October 24 saw the roll out of a newly minted Asian Infrastructure Investment Bank (AIIB) in Beijing to support infrastructure development in Asia. It is a timely initiative in view of the massive infrastructure requirements of Asian economies-estimated at about $8.0 trillion between 2010-2020-and the apparent failure of the World Bank and the Asian Development Bank (ADB) to meet them. While it is a welcome move from the perspective of emerging and developing economies that are severely starved of funds, it did not go well with the advanced economies that control the levers of power at multilateral development finance institutions.
Currently, there is a serious disconnect between the ownership structure (voting power) of international development finance institutions and the current economic strengths of various countries in the world. China, whose economy is roughly the same size as that of the US, has less than a third of the US voting power at the World Bank, a trifle larger than France's-which has one-sixth of China's economy. At ADB, the situation is similarly out of whack. China has a larger economy than Japan's, yet with less than one-half of its votes, Japan , which along with the US, commands about 13 per cent of the votes at ADB, has a virtual lock on the ADB presidency, as the US has in the World Bank.
China, India and other emerging economies had long been voicing their discontents about this disjunction, but the multilateral finance institutions did little to rectify the anomaly. There was an attempt, four years ago, to make some modest changes in the voting shares in the International Monetary Fund (IMF), but even that effort stumbled at the door of the US Congress, which is yet to ratify it. Understandably, this effort was also not greeted enthusiastically by the advanced European countries that would see their voting powers shrunk.
No doubt, an impetus for the Chinese initiative in launching AIIB is its frustration with its back-seat status in existing multilateral finance institutions. With AIIB-along with its sister institution New Development Bank-China will have a shot at the leadership role in multilateral development banks. In addition, they will provide China an institutional mechanism to deploy its large pool of savings-its huge accumulated foreign-exchange reserves-to help build the infrastructure in developing and emerging economies and contribute to their economic prosperity.
From the get-go, AIIB has been enthusiastically embraced by Asia economies, including India, Philippines, Viet Nam and Thailand, for its immense developmental promise. However, conspicuous absentees from the signing ceremony were Korea, Australia and Indonesia, countries which apparently succumbed to the intensive lobbying and political pressures by the US against the establishment of AIIB, as recent news reports suggest. However, the wholesale absence of advanced economies from the initial membership of AIIB created awkward optics-of advanced economies deliberately trying to derail an important initiative of emerging and developing economies for economic advancement.
Part of this lack of enthusiasm of the US about the proposed bank may stem from insecurity about its global leadership role at this volatile time. However, its expressed objection concerns AIIB's possible failure to meet environmental standards, procurement requirements and other safeguards. This argument seems no more than a red herring at many levels. First, the current multilateral banks have also been accused of gross violations of these standards in many instances in the past. Second, AIIB will have internal multilateral disciplines like the existing development banks, as there will be other members besides China.
China has expressed its openness to membership of the U.S., Japan and other major economies of the world (but did not expect this to happen at this stage). Finally, Chinese President Xi Jinping said the new bank would use the best practices of the World Bank and ADB with regard to safeguards. It is heartening to see presidents of both the World Bank and ADB expressed their interests to collaborate with AIIB.
Not much detail is yet known about AIIB operations at this stage. Those who signed the memorandum of agreement in October will participate in the negotiations for AIIB's Articles of Agreement, which will be signed and ratified by member states by the end of 2015. The AIIA will have an authorised capital of US$100 billion, with an initial subscribed capital of around US$50 billion, of which 20 per cent will be paid up.
At the beginning, AIIB will be relatively small compared to both the World Bank and ADB. Nevertheless, such a bank can be a win-win for all countries. First, it will give Asian countries access to additional resources and more choices than exist today. Second, it can exert competitive pressures on the global multilateral lenders to improve their governance and streamline their slow, turgid bureaucratic operations. Now, many of their loans take years to process and often come attached with conditions that are controversial.
Third, it can also lead to better specialisation and efficiency, with the World Bank and ADB, institutions whose stated overarching objective is to eliminate poverty, continue to focus on health, education and nutrition, besides infrastructure-as economic development entails more than infrastructure building. Furthermore, the World Bank can pay more focused attention to Africa which is in dire need of development assistance.
Finally, if this AIIB initiative jolts the existing multilateral finance institutions to improve their governance and brings about greater buy-ins by China and other emerging economies that could be a game changer for international development. It could augur a new era of global economic cooperation between advanced and emerging economies from which all countries can benefit considerably.
M.G. Quibria is a Professor of Economics at Morgan State University, Baltimore, MD 2128, and U.S.A.
mgquibria.morgan@gmail.com