The Asian Infrastructure and Investment Bank Debate: A Perspective from South Africa

Daniel Bradlow

University of Pretoria

30/04/2015

Towards the end of this year, at least 40 countries are expected to sign a treaty establishing the Asian Infrastructure Investment Bank (AIIB).

The purpose of this Chinese-led multilateral development bank is to fund Asian infrastructure projects.

Usually, the only South Africans interested in the creation of an Asian multilateral development bank would be serious policy wonks. However, recent developments should make South African policy makers sit up and pay close attention to the AIIB.

Recently, a number of close European allies of the US, in open defiance of its wishes, announced that they would join the AIIB. They included the UK, France, Germany and Italy. In addition, Australia and South Korea have announced that they will join the AIIB, Taiwan has submitted an application to join and Japan has said that it is considering becoming a member.

Leading countries in the Middle East and South America are also expected to join. In fact, it is beginning to look as if the US will be the only major economic power not to join the AIIB.

These developments are making the AIIB more than just an important regional event. It is becoming a significant global economic governance episode that is relevant to SA in three ways.

First, the decision of these countries suggests that they will support at least some of China’s efforts to build alternative international financial institutions to the US-dominated World Bank and International Monetary Fund (IMF).

The resulting institutional competition should help to make the governance of the global economy both more reflective of the actual distribution of global economic power and more responsive to the needs of developing countries such as SA.

The decision of these US allies is an acknowledgment that China is a major power in global economic governance and that it is becoming untenable to maintain that the US is the sole hegemonic power in the global system. It also suggests that while these countries’ political interests may still lie with the US, their economic interests are increasingly bound up with China and, as is so often the case, their economic interests are trumping their political concerns.

The AIIB, therefore, in addition to being a building block for a new regional order, could also help to lay the foundations for new global economic governance arrangements. These developments will affect SA’s efforts to reform the governance of the IMF, in particular its efforts to gain a third African seat on the international fund’s board of executive directors.

On the one hand, competition between the US and China for influence over the global economy may make the US, as well as other countries interested in reforming the IMF, such as India and Brazil, more receptive to supporting the South African effort to gain a third African chair on the IMF board — which, at least under present arrangements, does not require US congressional action. On the other hand, it may make countries such as China less willing to spend their political capital on promoting reforms in the governance of institutions that they see as being of slowly declining importance in global economic governance.

Second, the AIIB provides some indicators to the other Brics (Brazil, Russia, India, China and SA) countries about China’s views on the governance of international financial institutions.

China, which is to provide 50% of the initial AIIB capital of $50bn, has opted to base voting rights only on gross domestic product in purchasing power parity terms.

This is different from the World Bank and the regional development banks, which use a multivariable formula for calculating votes. Given the size of the Chinese economy, this proposal is likely to give China the dominant voice, and possibly a veto, in the AIIB. This possibility offers a cautionary lesson to those who think that a Chinese-dominated system of global economic governance will be more democratic and more responsive to the concerns of developing countries such as SA than the present US-dominated model.

It may even suggest countries such as SA may derive some benefit from having competing international institutions involved in the governance of the global economy.

Third, if the AIIB is to live up to its promise of being a new kind of multilateral development bank, it will need to develop a better approach to dealing with the most complex and controversial aspect of the operations of all the existing multilateral development banks — how to ensure that it pays appropriate attention to both the social and environmental effects of the projects it funds and to processing loan requests efficiently.

When it comes to infrastructure projects, the biggest complaint that China and other developing countries have about the existing multilateral development banks is that they take too long to process funding requests and are too demanding in their evaluation of the social and environmental effects of the proposed projects.

However, as China, SA and many other countries and companies have learnt, often at the expense of those communities affected by the projects they sponsor, a failure to responsibly deal with the environmental and social effects of a project up front can turn a potentially beneficial project into a costly economic, financial, social, environmental and political problem.

The existing multilateral development banks have struggled with this issue for many years — the World Bank is in the middle of an extensive review of its policies on these issues at present — and neither it nor any other bank has effectively resolved the issue.

If the AIIB can develop a better way of managing these issues, it will make a major contribution to development, not only in Asia but in Africa as well.

In conclusion, the AIIB is an Asian drama with a strong African and global echo — it can affect our chances of reforming international financial institutions such as the IMF, it could influence the governance and operations of the Brics’s New Development Bank, and it could help us learn how best to plan and implement efficient but socially and environmentally responsible infrastructure projects.

Our policy makers should therefore pay close attention to it — and the recent decision to join the bank is a welcome move.

Daniel Bradlow is Sarchi Professor of International Development Law and African Economic Relations in the Faculty of Law at the University of Pretoria.