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The Asian Infrastructure Investment Bank:  A Race to the Bottom

By Gene Rotberg

China’s recent move to establish another multinational development bank, the Asian Infrastructure Investment Bank (AIIB), is troublesome.  The new institution will lend to the same countries for the same purposes and to the same sectors as the World Bank and the Asian Development Bank (ADB).  Its membership, absent the United States and Japan, will not be much different from the membership of the ADB and the World Bank.  It will borrow at market rates in the same capital markets.  Concessionary funds for the poorest countries will come from the same higher income countries.

But duplication is not my primary concern.  The AIIB signals China’s desire for more influence.  To what end?  To restrain lending?  To expand lending?  To whom?  To lend for a different purpose?  The fact is China is not pleased with the preoccupation of existing multinational development banks with such matters as environmental protection, corruption, forced migration, child labor, and their penchant for stringent “belt tightening” as a condition to making a loan.

The industrialized member countries in the multinational development institutions have made their voice known on those matters and loans are often tied to those issues.  To the contrary, commentators have extensively criticized China’s bilateral lending in Asia, Latin America and Africa for its acquiescence in corruption, forced migration, the absence of civil governance and the adverse impact on the environment of China’s bilateral lending program.

Member governments of existing development banks have coped with these issues for decades:  Do you lend to countries that are ruled by oppressive military directorships, or have unsustainable population growth, or pollute the environment, or exploit human labor, or train terrorists, or have excessive military expenditures, or are corrupt, or have minimal rule of law, or allocate resources to a favored few, or deny basic freedoms, or discriminate against women and minority populations, or deny religious freedoms, or encourage ethnic cleansing?  And do you lend to countries where the government cannot tighten expenditures or meet the difficult conditions imposed by the development banks as a condition to further loans.  The staffs of the existing development banks are preoccupied with such matters.

My concern is that the establishment of a new development institution, which China essentially controls, will mimic China’s bilateral lending policies and put pressure on the other development banks to go along with China’s “noblesse oblige” policy in Africa, Asia and Latin America.  If China’s record on its bilateral programs is a proxy, economic conditionality and good governance will fall by the wayside.   No, it is not China’s turn to emulate the exploitation, colonialism and robber baron activities practiced by the West in the 19th Century.

To be sure, industrialized countries also have used their political and military power and, yes, their bilateral aid programs to serve their self interest and political agendas.  And that is still the case.  But the fact is, with very few exceptions, they have been unable and unwilling to do so in the multinational development banks because voting rights are so fragmented that a narrow political agenda by one country, or even a group of countries, cannot implement programs or make loans which are not agreeable to most member countries.  For example, even the United States, the World Bank’s largest shareholder with 16.17% of the voting power, cannot come close to the 50% threshold needed to approve or block a loan recommended by the staff.  The remaining votes are widely scattered with the largest after the United States as follows: Japan, 7.49%; China, 4.84%; Germany, 4.39%; France, 3.94%; United Kingdom, 3.94%; India, 3.0%; Saudi Arabia, 3.18%; Russia, 2.97%.  168 countries each have less than 1% of the vote.  That fragmentation, in part, is why the professional staffs of the multinational institutions have so much independence from political pressures.  The fact is the staffs benefit from the highly fragmented voting power of member countries, which leaves a void in the institution – filled by the professional staff.  These professionals debate and recommend where resources should be lent and why.  They are unfazed by “voting power,” and, indeed, as presidents of development banks have painfully learned, they are a force to be reckoned with. That will not be the case at the AIIB where, uniquely amongst the multinational development banks, one country, China, will have sufficient voting power along with but a few other countries to implement loans, procedures and practices which could never pass the tests and conditions of the other development banks.

What will be the result?  Developing countries will simply play off each development bank against the AIIB in an effort to avoid the conditions and policies imposed by the existing development banks.  It will be a race to the bottom.

It will also fundamentally undermine the professional non-political quality of all of the multinational development institutions.  It has taken decades for the development banks to nurture an independent cadre of professionals, virtually immune from the political pressures of member countries.  They are a unique resource.  Indeed, many have contended that it is not the funds supplied by the development banks, but rather the objective economic advice, and even the conditionality of the loans, which are their hallmarks.

Yes, the staffs of the multinational development banks have made mistakes of omission and commission – sometimes requiring unwise conditions or those which are too painful to accomplish in fragile circumstances.  But those mistakes do not stem from a mismatch of “voting rights” or the imposition of political agendas, but primarily because the world is a complex place, governments fall apart, earthquakes occur, famine strikes, civil unrest unsettle the best laid intentions.  Lessons and failures, however, are vetted and publicized and the learning is applied to the next project, the next loan.  That is to be encouraged.  One thing is for certain:  that process will not be enhanced by establishing a new development bank with realigned voting rights giving only one country unprecedented power.

Gene Rotberg was Vice President and Treasurer of the World Bank for 19 years.

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