From Lee Kuan Yew to China's AIIB: Dawn of a new order?

As one era ends in Asia, another begins. Or so China might have us believe with the establishment of the Asian Infrastructure Investment Bank (AIIB).

The death of Singapore’s founding father Lee Kuan Yew captured headlines across the region last month. His death marked the passing of the last of Southeast Asia’s major leaders to experience firsthand European and Japanese colonial rule, and then the hard work of building a nation.

But Lee’s promotion of a quasi-authoritarian, so-called “Asian way” focused on nation and community above any “Western” notion of individual economic freedom, rights or liberties lives on. Southeast Asian nations hoping to mirror Singapore’s success – but not yet his commitment to the rule of law, accountability and good governance – continue to find their own way forward with mixed success.

This transition to a new era is also most decidedly evident in China’s championing of a new kind of international financial institution that it may well hope marks the dawn of an Asia-led economic order – if not perhaps a return to an older order, with the Middle Kingdom at its core. 

The World Bank and the International Monetary Fund were founded under Western leadership as part of a post-World War II global financial architecture envisioned in 1944 at Bretton Woods, New Hampshire. The Asian Development Bank (ADB) followed in 1966 with Japan and the United States as the key players. Now, a new China-led international institution, the AIIB, is taking shape to help finance new ports, railways, bridges, airports and roads across the region as 

well as replace aging infrastructure.

The AIIB will ostensibly help fill an annual infrastructure financing shortfall in Asia that the ADB estimates at US$800 billion (Bt26.56 trillion). The new lender could also contribute a multilateral veneer and funds to realise Beijing’s vision of a “new Silk Road” and “new maritime Silk Road,” better connecting China to markets and resources in and outside of Asia. 

When Indonesia last November announced it would join this new China-led alternative to the World Bank, Asean’s largest nation and economy joined the rest of Southeast Asia in making resoundingly clear that pragmatism trumps politics when it comes to financing the region’s infrastructure. 

Little was to be gained by supporting what many saw as the Obama administration’s poorly conceived and executed opposition to the new institution. Both the United States and Japan had expressed concerns about the new institution’s “standards” in seeking to explain publicly their lack of support. All this mattered not, as the United Kingdom brushed aside concerns from Washington and announced this March that it would join as a founding member of the new international financial institution. Other Western nations quickly followed ultimately bringing the final tally of supporters to more than 50 countries.

Well over a quarter of the world’s nations, including 16 of the world’s 20 largest economies have now signed on as founding members of the AIIB. The notable exceptions are the United States, Japan, Mexico and Canada. This may well change as face-saving ways are found for the hold-outs to join.

The straight-talking former US Secretary of Treasury Larry Summers summed up the Obama administration’s approach to the AIIB as a “failure of strategy and tactics.” It was also a failure of imagination – an inability to see how strengthened engagement with China through the AIIB could well have been a landmark accomplishment of the so-called US pivot, or rebalance, to Asia.

With the initial membership debate now over, here is how the nations of Southeast Asia as well as all founding shareholders 

can help shape the AIIB for the better.

First, focus on the people. This should include insisting on the hiring and promotion of personnel based on merit, not nationality. Accountability and transparency will be critical. This is especially true if China as the primary source of capital for the $100 billion institution seeks to name the vast majority of the new bank’s staff and leadership.

Accountability mechanisms for all of the new institution’s staff also will need to be strong and effective. Transparency starts at the top, and that includes preventing corruption and avoiding conflicts of interest. 

Second, focus on results. Here, Southeast Asia’s representatives at the AIIB will need to balance their desire for “more money, faster” with concerns about impacted people and communities.

Metrics such as how many, how large and how quickly disbursed are the new institution’s loans must be complemented by a stringent assessment system of the results of such lending. A truly independent evaluations department that reports to the AIIB Board, not bank management, also will be vital. An enforceable process to hold borrowers and the AIIB accountable should there be non-compliance with the new institution’s standards is also important to ensure long-term credibility of the institution.

Third, focus on safeguards. Nathans Sheets, the US Treasury Under Secretary for International Affairs has called for the support of the World Bank and ADB’s “high quality, time-tested standards.” There are very legitimate concerns about the social and environmental impact of major infrastructure investments. Yet, the existing multilateral lenders are not always the best examples to follow. 

Case in point, this March, the World Bank identified serious shortcomings in implementation of its own policies related to the resettlement of people impacted by the institution’s projects. 

The Bank in turn announced a plan to improve oversight and management of its own practices to better protect people and businesses affected by projects it funds. Implementation and oversight will be key.

As did Lee Kuan Yew during his iron-fisted rule in guiding Singapore’s success, China with Southeast Asia’s support may well seek to advance an “Asian way” in this newest of multilateral lenders. For Asia’s citizens who may well be impacted for better and for worse by major infrastructure investments, the hope remains that the “AIIB way” will find a balance: building infrastructure and growing economies while also respecting individuals and their businesses and communities. 

As Singapore now must evolve after Lee Kuan Yew, so too can the AIIB if it moves forward transparently. An active and engaged board of directors and management will also be important, with or without the direct involvement of the United States and Japan.

 

Curtis S Chin, a former United States ambassador to and member of the Board of Directors of the Asian Development Bank, is managing director of advisory firm RiverPeak Group. Follow him on Twitter at @CurtisSChin