China & Asian Infrastructure Investment Bank (A.I.I.B) By F. Sheikh

In the last few weeks while the most of the world was focused on Iran Nuclear deal, another mostly overlooked economic event was taking place that may have far reaching economic consequences. As per Larry Summers, ex-US Treasury secretary, “it may be remembered as the moment the United States lost its role as the underwriter of the global economic system”. Many American allies, including Britain, France, Germany and Australia, who promised not to join the A.I.I.B, rushed to join it about 2 weeks ago before the deadline and ignored the pressure from Washington.

A.I.I.B is the brain child of China, mostly funded by China, for the development of infrastructure in Asia. The A.I.I.B came into being out of the frustrations with the governance of I.M.F., World Bank and Asian Development Bank which are dominated by the USA, Europe and Japan with little representations by China and other Asian countries. USA, Europe and Japan use these institutes to forward their own economic interests and benefit their own national companies to build projects supported by loans from World Bank and Asian Development Bank. Sometimes the projects are approved for developments which may benefit infrastructure companies, but which are controversial and not much beneficial to home countries.

The Managing Director of the IMF is always a European, the President of the World Bank is always an American and the President of the Asian Development Bank is always from Japan. Only a handful of countries from Asia benefit from Asian Development Bank.  Japan has hold on its policies and money is awarded with strings attached that benefit mainly Japanese companies. The IMF and World Bank is no different either. In current Greece crisis, many German and French banks had lent large amount to Greece and were in trouble. If Greece defaulted, these banks would have been affected and indirectly would have adversely affected German and French economy. New loans were given to Greece from World Bank and IMF to mainly save these banks. Whatever money Greece received, was paid to German and French Banks and did not help Greece economy. Greece acted basically as a middle man to transfer money from these institutions to German and French Banks, which are stronger now, but Greece is still in serious trouble. These world institutes are acting to safeguard the interests of major shareholders and their companies and interests of home country takes a back seat.

Many countries, including China, have repeatedly advocated for reforms in governance of these institutes to increase representations from other countries and selection of officers on merit basis. But despite promises of reforms nothing much has materialized.

In 2013 China came up with the idea of a new parallel Bank, A.I.I.B to challenge these institutions in Asia. Such a bank was needed for China’s own economic interest also. In the next two decades, the Asia will need about eight trillion dollars to build its infrastructure. When China announced the creation of A.I.I.B and promised to fund it initially with its own fifty to hundred billion dollars, Washington opposed it and many European countries and Japan refused to join it under pressure from Washington. Many Asian countries joined it, and finally about two weeks ago to beat the dead line and afraid to be left out, many opposing countries changed their mind and joined it except Japan and Washington.

It was a humbling moment for USA when its closest allies like Britain, France and Germany changed their mind and abandoned Washington for self-economic interests. Larry Summer, ex Treasury secretary, titled his article in Washington Post “A global Wake up call for the USA?’ and advised west and USA to reform the I.M.F., World Bank and Asia Development which is long overdue.

The governance policies of A.I.I.B are still being formulated. If China follows its own advice that it was giving to other world institutions, it will be great news for the developing countries and it will either force the other world institutes to reform or become irrelevant . While building projects, the economic interests of the major shareholders of world institutes should not undermine the interests of the home country and a proper balance should be found. If A.I.I.B can accomplish it, it will be a game changer in world economic affairs that will loosen the hold of I.M.F, and World Bank, but it is a tall order.