Co-op­er­a­tion Not Com­pe­ti­tion: The New Mul­ti­lat­eral De­vel­op­ment Banks and the Old

The New Mul­ti­lat­eral De­vel­op­ment Banks and the Old

Global Asia - - CONTENTS CONTINUED - By Ra­mon Pacheco Pardo & Prad­umna B. Rana

the AIIB’S and ndb’s fo­cus on in­fra­struc­ture fi­nanc­ing in de­vel­op­ing asia is wel­come.

A new wave of de­cen­tral­iza­tion in de­vel­op­ment fi­nanc­ing rep­re­sented by the China-led Asian In­fra­struc­ture In­vest­ment Bank and New De­vel­op­ment Bank has been widely seen as a threat to the World Bank and Asian De­vel­op­ment Bank. This need not be the case. The new banks’ fo­cus on in­fra­struc­ture fi­nanc­ing in de­vel­op­ing Asia is wel­come, while the World Bank and oth­ers rep­re­sent con­ti­nu­ity and good gover­nance, write Ra­mon Pacheco Pardo and Prad­umna B. Rana. Signs of use­ful co­op­er­a­tion are al­ready emerg­ing.

Global ECO­NOMIC gover­nance is in flux. In the case of the in­ter­na­tional de­vel­op­ment fi­nanc­ing ar­chi­tec­ture, a new wave of de­cen­tral­iza­tion is un­der way. among the most rel­e­vant phe­nom­ena is the launch of new mul­ti­lat­eral de­vel­op­ment banks with non-tra­di­tional donors in the lead: the asian In­fra­struc­ture In­vest­ment Bank (AIIB) and the new De­vel­op­ment Bank (NDB). Both have one thing in com­mon: China’s cen­tral­ity. as a re­sult, they are seen as chal­lengers to the tra­di­tional de­vel­op­ment banks — most notably the World Bank and the asian De­vel­op­ment Bank (ADB).

In this es­say, we ar­gue that the cre­ation of new in­sti­tu­tions is, per se, nei­ther good nor bad. It de­pends on how the in­sti­tu­tions work with each other. I also ar­gue that con­trary to pop­u­lar be­lief and on­go­ing crit­i­cisms, there are as yet no signs of “un­healthy” com­pe­ti­tion be­tween the tra­di­tional and non-tra­di­tional mul­ti­lat­eral de­vel­op­ment banks (MDBS). On the con­trary, the two new ones are ben­e­fi­cial to the ex­ist­ing de­vel­op­ment fi­nanc­ing ar­chi­tec­ture in gen­eral and to the World Bank and ADB in par­tic­u­lar. the rea­sons are three­fold. to be­gin with, the China-led in­sti­tu­tions are nec­es­sary due to mas­sive in­fra­struc­ture fi­nanc­ing needs in asia and the ob­so­lete — and seem­ingly un­re­formable — gover­nance struc­tures of the tra­di­tional MDBS. Fur­ther­more, the AIIB and NDB have in­tro­duced a de­gree of “healthy” com­pe­ti­tion to the de­vel­op­ment fi­nanc­ing ar­chi­tec­ture that should help de­vel­op­ing coun­tries by pro­vid­ing more funds. In fact, the ex­ist­ing MDBS have re­acted to the chal­lenge by lever­ag­ing more funds for in­fra­struc­ture fi­nance both in­ter­nally and from the pri­vate sec­tor.

