Do We need Another Supranational Bank?

The newly created Asian Infrastructure Investment Bank (AIIB) is under way. On October 24, 2014, a signing ceremony held in Beijing formally recognized the establishment of the bank. 21 countries signed the Memorandum of Understanding, and since we see quite a substantial number of countries becoming joint founding members.This includes the likes as Britain, Australia, Germany, and France. Japan may join, and so it is only the US out of the Big League that is missing. The bank will have a start capital of $ 50 billion which will be increased to $ 100 billion. Even though the name suggests differently, this will be the Chinese Infrastructure Bank for the region. Given that the Asian Development Bank which is in firm hands of Japan and where China’s capital share is kept well below the share of Japan forever, just lends around $ 10 billion on an annual base for infrastructure projects, the new AIIB will be a mjuch more potent actor. The same bank recently estimated that only East Asia is in need of $8 trillion of infrastructure investment – so there is a huge demand for additional funding. Infrastructure investments are long-term and financial markets are not too eager to provide funds, at least not to widely acceptable conditions. Credit provision by a supranational development bank can be crucial. For most of the period after WW II this was the job of the International Bank for Reconstruction and Development, better known as World Bank.

The World Bank and its sister the IMF have come under political scrutiny, though, not only from the political Left and international NGOs but also from some of its members. The problems mainly have to do with influence, or the lack of. There is no doubt that the influence of the US, Japan, and the EU is no longer proportional to their global economic weight. Proponents of the AIIB very much favour this argument. China’s share in global GDP today is around 16%, whereas its voting shares in the IMF is just 3.5%. The Group of 20 actually accepted this imbalance in principe;e and agreed five years ago on new quote that would favour the new economic powers, including China. This change still waits for ratification by the US Congress.

Despite all changes and reforms World Bank and IMF are the institutional representations of the old global order(s). In this respect it is not relevant that measuring the share of a country in global GDP via Purchasing Power Parities is not very relevant in order to measure global weight and influence. Using exchange rates modifies China’s share significantly to 12.5 % in 2013, but still the argument holds that this weight is not matched in voting shares of then old institutions. Founding a new institution thus seems to be a reasonable way to go. The more so as the need for infrastructure is big, not only in Asia.

What worries me in the debate about joining the AIIB is the missing piece: what kind of ‘infrastructure philosophy’ will the new bank follow? Will this be a Asian version of the mis-guided World Bank big project that provides the path for further environmental degradation? How are the success criteria for credit applications look like, and what kind of external and internal selection control will be put in place? The record of China’s big project approach does not look promising, and it would be a good thing if the new signing members would have some saying in the set up of the actual credit programs. This discussion probably only will start when the first credits will be handed out.