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Thursday, 13 April 2017 06:59

AIIB and its impact on BRICS' NDB Featured

Written by Vikram Nagvanshi
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                                              AIIB and its impact on BRICS' NDB

                                                                                                                              

The Asian Infrastructure Investment Bank (AIIB) is a multilateral development bank that aims to support the building of infrastructure in the Asia-Pacific region. The bank has 52 member states while another 18 are prospective members (as of March 2017) and was proposed as an initiative by the government of China. The initiative gained support from 37 regional and 20 non-regional Prospective Founding Members (PFM), all of which have signed the Articles of Agreement that form the legal basis for the bank. The bank started operation after the agreement entered into force on 25 December 2015, after ratifications were received from 10 member states holding a total number of 50% of the initial subscriptions of the Authorized Capital Stock. Major economies that did not become PFM include the G7/G8 members' Japan and the United States, although Canada applied for membership on 23 September 2016.

The United Nations has addressed the launch of AIIB as having potential for "scaling up financing for sustainable development" for the concern of global economic governance.  The capital of the bank is $100 billion, equivalent to  2⁄3 of the capital of the Asian Development Bank and about half that of the World Bank. The bank was proposed by China in 2013 and the initiative was launched at a ceremony in Beijing in October 2014.

The proposal for the creation of an "Asian Infrastructure Investment Bank" was first made by the Vice Chairman of the China Center for International Economic Exchanges, a Chinese think tank, at the Bo'ao Forum in April 2009. The initial context was to make better use of Chinese foreign currency reserves in the wake of the global financial crisis.

The initiative was officially launched by Chinese President Xi  Jinping on a state visit to Indonesia in October 2013. The Chinese government has been frustrated with what it regards as the slow pace of reforms and governance, and wants greater input in global established institutions like the IMF, World Bank and Asian Development Bank which it claims are dominated by American, European and Japanese interests.

The Asian Development Bank Institute published a report in 2010 which said that the region requires $8 trillion to be invested from 2010 to 2020 in infrastructure for the region to continue economic development. In a 2014 editorial, The Guardian newspaper wrote that the new bank could allow Chinese capital to finance these projects and allow it a greater role to play in the economic development of the region commensurate with its growing economic and political clout.[17] But until March 2015, China in the ADB has only 5.47 percent voting right, while Japan and US have a combined 26 percent voting right (13 percent each) with a share in subscribed capital of 15.7 percent and 15.6 percent, respectively. Dominance by both countries and slow reforms underlie China's wish to establish the AIIB, while both countries worry about China's increasing influence.

In June 2014 China proposed doubling the registered capital of the bank from $50 billion to $100 billion and invited India to participate in the founding of the bank. On 24 October 2014, twenty-one countries signed a Memorandum of Understanding (MOU) regarding the AIIB in Beijing, China: Bangladesh, Brunei, Cambodia, India, Kazakhstan, Kuwait, Laos, Malaysia, Myanmar, Mongolia, Nepal, Oman, Pakistan, Philippines, Qatar, Singapore, Sri Lanka, Thailand, Uzbekistan and Vietnam. Indonesia's joining was slightly delayed due to their new presidential administration not being able to review the membership in time. Indonesia signed the MOU on 25 November 2014.

For India what impact will be generated by AIIB is not much and everything lies in futures pocket.  Even a battle have been seen inside country when for representing India on opening ceremony of AIIB in Beijing 21, India was represented by a joint secretary in the ministry of finance. The decision to send a joint secretary was preceded by a turf battle between the ministry of external affairs (MEA) and the ministry of finance (MOF). MEA pushed for an official from the Indian Embassy in Beijing to represent the government. MOF staked its claim as the nodal ministry for multilateral development banks and won that tussle. AIIB could provide long-term funds for India's infrastructure needs and going forward India should pay considered attention to this institution.

