Report: What’s AIIB All About? China, Asia and A Contested Global Order

On 31 October 2016, the Institute of Security and International Studies (ISIS) organized the Public Forum titled “What’s AIIB All About? China, Asia and A Contested Global Order” in cooperation with Heinrich Böll Stiftung Southeast Asia (hbs) and Chulalongkorn University. The event hosted speakers from a variety of backgrounds to comment on the report “Making Inroads: Chinese Infrastructure Investment in ASEAN and Beyond”, authored by Mark Grimsditch of Inclusive Development International (IDI) with the support of hbs.

In his opening remark, Manfred Hornung encouraged the idea to think about the AIIB in terms of social and ecological coherence with other international initiatives. The G20 Hangzhou Action Plan and the UN Addis Ababa Action Plan for Financing both aim to (re-)focus development finance on infrastructure projects. This raises questions about the social and environmental sustainability of the direction of development cooperation is currently taking and potentially threatens the credibility of commitments made under the Paris Climate Action Plan. Another important aspect of the debate that would reappear over the event was mentioned by Ake Tangsupvattana. To date, it is too early to make a qualified judgment about the impact the AIIB will have on the regional and global order in general, and other multilateral development banks (MDBs) in particular.

Geopolitical concerns need to weight correctly in the debate. On one hand, foreign policy concerns rank rather low as a priority in China’s political discourse, says Joe Horn-Phathanothai. Instead, geopolitical ambitions are subordinated to the greater “China Dream” of prosperity and national glory, adds James Stent. One the other hand, it is true that the timing of the AIIB and One Belt, One Road (OBOR) announcements suggests a direct link to the US’ pivot to Asia. The recent communiqué released after the sixth plenary session of the 18th Chinese Communist Party Central Committee indeed suggests that soft-power projection has gained relevance over traditional economic goals.

However, a cautious consensus seemed to prevail that China’s stronger engagement with the region will most likely supplement rather than overthrow the current liberal order. Indeed, China is confronted with a dilemma here, as Thitinan Pongsudhirak rightly notes. While it surely is not conforming to some of its political aspects, it has profited immensely from the economic openness of the system over the last decades. Moreover, partial change is all the more likely as other regional states have mastered the art of hedging their bets in relation to the major regional powers, China, US and Japan. The Philippines unexpected turnaround in its approach to the maritime territorial disputes with China in the South China Sea, followed by significant investment purges by China and Japan, worth $23 billion and $19 billion respectively, is a strong case in point (TP), remarks Pongsudhirak.

Still, most participants sought to explain the establishment of the AIIB based on China’s national economic interest and experience. Over-capacities in the steel industry and the goal of “interconnectivity” and “industry linkage” are main drivers of Chinese outward foreign direct investment, says Mark Grimsditch. Others are lower returns on domestic investment and the need to overcome its investment disadvantage on global capital markets, according to Horn-Phathanothai. From his business perspective, infrastructure projects in Southeast Asia provide strong complementarity with Chinese interests and promise high returns. In this context, Kavi Chongkittavorn recommends to link AIIB policy closer to the ASEAN Connectivity Plan. This would also ease prevailing suspicions among China’s Southeast Asian partners that are otherwise keen to engage with the AIIB.

Panelists with an NGO background such as Luz Julieta Rio-Lightart and Mark Grimsditch, in contrast, were more cautious as most large infrastructure projects impact on some of the most vulnerable communities. Past ADB-funded railway projects in Cambodia, Chinese investments in the Myanmar energy sector as well as other MDB projects in Bangladesh, India and Lao (to only name a few) have threatened livelihoods all over the continent. Other projects, such as those in Pakistan, carry a high security burden. Moreover, there are serious shortcomings with regard to AIIB governance and operations. The bank’s environmental and social framework (ESF) list of prohibited investments is not comprehensive. Accountability mechanisms are biased, public communication is weak, and transparency of the bank’s operations is not sufficiently realized, warns Rio-Lightart. These issues raise fear of a race to the bottom in terms of ESF standards where AIIB competes with other MDBs. Participants with a background in business or finance, in contrast, expect competition between the bank and other multilateral development banks such as World Bank and ADB to have positive effects. In particular in operational terms, existing banks are far from perfect and a “lean” governance structure, as foreseen in the AIIB, could speed up lending.

Both, James Stern and Phatanothai, are also confident that the AIIB will gradually develop its ESF and transparency, especially now that a number of OECD countries are on board. Moreover, China knows that its international reputation is on the line. Observers should take into account that the Chinese policy approach is marked by risk-adversity and incremental learning from prior experience, says Stent. Policy changes will therefore be made slowly and on the go as operations advance and the bank evolves.  

Given that the AIIB only recently approved its first projects, the discussion rarely referred to them in particular. The issue that the AIIB declared its willingness to invest in coal-fired energy plans, despite the 2013 OECD-led ban on respective investments by several other MDBs, did not find mentioning and neither did the National Slum Upgrading Project in Indonesia which carries the risk of large-scale eviction if certain safeguards are not attended. Unfortunately, this omission had the consequence that a key issue in infrastructure investment projects was not addressed, i.e. their hybrid character. While projects need to be economically viable, they also (unlike a mere commercial endeavors) serve a wider social or public purpose. Experts would therefore do well to put their heads together and develop strategies that accommodate this problem. For example, the experience from past projects shows that it is often more cost-effective to upgrade existing settlements than to evict communities and construct new settlements with basic services beyond the city, according to the International Institute for Environment and Development. Similarly, to provide rural and far-flung areas with energy, decentralized renewable solutions can in many cases be more cost-effective than extending the traditional grid. Synergies between commercial and social needs do exist; they just need to be realized. We should hope that this lesson was part of China’s learning process, at home and in the region.

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