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China has spearheaded a move to launch a multilateral bank - Asian Infrastructure Investment Bank (AIIB) - amidst much US-led Western opposition. The President of the Asian Development Bank (ADB) legitimately concerned that AIIB may compromise the relevance of the institution he heads stated that the AIIB would duplicate ADB's work given that ADB's major investment is in the infrastructure sector. The critical question is if duplication of ADB's work is the only concern of the ADB President?
All multilaterals are engaged in the business of extending loans and technical assistance to promote development with specified objectives and this is where the problem has emerged time and again - the specified objectives are just too many, too ambitious and multilaterals expend too much staff time and resources on claiming that they have achieved all the objectives they set out to.
The three regional development multilateral banks itemized their desired albeit unrealistic objectives as follows during their fund replenishment meetings: (i) ADB identified its development agenda as (a) inclusive growth, (b) environmentally sustainable growth and (c) regional co-operation and integration where core areas include infrastructure, finance sector, education, environment and 8 other sectors; (ii) Inter-American Development Bank's overarching objectives are: (a) reducing poverty, (b) sustainable growth, (c) less developed and small countries, (iv) development of the private sector with sector priorities including social policy for equity and productivity, infrastructure for competitiveness and social welfare, institutions for growth and social welfare and environment protection, competitive regional and global international integration and environment protection, response to climate change and enhance food security; and (iii) African Development Bank identified 18 sectors including infrastructure, transport, energy, water and sanitation.
The ambit of World Bank and International Monetary Fund is not restricted to any one region but encompasses all member countries from the four corners of the world. However, these two routinely engage with regional banks to ensure that there is no duplication. In February 2001, the Presidents of five multilateral development banks (World Bank, the African Development Bank, the ADB, the European Bank of Reconstruction and Development, the Inter-American Development Bank, and the Islamic Development Bank) decided to create the Multilateral Development Bank Financial Management Harmonization Working Group (FMHWG) to address the harmonization of their policies and practices in financial management (diagnostic work, reporting and auditing and analysis of revenue generating entities including sector analysis and financial ratios and covenants) and analysis, which later expanded to include monitoring progress through monitoriable actions and indicators. The objective of this exercise: developing countries spend about $100 million a year on transaction costs to do business with the World Bank, according to an estimate by that institution. Costs grow when each country needs to borrow money from several multilateral institutions for a single development project. A global harmonization effort aims to reduce these transaction costs, which include improving service delivery and adopting standards for procurement, financial management, evaluation procedures, development effectiveness, environment issues and policy work.
So would the AIIB merely duplicate work of the ADB? The answer has to be a resounding no for the simple reason that ADB/IDB/World Bank operating in Asia do not have either the resources or the manpower to meet the continent's entire infrastructure needs. It would also not be remiss to point out that the ADB extends loans for infrastructure development at market rate (LIBOR plus a service fee which accounts for the Bank disbursing less than 85 cents for every dollar disbursed) and if the AIIB decides to compete in the rate charged then the ADB's utility as a lender would be severely compromised.
So was China's decision to set up AIIB purely needs based? The Chinese move has been a long time coming and is premised on its long-standing unfulfilled justifiable demand to have a greater say in the decision-making process of multilaterals. The presidency of the ADB has always been held by a Japanese government nominee, as per an unwritten agreement in which the selection of the head of the World Bank is the prerogative of the United States and that of the International Monetary Fund of the Europeans - prerogatives that were usurped at a time when the world economic order did not include China as an economic powerhouse. It is not clear whether the AIIB would finally compel multilateral institutions to grant the Chinese the power that they have sought for so long (including heading key sectors and the human resource department) or refuse to make any changes that may lead to a gradual erosion of their range of lending products in Asia.
In spite of individual charters and claims to the contrary there is a linkage between international politics and multilateral project/programme loan approvals and subsequent disbursements. It is relevant to recall that after Musharraf's coup in 1999 multilateral assistance all but dried up and experienced a rejuvenation post-9/11 when Pakistan became a frontline state in the fight against terrorism. Thus the Board of Directors of multilaterals representing member countries are heavily influenced by their donors (with the majority of the funds accruing from US-led Western countries as well as Japan, Australia and South Korea). Not surprisingly therefore Japan has not indicated an interest in joining the AIIB; and neither has Australia and South Korea with deep political and economic roots with the West.
Federal Finance Minister Ishaq Dar signed the Memorandum of Understanding with 20 other Asian countries that include India, Qatar, Singapore, Uzbekistan (with Maldives and Bhutan not yet on board in the South Asian region). As always Dar took personal credit for Pakistan being a pioneer member (though at this point in time it is unclear whether the AIIB would be a preferred lender in the region) and sent a press release back home stating: "Pakistan is a pioneer and founding member of the much-needed infrastructure investment bank (however, Pakistan would be a borrower rather than a donor) that would be instrumental, though complementary to other banks (implying that Dar will continue to borrow as much as possible from wherever possible) in addressing the pressing infrastructure needs and development deficits of the region and beyond (though the bank has not indicated yet that there will be programme lending or budgetary support)".
To conclude all Dar can see in the launch of AIIB is more money coming in for Pakistan's infrastructure development however he, as always, fails to take account of two mitigating factors: (i) current Chinese resistance to extend any easy infrastructure loans, in spite of nonbinding MoUs without guarantees and assurances that violate our Public Procurement Regulatory Authority rules; and (ii) without looking at the raison d'etre of the AIIB, which is international politics played within multilaterals in which Pakistan, unlike India and China, has an insignificant role.
(The views expressed in this article are not necessarily those of the newspaper)

Copyright Business Recorder, 2014

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