By: David Jankowski
China is growing and growing fast. Even in the middle of an economic slow-down, it is projected to grow 7.1% in 2015, nearly double the global average of 3.6%. Despite large growth projections Chinese growth has progressively slowed over the past six years, spurring the nation to seek proactive methods to promote economic expansion. Over the past 5 years, China has attempted to goad growth in an uncharacteristic manner. China has begun to look outward. To secure precious natural resources, it began investing in Africa and South America before turning its focus to its neighborhood.
Beginning in September of 2013, Chinese President Xi Jinping introduced the Silk Road Economic Belt concept that would connect China economically to Central Asia. One month later President Xi proposed a 21st Century Maritime Silk Road, linking China to the Association of Southeast Asian Nations (ASEAN). These visions were consolidated into a strategic plan to connect a community of common interests through infrastructure. By February 2014, construction of a rail bridge connecting China and Russia began, and the finalized New Eurasian Land Bridge linked the Chinese port city of Lianyungang to Rotterdam through Iran and Turkey. The pieces were in place.
Following the model of any great superstore, China began building an easier network for the consumer to receive its goods. It is one belt to link them all, one road to unite them. The logic is simple, efficient transportation links promote trade and increased trade leads to increased economic growth. This network would be expensive. The Asian Development Bank (ADB) estimated that between 2010 and 2020 Asia will require approximately $8 trillion and $290 billion for national and regional infrastructure respectively. But perhaps more challenging than a multi-trillion dollar need is collaboration between the nations within the region to build, maintain, and coordinate legislation. There needed to be something to connect Asian nations beyond rail, water, and road.
Enter the Asian Infrastructure Investment Bank (AIIB). The bank became the medium to take China from A-II-B. It initially united 21 Asian nations in October 2014 before expanding to 57 Prospective Founding Members (PFMs), 37 regional and 20 extraregional. Together the 57 PFMs account for 57% of global, nominal GDP and 16 of the 20 largest economies in the world. China has amassed a crack team to fund its field of infrastructure dreams in the form of a $100 billion international investment bank.
In the coming months AIIB members will create and sign a set of rules for the organization called an Articles of Agreement (AOA). This rulebook will detail institutional policy, status of members, privileges, currency usage, implementation approaches, and vote allocation among other things (check out the IMF’s AOA). Once the AOA is finalized, the bank will work toward its goal of becoming fully functional by the end of 2015.
China is missing two key elements to have the world at its fingertips you say? Both the United States and Japan have not joined the AIIB. These two nations are the first and third largest economies in the world and account for 28% of global GDP. This is where things get interesting and the scales tilt more in China’s favor. Without Japan and the United States to take votes away from China, and a likely cap on non-Asian voting to <25%, China will retain the lion’s share of influence within the new heart of Asian infrastructure financing and development. This will effectively make the bank an arm of Chinese trade investment funded in part by extra regional sources. This could make the AIIB the way in which China goes from A to B without having to foot the entire bill. If you ask me, it’s a genius way to get someone to pay for your party
The AIIB and the US
But how does the shakedown of US allies affect the role of Bretton Woods institutions like the IMF and World Bank who have ruled foreign investment and development since the 1940s? Does the AIIB diminish US influence?
The quick answers are “it doesn’t” and “no.” The purpose of the bank appears to be a method of ensuring regional participation and securing funds for the massive infrastructure needs in Asia. This is already one goal of the World Bank’s arm in Asia the ADB, but the ADB has many more purposes than infrastructure. In fact, the head of the ADB has welcomed the additional source of infrastructure funding in the region. More available funding for infrastructure relieves pressure on the ADB to acquire such funds, providing more room for the World Bank subsidiary to function in other aspects of Asian development.
Another concern is that the AIIB is an attempt to amplify China’s global influence. However, gains to influence will be predicated on an efficient and effectively managed bank that respects global environmental and human rights standards. While the AIIB espouses lofty goals that parallel global norms, its actions will determine how much respect the investment bank will garner. Until these details are put into practice, the United States and Japan will be wise to maintain control of the ADB for their Asian infrastructure goals.
Overall, the AIIB is an opportunity to catalyze economic growth and regional cooperation in Asia, however, it remains to be seen whether China will be able to manage such an institution. For now, the AIIB can be seen as a potentially positive addition to the world of international investment banking. It may augment economic growth in Asia, which provides exogenous benefits for the world economy. As President Franklin D. Roosevelt stated at the historic Bretton Woods Conference, “The economic health of every country is a proper matter of concern to all (the US’s) neighbors, near and far.”
David is a Master’s Candidate at the Patterson School of Diplomacy and International Commerce. He is a former professional athlete with a passion for diplomatic relations, international trade, and international athletics. Contact David with any questions, comments or opportunities: https://www.linkedin.com/in/jankowskidavid