As governors of the 67-member Asian Development Bank gather at Baku, Azerbaijan, for the bank’s 48th annual meeting, Asia braces itself for a second major multilateral development bank around 50 years since ADB was founded. The Asia Infrastructure Investment Bank — a brainchild of Chinese leadership as a means of realizing the One Belt, One Road vision — is moving to the next stage after approving a 57-member list of founding members and a $50 billion initial capital.
All ASEAN countries, most of South Asia, major Central Asian and Middle Eastern countries, all the major European nations and key Pacific nations have joined the bandwagon of AIIB membership. China has convivially kept an open door for AIIB membership: It forewent veto power for itself unlike the U.S. in the World Bank, and offered Japan a high position in the governance structure. Japan would make up its mind about AIIB in June and a favorable decision is not out of the cards. While close allies like Israel, the U.K. or South Korea rushed to join the new bank, the U.S. faces an unprecedented isolation against the implicit global consensus about the benefits of being part of the AIIB.
Many opine that failure of governance reform in the Bretton Woods institutions has led to the creation of alternative platforms like the AIIB and the New Development Bank of BRICS. The World Bank, International Monetary Fund or the ADB did not accommodate a stronger voice to developing nations like the BRICS countries in terms of leadership and voting shares in keeping with their rising economic clout.
The shortfall of over $700 billion in infrastructure investment in Asia over the next decade gives a compelling raison d’être to AIIB. While removal of tariff and regulatory barriers is gaining momentum in the Asia-Pacific, infrastructure deficit is a more intractable challenge. The AIIB is coming up with fresh funds when alternative sources have been stagnant since 2009. Gross commitments of ADB have fallen during 2009-2013, accompanied by slow growth and no significant upticks in the total multilateral aid outflows. Gross commitments by the World Bank also have fallen from 2010 to 2014. Official development assistance from the U.S. as a percentage of its gross national income fell during the same period as well.
The initial capital of the AIIB will be smaller than the World Bank or ADB. However, with single-minded focus on infrastructure investment, AIIB may surpass World Bank or ADB in the amount of lending it would make available for infrastructure. Beyond numbers, the AIIB provides more latitude and room for negotiation to the recipient nations which often have to stomach unpalatable conditionalities from donors.
For ADB, the key to a meaningful response is recognizing the undeniable relevance of AIIB while redefining its own mission. World Bank President Jim Kim struck the right note in saying that the enemy is “poverty, not AIIB or BRICS Bank” while terming the new banks as potential “strong allies” and “great new forces.” ADB President Takehiko Nakao voiced his readiness to work with the AIIB in co-financing suitable projects. ADB already has signed memorandums of understanding with the China Development Bank and Export-Import Bank of China to co-finance international projects.
ADB is actively considering reforms to sustain its relevance in a changing regional development scenario. Some of the latest reform ideas mooted in the midterm review of the Strategy 2020 by the ADB leadership include more devolution to country offices, more ICT and integrated solutions, and stronger outreach. Differentiation and focus are crucial for sustained relevance of ADB as it focuses more on the poorest countries and shifts attention to areas like private sector development. For a region highly vulnerable to climate change and home to 1.6 billion poor people, poverty reduction and sustainable development should remain top priorities of ADB.
ADB has a substantial knowledge capital and its recent launch of the Open Access Repository underscores the fact that like the World Bank, ADB is a robust source of knowledge and insights about emerging economic trends. Even as China draws on the knowledge and human capital of ADB, emulating the capabilities will be challenging. The Multilateral Interim Secretariat of AIIB is headed by Jin Liqun, former World Bank alternative executive director and ADB vice president. In ADB, AIIB has a valuable ally in realizing visions like connecting the South and Southeast Asia — ideas promoted by ADB but unrealized due to, among other things, resource shortfall. ADB Vice President Stephen Groff expressed support for China’s One Belt One Road initiative as a right move to boost the much-needed connectivity.
The international concerns about safeguards and integrity of AIIB can be ensured by closer participation of good governance champions in the evolving establishment process of the AIIB. China has a reputation of not interfering in the internal policy matters of partner countries. However, with the creation of a multilateral bank with capital coming essentially from taxpayers around the world, there is a need for a robust framework of accountability. In line with the vigorous domestic anti-corruption drive, China has to ensure that the Beijing-based AIIB has the right institutional safeguards against social or environmental concerns as well as corruption.
Even time-tested incumbents like ADB occasionally come under criticism for projects violating social and environmental standards as in recent infrastructure projects in Laos and Cambodia. Violations of safeguards have been reported about the World Bank as well and the ongoing review of safeguards is under keen watch of the civil society groups. Competition from a new entrant should raise rather than downgrade the standards. As potential partner, ADB can support the new entrant in developing effective safeguards and accountability frameworks.
The more the West and the Bretton Woods engage with the AIIB, the more opportunities there are for encouraging China toward rules-based multilateralism. Partnership for Development — which happens to be the tagline of the ADB Baku meeting — is the path toward a constructive future.
The writer, Mr. Syed Munir Khasru is Chairman of a Bangladesh based international think tank – the Institute for Policy, Advocacy, and Governance (IPAG).