China’s AIIB helps resolve Asia’s soaring infrastructure needs

About 1.8 billion people in Asia lack basic sanitation services, like this slum in Jakarta, Indonesia. Reuters

Less than two years after reports first appeared in October 2013 about the formation of a new specialized development bank focused on Asia, China’s Asian Infrastructure Investment Bank (AIIB) has become a reality.

While its birth has given rise to international tensions, it has also offered hope to developing countries that need an enormous amount of infrastructure investment in coming years.

The tensions – the US has fiercely opposed China’s bank and lobbied its allies not to join it – have been well reported and discussed. Overlooked by these critics is that the region’s investment needs are far too great to be met by the West’s development banks alone. China’s willingness to shoulder more of the burden should be welcomed, and the decision of US allies like the UK and Germany to become founding members gives the AIIB a significant credibility boost that will make it more likely to succeed.

Top priority: financing infrastructure

A few years ago the Asian Development Bank Institute, where I have been an adviser, contributed to a report pointing out correctly that Asia will require at least US$8 trillion to invest in infrastructure from 2010 to 2020 for the region to continue economic development at a reasonable pace.

The kinds of infrastructure needed range from the high-tech such as telecommunications services and high-speed railroads to the most basic and essential. About 1.8 billion are not connected to basic sanitation services, 800 million lack electricity and 600 million do not have access to potable water, according to the report.

For those of us who have been involved in strategy debates over Asian development since the 1980s, Japan, Korea, Taiwan and now China itself are all existing examples of the extent to which infrastructure investment is instrumental in economic development.

In my many visits to East Asia – most recently China – I have seen how national and international linkages can be constructed through infrastructure investment. China itself exemplifies how investing in roads and education can make a dramatic impact on a country’s long-term growth and lifting millions of people out of poverty.

Financing such investment is, therefore, a top strategic priority. The International Monetary Fund, the Asia Development Bank and the World Bank have all played pivotal roles helping finance such investment in these now prosperous countries.

The availability of transport, electricity, schools and hospitals has a “tremendous impact on improving the quality of life,” while businesses need more reliable infrastructure to spur growth, which boosts incomes and reduces poverty, according to the ADB report.

The addition of the AIIB to the fold would bring many benefits especially to those parts of Asia in the Southeast and South Asian regions that lag behind in infrastructure investment. Indonesia has the greatest needs, with the ADB estimating $450 billion will be required through 2020, mostly on transport. China needs just a little less, primarily due to electricity troubles, while another seven countries require at least $100 billion a piece.

In addition, the problem of a global lack of demand for goods and services due to the slowing economy will be mitigated by the hundreds of billions of dollars in extra infrastructure spending in Asia. Thus there are both local and global benefits that can be reaped from appropriate infrastructure investment projects financed by the AIIB.

AIIB’s rapid growth

In pushing the AIIB against the wishes of the US, the Chinese capitalized on a growing impatience among many Asian policy makers over the unwillingness of global institutions like the IMF and World Bank to allow greater input into its operations.

Last April Chinese Premier Li Keqiang said China was ready to intensify consultations with those interested in joining the AIIB. By June China proposed doubling the registered capital of the bank from $50 billion to $100 billion and invited India to participate in its founding. Just four months later, a signing ceremony held in Beijing formally established the bank, with 21 initial signatories, including Thailand, Singapore and Vietnam.

Since then the number of countries agreeing to sign on as founders has soared, such as Hong Kong in February, to 57.

But the AIIB’s credibility was particularly enhanced when in early March UK Chancellor of the Exchequer George Osborne announced that Britain had agreed to lend money to the Bank, becoming the first major Western country to do so in spite of US opposition. Soon on the heels of UK, three other European nations – Germany, France and Italy – followed suit.

Clearly, the concept of AIIB has become institutionally viable. It has also established the credibility of China’s economic diplomacy.

Competitive pluralism

Thoughtful economists should welcome this multilateral initiative led by China. In line with other southern initiatives such as the launch of the New Development Bank last July by the so-called BRICs (Brazil, Russia, India and China), the AIIB will ease emerging countries’ strategic financing problems for development. It will also lead to a healthy competitive pluralism in this area that the Asian Development Bank itself has defended in the past.

The time has come for the experts to offer serious analyses of specific projects and their costs and benefits for the region. Here in addition to growth and employment aspects, social and environmental issues can also be analyzed in a multilateral context.

The AIIB offers a great opportunity to craft new strategies and foster fresh frameworks for making serious investments in infrastructure in Asia. Indeed, this is the key challenge that development strategists must address as the AIIB takes shape and aims to make a meaningful contribution the region’s growth.