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Why Australia should join the Asian Infrastructure Investment Bank

Why Australia should join the Asian Infrastructure Investment Bank

At the upcoming APEC Summit in Beijing, China is hoping to announce a formal MoU for the Asian Infrastructure Investment Bank (AIIB). Offers to join the Bank have been sent around the region, including to Australia. So should Australia sign on?

Little is publicly known about how the Bank would work. According to reports, the initial capital for the bank will be US$50 billion, financed by members and by issuing bonds. China's finance minister Lou Jiwei has stated it will be 'more a commercial entity than an inter-government entity'.

Rather than seeing this as a threat to the Asian Development Bank (ADB) and World Bank, as many have suggested, the other option is to look at it as an opportunity.

As I've highlighted previously, China is involved in a growing web of development banks (including the ADB and World Bank). Undoubtedly, the AIIB — alongside the BRICS-led New Development Bank — is an attempt by China to have more of a say in the governance and operations of global financing institutions. China is frustrated with the slow pace of the World Bank and IMF reforms and wary of the Japanese-dominated ADB.

Australia could be cautious and wait to see how the AIIB develops. But as we know from the history of the Bretton Woods institutions, it is easier to shape these institutions by getting involved early. They prove challenging to change down the track. It is natural for the country committing the most dollars to want to have the most influence. China's desire in this regard shouldn't be seen as inherently problematic. But by signing up to the AIIB now, Australia has greater opportunity to influence its governance and operation. Those countries that sign the MoU at APEC will get to be part of the governing structure, and thus have voting rights. [fold]

The idea for the Bank is a good one. The region has immense infrastructure needs. A recent ADB study indicates that US$8 trillion must be invested between 2010-2020 to meet infrastructure needs in developing countries in Asia. China has money.

The Bank will initially be focused in Asia, but may later extend into the Pacific islands region. Australia has an interest in ensuring infrastructure projects are undertaken wisely and that external debt doesn't become a problem for developing countries. Funding infrastructure in Asia also fits well with the Australian Government's economic diplomacy agenda.

There are obviously some big questions involved in signing up to the AIIB now when so little is known about it. Why should Australia support an institution that could undermine existing ones? How much can it really influence China anyway? These are legitimate concerns, but China will proceed with the Bank whether or not Australia and other Western countries join. Our experience with China's development financing activities tells us that we have more chance of influence by engaging than by not.

China is involved in large infrastructure projects already, and it faces a backlash over its risk assessment, labour rights, and the environmental and social impact of some projects. A regional bank — even one that is China-led — provides a better framework for decisions about projects and financing, particularly those with cross-border implications. Chinese companies undertaking AIIB-funded projects will likely operate under stronger oversight than in China Eximbank-funded projects.

The more countries that sign on, the less China-dominated the bank will be, and thus the greater the ability to establish principles and practices that will lead to sustainable development outcomes. In this regard it is promising that the AIIB working group set up by China is headed by Jin Liqun, former vice president of the ADB.

Signing an MoU is just the beginning. Countries can work with China to set up the Bank in a way that blends some of the efficiency of Chinese lending with the good governance safeguards of the Bretton Woods institutions. Australia can and should play a leading role in supporting infrastructure development in Asia. Joining now will give Australia greater say in the role that the Bank comes to play in the region.

Photo by Flickr user arfldani nugraha.

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