Will the Asian Infrastructure and Investment Bank achieve a successful start?

Wednesday, September 30th, 2015

At the end of this year a new International Financial Institution (IFI), the Asian Infrastructure and Investment Bank (AIIB) will become operational. The AIIB is placed in Beijing. It has currently 57 founding members: 37 Asian countries (including Russia, Australia and New Zealand) and 20 outside Asia (17 European countries, two African countries and Brazil). The authorized capital of the AIIB is expected to be US$ 100 billion and will be used for infrastructure projects in Asia. There is a big need for infrastructure financing in a quickly developing Asia. The Asian Development Bank (ADB) estimates that for the period between 2010 and 2020, Asia needs US$ 8 trillion for infrastructure construction.

The founding countries of the AIIB took the decision to participate in spite of concerns raised that the creation of a new international bank would undermine existing IFIs, like the World Bank and the Asian Development Bank. The strong participation of European countries was a major breakthrough for Chinese diplomacy against resistance coming especially from the United States. This success is of importance not only for the development of Asia but it is also an important step for new global governance structures. The reform of the Bretton Woods Financial Institutions is stalled because of the negative attitude of the American Congress. Therefore the correction of the voting rights in the IMF, reducing slightly the dominant US influence and the over-representation of Europe at the benefit of countries in Asia and Africa is still not happening. The AIIB might be able to demonstrate that a new financial institution supported by China will be run on an inclusive pattern, allowing participants to join into the decision-making in a more equal manner.


But there are still important decisions to be taken to assure that the high ambition of China becomes reality: to create a new financial institution, which is a best practice case for the 21st century.

This new IFI must find a balance between the different interests of its shareholders. Chinas interest is to use the AIIB for the financing of infrastructure projects linked to its one belt on road strategy. The strategy has two main components a land based Silk Road Economic Belt and the 21st Century Maritime Silk Road. The Silk Road Economic Belt is intended to improve road and rail routes and other means of connection, including oil and natural gas pipelines and IT infrastructure, in an area that stretches from China to central and South Asia, Russia, the Mideast and Europe. The 21st Century Maritime Silk Road is intended to create a network of ports and industrial parks linking South and Southeast Asia, East Africa and the Mediterranean Sea. Chinas big Companies have over-capacities, which can be used for these investment projects. This can help these companies to cob with reduced growth in China. Especially Chinese state-owned companies have privileged access to political decision makers and might hope for a preferential treatment by the AIIB. But also companies from Russia and India might hope for a special treatment.

The European Partners expect to the contrary that an IFI functions without a national preference and that also International companies have a fair chance to participate in AIIB financed projects in open and transparent tendering procedures. European Countries being shareholders of other IFIs, which are also active in Asia like the World Bank, the Asian Development and even the European Investment Bank will underline the need for a good cooperation with these existing IFIs. This implies that the banking activities are based on common standards to facilitate cooperation.

The comments made by the Chinese AIIB-Secretary General Jin Liquin are encouraging: “ I will strive to ensure that the AIIB develops and embodies a corporate ethos that is characterized by transparency, integrity and accountability, and is focused on meaningful and measurable outcomes and results…The AIIB’s assistance to its clients should be technically, financially, economically, environmentally and socially sustainable.”

To implement these laudable objectives in the banking activities common answers amongst the participating shareholders must be found to some difficult questions:

– What is the right balance between high environmental and social standards and timely and cost-effective project implementation?

– How to avoid corruption in countries with weak governance and poor legal systems?

– How to deal with international sanctions against companies and states?

– How to assure open and transparent tendering for all activities?

– How to garanty access for the public to information?


If one takes the Aarhus Regulation, which guides the policy of the EIB, environmental and social information held by the Bank and related to projects should be made available. Will the AIIB develop a public register for dissemination of this information to the public? Are environmental and social impact assessments parts of publicly accessible information?

