Three years ago, more than 700 million people in India experienced a blackout that lasted more than 10 hours. Power outages of this scale are not just an inconvience; they also disrupt commutes and business activity, adding to Asia’s many economic challenges. Coupled with today’s overcrowded trains and roads, crises like the one in 2012 underscore the need for greater infrastructure development in India and in Asia at large.
This need is no secret to Asian leaders, who have launched several initiatives this year to combat the infrastructure gap that the World Bank estimates at $2.5 trillion. The Chinese-led Asian Infrastructure Investment Bank (AIIB), in particular, will soon become a prominent player in the battle against these infrastructure shortcomings. With $50 billion in capital, the AIIB distinguishes itself from the World Bank and IMF by concentrating its firepower on one clear target—infrastructural development. Even though it cannot be considered a panacea for Asia’s current economic slowdown, the AIIB can provide a useful boost to sinking investment spending. But like many other Chinese initiatives, American leaders worry about the influence China will gain from the AIIB’s success.
Diplomacy and Politics
Above all, American commentators have questioned where American supremacy has gone. To some, the Chinese-led AIIB appears to be yet another example of a power struggle that has left the United States holding less international sway. China has, after all, supplanted the United States as the world’s largest economy (when adjusting for purchasing power parity) and has maintained a powerful foothold in East Asia. The United States continues to assert its power in the region, but China’s rise has undoubtedly made American dominance more of a question than a certainty.
Nevertheless, institutions backed by—and to a large extend guided by—the United States have shown little ability and effort to stem a burgeoning infrastructure shortage. The World Bank, for one, has been facing significant administrative difficulties. After protests from World Bank employees late last year, The Economist reported, “staff in the countries where the Bank operates, who used to be charged with looking for new lending opportunities, complain that their budgets have disappeared.” It furthered, “Lending remains strong, but the pipeline of future deals is said to be weak.”
With the World Bank unable to help, Asian leaders counted on other institutions like the International Monetary Fund (IMF). Unfortunately, developing economies have a lack of say in the IMF’s policies too. The Obama administration attempted to correct this by nearly doubling China’s voting share and significantly increasing Brazil and India’s role in the organization. Yet while the reforms unanimously passed the IMF board, the U.S. Congress, who has final say on all policy, rejected them. The reforms have now been delayed for five years, pushing Asia to find solutions of its own.
Questions of Transparency
The World Bank and IMF’s inaction led China to both unilaterally create the AIIB and form a coalition with Brazil, Russia, India, and South Africa to found the New Development Bank. The NDB is part of a group of regional and national development banks that together are lending significantly more internationally than the World Bank itself. In other words, Asia’s frustration has developed into a formidable challenge to traditional centers of financial power.
Despite critiques that the AIIB and other such institutions could be breeding grounds for corruption, they may actually add transparency to the informal development aid that already exists. The AIIB is led by a country known for its lack of political transparency and corruption. Understandably, many worry that these notoriously shoddy governing practices may seep into the workings of the infrastructure bank. Kenneth Rogoff, an economist at Harvard, countered by pointing out that, “China is already pouring money into the developing world, often through highly opaque channels. To the extent that the AIIB [normalizes] a portion of Chinese development assistance, and subjects it to scrutiny from the new bank’s advanced-country members, the new bank’s existence should be all for the better.” In other words, the AIIB does give China significantly more power on the global stage, but it also pushes its inner workings into the public spotlight.
Most importantly, several close American allies have become founding members of the AIIB, signaling potential for oversight by the United States itself. The United Kingdom, Germany, Italy, and France have been among those to sign the AIIB’s charter. These allies will likely give credence to President Obama’s advice: “Our simple point to everybody in these conversations around the Asian infrastructure bank is, let’s just make sure that we’re running it based on best practices.” While it is clear that a unilaterally-run institution by China may cause American leaders unease, the AIIB originates from a diverse group of founding members, many of which will likely guide the institution in a path consistent with American goals.
A Global Safeguard
And surprisingly, institutions like the AIIB could end up directly servicing American interests. Experts agree that the world economy is in for a shock come the first round of Federal Reserve interest rate hikes, which are expected to start as early as this September. As soon as it raises interest rates, American investment opportunities will boast higher returns and thus become more attractive to investors around the world. Augmented by its strong economic recovery, the United States will continue to draw capital from slowing economies like India and China. This will reduce growth in these and other developing nations, but it will likewise make dollar-denominated debt more expensive. Unfortunately, emerging markets’ corporate debt denominated in dollars has skyrocketed to $1.5 trillion, more than double what it used to be. If American interest rates increase, the dollar will become more valuable and make this surging debt even more expensive. A combination of capital outflows from non-American countries and pricier debt will cause serious financial complications worldwide.
These negative effects are hardly constrained only to developing economies. In a report reviewing the American economy this past year, the International Monetary Fund had dire warnings about interest rates: “In either case, asset price volatility could last more than just a few days and have larger-than-anticipated negative effects on financial conditions, growth, labor markets, and inflation outcomes.” Furthermore, according to the IMF, the spillovers to economies with close trade and financial linkages could be substantial. With a highly internationally exposed financial system and trade worth about 23 percent of yearly output, the United States stands to suffer from global economic instability.
However, the incoming infrastructure spending from the AIIB and other institutions like it can mitigate such instability. Infrastructure projects, after all, take months, require a significant amount of paid labor, create lasting structures that support business development, and provide a much-needed boost to depressed economies. Joseph Stiglitz, a Columbia University professor and Nobel laureate in economics, noted in April that “China itself is a testament to the extent to which infrastructure investment can contribute to development. Last month, I visited formerly remote areas of the country that are now prosperous as a result of the connectivity—and thus the freer flow of people, goods, and ideas—that such investments have delivered.”
The End Game
Although the AIIB has sometimes been labeled as an example of Chinese overreach, global economic conditions suggest that the bank may be an important lifeline for what is to come. With the global economy set to experience great uncertainty and volatility, any amount of stimulus, especially in growth-targeted sectors like infrastructure, will stabilize rapid downturns. Though the extent of this stabilization is not game changing by any means, it is significant. Moreover, the trend toward non-Western development banks indicates a push toward assisting historically neglected parts of the world economy.
Arguments centered on American supremacy over Chinese interests, thus, largely detract from the larger issue of a global need for stimulus, which can be driven effectively by infrastructure expansion. The AIIB, and institutions like it, refocus attention on areas that groups like the IMF and World Bank have been unable to assist or represent properly. Though it may seem like these upstart institutions are usurping western power, they are in fact simply filling a void. The IMF and World Bank will continue to be vital sources of funding for countries in need like Greece or for initiatives other than infrastructure spending. Meanwhile, countries like China and India can take a leading role in their own rebounds from stalling growth. Instead of a competition, the different entities can complement one another and promote financial stability worldwide.