The Asian Infrastructure Investment Bank; The infrastructure gap

Development finance helps China win friends and influence American allies.

SINGAPORE - STRATEGIC rivalry between America and China takes many forms. Rarely does a clear winner emerge. An exception, however, is the tussle over China’s efforts to found a new Asian Infrastructure Investment Bank (AIIB). China has won, gaining the support of American allies not just in Asia but in Europe, and leaving America looking churlish and ineffectual.

This month first Britain and then France, Germany and Italy said they hoped to join the bank as founding shareholders. China said other European countries such as Luxembourg and Switzerland are thinking of joining the queue. Yet America has been sceptical about the AIIB. Its officials claim they have not “lobbied against” it, but merely stressed how important it is that it abide by international standards of transparency, creditworthiness, environmental sustainability, and so on.

America’s reservations were certainly taken by officials in the region, however, as admonitions to steer clear of the AIIB. They were enough, at first, to discourage some of its closest Asian allies from joining the initial 21 founding members. Australia, Japan and South Korea all stayed out—though other staunch American friends such as New Zealand, Singapore and Thailand signed up. The joiners argue that China was going to launch the AIIB anyway; better to be on the inside influencing its governance. The Europeans’ accession is likely to encourage changes of heart among the refuseniks. Australia has already indicated it is reconsidering; South Korea seems almost certain to join.

The AIIB is but one of a number of new institutions launched by China, apparently in frustration at the failure of the existing international order to accommodate its astonishing rise. Efforts to reform the International Monetary Fund are stalled in the American Congress. America retains its traditional grip on the management of the World Bank. The Manila-based Asian Development Bank (ADB) is always directed by a Japanese official. Partly for that reason—that the AIIB would amount to a diminution of Japanese influence in favour of China at a time when their relations are fraught—Japan is sniffy about the new bank. Its cabinet secretary, Yoshihide Suga, this week repeated that Japan will “carefully study” the AIIB’s governance standards.

China, flush with the world’s biggest foreign-exchange reserves and anxious to convert them into “soft power”, is building an alternative architecture. It has proposed not just the AIIB, but a New Development Bank with its “BRICS” partners—Brazil, Russia, India and South Africa—and a Silk Road development fund to boost “connectivity” with its Central Asian neighbours.

Nobody questions Asia’s almost inexhaustible appetite for investment in infrastructure. An oft-cited study by the ADB in 2009 put a number on it: $8 trillion between 2010 and 2020, of which 68% would be for new capacity. As for how it is spent, 51% would be for electricity, 29% for roads and 13% for telecommunications. Among this are many projects that China sees as in its own national interest, and certainly those of its contractors: high-speed railways linking Yunnan province to South-East Asia; ports in Indonesia, Pakistan and Sri Lanka (see article); a new Silk Road across Central Asia to Europe.

Despite the obvious need, America has, either by design or ineptitude, turned the AIIB into a test of diplomatic strength. That has proved a disaster. Its officials have, anonymously, rebuked Britain for its “constant accommodation” of China—and many observers would agree that they have a point. But that its closest allies have proved so keen to court China’s favour and so willing to flout American views suggests America picked the wrong fight.

China’s triumph is not unalloyed, however. The accession of so many financially strong shareholders to the AIIB will indeed make it more likely that the bank will adhere to the same sorts of standards that govern the World Bank and other international financial institutions. That is good for China’s hopes of getting a decent return on its investment in the AIIB, but less so for any residual ambitions its leaders may have that the bank might become an arm of Chinese foreign policy.

The affair also raises the stakes in America’s increasingly frantic efforts to conclude a trade agreement, the Trans-Pacific Partnership, with Japan and ten other countries. In his state of the union speech in January, Barack Obama advertised this explicitly as an attempt to counter China’s attempt “to write the rules for the world’s fastest-growing region”. “We should write those rules,” he declared. The AIIB fiasco suggests many in the world’s fastest-growing region are not so sure.

Source: Economist.com

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