The Asian Infrastructure Investment Bank and the New Balance of Power

David Angel, Vol. 36 Associate Editor

Introduction

This year has brought fresh examples of how the balance of the world’s economic power is shifting, promising to realign the relationships between major powers and their allies. A recent example of this is Australia’s decision to join the China-led Asian Infrastructure Investment Bank (AIIB) over the objection of US officials.[1] Earlier this year, close American allies including the United Kingdom,[2] France,[3] Germany,[4] Italy,[5] and South Korea[6] also decided to become AIIB founding members. One motivation for the creation of the AIIB is to plug a large infrastructure funding gap in Asia, providing much-needed capital for projects like roads and bridges.[7] Other development banks, including the World Bank and the Asia Development Bank, simply do not have sufficient funds to adequately finance infrastructure projects in the region.[8]

But a desire to provide much-needed financing to the region only partially explains China’s motivation. The creation of the AIIB also reflects Chinese dissatisfaction with the post-war system of international economic governance. Following World War II, the global community recognized the need for international institutions that could more effectively deal with the kinds of economic problems that helped precipitate the war.[9] One of these institutions, the International Monetary Fund (IMF), was set up to maintain stability in exchange rates and international payments.[10] Another, the World Bank, was created to facilitate post-war reconstruction, but eventually expanded its focus to include the alleviation of poverty.[11]

Power in the IMF and World Bank are unduly influenced by the state of the world following World War II, with voting power in both organizations heavily slanted in favor of the United States and its Western European allies.[12] But this distribution is becoming increasingly unreflective of the balance of power in the world at large. Several non-traditional powers, such as China, India, and Brazil, are rapidly growing and asserting themselves on the world stage, but governance inside these institutions doesn’t reflect that shift.  For example, France and the U.K. hold 9.02% of IMF votes[13] while China, with a GDP almost double that of the U.K. and France combined,[14] holds only 4%.[15] In fact, The U.K. and France taken together have a greater share of votes in the IMF than China, India, and Brazil combined.[16] In addition, the World Bank invariably is run by an American,[17] while the IMF is invariably run by a European.[18]

This maldistribution of power alienates growing world powers like China. But the United States and its allies have sought to maintain the status quo. In 2014, a series of reforms were introduced that would have redistributed six percentage points of voting power in the IMF to emerging economies, and moved two IMF directorships from Europe to developing countries.[19] But the U.S. Congress scuttled these reforms, refusing to pass them as part of a budget proposal.[20]

These kinds of actions delegitimize the Bretton Woods institutions, and dissuades emerging powers like China from buying into the prevailing international order. Even outside the traditional Bretton Woods institutions, these emerging powers often feel they are not adequately represented. For example China is also part of the Asian Development Bank, but that bank is dominated by Japan. Japan has twice as many voting shares as China, and the President of the Asian Development Bank is always Japanese.[21]

Hence the creation of new bodies in which emerging powers feel like they have a voice commensurate with their economic clout. The New Development Bank, for example, is run by the world’s largest developing economies: Brazil, Russia, India, China, and South Africa. The New Development Bank will fund infrastructure projects in each of its member countries, with each country wielding equal voting power.[22] The creation of the AIIB is motivated by similar concerns. Countries are looking for alternatives to institutions in which the United States and Western Europe are seen as wielding disproportionate power.

The creation of the AIIB will doubtless greatly expand China’s influence in the region at the expense of its traditional powers, the United States and Japan.[23] The United States claims to oppose the bank because of concerns over its governance, as well as concerns about whether or not it will adhere to essential environmental, labor, and procurement standards.[24] But it is hard not to suspect that a desire to maintain primacy in the region is also influencing its behavior. Still, the emergence of countries like China cannot be denied, and if they are not accommodated in the existing power structure, they will inevitably seek to strike out on their own.


[1] See Rob Taylor, Australia Will Join China-Led Investment Bank, Prime Minister Says, WALL ST. J., Mar. 28, 2015, available at http://www.wsj.com/articles/australia-to-join-china-led-development-bank-says-finance-minister-1427539140.

[2] Jane Perlez, With Plan to Join China-Led Bank, Britain Opens Door for Others, N.Y. TIMES, Mar. 13, 2015, available at http://www.nytimes.com/2015/03/14/world/asia/asian-infrastructure-investment-bank-britain-china.html?_r=0.

[3] Andrew Higgins & David E. Sanger, 3 European Powers Say They Will Join China-Led Bank, N.Y. TIMES, Mar. 17, 2015, available at http://www.nytimes.com/2015/03/18/business/france-germany-and-italy-join-asian-infrastructure-investment-bank.html.

[4] Id.

[5] Id.

[6] Alastair Gale & Rob Taylor, Decision to Join China-Led Bank Tests South Korea’s Ties to U.S., WALL ST. J., Mar. 24, 2015, available at http://www.wsj.com/articles/decision-to-join-aiib-tests-south-koreas-ties-to-u-s-1427185565.

[7] S.R., Why China is Creating a New “World Bank” for Asia, ECONOMIST, Nov. 11, 2014, available at  http://www.economist.com/blogs/economist-explains/2014/11/economist-explains-6.

[8] Id.

[9] JOHN BRATHWAITE & PETER DRAHOS, GLOBAL BUSINESS REGULATION 97 (2000), available at https://www.globalpolicy.org/component/content/article/209/42675.html.

[10] ABOUT THE IMF, https://www.imf.org/external/about.htm (last visited May 13, 2015).

[11] HISTORY, http://www.worldbank.org/en/about/history (last visited May 13, 2015).

[12] See generally IMF MEMBERS’ QUOTAS AND VOTING POWER, and IMF BOARD OF GOVERNORS, https://www.imf.org/external/np/sec/memdir/members.aspx (last visited May 13, 2015).

[13] Id.

[14] THE WORLD FACTBOOK: GDP (Official Exchange Rate), https://www.cia.gov/-library/publications/the-world-factbook/fields/2195.html (last visited May 13, 2015).

[15] Supra note 12.

[16] Id.

[17] Robert H. Wade, US Keeps Control of the World Bank, LE MONDE DIPLOMATIQUE, Oct. 2012, available at http://mondediplo.com/blogs/us-keeps-control-of-the-world-bank.

[18] Joshua E. Keating, Why is the IMF Chief Always a European?, FOREIGN POLICY, http://foreignpolicy.com/2011/05/18/why-is-the-imf-chief-always-a-european/ (last visited May 13, 2015).

[19] Robin Harding, Christine Lagarde Warns US over IMF Reform Failings, FINANCIAL TIMES, Dec. 12, 2014, available at http://www.ft.com/intl/cms/s/0/9026530c-821d-11e4-a9bb-00144feabdc0.html#axzz3XDzKpr4b.

[20] Id.

[21] Supra note 7.

[22] Raj M. Desai & James Raymond Vreeland, What the New Bank of BRICS is All About, WASHINGTON POST, July 17, 2014, available at http://www.washingtonpost.com/blogs/monkey-cage/wp/2014/07/17/what-the-new-bank-of-brics-is-all-about/.

[23] Supra note 7.

[24] Id.