Beijing’s Finance Street, the location of the Asian infrastructure Investment Bank. Photo by Wikipedia user Pseudotriton (public domain)
The development of the Asian Infrastructure Investment Bank (AIIB) and the obstacles the initiator and the regional great power, China, has to face are audacious. China is fervently portraying the image of a responsible global power as it secures its strategic position in the global market economy. The Chinese government claims its intent is to marshal financial resources in order to to assist developing economies in the Asia-Pacific region and to shrink the region’s infrastructural gap that’s estimated at $8 trillion USD. In this vein, the creation of a new and complementary developmental banking model that serves as an addition to the existing US-led World Bank system appears to be at the heart of China’s 21st century attempt at global responsibility. The premise is that it will merge neighboring nations and open markets with foreign direct investment, which is a key ingredient for economic development. Its synergic model of a traditional multilateral developmental bank with aspects of the commercial sector is what sets it apart from the World Bank and International Monetary Fund.
On June 29, 2015, fifty cofounding members signed an agreement to initially invest $100 billion USD as seed capital. This founding cohort pledged to build upon the existing international developmental banking system by incorporating commercial qualities that are absent in today’s conventional institutions such as the Asian Development Bank (ADB), the International Monetary Fund (IMF), and the World Bank (WB). The main difference between these institutions and the AIIB is the shift from a traditional donor model to a business-driven one that emphasizes revenue generation in the long-term. To be clear, however, President Xi Jinping has stressed that the AIIB will complement existing financial institutions and is not structured to compete with the IMF or ADB over growing markets.
Despite the fact that China repeatedly asserts its “peaceful rise,” it continuously clashes with its neighbors over land and resources in the South China Sea. Thus, could the AIIB serve as a carrot to the region in order to lessen the tensions through regional economic appeasement? Certainly, an increase of trade and investment in Asia’s developing regions would ignite a reduction in income inequality and would provide financial capital to a region that desperately seeks funding. The AIIB aspires to be the originator of the flow of capital to the region. Yet China has managed to maintain the largest capital share, and thus, one can only fear that the operational principles of the institution would be subject to a Chinese agenda as it positions itself as the regional hegemon. As it stands, China’s stake in the AIIB is 30.34 percent, giving China 26.06 percent of its votes. This is no feeble stance in a rising economic establishment.
The US should not have taken a defensive position and isolated itself from the potential of collaboration. What the US could have brought to the table was precisely what China was missing: diversification and a member with a strong market economy. The US withheld from joining the AIIB because it was apprehensive of the possibility of a downward economic drift that may have harmed economies on a global scale, but the US neglected to realize that it could have stabilized it. Moreover, the US certainly seeks to maintain its upper hand and its major share at the WB. The fear of undermining its vested power in the World Bank is a major reason why the US refused to join the AIIB.
Admittedly, China may likely have its self-interest at heart. The AIIB affords a platform that will allow China to furtively ensure financing of its “One Belt, One Road” initiative as well as its land-based and maritime Silk Roads. Though the AIIB promises to offer financial resources to developing economies, policy makers should consider the potential of abuse. The concentration of narrowed policy proposals from the Chinese due to their capital stake could bring potential perils to the table. This new institution should not only adopt a modus operandi of consensus, but also consider the socio-economic determinants of individual nations that seek funding to secure their ability to repay borrowed funds. Otherwise, the AIIB will has the potential to inflict economic harm to borrowing states, which could set them on a downward course. The borrower’s ability to deliver and repay is constrained by its individual economical strengths and inhibitors, and as such, the voices of the AIIB’s constituencies should be taken into account.
Global integration, which the AIIB promotes, could bring “dynamic benefits such as championing economies of scale and increasing the spread of innovation from one country to another.” New infrastructure and other developments will produce a myriad of positive outcomes such as new markets, more foreign direct investment, and an increased economic outlook for each individual borrower. The stakes are high, but one thing should assuage international fears: the multinational membership of the founding member cohort. Despite fears of Chinese dominance, the pivotal element that has the greatest potential of influencing the outcomes of the AIIB’s operational principles is its well-diversified cofounding member cohort. Though the absence of a major market economy is palpable (the US refused to join), the AIIB now has a diverse core membership with an additional seven members joining after its inception bringing the total number of members to 57. This varied group should lend its diversity as a comparative advantage to make the institution operate more effectively.
Since the AIIB aims to extend funds to any requestor that was turned down by the IMF or ADB, the possibility for mismanagement of borrowed funds by crony governments is impending. This is alarming, particularly because the IMF and the ADB declined funding to such requestors due to their volatile economies, opaque practices, and autocratic state-rules. The AIIB’s vision of interconnectivity could very easily bring with it interdependency and reliance on resources, capital, and a subsequent merging of economies. Some critics fear that this could lead to right-wing militarism and bring forward into action the evil vices of militarization to protect the nation-state. Additionally, the speed and size at which international financial markets operate could create a volatile flow of money, causing an increased risk to international economic integration, which could hamper the core members of the AIIB.
Ultimately, the AIIB has enormous potential, but with it, a few perils that should not be overlooked. One way to restrain Chinese influence in the AIIB – and the region – would be by vigilantly demanding concrete policy proposals and operating principles with accountability measures, and a heightened emphasis on transparency at the core of its modus operandi. Additional measures that would work toward this end would be lending money to only democratic nations and refrain from collaborating with countries under martial law. To prevent mismanagement, the leadership of the member cohort should serve as its sentinel. The AIIB’s goal is to be an alternative financial source to the Bretton Woods institutions by introducing a new form to the international developmental banking system. But we should be apprehensive of the underlying conundrums, and keep a watchful eye on China’s agenda. Development is indeed inevitable but the US might have placed itself on the sideline. Yet it is not too late to join as a general member, overturn this impetus, and regulate China’s influence in the region.
Petra Gabrielle Kubalkova is the Editor of International Association of Political Science Students (IAPSS) and Regional Security Studies Intern at the Daniel K. Inouye | Asia-Pacific Center for Security Studies (DKI APCSS). Previously, she was the Young Leaders Fellow at the Pacific Forum CSIS. She is a PhD student at the Department of Political Science at the University of Hawaii, Manoa. She holds a BA from the University of California, Berkeley, in Political Science and a Master’s in Public Administration from the University of Hawaii, Manoa. Her area of focus is East Asia security studies, coercive diplomacy, foreign policy decision making, economic prospects in the EA region, globalization, and neorealist theory.