Who can blame China for Asian bank move?
Friday, 20 March, 2015, 1:52pm
Comment›Insight & Opinion
Kevin Rafferty says Washington's inaction opened the door for Beijing
China's plans to set up the Asian Infrastructure Investment Bank have demonstrated that the United States is rapidly forfeiting claims to global financial, economic, political or moral leadership. It is too soon to claim that this is the Chinese century - because China has manifold problems - but the saga shows that the US has lost the plot.
Questions also have to be asked about the wisdom and leadership of the World Bank and Asian Development Bank, and also about the chief Asian surrogate of the US, Japan.
From the moment the project was mooted, Washington's responses have been woeful, more or less wishfully hoping that the bank would go away.
Even this week, US Treasury Secretary Jack Lew demonstrated his failure to understand the wisdom of that old adage that if you are in a hole, stop digging. Lew urged European countries not to join the Chinese-led investment bank. He was too late: Germany, France, Italy and Luxembourg had already announced they were rejecting US opposition and would join Britain and become founder members before the March 31 deadline.
The saga of the bank has been simmering for years. Who, however critical of China, can blame Beijing for feeling squeezed out of the international financial system, principally because of opposition from Washington?
China has given an object lesson in economic growth and development. In return, the G7, the top economic club of nations, invited Russia, but not China, to join. After long and painful negotiations, in 2010 a deal was concluded to give China a six per cent share in the IMF, still below Japan and below the US' effective veto share of 16.47 per cent.
But the US Congress has refused to approve the plans, even though the reshuffle of shareholdings will not cost America any money. So China languishes on 3.8 per cent of the IMF, below Japan, Germany, France and Britain. China's share of the global economy is 16.5 per cent on a purchasing power parity basis, slightly higher than the US, or 13.3 per cent expressed in market foreign exchange rates.
Beijing got the sop of becoming a founder-member of the Group of 20 countries, which claim to represent 85 per cent of the global economy. But the G20 has shown itself to be unwieldy, with too many hangers on.
On the other side of the equation, the world, particularly Asia, is crying out for infrastructure investment, for transport, energy and telecommunications. The Asian Development Bank estimated the infrastructure needs of Asian countries at an immense US$8 trillion between 2010 and 2020, far too much for it to meet.
Washington questioned whether a Chinese-led bank, headquartered in Beijing and with China owning as much as 49 per cent of the shares, would be open or transparent or follow international best practice rules.
America fears the bank would promote Chinese political, economic and commercial purposes, even though Beijing has persistently promised that the AIIB would be "open, inclusive, transparent and responsible". Britain's Chancellor of the Exchequer George Osborne claimed the UK wanted to join to ensure that the bank was ethical, transparent and efficient. This was received sceptically in China.
China's decision to break with the so-called Washington consensus and set up its own infrastructure bank also puts the established Bretton Woods institutions in a bad light, although Christine Lagarde, head of the IMF, has pleaded and begged with the US Congress to pass the 2010 agreement on shareholdings. Leaders of the World Bank and ADB have been more muted and said that there is plenty of infrastructure to go round.
Japan has been caught off guard. Chief Cabinet Secretary Yoshihide Suga this week tried to pour cold water on the project, asking whether the AIIB would be able to ensure fair governance or lend for sustainable projects. Too late.
The biggest questions remain for Washington. Congress is to blame for failing to approve a bigger role for Beijing. But Barack Obama has shown he can talk eloquently but does not really have a political clue how to get things done.
Kevin Rafferty was managing editor of the World Bank in Washington 1997-99
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