The AIIB: Its Impact on Global Financial Governance
By Hong Zhao

The AIIB: Its Impact on Global Financial Governance

May. 14, 2016  |     |  0 comments


The establishment of the Asian Infrastructure Investment Bank (AIIB) is a major event in the history of international financial development. As a Multilateral Development Bank (MDB) with the participation of several countries, the AIIB focuses on infrastructure investment in the Asian region. It will undoubtedly have a significant impact on the reform of the global financial governance system and promote regional financial cooperation in East Asia.


AIIB is Different from Traditional MDBs


According to some Chinese scholars, the financing model of the existing MDBs is mainly based on the “North-South” (the rich helping the poor) model. Its policy idea is to some extent the reflection of the Washington Consensus (policy measures that have been part of the IMF’s conditional lending) in the field of international development, and its operating policy is based on the principles set by the 2005 Paris Declaration.1


In these traditional MDBs, donors are mainly US-led developed countries, and when providing loans to developing countries, these MDBs such as the IMF often attach various guidelines and lending conditions which are often not accordant with the realities and needs of the developing countries.2 But most developing countries, including those in Southeast Asia, have long been sympathetic to the concept of non-interference. It was even enshrined as one of ASEAN’s founding principles in 1967. They well remember the harsh conditions that the IMF foisted on them during the 1997-98 Asian financial crisis.


In contrast, the China-led AIIB, although joined by some non-regional developed countries, is based on the “South-South” (the poor helping the poor) model. Its policy idea, to a certain degree, opposes the Washington Consensus, as “it opposes political conditions attached to loan assistance, and will give more consideration to the actual situation of the recipient countries, stressing the simplicity and efficiency of the lending procedures.”3


With respect to financing criteria, with the investment standards in developed markets based on the Washington Consensus as a benchmark, many projects in emerging markets and developing countries do not meet the requirements of investment and financing, as the Washington Consensus emphasizes transparency, liberalization, and political reform. Hence, those countries whose rules and norms are inconsistent with those of developed countries face high financing costs, and even are excluded from international financial markets.


In contrast, the AIIB will adopt a new set of risk assessment standards which are more suited for developing countries, and will identify projects which are of real investment value but which are currently unable to receive financing from the existing MDBs. In this sense, the AIIB as a new model of MDB could alter the landscape of international development assistance.


Impact on Global Financial Governance


Global financial governance is also called international financial governance. It is viewed as the application of governance in the global financial sector. The ultimate goal is to facilitate productive and sustainable economic activity that serves the interests of all stakeholders in the international economic order.


The current global financial governance system is large and complex. Although a new system has emerged, the “Bretton Woods system” — which was established after the Second World War — still dominates development lending and international financial regulations. The International Monetary Fund (IMF), the World Bank, and four regional MDBs — the Asian Development Bank, the Africa Development Bank, the Inter-American Bank, and the European Reconstruction and Development Bank — comprise the architecture of current global economic governance. This system has formed its decision-making and procedural rules based on subscribed shares and voting power.


For a long time, this traditional global financial governance system has faced many problems, including rigid mechanisms, bureaucracy, and low efficiency. Given the fact that global financial governance is a typical collective action, its practice is largely restricted by collective action. On one hand, the larger the size of the collective, the more difficult the concerted action will be; on the other, only when any new action gets support from the biggest beneficiary (usually the US), can it be started and implemented. The logic of collective action leads to the reform of global financial governance which is largely lagging behind dynamic changes in the global financial landscape. This is the fundamental reason for the various problems and challenges faced by the current global financial governance system.


Since the global financial crisis of 2008, China and other emerging economies have called for reforms to the global financial governance system, such as reevaluating the existing international financial governance structures, especially the issues of the undervalued quota shares of China and other emerging countries in the IMF and World Bank, and giving emerging countries a greater say in global financial rule-making. This is not only a great challenge facing the current global financial governance system, but also the background for the establishment of the AIIB.



China and other emerging economies have called for reforms to the global financial governance system, such as reevaluating the existing international financial governance structures and giving emerging countries a greater say in global financial rule-making.



What sort of impact can the AIIB can have on global financial governance? Viewing from the current situation, we can say that the impact will be limited. This is because China has explicitly positioned the AIIB as a MDB whose main task is “to foster sustainable economic development, create wealth and improve infrastructure connectivity in Asia by investing in infrastructure and other productive sectors.”4 This position has made it difficult for the AIIB and China to create a strong impact on the global monetary system reform and international financial supervision cooperation, let alone “shake or challenge America’s core interests in global financial field.” The Stratfor Report also holds that “China’s new bank does not signal a tectonic shift on the global order away from the US;” “without the onset of a massive disruption, this state of affairs is unlikely to change anytime soon.”5


The contribution that the AIIB can offer to the global financial governance system is that it will inject new funds and help meet the large financing gap in the global infrastructure sector.


