CORN May 2015 Edition.
The China-led AIIB is about more than just challenging US influence. This analysis argues that the bank provides a way forward for China on a number of global issues: resolving deadlocks in global financial governance, putting forward China’s favoured approaches to economic development, and bringing in stakeholders to share in China’s often frustrating experience with foreign investment.
The looming induction of the Asian Infrastructure Investment Bank (AIIB) into the global development and financial architecture has stirred yet another discussion about China’s rising influence in global affairs and the concomitant decline of US power in the global economy. Those who see the new institution as a sign of US decline are quick to point to the embarrassment suffered by US officials, who failed to prevent long-standing allies like South Korea, Australia, and the UK from joining the organization as founding members. But the AIIB is about more than just challenging US influence (albeit US and Japan’s loss of face is by no means an insignificant bonus for China); the bank provides a way forward for China on a number of global issues.
It goes some distance in addressing concerns, on China’s part, of the skewed governance structure of Bretton Woods institutions (BWIs). Perhaps more subtly, it also signifies a contestation of ideas about development, specifically with respect to infrastructure funding. Lastly, while certainly representing a diplomatic victory for China over its regional rivals—the US and Japan—it is in no small part about seeking stakeholders to share in China’s often frustrating experience with foreign investment.
Reforming the Bretton Woods System: Thinking Outside the Box?
At the time of this writing, the rollout of the AIIB certainly looks like an important victory for China over the US and Japan. While the US has denied that it pressured its allies, including the UK and Australia, to abstain from joining the AIIB, it is by now difficult, if not impossible, to shake the perception that, having been excluded from the bank, the US and Japan have become diplomatically isolated. Asian members of the new multilateral development bank (MDB) are to be joined by European countries and other members of the global North, and it increasingly looks like the new institution will have some claim to global legitimacy as a result.
Along the same lines, the AIIB is significant because it represents the world’s first China-led MDB. To be sure, this is not the first time that China has sought to institutionalize alternatives to US-led institutions. China has, for example, partnered with other BRICS members (Brazil, Russia, India and South Africa) in establishing the New Development Bank, which also focuses on infrastructure, as well as other projects aimed at stimulating economic development. The BRICS also established a Contingent Reserve Arrangement (CRA) among themselves, which helps members with short-term balance of payments and liquidity problems. After a decade-and-a-half of debate about reforming Bretton Woods institutions, China has joined other emerging economies in creating institutional alternatives on the margins of the Bretton Woods system. But the AIIB is unique in its simultaneous global representation and China-led initiation.
Announced in 2014, the AIIB addresses a number of complaints long levied against the existing global financial and development architecture: overrepresentation of the US, Japan (in the case of the Asian Development Bank), and European members; “mission creep” and too broad of a definition of development lending; and an outmoded governance structure, which gives the US veto power in initiating governance reforms in both institutions. In the IMF, for example, China’s voting share is only 3.8 percent, while its share of global GDP is roughly 12 percent.
The governance structure of the new organization will give 75 percent of the voting power on its board of directors to Asian countries. This way, China is guaranteed to be the most influential member, as voting shares are determined by economic size. It would not only have the biggest voting share, but rich, developed country members like the UK would have significantly less votes than their Asian counterparts. Thus, as governance reforms at BWIs continue to stall, it appears that China has now taken the lead in “rebalancing” international economic governance.
At the same time, China’s open invitation for countries to put up capital and join as founding members means that Japan’s membership would, as one Japanese official recently suggested, make it a significant voice in the organization—should Japan choose to join, that is. Similarly, while the AIIB is a separate entity from the BWIs and, unlike the Asian Development Bank, is not institutionally tied to the BWIs, it would be premature to suggest that China is actively creating alternatives to the existing framework of global economic governance. In fact, an emerging body of research suggests that China has gone out of its way to adopt, at home, the economic and financial standards set by existing, Western-dominated international financial institutions.
Likewise, its Asia-focused orientation, and its quasi-global representation leave ample room for cooperation and complementarity with BWIs. China is already involved in plenty of global governance initiatives that preclude Western participation, such as the BRICS leaders summit and the regional security agreement, Shanghai Cooperation Organization. The proposed governance structure and functionality of this AIIB makes it a poor candidate for directly countering Western influence in the region.
