Following Beijing’s announcement on April 15th, 57 nations will become founding members of the AIIB. With around $100 billion already earmarked for the bank, many countries joined based on the opportunity to secure future business while beating geopolitical concerns over China’s use of the multilateral institution.
Many have seen China’s decision to create the Asian Infrastructure Investment Bank (AIIB) as a geopolitical tool to extend its influence around the world. This has been outweighed by the reality that the AIIB will give Asia a much needed source of capital for infrastructure developments.
In 2009, the ADB estimated that Asia needs more than $8 trillion of infrastructure investment from 2010 – 2020. Current lending capacities of multilateral and bilateral institutions considered, this figure is nowhere near being reached.
Although it is unclear how the funding mechanisms will ultimately work, the projects financed by the AIIB will undoubtedly focus on big ticket infrastructure projects which have high investment costs. Research has demonstrated a range of benefits from investing in these types of projects.
For example, infrastructure investments generate a much higher rate of return in emerging economies than in developed countries. Infrastructure investments are also less volatile than equities over the long term, which creates favourable conditions for long term investors, such as insurance companies, to get involved.
The decision to join the AIIB is reflective of the reality facing countries, particularly in the Asia Pacific region. While many view China with suspicion, they have concluded that it is better to work with Beijing in terms of trade, investment, and business. This partially explains the decision taken by the Philippines and Vietnam to join the AIIB as founding members despite increasing tensions with Beijing over territorial disputes in the South China Sea.
Emblematic of this choice was Australia’s decision making process on joining the AIIB. Torn between its unwavering alliance with the US and its largest trading partner, China, the decision to join was debated twice: once amongst the prime-minister’s cabinet, and another time exclusively with members of the National Security Council. As highlighted by Kelly, ‘It is revealing that the second debate was conducted in the cabinet’s NSC, where strategic rather than financial arguments became paramount.’
For Australia, joining the AIIB was as much a security dilemma as an economic opportunity. Its admittance to the bank last week, along with several other states who have pro-US or anti-China interests, demonstrated that economic rather than geopolitical considerations ultimately prevailed.
Similarly, the European Commission was quick to point out that by going against US pressure to join the AIIB, European states saw this as a ‘business opportunity’.
The US and Japan, who have both suffered strong diplomatic blows for their refusal to become founding members, have also kept their doors open to the AIIB. For example, despite Japan’s public resistance to the new bank, it has acknowledged that it would be ready to contribute around $1.5 billion in capital should it join as an ordinary member at a later stage. The US, for its part, expressed that it was ‘willing to work with AIIB’.
Those who were traditionally in Washington’s pocket and still chose to join are certain that their participation as founding members will help resolve any concerns about China’s intentions or management standards.
While the Bretton Woods institutions may have failed to reform to the developing world’s expectations, the AIIB presents an opportunity to get things right. This is something the founding members should keep in their back pocket, along with their new business cards.
