Not to be confused with the Asia Development Bank (ADB), or the World Bank, China has proposed a new multilateral institution to help fill the yawning gap for capital in Asia. The ADB itself estimates that $8 trillion dollars is needed (PDF) to fund infrastructure in Asia over the decade. Australia’s economic growth, in just about every sector of our economy, is highly aligned with seeing this challenge through.
The supply and demand equation involved with capital allocation of this scale is inherently complex the most uncertainty exist on the supply side. Even if such sums of money could be found to invest, the real questions are whether and how capital might be allocated to economically productive causes and projects? The potential for waste and corruption abounds, and markets can only absorb so much new money before opportunities dry up and capital allocation becomes inefficient. It’s about more than just finding money—it’s about putting that money to good use.
Solving this problem requires leadership on many levels and open communication and coordination between institutions, businesses and governments. The free hand of the market will address some (perhaps most) but not all opportunities. For many decades governments have acknowledged that the strict commercial operation of capital in developing economies won’t meet society’s collective needs or indeed spark economic growth—hence the creation of such institutions as the World Bank and the ADB.
In this context China has proposed the AIIB. To resolve some of the uncertainty around the AIIB, let’s consider its power and purpose. These dimensions can be examined through the lenses of resources, governance and intent.
Firstly to resources. To estimate the financial influence of the AIIB we can compare the balance sheets, (or equivalents) of similar organisations at their last reporting date. To enable comparison I’ve included debt and standardised on US dollars. Consider, for example, sovereign wealth funds in our region. Australia’s own Future Fund manages around $85 billion, Singapore’s Temasek Holdings manages around $417 billion and the China Investment Corporation (CIC) manages $650 billion. The regional institution most similar to the AIIB, the ADB, manages around $115 billion. Finally, and perhaps somewhat provocatively, the NYSE-listed Berkshire Hathaway Inc. (of Warren Buffet fame), which manages a suite of businesses and investments, has a balance sheet of $526 billion.
Now recall that the AIIB is expected to raise $50 billion in capital, and media reports speculate that the figure could grow to $100 billion. In the context of the aggregate amount of capital already flowing around our region the figure seems modest. At face value the AIIB doesn’t appear set to dominate capital flows—at least not yet.
Secondly to governance. There’s some ambiguity in this area and China has proposed a multilateral framework. After various iterations of socialising the AIIB concept, China has arrived at a multi-layered system of political representation, director level oversight and management and administration. Of course, the greater the complexity introduced to please stakeholders, the more ambiguity exists in how the organisation sets goals, resolves conflict and takes decisions. But while a multilateral governance framework restricts any one party from controlling the institution, Chinese influence should be an expected feature in the AIIB.
Thirdly to strategic intent. There’s definite ambiguity in this area. If the AIIB doesn’t have excessive financial resources and is a true multilateral organisation, albeit with Chinese influence, that might serve to constrain and also expose any unilateral or nationalistic motives harboured by any single participant. And in time we might discover the true answer as to why a new model of capital allocation is proposed for our region and whether it will prove effective. As the late President Reagan would have said, ‘trust but verify’.
The lesson here is that if the underlying issue is really about trust, then all governments engaged in debate around the AIIB need to do better—their citizens depend on economic growth throughout our world and the stabilising effect that has on security and harmony. Perhaps the AIIB can serve as a model and a test-bed for economic engagement, where there are public consequences for poor behaviour and strong incentives for better regional cooperation.
For Australia, it’s for the Government to explore these issues and—with the support of its agencies—come to a judgement on how to proceed. It certainly stands as an issue in which nobody wants to be on the wrong side of history.
Sean Costello is a visiting fellow at ASPI. Image courtesy Flickr user 401(K) 2012.