Home / Opinion / AIIB: China takes a different path

The Asian Infrastructure Investment Bank (AIIB), a multilateral international financial institution proposed by China, has attracted a lot of attention, ruffled many feathers and upset several diplomatic configurations.

The AIIB, with a goal to fill the vast infrastructure vacuum in Asia ($8 trillion according to some estimates), is led by China with most Asian countries slated to be on board by October last year. The advanced countries, mere observers until this month, were jolted as the UK decided to join the AIIB in early March. This invited a sharp response from the US. Nonetheless, allies such as France, Germany and Italy quickly followed suit while Australia, South Korea and Japan were prompted into rethinking their stance.

In the latest development, the International Monetary Fund (IMF), World Bank and Asian Development Bank (ADB) have expressed their support for the China-led international bank, while the US now proposes to work in partnership.

The US’ worry was whether the AIIB would meet high standards, especially on governance (Japan’s concern too), environmental and social safeguards. There are other views on AIIB and China’s intent as well. Some consider that China’s bilateral deals where it loaned billions to several Latin American and African nations have worn out as commodity prices crashed and defaults surfaced.

Another view is that China is compelled to invest abroad due to its massive domestic overinvestment, need to rebalance towards consumption-led growth and smother exchange rate pressures as it liberalizes its capital account.

Yet another fear is the AIIB is posited as an alternative to the Fund-Bank institutions, whose governance is dominated by the advanced countries. Their setup, structure and slow pace of reform has long been a thorny issue for large emerging nations like China, Brazil and India. However, there are others who believe AIIB will inject much-needed competition for existing multilateral lenders.

Most consider AIIB as the clearest symbol yet of China’s growing economic and political clout. Enforced by a worldwide setting of weakened economies, it is China’s burgeoning surpluses that is, frankly, call the shots, according to this viewpoint.

China has assured the AIIB will be no competitor. That it will rather supplement the current multilateral lenders by boosting overall financial resources for infrastructure investments. The argument being that the establishment of the Asian Development Bank and the European Bank for Reconstruction and Development in the post-war decade hadn’t really weakened the two Bretton Woods institutions.

Time will shed light on these issues. There is, however, a pertinent contrast with a parallel situation that surfaced three decades ago. Japan was confronted with similarly large trade surpluses with a Yen revaluation (against the dollar and Deutsche Mark) under the Plaza Accord (agreement with France, West Germany, Japan, the United States, and the United Kingdom in 1985). As Japan sought to strengthen its own absorption by domestic expenditure-raising policies, it had to recycle its current account surpluses for absorption abroad.

The switch resulted in an increase in financial flows from Japan to the developing world, which however were mostly routed through the World Bank, IMF and the ADB. Over 1986-1987, Japan made major contributions through several extensive plans at these institutions (about $30 billion of direct, untied funds). Besides, Japan also increased its own official development assistance on tied, concessional terms.

In this sense, China is taking a different path, which is probably what evokes strong reactions. This backdrop also provides some perspective to the recent US response: it sees the AIIB as strengthening the existing international financial architecture and that co-financing projects with the World Bank or the Asian Development Bank will help guarantee high quality, time-tested standards are maintained besides ensuring the AIIB complements rather than competes with existing institutions.

Renu Kohli is a New Delhi-based macroeconomist.

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