Using criticism that the bank will undercut the World Bank and Asian Development Bank, the US has recently been lobbying allied nations really hard not to join the Chinese initiative, described on both sides as an attempt to buy soft power and by the US as a way to shift geopolitical balance towards China. My take on this is probably rather caustic, so here’s a cheer to the “continue reading” button. You have been warned.
Isn’t it time that we face up to the fact that the IMF and World Bank in particular have massive credibility problems and sound a lot like a rich country club to exert political pressure on developing countries? Putting struggling euro economies under the boot like in 1997 Asia was simply out of the question to any greater degree than “We’ll loan you money as long as you give us any reason to believe you’ll pay it back. Here, have some more!” I guess a lot of people in Asia at the moment are rather smug about being in a lot better positions and having significant currency reserves to shield their economies if Europe simply isn’t able to grow its way out. The slowdown in Germany feels like tragicomic poetic justice after all the stringency they straddled the rest of Europe with.
The unspoken rule of a US leader of the World Bank and a European leading the IMF chafed a lot for China last time the IMF quota came under review in 2010. Unless there is an Asia-ex-Japan or developing world nomination for the IMF in time for next year’s quota review, I really think that the AIIB will gather a lot of steam and will have no problem getting more money from countries that want to court developing Asia. The fact that this happens at all and that there is heavy lobbying against other countries paying into it by the US probably speaks to diplomatic differences, given that the US has opposed and delayed reviews to the IMF quota formula and still stands in a weak minority that holds the IMF quota reform hostage. Since 85% of the vote is needed, above a 3/5’s quota of member states, the US effectively holds a veto on any reform with 16.75% of the vote allocation. This would still be the case after the formula reviews, but the major change would be that China would increase it’s influence by nearly 50% (from 3.8 to 6% and change) on the next quota review under the 2010 formula instead of the 2008 one, other emerging markets would have a lot more sway, and balancing at 100% would require mainly euro zone countries to give up quota. Them asking the US to stand by a veto while voting with developing markets themselves could be a bit of a way to keep decision power but play the “we’re all with you developing countries, look at our votes!” card. Talk about eating your cake and having it. Hearing “we’re in trouble now so we need more say in the IMF to structure how the world will rescue us” was a particularly rough undertone during the most volatile of the euro zone mess for developing countries who are put under a lot of reform demands with few opportunities to defend themselves.
Conspiracy theories aside, the US has been playing a long game of restricting growth of influence to the developing world in the main decision-making bodies that make up the current world order, and they’re now miffed that the country with the biggest reserves and demand for global future growth does something about it? Because it “undercuts” the ADB (which in 2012 saw an US$8 000 000 000 000 (trillion!) investment need until 2020 in Asian infrastructure alone and no way to meet this funding need in their own operations)? Because of environmental concerns when the US is the largest polluter per capita? (If you’re concerned about this, well, how much research conducted in developing countries do you want to fund because you don’t want the developing world to build up any pollution debt like you have and get access to “cheap growth” so you can keep investing global reserve holdings into your own growth? Put your money where your mouth is.) Because the ADB should allow the total project request-to-investment turnaround be roughly the time it takes for most of the economies looking into tapping ADB cash to be roughly enough time for these economies to double and have those infrastructure needs be completely obsolete by the time they happen?
I’m not saying everything about the AIIB is a good thing (the indication seems to be that China wants a lot of influence and not having to go through other countries’ official channels) but hopefully the Korea and Australia pressure could actually force a bit better governance. Challenging the current world order when it largely doesn’t represent the needs of the vast majority of humanity (which the AIIB is getting close to having signed up for) is a good thing in my book. Here’s the positive developments I see coming out if this:
- It forces the IMF review holdouts to review their own positions for large areas of the developing world if they are to have a claim on credibility in the developing world.
- It opens up an avenue for private investment that the ADB is really not even close to paving by actually going at it without being beholden to massive red tape and obsolescence concerns pre-investment.
- It allows more funding to countries that have otherwise been off the radar, largely in resource-rich areas of Central Asia with low population, less infrastructure and often little-to-no access to global capital markets.
- The ability of many of these growth markets to access capital should really enforce the private interest in this group of countries and by that virtue the AIIB as a whole, as backing by the fund probably does the CAPM valuation increase gambit by lowering risk and increasing return.
- The last point should open up a lot of interest in Asian VC/PE firms as the AIIB could essentially act as a pool of investment targets or communication channel to potential acquisitions that benefit from AIIB activity.
The positives here far outnumber the negatives in my book!