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The AIIB and the NDB: The End of Multilateralism or a New Beginning?

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The AIIB and the NDB: The End of Multilateralism or a New Beginning?

Should the West be worried about new competition in the global financial architecture?

The AIIB and the NDB: The End of Multilateralism or a New Beginning?
Credit: Chinese RMB and globe image via

Multilateral cooperation over the past decade has taken a steep downward turn. From the final demise late last year of the World Trade Organization’s protracted Doha Round of multilateral talks, to the growing proliferation of regional and sectoral trade deals, world powers seem either unable or unwilling to seek common ground like they used to. Indeed, there appears to be a growing universal aversion to the post-World War II forums for negotiation and agreement, which seem mired in bureaucracy and stasis.

Even the United States, the masthead of the Bretton Woods Institutions, shows such inclinations. Washington’s regional efforts to secure the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership are an obvious departure from the principle of universal consensus-based decision-making.

Some argue that this shift from the global to the regional reflects the reality of a diverse and more complex world order, in which a Western-centric, “one size fits all” approach is no longer tenable. This is emphasized by the recent founding in mid-2015 of two multilateral development banks headed by emerging economies, the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (NDB, also known as the BRICS bank). While the AIIB is headed by China and backed by a founding shareholder membership of 57 countries, the NDB is operated on an equal basis between the BRICS nations – Brazil, Russia, India, China, and South Africa.

These new banks for the first time open up a strategic rivalry with Western and Japanese-led lending institutions, namely the World Bank, the International Monetary Fund (IMF), and the Asian Development Bank (ADB), mirroring the broader tussle for power and influence between the developed and developing world.

Equality for the Developing World

Both new banks share much in common. Firstly, they were set up out of a shared frustration with existing multilateral lending forums, whose voting structures are stacked against emerging markets. Despite accounting for a quarter of global economic output between them, the BRICS are given a mere 10.3 percent of the votes at the IMF. Meanwhile, Japan, Germany, France, and the U.K., each hold greater voting shares than China, despite the latter being the world’s second largest economy. Furthermore, the presidency at the IMF is confined to Europeans, whereas the United States has sole discretion over the top role at the World Bank, and Japan has led the ADB since its founding in 1966.

In 2010, the IMF agreed to reform this inherent bias to give a greater voice to emerging powers, but ratification of the proposal was regrettably turned down by the U.S. Congress (the United States is the only country with veto power at the IMF). In what seems like a directed riposte, the founders of the NDB have repeatedly emphasized the principle of stakeholder equality. Each of the BRICS countries will contribute an equal share of the NDB’s $100 billion start-up capital, giving them 20 percent of the voting rights each, while the 5-year presidency is to be rotated equally among its members. The AIIB has joined suit by vowing to give a bigger voice to developing nations, as well as reserving at least 75 percent of voting shares for Asia-Pacific countries, in a powerful contrast to its hierarchal, Western-centric counterparts.

Infrastructure Investment – Plugging the Gap

Aside from recognizing the growing geopolitical and economic clout of developing economies, both banks have as their mandate the goal of meeting the enormous demand for infrastructure investment in the developing world, with the AIIB focused on Asia particularly, and the NDB looking further afield. In a 2009 study, the ADB forecasted Asia’s infrastructure needs at $800 billion per year, from now until 2020. With the combined capital bases of the ADB and the World Bank totaling $383 billion, the region is woefully underfunded. Although the AIIB and NDB have been launched with even less, with just $100 billion of start-up capital each, one could do far worse than encourage new entrants onto the market. China’s already immense unilateral overseas development investment, as well as the newly established $40 billion “Silk Road Fund” will likely complement these efforts.

Furthermore, the banks also seek to avoid the strict conditionality of market and structural reform with which loans from the World Bank and IMF have been administered. Over the years, various host countries have seen this as a condescending and brash attempt to transplant the model of democratic markets, while failing to account for their specific developmental needs. Indeed, the World Bank’s insistence on austerity measures and forced financial liberalization in Thailand and Indonesia are held to have led to disastrous outcomes following the Asian financial crisis in 1997.

