The Asian Infrastructure Investment Bank: A New Standard
In response to Martin A. Weiss’s Asian Infrastructure Investment Bank (AIIB)
The term “Made in China” does nothing but provoke distrust at the quality of the product, but in terms of the Asian Infrastructure Investment Bank (AIIB), I believe in the concept and execution of the bank. Not as a way of spreading Chinese propaganda, but as a way of promoting economic growth through investments in regional infrastructure. Although it has some flaws, the AIIB is not only an appreciable organization, but also represents a new standard of multilateral development banks (MDBs).
To begin, the overly bureaucratic MDBs and Brenton Woods institution have failed to account for every region they encompass. China has felt for years that it cannot get anything accomplished in the World Bank or the International Monetary Fund (IMF). As a result, China created their own bank that fixes the problems that plague many MDBs, such as the “often slow and overly bureaucratic ways of the traditional lenders and their slow pace of representational and operational reform,” and the lack of an “adequate voice to emerging and developing countries.”[1] The AIIB aims to solve these problems through its innovative government structure and overarching legal frameworks, which are touched upon in later paragraphs. Competition breeds greatness and as a result, the AIIB has rapidly grown through its sound and effective policies.
In the cases of the IMF and the World Bank, the board structures of these banks are built around the United States. For the World Bank, that power is further secured through the United States’ control of the presidency of the bank. Hoping to assuage fears that China would use the AIIB to push their political ideologies, Beijing reportedly offered to forgo veto power and reduce their own voting rights to less than one-quarter if Japan or the United States had been willing to join the new bank as founding members.[2] While neither countries joined the AIIB, Jin Liqun, the Chinese head of the Interim Secretariat and the Chinese Foreign Ministry, was quick to assert that China will forgo their veto power anyways[3] to create a bank that is “inclusive and transparent” with a focus on the “achievement of common development.”[4] In addition, there is nothing preventing regional members from holding great influence within the bank. While the World Bank may give the United States hard veto powers, there is nothing in the statutes of the AIIB that prevents countries like India from contributing more money and getting more voting shares.[5] Unlike the Asian Development Bank (ADB) and other regional MDBs, the Articles of the AIIB limit the influence and shares of non-regional members to less than one-third, with the aim of preserving the influence of the Asian regional member states in the bank, preventing situations where countries like Canada were able to significantly influence decisions in the ADB due to the relative size of their original financial contribution.[6]
The board arrangement of the AIIB itself is also an innovation in terms of MDBs. Its dual board arrangement and delegated authorities from a larger Board of Governors (fifty-seven governors) to a smaller Board of Directors (twelve directors) fixes many of the flaws apparent in other MDBs. In the World Bank, the resident board costs some $70 million annually and according to an anonymous observer with senior management experience in MDBs, has highlighted that resident boards often slow down decision-making, sometimes unnecessarily.[7] The Zedillo Report also criticizes the current World Bank arrangement of the resident board as the extra layer of management was shown to slow down project preparation and make the bank less efficient.[8] Just the simple act of forgoing a resident board could ease frictions and save millions in governance costs for the AIIB and allow the money to be redirected for loans, investments, technical assistance, policy advisory, and training purposes.
Critics such as Edward Truman, a former senior US Treasury official have derided Beijing’s decision of forgoing the resident board as they do not trust the “likely management.”[9] However, it is preemptive of Truman to assume that China will continue to take on a role of management. It has always been controversial that the president of the World Bank has always been an American, the director of the IMF a European, and the governor of the ADB from Japan.[10] Questions about fairness and transparency of the selection process, especially merit vs nationality of the candidate, has always been common. China hopes that the AIIB’s innovative feature of an open and transparent appointment process, especially compared to the established patterns in other MDBs, can persuade other nations that China will not pursue their own political ideologies through the bank. The AIIB’s first president, Jin Liqun, a key member in establishing the AIIB, was elected president-designate on September 1st, 2015 and in the nature of an appointment process that focuses on merit, brought in experienced leaders such as Kyttack Hong, D.J. Pandian, and Joachim von Amsberg, who are Korean, Indian, and German, respectively.
Another feature of the AIIB that is considered innovative, but should be the standard for all banks, is the capital structure. In comparison to the ADB’s capital base of about $160 billion and the World Bank’s $223 billion, the AIIB’s initial capital base of $100 billion seems insufficient and lacking.[11] However, the AIIB makes up for this in the way their capital structure is set up. For reference, most payments to MDBs are through either paid-in capital, which generally requires the payment of cash to the MDB, or callable capital, funds that shareholders agree to provide only when necessary. Obviously paid-in capital is the preferred form of contribution but most MDBs have a 5% paid-in capital, limiting their efficiency and speed on development projects. In contrast, the AIIB’s significantly larger 20% paid-in capital exponentially raises their efficiency, allowing the AIIB to ramp up lending quickly.[12] In projects where time is of the utmost essence, AIIB’s innovative capital structure allows them to be efficient in lending and project developments, whereas other MDBs would delay payments and projects until all the necessary capital has been acquired from the callable capitals of shareholders.
For years, institutions backed by China have been distrusted by Western nations but the AIIB represents a new era of banks. Through innovations in government structure and overarching legal frameworks, the AIIB will promote economic activities in Asia through sound and efficient investments in regional infrastructure. Competition breeds greatness and the ineffectual performance of established MDBs has forced the AIIB to take a drastic approach in order to solve many of the problems that plague many MDBs.
Resources:
Anderlini, J. (2014). China expands plans for World Bank rival. [online] Ft.com. Available at: https://www.ft.com/content/b1012282-fba4-11e3-aa19-00144feab7de [Accessed 31 Jan. 2018].
Amerian, Stephanie M. 2015. “Buying European”: The Marshall Plan and American Department Stores1*. Diplomatic History 39 (1): 45–69.
Burgess, J., Richmond, O. and Samāddāra, R. (2016). Cultures of Governance and Peace. 2nd ed. Manchester: Manchester University Press, p.127.
Articles of Agreement, Asian Infrastructure Investment Bank
Kyōryoku Ginkō, K. (2005). Connecting East Asia. Washington, D.C.: The World Bank, p.76.
Humprey, C. (2015). Infrastructure Finance in the Developing World. Intergovernmental Group of Twenty Four/Global Green Growth Institute, 1(1), p.23.
Chin, Gregory T. 2016. Asian Infrastructure Investment Bank: Governance Innovation and Prospects. Global Governance: A Review of Multilateralism and International Organizations 22 (1): 11–25.
Wei, L. (2015). China Forgoes Veto Power at New Bank to Win Key European Nations’ Support. [online] WSJ. Available at: https://www.wsj.com/articles/china-forgoes-veto-power-at-new-bank-to-win-key-european-nations-support-1427131055 [Accessed 16 Feb. 2018].
Dollar, D. (2015). Lessons for the AIIB from the experience of the World Bank. [online] Brookings. Available at: https://www.brookings.edu/articles/china-on-the-global-stage/ [Accessed 16 Feb. 2018].
Weiss, M. (2017). Asian Infrastructure Investment Bank (AIIB). Library of Congress. Congressional Research Service..
[1] Chin 2016 1
[2] Chin 2016 13
[3] Chin 2016 13
[4] Wei 2015
[5] Chin 2016 13
[6] Chin 2016 14
[7] Chin 2016 16
[8] Dollar 2015
[9] Wei 2015
[10] Chin 2016 21
[11] Weiss 2017 11
[12] Weiss 2017 12