When 57 countries soon RSVP to a party the U.S. is pressuring them not to attend, it’ll be at least partially Congress’ fault for stubbornly refusing to deal with an economic elephant that wandered into the Capitol about five years ago.
Charter members of the Asian Infrastructure Investment Bank are expected to sign the bank’s Articles of Agreement — a document serving as bylaws and, essentially, a new member sign-up sheet — by the end of June. The bank, first proposed by China in 2013, will be a government-supported financial institution designed to lend cash for infrastructure and development projects across Asia. Member nations will make individual contributions to the bank’s resource pool, helping back those projects while getting in on the ground floor of the new institution.
That’s all well and good, except a similar bank already exists: The Asian Development Bank (in which the U.S. holds the second-highest percentage of voting power, behind Japan) has been around since 1966 and essentially serves the same purpose. And although the two institutions have vowed to play nicely and work together in the region, some see the new bank as yet another move by Beijing to increase its influence on the world stage, with the U.S. making largely impotent attempts to counter its rise.
“The Obama administration, when it comes to China, has no manhood,” says Peter Morici, a professor and economist at the University of Maryland. “China’s getting away with a lot of crap, both economically and security-wise.”
Ironically, the U.S. government helped spark the fire that fueled the creation of China’s new economic tool.
Back in 2010, the Obama administration signed off on a series of reforms to the International Monetary Fund — the global financial union that funded bailouts during the Great Recession and helps foster economic cooperation among its 188 member nations. Within the IMF, the U.S. commands veto power and a whopping 16.74 percent of internal votes.
The proposed tweaks to the IMF would increase the institution’s funding while slightly cutting U.S. power within the body and giving more voice to member nations like Brazil, China, India, Russia and South Africa. Despite the reshuffling, the U.S. would ultimately retain its top-dog status and veto power.
“These reforms will put the IMF’s finances on more stable footing over the long term, help modernize the IMF’s governance structure, and preserve America’s strong influence within the IMF and, more broadly, as a leader of the international financial institutions,” Treasury Secretary Jacob Lew said in March during a hearing before the House Financial Services Committee. “Until these reforms are in place, the United States runs the risk of seeing its pre-eminent role in these institutions eroded, especially as others are establishing new and parallel financial institutions.”
All that was needed on the American front was congressional approval, and the Treasury Department has repeatedly called on lawmakers to pass the reforms to no avail. But of the 188 countries in the IMF, the U.S. is the only G-20 world economy that hasn’t signed on.
“From the U.S. Congress point of view, I think the problem to some extent is still the same: When the world economy tanks and has crises, it’s the U.S. that has to really inject the global liquidity into the system using the U.S. dollar,” says Rajiv Biswas, Asia-Pacific chief economist at IHS Global Insight, an economic analysis firm.
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Indeed, much of the congressional reluctance is rooted in financial concerns. America’s hefty share of the IMF’s voting power comes with the responsibility of being the institution’s primary financial backer, meaning a big chunk of the IMF’s funding boost would need to come from the U.S.
“When Europe runs out of money, many turn to the IMF, whose major source of funding happens to be U.S. citizens,” Rep. Jeb Hensarling, a Texas Republican and chairman of the House Financial Services Committee, said during the March committee hearing. “Thus, the activities of the IMF must be carefully scrutinized by our committee.”
And although America’s veto power applies to big-ticket issues related to the IMF’s governance and resources, the U.S. can’t automatically block individual loans doled out by the institution. So should the reforms pass, it would mean the U.S. — though losing only a fraction of its voting power — would be contributing more cash to the monetary fund while giving China and Russia a greater say in how that money is spent.
“The American taxpayers are the largest shareholder of the IMF, and as such, we should maintain power that is representative of our investments,” Rep. Chuck Fleischmann, a Tennessee Republican and member of the House Appropriations Committee, tells U.S. News in a statement. “Increasing our spending while decreasing our control is simply not an option we should consider.”
