Implications of ADB Joining Forces with AIIB

Darson Chiu

        Takehiko Nakao, President of the Asian Development Bank (ADB) announced during ADB's 48th annual meeting in early May this year that ADB would work together with the Asian Infrastructure Investment Bank (AIIB) through co-financing development projects. However, Nakao put down AIIB on April 20 this year by stating that it would take a very long time for AIIB to catch up with ADB in terms of available resources as well as outright influence in the region. What have been the critical reasons making ADB eventually turning the tables around on AIIB within only two weeks?

        After Bretton Woods Conference charting financial agendas and regulations for major world political and economic powers in 1944, the World Bank (WB) led by the US and ADB jointly dominated by the US and Japan have been financing development projects in conjunction with other poverty reduction missions across the Asia-Pacific region and rest of the world. The initiative of establishing AIIB was announced by China in October 2013, a purposely set timing, as China served as the host of APEC meetings the following year.

        There is without doubt an extremely strong demand for emerging economies in the region to finance their much needed infrastructure improvement. It is estimated around US$ 700 billion required to meet the needs of infrastructure development in Asia per annum. Furthermore, given Asian economies' excess savings and significant gaps in economic development, directing capital to infrastructure could more or less ensure continued growth, especially when most Asian economies are losing steam for growth at this moment. From the simple supply and demand perspective, the lending capacity of ADB is unable to sufficiently finance infrastructure development projects in the region even with its proposal of expansion, enhancing its credit line each year by 50% to US$ 20 billion starting from 2017. But this is definitely not the only reason that explains why ADB has decided to join forces with the AIIB.

        During the 2014 APEC meetings, as there were doubts that the formation of AIIB was intentionally to challenge existing multilateral financial institutions, the WB and ADB. And Chinese APEC delegates in many international occasions often stressed that AIIB was not set to compete but complement works of WB and ADB. In addition, Chinese APEC delegates even claimed that AIIB could cooperate with the WB and ADB in joint projects. Therefore, the AIIB did extend its goodwill gesture before; however, neither WB nor ADB responded to that offer with adequate courtesy. The US and Japan did not wish to see a burgeoning new bank led by China to go beyond the works long been doing by the WB and ADB. The White House even warned its allies against joining AIIB then considering there's a possible purpose behind the AIIB to hold down the operations of WB and ADB.

        The big turning point would be when the United Kingdom announced in March this year that it intended to become a prospective founding member of the AIIB and be the first major Western power and a long time US ally to seek to join the China-led bank. Right after that announcement, the US expressed its unease at UK's decision by issuing serious concerns regarding if the new bank would be able to meet the modern governance benchmarks. As the UK is also a member of ADB, it is not irrational for the European country to join in Asia's development projects that might be equally relevant to the AIIB. In spite of everything, an estimated investment of about US$ 11 trillion in infrastructure for the next 15 years of emerging Asia is just too tempting.

        Despite the reproving signal from the US, Germany and France also joined the UK in becoming members of AIIB in March this year. Following these European Union fellow members, Italy was soon set to join the Chinaled bank. That means four out of seven G7 member countries, four largest European economies and the once most reliable US allies have "jumped ship" in a way, and it is probably enough and about time for the White House to put aside its animosity towards the new bank and consider revising the game plan.

         Jack Lew, the US Treasury Secretary stated in late March this year that US would position itself to welcome a China-led development bank on the conditions that the bank could complement existing institutions, implement good governance practices, and attain transparency. During a press conference set for welcoming Japanese Prime Minister Shinzo Abe's visit on April 28, the US president Barack Obama said the AIIB could be a positive thing for the region of Asia as long as it adopted high standards to finance development projects. The presidential press pronouncement unveiled the fact that how to address AIIB was definitely on the agenda of Obama-Abe meeting.

        Adding these all up; we can summarize several concluding points here. First, the US leadership in Asia-Pacific region was challenged by China, and then jeopardized by its European allies. As the EU Big Four also own memberships in ADB, it is sensible for them to continue their endeavors and help Asia's development projects. And it's probably unfounded to stop them from doing so. Second, as the only major ally of US now, Japan tried to seek US opinion of whether to join or jointly contain AIIB. The former seemed improbable, as Japan had been joined the US expressing skeptical of whether the AIIB would redundantly overlap the functions of existing institutes in the first place. The new bank looked so influential and powerful making the latter also seemed less likely to succeed, despite the Japanese ADB president attempted to discourage AIIB several days before the Obama-Abe meet up in April.

        Finally, the optimal solution would be using ADB to join AIIB thru the means of co-financing projects. The merits of doing so are multiple: a) Japan and the US can also enjoy a share of potential business opportunities associated with AIIB, b) Japan and the US can keep an eye on AIIB through cooperation, as then AIIB needs to be more transparent when working together with ADB, c) AIIB did offer the willingness to combine forces in the past, so ADB would hardly get a thankless cold shoulder from AIIB, and d) the AIIB does need to pull experience and expertise from ADB.

        Finally, the optimal solution would be using ADB to join AIIB thru the means of co-financing projects. The merits of doing so are multiple: a) Japan and the US can also enjoy a share of potential business opportunities associated with AIIB, b) Japan and the US can keep an eye on AIIB through cooperation, as then AIIB needs to be more transparent when working together with ADB, c) AIIB did offer the willingness to combine forces in the past, so ADB would hardly get a thankless cold shoulder from AIIB, and d) the AIIB does need to pull experience and expertise from ADB.