The AIIB through the Lens of the ADB
By Takehiro Masutomo

The AIIB through the Lens of the ADB

Mar. 24, 2016  |     |  0 comments


Occupying 18 floors of an office building in the Financial District of Beijing as its headquarters, the Asian Infrastructure Investment Bank (AIIB) started operations in January 2016 based on the agreement among its 56 founding member countries. Almost 3000 kilometres south in Manila stands the massive headquarters of the Asian Development Bank (ADB). How does the new multilateral development bank appear through the lens of its nearly-half-a-century old predecessor?

The ADB was established in 1966 when Japan was regaining its international presence after the end of the Second World War. As when China hosted the Olympic Games in 2008 and became the world’s second largest economy in 2010, Japan hosted Asia’s first Olympic Games in 1964 and became the world’s second largest economy four years later. As the only advanced industrial economy in Asia at the time, it was natural for Japan to lead the initiation.


Among other theories, the blueprint to establish an Asian development bank arose from a private meeting Takeshi Watanabe, then an official with the Japanese Ministry of Finance, had in 1963. Probably because the war memory was still vivid, Mr. Watanabe showed hesitation by noting, “it is better not initiated by Japan” (Watanabe, 1973). Concurrently, multilateral development banks such as the Inter-American Development Bank (IDB, established in 1960) and African Development Bank (AfDB, established in 1963) came into existence in other parts of the globe.


Mr. Watanabe, who would later serve as the first president of the ADB, insisted on two principles in the making of the bank; to welcome members from outside the Asia-Pacific region to assure a stable capital stream; and to adhere to a bankability principle to prevent the ADB from becoming a mere aid agency (Kapur, Lewis & Webb, 1973).

Initially, Japan assumed that it would not only obtain the top position, but would also host the ADB headquarters in Tokyo, Japan. Through a democratic election among  the 18 regional member countries, the host status was awarded to Manila, the capital of the Philippines. Contrary to Japan’s expectation to win once and for all, Tokyo failed to gain a majority of votes, and had to compete with Tehran and Manila in the second round. Then, Tehran was out, and in the final round the Philippines received 9 ballots against Japan’s 8. The Philippines had begun to work behind the scenes two years prior to the vote as the ADB headquarters host city, and as the election drew near, then President-elect of the Philippines Ferdinand Marcos actively lobbied for the bid (Krishnamurti, 1977).

Tokyo’s missed opportunity, however, helped transform the ADB into a more international bank in the sense that the ADB management team could now shield itself from intervention from the Japanese government (Wan, 1995-1996) In contrast, although South Korea and Indonesia reportedly showed their interest in hosting the headquarters of the AIIB, China opened it in its capital city, only miles away from the political center Zhongnanhai.

Comparing the Articles of Agreement for the ADB (ADB, 1966) and the AIIB (AIIB, 2015), one would notice that while the structure of the articles is similar, a clear difference is that the AIIB articulates one of its purposes as seeking to improve infrastructure connectivity in Asia. This coincides with the slogan Chinese diplomats have used for neighborhood diplomacy in recent years. The examples include the Kunming-Singapore railway, China-Pakistan Economic Corridor and Colombo Port City.

The AIIB has close linkages with Southeast Asian countries. A senior Chinese official first came up with the idea of launching the new multilateral development bank when he visited Laotian villages along the Mekong River (Perlez, 2015). Subsequently in 2013, President Xi Jinping during his visit to Indonesia announced the initiative to establish the AIIB. Also, the Chinese government first negotiated with the ASEAN 10 members about the bank with much expectation (Hu, Wang, & Wang, 2016). In addition, ASEAN was among the first group of countries to decide to join it.

While Japan can exert a great influence over the ADB, it is not fully a “Japanese bank.” In 2013, the contracts Japanese firms won in ADB-related projects was as low as 0.21 percent, far behind the 20.9 percent won by Chinese firms (Hosomi, 2015). It is suggestive that the China-initiated AIIB is emerging today when Chinese companies are urged to go abroad to relieve excessive capacity at home.



China’s share in the AIIB stands at 30.34 percent, giving the country the veto as of now, and it appears hard to exclude the possibility for the AIIB to become a “Chinese bank.”

As the two leading shareholders in the ADB, Japan and the U.S. hold 15.7 percent and 15.6 percent of the bank’s total shares respectively (voting powers of 12.8 percent and 12.7 percent). According to the former Dean of the Asian Development Bank Institute (ADBI) Masahiro Kawai, the US has pointed out the organizational ineffectiveness of the ADB in the past, and has long played the role of the “opposition party.” He believes that Japan has provided international public goods rather than pursuing its own purposes.1 In contrast, China’s share in the AIIB stands at 30.34 percent (voting power of 26.06 percent), giving the country the veto as of now, and it appears hard to exclude the possibility for the AIIB to become a “Chinese bank.”

Whereas the shares of developing or emerging economies is below 40 percent for the ADB, the same number reaches 70 percent for the AIIB, giving the developed economies of Europe a minority voice. In the case of the AfDB, the bank only accepted regional members at its inception, and its operation subsequently faced difficulties. Eventually, the bank had to open its membership to non-regional developed countries. History suggests the operation of the AIIB may not be as smooth as one hopes down the road.

