18 May 2016
The Asian Infrastructure Investment Bank will aid the global economy.
At the end of June 2015, 57 prospective member-states gathered in Beijing to sign the articles of association for an institution that China had first mooted in 2013, the Asian Infrastructure Investment Bank (AIIB). At the time of its launch, 50 countries had signed the bank’s charter, and another seven were waiting for final domestic approval. China had managed to win the endorsement of a large number of countries, including the UK and those in Western Europe. Headquartered in Beijing, the development bank was formally launched by President Xi Jinping on 16 January 2016.
This widespread endorsement was telling, since the run-up to the launch was fraught with controversy. When the AIIB was formally announced on 24 October 2014, only 20 countries had agreed to be its founding members. The US, UK, Japan, South Korea, and Indonesia were not on the list. It included a few countries from Central Asia and West Asia, members of the Association of Southeast Asian Nations(ASEAN) excluding Indonesia and five countries from Southasia – India was the largest non-Chinese founding member.
Despite the fact that Beijing had put out an open invitation to join the new initiative, and many countries like Australia, Indonesia and South Korea had expressed an interest, there was limited participation. Something or someone had dampened that interest, leading to the no-shows in October. However, matters changed between October 2014 and June 2015, with many countries that had expressed scepticism or said they would “wait and watch”, changing their minds and joining the AIIB as founding members. There was a rush of applications as the deadline approached.
The final tally of 57 applicants, though lower than the World Bank’s membership of 188 and the Asian Development Bank’s (ADB) 67, was significant given the concerted US campaign against the bank. The US refused to join on the grounds that the governance of the bank would not meet ‘required’ standards, with China having a veto on decisions and the likelihood that the impact of financed projects would not meet international safeguards on environment, labour and human-rights. The US also campaigned vigorously to keep its allies, principally the UK, European countries like Germany, France and Italy, and Asia-Pacific partners such as Japan, South Korea and Australia out of the AIIB. In the event, of these countries only Japan stayed away.
While the AIIB is clearly seen as an organisation led by China, the reference to China’s veto power, though technically correct, concealed important features of the distribution of voting rights in the organisation. Twelve percent of voting rights are distributed equally amongst all members, while another three percent each is given to founding members. The remaining 85 percent is distributed on the basis of equity. Therefore, though China has a shareholding of 30 percent, its voting right is restricted to a total of 26.06 percent. This has two implications: First, all member countries, have a voice irrespective of how much capital they contribute. Second, China has a veto only on those decisions which by virtue of being considered important require a super majority of 75 percent of the votes.
Eye to Eurasia
Though smaller than existing multilateral banking institutions, the AIIB is no pushover. With an authorised capital base of USD 100 billion, the AIIB as a start-up compares well with the Asian Development Bank, with around USD 160 billion of capital, and the World Bank, with around USD 220 billion.
The significance of the AIIB increases when we recognise that it is part of a slew of financing initiatives that China is either promoting or engaged in. The New Development Bank (NDB) or ‘BRICS Bank’, for instance, is far larger in scope, though it too has an authorised capital of USD 100 billion. While the NDB is slated to be a global bank, with its five founding members accounting for large chunks of the world’s population, land area and GDP, the AIIB is to have a definite Asia focus. What is more, 75 percent of the AIIB’s capital is from the Asian region, placing control in the hands of Asian governments. It also has an explicit infrastructure focus that would, among other things, increase connectivity within Asia. Since Japan has stayed away, China and India would have leading roles in this process.
But there is more power behind the China-led Asian financing thrust. Soon after the creation of the AIIB was announced, President Xi Jinping declared the launch of a Silk Road Infrastructure Fund, to which China will contribute an initial USD 40 billion, but which will be “open” and welcome other investors from Asia and elsewhere. The Silk Road Fund will, according to its chief executive Jin Qi, function more like a private bank and “seek reasonable mid- and long-term investment returns and protect the rights of the shareholders.” Finally, China has initiated a plan to establish a Development Bank of the Shanghai Cooperation Organization (SCO), whose members include China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, and Uzbekistan (with others like India slated to join). Here too China will be contributing the bulk of the capital, and the bank would serve as a vehicle to strengthen its investments in central Asia.
