The Asian Infrastructure and Investment Bank: Questions that should be asked

14 April 2015

The Obama Administration is taking heat for its refusal to join China’s proposed Asian Infrastructure Investment Bank (AIIB) and has now taken the limited step of suggesting that the World Bank work in concert with the new China-led bank. No one doubts the massive need for infrastructure development in Asia – the Asian Development Bank Institute estimated it at US$8 trillion by 2020. The AIIB is controversial because it will be the first major non-Western initiated international development organisation to compete with the institutional system established in Bretton Woods nearly seven decades ago. It is a Chinese initiative in direct competition with the World Bank (1947) and the Asian Development Bank (ADB, 1966).

The White House has expressed concern that the AIIB will not live up to the “high standards” of the World Bank and ADB, especially over environmental, governance, and social safeguards. Many have criticised the Obama Administration for taking issue publically with its allies who have signed up, especially the UK, Germany, and Italy. The White House told the Financial Times it was “wary about a trend toward constant accommodation of China, which is not the best way to engage a rising power.” Nonetheless, Australia and South Korea, apparently pressured by the US not to join, are getting ready to sign up. Christine Lagarde, Managing Director of the International Monetary Fund (IMF) has now said that the Fund will be delighted to cooperate with the AIIB, affording it additional legitimacy.

Most commentary argues that the US must either sign-up or back off and let the AIIB gather members. However, a number of key questions remain and the best path forward is not entirely clear.

The first is a systems question: Why is China creating an AIIB so directly in conflict with the ADB? Perhaps it is a desire to expand its influence in Asia for geopolitical and commercial reasons. Perhaps it doesn't like Japan’s influence in the ADB (Japan is the largest shareholder and all ADB presidents have been Japanese) or is concerned with America’s influence in that body. But perhaps it is a reaction to a global system conceived in liberal democracy and dedicated to the rule of law; a system that emphasises transparency and free markets. China’s system favours economic growth while subordinating other values.

If the first of these reasons, why didn’t China simply put up the vast pot of money that it has promised to the AIIB into the ADB and use that power to wrest more control? Money buys voting power in the ADB, and the World Bank. Why create a whole new institution rather than reforming the existing one? But if it is the last of these reasons, well, what does a Bank with Chinese characteristics look like?

The second is a budget question: Will all the new European recruits add more to their national budgets to fund the AIIB, or will their contributions be deducted from what they would have allocated to the World Bank and the ADB? Is AIIB a net gain to global development investment, or simply a reallocation to a new institution with uncertainties as to structure, strategy, standards, rules, and procedures?

If it is a zero-sum proposition, and it is hard to imagine that it is not, wasn’t the US correct to encourage its allies to stay dedicated to the ADB?

The third is a political economy question: If the countries signing up for AIIB are not “accommodating” China, why are they joining? One clear explanation is that they hope to gain trade and investment advantages in Asia. If the Europeans are unhappy with the ADB’s performance, why not simply use their internal influence (having as a group the third largest bloc of voting power) to reform the ADB? Why join in establishing a new institution?

The fourth is a competition question. Will competition by the AIIB increase investment and improve outcomes as economists might hope? Will competition generate a “race to the top” in terms of development performance, or might it force a race to the bottom as recipient countries bargain between them and competition lowers standards of performance?

Finally, as a strategic matter, can the US most effectively influence the AIIB from within or from outside? This is a counterfactual question to which the answer likely can never be known. But it is a question any American administration would face. China is re-claiming its position as a great power. It has, for the past half-decade at least, boldly used its growing economic power to punish and reward trading partners. It is raising its military profile, claiming geographic space, and aggressively consolidating domestic power in the new leadership. It is certain that China has an eye to a global trading system with more Chinese influence. The AIIB could be a key first step. Smaller trading partners have the luxury of making a simpler cost-benefit calculation. The US response matters more and requires thoughtful deliberation.

Robert A. Rogowsky is a Professor at the Middlebury Institute of International Studies and an Adjunct Professor at the School of Foreign Service, Georgetown University. He served as Chief Economist of the US International Trade Commission.

Alan Wm. Wolff is a member of the E15 Expert Group on Trade and Innovation He is a former US Treasury lawyer and a former US Deputy Trade Representative. He is Senior Counsel with the firm of McKenna Long and Aldridge. He is Chairman of the National Foreign Trade Counsel and Co-Chair of the Innovation Policy Forum of the US National Academies.