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BrackenApril 27 2015

Asian Infrastructure Investment Bank: China’s superpower vehicle or a harmonious Asian programme?

The Asian Infrastructure Investment Bank has the potential to reallocate both Chinese and Western savings into projects that will boost the global economy and satisfy China's aspirations for a leadership role.
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Between last October’s inauguration of the Asian Infrastructure Investment Bank (AIIB) in Beijing involving 21 important Asian countries (from India to Singapore to Saudi Arabia), and the recent entry by six European countries (France, Germany, Italy, Luxembourg, Switzerland and the UK) plus New Zealand, the bank has introduced itself as a major player in future Asian development.

Unlike existing 'rivals', notably the $223.2bn World Bank and the $175.4bn Asian Development Bank, the AIIB promises to focus on only one aspect of Asian development: infrastructure. After initially seeding it with $50bn, China has already increased its capital base to $100bn, showing its willingness and an impressive capacity to expand. This is not surprising, given China’s world record currency reserves of nearly $4000bn.

And Asia desperately needs infrastructure. The AIIB’s focus on that and its huge capital base will certainly be a boon for its poorest members’ development in areas such as electricity, water, roads, telecommunications and banking. This may not only spur economic growth worldwide, but also guarantee better-functioning social infrastructure and government programmes on a continent full of contradictions and tensions.

The participation of advanced European countries, along with other democratic players, could favour good governance and a focus on high-quality projects, job creation, and strict environmental standards in the AIIB’s future investments. Moreover, their role in the design and approval of funded projects could encourage the opening of potentially profitable foreign investment channels. As the Chinese economist Justin Yifu Lin has claimed, successful financing of the poorest countries’ infrastructure projects may even help European countries to fully exit the post-2008 crisis stagnation and fully value Europe’s still under-utilised labour and production capacity.

Solving the puzzle

One of the mysteries of international economic growth – the so called 'Lucas Puzzle' – focuses on why profit-seeking productive capital does not flow from rich to poor countries. A related mystery – the 'allocation puzzle' – asks why capital does not flow into countries with promising future growth prospects. Following on from this, it should be asked whether the AIIB has the potential to avoid slipping into the Lucas Puzzle. After all, it will coordinate many public-private banking interactions and this could help regions where a technological catch-up is needed to bring about profitability. Perhaps it could be posited that the whole raft of investment opportunities the AIIB presents could prevent the Lucas Puzzle from becoming even more of a problem.

Moreover, with the overriding influence of Asia within the AIIB, huge savings may be redirected away from the US. According to former chairman of the US Federal Reserve Ben Bernanke, the global “saving glut” was responsible for the US economic imbalance (as exemplified by the US's $342bn trade deficit in goods with China) and the financial irregularities that were a direct consequence of this.

But will the AIIB be harmful for the World Bank and for the ADB? I think it will not. The amount of infrastructure investment needed in Asia is so large (new annual investments of $750bn according to ADB estimates) that the AIIB’s success will still leave plenty of opportunities for World Bank and the ADB, and may relieve some of the pressure on them.

But we might ask, why should the AIIB’s founding members not just pour their money into the existing institutions, rather than duplicating bureaucracy and management costs? Well, given the massive demand to satisfy, having more competition in the highly concentrated world of public-finance providers could perhaps spur all institutions to improve their performance.

Founder’s role

However, wouldn’t the AIIB be just another Beijing-centred big player? This is a possibility that may have to be considered, especially given the required Chinese financial involvement. The presence of other wealthy and/or fast-rising Asian countries, most notably India, should hopefully help to balance the influence. Membership of more countries, such as Japan, South Korea and Australia, would certainly allow a broader perspective and balance. Furthermore, it could foster co-operation and peace in Asia overall.

Finally, with a gross domestic product almost comparable to the US, but with about four times as many people to look after, China’s new effort to foster development in Asian countries is unlikely to be achieved without a level of enthusiasm that is so far quite poorly understood by the existing international institutions. These institutions are often mired in internal power struggles and deaf to China’s repeated requests for more global leadership roles.

With ample Western recognition and participation in the bank, the AIIB could reward China as well as benefit its needy neighbours, with potentially huge beneficial consequences for the global economy and for an international peace policy.

Guido Cozzi is professor of economics at the University of St Gallen.

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Read more about:  Analysis & opinion , Bracken , Asia-Pacific , China