China's AIIB challenge

The rise of China as a major economic power was bound to change the global financial scene. Finding not enough clout in the Bretton Woods institutions proportionate to its present economic strength, China launched the establishment of a new international development bank known as the Asian Infrastructure Investment Bank (AIIB) in Beijing last year. To start with, 26 countries have been included as AIIB founder members, mostly from Asia and the Middle East, until early this year. On 17th March, 2015, the world witnessed an unexpected coup d'etat when France, Germany and Italy said that they would also follow Britain's lead and join the AIIB. A joint statement by the foreign and finance ministers of these countries promised to work with the new institution and ensure that it "follows the best standards and practices in terms of governance, safeguards, debt and procurement policies". A spokeswoman for the executive European Commission also endorsed member states' participation in the AIIB as a way of tackling global investment needs and as an opportunity for the EU companies while Chinese foreign ministry repeated that the new bank would be "open, inclusive, transparent and responsible."
As expected, the US was not happy with this historic event. In fact, in some circles, European allies' move to participate in Beijing's flagship project was seen as a diplomatic blow to the US, reflecting European eagerness to partner with China's fast growing economy - the world's second largest. The move was also interpreted as contributing to the spread of China's "soft power" in the EU region, possibly at the expense of the role of the United States. Washington, nonetheless, has questioned whether the AIIB would have high standards of governance and environmental and social safeguards. The US Assistant Secretary of State for East Asian and Pacific Affairs, Daniel Russel, reiterated to seek unmistakable evidence that the new Bank's starting point was the high watermark of what other multilateral development banks have done in terms of governance. The EU parliamentary president, Martin Schulz, also added that he welcomed the four European nations joining the AIIB but the Bank must conform to internationally accepted standards.
Whatever the US or Chinese authorities have to say, the background of the new development is clear. China and other emerging economic powers have been asking for a long time to have more say in global economic governance but the US response has not been sufficiently encouraging. Not only are the US quota and its voting rights in the multilateral financial institutions are overwhelming, the World Bank is also traditionally run by a US nominee. Moreover, Washington has also the largest influence at the IMF. Other countries, despite their reservations, were forced to accept the situation but the times have changed and there is a growing challenge to the US clout in the global economic order. Recognising the realities of a changed world, Britain had brokered a fresh adjustment in shares and voting rights in the IMF in 2010, which the European countries were quick to ratify but the US Congress has held up this reforms agenda and prevented it from taking effect. However, the US administration now appears to be realizing the gravity of the challenge. As late as on 17th March, 2015, Treasury Secretary, Jack Lew warned the Republicans - dominated Congress that continued failure to approve the IMF quota and governance reforms was causing other countries, including some of our allies, to question our commitment to reforms at the IMF and other multilateral institutions and pushing emerging market powers to create their own parallel multilateral financial institutions. IMF reforms, Lew argued, would "help convince emerging economies to remain anchored in the multilateral system that the US helped design and continue to lead."
Obviously, the US efforts to preserve or refashion the old order would appear to be too little and too late. Once the gauntlet has been thrown by China, it would be difficult for the US to turn the tide and keep a lid on the new development or stop other countries including its close allies from joining the AIIB. The US authorities could, in fact, see its influence slipping in the global economic and monetary order over time if the emerging market economies continue to march on the path of development at the present speed and do not need to borrow from the IMF, the World Bank, etc. The remarks of US authorities about the AIIB are flimsy and could easily be ignored. On the other hand, the establishment of the AIIB would, of course, be a major development for developing countries like Pakistan. Although their access to the resources of the AIIB would depend on the size of capital of the Bank and the conditions likely to be attached to its borrowings under various facilities to be made available, it would give the developing countries another option, possibly a better option, to borrow from.