Implications for East Asia


At the regional level, according to the oft-cited ADB estimate, from 2010-20 Asian countries will need to invest USD 8.3 trillion in national infrastructure and an additional USD 290 billion in regional infrastructure projects in transport and energy.6 ADB studies also show that ASEAN countries will need to invest USD 1.2 trillion in national infrastructure construction between 2010 and 2020, including Indonesia’s USD 450 billion, Malaysia’s USD 188 billion, Thailand’s USD 173 billion, Philippines’ USD 127 billion, and Vietnam’s USD110 billion.7


Faced with the Asian infrastructure bottlenecks, the existing development banks like the World Bank and the ADB cannot meet such a huge demand for financing. Currently, the total loans which the World Bank and ADB can give to Asia annually is around USD 200 billion, of which 40-50 percent can be used for infrastructure investment in Asia. In other words, the two institutions can only come up with USD 10 billion of funds for infrastructure construction in Asia. Compared with the annual demand for USD 750 billion, this is just a drop in the bucket.


China and some developing countries have repeatedly suggested that the World Bank and ADB adjust the right structures and increase the shares of their loan amounts to Asia so as to overcome the infrastructure gap in the region. However, in order to do so, these multilateral institutions need to implement a series of internal reform measures. But as mentioned above, due to the reasons of financial constraint and collective action, it is very difficult to carry out these reforms. In this sense, the AIIB will become an important platform to build an internal savings-investment conversion mechanism in Asia.


The other implication is that the AIIB may create a significant impact on East Asian financial integration. After the Asian financial crisis in 1997, China and other East Asian countries acknowledged the significance of regional financial cooperation. They established the Chiang Mai Initiative (CMI), the Asian Bond Market Initiative (ABMI), and the Asian Bond Fund Initiative (ABFI) as the three pillars of East Asian financial integration. Through the implementation of these initiatives, East Asian countries have realized policy coordination in their Bond Markets and financial institutions to a certain degree, largely reducing the possibility of the recurrence of crisis.


But East Asian financial integration has never been separated from the existing international and monetary system. The CMI is still connected with the IMF, and there has been close links between the ABMI and the Eurobond, the ABFI and the Bank of International Settlement. Although the Chiang Mai Initiative Multilateralization Agreement (implemented in 2010) was a milestone for the construction of an East Asian financial governance mechanism under the framework of ASEAN+3, it is restricted by the IMF in many aspects, including fund usage and regulation-making to a considerable extent. In addition, it does not have an independent oversight mechanism.


The establishment of the AIIB might create significant impact on the landscape of financial cooperation in East Asia. If the AIIB can build a sound operational mechanism as it claims, it will have the ability to integrate the CMI, ABMI, and ABFI. This will give East Asian countries greater flexibility in dealing with regional financial problems, especially when the IMF and World Bank are too slow to launch projects or too inept to tackle regional issues. In this sense, the AIIB will lead East Asian regional financial cooperation to a model of a “highly autonomous nature.”8


Conclusion


Competition improves the efficiency of resource allocation. Regardless of China’s motives, Asia stands to benefit greatly from the establishment of the AIIB. Billions of investment either dispersed directly or leveraged by the AIIB will greatly improve energy supply and expand the networks of highways and railways in the region, thus enhancing interconnectivity and boosting the growth of the regional economy.


Available evidence suggests that the AIIB holds promise. Despite obstacles and challenges of various kinds, the prospects look exciting and a “MDB of new model” might well be in the works. The fact that the US and Japan found it necessary to voice their objections initially to the setting up of the AIIB, the fact that East Asian countries found the importance of strengthening financial cooperation in the region, and the fact that many countries now find the AIIB all the more necessary to push for reform in global financial governance, mean that the AIIB could alter the landscape of the US-created financial system in the future.


Notes


1. Wang, D. & Xiang W. (2015). Yatouhang de quanqiu jinrong zhili yiyi,tiaozhan yu zhongguo de yingdui [AIIB’s significance in global financial governance, challenges and China’s response].Guoji guancha [International Survey], 5.


2. Shu, J. (2015). Yazhou jichu sheshi touzi yinhang yu guoji jinrong zhixu [Asian Infrastructure Investment Bank and the international financial order]. Guoji guanxi yanjiu [Journal of International Relations], 4.


3. Ibid.


4. Asian Infrastructure Investment Bank. (2015, June 29). Articles of Agreement of Asian Infrastructure Investment Bank. Retrieved from http://www.aiib.org/html/topic/Entry_into_Force/


5. Stratfor Global Intelligence (2016, January 16). China: Asian Infrastructure Investment Bank launched. Retrieved from

https://www.stratfor.com/situation-report/china-asian-infrastructure-investment-bank-launched


6. Asian Development Bank Institute. (2009). Infrastructure for a seamless Asia. Retrieved from http://adb.org/sites/default/files/pub/2009/2009.08.31.book.infrastructure.seamless.asia.pdf


7. Bhattacharyay, B. N. (2010). Estimating demand for infrastructure in energy, transport, telecommunications, water and sanitation in Asia and the Pacific: 2010-2020. ADBI Working Paper No. 248. Retrieved from http://www.adb.org/sites/default/files/publication/156103/adbi-wp248.pdf


8. Tan, W. (2015). Yatouyin de zhidu gongneng ji weilai yingxiang [AIIB’s system, capabilities and future impact]. Chinese (Taiwan) Society of International Law. Retrieved from http://csil.org.tw/home/2015/09/10/%E8%AD%9A%E5%81%89%E6%81%A9%EF%BC%9A%E4%

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