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China seems to be taking the challenge head on.
By Krishnakumar S.
NEW DELHI: The unkind remarks from Washington about the Asian Infrastructure Investment Bank (AIIB), floated by China and supported by 21 countries, has triggered a controversy in international economic policy circles.
Started with the express objective of supporting infrastructure financing in Asia, the bank has already become the cynosure in the eyes of the economic policy think-tanks based in Washington, which feel that the AIIB stepping into the shoes of the World Bank and ADB, would do more harm than good. It is feared that the entry would result in unwarranted and unhealthy competition in the international market for infrastructure finance.
Far more than the Chinese initiatives in this regard, it is the olive leaf extended by Britain to partner with AIIB, which has irked the Bretton wood twins as well as Capitol Hill the most.
In the aftermath of any financial crisis, it is only logical that there would be an institutional restructuring which would rectify the weaknesses of the international financial system. The different institutions of financial regulation bequeathed by the world economy are the product of the Great Depression. Indeed to provide reasonable stability and direction to the world economy, in the post war period, the Bretton Wood twins were established. One with an objective of providing development finance, and the other, to provide for international liquidity to economies in need.
In the context of the Asian financial crisis, when the window of liquidity was not extended at the needy moment by IMF to countries like Malaysia, the central banks in East Asia initiated a reserve sharing arrangement towards thwarting any speculative attack on their currencies through the regional monetary arrangement of Chang Mai Initiative.
The first decade of the current century was witness to a spectacular increase in the share of the emerging market economies in world trade, and their being important links in the emerging global value chain. These Asian economies have also resorted to an unprecedented accumulation of foreign exchange reserves towards quelling any threat of currency attack on the one hand, and enhancing competitiveness of their exports, on the other hand.
But despite the massive nature of the recent global financial crisis, and the repeated efforts from the part of the People’s Bank of China towards drawing the attention of the world economy on the necessity of the reform of the international monetary system, the same was left unheeded. The Governor of the PBoC even proposed that the SDR should be transformed into an international reserve currency. Indeed, the economic leadership was not even ready to take cognizance of the changing shares of the emerging economies in the world economic pie. Nor did they find it necessary to accommodate the rising aspirations of the emerging economies in the international policy making institutions, through increase in the share of their quotas. It was business as usual.
While President Obama never thought it necessary to garner support from the US Congress towards enhancing the quotas of the emerging market economies in the Fund- Bank establishment, why should Capitol Hill make an issue out of Asia Infrastructure Investment Bank, proposed by China, and supported by 21 other economies? One is a loss to make sense of the logic of the Washington based think-tanks that the AIIB would eat into the space currently occupied by the ADB and World Bank.
The estimates of the ADB, in itself, reveal that there would be an infrastructure financing gap requirement of eight trillion dollars in the Asian region in the coming decade. The annual loans extended currently by the World Bank of $50 billion is too little too less, that it would barely be able to address the requirements of a country like Indonesia.
Given the massive demand for infrastructure in the region, no wonder President Xi Jinping’s call to “build more roads” seems to have struck a chord with many an Asian leader. Forget about substituting the ADB/ WB, the AIIB would, at best, be complementing them in their mandate. Given the presence of AIIB, Bank-ADB duo would no more be able to neglect the Asian demand for infra finance, nor be able to extract unwarranted conditionalities.
The development experience of many of the Asian economies reveal that the “conditionalities” recommended in the form of market friendly systems and minimalist state were not desirable either. One would have to wait to see as to what would the design of the AIIB be in this regard.
Some of lobbies have set alarm bells ringing that the Chinese lead in infrastructure finance would have severe and deleterious environmental consequences. A study report of the Council of Foreign Relations by Elizabeth Economy and Michael Levi argues that the given the sheer disregard for environmental safeguards back home, the entry of institutions promoted by China to the sphere of infra finance at the global level would result in an environmental catastrophe, it is argued. Less said the better, of the track record of the World Bank in this regard. A cursory glance through the reports of Independent Evaluation Office about the World Bank would reveal that their track record in environmental regulation is no better either.
That said, once in full swing, given the superior role of China in AIIB, it would be able to maneuver the same as a tool of economic statecraft. In as much as the same is done by United States and Japan through the World Bank and ADB, should one be expecting China, which has emerged as one of the leading exporters in the international economy and sitting pretty on the a huge trove of forex reserves, to continue in a subordinated role? Whether we like it or not, as much as western / Japanese capital and technical labor follow World Bank/ADB projects, so too would their Chinese counterparts be following the AIIB projects.
Indeed the Chinese response through AIIB is masterstroke. It is trying to deftly respond to the efforts of United States to tailor mega free trade agreements with European region through TTIP (Transatlantic Trade and Investment Partnership) and with Asia and Pacific through TPP (Trans Pacific Partnership), so as to push China to economic isolationism. China seems to be taking the challenge head on.
(Krishnakumar S. teaches economics at Sri Venkateswara College, University of Delhi.)
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