Signing up not routing round: The Asian Infrastructure Investment Bank and the global economic order

April 28, 2015
Signing up not routing round: The Asian Infrastructure Investment Bank and the global economic order
Richard Woodward
Richard Woodward Non-Resident Fellow - International Economics

Normally the investiture of a new regional economic organisation barely raises a murmur. That the new Asian Infrastructure Investment Bank (AIIB), a Chinese sponsored development bank designed to finance solutions to the region’s overwhelming infrastructural shortcomings, has been greeted with such fanfare reflects the widespread belief that it is a harbinger of drastic changes in global economic governance. The AIIB’s emergence has attained greater significance because of the United States’ abortive attempts to stymie this initiative by exhorting its allies to boycott the organisation. The decision by stalwart US allies such as the United Arab Emirates (UAE), plus major European powers including the United Kingdom, France, Germany, Italy and Spain to defy this pressure and become Prospective Founding Members of the AAIB supplied further ammunition to those who glimpse the twilight of American hegemony and the liberal, rules based international order it fathered. This blog argues that such claims are exaggerated. Instead the AIIB is testament to China’s desire to exert its authority within the existing architecture of global governance rather than marking the start of an attempt to supplant it.

The case that the AIIB’s formation and the decision of major economies to join it marks an “epochal event” epitomizing of “the end of the American century” runs along the following lines. Despite the drastic shift in wealth and power towards the countries of the South and East, the decision-making structures of the major institutions of global economic governance remain frozen in the ‘1945 moment’ and are thus dominated by the countries of the North and the West. Feeling frustrated by the absence of substantive reforms that would allow them to play a role in these institutions commensurate with their newfound economic heft prompts the rising powers, headed by China, to develop a competing institutional apparatus premised on rules and norms more conducive to the pursuit of their interests. The consequence will be a more contested and fragmented international order characterised by regional and ideational rivalries.

Initially the formation of the AIIB appears to exemplify this blueprint in action. Half-hearted reforms that have left the rising powers under-represented at the International Monetary Fund (IMF), World Bank and Asian Development Bank (ADB) combined with the failure of these institutions to deliver on their commitments to Asia, especially in regard to infrastructural investment, have incentivised China to bankroll a new body that will allow it to ‘route around existing institutions. Although the AIIB’s articles of agreement are still under discussion, its base in Shanghai plus China’s proposed 49% shareholding in the bank (a proportion far in excess of the biggest shareholders in any of the other multilateral development banks) suggest that a Chinese dominated governance structure is likely. This would allow China to use the organisation to support its strategic interests, for example approving loans that would open up markets for its corporate giants. With paid-up capital of $10bn and authorised capital of $100bn some predict the AIIB could dwarf the loan portfolio of the Japanese dominated ADB and the World Bank’s disbursements to the region. Together with the BRIC’s inspired New Development Bank (NDB) and the Silk Road Fund, the AIIB has the appearance of being part of a wider conspiracy to devise a “Sino-centric” development finance infrastructure.

Unquestionably these developments will augment China’s role in multilateral development lending, however the picture is more complicated than these narratives suggest. First, China’s motivation for the AIIB cannot be explained solely by a feeling of exclusion at existing global institutions. The rising powers rightly complain about the glacial pace of reform amongst the global economic institutions. Nevertheless China has been reluctant to accept a more prominent role, successfully restraining the growth of its voting power on the IMF Executive Board for example.

Second, rather than representing a rejection of the current international order and related governance institutions, the AIIB incorporates many of their most cherished rules, norms and principles. Rather than an attempt to divide the world into rival camps, the AIIB is a multilateral organisation demonstrating China’s willingness to be constrained by agreed rules and norms. The presence of 22 OECD countries, including four members of the G7, amongst the 57 Prospective Founding Members is likely to cramp China’s ability to exploit the AIIB for the purpose of pursuing its strategic objectives. It is also worth pointing out that in addition to launching initiatives such as the AIIB, China has been cementing its ties with the existing network of regional development banks. For example in 2007 Shanghai hosted the annual board meetings of the African Development Bank (of which China has been a member since 1985) and the following year became a donor member of the Inter-American Development Bank. The embrace of a multilateral approach and decision to throw down a welcome mat for Western countries might reflect China’s weakness as much as its strength. The AIIB is an acknowledgement that China is unwilling to shoulder the risks of the vast projects the organisation proposes to undertake and, having witnessed the souring of bi-lateral loans in Sri Lanka, Venezuela, Myanmar and elsewhere, that it might benefit from the knowledge and experience of these countries and the tougher governance regime upon which these are sure to insist. Since September 2014 the UAE has also been a Participant in the OECD Development Assistance Committee (DAC), suggesting that important non-OECD states might also compel high standards of AIIB governance.

Institutionally and intellectually the AIIB also looks like a clone of existing multilateral development banks. The promises on the AIIB’s official website that the organisation will be “lean, clean and green” with a small management team, zero-tolerance for corruption and an emphasis on environmental and social responsibility echo the statements from the world’s 25 existing multilateral development banks. This may reflect compromises China has had to make to get buy-in from OECD countries.

Third and reflecting the observations made in the previous paragraph, the AIIB is poised to complement rather than displace the role of the ADB and World Bank in the region, with the latter already making overtures towards the fledgling organisation. In 2010, an ADB report estimated that Asia would require an $8tr invest in its infrastructure if development was not to stagnate. This daunting figure is far in excess of the financial firepower that the existing multilateral development banks are able to muster. Asia clearly has room for another development bank. Past experience of cooperation between the World Bank and the regional development banks suggest the AIIB will complement the World Bank in several other ways. The readiness of regional development banks to fund cross-border projects helps to address some of the inconsistencies that arise in the country centred approach favoured by the World Bank. With other multilateral development agencies having moved away from mega infrastructure projects towards a fixation with poverty alleviation the AIIB may also be filling a necessary niche.

China’s assent is unquestionably beginning to alter the international economic order. However, the suggestion that the AIIB marks the instigation of a rival system of economic governance is premature. If the AIIB demonstrates anything it is China’s acceptance of, and further accommodation within, the liberal, rules based, international order developed under US auspices since 1945. As John Ikenberry has eloquently argued, the US cleverly and carefully fabricated an international order that was “hard to overturn and easy to join”. The rising powers have not only joined the system but become prosperous and powerful as a consequence. Importantly, as China’s decision to establish the AIIB as a rules-based organisation respecting multilateral norms demonstrates, it is looking to work within that system rather than to overturn it. As one of the system’s principal beneficiaries, we should not be surprised.