By Martin Wolf
It would be good if the lender were white as snow. But this is a fallen world
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Britain has irritated the US by opting to become a founding member of an institution that some view as a part of China’s answer to the World Bank. But this does not mean the decision is a bad one. On the contrary, it is sensible — although not without risk.
The Asian Infrastructure Investment Bank is to have initial capital of $50bn, which may be doubled. It will finance for example roads and railways in the continent’s developing countries.
China is to be the biggest shareholder with many other Asian countries joining while non-Asian members are restricted to 25 per cent of the shares. Other European countries, including Germany and Italy, have decided to apply; Australia, Japan and South Korea are still in two minds .
The lender is potentially valuable. Developing countries in Asia are in desperate need of such investment . Private funding of risky and long-term projects is often either expensive or non-existent. The resources of the World Bank and Asian Development Bank are grossly deficient, relative to the needs.
Thus, the fact that China wishes to invest a part of its $3.8tn in foreign exchange reserves in the AIIB is good news. That it wishes to do so via multilateral institutions, in which its voice, however loud, will be one among many, is still better. The bank would have a global staff, which should make it less politicised than if China provided the money on its own.
For all these reasons, the US should also join. The White House might reply that, however much it would like to do so, it has no chance of getting approval from the current Congress. That may be true. But it is not an argument against participation by other countries.
Still, the US does have an argument, although it is a baffling one. Western countries, it says, can have more sway by staying outside. That, argues one US official, would be better than “getting on the inside at a time when they can have no confidence that China will not retain veto powers”.
Yet outsiders will have no influence over an institution that does not need their money. The only hope is from inside. True, it would have been better if the Europeans had agreed on conditions for entry. But it is too late for that.
Jack Lew, US Treasury secretary, has voiced American concerns that the Asian bank would not live up to the “highest global standards” for governance or lending.
As a former staff member of the World Bank, I must smile. Mr Lew might like to study the Bank’s role in funding Mobutu Sese Seko of Zaire, one horrifying example among many.
It would be good if China’s lender were as pure as the driven snow. But this is a fallen world. At the least, it would be better with a broad membership than without it.
Nor can the US argue with any credibility against competition to the existing institutions. Yes, a risk of a race to the bottom on standards remains. But a possibility also exists that needless red tape would be eliminated.
The real American concern is that China might establish institutions that weaken the US influence on the global economy. To this I offer four replies.
First, the US, Europeans and Japanese treasure a degree of influence on global financial institutions that is increasingly out of line with their position in the world. Moreover, they have failed to exercise that stewardship as well as they ought to have done. Not least, they have insisted on the right to appoint leaders who have been far from consistently excellent.
Second, it is five years since the Group of 20 leading economies agreed on new quotas that would moderate their outsized influence at the International Monetary Fund. The world is still waiting for the US Congress to ratify the changes. This is an abdication of responsibility.
Third, the world economy would benefit from larger flows of long-term capital to developing countries as well as from a bigger insurance fund than the IMF can offer to countries exposed to “sudden stops” in capital flows.
Foreign exchange reserves have risen to nearly $12tn, from about $2tn at the turn of the millennium, dwarfing the IMF’s resources of less than $1tn. This indicates the scale of the shortfall. China’s money could push the world in the right direction. That would be an excellent thing.
Finally, the US criticises the UK for its “constant accommodation” of the rising superpower. But the alternative to accommodation is conflict. China’s economic rise is beneficial and inevitable. What is needed is intelligent accommodation.
Where China offers proposals that make sense for itself and for the world, engagement is more sensible than carping from the sidelines. An erstwhile US policy maker once asked China to be a “responsible stakeholder”. With the creation of the AIIB, it is doing just that.
Thus, the approach of the UK and other European allies is to be applauded. Moreover, the UK’s decision to join the AIIB could even be a salutary shock to the US.
Yes, it would be desirable if countries with similar interests and values, such as Britain and the US, could speak and act as one. And yes, the UK is taking risks in adopting a line different from that of its most important international partner. But support must not be slavish. That has proved to be in nobody’s interests.
Moreover, if Britain’s choice makes clear to US policy makers that leadership is not a right but has to be earned, the decision could well prove beneficial. In the years after the second world war, in a fit of presence of mind, the US created the institutions of the modern world. But the world has moved on.
It needs new entities. It must adjust to the rise of new powers. It will not stop, just because the US can no longer engage. If the results are not to America’s liking, it has only itself to blame.