More im­por­tantly, there are great op­por­tu­ni­ties for func­tional com­ple­men­tar­ity and co-op­er­a­tion be­tween the tra­di­tional MDBS and the new, China-led de­vel­op­ment banks. In­deed, the World Bank and ADB have signed their own sep­a­rate co-op­er­a­tion and co-fi­nanc­ing agree­ments with the AIIB and NDB, and co-fi­nanced projects are al­ready be­ing im­ple­mented. Func­tional ar­eas of po­ten­tial co-op­er­a­tion in­clude knowl­edge and in­for­ma­tion-shar­ing; coun­try-, sec­tor- or firm­spe­cific co-op­er­a­tion; and reg­u­lar con­sul­ta­tion. there­fore, greater com­ple­men­tar­ity is ex­pected among in­sti­tu­tions to de­fine their re­la­tion­ship to the ben­e­fit of de­vel­op­ing coun­tries across asia.

the Case against Co-op­er­a­tion

at first glance, how­ever, many be­lieve the cre­ation of the new MDBS will spur “un­healthy” com­pe­ti­tion. new in­sti­tu­tions lead to the de­cen­tral­iza­tion and frag­men­ta­tion of global gover­nance. a patch­work of in­ter­na­tional in­sti­tu­tions with dif­fer­ent char­ac­ters, mem­bers, ge­o­graph­i­cal reach and sub­ject mat­ter emerges. In­evitably, these in­sti­tu­tions take dif­fer­ent ap­proaches and de­velop their own pol­icy so­lu­tions — even if they are tack­ling the same prob­lem, such as the de­vel­op­ment needs of asia. also, these dif­fer­ent in­sti­tu­tions of­ten com­pete for the same clients, es­pe­cially in an in­ter­na­tional sys­tem awash with liq­uid­ity. this raises the in­cen­tive to re­duce stan­dards to at­tract clients, who have op­por­tu­ni­ties for fo­rum shop­ping and ar­bi­trage.

Con­tested mul­ti­lat­er­al­ism is the re­sult of this frag­men­ta­tion. the Bret­ton Woods in­sti­tu­tions, launched in 1944, dom­i­nated both short-term liq­uid­ity pro­vi­sion in the case of the IMF and longer-term de­vel­op­ment fi­nanc­ing in the case of the World Bank. In the case of the lat­ter, a wave of re­gional and sub-re­gional de­vel­op­ment banks cre­ated through­out the decades did not chal­lenge the World Bank’s po­si­tion at the top. It was the largest provider of de­vel­op­ment fi­nanc­ing and, cru­cially, led the way in terms of new think­ing and ideas about de­vel­op­ment. the new de­vel­op­ment banks, how­ever, are dom­i­nated by non-tra­di­tional donors with their own ideas about de­vel­op­ment. Most notably, their fo­cus is on in­fras­truc-

build­ing rather than the so­cial de­vel­op­ment goals fa­vored by the World Bank since the turn of the mil­len­nium. For the first time, the World Bank faces com­pe­ti­tion in the realm of ideas, and not only in terms of pure fi­nan­cial power.

China’s po­si­tion is par­tic­u­larly prob­lem­atic for tra­di­tional MDBS. It is no se­cret that Bei­jing launched the AIIB and NDB at least partly as a re­sult of dis­plea­sure with the distri­bu­tion of power in the World Bank and ADB. First, China sought to re­form these in­sti­tu­tions in or­der to have a greater say within them, par­tic­u­larly the World Bank. When it be­came clear that this would not work, Bei­jing sim­ply used part of its sav­ings to es­tab­lish the two new in­sti­tu­tions. Given their ori­gins, it seems rea­son­able to think that co-op­er­a­tion be­tween new and tra­di­tional de­vel­op­ment banks will not be forth­com­ing. It would not make sense for China to launch new in­sti­tu­tions for them sim­ply to pro­vide eco­nomic sup­port to World Bank and ADB projects un­der ex­ist­ing ideas about de­vel­op­ment.

the NEEDS of de­vel­op­ing asia

But tra­di­tional and non-tra­di­tional MDBS are be­ing co-op­er­a­tive, most notably with co­fi­nanced projects. a key rea­son re­lates to the needs of de­vel­op­ing asia. stud­ies for the ADB show that this re­gion will need us$8.2 tril­lion in in­fra­struc­ture in­vest­ment. nev­er­the­less, from the 1980s on­wards, the World Bank and ADB have fo­cused on struc­tural re­forms and so­cial de­vel­op­ment. In con­trast, in­fra­struc­ture de­vel­op­ment has re­ceived a de­creas­ing per­cent­age of de­vel­op­ment funds flow­ing into the re­gion. By the 2000s, in­vest­ment in in­fra­struc­ture ac­counted for 30 per­cent of the World Bank’s to­tal, down from 70 per­cent in the 1960s. the fall was less dra­matic in the case of the ADB, but the asian bank also saw a de­cline. Coun­tries in asia were thus de­prived of the nec­es­sary in­vest­ment to build and up­grade their in­fra­struc­ture for more rapid eco­nomic de­vel­op­ment.

