Tuesday, June 23, 2015

AIIB: The need for thought to replace hasty resolve



 By Tarun Nair*


The Asian Infrastructure Investment Bank (AIIB) has been in the news off late, mostly for the right reasons. Heralded as the answer to the World Bank’s deficiencies which include its exclusive representation of European interests, it is touted to be a mechanism which will singularly fulfil Asia’s development needs through timely funding. Considering that a recent report pegs Asia’s infrastructural development to require around 8 trillion dollars’ worth of investment, the AIIB may indeed occupy a place of great importance, with its 100 billion dollar capital allocation. (china.org.cn) However, though the initiative must be welcomed, no extreme positions can be taken as of now, for it has certain aspects which must be carefully evaluated first. Until the shares, voting and veto rights are announced, it is early to comment on the role played by the organisation. Other concerns abound about whether the bank will be dominated by Chinese interests as an arm of their foreign policy, its possible interference with schemes put forward by the Asian Development Bank (ADB) and whether it is a ploy to counter American financial power and supplement China’s rise amongst others. More importantly issues like the credit worthiness, environmental impact and projects to be implemented lie unresolved.
On this note, the haste displayed by nations to join as founding members may be questioned. Without considering any of the aspects mentioned, 57 nations including all the BRIC’s nations, 14 of the G20 nations (EU giants like Germany) and others from Africa and Latin America have pledged their support. The strength of this new multilateral initiative can be seen in the fact that 16 of the world’s largest economies are on board. (Tiezzi)  Notable sceptics include the United States and Japan who are looking in from the outside as of now. The implications of this can be demarcated into strategic underpinnings, financial benefits and inherent problems

Talking Strategy

While the AIIB was intended to be an organisation devoid of politics and unnecessary power plays, the politics seem to have begun before the start of the organisation itself. This can be seen in the rejection of Taiwan, with the nation making a last ditch bid for founding member status. The bid was refused on the grounds that their status as a sovereign named Taiwan was unacceptable to China, who considers Taiwan as its territory. To add insult to injury, China mentioned that future bids under the name Chinese Taipei would be welcomed. (BBC)
The issue here, a questionable precedent in itself, is that China’s foreign policy, an issue limited to the domestic realm, has already begun to influence the workings of a multilateral initiative. Taiwan though being diplomatically isolationist due their status, has a flourishing economy and fulfils other membership criteria like an economy open to scrutiny, something which fellow reject North Korea does not. At the same time membership was promptly assigned to Iran, a nation which has long been in the international gaze for its covert military nuclear program. The inclusion of Germany also raises questions owing to the strategic sum of the move. The move could possibly reflect the beginning of a closer relationship, which also includes a trade off-Chinese backing for Germany’s permanent membership in the Security Council in return for help against Taiwan. UK’s membership has certain strategic undertones as well. Considering that they always wanted Chinese multilateral involvement, the British involvement may be their way of influencing policy from the inside and keeping a check on China. AIIB can be used by China in the future to use investment and their large role at the bank, to strong-arm dependent nations for strategic benefits. Though China has declined their veto right in order to woo European nations, this does not in any way ensure against their misuse of the mechanism. The collective paranoia off being left out of ‘the next big thing’ has caused nations to commit without foresight and has inevitably created a bigger strategic dilemma.
Additionally the inception of the AIIB takes away the problem of multiple avenues requiring funds. With AIIB investments funding strategic projects like ports in Sri Lanka, the Kra canal in Thailand and the developments in the Spratleys, a majority of their own funds can be solely concentrated towards domestic projects like the socialist countryside program. (Chengfang Liu) How to understand and negotiate these concerns should be a bigger question before joining for nations.

Concerns

The primary concern is that China is using the AIIB to counter their economic slowdown and problems like rising labour prices. This suspicion cannot be entirely discredited since with an expected share of 30%, China may offset their slowing manufacturing growth with AIIB funded investments in the next 10 years. It is even more important since they have committed to projects like the ‘One Belt, One Road’ initiative and will need money to fund highway projects etc. This forms a part of the bigger concern here, which is that majority stake holders China and India will appropriate the maximum funding for their own projects, decreasing incentives for lower Asian stakeholders and making it a bank by China, for China and of China. While China is already benefitting from low cost loans from the ADB, it will now have the additional funding as well as geopolitical influence, afforded to it through the initiative.
The second problem is that as of now, there is no mechanism in place to counter countries engaging in currency manipulation for competitive advantages, something China has been known to dabble in. There has been no commitment from the bank’s side regarding environmental stability in the face of infrastructural developments, a factor which is regarded as the fundamental pillar of multilateral finance bodies like the ADB. Talking about the ADB, there are unlimited opportunities for growth and inter organisation cooperation. But more than this, there is a risk that the AIIB may overlap with schemes being floated by the ADB which are already in existence. More so the relevance of the ADB stands to be eroded with promises of a bigger loan portfolio and by extension higher annual lending going by current capital estimates. (Reisen) In the long run this Sino centric economic system may indeed entrench itself the same way Western powers did so with the Bretton Woods institutions. Thus America does have reason to worry.
There is also the underlying problem of good project selections and evaluations towards this goal. With the politics involved, strategic or beneficial infrastructural projects may take a back seat in favour of projects with lesser feasibility and reduced scope in several nations. For right tenders to be passed, independent directors with considerable expertise are required, which is factor the founders don’t seem to have commented on. Also, AIIB has the aim of being a lean organisation bereft of bureaucratic issues, but with 57 members can it afford to do so? Proportional representation would require 10-15 vice presidents thus putting it right back in the red tapism it wished to avoid.

What lies ahead?

For nations like India, the benefits provided by the formation of AIIB are immense. Keeping in mind that the World Bank has refused to allocate loans for energy purposes citing environmental concerns, the AIIB may be the solution for the medium term purchase of coal, thus propelling manufacturing as envisaged by the Modi government as well. However a great degree of caution is to be exercised. With challenges like the lack of a firm commitment on the institution’s integrity lying in wait, it is imperative that nations including India do not get carried away by the promise of infrastructural expansion propelled by ease of procuring finances for the same. In the coming times it will also be interesting to see China’s reactions to the flux of political and economic pressures, brought about by the diversified membership in what was initially proposed as an ‘Asian’ bank.

References

BBC. “Taiwan rejected from China-led Asia bank 'due to name'.” 13th April 2015. bbc.com. 28th May 2015. <http://www.bbc.com/news/world-asia-32285583>.
Chengfang Liu, Linxiu Zhang, Renfu Luo, Scott Rozelle and Linxiu Zhan. “Infrastructure Investment in Rural China: Is Quality Being Compromised during Quantity Expansion?” The China Journal (2009): 105-129.
china.org.cn. “China-proposed AIIB is a gift to world.” 19th May 2015. china.org.cn. 28th May 2015. <http://www.china.org.cn/business/2015-03/19/content_35103443.htm>.
Reisen, Helmut. “How the New AIIB Dwarfs the Asian Development Bank.” 8th April 2015. theglobalist.com. 28th May 2015. <http://www.theglobalist.com/aiib-to-dwarf-adb-loan-portfolio/>.
Tiezzi, Shannon. “China’s AIIB: The Final Tally.” 17th April 2015. thediplomat.com. 28th May 2015. <http://thediplomat.com/2015/04/chinas-aiib-the-final-tally/>.



*Tarun Nair is Research Intern at CPPR and a student of International Relations at FLAMES, Pune

The Authors views are personal and does not in anyway represent the views of Centre for Public Policy Research.

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