This year’s G20 summit has rightly given infrastructure investment top priority in engineering long-term recovery of the global economy. Despite continuing signs of recovery in the United States, growth in much of the industrial world remains stagnant and slower growth in emerging economies is yet to bottom out.
Lifting global growth towards its long-term potential and avoiding a new normal of low growth will be greatly assisted by filling the US$50 trillion infrastructure gap that the OECD estimates worldwide with productive investment.
Promoting infrastructure investment is a particular priority in Asia and the Pacific. The recovery of the global economy needs the boost. Meeting the US$8 trillion deficit that the Asian Development Bank estimates in regional infrastructure demand is critical to the continuing growth and development of regional economies through deeper integration and connectivity.
As is widely recognized, finance is not the only constraint. But the scale of funding through the multilateral development banks such as the World Bank and the ADB, small relative to the size of demand, has shrunk in recent years, and there is clear scope for intermediating Asian savings to cope with the huge shortfall in infrastructure investment.
As Keshav Kelkar points out: ‘The 2008 global financial crisis has diminished the lending capabilities of Western institutions. The World Bank’s lending has reduced to half of what it was before the global financial crisis. Private lending for infrastructure has also shrunk to one-third of its pre-crisis level’.
There are many viable projects, including ones that have been identified by the development banks themselves, but the institutional and regulatory weaknesses in many economies delay bringing projects to fruition, if they get up at all. International financial institutions, subject to strong international governance and lending arrangements, help inject the disciplines to overcome these weaknesses.
The new Asian Infrastructure Investment Bank proposed by Chinese President Xi Jinping, which is expected to be formally launched by China to coincide with its hosting of the APEC annual meeting in 2014, is an entirely welcome initiative in this context. The existing multilateral development banks were created to reduce the transaction costs of assessing development projects, as well as to reduce the risks of these investments.
At present, the multilateral development banks are not making a significant contribution to the commercial financing of investment to upgrade or extend essential economic infrastructure, partly due to their limited financial capacity. And there are barriers to emerging economies like China playing a significant role in lifting their capital base for this purpose.
China already has large bilateral development financing programs. The AIIB proposal is different: it is open to shareholding by any government and by private investors; participants will shape its governance and operations; it is designed to narrow gaps in the region’s economic infrastructure; and it represents a timely contribution to the provision of this class of international public goods.
The establishment of the AIIB would spur existing development banks to consider expanding their financing capacity and create new competition. At the same time, the new bank will have a strong incentive to cooperate with them. Tapping into the expertise of banks that have accumulated knowledge and experience is the most effective way to build up the capacity of new international financial institutions.
The Chinese can do whatever infrastructure financing they wish unilaterally, it is argued, but they have chosen to offer multilateral partnerships in this initiative. It should take a no more than a nanosecond to conclude that countries like Australia, Korea, Japan and the United States should partner in this enterprise.
The idea that China’s AIIB would lower international multilateral development bank investment standards is nonsense when the Chinese are inviting participation in funding and governance. The Chinese have actively sought this. Countries like Singapore and Australia are not going to sign on to lower governance and loan standards.
Washington’s negative response to the initiative appears churlish. The US government would, of course, have to take funding approval through Congress — an impossible challenge — although that is no reason for not giving support in kind and in principle. United States calls for China to create or supply regional and global public goods are beginning to sound empty and hypocritical. It is a wrongheaded idea that China can be contained from participation in multilateral development finance and the economic and diplomatic kudos that it might bring. Nor should the US be messing its partners over on this initiative. That is not in its own best interests, even if it cannot easily sign in itself.
This is a strategic choice point for countries like Australia, Canada, Japan and Korea, and New Zealand. Ironically, there was the same hesitation when Japan moved to establish the ADB in the 1960s. There should be none now. If these countries do not engage China on these positive initiatives they both stand to frustrate entirely positive regional and global economic outcomes and lose the opportunity forever to shape the terms of China’s regional and global engagement. In so doing, they would be choosing to act against their national and collective regional interests. Fortunately they have not yet so chosen.
Peter Drysdale is Editor of the East Asia Forum, where this originally appeared.