The Asian Infrastructure Investment Bank

Chinese President Xi Jinping announced the AIIB initiative in October 2013 during a visit to Southeast Asia. The factors behind the announcement are multi-faceted. Some suspected a commercial rationale to push for more Chinese market opportunities. Japan encountered the same suspicion when the ADB was created. Others speculated about geopolitical objectives and what is perceived as tighter control of the governance structures by Beijing. An important element was the feeling by the Chinese that, despite their rise as a great power and emergence as the second largest economy in the world, they had not been sufficiently rewarded with capital share and voting power rights in the World Bank and the ADB. In other words, the Chinese felt they were being denied an opportunity to participate at their weight level.

Initially, little attention was paid to the AIIB. Some even thought that it might not get off the ground. By the time it was apparent that the AIIB was here to stay, there wasn’t much any nation could do about it. The main concerns about the AIIB are related to governance and safeguard policies. Contrary to some media reports, the US position was not to discourage other countries from joining the AIIB but to say - “if we were asked” - these are the questions we would raise with Beijing.

The controversy surrounding the creation of the AIIB was intense, as some countries worried about Washington’s reaction or Tokyo’s or both. In October 2014, 22 Asian countries met in Beijing to sign a Memorandum of Understanding to establish the AIIB; rapid progress in creating the bank ensued. The big break was when the United Kingdom announced its intention to join the AIIB - not necessarily pleasing other European nations who felt London had jumped the gun. However, shortly thereafter other Europeans signed up. Japan and the US have not. It is difficult to see a near-term chance of their joining despite many voices in Tokyo and Washington advocating just that.

To the AIIB’s credit, it seems to have heard the concerns about safeguard policy and has engaged former officials from other MDBs to help craft practical policies - or at least deploy the right buzz words. They have an emphasis on transparency, accountability, openness, and independence. As the new president, former ADB Vice President Jin Liqun has said, the AIIB will be “lean, clean, and green.” The AIIB Secretariat plans to have 700 personnel, which is substantially less than the 2,000 employees at the ADB headquarters. It is too early to tell whether the AIIB will adhere to these precepts, as it only opened its doors in January of this year. The proof will be in the pudding, but there are already good signs. I am encouraged by the extent to which the AIIB has reached out even before opening to consult with other MDBs such as the ADB and World Bank. Already AIIB officials are studying the feasibility of co-financing 18 projects proposed by the World Bank and eight submitted by the ADB. Many of these cou ld be approved by the AIIB Board as early as this summer. The ADB has made it clear that there will be no co-financing with the AIIB until ADB safeguards are accepted, and this does not seem to have given the AIIB any pause.

The AIIB, with 57 member countries, will have a different emphasis than the ADB, with its expanded capital base moving into new areas such as education and healthcare. This will be a small step from the ADB’s comfort zone of infrastructure; some have said that ADB really stands for “Asian Dams and Bridges.” That said, the AIIB looks to remain in the infrastructure and connectivity space.

One area of governance that many have viewed with discomfort is the AIIB’s insistence on a non-resident Board of 12 members. A resident Board is viewed, apparently, as an unnecessary cost, but it is necessary for efficient oversight. On the ADB Board when I or my staff had concerns, arranging a face-to-face meeting with management could be done in minutes. Emails and long distance phone calls were insufficient. Smaller MDBs like the Caribbean Development Bank with a capital base of around $3 billion can handle this. But it’s hard to see how a mega-bank like what the AIIB envisions will be able to sustain such fragile governance. It will be interesting to see how nongovernmental organizations react to not having Board-level points of contact at the AIIB headquarters year round and how that will manifest in member country capitals. There could be calls for Board residency.

Despite frequent denials, MDBs are fundamentally political institutions. It is difficult to make decisions for vice presidents based purely on merit at that level. It’s hard to see how political factors could ever be totally excluded. This is true at the ADB. The AIIB got its first taste of this when a European government assumed it would receive one of the two VP slots that Europe was to get and it wound up going to another. That capital thought it looked like a classic bait and switch. And already friction ensued.

I see many potentially positive outcomes with the AIIB. Infrastructure demands in developing Asia far outstrip what the ADB and World Bank can provide so another player, governed correctly, should be a welcome addition. Ultimately, it will have to be private capital that provides the lion’s share of the developmental and infrastructure tools, but MDBs can send signals of stability and safer investment returns to private investors…sort of “good housekeeping seals.”

Conditional collaboration?

Will collaboration between the ADB and AIIB be driven by governance conditionality? In the beginning, at least, my sense is yes, as both institutions develop a better sense of how the AIIB’s governance model will uphold adequate safeguards that are vital to the ADB and, for that matter, the World Bank. It is critically important for all MDBs to coordinate. It won’t happen all the time as there may be policy preferences that are different. The ADB may have a stricter code on environmental issues than will the AIIB.

Healthy competition between the two banks is not a bad thing and can act as a catalyst for important reforms in each institution. I think the existence of the AIIB will push the ADB to widen and deepen reforms, which many stakeholders have advocated for years. Competition can enhance that. It can act to improve the effectiveness of safeguard regimes and the projects themselves. In the end, we will all benefit.

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