Not only India even US tried to dissuade its Western friends from joining AIIB but even its closest ally the UK decided to break ranks with it. This is the first time that three out of five permanent members of the UN Security Council (China, UK and France) and four out of seven G7 members (UK, France, Germany and Italy) have defied the US in the setting up a new multilateral development bank.

Developed Western countries never shown show much interest in becoming members of the New Development Bank (NDB) or the Contingent Reserve Arrangement (CRA) to be set up by the five BRICS nations. China appears to be more focused on getting AIIB up and running. The $50 billion AIIB will be headquartered in Shanghai like the NDB but China will be the dominant share-holder with 49 per cent equity unlike the $10 billion NDB in which the five founder countries have 20 per cent stakes each.

India's relations with China are complicated by sensitive bilateral and wider strategic issues. And, there is not much that India can do if China goes slow in making NDB operational since it is China's economic size and hard currency reserves which could enable NDB to be a major lender. China may prefer to begin with AIIB lending to countries in central Asia and perhaps later use NDB to lend to African or Latin American nations. However, the resulting loan portfolios would raise the exposure of these two institutions to high concentrations of country creditworthiness risk. India could keep its interactions with AIIB and NDB tied closely to its obvious strength as the potentially largest creditworthy borrower.

The World Bank and the ADB have flourished so long because they targeted their cost plus IBRD type lending initially to larger creditworthy borrowers such as India and subsequently China. The poorest countries have mostly received concessional IDA loans which are funded out of grants from developed countries. Borrowers usually baulk at defaulting to Bretton-Woods institutions as even short-term credit from Western commercial sources would not be rolled over, if they did.

China, with a one-party totalitarian communist system, has shown remarkable flexibility and competence in becoming the world's largest economy in purchasing power parity terms (China GDP: $17.6 trillion; US GDP: $17.4 trillion in 2014. Source: IMF). Although China's economic weight continues to grow its clout in Asia is tempered by its territorial and other differences with several neighbouring nations. A counterpoint is that most Asian countries have higher volumes of trade with China than the US.

The immediately relevant issue for the US is an erosion in the dominance of the IMF, World Bank and ADB if the CRA, AIIB and NDB grow in size over time. After former IMF managing director Dominique Strauss-Kahn left in disgrace in mid-2011, it was apparent that there were several non-G7 country candidates who were well qualified to replace him. However, yet another European (French) national was appointed. Since then, the US Congress has persistently stood in the way of IMF quota reforms. The principal shareholders of these multilateral institutions refuse to acknowledge that Asian nations are appalled by the lack of transparency in appointments at senior levels and the way these institutions are managed at times. For instance, the World Bank violated its Articles of Agreement in denying India fresh loans after India tested nuclear weapons in May 1998. As per its Articles, political issues should not influence the World Bank's lending policies.

The US has suggested that the AIIB will not follow the high lending standards of existing multilaterals. The World Bank's lending policies were covered in full page advertisements in Washington DC based newspapers about 15 years back when the bank felt it was under unfavourable scrutiny of the US Congress. These advertisements stressed that IBRD loans are used by borrower countries for imports from the US. As for the IMF, it has announced loans to Ukraine and earlier to EU countries somewhat hurriedly. Irrespective of whether these lending decisions were justified or not the IMF should follow the same procedures as it did for Asian nations in the late 1990s.

 

The World Bank has moved far away from when it used to proactively fund long gestation infrastructure projects. Consequently, AIIB would try to step into that role. The World Bank and ADB now seem to be too driven by the sensibilities of NGOs in developed countries on sustainable development issues. This is not to suggest that such considerations should be ignored. However, should multilateral development banks unilaterally refuse to fund projects in the hydroelectricity-irrigation, thermal and nuclear power sectors? To conclude, any initiative taken by AIIB or NDB to be open-minded about loans for projects in such sectors, in consultation with borrower countries, is likely to be welcomed.

--compiled by Vikram Nagvanshi based upon various official websites of these institutions. 

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