On the organizational structure front,  the ADB’s Board of Directors, which resides in Manila, is elected by the Board of Governors – the bank’s highest policy-making body – to approve all loan and other projects. Controversially enough, Mr. Jin Liqun, the AIIB’s president, argues that the AIIB should not have a resident Board of Directors due to cost problems and unclear responsibilities (Hu, Wang & Wang, 2016).

From the perspective of human resources, nine ADB presidents thus far were formerly Japanese officials either from Japan’s ministry of finance or the Bank of Japan. Similarly, the key Budget, Personnel and Management Systems Department has always been headed by a Japanese staff member. Criticism against such reality exists, but it did not spread widely since Japan has been making tireless contributions to the Asian Development Fund, which intends to reduce poverty in ADB’s poorest borrowing countries. The AIIB is currently recruiting professionals from around the world, and some former ADB staff have joined the AIIB. Mr. Jin Liqun himself was a former ADB vice president.


In regard to its first lending project, the ADB spent more than a year selecting the loan project: the Industrial Finance Corporation of Thailand. The post-evaluation report written by the ADB mission concluded, “Despite the difficulties associated with the fact that it was the Bank’s first loan, it has attained … its intended objectives generally.”2 This company continued its business on its own until it merged with a commercial bank in 2004, suggesting the ADB was not looking for short-term interest. The AIIB, on the other hand, is quick in picking the first lending program – expected as early as the second quarter of 2016.


In China, the ADB is criticized for the lengthy selection process for their projects. Many ADB staff members acknowledge the organization is too bureaucratic. Responding to such criticism, ADB president Takehiko Nakao in the 2015 Baku meeting called for “a stronger, better and faster ADB” (ADB, 2015). After being elected as president in 2013, Mr. Nakao has pushed for a series of reforms such as consolidating ADF and ordinary capital resources (OCR), launching the Office of Public-Private Partnership, and increasing annual lending capacity by 1.5 times to $20 billion. As for the AIIB, Mr. Jin Liqun has vowed that the bank will be “clean, lean and green” with a “21st century management” (Zheng, 2015).

Another concern is the AIIB’s safeguard policy. Mr. Jin Liqun recently noted the bank will operate based on “innovative” international best practices that include lessons learned from China’s past experiences (Hu, Wang, & Wang, 2016). Yet, international NGOs have expressed concerns about environmental and social aspects compared with the ADB, which published a well-received safeguard policy statement back in 2009. 3

In sum, while the international status between China today and Japan at the time is similar, the AIIB and the ADB may be quite different in terms of their origins, principles, international operations, as well as geopolitical circulation.


Notes

1. Author’s interview with Prof. Masahiro Kawai on June 1, 2015.

2. The post-evaluation report which this Author obtained from the ADB.

3. Based on interview with an NGO staff in Manila.


References


ADB (1966). Agreement establishing the Asian Development Bank. Retrieved from http://www.adb.org/sites/default/files/institutional-document/32120/charter.pdf

ADB (2015, May 4). President Nakao seeks to build a stronger, better, faster ADB. Retrieved from http://www.adb.org/news/president-nakao-seeks-build-stronger-better-faster-adb

AIIB. (2015). Asian Infrastructure Investment Bank Articles of Agreement. Retrieved from http://www.mof.gov.cn/zhengwuxinxi/caizhengxinwen/201506/P020150629360882722541.pdf

Hosomi, R. (2015, April 4). アジア投資銀参加見送り「マイナスない麻生財務相. [Finance Minister Aso says Japan’s decision to wait and see the AIIB participation will generate “no negative effect”]. 朝日新聞 [The Asahi Shimbun]. Retrieved from http://www.asahi.com/articles/ASH434QW7H43ULFA01J.html

Hu, S., Wang, L. & Wang L. (2016, January 16). 用创新的国际最佳准则打造亚投行 [Making the AIIB with innovative international best practice], 财新周刊[Caixin Weekly]. 88(3).

Kapur, D., Lewis, J., & Webb, R. (Eds.). (1997). The World Bank: Its First Half Century Vol 2 Perspectives. Washington D.C., Brookings Institution.

Krishnamurti, R. (1977). ADB: The Seeding Days. Manila: ADB.

Perlez, J. (2015, December 5). China creates a world bank of its own, and the U.S. balks. The New York Times. Retrieved from http://www.nytimes.com/2015/12/05/business/international/china-creates-an-asian-bank-as-the-us-stands-aloof.html?_r=0

Wan, M. (1995-1996). Japan and the Asian Development Bank, Pacific Affairs, 68(4), 509-528.

Watanabe, T. (1973). 私の履歴書 49 [My curriculum vitae 49]. Tokyo: Nikkei Publishing Inc.

Zheng, Y. (2015, June 29) AIIB to be "lean, clean and green". China Daily. Retrieved from http://www.chinadaily.com.cn/business/2015-06/29/content_21128069.htm

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