AIIB and US Development Leadership: A Path Forward

By Daniel Runde

(The writer is the director of the Project on US Leadership and Development at the Center for Strategic and International Studies.)

AIIB and US Development Leadership: A Path Forward

By Daniel Runde

(The writer is the director of the Project on US Leadership and Development at the Center for Strategic and International Studies.)

T he rapid rise of China’s Asian Infrastructure Investment Bank (AIIB) should be a wakeup call for the United States, and requires a well thought out response. The AIIB and other Chinese development agencies represent a new form of strategic competition that can help to drive progress at the multilateral level. Its emergence was spurred forward by growing infrastructure needs in Asia, and a lack of strategic vision to ensure that our existing multilateral institutions fit the changing global landscape.

The AIIB, however, will undoubtedly face challenges and growing pains. There is an opportunity for the United States and its partners to help the new institution face these implementation challenges, and establish the fledgling infrastructure fund as a positive player in global development. An effective approach will require coordinated action with Japan and other allies. The good news is that with some legislative actions, increased U.S. leadership within existing multilateral development banks (MDBs), and relatively small amounts of money, the United States could respond in a serious and constructive way to the AIIB.

US Policy Accelerated AIIB’s Emergence

The AIIB was just an idea two years ago. Its rapid success is a result of major gaps in what the established international architecture is offering in terms of global progress, China’s new status as one of the top trading partners to dozens of countries, and unmet development needs around the world. Tone deaf efforts by the U.S. to pressure allies into steering clear of AIIB membership represent both bad policy and lack of understanding for the global context which led to the AIIB’s creation. Apart from these broad conditions, however, there are two specific U.S. (in) decisions which served to create political cover and practical demand for the new institution.

First, the United States has failed to pass Quota Reform at the International Monetary Fund (IMF) since 2010. As agreed to in 2010, IMF quota reform would result in a slight rejiggering of IMF shareholder votes away from Europe to emerging economies, and a doubling of the money available for global crises. The United States would see its voting share drop from 17.7 percent to 17.3 percent, but would remain the largest shareholder and retain its veto.

Although the United States agreed to these terms at the 2010 summit, it has so far failed to implement them because it requires Congressional approval. IMF Quota Reform has been mishandled by the Administration, which has been reluctant to address concerns, and the issue has been largely ignored by the Republican-controlled Congress. The possible $300 million dollar impact related to changes from one IMF account to another has not helped.“Unfortunately”, China has used IMF quota reform as political cover to create the AIIB.

Second, de facto and explicit policy decisions related to energy and power, including coal, oil, gas and hydroelectric dams, have limited U.S. ability to meet global infrastructure and energy demand. Exceptionally rigorous standards have handcuffed U.S. actors as well as the World Bank, Asian Development Bank and IFC from offering the energy mix developing countries are demanding right now.

India’s coal industry is surging as a result of fast-track mine approvals, tighter production oversight and more flexibility in coal sales. The trend towards coal-fired power generation is spreading across the region. By 2019, India, Indonesia, Vietnam, Japan, and South Korea will increase collective coal driven power generation capacity by 60 percent. Our response has been to make it much harder or even impossible to finance coal, hydro or thermal sources of energy via Bretton Woods institutions and U.S. institutions such as OPIC or EXIM. It is almost certain that the AIIB will step into this void that we have left.

Implementation Challenges for the AIIB

Earlier this month, the AIIB announced final approval for 57 countries as founding bankmembers, including 16 of the world’s 20 largest economies. The United Kingdom, Germany, France, and Russia joined. Key economies in Asia have joined the bank, including South Korea, Australia, India, and Indonesia. Japan, Canada, Mexico, and the United States have not yet joined.

While the AIIB’s membership has been unequivocally hailed as a success for Chinese global influence, it also means that China may face increased internal constraints at the new institution. With countries like Germany, the United Kingdom, and Australia now involved, China may face real pressure to ensure that the AIIB maintains a variety of standards and practices similar (but not the same) to those at existing MDBs. If China wants to step forward as a global leader, it must accept that leadership comes with burdens and responsibilities.

In many ways, China’s turn towards multilateral economic engagement through the AIIB is recognition of the value in partnering with established economies whose investments bear the “good housekeeping seal of approval.” Recently, China has seen significant pushback against its economic engagement in places like Myanmar and Vietnam where Chinese led projects have been perceived as poorly managed, corrupt, or intrusive in domestic affairs. The AIIB will confront a series of implementation questions, including the following:

• What approach will the AIIB take to coal, hydro and thermal energy projects?

• How will the AIIB award contracts?

• How will the AIIB confront moving human settlements, dealing with indigenous group/ minorities, and labor conditions around AIIB projects?

• How will the AIIB confront corruption in projects it funds?

• Will China have an implicit veto?

How should the U.S. Respond?

For the first time in decades, there is a real competitor to the U.S. led version of globalization. The U.S. will have to offer those things that are important to developing countries, not just important to U.S. (called“demand driven” development). President Obama and the Republican Congress should take a number of steps in response or risk becoming irrelevant.

• Pass IMF Quota Reform. The U.S. has been bleeding global credibility for five years because of IMF Quota Reform. If we are serious about our global economic leadership, this issue can no longer wait.

• Pass EXIM Bank Reauthorization before it expires this June. Our leading competitors around the world (including China) are utilizing vigorous export credit programs, and if we “unilaterally disarm,” U.S business will be harmed. EXIM offers financing for goods and activities related to infrastructure. The AIIB should be an additional reason to pass reauthorization.

• Reauthorize OPIC on a long-term basis, remove or further loosen OPIC’s carbon cap, triple OPIC’s financing limit and increase its staff to 400. The ensuing increases in financial capital and staff should be focused on Africa and Asia.

• Double U.S. Trade and Development Agency’s budget and staff. This relatively small agency is charged with increasing U.S. exports while also supporting economic growth in developing markets, and receives support from both sides of the aisle. This support is understandable—in FY 2014,

USTDA identified $5.8 billion in U.S. exports supported by its activities. A major constraint to infrastructure is project preparation and TDA is designed to help with project preparation and feasibility studies.

• Japan and the U.S. should seek a new capital increase for the ADB or a special capital increase. The ADB recently increased its lending by 40 percent, which is a positive development. However, Asia is facing a projected $8 trillion infrastructure gap over the next decade. The ADB and World Bank together offer less than $400 billion in capital, and have mandates that encompass a range of initiatives other than infrastructure development. The US share of a special capital increase would likely require $200 to $300 million dollar commitment from Congress over three to five years—a small price to pay if we want to meet China’s challenge.

• Review business processes at the ADB, IFC, EXIM, OPIC, and the World Bank, including implicit and explicit policies that constrain support for coal, hydro, oil, gas and nuclear energy investments. Many attempts are in the works to review business processes at major institutions, yet so far the rhetoric has outpaced reality. The G24 and G20 have both expressed frustration with the lack of movement on these issues.

In some ways, competition at the multilateral level is a sign of global growth and progress and may be inevitable. As new economic players emerge, the U.S. (and U.S. led multilateral institutions) will need to offer more attractive capital, networks, and advice to remain a world leader. Our institutions will be pushed to become faster, more flexible and more responsive to the interests of developing countries. If not, these countries will work with the Chinese.

Source: http://www.forbes.com