The birth of new development banks led by developing countries and the United States’ failure to block them are signs of rebalancing of economic power, especially in Asia.
IN the last month, the international media has been carrying articles on the fight between the United States and China over the formation of the Asian Infrastructure Investment Bank (AIIB).
Influential Western economic commentators have supported China in its move to establish the new bank and judged that President Barack Obama made a big mistake in pressurising US allies to shun the bank.
The United States is seen to be scoring an “own goal” since its close allies the United Kingdom, Australia and South Korea decided to be founding members, as well as other European countries, including Germany and France, and most of Asia.
The United States also rebuked the United Kingdom for policies “appeasing China”, but the latter did not budge.
The United States did not give any credible reason why countries should not join the AIIB.
Treasury Secretary Jack Lew said the new bank would not live up to the “highest global standards” for governance or lending.
But that sounded like the pot calling the kettle black, since it is the lack of fair governance in the International Monetary Fund (IMF) and World Bank that prompted China to initiate the formation of the AIIB, and the BRICS countries (Brazil, Russia, India, China and South Africa) to similarly establish the New Development Bank.
For decades, the developing countries have complained that the developed countries have kept their grip on voting power in the Breton Woods institutions by clinging to the quotas agreed upon 70 years ago.
These do not reflect the vastly increased shares of the world economy that the emerging economies now have.
Even the mild reform agreed upon by all – that the quotas would be altered slightly in favour of some developing countries – cannot be implemented because of US Congress opposition.
The big developing countries have been frustrated. They had agreed to provide new resources (many billions of dollars each) to the IMF during the financial crisis, but were rewarded with no reforms in voting rights.
In addition, the unjustifiable “understanding” that the heads of the World Bank and IMF would be an American and a European respectively remains in place despite promises of change.
So much for legitimacy of lectures about good governance, merit-based leadership and democratic practice, which are preached by the Western countries and by the IMF and World Bank themselves.
The BRICS countries then set up the New Development Bank, which will supplement or compete with the World Bank, while China created the AIIB to supplement the Asian Development Bank (ADB), which also has a lopsided governance system.
The new banks will focus on financing infrastructure projects, since developing countries have ambitious infrastructure programmes and there is gross under-funding.
Critics anticipate that the new banks will finance projects that the World Bank or ADB would reject for not meeting their environmental and social standards.
But that is attacking something that hasn’t yet happened. True, it would be really bad if the new banks build a portfolio of “bad projects” that would devastate the environment or displace millions of people without recognising their rights.
It is thus imperative that the new banks take on board high social, environmental and fiduciary standards, besides having good internal governance and being financially viable.
The new institutions should be as good as or better than the existing ones, which have been criticised for their governance, performance and effects.
It is a high challenge and one that is worthy of taking on. There is no certainty that the new banks will succeed. But they should be given every chance to do so.
The AIIB, in particular, is being seen as part of the jostling between the United States and China for influence in the Asian region.
A few years ago, the United States announced a “pivot” or rebalancing to Asia. This included enhanced military presence and new trade agreements, especially the Trans-Pacific Partnership Agreement (TPPA).
It seemed suspiciously like a policy of containment or partial containment of China. The United States combines cooperation with competition and containment in its China policy, and it retains the flexibility of bringing into play any or all of these components.
China last year announced its own two initiatives, a Silk Road Economic Belt (from Western China through Central Asia to Europe) and a 21st century Maritime Silk Road (mainly in South-East Asia).
The first initiative will involve infrastructure projects, trade and public-private partnerships, while details of the second initiative are being worked out.
The AIIB can be seen as a financial arm (though not the only one) of these initiatives.
China is also part of negotiations of the RCEP (Regional Comprehensive Economic Partnership) that does not include the United States.
Last year, it also initiated a study to set up a Free Trade Area of the Asia-Pacific, which will include the United States.
These two intended pacts are an answer to the US-led TPPA. It is still uncertain whether the TPPA will conclude, due both to domestic US politics and to an inability to reach a consensus yet among the 12 countries on many contentious issues.
Meanwhile, prominent Western opinion makers are urging the United States to change its policy and to accommodate China and other developing countries.
Former US Treasury Secretary Larry Summers said this past month will be remembered as the moment the United States lost its role as the underwriter of the global economic system.
Summers cited the combination of China’s effort to establish a major new institution and the failure of the United States to persuade dozens of its traditional allies to stay out of it.
He also called for a comprehensive review of the US approach to global economics, and to allow for substantial adjustment to the global economic architecture.
Martin Wolf of the UK-based Financial Times said that a rebuff by the United States of China’s AIIB is folly. This is because Asian countries are in desperate need of infrastructure financing, and the United States should join the bank rather than pressuring others not to.
The real US concern is that China might establish institutions that weaken its influence on the global economy, said Wolf.
He added that this is wrong since reforms on influence in global financial institutions are needed and the world economy would benefit from more long-term financing to developing countries. China’s money could push the world in the right direction.
In a devastating conclusion, Wolf said the world needs new institutions.
“It must adjust to the rise of new powers. It will not stop just because the United States can no longer engage. If the results are not to the United States’ liking, it has only itself to blame.”
The winds of change are blowing in the global economy, and many in the West recognise and even support this.
> Martin Khor is executive director of the South Centre, a research centre of 51 developing countries, based in Geneva. You can e-mail him at email@example.com. The views expressed here are entirely his own.
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