The AIIB is the new World Bank
The Chinese led bank is quickly becoming an Asian alternative to western organizations
24th October 2014, Beijing — Delegates from twenty-one Asian nations had gathered to change the way developing nations source funding. With China and India at the lead, the Asian Infrastructure Investment Bank would be formed.
The response from the west and particularly the United States was swift and dismissive. Questions were raised on its intent, on the excessive Chinese influence and whether the AIIB would stand on par with the IMF and the World Bank when it came to standards. So far, it has exceeded expectations.
To understand why this bank came into existence and the reaction to it, we need to go back in time.
A new financial order
When World War II ended in 1945, much of Asia and Europe were left in shambles; more than 80 million had died, and much of the world lived in abject poverty. Countries were in desperate need of money to finance their rebuilding efforts.
The Allies had foreseen this and had made preparations; at the Bretton Woods Conference held in 1944, diplomats from 44 nations came together to discuss the formation of a new financial order.
When the war ended, the World Bank and the International Monetary Fund were born
The World Bank would provide loans for capital projects to promote economic development and infrastructure while the IMF would regulate, advice and monitor the financial health of nations, and if there was a financial crisis, step in.
Caveats
None of this came for free of course, there was interest to be paid, but more importantly, the organizations would dictate terms; loans issued by the World Bank and the IMF have a number of fiscal and policy conditions the recipient must accept or else they run the risk of not receiving funds.
Joseph Stiglitz, the former Chief Economist of the World Bank stated that the conditions are very rigid and sometimes dictated without thought, no matter the recipient country’s individual characteristics. Some of the conditions include,
- limitations on Government Expenditure
- being open to Foreign Direct Investment
- reduced roles for the State among others
Political scientist Ian Bremmer notes that America had used its authority in the affairs of the World Bank and IMF to influence developing countries into adopting western values
If you were a developing nation and there is only one organization capable of giving you a loan, do you really have a choice?
More 60 years later, America and its allies still dominate the working of both institutions while China holds very small roles. At the Asian Development Bank (ADB), Japan dominates.
This would have made sense in 1945 or even 1990. Not today when China is the world’s second-largest economy.
More than just politics
The reasons for founding the AIIB go beyond geopolitics, it serves a pressing need. Infrastructural development is in high demand in Asia, there are estimates that the continent will require $1.3 trillion a year for just for infrastructure development.
Since it began operations on 16th January 2016, the AIIB has offered funding for projects such as rural infrastructure, energy & power, and environmental protection.
The bank currently has $100 billion in capital, and the loans handed out have fewer conditions than the World Bank or the IMF, in line with the Asian (read Chinese) opinion that each country should reserve the right to dictate how its internal affairs are conducted rather than be forced to follow rules that an international body prescribes them.
This approach has certainly worked, in just two and a half years, the bank has financed over 25 projects in countries ranging from Bangladesh to Oman, with more than 15 proposed projects in the pipeline.
Over $1 billion of that money has been invested in India. Examples include Bengaluru’s Metro Rail Line 6, and Andhra Pradesh’s Power for All project.
The US has urged its allies to not have ties with the bank. It believes (perhaps rightfully) the bank was established by China to pursue its own geopolitical interests in the future. In that attempt, it has failed.
China decided to forgo veto power in the bank — a bold move that helped bring European countries as members into the bank, most notably US’s strongest ally, the UK. The bank now has 87 partner nations including many western allies. China and India hold 31% and 8.7% of the total subscriptions respectively and thus the most voting rights.
The AIIB has been given top ratings by three major rating agencies, loans are flowing and the bank is now a recognized and respected Multilateral organization. The World Bank and the IMF are still larger and more influential, but it is clear that the tide has turned.
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