C3S Paper No. 0010/ 2015
We are preparing a report about the development of the Asia Investment Infrastructure Bank (AIB) in the region. We are interested in determining how competitive the AIIB will be compared to the Asian Development Bank (ADB) and the World Bank. Both these institutions officially state the AIIB is a very good move since it could allow more development in the region. But ironically, the US tried to convince Australia not to take part in it for its lack of commitment to transparency (among others). We are also interested in knowing more about the influence China will extend in the region through this new Bank – with a particular focus on Cambodia. We request your assessment of the following issues.
Q1. Do you think the competition the AIIB presents to the ADB and the World Bank can be beneficial for the region in the long run?
ANSWER: The Asian Infrastructure Investment Bank is not so much a competitor of the ADB and World Bank but an alternative source of funding for infrastructure development. Neither the ADB nor the World Bank presently can meet the demands for infrastructure development in the Asian region. The World Bank presently has an annual lending capacity of US $15 billion. In 2013 the World Bank and ADB provided nearly US $30 billion in loans to the region. The President of the World Bank, Jim Yong Kim, estimated that there is an annual demand for infrastructure development of at least US $1 trillion. This far exceeds what the ADB and World Bank can deliver. The demand for such investment is projected to rise quite markedly in coming years. In 2009, the ADB estimated that that the region would need US $8 trillion in infrastructure investment by 2020. The United States argues that reforms currently being adopted by the World Bank would raise its annual lending capacity to US$28 billion and that reform of the ADB could boost its landing capacity by twenty to forty percent. Together the reform of the ADB and World Bank would meet capacity demands for infrastructure development.the U.S. argues. China is frustrated that its demands for reforms of the major international financial institutions (ADB, International Monetary Fund and World Bank) to reflect the rising economic power of the BRICS – Brazil, Russia, India, China and South Africa – has been so tardy. China was a key mover in founding the “BRICS Bank” headquartered in Shanghai. China has an estimated US $4 trillion in international reserves. It needs to invest more of its capital offshore and the AIIB would serve as vehicle to support this process.
The AIIB is expected to be set up by the end of this year and it will be initially capitalized by China to the tune of US $50 billion. China expects other private financial institutions and bank members to contribute another US $50 billion. This compares to the ADB and World Bank which are capitalized at US$175 billion and $220 billion, respectively. However, the China Development Bank currently provides more funds for development in the region than either the ADB or World Bank There is another view that argues more investment in infrastructure development can be generated by enlisting the private sector. The AIIB along with the ADB and World Bank will perpetuate state funding as the source of infrastructure development rather than enlist the private sector. However, there is a risk that the AIIB could undercut already established global standards and practices upheld by the ADB, IMF and World Bank. This could result in lower international lending, environmental and labour protection standards as well as the erosion of safeguards on loans designed to prevent abuses and protect vulnerable populations.
Q2. Are you confident that the AIIB will be a good alternative given that it has been trying to strengthen its integrity and rule-based approach within its governance system?
ANSWER: Whether or not the AIIB will meet current global standards of integrity, transparency and governance is an open question. These issues were not directly addressed by the Memorandum of Understanding among China and twenty-one countries that agreed to join the AIIB on October 24th. Initially China offered Australia a senior role in running the AIIB and gave Australia a two-day deadline to decide whether or not to join as a founding member. China later extended this deadline to the end of 2015. It is clear from Australia’s discussions with Chinese officials that China is sensitive to these issues and is willing to make compromises to meet Australia’s concerns. Nevertheless, there are deep concerns that the AIIB, headed by a Chinese president, Jin Liqun (former head of the China International Capital Corporation), will be an extension of Chinese state influence.
Q3. What does it represent for “influential nations” to be part of this new institution and how do you explain the silence of Japan, Australia & South Korea on their participation?
ANSWER: Japan, which traditionally heads of the Asian Development Bank, is opposed to the AIIB because it represents a challenge to the existing order by Tokyo’s rival, China. Prime Minister Abe personally lobbied Australian Prime Minister Tony Abbott against joining the AIIB. Japan also exerted similar pressure on South Korea. The United States also played a strong role in lobbying Australia and South Korea. President Barack Obama, Secretary of State John Kerry, and Treasury Secretary Jack Lew all lobbied their Australian counterparts. In addition to U.S. pressure, all three countries – Australia, Japan and South Korea – held legitimate concerns about transparency, governance, procurement, environmental impact, lending standards, investment guarantees, debt sustainability, social safeguards, human rights, and staffing regarding the new AIIB. South Korea looked to Australia for guidance and followed Canberra’s lead in not signing the October 2013 MOU. In addition, the National Security Committee of Australia’s Cabinet decided against Australian’s membership of the AIIB on strategic grounds. The National Security Committee concluded that China would convert its financial power through investment loans into direct military advantage in vulnerable countries close to Australia. In other words, the AIIB would function as an instrument to advance China’s national interests. There is a growing view in the three recalcitrant countries that it is better for them to join the AIIB process early and exercise influence from within in shaping its governance structures than to remain outside and be viewed as harping critics. South Korea, for example, has asked China to improve the governance structure of the AIIB. The United States has shifted its position from opposing the AIIB and lobbying its friends and allies to follow suit, to a policy of “wait-and-see” as China responds to concerns expressed by Australia and South Korea. China’s present position would allow late comers to become founding members of the AIIB by signing and ratifying its article of agreement expected to be completed this year. As of January 6, twenty-four states have indicated their willingness to become founding members of the AIIB. New Zealand was the most recent state to join.
Q4. What are the main challenges for ASEAN countries to ensure the success of this inter-governmental regional institution?
ANSWER: Nine ASEAN countries signed the October 2013 AIIB MOU – Brunei, Cambodia, Laos, Malaysia, Myanmar, the Philippines, Singapore Thailand and Vietnam. Indonesia signed the MOU a month later. China is already committed to supporting ASEAN’s goals of improving interconnectivity – roads, railways, air ports, ports, dams and power plants, and telecommunications. ASEAN’s developing countries can expect to receive funding for infrastructure projects. It is in ASEAN’s interest for all major economies – the U.S., Japan and South Korea in particular, to join the AIIB and help shape its decisionmaking and governance structures. Singapore and Indonesia, for example, lobbied Australia to play a regional leadership role by joining the AIIB ASEAN, a grouping that includes emerging market economies, supports giving developing countries a greater role in the management of multilateral internationalfinancial institutions. ASEAN thus has no problem with China taking a leadership role in the AIIB.
(Article reprinted with the permission of the author Carlyle A. Thayer, Emeritus Professor,The University of New South Wales at the Australian Defence Force Academy, Canberra email: Carlthayer@webone.com.au)
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