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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
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
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
BBC. “Taiwan rejected from China-led Asia bank 'due
to name'.” 13th April 2015. bbc.com. 28th May 2015.
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-proposed AIIB is a gift to world.” 19th May 2015. china.org.cn.
28th May 2015.
Reisen, Helmut. “How the
New AIIB Dwarfs the Asian Development Bank.” 8th April 2015. theglobalist.com.
28th May 2015.
Tiezzi, Shannon. “China’s
AIIB: The Final Tally.” 17th April 2015. thediplomat.com. 28th May
*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.