The AIIB as China’s Pilot Attempt to Reform the Global Economic Governance
David Daokui Li
The new China-initiated Asia Infrastructure Investment Bank, which intends to initially raise at least $50 billion is well on track to do so, which goes against the wishes of the American administration. More importantly, despite U.S. efforts to persuade its long-time allies, including the UK and Canada, not to invest in this IPO, money is pouring in from all of these friends of America, as well as from countries that the White House views negatively, such as Russia.
In fact, it is China that is more surprised that so many long-time American allies are signing up for the initiative, because China itself is not yet totally prepared to articulate the AIIB’s governance structure, general scope of operation and specific key operational details. The AIIB so far is a fund-raising story, like many of those told to a venture capital fund by a start-up entrepreneur. Yet all of these veteran players of global finance, such as the UK and Canada, are eager to join.
This is especially alarming for the U.S. considering another trend over the past two years, one which has received less fanfare: The British, Germans, Canadians, French and Singaporeans, all long-time supporters of the U.S., have been competing with each other to work with Chinese authorities to establish RMB clearing centers. This has drastically gone against the wishes of the U.S. Treasury, because the RMB’s emergence is perceived by the Treasury as a threat to the dominance of the U.S. dollar, which is so essential to America's economic prosperity, a key fact that people easily forget.
The Enthusiasm of US Allies for the AIIB --- A Testimony of the Desire for Reforming Global Governance
In many accounts, the AIIB represents a setback for the U.S. administration that could have greater long-term consequences than many people may realize.
A natural tendency may be to blame China. The argument goes that the Chinese are conspiring behind the scenes, have become too assertive, and are trying to steal the global leadership role from the U.S. As logical as this argument may appear, it is, in reality, not the case. China has repeatedly and openly stated that the AIIB welcomes the U.S. as a co-founder. When the idea of the AIIB was in its infancy, the Chinese, as far as I know, reached out through many channels to the U.S. administration to conduct closed door discussions. In a larger context, I have attended numerous policy consultation meetings among Chinese policy makers, academics, and opinion leaders. Consistently, the majority view has been that China should work with the U.S. to gradually reform the existing global economic governance architecture, including the IMF, the World Bank, and WTO. One main reason for taking this stance is that China has been an economic beneficiary of the architecture, so why would China want to change it?
Instead of blaming others, the U.S. administration and Congress should look to themselves regarding these recent developments, as they have been doing everything in their power to undermine America's global leadership. The IMF, which has been upholding the world’s financial stability, has been trying to implement necessary reforms which recognize the importance of emerging markets, including China and India. After painful negotiations, the Europeans, who stand to lose the most in any reform of IMF voting rights, agreed to the reform proposal. But the entire reform package is going nowhere, since the U.S. Congress is not even willing to consider approving it.
In another instance, at the G20 Global Summit following the global financial crisis, the IMF agreed that it should increase its ammunition of funds to deal with today’s financial instability. Major countries, including China, have pledged more stand-by resources. However, the Obama Administration, concerned with objections from Capitol Hill, refused to go along. It is important to note that this is not “real” money; rather, it is only a commitment in case there is a need for more money, which the Fed had been printing during its rounds of Quantitative Easing. The money requested for the U.S. to make available if needed pales in comparison to the $3 trillion printed by the U.S. Treasury over the past several years.
The world financial community has not forgotten the episodes regarding the selection of the Managing Director of the IMF and World Bank President a few years ago. There were already many calls for these candidates to be chosen based on merit, without nationality as a prerequisite condition. The chosen leaders of the institutions may very well still be the most suitable candidates had a wider search been conducted, but the White House was not willing to yield the principle.
America's allies, led by the U.K., are sending a simple but powerful message to the U.S.: We’re tired of your inaction and reluctance to make much needed reform regarding global economic governance. We’re now willing to buy a Chinese story, a story which is certainly unproven, but a story that at least has some promise for future reforms. If the U.S. Congress and the White House continue to drag their feet in recognizing the needs of global governance reform and fail to take real action, the U.S. will further alienate the allies that have stood by it for the past 70 years.
It is unfortunate that the U.S. Congress and White House are not proactive in this regard considering the current steady improvement of the U.S. economy, and the regaining strength of the U.S. dollar. It is even more unfortunate given the general willingness of China to work together with the U.S. to implement the reforms, as explained above.
The AIIB episode is a wake-up call for the U.S. Instead of blaming China and long-time American allies, the U.S. Congress and the White House should look at the world and recognize the reality and join the AIIB. They should work with other countries, including China, and support the ongoing necessary reforms of the global governance structure.
What China Wants to Achieve with AIIB?
Many people may believe that the AIIB is just another business deal that China is doing, so there is no need to be alarmed. Unfortunately, they are wrong. Many observers estimate Asia will require as much as $1 trillion worth of infrastructure investments in the coming decade. The Chinese have been busy building domestic infrastructure and possess construction expertise they can offer other countries. This is no different, for instance, than Pizza Hut expanding abroad. For the countries joining the AIIB, their businesses will gain opportunities to obtain construction and other related contracts. Again, this argument does not hold water. Chinese companies can continue conducting construction overseas without the "big fuss" of setting up new international institutions like the AIIB. Countries do not have to join the AIIB in order to do business with the AIIB.
Based on the early enthusiasm of China’s initiative to establish the Asia Infrastructure Investment Bank (AIIB), there are at least two widely held expectations. First, the AIIB needs to be able to provide much needed capital and implement greatly needed infrastructure investments in Asia. China has abundant experience in making infrastructure investments. However, the extent to which the experience of China’s domestic infrastructure investment is relevant for practice internationally is still a question mark. At the same time, many governments around the world do expect that China will be up to the task to lead the efforts in enhancing infrastructure investments. By doing so, China needs to demonstrate that under its leadership, the AIIB will be more effective than the Asia Development Bank, the World Bank, and others in implementing infrastructure projects. Perhaps more important is the expectation that through making infrastructure investments, the AIIB can credibly enhance economic development and provide tangible welfare enhancements for the relevant regions.
