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Economics for the 99% Asian Infrastructure Development Bank in Beijing: Now, that's a seriously bad idea

By John Weeks

[Follow me on twitter, #johnweeks41

and listen my weekly radio program on Radio Free Brighton,

http://radiofreebrighton.org.uk/blog/2015/02/04/new-weekly-show-the-week-in-economics-with-john-weeks/ ]

A Bank for the South?

Last October in Beijing the governments of 21 Asian countries signed the founding document of the Asian Infrastructure Investment Bank (AIIB).  The formal purpose of the new institution will be to provide loans to member governments for "infrastructure", such as roads and ports.

Many commentators hail the creation of this bank as a game changing assertion of "South" power to confront the domination of the West and especially the United States over control of development finance and the development agenda itself.

Suddenly the "South" takes control of its own development.  The US government is in total opposition, which in itself demonstrates the importance, necessity and anti-imperialist credentials of the AIIB - right?

Wrong.  This view is analytically unsound, the triumph of hope over experience (as Samuel Johnson allegedly said of second marriages).  The "South" (whatever that may mean) is not in control of this new institution, a few governments are, most notably the government of China.

Founding meeting of the AIIB. Count the democracies (I see at least one).

Chinese Government Influence

The myriad failures of the IMF and the World Bank result in no small part from their location in the capital of their most powerful member.  In addition to this the United States has the largest share of votes.  Therefore, it comes as no surprise that the US controls the two institutions.

The AIIB mimics these characteristics of the so-called Bretton Woods Twins (so its endorsement by the IMF comes as no shock).  The headquarters will be in Beijing.  A Board of Governors will make the major decisions in the AIIB, with voting proportional to a country's GDP. This means that the Chinese government would hold a decision making share in the AIIB larger than the United State government has in either the IMF or the World Bank (less than 20% in both cases).  As a result, it is little more than formality that the Chinese government volunteered not to retain a veto power.

But these are only the bureaucratic failings of the AIIB.  The faults and transgressions of the IMF and World Bank can be -- and have been -- exposed through the media.  Both have faced large public demonstrations on their doorsteps (I participated in these while living in Washington).  A repressive dictatorship that tolerates no press freedom or public protests of any nature rules China.

The AIIB leaders need never fear demonstrations of public outrage nor criticism in the Chinese media.  Combine this with a head of the bank chosen by the Chinese government and the prospects for openness -- any information beyond propaganda -- is very slight.

The major influence of China in any such institution is a very serious problem that cannot be exaggerated.  Chinese state and private capital, and the distinction is slight, includes some of the world's largest construction companies.  With the AIIB overwhelmingly funded by the Chinese government that will have the largest voting share, it would be naïve to think that Chinese companies will not enjoy privileged access to construction contracts.

More serious is the rather poor behavior of the Chinese businesses toward economic "cooperation" in less powerful countries.  MY experience of this is in Africa, where its record is frequently appalling.  In Zambia trade unions singled out Chinese companies as especially guilty of abusing workers, and the Zambian government suspended the operation of a Chinese company for gross environmental infractions.

I was in Zambia working with the central bank (Bank of Zambia, BoZ) in February 2015.   I met with mining owners to discuss the government's exchange rate policy.  Attending the meeting was the manager of the largest Chinese company in mining (he was Chinese), who in a short speech managed to offend both the BoZ officials and his private sector colleagues with his apparent disregard for Zambian exchange rate and labor regulations.

The systemic indifference of the Chinese government and companies to the sensitivities of their counterparts in economically weaker countries emerged clearly in a report I did for the United Nations Development Program about its funding for the China Africa Business Forum.  About 25 business representatives awaited me in the meeting I attended in 2008 -- held in Communist Party headquarters in Beijing lest I have any confusion about who was in charge -- and not one was from Africa (the only African being a minor employee of the Forum).

The main topics of the meeting were the loans and technical assistance from China to African governments and businesses.  At one point I suggested that the Chinese tourist industry -- then gearing up for the Olympics -- might seek technical assistance from the very successful local tourist companies in Kenya, Zambia and South Africa.  The suggestion that Chinese business might learn from African business brought a round of laughter.  I did not press the point.

It may be that Chinese officials are more understanding in their dealings with Asian partners.  I have not reason to think so.

It is Unnecessary

Even were the AIIB located in (say) Vientiane and voting were equal across members, a fundamental flaw remains -- the AIIB is unnecessary, just as the World Bank, Asian Development Bank, Inter-American Development Bank and African Development Bank are unnecessary.

In a 1933 article in The Yale Review, J M Keynes wrote,

"I sympathize, therefore, with those who would minimize, rather than with those who would maximize, economic entanglement among nations. Ideas, knowledge, science, hospitality, travel--these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible, and, above all, let finance be primarily national." [Emphasis added.]

Keynes issued this warning because he recognized -- few do now -- that foreign debts leave a government vulnerable to the instability of global prices and financial markets much more than is the case for domestic debt, public or private.

The claim that the countries of Asia lack the means of financing their infrastructure is little more than vulgar propaganda, as well as economic illiteracy.  The estimate that Asian countries need trillions of dollars in infrastructure finance comes not from the governments of those countries, but from the solidly establishment and impressively inefficient Asian Development Bank.

In any country with its own currency -- which every Asian country has -- can use credit from its own central bank to finance infrastructure, both private and public.  What governments lack is the foreign currency necessary to import the equipment and materials that are not produced in-country.

This is a distinction -- total project finance and borrowing just the foreign currency component -- that has major implications.  Financing a project through the AIIB will require a government to present a proposal for approval by the Board of Governors, just as the equivalent in the World Bank and the IMF must approve loan and program applications.  Even without the notorious policy conditionalities, this approval process, its bureaucratic delays and political interventions, is one of the major complaints borrowing governments make of the Bretton Woods Twins.

Those in favor of the AIIB might ask themselves, why should a gathering of political appointees in Beijing decide on the viability of a road project planned by the government of Vietnam?  To me the answer is simple.  The government of Vietnam should be free to fund any project it wishes no matter how wise or foolish.

The Alternative?

What about the foreign currency component of projects?  Isn't the AIIB or something like it required to provide that?  The answer is "no" because project finance and access to foreign currency are two quite different things.

An institution designed to provide access to foreign currency -- and the Chinese government has the most foreign exchange reserves of any government in the world -- need never consider specific projects.  The mandate of a "South Foreign Currency Bank" (SFCB) would limit it to considering whether a borrowing government could service the loan it received and prohibit setting policy conditions when doing so.

Decisions would be based on the overall balance of payments position and prospects of the borrowing government.  No assessment of specific projects would be necessary, greatly simplifying the loan process and reducing bureaucracy of my imagined SFCB.  The world has enough dysfunctional multi-lateral development banks as it is without adding another one.  The problem for governments in Latin America, Africa and Asia is not finance, but foreign exchange.  The AIIB is the answer to a question none need ask and solution to a problem that does not exist.

 

 

 


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