The financial crisis of 2008 was a telling blow to the Anglo-Saxon control on the global financial system. It was only a matter of time before alternative structures surfaced. The Asian Infrastructure Investment Bank (AIIB) proposed by China is now threatening the traditional hegemony of Western-dominated global financial institutions.
March 31 was the last date for joining the AIIB. Most had expected the AIIB to remain confined to a handful of Asian countries. The US had expressed doubts over the “standards” to be followed by the AIIB and wanted its allies and partners to stay away. In what is being interpreted as a major snub for American diplomacy, many US allies and partners have joined the AIIB. These include European allies like Austria, Denmark, Germany, France, Italy, Luxembourg, Norway, Switzerland and the UK; allies from the Asia-Pacific — Australia and South Korea; as well as US allies from the Gulf — Saudi Arabia, Jordan and Turkey. Japan is the only major US ally from Asia that is yet to join the AIIB.
The enthusiastic response to the AIIB has several implications. It underscores the lack of American influence in persuading allies and partners to stay out of an institution that would not be dominated by the Anglo-Saxon financial powers. The US posture was to try and influence the AIIB to adopt “appropriate” standards and practices by pressuring from the outside. It had hoped to have its allies with it on this. Unfortunately, most of them felt otherwise, with the dominant view being standards are better influenced while being inside.
The response also shows that many Western countries are happy to work with China in reshaping the global financial architecture. The prospective European members of the AIIB appear to have overcome their inhibitions regarding China. Austria, Denmark, Norway, Germany, France and Switzerland are traditional donors to less-developed and poor countries. They have always insisted on development funding being “tied” to not only economic performance, but also track records in human and social development, including political and institutional reforms. The traditional Western donors criticised China’s “no strings attached” policy of lending to poor countries in Sub-Saharan Africa for ignoring conditions that the West felt were important for aid. With several China “critics” joining the AIIB, including Norway, with whom China had severed high-level ties after Chinese dissident Liu Xiaobo was awarded the Nobel peace prize in 2010, the wheel has turned full circle.
The AIIB is aiming for a corpus of $50 billion for addressing physical infrastructure needs of Asian countries. There are various expectations from the bank. The fact that least-developed Asian countries with pronounced infrastructure deficits — Bangladesh, Cambodia, Myanmar, Laos and Nepal — are among the founding members, points to the possibility of the AIIB responding sympathetically to their needs. For middle-income Asian countries that do not avail concessional lending from the Asian Development Bank (ADB) and the World Bank, the AIIB is a viable alternative. The expectation in this regard is that the AIIB’s loans would have lower interest rates than those from the ADB and World Bank.
The financial competition from the AIIB is a cause for worry for the World Bank, IMF and the ADB. Although the AIIB will have a smaller initial corpus than all these institutions, coupled with the New Development Bank (NDB) established by the BRICS countries, it will challenge the monopoly of institutions dominated by the US and its allies in the global lending sphere. The ADB, dominated heavily by Japan, the core US ally in Asia, will face strong competitive pressures if China, India and its other major Asian borrowers shift to the AIIB. This will not only imply financial competition, but also the erosion of the strategic influence of the US-Japan alliance in the region. The US concern with the AIIB is therefore obvious.
For China, the AIIB has spelt a major strategic coup. It has firmly established its ability to reorganise the global financial architecture. With several Western countries happy to belong to the AIIB, China can contemplate bigger constructs. It is already doing so through ideas like the Free Trade Area for the Asia-Pacific and the Maritime Silk Road. It won’t be surprising if the
AIIB success encourages China to conceive other global trade and financial initiatives.
India has been strategically wise in being a founder member of the AIIB. This would enable it to contribute effectively to the decision-making in the AIIB. Joining both the NDB and the AIIB are rational choices. Like other large emerging markets and developing countries, India was hardly ever able to influence decisions significantly at the IMF, World Bank and the ADB, as it lacked the room for doing so. Staying beholden to these institutions without the ability to influence them is hardly a sensible choice.
The AIIB gives China, India and other developing countries the historical opportunity to enter and reform a bastion where they have been traditionally denied entry. With major Western countries willing to play ball, a pragmatic approach focusing on cooperation can make the AIIB a powerful institution and an agent for changing the global financial balance of power.
The writer is senior research fellow at the Institute of South Asian Studies, National University of Singapore. Views are personal.
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