Realize potential of multilateral finance
Time for China to lead the world and set the standard in global development push
With high-level meetings underway to commemorate the 75th anniversary of the United Nations, President Xi Jinping’s questions and answers to the future of the UN and the world keep resonating.
Reiterating China’s support for multilateralism in general and the UN in particular, Xi emphasized promoting cooperation and real action on the ground in the context of the UN. Such real actions can be immediately extended to an often overlooked aspect: multilateral financial institutions and the impact they can have.
China has an unparalleled track record in the development of finance. While it is mostly domestic, nevertheless it was able to bring about development and uplift its people from abject poverty the likes of which the world has never seen. Most remarkable is that it has achieved this while maintaining a fairly healthy public purse.
Although its own development story is far from over, China can consider investing further in helping other nations develop along the path that China itself took.
As its experience suggests, investing in this kind of development can bring significant rewards to both the investor and the host nation, so China has enabled its sovereign wealth fund, China Investment Corporation, to invest directly in developing countries. Doing it right, however, means engaging multiple stakeholders, and a multilateral approach is required.
A multilateral approach to financing development projects is based around creating a development bank that invests on behalf of its members. The Asia Development Bank headquartered in Manila has been a big player in development financing in Asia since the 1960s, but the region’s needs far exceed its capacity.
China has outlined financial assistance via the Belt and Road Initiative. So far, the BRI is focusing on the macro projects — to begin with, projects big enough to get funding from big state lenders like the Export-Import Bank. So new vehicles are required to help deliver on impactful projects without having to be constrained by scale or framework.
Two new multilateral development banks (MDBs) have been set up — the Asia Infrastructure Investment Bank and the New Development Bank. The AIIB focuses on infrastructure in Asia, whereas the NDB concentrates on the BRICS countries — Brazil, Russia, India, China, and South Africa.
The impact of these new MDBs is already perceivable. For example, the investment that the AIIB approved for the improvement of the Sylhet-Tamabil road connecting Bangladesh and India is an excellent example of the kind of impact a wellthought-out MDB-funded project can have — a simple yet powerful investment that will meaningfully improve lives and boost economic development.
Yet a strong argument can be made that the MDBs have yet to live up to their full potential. Despite the amount of good work they have done, they can take full advantage of their unique position.
At this moment, Western institutions are promoting a focus on ESG — a particular set of environmental, social and governance issues that prevent them from investing in things like traditional power generation. This, unsurprisingly, neglects the basic needs of developing nations — first and foremost, cheap and reliable power and communications networks.
Certainly, one ought to take on board the best practices in things like governance, but the priority has to be development and improving quality of life, rather than ticking boxes, as Western institutions tend to prioritize.
Given the Chinese experience, and that of the members of the two MDBs, there clearly is an opportunity for these banks to actually invest in projects that bring about social development and a positive change in the environment; an ESG focus that does not just look good on paper but makes a difference at the grassroots level.
A similar opportunity exists for the China Investment Corporation. The fund has suffered from senior departures recently, and its operations are complicated and multifaceted. However, it does have a direct investment arm that can also pioneer a Chinese-led approach to investing in development projects that both produce returns and make an impact.
The purpose here is to derive a real-world-tested ESG framework that also reflects Xi’s aspirations on having a real impact, thus promoting cooperation on development paths most underdeveloped nations may adopt.
Saying no outright to fossil fuels or nuclear power is nonsensical given the power shortages in Asia. Further, it is possible to build-out traditional power infrastructure and still cut carbon emissions like, for example, moving from biomass burning for heat to a clean coal-fired plant, which is a big reduction in per capita CO2 emissions.
It is important to manage relationships with hosts and members of MDBs. Encouraging the host economies to adopt practices that will offer immediate benefits is the way to get a more widespread uptake of any broad policy.
The ESG framework is considered extra financial — that is to say, it is over and above the bottom line of any project proposal. Here lies an opportunity for Chinese institutions to codify a holistic approach that will bring about cooperation among all stakeholders and real action on advancing the quality of life while being mindful of the environmental impact.
Certainly, one ought to take on board the best practices in things like governance, but the priority has to be development and improving quality of life, rather than ticking boxes, as Western institutions tend to prioritize.