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Judge infrastructure bank on the projects it chooses
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With China set to lead a new US$50 billion international financial institution, the Asian Infrastructure Investment Bank (AIIB), most of the debate has centered on the United States鈥 futile efforts to discourage other advanced economies from joining.
Far too little attention has been devoted to understanding why multilateral development lending has so often failed, and what might be done to make it work better. Multilateral development institutions have probably had their most consistent success when they serve as 鈥渒nowledge鈥 banks, helping to share experience, best practices, and technical knowledge across regions. By contrast, their greatest failures have come from funding grandiose projects that benefit the current elite, but do not properly balance environmental, social, and development priorities.
There are huge infrastructure needs across developing Asia, and it is high time for China to play a greater role in international lending institutions. Moreover, the official US argument 鈥 that China should invest its money in existing institutions, such as the World Bank and the Asian Development Bank, because a Chinese-led bank would likely have governance problems 鈥 smacks of hypocrisy. Good governance? Is the US prepared to relinquish its historical prerogative to choose the World Bank president?
Likewise, the US worries that China may use the AIIB to advance China鈥檚 economic and political interests. But anyone who is even vaguely familiar with the US approach to multilateral lending knows that no other country has been as adept at exploiting its power and leverage for strategic gain.
With China鈥檚 growing importance in the world order, it needs to be given space to forge its own approach to global economic leadership. Frankly, a relatively small infrastructure bank seems as good a place as any to start.
Besides, China is already pouring money into the developing world, often through highly opaque channels. To the extent that the AIIB normalizes a portion of Chinese development assistance, and subjects it to scrutiny from the new bank鈥檚 advanced-country members, the new bank鈥檚 existence should be all for the better.
With its penchant for constant experimentation and improvement, one might even hope that China will draw lessons and apply them to all of its developing-country lending. Who knows, maybe the existing development banks will learn something.
While the world should generally welcome China鈥檚 initiative, the real question is what kind of aid developing Asia needs.
My interpretation of the World Bank鈥檚 record is that its role has been most consistently positive when it helps countries with 鈥渟oft鈥 development infrastructure: technical assistance and serving as a global knowledge bank. When its main role has been to provide financial muscle, the results have been less impressive. In China itself, for example, World Bank money has not been so important quantitatively, yet the Chinese generally credit the Bank for having helpful blueprints and information.
It is far from clear that the Chinese model of infrastructure development can be exported universally. But given the legacy of problematic loans and projects funded by Western-led infrastructure banks, it is reasonable to ask whether another one is needed, as opposed to reforming existing institutions.
Still, if the AIIB views itself mainly as a knowledge bank, it could provide real added value. We should evaluate the AIIB by how it chooses and fosters projects, not just by how much financing it provides.
Kenneth Rogoff, a former chief economist of the IMF, is Professor of Economics and Public Policy at Harvard University. Copyright: Project Syndicate, 2015.www.project-syndicate.org. Shanghai Daily condensed the article.
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