Pacific Money

China’s Controversial Asian Infrastructure Investment Bank

The U.S. has been very quick to make an issue of China’s new bank.

China’s Controversial Asian Infrastructure Investment Bank
Credit: U.S. Embassy The Hague via

China is leading the creation of the Asian Infrastructure Investment Bank (AIIB) in an attempt to improve infrastructure in Asia. A move by the U.K., and soon after Germany, France and Italy, to join the AIIB as founding members has been viewed by the United States as folly, and the U.S. warned other nations on Tuesday not to join the organization without considering China’s governance of the institution. Germany, France and Italy have pledged to ensure proper governance.

Currently the AIIB has 31 founding members, including the new European members, and is supposed to be a development bank similar to the World Bank and Asian Development Bank. China’s President Xi Jinping announced the proposed creation of the bank just before the APEC meeting in Bali in October 2013. While the specific plans for governance of the bank are unclear, Xi has noted that management of the AIIB would be less bureaucratic than the Asian Development Bank, which has been touted as inefficient and redundant.

The AIIB, along with the New Silk Road initiative, which is also led by China, is designed to improve infrastructure throughout Asia. China’s pockets are bursting with foreign exchange, which the nation intends to use in part for these endeavors. Chinese companies have also proven their ability to build infrastructure (albeit excessively in recent years) through construction of the world’s largest dam (although controversially displacing millions of citizens), the longest bridge, and the largest express road network. Employment of Chinese construction companies in these multilaterally funded projects would boost China’s gross national product.

Good governance of the AIIB would help to ensure that infrastructure projects maximize their humanitarian impact and are carried out efficiently. Some of China’s infrastructure projects remain controversial, including construction of the Three Gorges Dam and the South to North Water Transfer Project. The Three Gorges Dam has come under fire for its displacement of local residents, extremely negative impact on the environment and climate, and adverse impact on water availability in surrounding areas; the South to North Water Transfer Project has been viewed by some as unnecessary, wasteful, and environmentally damaging. Infrastructure companies have also been accused of corruption, funneling money away from construction of these projects. In recent years, local governments have been increasingly wasteful in building up so-called “ghost towns,” entire urban areas devoid of residents.

If Germany and other European nations are to help oversee governance of the AIIB, better planning may occur, but this is not guaranteed. German federal transportation projects are notorious for their long delays and inefficiencies. Italy is only just improving its infrastructure, from relatively low levels. However, while European nations may not boast exemplary efficiency in the construction of infrastructure projects, certainly their human rights record is better than that of many nations in the AIIB, including China, Laos, Uzbekistan, and Myanmar. Hence active participation by European nations may prove essential in ensuring proper governance.

Washington’s negative stance on European enthusiasm for the AIIB has been rightly criticized by Robert Zoellick, former president of the World Bank. Zoellick faulted the Obama administration for taking an unfavorable position on the AIIB in advance of knowing the details of its governance. Strangely, this relatively uncontroversial institution has become a point of contention between the U.S. and Europe, even before the rules of the organization have been established.