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Asian Infrastructure Investment Bank: An Idea Whose Time Has Come?

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Asian Infrastructure Investment Bank: An Idea Whose Time Has Come?

The AIIB offers the region an additional source to fund infrastructure. This should be welcomed.

Asian Infrastructure Investment Bank: An Idea Whose Time Has Come?
Credit: China infrastructure via

A new multilateral bank was created in October 2014 with the formal launch of the Asian Infrastructure Investment Bank (AIIB), which is backed by at least 21 countries in the region. The new multilateral institution’s main lending thrust is in the area of infrastructure financing across Asia, backed by an initial paid- up capital of $50 billion and with authorized capital of $100 billion.

The timing of the establishment of the bank could not be more opportune. The infrastructure needs across Asia are great, especially as countries try to bridge their own domestic infrastructure deficit. According to the Asian Development Bank (ADB), infrastructure investment needs in Asia could reach $750 billion annually during the period 2010-2020. The ADB’s estimated lending approval each year of about $13 billion is simply not enough to support Asia’s infrastructure financing needs.

Filling the Infrastructure Financing Gap

During the launch of the AIIB, Chinese President Xi Jinping told representatives of the 20 other nations who signed the Memorandum of Understanding establishing the bank that “to build fortune, roads should be built first.” This struck a chord with many developing countries, where a lack of basic and adequate infrastructure impedes their economic development. As Asia continues to take center stage in driving the global economy, the region’s full potential can only be fully realized when the infrastructure gap is sealed.

Indonesia, initially absent in the formal launch of the AIIB, has announced that it will be keen to join the bank. While no formal announcement was made during the Asia Pacific Economic Cooperation (APEC) Summit to this effect, it should be noted that China has made strong overtures to other countries attending APEC to join the AIIB. This met with varying success. Australia offered tentative support to AIIB, saying it will only join ones it becomes a “genuinely multilateral body,” echoing its previous position that AIIB in its current form is a unilateral institution dominated by China. New Zealand responded to the call with Prime Minister John Key saying that his country wants to be “a participant” in the AIIB, but offering no further details.

For the Philippines, tapping various sources to finance its infrastructure investments is important if it is to drive its economy forward. The ADB estimates that the Philippines would need $20 billion annually to finance its infrastructure needs by 2020. The story for most countries that joined AIIB is similar.

Beyond national infrastructure projects, there is also a need to further develop and finance cross-border regional connectivity infrastructure projects. These projects are even more important with the rise of trade in value-added and production networks in the region. These production networks have contributed to the industrial upgrading and competitiveness for many countries. However, for countries to meaningfully participate in production networks, a reliable network of cross-border infrastructure, including road systems, ports, and telecommunications backbone, should be present.

China’s Economic Statecraft

The rise of China has led to calls to reform the global financial and economic architecture. China’s growing economic stature should be reflected in the governance structure of global institutions such as the International Monetary Fund and the World Bank. Unfortunately, reforms to change these institutions are slow to come. But what does Chinese leadership in global economic governance mean for the rest of the world? What form and shape will the institutions it creates evolve into and what kind of norms and practices will be diffused through these institutions? Will these institutions come with the same rigidity, inflexibility, and exclusivity Western-linked economic institutions are accused of now? China’s leadership in steering the AIIB could give a glimpse into the type of economic statecraft it will use and the kind of normative economic power it will become moving forward. These considerations will be important in determining the AIIB’s longevity and developmental impact in the region.

Safeguards and Governance Rules

This early, concerns remain as to the kind of lending policies, governance, and transparency standards AIIB will follow. Indeed, it is in the area of safeguards and social standards where analysts are critical of the AIIB, taking note of China’s infrastructure lending history and practice in the African continent in particular. Xi’s assurance that AIIB will follow “multilateral rules and procedures” and that it will adhere to “good practices” of existing multilateral institutions such as the World Bank and Asian Development Bank has failed to fully deflect skepticism about the AIIB. For instance, Washington has said that while it welcomes the idea of an infrastructure bank for Asia, it does not agree with the “ambiguous nature of the AIIB as it currently stands.” South Korea and Australia, two significant regional players, have so far snubbed the invitation to join the AIIB citing various political, economic, and strategic factors.

China’s expanding economic footprint and influence in the region are certainties that countries need to accept. The creation of the AIIB is a response to the growing reality that Asia needs infrastructure investment and, at the same time, China will have increasing involvement and confidence in leading the economic future of the region in its own terms. This economic impetus should not be lost as AIIB tries to build its organizational, professional, and institutional capacity. For AIIB to be effective, China, as the main driver, should refuse any urge to use the new institution as a tool to expand its political interest overtly in the region, more than the economic and infrastructure financing mandate AIIB purports to advance.

Don Rodney Ong Junio is an Associate Research Fellow at the Centre for Multilateralism Studies, S. Rajaratnam School of International Studies.