ma­tion of the Asian In­fra­struc­ture In­vest­ment Bank (AIIB).

In­flu­en­tial West­ern eco­nomic com­men­ta­tors have sup­ported China in its move to es­tab­lish the new bank and judged that Pres­i­dent Barack Obama made a big mis­take in pres­sur­iz­ing U.S. al­lies to shun the bank.

The United States is seen to be scor­ing an “own goal” since its close al­lies the United King­dom, Australia and South Korea de­cided to be found­ing mem­bers, as well as other Euro­pean coun­tries, in­clud­ing Ger­many and France, and most of Asia.

The United States also re­buked the United King­dom for poli­cies “ap­peas­ing China,” but the lat­ter did not budge.

The United States did not give any cred­i­ble rea­son why coun­tries should not join the AIIB.

Trea­sury Sec­re­tary Jack Lew said the new bank would not live up to the “high­est global stan­dards” for gov­er­nance or lend­ing.

But that sounded like the pot call­ing the ket­tle black, since it is the lack of fair gov­er­nance in the In­ter­na­tional Mon­e­tary Fund (IMF) and World Bank that prompted China to ini­ti­ate the for­ma­tion of the AIIB, and the BRICS coun­tries (Brazil, Rus­sia, In­dia, China and South Africa) to sim­i­larly es­tab­lish the New Devel­op­ment Bank.

Bre­ton Woods

For decades, the de­vel­op­ing coun­tries have com­plained that the de­vel­oped coun­tries have kept their grip on vot­ing power in the Bre­ton Woods in­sti­tu­tions by cling­ing to the quo­tas agreed upon 70 years ago.

Th­ese do not re­flect the vastly in­creased shares of the world econ­omy that the emerg­ing economies now have.

Even the mild re­form agreed upon by all — that the quo­tas would be al­tered slightly in fa­vor of some de­vel­op­ing coun­tries — can­not be im­ple­mented be­cause of U.S. Congress op­po­si­tion.

The big de­vel­op­ing coun­tries have been frus­trated. They had agreed to pro­vide new re­sources (many bil­lions of dol­lars each) to the IMF dur­ing the fi­nan­cial cri­sis, but were re­warded with no re­forms in vot­ing rights.

In ad­di­tion, the un­jus­ti­fi­able “un­der­stand­ing” that the heads of the World Bank and IMF would be an Amer­i­can and a Euro­pean re­spec­tively re­mains in place de­spite prom­ises of change.

So much for le­git­i­macy of lec­tures about good gov­er­nance, merit-based lead­er­ship and demo­cratic prac­tice, which are preached by the West­ern coun­tries and by the IMF and World Bank them­selves.

The BRICS coun­tries then set up the New Devel­op­ment Bank, which will sup­ple­ment or com­pete with the World Bank, while China cre­ated the AIIB to sup­ple­ment the Asian Devel­op­ment Bank (ADB), which also has a lop­sided gov­er­nance sys­tem.

The new banks will fo­cus on fi­nanc­ing in­fra­struc­ture projects, since de­vel­op­ing coun­tries have am­bi­tious in­fra­struc­ture pro­grams and there is gross un­der-fund­ing.

Crit­ics an­tic­i­pate that the new banks will fi­nance projects that the World Bank or ADB would re­ject for not meet­ing their en­vi­ron­men­tal and so­cial stan­dards.

But that is at­tack­ing some­thing that hasn’t yet hap­pened. True, it would be re­ally bad if the new banks build a port­fo­lio of “bad projects” that would dev­as­tate the en­vi­ron­ment or dis­place mil­lions of peo­ple with­out rec­og­niz­ing their rights.

It is thus im­per­a­tive that the new banks take on board high so­cial, en­vi­ron­men­tal and fidu­ciary stan­dards, be­sides hav­ing good in­ter­nal gov­er­nance and be­ing fi­nan­cially vi­able.

The new in­sti­tu­tions should be as good as or bet­ter than the ex­ist­ing ones, which have been crit­i­cized for their gov­er­nance, per­for­mance and ef­fects.

It is a high chal­lenge and one that is wor­thy of tak­ing on. There is no cer­tainty that the new banks will suc­ceed. But they should be given ev­ery chance to do so.

The AIIB, the Jostling

The AIIB, in par­tic­u­lar, is be­ing seen as part of the jostling be­tween the United States and China for in­flu­ence in the Asian re­gion.

A few years ago, the United States an­nounced a “pivot” or re­bal­anc­ing to Asia. This in­cluded en­hanced mil­i­tary pres­ence and new trade agree­ments, es­pe­cially the Trans-Pa­cific Part­ner­ship Agree­ment (TPPA).

It seemed sus­pi­ciously like a pol­icy of con­tain­ment or par­tial con­tain­ment of China. The United States com­bines co­op­er­a­tion with com­pe­ti­tion and con­tain­ment in its China pol­icy, and it re­tains the flex­i­bil­ity of bring­ing into play any or all of th­ese com­po­nents.

China last year an­nounced its own two ini­tia­tives, a Silk Road Eco­nomic Belt (from West­ern China through Cen­tral Asia to Europe) and a 21st cen­tury Mar­itime Silk Road (mainly in South-East Asia).

The first ini­tia­tive will in­volve in­fra­struc­ture projects, trade and public-pri­vate part­ner­ships, while de­tails of the sec­ond ini­tia­tive are be­ing worked out.

The AIIB can be seen as a fi­nan­cial arm (though not the only one) of th­ese ini­tia­tives.

China is also part of ne­go­ti­a­tions of the RCEP (Re­gional Com­pre­hen­sive Eco­nomic Part­ner­ship) that does not in­clude the United States.

Last year, it also ini­ti­ated a study to set up a Free Trade Area of the Asia-Pa­cific, which will in­clude the United States.

Th­ese two in­tended pacts are an an­swer to the U.S.-led TPPA. It is still un­cer­tain whether the TPPA will con­clude, due both to do­mes­tic U.S. pol­i­tics and to an in­abil­ity to reach a con­sen­sus yet among the 12 coun­tries on many con­tentious is­sues.

Mean­while, prom­i­nent West­ern opin­ion mak­ers are urg­ing the United States to change its pol­icy and to ac­com­mo­date China and other de­vel­op­ing coun­tries.

For­mer U.S. Trea­sury Sec­re­tary Larry Sum­mers said this past month will be re­mem­bered as the mo­ment the United States lost its role as the un­der­writer of the global eco­nomic sys­tem.

Sum­mers cited the com­bi­na­tion of China’s ef­fort to es­tab­lish a ma­jor new in­sti­tu­tion and the fail­ure of the United States to per­suade dozens of its tra­di­tional al­lies to stay out of it.

Martin Wolf of the UK-based Fi­nan­cial Times said that a re­buff by the United States of China’s AIIB is folly. This is be­cause Asian coun­tries are in des­per­ate need of in­fra­struc­ture fi­nanc­ing, and the United States should join the bank rather than pres­sur­ing oth­ers not to.

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