So, roughly five years later, the reforms have yet to pass, even becoming a sticking point in last year’s effort to aid Ukraine following Russia’s annexation of the Crimean peninsula. And as well-intentioned as Congress may be, American inaction has led to a result similar to if an actual elephant was stuck in a room for half a decade without any meaningful attention: The U.S. now has quite a mess on its hands.
In an unprecedented move, the IMF has threatened to completely bypass the U.S. and proceed with reforms. Such an end-around would undermine America’s authority in the group far more than would the proposed representation reshuffle.
“The U.S. leadership role would be not so much reduced as abandoned in a self-inflicted wound,” Edwin Truman, former assistant secretary of the U.S. Treasury for international affairs, wrote in a policy brief for the Peterson Institute for International Economics earlier this year. “Respect for the United States in international institutions has been badly damaged, and U.S. policy leverage has declined. The legitimacy and effectiveness of the IMF have been weakened. But this is the world that Washington has chosen by its inaction.”
In the meantime, China — a country whose say in the IMF is now almost comically dwarfed by smaller economies like the U.K., France, Germany and Japan — appears to be fed up with being marginalized and waiting for Congress to make a move.
Enter the AIIB. Through it, China gains not only more influence, but more power through that influence.
“The situation within the IMF and the World Bank is limiting the ability of China to use its increased economic size to put more liquidity into these institutions, which is not good for these institutions. And it’s not good for developing countries because it means the size of the lending capabilities of the world banks is rather restricted,” Biswas says. “I think what it means for developing countries is the true size of the Chinese economy can come to bear in terms of capital funding and development.”
How the new bank will be governed has not been finalized, though a report this week from The Wall Street Journal cited “people close to the institution” as saying China will have veto power over major decisions in the AIIB, possibly similar to America’s veto power in the IMF.
“Initial indications are that China and India will most likely have significant voting rights,” Biswas says. “And the total voting rights of all Asian member countries will be well above 50 percent of the total AIIB voting rights.”
The U.S. hasn’t publicly attacked the formation of the AIIB or its international partners who intend to be part of it, although an unnamed U.S. official in March sparked backlash by telling the Financial Times that the U.K. was developing “a trend toward constant accommodation of China” when the British announced interest in joining the AIIB.
“We clearly haven’t made the decision to join,” White House spokeswoman Jen Psaki said shortly after the U.K. announced its plan to partner with the new bank. “We believe that, while there’s a need to enhance infrastructure around the world, that multilateral institutions should have the highest standards that the international community has built.”
The U.S. has, however, been accused of unsuccessfully pressuring its Western allies to steer clear of the new investment bank. Officials reportedly have raised questions about China’s ability to govern the union in a noncorrupt manner, though American pleas have largely fallen on deaf ears as the AIIB is offering something U.S. pressure can’t really compete with.
“We’re offering the world market access and democracy, and the Chinese are offering the world cash. It’s the old story: Does the girl marry for love or for money?” Morici says. “Nation-states tend to marry for money, unless they feel an existential threat.”
China will also command a leading role in the New Development Bank, an institution similar to the IMF that would be spearheaded by the BRICS countries: Brazil, Russia, India, China and South Africa. Through these new institutions and its investment of $40 billion into a Silk Road infrastructure project, Beijing will be able to increasingly flex its economic prowess without the restrictions placed on it by the IMF and World Bank.
For other countries, joining the AIIB is as much about funding development as it is showing a willingness to play ball with Asia’s adolescent economic titans.
“Many EU nations as well as several developed countries in the Asia-Pacific have joined the AIIB,” Biswas says. “They see this as an important opportunity to build business opportunities for their firms and financial institutions in the fast-growing Asian markets.”
And now, even if Congress spontaneously approves IMF reforms and decides to finally share its toys, it’ll be too little, too late. Beijing went out and got its own toys to play with, and the U.S. and the Western world will have to come to terms with China’s continued emergence and influence.
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Asian Infrastructure Investment Bank: China’s Answer to Western Marginalization originally appeared on usnews.com
