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Why US Allies Are Happy to Join China's AIIB

June 30, 2015 in Economics

By Swaminathan S. Anklesaria Aiyar

Swaminathan S. Anklesaria Aiyar

On June 29, representatives of 50 countries gathered in Beijing to sign the legal framework agreement to establish the $100 billion Asian Infrastructure Investment Bank (AIIB). Seven more countries are expected to sign, bringing the total number of founding AIIB members to 57. The institution will launch with China having a 30.4 percent share of the AIIB’s equity, followed by India (8.5 percent) and Russia (6.7 percent). The two notable absentees are the United States and Japan. Key NATO allies of the U.S., like Germany, France and the United Kingdom, have opted to join the AIIB. Germany will have the largest non-Asian stake (4.1 percent).

The China-led Asian Infrastructure Investment Bank (AIIB) has swept up U.S. allies.”

Of all its allies, why did only Japan stand with the United States on an issue with strategic implications? The new AIIB will symbolize China’s rise as a financial superpower, guiding the world’s biggest infrastructure financing institution. Whatever their reservations about China’s financial rise, most countries see it as a fact of life that cannot be stalled by staying out of the AIIB. They would rather be inside it, getting a share of the infrastructure orders that the AIIB will finance.

U.S. President Barack Obama says China may steer AIIB loans to meet political or strategic considerations rather than economic. So, the AIIB will have lower lending standards than existing multilateral institutions like the World Bank and Asian Development Bank, and undercut their effectiveness. Japan echoes this sentiment.

Why have other major donors shrugged away this objection? Because their diplomats smile at the notion that the World Bank or ADB have always had the highest lending standards. The U.S. as chief shareholder of the World Bank has always viewed it as a foreign policy tool. Ditto for Japan, chief shareholder of the ADB. Besides, as a development institution, the World Bank measures its success by its top line—lending volume—and not the bottom line. It has financed huge public sector undertakings of dubious quality across developing countries.

When I first worked for the Bank in 1985, one staffer explained to me the pressures to lend. “In the first quarter of the year, we promise to be really tough. By the second quarter, we worry that disbursements are behind schedule. By the last quarter, we are shoveling money as fast as possible. If we don’t meet disbursement targets, we risk losing allocations …read more

Source: OP-EDS

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