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The Asian Infrastructure Investment Bank (AIIB), a Chinese-founded multilateral development bank, has announced a new office in the United Arab Emirates (U.A.E.). This office is the institution’s first office located outside China, seemingly revealing its global expansion. So, what are multilateral development banks? What is the AIIB? And why does this new office matter?
So, What Is a Multilateral Development Bank?
Multilateral development banks (MDBs) are international financial institutions that provide loans and funding for development projects in low- and middle-income countries. These banks include the World Bank, the Asian Development Bank, and the African Development Bank.
The World Bank is one of the largest sources of development loans for developing countries. It was founded in 1944 to provide loans for post-war reconstruction efforts and has since evolved to fund over 12,000 development projects globally. Now, with 189 member nations, the World Bank defines itself within its “commitment to reducing poverty, increasing shared prosperity, and promoting sustainable development.” As the largest development bank in the world, the World Bank is a good point of comparison in examining the establishment and expansion of the AIIB.
The U.S. and China: Two Superpowers
Currently, within the World Bank, the United States holds over 16% of the voting power, followed by Japan with nearly 8%, and China with almost 6%. Since the World Bank requires an 85% majority to vote to pass proposed motions, this means that the U.S. has a veto within the Bank, as a vote against would allow for a maximum of an 84% majority vote.
U.S. involvement and dominance within such institutions have been a key feature of their foreign policy and leadership of the global liberal international order. Having leverage over its World Bank and overseas investments has allowed the U.S. to sustain significant influence over the global development agenda. With its control over funding, the U.S. Congress has thus been able to set priority agendas and push in the direction of MDB, particularly World Bank policies.
China has also been involved in the World Bank, but in a limited fashion compared to the U.S. China was a founding member of the World Bank in 1944 but did not begin its partnership until 1980 when they could benefit. It quickly became the third largest shareholder of the Bank in 2010. The Chinese state received support to work through development reforms and projects and accepted funding from the International Finance Corporation (IFC), a World Bank branch dedicated to providing funding for private sectors.
China’s partnership with the World Bank has been a key feature in its integration into the “neoliberal global regime,” characterized by the opening up of domestic markets, foreign competition, deregulation of markets, and privatization. Although China has abstained from aligning its economic policy with neoliberalism, the reforms undertaken to kickstart China into the multilateral system of international institutions have allowed it to establish its own “alternative development model.”
Establishing the Asian Infrastructure Investment Bank
The AIIB was founded by the Chinese state in 2016 as a multilateral development bank focused on Asian development. It states that AIIB is committed to the “Infrastructure for Tomorrow (i4t),” a principle that centralizes sustainability in funding a country’s facilities and services.
U.S. dominance over existing MDBs, particularly its veto power within the World Bank, can be seen as a counterpart to China’s financial principle. With its veto power, holding 27% of the voting shares, China can shape the priority agenda, influence the decision-making process, and determine the asset distribution of the AIIB. The AIIB can tackle China’s concerns with its internal weight and influence in other financial institutions by persisting for a higher emphasis on infrastructure investment.
Additionally, the AIIB has been characterized by a commitment to governmental non-interference, reflecting China’s initial concerns with the World Bank that its loan conditionalities were a weakness. The AIIB’s Operational Policy on Financing highlights that it will not “interfere in the political affairs of any member” and only make relevant the “economic considerations” of the state. Thus, democratization, good governance, and market reforms are not factors to consider. Nor are conditions for state development loans, in order to make the AIIB arguably more appealing to borrowing countries, for whom a one-size-fits-all standard is difficult to impose – usually, developing countries.
First Overseas Office in the U.A.E.: What Are the Implications?
Establishing the first out-of-country AIIB office reveals China’s goal of globally expanding the institution. With 106 members, excluding the U.S., the AIIB is increasingly presenting itself as a competitor to the World Bank. Now having more options and opportunities for development loans and credit, the “international development finance regime” is more competitive. Borrowing countries are less tied to the World Bank, resulting in the Bank improving its lending practices. Shortly after the AIIB began its operations, the World Bank issued a reform granting more autonomy to borrowing states and their loan conditions based on “national environmental and social systems” than standard World Bank frameworks.
The decision to open the first overseas office in the U.A.E. can also be seen as a strategic move in China’s expansion of the AIIB. The AIIB has stated that Abu Dhabi, the nation’s capital, has been selected as “the preferred location” due to being “one of the region’s fastest-growing economies” and promoting sustainability. The U.A.E. as a hub and epicenter of development in the Middle East is key to the AIIB’s goal of infrastructure development through regional cooperation.
However, as the U.S. continues to abstain from membership in the AIIB, the competing interests and institutions of the two global superpowers may jeopardize the scale of the World Bank. The AIIB, with its founding principle of non-interference, commitment to infrastructure investment, and lax loan conditions, may influence borrowers to partner with it over alternative development banks. Conditions tied to democratization and neoliberal market reforms may no longer be an agenda to be intervened in by the U.S.
The expansion, tied to China, may mean that the geopolitical atmosphere within Asia will change as more of its neighboring nations become more reliant on Chinese-issued loans and credit. Their reliance on China through financial means implies that the country’s currency, the renminbi (RMB), may become more powerful. Potentially, their currency could threaten the current position the U.S. holds as an economic hegemon within international financial institutions and global financial markets.
Edited by Light Naing