In the remaining months until the start of the operations of the AIIB the shareholders of the bank have to find an agreement about the standards and procedures for the functioning of the AIIB. It is a positive sign that in the preparatory discussions an exchange of view with other IFIs takes place. Hopefully the best international standards will be agreed to make the AIIB really a model for the 21st century.

Chinas active support for high standards of transparency and accountability in the banking activities will be the best answer to the existing doubts about the will and capacity of Chinas leadership to improve governance and eradicate corruption.


Gerhard Stahl
Professor, Peking University HSBC Business School, Shenzen


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The AIIB and How Not To Repeat Historical Mistakes

Wednesday, May 6th, 2015

Old hero looks on bad temperedly as would-be new hero launches his idea for a new global financial order. Old hero tries for all he is worth to prevent the new idea from gaining currency among his erstwhile followers. His efforts are to no avail. The new hero manages to amass overwhelming support for his proposed institution.

Ah you might well say. This is all about the Asian Infrastructure Investment Bank, new hero being China and old hero being the USA. Right? Yes indeed. But there is actually another answer which could be considered equally as correct. It is the case of the creation of the IMF. On that occasion the new hero was the US with the UK being the grudging old hero. At that point, not even an alternative idea put forward by none other than John Maynard Keynes was able to prevent the dollar based international structure from being born.

The IMF was created in 1945. And now it is 2015. 70 years is a long time in economics, perhaps. Yet surely not that long for the American memory not to be stirred and to recognise the irony of the turn of events. Well may be not. But it is certainly an indication that people react in pretty much the same fashion when the same kind of shock hits them.

That said it is difficult to envisage the renminbi acquiring the position that the US dollar did in the immediate postwar years. In passing, it should also be noted that the US dollar’s reign itself did not last that very long. The dollar’s convertibility to gold was terminated in 1971 after all, thereby effectively ending the dollar’s position as unchallenged international key currency. Nevertheless the Chinese currency is even more disadvantaged than the dollar of those days in that China’s economic supremacy of today is nowhere near that of the US in the immediate postwar years. At that point, everyone else was struggling with postwar redevelopment. They desperately needed dollars to finance that endeavour. The renminbi is so clearly not in that position.

In Japan we have the saying “acorns comparing heights” indicating competition among contestants who are not that different from each other in terms of ability. There is no outstanding winner with undisputed might. This is very much the case now that we live in a highly globalised world in which people, goods and money flow so effortlessly over borders. No single nation or region can boast of being the oak tree rather than an acorn. China may be an extremely super large acorn but it remains an acorn nonetheless and not the tree.

Moreover, the dollar of pre-1971 years was the only currency that was convertible to gold at a fixed price. The renminbi enjoys no such exceptionality.

All this being said, one can understand China’s motivations behind the AIIB initiative quite well. It needs access to the infrastructure development market of Asia. In needs some big projects on which it can use up its vast excess production capacity. Having run out of investment opportunities inside its own economy, it is now looking for space elsewhere. It is also looking for a way out of dollar-dependency. It wants access to global finance in its own right without having to rely on the dollar as a gateway.

So the new kid on the block is trying to grow up in a workable fashion. The US should look back on its experience of 70 years ago and try to avoid the British mistake of attempting to block the newcomer’s way. Begrudging new people access to club membership is never a very sophisticated thing to do. They will sulk, become defiant and go on to create a club of their own. This will more often than not lead to unproductive squabbles and pitch warfare.

It was refreshing to watch the British manoeuvre on this occasion. To be the first to stand up and be counted as a member of the AIIB club was a stroke of piratical genius. It seems that the country’s buccaneer spirits have not died down completely. A completely different performance to 70 years ago. Much more sensible. It is a typical case in point which shows you that when you are no longer the old hero whose position is being threatened by youthful rivals you can relax and come up with some impish ideas about position taking.

Most pitiful in this context has been Japan’s response to the AIIB idea. It would have done better to try to outdo the British. If a young and upcoming very large Asian acorn is trying to boost infrastructure development in the area, a more mature and more experienced Asian acorn of not at all negligible size should welcome the opportunity to lend a hand. Or even both hands. Having secured the position of wise old advisor, Japan could have gone on to mediate between old hero and new hero. Alas no such luck. Japan just keeps looking on with scared stiff eyes for the new comer and apologetic diffidence for the old timer. Pathetic.