Armed with these instruments, China has launched the “One Belt, One Road” Plan, a pet project of Chinese president Xi Jinping. The plan combines two initiatives announced by Xi in 2013 – the “Silk Road Economic Belt” and the “21st Century Maritime Silk Road”. Recreating in different forms the ancient Silk Route, the “One Belt, One Road” project aims to establish connectivity within the Eurasian region and link it to Africa and Western Europe, by combining overland road and rail routes and other infrastructure such as oil and natural gas pipelines (the “Belt”), with a maritime counterpart linked by a network of ports and coastal infrastructure projects (the “Road”). This would connect China, through Central Asia, with Russia and Europe, as well as through hubs in South and Southeast Asia to East Africa and the northern Mediterranean Sea. The two major initiatives within the belt-and-road project of relevance to Southasia are the China-Pakistan Economic Corridor (CPEC) and the Bangladesh, China, India, Myanmar (BCIM) Corridor. In April 2015, China committed USD 46 billion to the CPEC initiative, which would extend the Karakoram Highway to the Gwadar port in Pakistan, providing China direct access to the Arabian Sea, and will give Pakistan access to markets as far away as China’s Xinjiang province. The BCIM, on the other hand, will give China access to India’s resource-rich Northeast and India access to markets in China and the ASEAN.
Motivation and strategy
According to economist Robert Skidelsky, famous for his biography of John Maynard Keynes:
China’s motive for reviving Pax Mongolica is clear. Its growth model, based largely on exporting cheap manufactured goods to developed countries, is running out of steam. Secular stagnation [a condition of limited economic growth in a market economy] threatens the west, accompanied by rising protectionism sentiment. And, although Chinese leaders know that they must rebalance the economy from investment and exports to consumption, doing so risks causing serious domestic political problems for the ruling Communist party. Reorienting investments and exports toward Eurasia offers an alternative.
Well before the establishment of the regional development banks, China’s emphasis on building connectivity and establishing trade links through investments in the Eurasian continent was evident in the activities of the China Development Bank (CDB) and the China Ex-Im Bank (CEIB). A study of 67 Chinese government-related international loans totalling USD 49.4 billion disbursed between January 2014 to March 2015, by China Investment Research, found 91 percent of all loan commitments by CDB and CEIB were to projects in Asia, Africa and Europe. Further, if six Latin American loans and 10 Central and Western African loans are excluded, a little more than three-fourths of the loans were to entities and projects in or near the Belt and Road Initiative. Infrastructure projects accounted for 52 percent of total loans and another 30 percent went towards trade-related financing.
There are strategic disadvantages associated with dramatically enhancing direct financing to a particular region, as it may create fears of possible dominance and elicit hostile reactions. No one believes that such foreign investment and/or lending decisions are motivated by pure altruism. Both the NDB and the AIIB are instruments of international diplomacy in search of political and economic gains. This possibly explains China’s willingness to share power in institutions that it has intitiated and that are likely to be regionally very influential. Strategically, China’s real success is its ability to win partnership with Russia and India, two neighbours who may be threatened by signs of Chinese dominance over Eurasia, and its clever isolation of the US and Japan on the issue of membership of a new, regionally focused multilateral bank.