In or­der to ad­dress this sit­u­a­tion, the AIIB and NDB have a clear fo­cus on in­fra­struc­ture build­ture

The AIIB and NDB have a clear fo­cus on in­fra­struc­ture build­ing. The projects so far ap­proved and launched in­clude pipe­lines, roads, rail­ways, hy­dropower plants, dams, ports and other in­fra­struc­ture schemes. No­tice­ably, none of the two in­sti­tu­tions has any project fo­cus­ing on struc­tural re­forms and so­cial de­vel­op­ment.

ing. the projects so far ap­proved and launched in­clude pipe­lines, roads, rail­ways, hy­dropower plants, dams, ports and other in­fra­struc­ture schemes. no­tice­ably, none of the two in­sti­tu­tions has any project fo­cus­ing on struc­tural re­forms and so­cial de­vel­op­ment. tak­ing a cue from China’s own de­vel­op­ment ex­pe­ri­ence, the two in­sti­tu­tions fo­cus on in­fra­struc­ture at the ex­pense of other goals that — from a de­vel­op­ing coun­try per­spec­tive — can be seen as in­ter­fer­ing in do­mes­tic af­fairs. In­fra­struc­ture de­vel­op­ment, on the other hand, is gen­er­ally seen as eco­nom­i­cally ben­e­fi­cial with­out hav­ing any po­lit­i­cal con­no­ta­tions other than boost­ing the sit­ting gov­ern­ment tak­ing credit for the new road or dam.

the World Bank and ADB have also rec­og­nized this need. Both have launched joint in­fra­struc­ture build­ing projects with the AIIB in coun­tries such as azer­bai­jan and Bangladesh — al­beit not with the NDB at the time of this writ­ing. But they have not blindly agreed to AIIB de­mands. In fact, joint projects have un­der­gone en­vi­ron­ment and so­cial pro­tec­tion as­sess­ments, sug­gest­ing that the World Bank and ADB are al­ready hav­ing a prac­ti­cal in­flu­ence on the work of the new MDBS. like­wise, the lat­ter are hav­ing an in­flu­ence on the at­ten­tion that the former pay to in­fra­struc­ture. In Oc­to­ber 2014, the World Bank an­nounced the launch of a new Global In­fra­struc­ture Fa­cil­ity. the G20 fol­lowed suit with its own Global In­fra­struc­ture hub, an­nounced in 2016. these an­nounce­ments came shortly af­ter the BRICS coun­tries -- Brazil, Rus­sia, In­dia, China and south africa -- signed the agree­ment to launch the NDB in July 2014, and ex­actly a year af­ter Chi­nese Pres­i­dent Xi Jin­ping of­fi­cially an­nounced the cre­ation of the AIIB.

a dose of ‘healthy’ Com­pe­ti­tion

the China-led MDBS also bring com­pe­ti­tion to tra­di­tional banks and donors. But com­pe­ti­tion is “healthy” when ad­min­is­tered in the right doses, as is the case with the AIIB and NDB. Com­pe­ti­tion can be ben­e­fi­cial for re­cip­i­ent coun­tries with a pipe­line of in­fra­struc­ture projects await­ing fi­nanc­ing. ul­ti­mately, de­vel­op­ment banks have a clear re­mit: to sup­port the de­vel­op­ment needs of emerg­ing mar­kets and de­vel­op­ing coun­tries. If this is the goal, then tra­di­tional de­vel­op­ment banks ought to be un­afraid of their younger coun­ter­parts — es­pe­cially given huge in­fra­struc­ture needs that can­not be met by ex­ist­ing in­sti­tu­tions. In­deed, the boom in in­fra­struc­ture projects since the AIIB and NDB were launched sug­gests that “healthy” com­pe­ti­tion is al­ready ben­e­fit­ing coun­tries in need of build­ing and up­grad­ing their in­fra­struc­ture.

