Bangladesh joins AIIB: Implications
Last week, Bangladesh joined 20 other Asian countries in Beijing to sign an MOU to set up a $100 billion Asian Infrastructure Investment Bank (AIIB). By being one of the founding members, Bangladesh for the first time has decided to secure its infrastructure development funds from a source other than the World Bank (WB) or the Asian Development Bank (ADB). In many ways, it is a seminal move to get away from some of the 'conditionalities' that are usually imposed by these traditional sources of development finance. However, time will tell how the AIIB will function and whether it was a good step on our part to join the bank at such an early stage. Interestingly, the main financier of the AIIB will be China. The other major country in Asia to join is India. But Japan, Australia, South Korea and Indonesia are yet to come forward and join the initiative. The Bank will begin operations in 2015 and will be an intergovernmental regional development institution in Asia.
The AIIB is expected to differ from the present ADB by focusing on building infrastructure rather than in prioritising poverty reduction. According to initial statements, the AIIB is also unlikely to 'attach political conditions to its loans' which includes the environment and human rights practices. It is to have a clear 'Asian-led identity' and will have 'enormous development potential in the future.' The plan to form the bank was first announced by Chinese President Xi Jinping during his visit to south east Asian countries in October last year. The bank will be initially capitalised with $50 billion, mostly financed by China. But which member country will contribute how much to AIIB's coffers is likely to be discussed and agreed upon in the near future. The pledging would be based on two criteria: the total size of the economy of a country and its purchasing power. The AIIB will, at present, be smaller in size than the ADB based in Manila and has a capital base of $170 billion. But with China having $3.5 trillion in foreign reserves, it is likely that the AIIB capitalisation will increase much more in future.
It is clear from the signing of the AIIB MOU that several reasons have prompted China, India and the rest of the member states to join hands. All the 21 signatory countries seek a “multi- national financial institution which is fair, just, open… with good governance structure.” It must be remembered that China and other emerging economies like Bangladesh have long protested against their limited voice in the WB and the ADB. In the WB itself China is grouped in 'Category II' voting bloc, and in ADB, China has been given 5.5% share while the USA has 15.7% share and Japan 15.6% share. Thus, USA and Japan dominate decision making in the ADB. This unfair and convoluted structure has limited the financial reach of China. President Xi Jinping of China commented that the new bank “will improve global financial governance.”
But is it financially prudent for China and 20 other emerging economies of Asia to build an alternative development bank? There are several reasons why China and these countries think so. China's economy itself is to reach $10 trillion this year. It will soon surpass the US economy in size. The contribution of other emerging economies of Asia is also rising steadily. The western economies that are dominating the WB and the ADB recognise that the governance of these global financial institutions needs to be changed. But nothing substantive has happened. The share of emerging markets, including in the International Monetary Fund (IMF), has remained frozen since the US Congress did not ratify the proposal of the US government to reform. Japan too has a lock on the presidency of ADB in spite of China now being the largest economy in Asia. But the AIIB, when it becomes functional, is expected to change all that. It is going to be more flexible and give weight to these economies and allow them more say in policy making. It is also expected that the AIIB will both cooperate and compete with the World Bank and the ADB. It will cooperate because many large infrastructure projects need co-financing. But it will have to be faster and efficient when it deals with member states in order to implement some gargantuan projects. Let us not forget that Asia needs $ 8 trillion to build its infrastructure by 2020. The ADB and the WB do not have that kind of money or the management capacity to deliver. China has enough money and cash flow and also enormous experience to build infrastructure both within China and outside, including in Africa and Asia. It is, therefore, economically sensible for China to take a leadership role here.
Bangladesh's decision to join the AIIB initiative is likely to bring dividends. We have seen how the WB behaved when we were keen to take the lead in financing the Padma Bridge. Any alternative source of financing of such mega-projects would give us leverage in the long run to meet our development targets. Unless we are able to build roads, ports, rail, electricity generating capacity and telecommunications we cannot compete economically in the world. We need a bank that understands our needs and helps us to get funds to build our capacities. The AIIB is likely to change things for us without putting up obstacles.
Slowly but surely, Bangladesh is coming out of the need to finance for poverty alleviation. It is entering a new era of fast economic growth. Perhaps the AIIB is our answer to the new reality. It is natural for us to be pragmatic now when we make our choice for funding of projects in the future.
The writer is a former Ambassador and a commentator on current issues.
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