ASIAN INFRASTRUCTURE INVESTMENT BANK

The AIIB (Asian Infrastructure Investment Bank) was first proposed by the

Chinese President Xi Jinping in October 2013. A year later, at its official launch in Beijing, 21 Asian nations, including China, had signed up to be the foundation members. Currently another 21 nations— including Australia, the United Kingdom, New Zealand, Germany and France—have expressed a desire to join as well. An interesting applicant is Taiwan—which signed up just before the April 1, 2015 deadline—although issues around its membership name may complicate the deal. Russia also left it to the last minute to fire in its application. Chinese media reported that only 30 of the 42 member applications have been accepted. The Chinese foreign ministry has said that the full list of countries approved as founding members would be released by mid-April 2015.

The AIIB is aimed at providing finance to infrastructure projects in the Asia region, as a multilateral instituion. It is planned to operate broadly in the same manner as existing multilateral development banks (MDBs) such as the World Bank and the Asian Development Bank (ADB). While much of the debate is centred on whether the AIIB will complement or compete with existing organisations, it is intended to be more a commercial bank—with nations as shareholders, than a purely development aid institution. The AIIB will start with an authorised capital base of US$ 1 billion to be enhanced to US $ 100 billion.

Experts have termed it as a rival for the International Monetary Fund (IMF), the World Bank (WB) and the Asian Development Bank (ADB), which are regarded as dominated by developed countries like the United States.21 The United Nations has addressed the launch of the AIIB as ‘scaling up financing for sustainable development’ and for the concern of Global Economic Governance.22‌

As per the experts and analysts, there are several factors which are behind such an initiative coming from China. Major ones are as given below:

(i) The Chinese government has been frustrated with what it regards as the slow pace of reforms and governance, and wants greater input in global established institutions like the IMF, World Bank and Asian Development Bank which it claims are dominated by American, European and Japanese interests.

(ii) The ADB, a Manila-based regional development bank designed to

facilitate economic development in Asia, estimated in a report that developing Asian countries have an infrastructure demand of about US$ 8 trillion between 2010–2020— $2.5 trillion for roads and railroads, $4.1 trillion for power plants and transmission, $1.1 trillion for telecommunications, and $0.4 trillion for water and sanitation investments.23

(iii) Oxford Economics reported that by 2025, the region will constitute 60 per cent of global infrastructure investment, with China’s share alone is expected to increase from around 22 per cent to 36 per cent over the next decade.

(iv) Despite the significant economic growth enjoyed by countries such as China, India, and South Korea in recent decades, many countries among the developing Asian regions are still mired in poverty, suffering from a profound lack of access to modern-day necessities such as sanitation, a reliable power grid, and adequate transportation and communications networks.

(v) It is believed that the new bank could allow Chinese capital to finance these projects and allow it a greater role to play in the economic development of the region commensurate with its growing economic and political clout.

Stand of the USA and Japan: The United States, Japan and Canada remain firmly on the sidelines despite a number of their closest allies and partners recently breaking ranks. The US has argued that the AIIB doubles up on existing organisations, such as the World Bank and ADB, but doubts it will have adequate transparency and governance standards. However, it appears the US may be softening its stance. Japan has said it would not be bound by a deadline not ruling out the possibility of joining in. Though the US has been openly opposing this move some experts view that the US in place of opposing it should work with it. Experts have suggested that China is promoting a solution to the shortage of infrastructure capital in Asia and there is nothing wrong in supporting it.24

Size of the AIIB: The AIIB will be one of the largest development banks, but still a fair bit smaller than the European Development Bank, World Bank and ADB. It will start off about the same size as the BRICS Development Bank,

which was formed by Chinese initiation with Brazil, Russia, India and South Africa in 2014.

Based on the lending capital ratios of the World Bank and European Development Bank —the AIIB could extend loans for infrastructure spending at around 100 per cent to 175 per cent of its subscribed capital. This would mean having outstanding loans of up to $US175 billion. With Public Private Partnerships and increased subscriptions, considerably larger amounts could leveraged for projects in the future.

An edge to China: The Bank is supposed to give China an edge in the global economy, major ones are—

(i) The AIIB will be a better way for China to deploy its massive foreign exchange reserves which are currently earning next to nothing in US Treasury bonds. China believes that the commercial financing of infrastructure differentiates the AIIB from the likes of the ADB which places a greater emphasis on poverty reduction.

(ii) The AIIB also supports China’s strategic interests in its hugely ambitious ‘Silk Road Economic Belt’ policy.

(iii) By exporting technology, transferring development know-how, and facilitating industrialisation using Chinese long-term finance to the under-developed economies, China will not only find a bigger market, promote prosperity of all nations along the ‘Belt and Road’, but also diversify its foreign asset portfolio.

(iv) It will make China emerge a much bigger global power player which is supposed to be keen to challenge America’s long-established strategy of institutionalising power in a rules-based order. The case of the AIIB shows that China now seeks to define this order for itself, with the battle for influence in Asia increasingly fought through rules and institutions.

(v) The so-called ‘rules based order’ was set up after the 2nd World War through policies such as the Bretton Woods agreement which established US dominated organisations such as the World Bank and IMF in which China plays a very small role.