China’s decision to accommodate (in fact, attract) partners is, in fact, remarkable, especially since the other major partners in AIIB include countries with whom China’s relationship has not been congenial historically. It points to a shift in China’s global strategy. In the era of rapid growth, when China was focused on winning new markets and obtaining access to crucial raw materials and intermediates, it functioned as a loner. It sought to deal bilaterally with governments, offering infrastructural and other support in return for access to markets or raw materials. This was no different from what today’s developed countries have done, and continue to do, with respect to their erstwhile colonies or spheres of influence. China was perhaps only doing it better. In any case, having one more player interested in their markets and resources only increased the bargaining power of developing countries. However, as the presence of China grew in different countries and continents, it became the butt of criticism, encouraged by the erstwhile imperial powers. Criticism that China was rapacious when it comes to buying up resources, or that it was wantonly violating environmental and labour standards, or that it was turning a blind eye to human-rights violations became common. The fact that China did on occasion implement infrastructural projects with labour imported from home or acquired tracts of land by displacing local populations helped those who had launched this campaign.
However, as always, having sped in one direction and perhaps gone too far, China has chosen to correct its course. The AIIB, Silk Road Fund and the NDB are suggestive of such corrective interventions. A major innovation that helped the US appear a less rapacious imperial master when it won global hegemony from the UK, was that it substituted colonial devastation and plunder with a more veiled and often indiscernible way of ensuring control over markets and resources, and transferring surpluses from the periphery to the centre with multiple means of unequal exchange mediated by the “market”. A part of that strategy was the use of the Bretton Woods institutions – the IMF and the World Bank – created to govern the post-war international economic order, to discipline governments of developing countries so as to keep their markets open to imports and their economies open to foreign investors. This placement of multilateral organisations between the hegemonic power and the hegemonised nation, rendered the motives and practices of the imperial power more opaque.
Despite China’s growing presence in the world economy, and the international clout its large foreign reserves ensure, obtaining a position of influence in the World Bank (controlled by the US) and the ADB (controlled by Japan) has been out of the question. The US and Japan have 23.85 per cent of the voting power in the World Bank and 22.87 percent in the IMF. Efforts to even marginally shift the distribution of quotas and voting power in the IMF, for example, which were agreed to by the US administration have not gone through the US Congress. The US retains the right to nominate the leadership of the World Bank, and the head of the IMF is always European. In Asia, Japan, a loyal ally of the US, has been given control over the ADB. In sum, the US and its allies had tied up things in their favour, and more or less froze it thus.
China has therefore chosen to establish a parallel multilateral system. By using its foreign exchange surpluses to emerge a founding leader of the NDB and the AIIB, China seems to be taking a leaf out of the imperial handbook and adopting the same strategy as the erstwhile imperial powers. But by giving other founding members of the AIIB a reasonable 15 percent voting right and restricting its own voting right to 26.06 percent (irrespective of share in equity), China has won support by providing some evidence of being more democratic. It has managed to persuade a wide array of nations including the UK and European powers to join the board of AIIB, which China would control for all practical purposes.
Another implication of the creation of these institutions also needs to be stressed. While expressly aimed at addressing the shortage of long-term capital for investment in crucial infrastructural areas and capital intensive industries, support for these institutions is also motivated by the disillusionment of some developing countries with the Bretton Woods institutions and the leading regional development banks. The initiative for establishing the new institution has not come from the developed countries but from a group of middle-income countries, especially China and India. Thus, even if it is likely that the voting structure in these institutions would be skewed, it helps correct the imbalance and the structures governing the allocation of such financing relative to the contribution of individual countries to global development financing. The new institutions also alter the nature of competition between institutions in the development-banking sphere. How much difference this would make to the quantum, pattern and quality of financing is yet to be seen.
However, the emergence of the NDB and the AIIB is undoubtedly positive for a number of reasons. First, given the huge estimates of investment required for infrastructure in less developed countries across the world, the World Bank and existing regional development banks are clearly inadequate to provide the needed financing. Furthermore, the reluctance of the dominating nations to relinquish power makes it difficult for these institutions to expand their capital base and therefore their lending volumes. The new institutions will allow for the mobilisation of additional resources. It is unlikely that the commitment of resources by China to NDB and AIIB would be at the expense of contributions to the World Bank and other regional development banks, or its financing of developmental activities through the CDB and CEIB.
