Co-authored with Robert Martin
China's plan to create a new development bank for Asia -- the Asian Infrastructure Investment Bank (AIIB) -- has generated much fanfare since Chinese premier Xi Jinping announced China's intentions to create the Bank last year. Since then, there has been a great deal of speculation about which governments may join, and considerable discussion about the AIIB's true intent, with some quarters speculating that the ultimate purpose is to challenge Japan's regional financial primacy through its leadership of and large shareholding in the Asian Development Bank (ADB).
Given that all international financial institutions are at their core political entities, disguised as development banks, this challenge to Japan must ring true in Tokyo. All member countries of the ADB have been invited to join the AIIB -- including the United States, Japan and South Korea. There is considerable debate at the highest levels of government about whether these countries will indeed join the Bank. Our guess is that few will want to be perceived as preventing further development in the region because the AIIB happens to be a Chinese initiative.
An important part of the debate is not only perceived financial supremacy in Asia -- and in that regard, China already reigns supreme -- but the acknowledgement that China is stepping up to the plate to transition from being primarily a recipient of development aid to becoming a primary donor.
Development banks such as the ADB have wanted China to keep borrowing from them given that China accounts for a significant percentage of their loan portfolios, which they wish to maintain. Why China should be accepting any development assistance has been a subject of ongoing debate in the development community, given that it is the world's second largest economy and has the world's largest foreign exchange reserves. The creation of the AIIB would be a big step in the direction of encouraging China's transition from borrower to lender.
But in order to be successful as a political institution, the AIIB will first need to be successful as a development institution. As de facto leader of the bank, China will need to be seen as being a leading advocate not only for the development process and the alleviation of poverty, but also best international practices in good governance, environmental compliance, anti-corruption initiatives, and transparency -- subjects which are not generally associated with Chinese political and business practices. Whether China is up to the task will remain an open question.
There is no question that Asia would clearly benefit from an additional infusion of capital, as the region struggles to meet its growing infrastructure needs. The ADB currently estimates that Asia will need $8 trillion in national infrastructure and $290 billion in regional infrastructure through 2020 in order to sustain the region's growth trajectory. Neither the ADB nor the AIIB can raise anywhere near these sums.
Indeed, the ADB currently finances less than 2% of Asia's needs, a sum the AIIB can only hope to match in the coming decade. The remainder must come from a combination of private sector funding, government funding, and public/private partnerships. The problem is that Asia has fallen so far behind in meeting its infrastructure needs that only a large, sustained, and lengthy effort can make a difference in the longer term. That effort needs to start now.
To entice the private sector to step up its investments into long term infrastructure projects, Asian governments must start by improving their governance regimes. The rule of law, independent regulators and judiciaries, predictability, clean politics, and political stability are all essential elements in the highly competitive race for private capital. Singapore and Hong Kong have demonstrated that it can be done well.
To a limited degree the ADB understands this. Promoting these ideals has been an important element in the success of its private sector operations since 2000. Development banks more generally have much more to do in that regard, but they are heading in the right direction.
Major donor countries must be honest in asking themselves whether Asia would be better off with the additional development capital the AIIB promises to deliver to the region. If these countries can get over the politics associated with joining hands with China, it should be a simple question to answer. In the interim, China faces an enormous task in getting the AIIB up and running -- the right way.
If China will publicly stress the importance of good governance as an essential component of making the development process work, the AIIB has a chance of being successful, and may work well in generating significantly more financial resources for the region. If not, the AIIB could become an embarrassment for China's government, and, in the end, its own commercial interests. With Xi Jinping's personal endorsement and credibility on the line, there is a better chance that it will succeed, than not. The proof will be in the pudding.
*Daniel Wagner is CEO of Country Risk Solutions, senior advisor with Gnarus Advisors, and author of the book "Managing Country Risk." Robert Martin is a former senior official at the Asian Development Bank.