Members of multilateral development banks, historically, enjoy benefit such as getting ahead of the queue for loans and enjoying a greater chance of

success for national firms competing for project work. Put bluntly, without signing up it is highly likely that a large chunk of the billions of dollars worth of work on offer will simply be doled out to Chinese companies. Before conclusive remarks could be drawn, it will better to keep watching the future developments regarding the new bank.

1. D. Salvatore, International Economics (New Jersey: John Wiley & Sons 2005), pp. 737–38; Samuelson and Nordhaus, Economics (New Delhi: Tata McGraw-Hill, 2005) pp. 609–12.

2. D. Salvatore, International Economics, p. 738.

3. For the new international monetary system, basically two plans were presented in the meeting—one by the US delegation led by Harry D. White (of the US Treasury) and the British delegation led by John Meynard Keynes. It was the US plan which was ultimately agreed upon.

J.M. Keynes had proposed a more impartial, practical and over-arching idea via his plan at Bretton Woods. His suggestions basically included three things:

(i) Proposal to set up an International Clearing Union (ICU), a central bank of all central banks, with its own currency (Keynes named this currency ‘bancor’)— to mitigate the balance of payment crises of member nations.

This bank was supposed to penalise (no such provision in the IMF) the countries holding trade surpluses (with a global tax of one per cent per month) on the ground that such countries were keeping world demand low by under- purchasing the products produced by other countries. The corpus collected via this tax was to be used to maintain an international buffer stock of primary goods (i.e., food articles)—to be used in the periods of food shortages among the member nations. (In place, under the IMF provisions trade deficit countries are penalised.)

(ii) For the reconstruction of war-devastated Europe, a fund was to be set up, on the basis of this plan for Relief and Reconstruction (in place of it the US- sponsored Marshall Plan took care of the needs of Europe).

(iii) There was a proposal of creating Commodity Buffer Stock to be operated by an International Trade Organization (ITO). This stock of primary goods was to be used to stabilise their prices in the international market.

The operation of this ITO making purchases when the world prices were low and selling when the prices became high. The buffer stock operations, however, were to be helpful to the poor countries, Keynes was primarily interested in stabilising the input prices of the rich countries. (Though the charter of the ITO

was drawn up and other formalities completed, it was never born because of US opposition.) For further readings see D. Salvatore, International Economics, 742–43; B. Dasgupta, Globalisation : India’s Adjustment Experience (New DelhI: Sage, 2005), p. 48.

4. Basic Facts About the United Nations (New York: United Nations, 2000), pp. 55– 137.

5. These securities are non-interest bearing note purchase agreements issued by the RBI which can be encashed by the IMF anytime as per its requirement. They do not entail any cash outgo unless the IMF calls upon India to encash a portion of these notes. The ‘Reserve’ ( paid in ‘cash’) asset portion of the quots is counted as a part of country’s ‘Reserves’.

6. Such facility from it is available once the member country has signed the agreement with the IMF called as the Extended Fund Facility (EFF). Popularly, this is known as the ‘Conditionalities of the IMF’ under which India started its Economic Reform Programme in 1991-92 once it borrowed from the IMF in the wake of the BoP crisis of 1990–91.

7. FTP is the mechanism of the IMF through which it finances/repays its operations— member nations contribute money into it from their ‘quota resources’ on which they get ‘interest’.

8. E. F. Schumacher, Multilateral Clearing Economica, New Series, Vol. 10, No. 38 (May, 1943), pp. 150-165.

9. M. Friedman., (1968) The American Economic Review, Vol. 58, No. 1, pp. 1-17.

10. Zhou Xiaochuan, ‘Reform the International Monetary System’, BIS Review 2009, Bank of International Settlements, Basel, Switzerland, 28 November, 2011.

11. Zhou Xiaochuan, Financial Times, 12th Dec. 2011.

12. Recommendations by the Commission of Experts of the President of the General Assembly on reforms of the international monetary and financial system, UNO, 20th March, 2009.

13. Reserve Accumulation and International Monetary Stability, IMF, Washington DC, 13th April, 2010.

14. Based on Basic Facts About the United Nations, 52–55; Publication Division, India 2004 (New Delhi: Government of India, 2007); Publication Division, India 2013 (New Delhi: Government of India, 2014).

15. Publication Division, India 2014 (New Delhi: Government of India, 2015), p. 322.

16. Publication Division, India 2013, p. 415.

17. Government of India, Ministry of Commerce & Industry, Government of India, N.

Delhi, as on 5 April 5, 2016.

18. Publication Division, India 2012 (New Delhi: Government of India, 2013), p. 418.

19. As per the WTO website, March 2017.

20. Ministry of Finance, Economic Survey 2015–16 (New Delhi: Government of India, 2016), Vol. 2, pp. 73–75.

21. The Guardian, ‘Support for China-led development bank grows despite US opposition’, UK edition, 13 March, 2015.

22. United Nations Financing for Development Office, ‘Global Economic Governance’, New York, 20 March, 2015.

23. The Economist, ‘An Asian Infrastructure Bank: Only Connect’, 4 October, 2013; Biswa N. Bhattacharyay, Estimating Demand for Infrastructure in Energy, Transport, Telecommunications, Water and Sanitation in Asia and the Pacific: 2010-2020, Asian Development Bank Institute, 9 September, 2010.

24. The Guardian, October 27, 2014.