ABC's of the AIIB

The 57 founding members of the China-sponsored Asian Investment Bank will meet on May 20 in Singapore.   Many countries rushed to join the new development bank before the March 31 deadline even though key rules had not been decided.  Even the size of the new institution had not it officially set.

Chinese initiatives often meet several of objectives.  The development bank will help facilitate China's foreign policy goals under the slogan of "One Belt, One Road." This refers to the resurrection of the land-based Silk Road, complimented with a maritime initiative as well.

In seeking resources and markets, China's focus is on its neighborhood: Asia.  Many observers expect the PRC to seek regional hegemony before challenging the US global role.  However, this is too static of an understanding, and does not give due to China's long game approach.  Specifically, within 15 years, Asia is expected to account for half the world's GDP and two-thirds of the global middle class.

To dominate Asia will be to dominate the world.   Early in the 20th century, the political scientist H. MacKinder proposed a geostrategic theory that he summarized as:  "Who rules East  Europe commands the Heartland; who rules the Heartland commands the World-Island; who rules the World -Island commands the world." 

It is like the four center squares on a chess board.  Controlling those four squares makes it easier to win the game.  MacKinder's view, which continues to influence many (see Ukraine), is predicated on a euro-centric view of the world.   That made sense at the start of the 20th century.  It makes less sense at the beginning of the 21st century.  China's One Belt, One Road puts an Asian to MacKinder's classic analysis.  The center of the world economy is shifting to Asia.   Indeed, for about a quarter of a century, more goods cross the Pacific than the Atlantic.  

The Middle Kingdom, which was the world's largest economy for 18 of the past 20 centuries, is on its way to reclaiming perch. Chinese officials need not talk about challenging US global leadership. They know that be becoming the regional hegemon, it will succeed with loftier goals as well. 

Chinese officials do not think they have received the level of respect that they deserve.  China is the world's second largest economy.  Yet its voting rights at the IMF is sixth, behind the US, Japan, German, France and the UK, for example. The multilateral institutions have been painfully slow to adjust to the changes in the world economy and the increasing importance of developing countries.  

In 2010, the IMF agreed on a reform plan, which called for a doubling of the IMF's capital and an increase in the voting rights of several emerging markets.  China would move into third place. India would move into eighth place from eleventh.  Brazil, South Korea and Singapore would also have a slightly greater say.  

However, given the US votes (16.7%) and the 85% votes needed, the US has an effective veto. Owing to domestic US political wrangling, the US Congress has not supported the effort.  This has stymied IMF's reform efforts.  Although the IMF is exploring a work-around, which could include a much smaller increase in its capital (10%), it is too little and too late for many countries.  

If room at the table is not made for rising economic and political powers, they will seek to establish parallel institutions.  They will serve as tool to project power, reward friends and punish enemies.  Chinese officials sought broad participation in the AIIB, but rejected its bid.  Taiwan had offered to use a name more acceptable to Beijing, and following the APEC model, was willing to use the name "Chinese Taipei."  This was still not acceptable to China. 

The first 21 members AIIB were Asian, but by opening membership to Europe, China succeeded, it would appear, in causing a bit of a fissure among its competitors, and often rivals.  However, it is still not clear what they signed on to.  For example, Europe is now arguing that non-Asia contributors should contribute 30% rather than 25% and get more than three seats on the 12-person board.  China had earmarked Asian countries receiving 75% voting rights.  China alone would have a 30% weight.  India and Russia would be tied for second with about 10% each.  

China has responded to the European pressure by offering to increase the size of the initial capital from $50 bln to $100 bln.  In effect, this tests Europe's resolve; to put their money where their mouth is, as Americans might say.  

China does not want the AIIB to have a large number of directors or a full-time board, unlike other multilateral lenders.  It is expensive and tends to slow the decision-making process. Instead, China seeks a devolution of power to the senior staff which can provide loan approval (though such decisions could be overturned by the board). 

Japan, which heads up the Asian Development Bank, has indicated a willingness to cooperate with the AIIB, but it is suspicious.  More than that, Japan Prime Minister Abe is expected unveil a new regional development initiative under its Japanese Bank for International Cooperation on May 21, the day after the AIIB meeting in Singapore.  Reports suggest that it will also be seeded with $100 bln.  

The competition to fund much needed development projects may actually spur infrastructure investment.  Borrowers are at an advantage, being able to pit one lender's terms against another.  Remember the Soviet Union beat out the West in building Egypt's Aswan Dam.  On the other hand, the risk is the competition dilutes quality and standards.  

Europe's hope to join AIIB to influence it may be a bit naive.  China is not about to let those countries that tried dismembering it (the old summer palace that was burned down by the British and French remains a significant tourist attraction) to wrestle control of the AIIB from it.  

ABC's of the AIIB ABC's of the AIIB Reviewed by Marc Chandler on May 19, 2015 Rating: 5
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