from Asia Unbound

When Will the Jury Be In on the AIIB?

July 1, 2016

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Gabriel Walker is a research associate for Asia Studies at the Council on Foreign Relations. This is the first part of a series on China’s role in international development.

Less than six months after its official launch, the Asian Infrastructure Investment Bank (AIIB) is already doing a brisk business. This past weekend the China-backed institution held its first annual meeting in Beijing, hosting the AIIB’s Board of Governors and delegates from all fifty-seven member nations. AIIB President Jin Liqun announced during the gathering that the board had approved loans for its first four ventures to the tune of $509 million: two roadways in Pakistan and Tajikistan, a slum rejuvenation project in Indonesia, and an electrical grid expansion in Bangladesh. By the end of this year, the bank expects to approve $1.2 billion in financing.

When Beijing initially began seeking founding members for the AIIB, the U.S. government pushed back, citing worries over lax procurement and environmental standards. But the fact that so many nations have now signed on to the AIIB—including U.S. allies like the United Kingdom, South Korea, and Australia—shows that these concerns are not enough to dampen global zeal for development financing. At the same time, however, the number of member countries alone does not guarantee that the AIIB will be a model institution. There are a few indicators worth watching to determine whether Beijing’s first major multilateral financial institution can measure up to—or even surpass—the established track records of existing development banks.

Most importantly, the AIIB must prove that it can uphold the high environmental and social safeguards its founders have baked into its design. The bank’s Environmental and Social Framework calls due diligence in these areas an “integral element” of project appraisals, and the review and monitoring process considers a multitude of factors like biodiversity, sustainable land and water use, effects on indigenous peoples, and safe working conditions. The thorough assessment and management plan for the bank’s Bangladeshi electrical grid venture, its first independent project (the other three rely on the frameworks dictated by the AIIB’s co-financing institutions), clearly reflects learning from existing development institutions. Furthermore, if loan recipients or project consultants fail to comply with the AIIB framework in any way, the bank should be able to prove it has the will to cut off funding, like the Asian Development Bank and African Development Bank have done in the past because of unrealized results and corruption. Finally, as Columbia University economist Takatoshi Ito has hinted, the AIIB must show it will not competitively undercut other development banks by funding projects that do not meet the stricter requirements of institutions like the World Bank.

China must also work to prove its good stewardship and judicious management of the AIIB. Since China has a 26 percent voting stake in the bank, it has effective veto power over some major institutional decisions like adjusting capital stock, suspending members, and electing a president (and not over others like adjusting share terms and establishing subsidiaries). Should a high-level disagreement regarding bank governance arise, China could show its strong commitment to multilateralism by not exercising its veto, even if it were not in China’s direct national interests. To disabuse critics of the suspicion that the AIIB is a global tool designed to offload Chinese industrial overcapacity, create Chinese jobs, or advance Chinese geopolitical interests, the institution must also uphold its universal procurement procedures and give players from all countries fair appraisals when bidding for contracts. Lastly, the AIIB must continue to implement the high standards for transparency that President Jin has set forth for both funded projects and the institution itself. In this respect the bank has already received some criticism for inadequate public consultation in drafting foundational documents. Furthermore, if the AIIB provides funding to Asian state-owned enterprises, whose transparency in many cases “leaves a lot to be desired,” the bank will need to ensure that those companies are held to the same high standards that private companies are.

The AIIB also has an opportunity to surpass international expectations and prove itself more effective than existing development banks. For example, President Jin claims that the AIIB will be able to adopt much more rapid lending procedures by eschewing a micromanaging board, a real innovation in a space where existing multilateral organizations tend to be slow and bureaucratic. The difficultly here, however, is finding the proper balance between the benefits of efficiency and the necessity of oversight. If the bank is truly lighter on its feet, it may also be able to react more quickly to the kind of public criticism over unintended malfeasance that sometimes taints other development banks. By focusing solely on infrastructure development projects the AIIB can also achieve more project successes than comparable institutions, whose poverty reduction endeavors are often highly complex and relatively intangible. Overall, the more cooperative projects the AIIB initiates and participates in, as it has done with three of its four initial proposals, the more it will reassure stakeholders that it is fundamentally complementary to, and not competitive with, existing development banks.

On paper, the AIIB is an impressive international institution, and not simply another China Development Bank with international characteristics. However, it will have to prove itself by delivering real results while upholding rigorous environmental, social, and governance standards. While the jury will be out on the AIIB for some time, initial indicators suggest it could be a transformative force for meeting Asia’s huge infrastructure gap—estimated to be $8 trillion between 2010 and 2020. Steered properly, Beijing’s first global financial institution has the potential to do a great deal of good, and potentially even challenge existing institutions to do better themselves. Both AIIB members and nonmembers alike will be watching for the right signs of success.

More on:

China

Development

Diplomacy and International Institutions

Economics

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