Should Bangladesh be cautious about Asia\\\'s new knight in shining armour?

In a recent interview, Bangladesh Finance Minister AMA Muhith highlighted the fact that Bangladesh has fallen into a 6% GDP growth trap, and attaining the much-elusive 7-8% growth requires larger investments.
Investments, in turn, require greater development in infrastructure. Consequently, Bangladesh joined a league of what is now 21 Asian nations in signing a Memorandum of Understanding to establish the Asian Infrastructure Investment Bank (AIIB).
The International Chamber of Commerce (ICC) Bangladesh also welcomed the initiative in a recent conference in Dhaka. Intriguingly, outside of Bangladesh, the arrival of the AIIB has been met with mixed reactions at best. Some see it as a possible threat to the traditional multilateral lending giants, the World Bank (WB) and the Asian Development Bank (ADB). Others have added to the rising controversy by portraying the initiative as an attempt to lure South and South-East Asian countries under Chinese control.

This sort of scepticism solicits a single question. Is the AIIB truly the long-awaited answer to Bangladesh's infrastructural woes, or just China's indignant response to their lack of influence in the major multilateral lenders?
Infrastructure in search of impetus
Bangladesh's infrastructural inadequacies have been underscored over the years in numerous reports by the World Bank and the Asian Development Bank. It remains one of the core factors hindering transition to middle-income status. According to the World Economic Forum's Global Competitiveness Report (2014-15), "inadequate supply of infrastructure" has been identified as the most problematic factor for doing business in Bangladesh.
A look at the table above, which presents ranking in infrastructure-related indicators in Bangladesh and similar frontier economies, makes it evident that Bangladesh desperately needs external assistance in infrastructural development. But external assistance comes with its share of baggage. The traditional multilateral lenders often demand stringent policy reforms which are not always compatible with short-term economic objectives or capacity in Bangladesh. Additionally, since the WB and ADB have generally concentrated on poverty reduction, there is a gaping hole in the search for an institution focused solely on infrastructure development. Consequently, the AIIB's accelerated loan application process and relatively easier monitoring conditions could be the perfect formula for Bangladesh to climb up the rankings shown above.
While these factors may paint the AIIB as the answer to Bangladesh's infrastructural needs, one must remember that everything that shines is not gold. We need to understand how much change the bank can actually bring to Bangladesh.
Greater capitalisation not an option, but a necessity
It is widely known that Asia needs $8 trillion investment in infrastructure in the period 2010-2020 to sustain growth, according to ADB estimates. Given that the bank is starting with an initial capital of only $50 billion, Bangladesh might have to enter a fierce tug-of-war with other nations to get a slice of development finance from AIIB. There is always a possibility that nations like India, which is the second biggest contributor in capital in AIIB after China, will get precedence over Bangladesh when it comes to allocation of limited loans.
However, China's approximately $4 trillion foreign reserves can be used to increase capital once the bank gains momentum. The only potential concern is a rapidly rising external debt in the host nation which stood at $863 billion at the end of 2013 - up from $390 billion in 2008 (Source: State administration on Foreign Exchange).We have to assume this growth rate of external debt will be contained within tolerable limits, and that China maintains its stable terms of trade. Then we can conclude that they have more than sufficient reserves to boost capitalization of AIIB.
One-man shows are generally sub-optimal
The fact that China, which has already contributed half of current capital, might hold an even greater share in AIIB in future seems all too likely. This implies that they might eventually monopolize the new multilateral institution (some might argue that it already has). A recent article characterized the AIIB as an institution where member countries will have a more equitable say in the running of the institution (A new option in International finance, The Daily Star, October 28, 2014). Given that a bulk of the financing is coming from one country, how do we know that? As it is, our bilateral trade is heavily tilted in China's favour. Naturally, all one can infer is that Bangladesh will have to maintain cozy economic and diplomatic ties with China if it were to depend on the AIIB for development funding in infrastructure.
But that is not the only downside to this potential domination. China's marred reputation in international assistance and lending raises serious question marks over whether the AIIB will maintain global standards in governance. A look at the "Aid Transparency Index" prepared by "Publish What You Fund" might even trigger alarm bells. China came last in the ranking of 68 donor nations for the last two years (2014 and 2013) and second from last in 2012. Is it any wonder that countries like Australia have refused to join the AIIB citing lack of transparency and governance arrangements?  
What guarantees effective utilisation?
Setting aside arguments against the credibility of the lender, another important consideration is effective utilization of development funds by the borrower itself. It is common knowledge that over the years large portions of development finance have been lost to corruption and misuse. According to a 2009 report by the World Bank's own Independent Evaluation Group, the International Development Association (the lending arm of WB) "does not protect its funds adequately from theft and diversion". One must wonder if the largest multilateral development bank, with seven decades of experience, cannot always ensure effective utilisation of funds, whether a new-comer can do this any better. Therefore, without the knowledge of the usual lenders, ensuring effective utilisation of development aid entails greater responsibility from Bangladesh when working with AIIB.
Potential for conflicting conditionalities
Finally, while the decision to join the AIIB is fuelled by the desire to move away from strict "conditionalities" the WB/ADB demand, this may not necessarily bear fruit in the long-run. Loans from AIIB will not be "condition-free" - even if they are relatively easy. There is a high probability of divergence in lending conditions between AIIB and the WB/ADB. If this divergence results in contradictory reform requirements, Bangladesh runs the risk of having to choose between opposing geopolitically-oriented financial institutions. This could threaten future financial opportunities from the traditional lenders which have provided around half of all foreign aid to Bangladesh since 1972(Source: World Bank Bangladesh and Asian Development Bank Bangladesh).
Takeaways: Welfare maximisation hinges on collaboration
Advancement in infrastructure is arguably the steepest mountain that Bangladesh needs to climb to reach its destination of middle-income status. Our 6-6.5% growth rate is perhaps the maximum potential of current labour and capital endowments. To push beyond the current potential, external assistance is critical. We have, without a doubt, benefited from the financial aid (as well as knowledge on policy-reform) by multilateral development banks over the last four decades. What we need to remember is that, while a new option is always welcome, priority should not shift from the experienced players. The AIIB does hold substantial potential for helping Bangladesh overcome infrastructural inadequacies - but its true value to developing countries like ours depends on collaboration with its so-called rivals. Because if these multilaterals work in tandem with Bangladesh, we can complement reduced poverty with stronger infrastructure. Ultimately, it is this collaboration, and not destabilizing competition, that will help Bangladesh combat its development challenges and emerge as a regional powerhouse in South Asia.
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The writer is a graduate student in International Economics, Johns Hopkins University. He can be reached at:
[email protected]