Second, the availability of alternative sources of financing increases the manoeuvrability that less developed countries have, allowing them access to finance on better terms and conditions. Even if lending by the new development banks is driven by the interests of the nations controlling them, competition between the multilateral development banks (MDBs) can make a significant difference to the terms and conditions set by the lender. At the opening of the NDB, Chinese Finance Minister Li Jiwei, while not referring to the World Bank or the ADB declared:
This bank will place greater emphasis on the needs of developing countries, have greater respect for developing countries’ national situation, and more fully embody the values of developing countries.
Third, inter-MDB competition can make a significant difference to the attention paid to factors like labour conditions, resettlement and rehabilitation requirements, and environmental impacts of the projects being financed. As noted earlier, the US, ironically, has raised the alarm suggesting that the AIIB would be characterised by governance shortfalls and failure to meet international environment and labour standards because of China’s domination. There are few who would agree that the governance of the Bretton Woods institutions or the regional development banks is completely praiseworthy in this regard. The environmental and human-rights record of projects funded by the World Bank and ADB have been the target of much criticism from civil society organisations and other democratic forces. But the fact that this issue has been raised by a culpable US suggests that better governance and increased adherence to environmental and labour standards may be a fallout of the competition that is being unleashed.
That having been said, exaggerated expectations are not in order. An example of those is the claim that new ‘Southern’ institutions such as the NDB and the AIIB can be pressured into improving upon the record of existing multilateral institutions with respect to the social, environmental and human rights impacts of developmental lending. It must be recognized that the record of the member governments on these fronts is not unblemished. Development banks are institutions established by the state to facilitate capitalist development. Inasmuch as the latter is driven primarily by the thirst for profit, transgressions with respect to labour or environmental rights are more than likely. It requires separate interventionist measures, rather than mere development banking guidelines, to ensure that such transgressions are minimised, or preferably, do not occur. In this, the structure of control of the AIIB and NDB, by shifting the locus of decision-making to the global South, permits a greater role for civil society organisations from the affected countries in influencing the standards maintained by these organisations.
Even more far-fetched is the idea that in the context of the recent agreement on the post-2015 Sustainable Development Goals (SDGs), these new institutions can be called upon to provide the financing needed for the social infrastructure required to advance those goals. While the social returns to such investments (in sectors varying from improved sanitation and health to basic education and skill development) may be high, the private returns are low, requiring the government to finance such projects through taxation. Development banks, while possibly satisfied with lower returns than high-profit commercial sectors, would need to show healthy balance sheets. That in itself precludes certain kinds of lending. Further, the financing activity of these entities must necessarily be supported with borrowing from the open market. While the implicit sovereign guarantee of the governments behind these organisations may help them borrow at relatively favourable rates of interest, those rates would be by no means low. So responsible business practice would require directing the resources to reasonably profitable projects that are backed by host country governments. This too would limit the engagement of these institutions with projects in which returns are predominantly social rather than pecuniary. This limitation would be much more than in the case of national development banks in individual countries, which may be supported with concessional finance from the government’s budget or the central bank. Such limitations can be partly overcome only if the AIIB or the NDB become the instruments to channel any concessional assistance that member countries may provide to their less developed neighbours or partners.
According to reports, when accepting the invitation for membership of the AIIB, some countries such as Nepal had suggested that there should be a grant and/or element associated with lending to poor countries by the AIIB, besides flexibility on the aid conditions. The presence of both China and India as lead partners in the AIIB makes it more than likely that the bank would emerge a major player in the SAARC region, where it would combine with bilateral aid flows from these countries to finance infrastructure projects. Collaboration between two contesting neighbours would help in financing and implementation of large projects of other countries in the region. It may also, however, raise fears of more unified investor-donor power that leads to disregard of environmental or labour standard concerns. This makes the role of civil society organisation even more relevant.