Noriko Hama
Professor & Dean at Doshisha Business School, Kyoto


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Japan’s (Abenomics’) Failure – are there Growing Risks for other Asian Countries and the World Economy?

Wednesday, December 3rd, 2014

In the third quarter, Japan’s economy tumbled again into a recession. “Abenomics” – i.e. the economic program of prime minister Shinzo Abe (LDP) – proved to be a failure. Expressed very briefly, “Abenomics” means that the Bank of Japan (Nippon Ginko) two years ago was committed to massively print money in completely uncharted waters in order to combat the long-lasting deflationary problem.

Furthermore, Abe wanted to do something about the excessive government debt (more than 240 % of GDP), for example by raising the VAT from 5 to 8 last April – a measure that obviously contributed to the current recession and made Japanese consumers even more reluctant. For this reason, another planned VAT hike has been postponed.

Bad advice

One of the intellectual fathers of “Abenomics” was Nobel Prize winner Paul Krugman who during a long time had complained about Japan’s “irresponsible monetary policy” (and who also had accused the Swedish Riksbank for a similar failure – and who, unfortunately, has quite a number of supporters among Swedish academics and financial analysts). The idea of the whole experiment was to print money in borderless amounts for government expenditure – government expenditure that should give positive multiplier effects on consumers and private corporate investors. Furthermore, some inflation should be created this way.

Today, it seems to be obvious that the Krugman-/Abe-experiment has failed. Extreme monetary expansion cannot work in the long run and never replace a structurally well-founded growth/supply side policy. If it was that easy…Something to remember in Sweden and in Frankfurt (ECB) as well.

It would be good idea if the world listened less to Krugman and consortes. With quite some luck, the previous monetarization in the U.S. by the Fed may be managed without major distortions. Janet Yellen understands economics. But Japan and Europe (ECB; Sweden included) function quite differently and have probably very different reactions functions for increased liquidity.

M x V = P x Q

Old fundamentals may help. Let’s for example, look at Irving Fisher’s so-called “equation of exchange” (1911): M x V = P x Q (M = money in circulation, money supply, V = velocity of money circulation, P = price level, Q = expenditures in real terms).

In our context, V, P and Q are the interesting variables. V stands for the average frequency that one unit of the currency/money is spent. An important point in this context is the fact that the “equation of exchange” is an identity equation which means that it is always valid whatever number you put in it. Consequently, the new number for V is not known in advance when M is changed. The same can be said about P (inflation) and Q. These simple facts make the effects of strongly extended money supply uncertain and, consequently, the whole basket of different kinds of quantitative easing (QE) – an instrument which central banks so actively apply these days or intend to use as an instrument for better growth and higher inflation (the Riksbank, unfortunately, included).

Now, in order to make the whole process of monetarization work, it is necessary that the velocity of money circulation increases visibly. Consumers and investors should be willing to spend more money more rapidly. And here we come finally to the point: consumers and investors must believe in the future. This is about behavioral economics.

Behavioral economics needs more attention

In the Japanese case, this necessary condition for a successful expansion of the money supply is not there. The Japanese are not showing enough confidence in the future. This is why any continuation of Abenomics will fail again under current structural conditions. A new policy failure – and the economic outlook for the currently third largest economy in the world will worsen much more.

In this case: at some point – within the forthcoming decade – negative contagion from Japan on other Asian countries and the whole global economy could happen. Consequently, the next Japanese government has to think more about giving real confidence in the economic future. So far, 25 years have gone without positive results. Institutional economics and the lack of behavioral studies explain a lot of this ineffective economic policy.

Economic history tells us that printing money and other liquidity-creating measures never really could cure long-term problems in the real economy.

This is indeed an important experience that academic researchers, decision-makers in central banks/governments and on financial markets should remember more actively.


Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board


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