The Asian Infrastructure Investment Bank
March 20, 2015
Q1: What is the Asian Infrastructure Investment Bank (AIIB)?
A1: The AIIB is a multilateral development bank that will finance infrastructure needs in the Asia Pacific region. There are two prominent multilateral development banks already working on development needs in the region: the Asian Development Bank (ADB) and the World Bank, with the ADB also investing the majority of its funds in infrastructure projects.
The AIIB was first proposed by Chinese President Xi Jinping at the October 2013 Asia Pacific Economic Cooperation (APEC) meeting in Indonesia as a means of leveraging Chinese financial capital and experience in infrastructure development to bridge the widely acknowledged “infrastructure gap” in Asia. The bank was established by a Memorandum of Understanding signed by 21 countries in October, 2014. The MOU specifies that it will have authorized capital of $100 billion, with initial subscribed capital of $50 billion. As of March 18th, the bank has 32 members, including 6 non-regional members. Notable regional powers that have signed on include India, Vietnam, the Philippines, Indonesia, and New Zealand. Last week, the United Kingdom announced that it would join the AIIB; this announcement triggered similar statements by Germany, Luxembourg, France, and Italy. Australia, which up until now refused to join, has now signaled that they may sign on to the Bank.
The bank is part of a broader agenda being pursued by Beijing to create new regional and global economic institutions, including the New Silk Road infrastructure fund and the BRICS led New Development Bank. The AIIB is the most high profile and fleshed out initiative. These are seen as being separate from and potential challengers to the existing U.S.-led Bretton Woods institutions such as the World Bank and Asian Development Bank. China has indicated that it would be open to Japanese and American membership in the Bank, though at this moment that appears unlikely.
As it stands, China will control the largest voting share (at present, somewhere around 36 percent), although the exact degree of control will be determined by the final governance structure of the bank, which remains uncertain.
Q2: Is there a need for this new institution?
There are immense challenges facing financing for infrastructure in Asia. The ADB estimates that the gap between available funding and needed funding is approximately $800 billion annually. Although both the World Bank and ADB provide significant financing for infrastructure in the region, neither come even close to that need. Looked at from this absolute perspective, the Asia-Pacific region requires significant new sources of finance to meet this need. Yet there are questions as to how many investable projects there truly are and, in some case, where there is a need, whether there are the conditions needed to sustain a project.
From this perspective, the rapidly developing Asia Pacific region needs new sources of finance to fill the gap and ensure that growth prospects are realized. Another strong institution with high standards, talented personnel, and a clear mission to identify suitable projects and effectively implement infrastructure development could help fill this gap. The ADB lists infrastructure as just one of 10 strategic priorities in its “Strategy 2020” plan, so another institution focusing exclusively on infrastructure could allow the ADB to turn towards other regional priorities and needs.
The AIIB could be this institution, but the devil is in the details.
Q3: What is the U.S. position on the AIIB?
A3: The U.S. government’s official line is that it recognizes the need for new investment but has concerns about the governance and lending standards of the bank. The position is illustrated most succinctly in this statement from the National Security Council:
“Our position on the AIIB remains clear and consistent…We believe any new multilateral institution should incorporate the high standards of the World Bank and the regional development banks. Based on many discussions, we have concerns about whether the AIIB will meet these high standards, particularly related to governance, and environmental and social safeguards.”
Essentially, the United States has taken the position that it is not opposed to the bank on principle, but concerned about the practical details.
The United States has been criticized, however, for inconsistencies between this public position and the perception that it has been twisting the arms of its allies behind closed doors. It is widely perceived that the United States has leaned heavily on allies to steer clear of the bank, including South Korea and Australia. This has led to a perception that the U.S. government sees the AIIB as a challenge to U.S. influence exercised through its preferred multinational development banks (MDBs) in the region—the World Bank and ADB. The quotes from an anonymous White House official accusing the UK of “constant accommodation of China” in response to London’s announcement that it would join the bank has further reinforced this perception, despite the U.S. government’s more principled public stance that the AIIB could undermine the norms that the Bretton Woods’ institutions have created over the course of 70 years.
The decision whether to join the AIIB is now partially being seen as a referendum on U.S. influence. The perception now is that the U.S. is unwilling to acknowledge greater Chinese capacity and geopolitical inertia, and will fight the expansion of Chinese influence and prestige even at the cost of regional and global development.
Q4: What is the significance of recent European signatories?
A4: The timing of the UK’s move to join the AIIB was unexpected. The G7 countries had been in talks about what the response to the bank should be, but the UK unilaterally pre-empted the G7 decision, a clear break from the norm in the “special relationship”. Three other G7 countries then quickly followed suit: France, Germany and Italy, with Luxembourg joining shortly thereafter. Switzerland, Australia, and South Korea are also considering joining.
From the Chinese perspective, creating the AIIB seems like a justified response to stalled IMF quota reform, the refusal to give it a bigger role in the ADB, and calcified operations at the World Bank. Further opposition by the United States is likely to prove ineffective at dissuading new membership.
However, concerns around the governance structure, environmental and labor standards, and procurement practices at the AIIB remain. For now, most of these details remain unclear. The UK, Germany, and other U.S. allies now involved in the bank have posited that engagement allows for greater influence over the formation of these standards and the practical execution of AIIB operations. Though given the number of shares China will hold, it is reasonable to question how much influence these other countries will have on Bank organization and operations.
Q5: Will the U.S. join the bank? How do we go forward from here?
A5: U.S. engagement is needed, but is unlikely to come in the form of bank membership. U.S. membership would need to be approved by Congress and, as has been demonstrated by the refusal to pass IMF reform, there is little sympathy on the Hill for any move that would, or would appear to, cede influence to China – especially at great financial cost to the United States. The U.S. government could support the bank by sending experts and advisors to help inform governance structures and standards. It can also work with its allies who have since joined the bank to use their influence to ensure that the AIIB adheres to best practices.
Also critical will be improving existing institutions. MDBs rarely ever face competition, and if we frame the formation of the AIIB in this context, it can be seen as an opportunity to push forward greater responsiveness, flexibility, and capacity at the ADB and World Bank. Competition can be critical in driving forward progress, and as the Bretton Woods institutions lose their global monopoly the U.S., Japan, and other major shareholders must consider ways to improve the quality of the services they offer.
Daniel Runde is director of the Project on Prosperity and Development and holds the William A. Schreyer Chair in Global Analysis at CSIS. Matthew P. Goodman is the William E. Simon Chair in Political Economy and senior adviser for Asian economics at CSIS. Conor Savoy, deputy director of the Project on Prosperity and Development, and Amy J. Studdart, deputy director of the Simon Chair in Political Economy, also contributed.
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