The real loser is likely to be the US. When after the 1997 financial crisis, Japan mooted the equivalent of an Asian Monetary Fund to provide balance of payments support to countries in the region in times of difficulty; the proposal died quickly because of US opposition, on the grounds that it would unnecessarily duplicate activities of the IMF and World Bank, and dilute disciplinary conditions. This time, however, the US is faced with isolation. Not only did the UK decide to suffer rebuke from the US, which it has faithfully supported as a strategic partner in the past, and become a founding member of AIIB, but many other US allies, like Germany, South Korea, and Australia, also opted to register as founding members.
The AIIB is perhaps one way in which China is calling the US’s bluff that it still has the might to fully determine the global balance of power. It does not take much to recognise in China’s moves an effort to leverage its foreign exchange reserves (estimated at USD 3.7 trillion currently) to advance its economic and strategic interests in the region. This decision to take control of the eventual deployment of its surpluses seems inevitable. What is remarkable, however, is the focus on infrastructure. This is an area where the deficit is huge globally. The estimated requirement of infrastructure financing till 2020 is USD 8 trillion, with Asia alone requiring USD 800 billion a year for the foreseeable future. By some estimates India alone needs USD 1 trillion to finance an ailing infrastructure sector. Much of that investment is not only central to growth but also for realising social and sustainable development goals post-2015.
Governments that have almost all resorted to reduced spending because of the fears of financial crises precipitated by inflation and balance of payments deficits have largely withdrawn from infrastructural funding. The private sector is not able to enter infrastructural projects without direct government support. To do so through public-private partnerships (PPPs), defeats the purpose of bringing in the private sector. The PPP framework, which was much touted for long, has been recognised to be a failure. The multilateral development banks are nowhere near filling the breach – ADB, for example, allocates only about USD10-13 billion a year to infrastructural projects.
Coming into a context like this, with large volumes of infrastructural funding is a masterstroke. Countries – including those in Southasia – desperately looking for infrastructural finance want to be in the game. Others that have seen capacities for producing equipment and raw materials for infrastructure lying unutilised don’t want to be outsiders. So ‘political’ objections to the AIIB, influenced by a US that can offer little in return for support, have been quickly dropped.
Meanwhile, seeing the BRICS, and China in particular, “exploiting” the development and infrastructure financing platform for a foray in economic diplomacy, the G20 countries as a group are looking to play a role. At their meeting in Brisbane in September 2014, the group decided to launch a Global Infrastructure Initiative centred on a Global Infrastructure Hub in Sydney that will share information and match investors with needed projects. This is merely an attempt to strengthen the existing multilateral development finance network with a dose of coordination. Not surprisingly the leading MDBs – the African Development Bank, Asian Development Bank, the European Bank for Reconstruction and Development, the European Investment Bank, the Inter-American Development Bank, the Islamic Development Bank, the World Bank and the IMF – issued a statement which said: “We stand ready to bring our experiences and skills to the G20’s work on infrastructure and to support a proposed new global infrastructure hub.”
Besides, the World Bank has decided to step up its presence in the infrastructure area by presenting itself as a body that can coordinate investments in developing countries in infrastructure. Since governments are not in a position to provide for such money either directly, through the World Bank or through the new Southern institutions being created, the Bank has set up a Global Infrastructure Facility, which it defines as “a global open platform that will facilitate the preparation and structuring of complex infrastructure PPPs to mobilise private sector and institutional investor capital.” This may be difficult, however, for an institution that has thus far delivered a maximum of USD 24 billion a year (in 2014) for the purpose.
However, all of this competition bodes well for the global economy in dark times. International rivalries seem to be triggering expenditures and financing forays that can increase demand and spur growth – a process that could not be put in place by a globally agreed and coordinated Keynesian thrust. Developing countries, including those in the SAARC region, would gain not just from more availability of crucial infrastructure, but also from the buoyancy that such spending generates.
~ C P Chandrasekhar is a Professor at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi, India. He is the co-author of Crisis as Conquest: Learning from East Asia and The Market that Failed: Neo-Liberal Economic Reforms in India. He is a regular columnist for Frontline, and BusinessLine.