EUROSCOPE. An answer to Fund-Bank domination

Is the tide turning on the Asian Infrastructure Investment Bank, the new development bank being pushed by China to help plug Asia’s multi-trillion-dollar infrastructure financing deficit?

When 21 countries from the Asia Pacific region — including India, Pakistan, Qatar, Malaysia and Singapore signed up to be founding members late last year, there were a number of notable absences from the region — including Australia, Japan and South Korea. At the end of last year, not a single country, outside Asia and West Asia, had signed up.

The need for the bank is plain. An often-cited research report commissioned on behalf of the Asian Development Bank Institute in 2010 estimates that countries in Asia required financing of $776 billion per year for national infrastructure in the decade to 2020.

This need has been met in part by institutions such as the Asian Development Bank (with a capital base of $160 billion) and the World Bank ($223 billion) but much more is needed.

This is also the logic behind the Brics ‘New Development’ Bank announced in Brazil last July.

The watershed moment seems to have come last week when Britain became the first G7 country to join the AIIB ahead of the end of March — the deadline for those countries wishing to join AIIB as founding members.

Now according to media reports Italy, France and Germany have signed up, while Switzerland, South Korea and Luxembourg are also said to be considering it. Australian Prime Minister Tony Abbott said at the weekend they were reconsidering their initial sceptical stance.

Firmly opposing the bank, pretty much in isolation now, remains the US, which made its opposition clear last week after it sent Britain a strongly worded message via various media outlets (notably the Financial Times ) expressing its concerns in no uncertain terms.

It couched its opposition in terms of concerns about lending standards and transparency (though there is an inescapable irony that a country whose regulators spectacularly failed to spot the biggest credit crisis in recent history could feel it had the moral high ground on this count).

However, that argument that the US and west in general would be better able to push for standards from the outside is a non-starter — rarely has change — if at all needed in this case — been brought about this way.

Besides, the signs are that nothing but the highest standards are planned for the bank. For instance the person expected to be in charge, Jin Liqun, is the former chair of the board of supervisors of China Investment Corporation, the Chinese sovereign wealth fund with $200 billion of registered capital, and chair of the International Forum of Sovereign Wealth Funds. He’s also a former vice president of the Asian Development Bank.

The lack of a credible reason from the US points to its true concern: unhappiness with the changing dynamics of world influence and politics.

Till now the US has exercised much influence both over Western-based lending institutions such as the World Bank and IMF as well as Asia-focused ones such as the Manila-based Asian Development Bank (while the US and Japan each have over 15 per cent share in that institution, and the bank has typically been headed by a Japanese national, China has just over a 5 per cent stake in the bank).

Pushes for reform have been slow, often halted by the US Congress. China continues to have just a 3.8 per cent share of IMF voting rights (India is even lower at 2.3 per cent) and 4.4 per cent at the World Bank (India has 2.9 per cent).

It’s similar to the story about pushes for reform of other international institutions such as the UN and the UN Security Council.

The key takeaway is that the strategy of deferring change no longer works: if existing western-dominated institutions are not opened up, countries such as India and China will increasingly give up on changing the rules of the existing game and come up with new ones. It’s a fact that Britain — and apparently other European nations — seem to be recognising, albeit slowly.

The infrastructure deficit in Asia will provide great opportunities for these nations saddled with sluggish economic growth at home — something signalled by the huge interest in economic corridors such as those between Delhi and Mumbai and Mumbai and Bengaluru.

The current British government has for some time now pursued a policy of strengthening ties with China — pushing for London to become a leading Renminbi trading hub and easing the regulations for Chinese wholesale banks to operate in the UK.

Still there is a long way to go — Europe for one has focused on the Transatlantic Trade and Investment Partnership — aimed at cementing its already strong relationship with the US rather than focusing on opening up opportunities in new markets (notably within India, given that the Free Trade Agreement remains on the backburner).

The past two weeks certainly seem to have been a decisive time for western positioning on the AIIB. Whether it translates into a wider re-balancing and recognition of the new global economic realities remains to be seen.