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23 April 2015, Gateway House

An ASEAN lens on the AIIB

The AIIB is a step along a path that started with the Asian financial crisis, which defined ASEAN’s views about the U.S.’s commitment to the region. Although the bank may signal the rise of China, it is also a coming together of Chinese and ASEAN goals—ASEAN’s focus on infrastructure for growth requires another source of finance, and this forecasts its strong relationship with the AIIB

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From an ASEAN perspective, the Asian Infrastructure Investment Bank (AIIB) is an opportune coincidence of Chinese and regional goals. The Association of Southeast Asian Nations (ASEAN) considers infrastructure as the key to unlocking the exceptional growth rates that it perceives as the region’s norm. As a result, it is keen to tap another source of finance in its quest for infrastructure, and is therefore responding pragmatically to the new bank.

The emergence of numerous regional development banks, of which the AIIB is another, is rooted in the successes and failures of the post-World War II global institutions. That global architecture envisioned the international community delivering three global public goods that were beyond the capacity of nation states to deliver independently—the global financial system, a global trade system, and a global development framework. The resulting institutions—the International Monetary Fund, a global trade organisation (delayed and never fully realised), and the World Bank—supported an era of high growth by facilitating a tremendous globalisation of the world economy.

Yet, at the same time, dissatisfaction surfaced, especially among developing countries, that the global organisations failed to reflect their development models or regional needs. This has triggered the setting-up of at least 15 regional banks in the last five decades, beginning with the Inter American Development Bank in 1959. The AIIB is thus far from an anomaly in the global system.

But its emergence also symbolises something more: it is one more step along a path that started in mid-1997 with the deeply-scarring Asian financial crisis. The Asian crisis remains the watershed that defines the rationale for, and identity of, ASEAN regional economic and financial institutions such as the Chiang Mai Initiative of the ASEAN plus China, Japan, and Korea that was started in 2000.

The Asian financial crisis proved to be pivotal in defining ASEAN’s views about the U.S.’s commitment to the region. As the crisis began to gather steam following the July 1997 floating of the Thai baht, a group of countries called “Friends of Thailand” met in Tokyo. They pledged financial support for the economic reforms programme Thailand had agreed to with the IMF.

It was ASEAN’s hour of need and the absence of the U.S. from the meeting was noted. The absence was due to a tension, analogous to what we see today, between an outward-looking White House and an inward-looking U.S. Congress that, in this case, was unhappy with the administration’s support of Mexico during that country’s financial crisis a few years earlier.

The failure of the U.S. to block a broadly-supported AIIB can be traced to a similar stalemate that is undermining the global economic leadership of the country. For example, the U.S. has been unable to get the Congress to ratify changes in IMF quotas to reflect the role of emerging markets, and China in particular. This is a significant setback for the credibility of American leadership, and reflects the same tussle between those wanting a global leadership role and those favouring a more inward-looking stance. The consequence is broad-based geographic support for the AIIB and its 57 founding members, that signals a diminished regional and global leadership role for the U.S. in economic affairs.

The AIIB has variously been reported as also signaling the rise of China in relation to the U.S.; a regional power play of China versus Japan and the Asian Development Bank; and as an opportunistic vehicle to secure access for Chinese companies to major projects throughout the region. Arguably, China is following a regional economic development path already well-worn by Japan. Private direct investment by Japanese companies, bilateral development packages, and regional activity led by the Asian Development Bank are the three strings of this strategic bow. Japanese institutions such as the Japan Bank for International Cooperation, and diplomatic efforts, support this strategy.

The world has changed, however, and the multilateral element of this strategy may prove to be problematic. The broader AIIB membership, including its European members, has latched on to governance as the key to their support of the bank. Governance is a code word for many things—from how procurements and contracts are conducted to the need for projects to satisfy a lengthy list of conditions, including environmental and labour standards.

These may well be appropriate conditions, but the experience of the World Bank and other development banks is that in combination these conditions can be used to make it difficult for them to function in a timely and flexible manner.

Nonetheless, as long as the mandate of the AIIB matches ASEAN’s policy priorities, the rationale for the bank is unlikely to be questioned by ASEAN—whatever China’s motivation, infrastructure provision is at the top of ASEAN’s list. This priority overcomes any concerns because the AIIB can help the region return to the growth rates of the “Asian Miracle” period of the 1980s and early 1990s that many see as the region’s destiny once the infrastructure hurdle is jumped.

At the same time, ASEAN economies will be anxious to preserve national control and the identity of their infrastructure investment. The intensity of national interest concerns may well be influenced by the evolution of the broader diplomatic and security context, such as the territorial disputes with China in the South China Sea. That said, ASEAN’s priority on economic development will still serve as a strong foundation for a constructive relationship with the AIIB.

David Nellor is adjunct professor, Lee Kuan Yew School of Public Policy, National University of Singapore.

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