What the AIIB Can Learn from World Bank Shortcomings

Posted on 05/11/15
By David Dollar | Via Brookings Institution
(Photo via aiibank.org)
(Photo via aiibank.org)

To understand the impetus for launching the Asian Infrastructure Investment Bank (AIIB), look no further than China’s concern that the governance structure of existing international financial institutions was evolving too slowly. An important agreement to increase the resources of the International Monetary Fund and to raise the voting shares of fast-growing emerging markets, ratified by other nations, has been stalled in the US Congress. It is ironic that one of China’s frustrations with the US-dominated institutions is that China sees a need for more resources and is willing to contribute, whereas the different parts of the US government cannot agree to this expansion.

 

China’s frustration is not just about the size of the institutions and its weight within them. In the case of the World Bank, China has argued for years for more focus on infrastructure and growth.

 

Several years ago, Ernesto Zedillo, former president of Mexico, chaired the High-Level Commission on Modernization of World Bank Group Governance. This was a serious effort by a distinguished international committee, including Zhou Xiaochuan from China and other emerging market heavyweights.

 

The Zedillo report is quite critical of the current World Bank arrangement of a resident board that approves all loans. The resident board is both a large financial cost to the bank (US$70 million per year) and an extra layer of management that slows down project preparation and makes the bank less efficient. Slowness of project preparation is one of the main criticisms of clients concerning the poor performance of the multilateral development banks.

 

The Chinese officials charged with developing the AIIB are looking at the Zedillo report for ideas. It is likely that the bank will have a non-resident board that meets periodically in Beijing and also by videoconference. Given the newness of the bank, a likely compromise among the countries that have signed up is that the board will approve many of the initial projects and eventually delegate more decision-making to management.

 

The Zedillo report recognises the importance of environmental and social safeguards but argues that the World Bank has become so risk averse that the implementation of these policies imposes an unnecessary burden on borrowing countries. In practice, developing countries have moved away from using the existing multilateral development banks to finance infrastructure because they are so slow and bureaucratic. The enthusiastic response of developing countries in Asia to the AIIB concept reflects their sympathy with the idea that a bank can have good safeguards and still be quicker and more efficient than the existing banks.

 

Some of the Western commentary on the AIIB expresses a fear that China will use the bank for narrow political or economic ends. Now that a diverse group of nearly 60 countries have signed up, it would be difficult for China to use the bank to finance projects in favored countries over the exclusion of other members.

 

Click here  to read the complete article at the Brookings Institution.

 

David Dollar is Senior Fellow, John L. Thornton China Center, Brookings Institution. He was the former World Bank Country Director for China and Mongolia in the East Asia and Pacific Region.

 

 

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