The AIIB and Global Governance
HONG KONG – Despite official American and Japanese opposition, 57 countries have opted to be among the founding members
of the China-led Asian Infrastructure Investment Bank (AIIB).
Regardless of what naysayers believe, this remarkable turn of events can
only benefit global economic governance.
According to former US Treasury Secretary Larry Summers,
the AIIB’s establishment “may be remembered as the moment the United
States lost its role as the underwriter of the global economic system.”
Asia Development Bank (ADB) President Takehiko Nakao, by contrast, does not believe
that there will be a “major change to the world of development
finance,” though he conceded that “there can be interpretations as to
the symbolic meaning of this.”
Who is right will
depend largely on the decisions that the AIIB’s top shareholders make
regarding its operating structure. So far, the AIIB has not sought to
amend the principle that the largest contributor to a multilateral
organization gets the largest say in running it. Just as the US
dominates the World Bank and Europe leads the International Monetary
Fund, China will head the AIIB.
This implies a larger global leadership role for China
– which the world, including its traditional powers, should welcome.
After all, global leadership is not just a matter of might; it also
reflects the provision of global public goods.
When World War II
ended, the US, aside from being the world’s leading military and
economic power, was the largest provider of such goods, through the
Marshall Plan, support for the United Nations, and contributions to the
Bretton Woods institutions (the International Monetary Fund and the
World Bank). But massive debts have lately undermined the ability of the
US – not to mention Europe and Japan – to continue making such large
contributions. Fortunately, China is willing and able to fill the gap.
In fact, China might
have done so within the Bretton Woods institutions, were the
distribution of voting rights within them not skewed so heavily toward
the incumbents, who still enjoy veto power. For example, China has a
3.8% voting share in the IMF and World Bank, even though it accounts for
more than 12% of world GDP. The United Kingdom and France – which are
one-third the size of China – each have a 4.3% share. With the
incumbents unwilling to bring China’s voting share in line with its
economic might, China had little choice but to launch its own
institution.
But the AIIB has its
own objectives, which do not align precisely with those of, say, the
World Bank. Specifically, the bank is a critical element of China’s “one belt, one road”
strategy, which encompasses two initiatives: the overland Silk Road
Economic Belt, connecting China to Europe, and the 21st Century Maritime
Silk Road, linking China to Southeast Asia, the Middle East, and
Europe. While the US “pivots” to the east, China is pirouetting west,
applying the lessons of its development to its trading partners across
Eurasia and beyond.
Perhaps the most
important of these lessons is that connectivity is vital to economic
growth. Over the last three decades, the construction of roads,
railways, ports, airports, and telecommunications systems in China has
fostered trade, attracted investment, and, by linking the country’s
land-locked western and southern provinces to its more prosperous
coastal areas, helped to reduce regional disparities.
China’s Silk Road
initiative, which aims to boost prosperity among China’s trading
partners largely through infrastructure investment, is a logical next
step – one on which China is spending significantly. In addition to its
initial contribution of up to $50 billion to the AIIB, China has
committed $40 billion to its Silk Road Fund, $32 billion to the China
Development Bank, and $30 billion to the Export-Import Bank of China.
According to estimates by HSBC,
the “one belt, one road” initiative could end up costing as much as
$232 billion – just under two-thirds of the World Bank’s balance sheet
in 2014. The $100 billion AIIB will play a central role in this effort.
Given massive global demand for infrastructure finance – which, according to ADB estimates,
will amount to $8 trillion in Asia alone over the next decade – the
AIIB should not be considered a threat to the World Bank, the ADB, or
other multilateral lenders. Nonetheless, it will compete with them,
owing to its distinctive – and probably more efficient – approach to
lending.
In fact, the AIIB’s
operations will most likely resemble those of the World Bank in the
1960s, when engineers with hands-on development experience dominated the
staff and could design lending conditions that worked for borrowers. In
the late 1980s, the World Bank began to implement the Washington Consensus,
pushing for economic and political liberalization, without sufficient
regard for local political or economic realities. The result was
conditional lending, with terms – created mostly by policy wonks – that
many developing-country borrowers could not meet (at least not without
hiring consultants to adjust their official reporting).
The acid test of the
AIIB’s effectiveness will be its governance model. One failing of the
Bretton Wood institutions is their full-time shareholder boards of
directors, which tend to undermine effectiveness by micro-managing and
often requesting conflicting lending conditions. The World Bank has
wasted far too much time re-organizing itself under various presidents,
without recognizing the fundamental problem with its own governance
structure.
Even if the AIIB does
not deliver as promised, its establishment is an important reminder
that in a fast-changing world, economic governance cannot remain
stagnant. If Western leaders really do believe in innovation,
competition, and meritocracy, they should welcome the AIIB.
Andrew Sheng, Distinguished Fellow of the Fung Global Institute.
Xiao Geng, Director of Research at the Fung Global Institute.
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