an added ben­e­fit is the stream­lin­ing of the op­er­a­tional pro­ce­dures in ex­ist­ing MDBS. the ADB and, es­pe­cially, the World Bank have been ac­cused of in­ef­fi­cien­cies de­rived from their al­leged bloated bu­reau­cracy, strin­gent pro­ce­dures or com­pla­cency. Younger in­sti­tu­tions do not suf­fer from these prob­lems. If any­thing, their thirst to se­cure clients and claim a seat at the de­vel­op­ment ta­ble might make them a bit too ea­ger to ap­prove new projects. For ex­ist­ing banks, this brings pres­sure to be­come more ef­fi­cient. there are signs this is hap­pen­ing at the World Bank and ADB. the former, in par­tic­u­lar, has launched painful and con­tro­ver­sial re­forms un­der pres­i­dent Jim Yong Kim aimed at cut­ting costs and mak­ing more fund­ing avail­able to clients.

“healthy” com­pe­ti­tion is also ben­e­fi­cial to the new banks them­selves. the AIIB and NDB have had to hit the ground run­ning. they can­not show com­pla­cency and as­sume that de­vel­op­ing coun­tries will flock to them out of dis­plea­sure with the World Bank — and ADB — or out of shared val­ues with China and other emerg­ing economies. Gov­ern­ments in de­vel­op­ing coun­tries want fi­nanc­ing to sup­port de­vel­op­ment and

are ul­ti­mately ac­count­able to their own pop­u­la­tion — not to Bei­jing. this means that it is be­com­ing in­creas­ingly dif­fi­cult for them to dis­re­gard their own do­mes­tic pop­u­la­tion’s le­git­i­mate con­cerns about the so­cial and en­vi­ron­men­tal im­pact of some projects. the fact that the new de­vel­op­ment banks are col­lab­o­rat­ing with their tra­di­tional coun­ter­parts and for the most part fol­low­ing es­tab­lished in­ter­na­tional prac­tices and stan­dards re­lated to debt man­age­ment, pro­cure­ment in­tegrity and due dili­gence shows that “healthy” com­pe­ti­tion also af­fects them.

op­por­tu­ni­ties for real Co-op­er­a­tion

Com­ple­men­tar­ity and func­tional co-op­er­a­tion be­tween tra­di­tional and non-tra­di­tional de­vel­op­ment banks is re­ally a no-brainer. the de­cen­tral­iza­tion and frag­men­ta­tion of global gover­nance — at least in this area — is to a large ex­tent driven by func­tional dif­fer­en­ti­a­tion due to the in­creas- ing com­plex­ity of pol­icy do­mains. In other words, new in­sti­tu­tions are be­ing cre­ated be­cause de­vel­op­ment needs are grow­ing ever more com­plex. It is nec­es­sary to at­tend to struc­tural re­forms and so­cial de­vel­op­ment needs, and the World Bank and ADB have decades of ex­pe­ri­ence in this. But build­ing hard in­fra­struc­ture can­not be con­sid­ered a sec­ondary task or, worse, ne­glected. the AIIB and NDB have thus far clearly fo­cused on bridg­ing this gap.

ta­ble 1 above shows six con­crete ar­eas of po­ten­tial func­tional co-op­er­a­tion be­tween new and tra­di­tional de­vel­op­ment banks. they are based on Mous that they have al­ready signed with each other or with other part­ners such as the euro­pean In­vest­ment Bank or the euro­pean Bank for Re­con­struc­tion and De­vel­op­ment. these go be­yond vague state­ments about the need to co-op­er­ate that gov­ern­ments and the in­sti­tu­tions of­ten make.

