More nations join China-led bank

March 31 marked the deadline for charter founders to line up for the new, China-led Asian Infrastructure Investment Bank. At the last moment, Norway, Taiwan and others rushed to find the good graces of the Chinese opportunity. However, Washington has been miffed by Chinese rejection of its traditional actors - notably the World Bank, the International Monetary Fund and the Asian Development Bank - so the United States and Japan, which initially was cool but now perhaps is contemplating some eventual partnership, will remain on the sidelines.

A Chinese proverb says, “They sleep in the same bed but dream different dreams.” The many founding members of the AIIB are a diverse group with a wide range of investment agendas. South Korea, marginalised in the Asian Development Bank, expects to take a stake of more than 5 per cent in the AIIB despite the US misgivings. With its heavy-equipment industry, Hyundai, Doosan and its infrastructure prowess in everything from roads and ports to bridges with Hanwha and Posco, South Korea will not take second place to Japanese industry.

Australia, another country the Americans had leaned on heavily not to join, counts China among its main export markets for coal, copper and iron ore, creating the industrial might for major infrastructure projects. The United Kingdom, the first major European Union country to apply for the AIIB membership, caught Washington by surprise, keeping it out of the loop during secret negotiations. While the UK's major interests in accommodating China are unclear, it undoubtedly hopes to regain the Asian influence that it lost after its handover of Hong Kong to China in 1997.

In short, a new development bank with China’s financial support, via its $4 trillion in reserves, is too big to pass up. Will the new Chinese initiative be effective or merely serve as an iconoclastic offset to established Western development interests?

The Chinese development model of technology transfer and infrastructure development, including highways, ports and railways, has brought millions out of poverty and into a middle-class existence. Exporting this model, and not simply labour-intensive manufactured products to Western nations, could prove the next leg up in China’s ascent as a credible, newly emerging superpower.

Of course, scepticism abounds. “We are wary about a trend toward constant accommodation of China,” a US official told The Financial Times on news of the British membership application, “which is not the best way to engage a rising power.”

Oddly, these words are reminiscent of the heated 1944 economic manoeuvrings at Bretton Woods between British economist John Maynard Keynes and US technocrat Harry Dexter White. The British system was in decline, while the rising US was challenging the pound-sterling supremacy that the British Empire did not want to relinquish.

Even so, as The Guardian pointed out in 2014, “Strategically, the US cannot keep on shoring up an obsolete economic order in Asia.” Asia is in need of about $800 billion in infrastructure per year. However, investment today is defined not merely in financial capital, but also in human capital.

The IMF and the World Bank have demonstrated human-capital effectiveness perhaps too well, with a deep bench of talent, gathered from much of the developing world and now in need of reform. Perhaps no other organisations have such an agglomeration of financial, economic and legal knowledge to work with on hand for their many projects, most no doubt politically mandated and recently geared toward European “rich-country” challenges, including Greece and Ukraine.

The Chinese model of development traditionally has been a “one size fits all” straitjacket due to industrial planning and state-sponsored enterprises that tend to ignore such matters as human rights, labour rights and the environment. It is capital-intensive investment, with an engineering mindset intensely focused on processes and physical results.

These are not minor concerns in the formation of a new regional investment bank. Domestically, China’s one-party state allows no dissent regarding labour-related disputes, equitable pay, air pollution or other environmental concerns. Acidic smog in major Chinese cities is off the charts, mostly due to coal being burned for steel production and electricity generation, as health concerns take a back seat to full-speed growth. The Three Gorges Dam was planned and mandated from Beijing without significant local input. Historical sites were submerged and villages were relocated without debate, and many did not receive promised compensation.

The same approach, applied internationally, would be problematic. In Nicaragua, for example, large-scale Chinese investment no doubt would be the driver of a second canal across the pan-American isthmus. If the Three Gorges dam were any benchmark, however, the project’s outcome could prove controversial: a technological marvel, but wracked with social and environmental concerns.

Negligent behaviour
If negligent behaviour is tolerated in new infrastructure, the AIIB could garner negative media treatment in a socially connected world, which would only reaffirm the US preference for Western-led, not Asian-led, investment vehicles that enforce high standards. Any capital-intensive infrastructure project must be handled carefully, and planners must consider that we all share an interconnected world, one where problems cannot simply be swept under the carpet.

China is now tackling domestic problems such as smog and corruption more aggressively, but whether or not these politically mandated initiatives influence regional thinking remains to be seen. Nonetheless, these regions could receive immense benefits learned from China’s infrastructure.

Perhaps the best outcome to a Chinese-led AIIB would be transparency and cooperation among all actors. The current venue and leadership must be seen as “All China” in substance and form, however. Asia is now the “pivot” and, with so many countries signing on, population giants such as India and Indonesia should be institutionalised in their roles. Perhaps there could be an Indian director of the AIIB, based in Jakarta, the world’s second-largest metro area. Such moves would seal greater cooperation with the two. China has stated that, while open to other venues, it prefers Shanghai as the new institution’s base.

The key takeaway is that the success of the AIIB will not be solely defined in terms of capital largesse and engineering excellence. It must incorporate human-capital development and social issues in its processes, and address environmental and natural-resource concerns of our shrinking planet. Only then will the bank and all its development projects have real legitimacy and value.