Will China’s Asian Infrastructure Investment Bank begin a new world order?
Summary: China has created the Asian Infrastructure Investment Bank (AIIB) and signed on enough nations to make it a significant global force, but opinions differ about its odds of success and long-term significance. Some people expect nothing; some expect the world to change. Here I review the various bets and pick a winner.
- The AIIB is perhaps important, & bad
- It’s big news. It’s the end of US rule.
- Skeptical voices, with good reason
- My conclusions
- For More Information
(1) The mainstream view: the AIIB is perhaps important, but bad
For the mainstream view we turn to the Washington Post, where journalist Fareed Zakaria describes the situation and the consensus wisdom of its implications:
This summer, China spearheaded an agreement with Brazil, Russia, India and South Africa (known collectively as the “BRICS” countries) to create a financial organization that would challenge the International Monetary Fund. In October, Beijing launched a $50 billion Asian Infrastructure Investment Bank, explicitly as an alternative to the World Bank. And last week, Xi declared that China would spend $40 billion to revive the old “Silk Road” trading route to promote development in the region.
… But if China uses its growing clout to keep asking countries to choose between the existing arrangements or new ones, it might create conditions for a new kind of Cold War in Asia. It will certainly help to undermine and destroy the current international order, which has been a platform on which peace and prosperity have flourished in Asia for 7 decades.
The Economist gives a deeper analysis, but being The Economist we should assume it gets the details right but misses the big picture. Excerpt:
But the real, unstated tension stems from a deeper shift: China will use the new bank to expand its influence at the expense of America and Japan, Asia’s established powers. China’s decision to fund a new multilateral bank rather than give more to existing ones reflects its exasperation with the glacial pace of global economic governance reform. The same motivation lies behind the New Development Bank established by the BRICS (Brazil, Russia, India, China and South Africa).
… Reforms to give China a little more say at the International Monetary Fund have been delayed for years, and even if they go through America will still retain far more power. China is, understandably, impatient for change. It is therefore taking matters into its own hands.
(2) It’s big news. It’s the end of US rule.
Alarmists went wild as each new nation signed onto the AIIB. Such as Zero Hedge: “US Hegemony, Dollar Dominance Are Officially Dead As China Scores Overwhelming Victory In Bank Battle“. It’s “de-dollarization” of the world economy: hysterical article, hysterical article, more hysteria.
For an excited but sensible opinion, read this by Kishore Mahbuban (Dean of Singapore’s Lee Kuan Yew School of Public Policy). He sees the AIIB as “a Sign of American Decline”. Excerpt from his article in the Huffington Post:
Any objective and calm assessment of the Chinese decision to launch the AIIB would show that this is a bank whose time has come. The Asian Development Bank has estimated that Asia needs to spend at least $8 trillion in infrastructure investment. The American-dominated World Bank and related institutions cannot possibly fulfill this demand. China’s decision to use its reserves to boost Asian infrastructure investment was clearly welcomed in Asia. Given its spectacular success with developing world-class infrastructure in record time, China has a lot of expertise in this area. Asia needs this.
(3) Skeptical voices, with good reason
Some dismiss the likelihood of AIIB making waves, such as Erik Voeten (Assoc Prof of Geopolitics and Justice, Georgetown): “Why the U.S. effort to curb the Asian Infrastructure Investment Bank is doomed to fail (and why it doesn’t matter all that much)“.
For a more accurate explanation we can turn to the latest by Michael Pettis: “Will the Asian Infrastructure Investment Bank (AIIB) one day matter?” It’s brilliant and well worth reading (redundant: it’s by Michael Pettis). It’s long and technical (ditto). He uses China’s new AIIB as a springboard to correct several common misconceptions (e.g., about the Chinese RMB becoming a reserve currency).
This is not to say that the AIIB cannot become as important an institution as some of the more excited commentary suggests. It can, but only under certain fairly implausible conditions. If China’s economic rise during this century leads it not just to overtake the United States but to achieve a level comparable to that of the United States in the 1940s and 1950s, and if the RMB becomes the world’s dominant reserve currency, with Beijing understanding and accepting the full costs of having the RMB as the dominant reserve currency, and if Beijing chooses to implement its foreign policy objectives at least partly through the AIIB, its importance will rival that of the Bretton Woods institutions.
However if the 21st Century evolves into a bi-polar world, or a multipolar world, or if it continues to be dominated by the US, the AIIB’s history will resemble that of its many antecedents. It will join the long list of much-hyped initiatives aimed at transforming the global trading regime but now languish in obscurity, known primarily for absorbing university graduates from very prestigious schools who have failed their other job interviews.
This just means, in other words, that if Beijing occupies the same relation to the rest of the world that Washington did in the 1940s, and if, occupying this position, its ideas about what it expected from a global trade and currency regime had not changed during the next decade or two (which, given its very difficult expected rebalancing, as I will show, makes this very unlikely) then the AIIB can replicate the rather extraordinary impact of the Bretton Woods institutions. Note however that the AIIB itself will not play a role in China’s rise. It will be nothing more than one of the consequences of that rise, which is why even if this whole string of implausibilities were to become real, it is absurd to say that the AIIB itself changes anything.
(4) My conclusions
All of the above are correct in a sense. The AIIB is a small step by itself, of little importance during the next few years. From a long-term perspective it’s another step on the road to replacement of the US as global hegemon by a multi-polar system.
The international financial institutions are a key part of the current US-centric system; the World Bank is a key piece of that. Creating a competitor to the World Bank — the AIIB — required signing on many major nations. US government officials understood the importance of stopping China’s first steps, and strongly pressured our allies to not participate. That 46 nations signed on so far shows that by skill or luck China has chosen the right moment to act. Other nations have grown tired of our increasingly erratic prima donna act — one no longer justified by overwhelming US power — and are willing to publicly defy us by supporting an alternative.
The first step is the most difficult. China will find the next step easier to accomplish.