As a diverse cohort of varying and perhaps contradictory economic, political, and geographic backgrounds, the NDB is unlikely to advance any distinct value system behind its funding. This would likely offend the notion of equality on which the bank is founded. The AIIB, led by China, a country which has largely practiced a foreign policy of passive non-interference, is similarly unlikely to meddle in the internal affairs of other nations.

Complementary or Contradictory?

However, as noble as the new banks’ intentions of championing the role of developing nations may appear, the emergence of untested players have unpredictable and potentially destabilizing consequences for global economic governance. Despite the recent misgivings over the Bretton Woods system, it is no doubt to be credited for forging a normative, rules-based order on which global trade and prosperity has thrived for over 70 years. It did much to stymie the threat of further conflict when the wounds of the Second World War were still raw, providing a viable model for growth and security for the world, while other powers such as Russia and China struggled in the midst of ideological turmoil. Indeed, the context for current grievances exist only because the massive historical gains wrought by foreign trade and investment through the Bretton Woods architecture have faded into ubiquity, for both emerging and developed countries alike.

The strong credibility of this legacy still rings true, and is exemplified by the prevailing commitment to high commercial standards, such as intellectual property and labor rights, which have brought together 12 economies under the Trans-Pacific Partnership. Together, these nations account for 40 percent of global GDP, combining economies as diverse as Vietnam and Peru with the United States and Australia.

As such, one of the key, closely watched challenges confronting the new banks that will be their progress toward implementing good governance. While China’s “no strings attached” approach to overseas investment in Asia and Africa has meant significant headway for vital infrastructure projects, it has also drawn valid criticism for failing to adhere to adequate environmental or labor standards. Furthermore, as relative novices competing with stalwart institutions, the banks face an uphill challenge in proving to the global community that they are more than a symbolic gesture worth taking seriously.

In a nod to the high watermark set by their Bretton Woods counterparts, the AIIB has explicitly recognized the safeguards and practices of existing lenders as the industry standard. Jin Liqun, the incumbent president of the AIIB, has repeatedly vowed to make the bank “lean, clean, and green.” Jin has himself spent six years each at the World Bank and the ADB, and has allegedly filled the ranks at the new bank with their former staffers.

In signs of further convergence, recent weeks have seen declarations that the AIIB will undertake joint loan projects and co-financing agreements with the ADB, the World Bank, and the European Bank for Reconstruction and Development (EBRD). This will see the AIIB supporting the ADB’s lead role in funding a cross-country motorway in Pakistan, as well as joining another transport project headed by the World Bank and the EBRD in Kazakhstan’s business capital, Almaty.

This cooperation is in stark contrast to the acrimony which animated the AIIB’s establishment, which saw a total of 57 countries sign up to the bank, including advanced economies such as the U.K. and Germany, much to the chagrin of the United States and Japan. One year later, both sides seem intent on burying the hatchet, with ADB president, Mr. Takehiko Nakao stating in an interview, “People want to depict ADB and AIIB as rivals and Mr. Jin and I as rivals. But actually we are friends, and ADB and AIIB can be partners.”

There therefore appears to be an emerging rapport of healthy cooperation and competition between the banks, rather than a guarded, tit-for-tat rivalry. An increase of players will plausibly impel all multilateral lenders into greater efficiency and reform. The plans for the AIIB to join forces with the ADB and World Bank come with added benefits, as the former can tap into existing investment portfolios, receiving vital experience and know-how, while the latter receives additional funding.

As long as the banks strive predominantly for value-added and goal-oriented investments, the tendency from a universal multilateral order to a multifaceted one need not be based on stark geopolitical divisions or implicit threats to global governance. Instead, they showcase how developing nations can effectively channel their increasing strengths to global development goals, as well as promoting new norms of shared leadership and responsibility in advancement of, rather than in contradiction to, the existing international order.

Jonathan Dove is a student at the University of Law in London. He has completed traineeships with the EU Delegation to China and the German Marshall Fund in Brussels