Resolving debates about economic development
In addition to tweaking global economic governance structures, the AIIB’s very specific focus on infrastructure investment promises to be a departure from the World Bank’s more comprehensive approach to development financing. The World Bank and the IMF have long been criticized for promoting the US-championed “Washington Consensus” model of development that became prominent in the 1980s, which stresses privatization, macroeconomic liberalization, labour market reform, and increasingly political reforms as well. China, by contrast, has favoured economic growth, prioritizing infrastructure development and slower, more experimental steps towards privatization and economic liberalization. This is in line with China’s broader foreign policy, which stresses respect for national sovereignty and political neutrality. Indeed, China’s hands-off approach has frequently been criticized for being too permissive of human rights abuses and for courting corrupt autocrats, especially in oil-producing countries.
The AIIB’s insistence on infrastructure spending alone thus goes some way in addressing China’s criticism of what it considers to be the World Bank’s “mission creep,” which insists on specific political and economic reforms. Andrew Sheng and Xiao Geng have even gone so far as to insist that “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.” Not surprisingly, the US and Japan have all but jointly expressed the concern that the AIIB’s approach to lending practices will have too few strings attached.
On this point, US President Obama and Japanese Prime Minister Shinzo Abe inserted themselves directly in this debate. As President Obama explained: “in the past, some of the efforts of multilateral institutions that the United States set up didn’t always do right by the actual people in those countries. And we learned some lessons from that, and we got better at making sure that we were listening to the community and thinking about how this would affect the environment, and whether it was sustainable.”
Indeed, if the US and Japan are drawling lines in the sand, they are framing it as a debate about the nature of multilateral lending initiatives. This could be a successful face-saving approach precisely because it could challenge China on normative grounds, not simply on political ones. And in fact, we do not yet know what kind of lending conditions and project oversight the AIIB’s still undecided governance structure will involve. Perhaps normative differences from the Bretton Woods Institutions (BWIs) will not be so stark.
Bringing in Stakeholders
It has been suggested that the AIIB is just one part of China’s push for a “silk road revival”—an economic initiative aimed at building up physical infrastructure linkages between China and its neighbours to the West. China first pursued this strategy by cooperation with its Central Asian and South Asian neighbors. However, the AIIB’s globally inclusive governance structure signals China’s willingness to cooperate with a broader array of stakeholders in promoting regional economic development and integration.
What is behind this attempt to expand the stakeholder pool? After all, China has long preferred to make bilateral investment agreements, which allow China to avoid the scrutiny of countries that not only oppose China’s no-strings-attached lending on normative grounds, but of geopolitical rivals like Japan. One plausible explanation is simply that Chinese policymakers have gradually come to realize that this bilateral approach increasingly looks bleak in purely financial terms. Some sources suggest many of China’s bilateral infrastructure financing projects in South America and Africa look to be financially precarious, potentially costing China tens of billions in delayed or defaulted loans. Moreover, as China looks for safe alternatives to invest its surplus savings—much of which is held passively in low-yielding (and even loss-making) US Treasury bonds—its policymakers might simply be looking for other countries to share the risk that accompanies many of its desired infrastructure projects.
Is the AIIB a strategic response to the US and Japanese led Trans-Pacific Partnership in investment and trade (the latter presently in the midst of negotiation)? Certainly, we cannot discount China’s desire to counter Obama’s foreign policy “Pivot” to Asia and its re-emphasis of friendship and alliance with Japan. But other important factors at play. In many ways, the institution represents a modest move to address some long-standing discussions regarding the normative orientation and governance structure of the Bretton Woods system. Likewise, the AIIB also looks to be a rational economic response to China’s growing domestic economic and foreign economic policy challenges. As such, surely the decision by the UK as well as other US allies to join the new institution was also about more than simply abandoning the declining hegemon, and jumping on board with the rising one.
Anton Malkin is a PhD candidate in global governance at the Balsillie School of International Affairs (Wilfrid Laurier University), in Waterloo, Ontario. His doctoral research concerns the role of foreign banks in China’s financial internationalization. His other areas of research include the international monetary system and international financial institutions.
He can be reached at amalkin [at] balsillieschool.ca