AIIB: Financing Development in Asia
During the Asian-African Conference Commemoration Summit in Jakarta, the Indonesian president, in his opening address, put the record straight: "The view that the world economic problems can only be solved by the World Bank, the International Monetary Fund, and the Asian Development Bank is an out-dated view." One can hardly hear such a scathing attack from an incumbent leader against the financial troikas in Asia. Besides the World Bank, IMF and the ADB, the European Bank for Reconstruction and Development (EBRD) is another addition to Western-dominated international financial institutions (IFIs), which finance development programmes in Asia.
The President seems to be right in terms of the changing developmental finance landscape of Asia. The establishment and institutionalisation of China-led Asian Infrastructure Investment Bank (AIIB) and BRICS (Brazil, Russia, India, China and South Africa) sponsored New Development Bank (NDB) is the new additional sources of development financing. Presently, funds from IFIs with their patron donor countries' bilateral aid and developing countries’ domestic resources are lagging in fulfilling the ever-growing gap of investment requirements in various Asian sectors. Asia is estimated to need $7.9 trillion in the infrastructure sector alone.
The year 2015 is vital for guiding global development. While the ongoing post-2015 Sustainable Development Goals (SDGs) discourses are scheduled to be held at Addis Ababa in July, COP 21 on climate change in Paris is gaining pace, along with the upcoming 10th WTO Ministerial Meeting in Kenya. All debate boils down to finance.
Who foots the bill?
Asia needs more investment than what is presently being provided by the donors. The Manila-based ADB mobilises annual investments of up to $23 billion in infrastructure, energy, agriculture, water resources, etc. The World Bank's (IBRD, IDA and IFC) annual investment in Asia is approximately $26 billion on similar lines. The EBRD funds funnel nearly $1.5 billion annually in Central Asian countries and Mongolia. The Islamic Development Bank (IDB), which lends predominantly to Muslim countries, invested $5.1 billion in 2013 in 17 Asian countries. There are also other smaller funds, such as the ASEAN Infrastructure Fund. The 'Chinese Silk Road Economic Belt' has a pool of resources used to consolidate and continue Chinese investment in Asia and Africa. India, too, has its fund for external investments, as has the IBSA (India, Brazil, and South Africa) Fund since 2004.
However, the AIIB is a new addition, like NDB, into the lexicon of development finance that will primarily fund infrastructure projects in Asia from its paid-up capital of $50 billion and an authorized capital of $100 billion. By next year, BRICS' NDB will also start lending to Asia from its $50 billion subscribed capital. Still, this may not meet the demand for need-based development in Asian countries. For example, only a whopping $450 billion is required to meet Indonesia's infrastructure needs by 2020. The ASEAN region requires an annual investment of $70 billion for various developmental projects. The Emerging Five (E-5) needs $4 trillion in five years to meet its infrastructure gap.
The establishment of the AIIB is a welcome move as it aims to fill the fundamental financing gaps in Asia. This is where the primary problem for the US and Japan lies, as they want to continue using bilateral resources and IFIs as primary foreign policy tools. For instance, while testifying before the House Committee in March, US Treasury Secretary Jack Lew urged that the US shouldn't let go of the World Bank and IMF as its foreign policy instruments. Meanwhile, President Obama's 'Asia pivot' has become a formidable competitor in Chinese financial aid.
On the other hand, the NDB and AIIB have swiftly achieved what the G-20/G-24 failed so far, especially since 2010 when the developing countries demanded overhauling the Bretton Woods Siamese twins - World Bank and IMF. At least, the new banks have compelled the US government to rethink the monopoly on global economic structure. Despite the demand, in a typically US 'standard procedure', Congress has been sitting on a reform bill of the Bretton Woods. It is long overdue. The AIIB and NDB have both emerged on the Asian horizon to send a strong message to the unequal economic governance structure and to provide alternative but supplementary need-based development finance. This is a paradigm shift in Asia, which is needed to counter the neo-colonial western dominant institutions.
