Editor's note: This article has been updated to reflect the correct amount of money Asia needs to invest annually in infrastructure to sustain its current growth trajectory.
When China rolled out the Asian Infrastructure Investment Bank last October, the stiff resistance from the U.S. (as well as Japan) took the world by surprise. This opposition notwithstanding, AIIB, has so far picked up 27 regional members and seven non-regional members, including the U.K., Germany, France and Italy. In addition, there was a virtual avalanche of applications before the March deadline for founding membership, which included another 23 countries that are currently under consideration. This overwhelming positive response to the AIIB from countries across the globe was perhaps more than China initially anticipated.
Why did the U.S. opposition not convince even its traditional allies to steer clear? Part of the reason was a serious misreading of global sentiments on this matter.
To Asian developing countries, the U.S. opposition reflected a retrograde cold-war mindset that wasn't attuned to their economic wishes and aspirations. To sustain its current growth trajectory, developing Asia needs to invest about $800 billion annually in infrastructure, according to an Asian Development Bank (ADB) study. And the existing international development finance institutions, such as the World Bank and ADB, cannot muster sufficient resources to meet this demand.
Other developed countries found this face-off with China unnecessary; they wanted to take part in the economic transformation of this dynamic region of the world and the business opportunities it affords.
To many, the U.S. policy toward AIIB appears both contradictory and self-serving. Although the U.S. administration often chides China as a global free-rider, its capacity to play a larger role in the existing global development financial institutions has been circumscribed.
China's economy is roughly the same size of the U.S., but it has less than a third of the U.S. voting power at the World Bank. (Its voting power is slightly larger than France's — which has one-sixth of China's economy.) In ADB, the situation is similarly out of whack. China has one half of the votes that Japan and the U.S. have. Japan has a virtual lock on the ADB presidency, as the U.S. has in the World Bank.
China, India and other emerging economies have long been voicing their discontent about these anomalies. There was an attempt five years ago to make some modest changes in the voting shares in the International Monetary Fund, but even that effort tripped at the door of the U.S. Congress.
With AIIB — along with its sister institution the New Development Bank — China will now be able to establish its bona fides as a responsible stakeholder in the global economy. These organizations will provide China with an institutional mechanism to deploy its large pool of savings — almost $4 trillion in foreign-exchange reserves — to contribute to global economic development.
The U.S. objections to AIIB concern its possible failure to meet governance, environmental and labor standards. Those objections seem a bit hollow and unconvincing for a number of reasons. First, the AIIB has not yet written its articles of agreement, let alone begun operations. To worry about its presumed violations in future operations seems a red herring at this stage. Second, the AIIB will have internal multilateral disciplines, policed by its memberships, like the existing multilateral development banks. Finally, Chinese leadership has repeatedly assured that the new bank would apply the best practices of the World Bank and ADB with regard to safeguards. And it is heartening to see that the World Bank, IMF and ADB have expressed interest to collaborate with the AIIB in this regard.
The advent of the AIIB in global development finance can be a win-win for all countries. It will provide developing countries access to additional resources and more choices than exist today, and it can exert competitive pressures on the other global multilateral lenders to improve their own governance and streamline their bureaucratic inefficiencies in operations.
It can also lead to improved specialization and efficiency of the World Bank and ADB if they focus more on areas such as health, education and nutrition along with infrastructure. After all, economic development is more than infrastructure building. Furthermore, the World Bank can pay more focused attention to Africa, which is in dire need of development assistance.
If this AIIB initiative jolts the existing multilateral finance institutions to be more inclusive, and leads to greater buy-ins by China and other emerging economies, it could be a game changer for international development. This could augur in a new era of global cooperation between developed and developing economies from which all countries can eventually benefit.