The other expectation is that through the AIIB, China will demonstrate a new style of global leadership that is in contrast to what has been seen in the World Bank and the IMF. The U.S. style of leadership can be very efficient because it features the U.S. at the center and containing veto power, and the effectiveness of such leadership depends upon the relative strength of the U.S. economy. When the U.S. was the absolute dominant economic power in the world, as was the case in the years following World War II and also in the 1990s, this kind of leadership proved to be effective and impactful. However, with the relative decline of the economic power of the U.S., this effectiveness is fading. China, however, needs to show to the world that it is able to lead, and that in the process it is able to generate enough comfort among other countries, as the AIIB is widely regarded as an experiment or a pilot for the emergence of China’s leadership in global governance.
Three Challenges Facing Chinese Efforts on AIIB
Despite the high expectations for the AIIB, it is facing at least three major challenges. The first challenge is to what extent China’s global vision is operational. Up until now, China has been a beneficiary of the global governance structure, which is led by the U.S., even though China often voices discontent of the leadership of the U.S. China’s own intentions and style of leadership are yet to be proven. What does China want? Will China be able to deliver on its vision of global governance? These are all major question marks. China needs to demonstrate that it seeks to implement a multi-polar world, with more democratic voices then what is the case in today’s global governance system, and that this can be operational. China needs to confront the dilemma that in international organizations and negotiations, the principles of democracy and legality are often in conflict with efficiency.
The second challenge is whether China’s domestic practice of rapid investment is duplicable or adaptable outside of its borders. It is natural for China to push for some version of its own model of infrastructure investment by AIIB in Asia. It is unclear, however, whether or not this is duplicable. In China there are several very specific factors which make infrastructure investment very effective. They include the government’s monopoly of land rights, which makes the conversion of the use of land very quick; the large amount of capital readily provided and rolled over in infrastructure investments; China’s large supply of low cost laborers, who are willing to work extra hours so that infrastructure investments are completed both timely and under budget; and the coordination between the central and local governments in investment projects. All of these factors do not always exist outside of China.
The third challenge for the AIIB is the small pool of international talents. China is already arguably much more international than Japan or Korea during comparable stages of economic development. In China, the product market is highly international, and China attracts the world’s largest amount of FDI among all developing countries; in many years, the direct inflow of FDI is higher than the flow into the U.S. However, China has a visible shortage of talents who can work effectively in an international environment. China’s own market is attracting a lot of talents who previously worked in international organizations such as the World Bank and IMF. In these international organizations, it is known that retaining Chinese talent is very difficult because the domestic market has a big attraction of such talents. Also, despite many years of English education, Chinese students still find English much more difficult to command than their European counterparts. At the same time, the Chinese education system, spanning from primary school to doctoral programs, still emphasizes memorizing scientific principles and learning hard skills, such as solving mathematic problems, rather than learning soft skills. China has a wide shortage of leadership, and this shortage is most acute at the level of senior management. In recent years, the bottleneck blocking China’s desire to push international organizations like the IMF to hire senior officials from China is China’s lack of talents with strong international experience.
A Likely Governance Structure of the AIIB
Given the high expectations for and the challenges facing the AIIB, China is establishing the initiative together with other countries. There are several things I think the Chinese government will do with the AIIB. First, China will avoid the issue of veto rights and implement a softer governance structure. Some people expect China to follow the model of the U.S. in designing a structure in which China can maintain veto rights. I do not believe that this is a possibility, since this runs counter to China’s long-time claim that the IMF and the U.S. are not being fair by designing veto rights in existing international organizations. Instead, what China might do is to have a multi-stakeholder approach. Specifically, instead of having only one decision making body, the AIIB may have multiple committees. For example, a consultation committee consisting of members invited from all over the world, including opinion makers, labor leaders, media leaders, and academics, who would voice their concerns and make their views heard within the AIIB before critical decisions are made.
The other committee might be one similar to the U.S. Senate, with a fixed number of representatives from each member country, and this “senate” will have more equal representation forming a balance against the Board of Directors. In the Board of Directors, China may hold the largest amount of voting rights. However, this may not imply that China will have veto rights. Decisions will have to be made after careful consultations are conducted with various stakeholders. Even though the final decision might go against the desire of some of the members, the opinion of the opponents of these decisions will be carefully voiced and heard.
The second thing the AIIB will do is depoliticize investment decisions. The World Bank and IMF often have to take global political issues into account when making decisions. It is unlikely for China to do so, because it has been a long-time belief of China that economic development should be delinked with geopolitics. The beneficiaries of economic investment are the common people of the countries, rather than the rulers. Economic sanctions would not be useful, because in the end the common people will be held as hostage, and that is too much of a draconian punishment for the people. Therefore, China will try to invest in countries which may even be perceived as politically unsuitable by the current decision makers in the existing international organizations.
The third thing China may do is hire global talents for the AIIB, at least initially, to compensate for the shortage of local talents. China may very well hire away a lot of experienced staff members of the IMF, World Bank, ADB, and the Africa Development Bank, as a way for the AIIB to learn the good aspects of the practices of these existing international organizations.
In summary, I do believe that the AIIB will be a great opportunity for China to demonstrate what it wants for a new model for global governance. Although China faces tremendous challenges against the high expectations of the many stakeholders of the AIIB, China will have to be very pragmatic and very careful in implementing the first steps of the AIIB. In many aspects, the AIIB will be very different from other existing international organizations. The first steps will be carefully watched by the rest of the world.