Since November 2014, the AIIB has been in the headlines for all wrong reasons when the US asked its allies not to be part of this seemingly “less transparent governing institution with unknown environmental standards and procurement policies.” Are the World Bank and ADB transparent and governed by democratic principles? Why can only a US citizen be World Bank President, or why will only a Japanese citizen be President of ADB, and why will only a European be chief of IMF? Besides, the Board of Directors, who control and approve these institutions' projects, policies and programs, are not democratically represented. The countries are not equal in decision-making. The rule of the game is that whoever’s contribution is hefty will call the shots. NDB provides a fresh example in its structure as India is taking its first presidency in five years.
However, in the fast-changing world politics, many US allies - four out of G-7 members (UK, France, Germany and Italy) -- jumped one after another against the US' diktat to be founding members of the AIIB. Some argue that they will make changes in AIIB from within by becoming members; others are waiting to join when the institutional policies are released in July of this year. It's out of sheer fear of losing their bilateral relevance in the 'development business’ that most non-Asian members joined the AIIB.
The legitimacy of any institution in the 21st century depends on an equitable, democratic governance structure with a pro-people agenda. While 21 Asian countries signed the Memorandum of Understanding (MoU) on 24 October 2014 to establish the AIIB, by April 15, 2015, it already has 57 countries as founding members. When World Bank (IBRD) was established in 1944, the membership was 44. Similarly, ADB was established with just 31 member countries in 1966. To stay relevant in terms of competition in Asia, the ADB, as predicted earlier, has proposed and agreed to work with AIIB as a co-financing partner. The World Bank, too, has already welcomed and acknowledged the arrival of AIIB.
Bone of Contention
It is not a coincidence that a handful of opponents (economists, CSOs, academicians) in the developed world and their corresponding counterparts in Asia have reservations against NDB, particularly AIIB, like their host governments. Grave concerns related to human rights violations and transparency in AIIB projects loom large, at least in Asia. However, it should be noted that the so-called 'gold standard' of the World Bank - Safeguard Policy (environment, resettlement, Indigenous and information) - has failed to protect 3.4 million people's physical and economic eviction worldwide between 2004 and 2013 for its projects. In his admission, the World Bank President promised to rectify these grave mistakes immediately. The South Korean government, which initially opposed AIIB due to its unknown environmental policies, rushed to be a founding member. Was the POSCO project in Odisha (India) funded by a Korean giant protecting human rights? Even bilateral agency-supported projects are not bereft of human rights violations. But neither these agencies come under independent watch groups’ mandate nor are being strictly scrutinized for non-compliance with international standards. The same outstretched concerns are being thrown about whether the ADB will be following its standards in protecting the environment for any co-financing projects with AIIB. In fact, since 2009, the ADB policies (Safeguard and Accountability Mechanism) categorically state that all co-financing projects will strictly follow its policies.
It has not been noticed by the same opponents that AIIB has already been taking into account the robust provisions of all existing financial institutions, bilateral donor agencies, and international best practices to form its institutional policies that are more responsible and accountable. In March 2015, AIIB organised a workshop where more than 100 technical experts across 32 countries and international agencies, including the World Bank, ADB and UN, were consulted to prepare the intuitional documents - safeguard and procurement policies. It should be remembered that Rome was not built in a day. So, the formulation of ideal institutional policies would also take time. The AIIB and NDB should learn from the mistakes of the IFIs, especially the World Bank and ADB. If AIIB can ensure that people will be consulted fairly before any project design and during the project cycle, that would be a revolutionary change from existing developmental discourse. The Article of Agreement must reflect as boldly as possible the aspirations of Asian people rather than those of the governments of Asia. Those who oppose the new institutions seem to fear losing their relevance and are thus forced to oppose AIIB and NDB.
The message of Indonesian President Jokowi is loud and clear. Hitherto, arm-twisting, pushing, coercing, and cajoling through conditionalities and handpicked projects by a few donor countries in the World Bank and ADB would now not dare to follow the usual practice. Asian countries will have additional leverage to deal with pressure from the World Bank and ADB. Many government representatives leading negotiations in these Western dominant financial institutions have vented their frustrations about 'coerced development'. It is also an opportunity for countries to raise their national standards and take responsibility for the projects supported by the IFIs (World Bank and ADB). The AIIB and NDB have provided additional financial opportunities to smaller Asian countries and given them the freedom to access resources. A new world economic order is beginning to take shape in Asia. Time will witness whether it is a success or a momentary bubble.