ta­ble 1 sug­gests that po­ten­tial func­tional co­op­er­a­tion is ac­tu­ally more likely be­tween the World Bank and NDB, and be­tween the ADB, on one hand, and the AIIB and NDB, on the other. the agree­ments in­clude five of the six ar­eas cov­ered in the ear­lier World Bank-adb agree­ment. how­ever, co-op­er­a­tion has hith­erto been strong­est be­tween the AIIB and the World Bank. this is largely be­cause project co-fi­nanc­ing has so far spurred the great­est co-op­er­a­tion. as the AIIB and NDB be­come more ex­pe­ri­enced and since they have com­mon coun­tries of co-op­er­a­tion in asia to­gether with the World Bank and AIIB, func­tional co-op­er­a­tion in the other five ar­eas will even­tu­ally emerge. Fur­ther­more, the AIIB has de­vel­oped coun­tries such as south Korea, sin­ga­pore, Ger­many and aus­tralia among its mem­bers. these coun­tries are also part of the World Bank, lead­ing them to push for co-op­er­a­tion with the AIIB. Plus, it seems that Bei­jing is pri­or­i­tiz­ing the World Bank pre­cisely be­cause of its broader mem­ber­ship — which has boosted the soft power and re­spon­si­ble stake­holder im­age of the Xi Jin­ping gov­ern­ment.

Of the other ar­eas of po­ten­tial co-op­er­a­tion be­tween new and tra­di­tional MDBS, col­lab­o­ra­tion in knowl­edge and in­for­ma­tion shar­ing is of cru­cial im­por­tance and is al­ready hap­pen­ing. From an AIIB and NDB per­spec­tive, their staffs will build ca­pac­ity as they learn from their coun­ter­parts in tra­di­tional banks. as for the World Bank and ADB, col­lab­o­ra­tion in this area will help to al­lay con­cerns about the trans­parency, gover­nance and ac­count­abil­ity of the new banks. Knowl­edge and in­for­ma­tion shar­ing will also re­sult in bet­ter in­for­ma­tion about the needs and changes in client coun­tries, as all in­sti­tu­tions gather in­for­ma­tion on the ground and else­where.

Co-op­er­a­tion should also re­sult from even­tual OECD De­vel­op­ment as­sis­tance Com­mit­tee (DAC) mem­ber­ship. the World Bank be­longs to this donor co-or­di­na­tion frame­work, which re­sults in the adop­tion of ex­ist­ing in­ter­na­tional stan­dards and best prac­tices. the AIIB and NDB

The neg­a­tive per­cep­tion of the emerg­ing de­vel­op­ment bank ar­chi­tec­ture is wrong, at least in the case of Asia and with re­gard to the China-led in­sti­tu­tions. For one, the fi­nanc­ing needs of de­vel­op­ing Asia open up enough room for a host of in­sti­tu­tions to co-ex­ist. Fur­ther­more, new and tra­di­tional MDBS are in­volved in a process of “healthy” com­pe­ti­tion ben­e­fi­cial to both.

are likely to come un­der pres­sure to adopt these stan­dards and even­tu­ally join DAC. the former is to an ex­tent al­ready hap­pen­ing, as men­tioned above. the lat­ter might be more prob­lem­atic due to ac­cu­sa­tions of the OECD’S pro-western bias. Only two of its mem­bers come from else­where — south Korea and Ja­pan. how­ever, a com­pro­mise could be found in the AIIB and NDB be­com­ing ob­servers at DAC meet­ings, like the IMF, undp, ADB and other re­gional de­vel­op­ment banks. this would be in the in­ter­ests of both tra­di­tional donors rep­re­sented in DAC and new de­vel­op­ment banks seek­ing le­git­i­macy.

part­ners, Not ad­ver­saries?

