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Should we oppose China’s infrastructure bank?

Three facts are not in dispute. First, China recently announced it will pledge $50 billion and lead a new multilateral financial institution called the Asian Infrastructure Investment Bank. Second, despite the strenuous objections of the United States, more than 40 nations—including several salient U.S. allies such as France, Germany and the United Kingdom—have joined the AIIB. Finally, the U.S. itself is opposed to the existence of this new China-led international financial institution.
 
The above state of affairs raises the following important question that has significant economic and geopolitical ramifications: Does it make sense for the U.S. to oppose the AIIB? The answer is in three parts.

The first part involves understanding the motivation for China’s creation of the AIIB. Until very recently, most of China’s official development assistance was bilateral, and this assistance was not only frequently provided to unsavory regimes in the developing world but also came with very few strings attached. All China wanted was to further the prospects of Chinese firms, contractors and products. It cared little about local politics, human rights, and the absence of democratic institutions and processes.

Although this “promote China in development” strategy yielded some dividends, it also produced a backlash in several nations in both Africa and Asia. As noted by the sociologist Ho-Fung Hung in 2013, the then governor of the Central Bank of Nigeria warned that China’s strategy in Africa was, in essence, a new kind of imperialism. Very recently, the government in Myanmar blocked a large Chinese dam project because of the local unrest that it was causing. This kind of backlash against China’s bilateral development initiatives is arguably the primary motivation for China’s newfound interest in promoting its development initiatives via a multilateral institution.

The second part of the answer involves asking whether the AIIB is actually needed. There clearly are substantial infrastructure needs in many developing nations in Asia. It is also true that infrastructure projects, if done right, can have a major positive impact on economic development. That said, the history of many infrastructure projects handled by existing multilateral development institutions such as the World Bank is unappealing. What we have seen with many such projects is the systematic overstatement of benefits and the understatement of costs. Therefore, the economist Kenneth Rogoff has rightly pointed out that what is now needed even more than cash—primarily in the form of loans—for large projects is the strengthening of weak institutions and the promotion of good governance across the developing world.

The third part of the answer requires us to consider whether the AIIB will actually work. The economist William Easterly has sagaciously noted that multilateral development institutions have typically been successful when they have targeted modest, clearly defined projects, and when they have served as repositories of knowledge. In contrast, such institutions have frequently failed when they have attempted to fund grandiose projects that benefit a small elite but produce little broad-based development. Therefore, our experience with existing multilateral development institutions certainly gives us pause when we ponder the likelihood of the future success of the AIIB. Adding to this uncertain state of affairs is the position of some scholars, such as Allan Meltzer, who have contended that development aid would be more useful if it took the form of grants and not loans that eventually will have to be repaid.

Looking at the above three-part answer holistically, it is difficult to endorse the pusillanimous U.S. perspective on the AIIB. Rather than worry, yet again, about the impending global dominance of China, we should be supportive of the formation of the AIIB. After all, as noted by Rogoff, there is little reason to believe that the Chinese model of infrastructure development can be exported universally.

Amitrajeet A. Batabyal is the Arthur J. Gosnell professor of economics at Rochester Institute of Technology. These views are his own.

5/8/15 (c) 2015 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email rbj@rbj.net.

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