Rhetoric vs reality at the new Asian development bank

Southeast Asian countries were far from alone at this week’s signing ceremony for a new China-led version of the World Bank. Representatives from some 50 founding members of the new Asian Infrastructure Investment Bank were present, including from Europe and South Asia as well as Australia. But the show was clearly China’s.

As one era ends, another begins. Or so China would have it.

This was most decidedly evident as China championed a new kind of international financial institution it hopes 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.

Distinct and different from the World Bank and the International Monetary Fund, which were established under Western leadership as part of a post-World War II financial architecture envisioned at Bretton Woods, the new China-led institution has quickly taken shape without either Washington or Tokyo’s support. Both nations were absent from this week’s celebrations in Beijing given their governments’ decision to refrain from joining the AIIB, even as almost every major economy, including close European and Asian allies, did so.

Ostensibly to help fill an annual infrastructure financing shortfall in Asia of some US$800 billion, this new lender could also contribute a multilateral veneer and funds to realise Beijing’s vision of a “new Silk Route”, better connecting China to markets and resources in and  beyond Asia. Loans will go to fund ports, railways, bridges, airports and roads across the region as well as to replace ageing infrastructure.

This follows the announcement last year of the launch of a New Development Bank, or so-called BRICS bank, by founding members Brazil, Russia, India, China and South Africa. That bank, like the AIIB, will be headquartered in China.

Each of these new multilateral lenders are direct challenges to existing institutions that China and other nations argue have been too slow to evolve as Europe and the United States’ share of global GDP has declined. The AIIB is also a pointed response and potentially potent competitor to Japan and the Asian Development Bank, a Philippines-based multilateral lender focused on poverty reduction. Since its 1966 founding, the ADB has always been led by a Japanese president, with strong US support. At an initial approved capital base of $100 billion, the AIIB at establishment will be nearly two-thirds the size of the decades-old ADB. China will provide some 30 per cent of the new bank’s initial capital.

The debate will continue over whether the establishment of the AIIB is a reflection of failed US diplomacy and, more cynically, a Chinese wolf in a multilateral sheep’s clothing, or simply an institution whose time has come given China’s economic rise. 

There are several key points all signatories to the AIIB Charter – including those from Asean – should be on the lookout for, if they are to indeed work from the inside to establish an institution that is less corrupt and wasteful, and more “green” and respectful of rights, than it might otherwise have been.

 

Key pillars

First, personnel is power. During my own time serving as US ambassador to and member of the board of directors of the Asian Development Bank under presidents George W Bush and Barack Obama, I saw how management and staff were able to undercut or “slow-walk” initiatives advocated by the US and European shareholders.

These included the advancement of qualified, senior women, and also the hiring and promotion of personnel based on merit, not nationality. Strikingly, the head of the ADB’s budget and personnel management systems department, one of the most important senior roles at the bank, was typically a secondee from the Japanese government, and to this day, spots in senior management are informally reserved for specific nationalities. 

As AIIB’s personnel policies are written, shareholders will want to understand how the AIIB will learn from, follow and improve upon what Japan, Europe and the US have wrought elsewhere. During my time at the ADB, a new standing committee of the board was created to provide greater oversight of the institution’s human resources given persistent concerns about less-than-best practices. The degree to which the AIIB will find budget for experts in areas ranging from environmental impact and resettlement – typically major issues on large-scale infrastructure projects – to world-class human resources and an office for an ombudsman, will reflect immensely the new bank’s priorities.

Second, metrics matter. What gets measured does indeed get managed. China has made clear that a “lean, clean and green” AIIB will not be subject to what it and other borrowers have viewed as overly bureaucratic systems for approval and evaluation at the ADB and World Bank. Shareholders will want to focus on what rules and procedures will and will not be adopted from the established multilateral lenders. 

Critical will be the system put in place to evaluate the AIIB’s impact. 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 not to bank management but to the AIIB Board – even a non-resident board – will be vital, as will be a process to hold borrowers and the AIIB accountable should there be non-compliance with the new institution’s standards.

Accountability mechanisms will need to be strong and effective. At the ADB, there have been examples where borrowers, including China, have undercut or ignored the work of that institution’s Compliance Review Panel. In one case in the city of Fuzhou, the Chinese government declined permission for ADB staff to investigate an allegation of non-compliance with bank standards. 

Simply stated, China’s control of freedom of movement worked to its advantage in quashing an investigation. Shareholders will want to fight for access and data for effective measurement and evaluation systems.

Third, don’t be fooled by sweet promises. The Wall Street Journal reported that a Chinese promise that it will not have veto power at the AIIB helped sway some European nations to join. Yet, the lesson of the ADB is simple: Money matters, and the shareholders that contribute the most have the most influence, regardless of whether they have veto power. At times derided as a rubber-stamp board akin to China’s National People’s Congress, the ADB board works by consensus and rarely fails to give approval. There, Japan maintains significant control over the ADB agenda despite having only about 16 per cent of the bank’s shares.

This is likely to be no different at the AIIB, but there China, as the dominant shareholder will call the shots. Shareholders will want to pay close attention to ensuring a means to influence policies and shape project lending proposals early on, well prior to what is likely to be eventual rubber-stamp board approval.

Fourth, transparency starts at the top, and that includes for preventing corruption and avoiding conflicts of interest. My former ADB colleague Jin Liqun, now the secretary-general of AIIB’s interim secretariat, was an eloquent advocate for the role of the private sector and strong public-private-partnerships in development. This is likely to continue at the AIIB.

Whether the AIIB, however, will be used as a means by China to strengthen its own state-owned-enterprises and other Chinese entities via “China-friendly” procurement rules at the expense of other nations will need to be scrutinised. The AIIB also might show the World Bank and the ADB how real transparency works, and have its senior management subject to financial disclosure rules. As Chinese President Xi Jinping continues his much-vaunted fight against corruption, the AIIB can go a step further and make clear that board, management and staff will not directly benefit from decisions they make. Strong restrictions should also be put in place to limit a revolving door of future former AIIB staff becoming high-paid consultants to the organisation.

Finally, safeguards matter. At the ADB, there has been a general commitment that no individual should be made worse off by bank-funded projects. People are compensated if affected. It is a high and difficult goal for any multilateral lender, even with the best board oversight and management intent. 

That’s one reason for safeguards and periodic policy reviews at the new AIIB. As recently as this March, the World Bank identified serious shortcomings in implementation of its resettlement policies and said it would improve oversight and management of its practices to better protect people and businesses affected by projects it funds.

Nathans Sheets, the US Treasury Under-Secretary for International Affairs, has called for support of the World Bank and ADB’s “high quality, time-tested standards”. China has made clear that those standards are up for debate at the AIIB, and indeed the existing multilateral lenders are not necessarily the best poster-children for good governance. 

Like the late Lee Kuan Yew during his iron-fisted rule in guiding Singapore’s success, China is now advancing an “Asian way” in this newest of multilateral lenders. For the founding members at this week’s signing ceremony, their challenge is now to ensure that the “AIIB way” is a balanced one: building infrastructure and growing economies while also respecting the 

environment as well as individuals and their businesses and communities. 

 

Curtis S Chin, a former US ambassador to and member of the board of directors of the Asian Development Bank, is managing director of advisory firm RiverPeak Group, LLC. Follow him on Twitter at @CurtisSChin.