Britain Launches European Rush to Join AIIB. Now What?

China continues to expand its influence through the Asia Infrastructure Investment Bank.

Last fall, China launched the Asia Infrastructure Investment Bank (AIIB). Britain is the first major Western ally to sign up as a donor/member. This may be the break in the dam (sorry for the infrastructure reference!), as France, Germany, and Italy have now agreed to join, while other key allies including Switzerland, Australia, and South Korea are supposedly on the fence.

As the AIIB builds momentum and accrues members, our best response would be to ensure that our existing institutions — the IMF, the World Bank, and regional development banks — are better, more flexible, and adequately funded. It also means we will have to work harder to provide developing countries with what they want, including financing for the energy choices they make.

With Britain as a member, British companies will get favorable treatment on big infrastructure deals funded by this new bank. Those companies whose countries are not members will not be able to bid, or will be at a disadvantage. Prime Minister David Cameron has made international development a major part of his governing program, and now faces an election in May where the economy will be the top issue. In response to U.S. reservations regarding British membership in the new bank, a Cameron spokesman simply said: “we think it’s in the U.K.’s national interest.”

The United States should accept some blame for China’s decision to create the AIIB, because of our slowness to act on IMF Quota reform — in essence, giving poorer countries marginal increases in their ownership shares at the expense of a small amount of U.S. and European votes, while keeping our unique veto on anything we don’t like. Washington should also be willing to take some of the blame because of its lack of action on meeting the needs of our donor partners. We are now at a point where it is impossible to tell China — or others — “We think you should not create a new infrastructure bank.”

The United States and Japan rightly see this new bank as a direct competitor of the World Bank and the Asian Development Bank, a regional version of the World Bank that is largely owned by the United States and Japan.

It is true that the cost of the infrastructure that needs to be financed in Asia each year is in the hundreds of billions of dollars, and that the Asian Development Bank and the World Bank contribute amounts in the low tens of billions each year. Most infrastructure is not fully financed by these banks, but they do provide some money, offer best-in-class standards, an additional good housekeeping seal of approval, and provide advice. There is a debate in international development that says because developing countries are awash in tax dollars and because many developing countries can access the global capital markets, there is no shortage of money, but, rather, a shortage of “bankable” projects (e.g., a lack of confidence in rule of law or whether a project is actually feasible, etc.). Regardless of where one comes out on this debate, there is a massive infrastructure deficit in many places in Asia, and so many Asian countries have welcomed the AIIB with varying degrees of enthusiasm.

The AIIB is also a response to growing “South-South” trade in the world, including in Asia. South-South trade’s share of global trade has doubled in the last 20 years, and now accounts for a quarter of global trade. This means that the most rapid growth in world trade is among poor countries, not rich ones.

The United States has given China and others political cover to push this through because of our lack of movement on IMF Quota Reform, which would cost the United States $300 million, money that would come out of our international affairs and/or defense budgets. The Obama ddministration has been unable to cut a deal with Congress on IMF Quota reform for four years. Out of the 20 G-20 countries, we are the only hold out. China has pointed this out, and said, “[t]he IMF and World Bank and others are not responding to the new realities of the size of our economy. We are going to create our own version of the Bretton Woods System.” Without IMF Quota reform, this strengthens the Chinese argument. I wrote about that here.

The Obama administration must take some blame for the rise of the AIIB because AIIB fills a void due to administration policy decisions around energy financing.

The Obama administration must take some blame for the rise of the AIIB because AIIB fills a void due to administration policy decisions around energy financing.

 Through policies and executive actions, the World Bank, Overseas Private Investment Corporation (OPIC), and the Export-Import Bank (EXIM) are turning away from coal, nuclear, hydro, and even oil and gas projects because of environmental concerns and pressures from environmental lobbies. Asia is the largest consumer of coal in the world, and the United States is the Saudi Arabia of coal. You could see the AIIB financing U.S.-built coal-fired power plants, or situations where the United States is providing the coal when OPIC, EXIM, and the Bretton Woods institutions have turned up their noses to these projects. These environmental policies, pushed largely by the Obama administration (although the OPIC “carbon cap” was regrettably instituted under President George W. Bush), are largely opposed by developing countries who have major energy demands and are making decisions based on “energy poverty” first.

There are many challenges and dilemmas for the AIIB:

1) What percent of the vote will China have? The first proposal, based on GDP size, gives China 60-plus percent control. But China quickly realized that no one would want to join such an institution. The latest proposal has Chinese voting shares in the 30s.

2) Will AIIB be the funder of choice for “uncertified” palm oil plantations, Iranian airports, and roads built with quasi-slave labor? In other words: what labor, environmental, and other standards will be used? Will AIIB provide financing to any regime? What happens the first time there are community problems at an AIIB-funded project?

3) What sort of approach will this bank take to corruption in infrastructure projects? Japan and the United States can’t stop China, but we can expand our lending portfolios, fix the internal processes, offer great advice and research, and review our policies with regards to energy financing

The ADB’s announcement — not a coincidence, I am sure — to increase lending by 40 percent is a good first step but not the last.

The West no longer has a monopoly on official financing, and we should respond with a better, faster, and broader offering from Bretton Woods institutions and regional development banks.

article published in on March 17, 2015.

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