the de­cen­tral­iza­tion of global fi­nan­cial gover­nance in gen­eral and the MDB net­work in par­tic­u­lar has been por­trayed as a threat to tra­di­tional in­sti­tu­tions. Frag­men­ta­tion, the ar­gu­ment goes, re­sults in fo­rum-shop­ping and ar­bi­trage. this leads to con­tested mul­ti­lat­er­al­ism, with ex­ist­ing in­sti­tu­tions hav­ing to en­gage in com­pe­ti­tion with their younger coun­ter­parts. Dis­plea­sure with tra­di­tional de­vel­op­ment banks ac­cel­er­ates this process, since it is the main rea­son why these new coun­ter­parts have been launched.

I ar­gue that this neg­a­tive per­cep­tion of the emerg­ing de­vel­op­ment bank ar­chi­tec­ture is wrong, at least in the case of asia and with re­gard to the China-led in­sti­tu­tions. For one, the fi­nanc­ing needs of de­vel­op­ing asia open up enough room for a host of in­sti­tu­tions to co-ex­ist. Fur­ther­more, new and tra­di­tional MDBS are in­volved in a process of “healthy” com­pe­ti­tion ben­e­fi­cial to both. there is also plenty of op­por­tu­ni­ties for func­tional co-op­er­a­tion in a range of ar­eas be­tween the two sets of in­sti­tu­tions. the AIIB, in par­tic­u­lar, has taken ad­van­tage of this and is co-fi­nanc­ing projects with the World Bank and ADB. this proves that new and ex­ist­ing banks can have a friendly re­la­tion­ship based on co-op­er­a­tion and mu­tual sup­port. un­like in trade ar­chi­tec­ture, where re­gional trad­ing agree­ments could un­der­mine the cen­tral­ity of the World trade Or­ga­ni­za­tion’s rules, and fi­nan­cial ar­chi­tec­ture, where re­gional safety nets could com­pete with the IMF, in the de­vel­op­ment ar­chi­tec­ture the World Bank and the ADB do not face a threat from the new in­sti­tu­tions.

Go­ing for­ward, the tra­di­tional and non-tra­di­tional MDBS should, as in the past, seek to fur­ther en­hance the ben­e­fi­cial im­pacts of “healthy” com­pe­ti­tion and func­tional co-op­er­a­tion among them­selves while min­i­miz­ing the costs of “un­healthy” com­pe­ti­tion or a race to the bot­tom. Global over­sight bodies such as the G-20 and the OECD could help in pro­mot­ing such com­pe­ti­tion within a col­lab­o­ra­tive frame­work. In 2011, the G-20 is­sued a num­ber of prin­ci­ples for co-op­er­a­tion be­tween the IMF and re­gional fi­nanc­ing ar­range­ments. sim­i­lar prin­ci­ples for co-op­er­a­tion be­tween tra­di­tional and non-tra­di­tional MDBS could also be use­ful. ra­mon pacheco pardo is se­nior lec­turer in in­ter­na­tional re­la­tions, depart­ment of Euro­pean and in­ter­na­tional stud­ies, King’s Col­lege lon­don and Kf-vub Korea Chair, in­sti­tute for Euro­pean stud­ies, Vrije uni­ver­siteit brus­sels.

prad­umna b. rana is as­so­ciate pro­fes­sor and Co­or­di­na­tor of the in­ter­na­tional po­lit­i­cal Econ­omy pro­gramme at the Cen­tre for Mul­ti­lat­er­al­ism stud­ies of the s. ra­jarat­nam school of in­ter­na­tional stud­ies, and served for 25 years at the asian de­vel­op­ment bank.

Many of Asia’s great cities are coastal, which places them squarely in the path of ris­ing sea lev­els as global tem­per­a­tures con­tinue to rise. If ef­forts aren’t stepped up to mit­i­gate the im­pact of cli­mate change on these ur­ban ar­eas, the ques­tion isn’t whether they will be flooded, but when. John Fef­fer ex­am­ines the fee­ble ef­forts to grap­ple with this grow­ing threat.

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