The ongoing kerfluffle over the new Chinese-sponsored Asian Infrastructure Development Bank — defined by The Economist as a “World Bank” for Asia — is one of those issues that has drawn great attention from the international economic media but is entirely ignored by the average person in the United States.
Are we correct to be so blase? Or might this new institution someday affect businesses and farms in Minnesota?
The basic issue is that China is trying to set up a new international bank, somewhat like the World Bank or the Manila-based Asian Development Bank, that will fund physical construction, public and private, in Asia. Our country opposes this initiative but is failing spectacularly at convincing historic allies, such as the United Kingdom, France and Germany, to stay out.
At this juncture, the best advice for the Obama administration and Congress comes from Aesop (and my mother): “Don’t be a dog in the manger.” Or take Kenny Rogers’ sage admonition that “you need to know when to hold ’em, know when to fold ’em;” in this case, for the U.S.: “fold ’em.”
To understand the issue, we have to go back 71 years.
As it became clear that the Allies would win World War II, leaders understood that in rebuilding the devastated global economy after the war it was vital to avoid the errors made after World War I. So they held a conference at Bretton Woods, N.H., in June 1944 to hash out the issues.
Three were key: First, the world needed a stable and efficient system for international financial flows. Second, we needed a global system that would facilitate international trade and avoid the beggar-thy-neighbor trade restriction of the early 1930s that had deepened the Great Depression. Finally, reconstructing the vast physical war destruction would require enormous amounts of capital. But, especially in the light of the episodic defaults on World War I debts that had occurred in the 1920s and 1930s, it seemed clear that existing private capital markets and national treasuries were not structured to meet the task.
The solutions were the International Monetary Fund to facilitate a system of fixed exchange rate, an International Trade Organization and an International Bank for Reconstruction and Development.
The system the IMF was established to run died in the early 1970s, but the institution has continued in the role of an international lender of last resort. The ITO never got off the ground because the U.S. Congress refused to ratify our participation in it. However, over time, a much weaker General Agreement on Tariffs and Trade morphed into the World Trade Organization, about what had been intended in the ITO. The IBRD, better known as the World Bank, was a great success at financing post-war reconstruction through 1960, with a more checkered history at development since then.
The model of this bank was that it was multi-national, with member nations all chipping in some money, but with most funds obtained by selling bonds in private capital markets. These bonds would be safer than individual nation’s World War I bonds because they would be the joint liability of all member nations and not just one.
Initially, most loans were for infrastructure such as power plants, port facilities, roads and bridges, dams, irrigation, mines and industrial projects like steel mills or refineries. Later health and education initiatives gained importance.
Now to the present. China’s new initiative follows this model, a multinational bank into which nations that choose to participate all put up some ante. The bank will then borrow in international capital markets and lend to governments and businesses in Asia to fund new infrastructure.
There are two implicit promises. First, the new bank will not be dominated by the United States, Europe and Japan the way the World Bank and IMF continue to be. Second, the new bank won’t impose environmental, good governance and human rights conditions on borrowers the way the World Bank now does.
This end run around existing institutions is one reason for U.S. opposition. The other is a generalized U.S. policy of doing whatever it can to slow China’s inexorable emergence as a world or regional Asian power. It is joined by Japan in this but, it turns out, not by Europeans.
This is where the moral of the story, via Aesop, comes in. The best way to have avoided this would have been to support a long-overdue rebalancing of shares and voting rights in the IMF and World Bank that has been discussed for two decades. A concrete agreement has been on the table for more than five years. Like Aesop’s fabled dog that could not eat hay but would not let cows eat it either, recalcitrant Republicans who oppose multi-lateral institutions in general have blocked U.S. ratification of this needed change at the IMF and World Bank. This has been resented by nearly every other nation, including many close allies, setting the stage for Chinese action. The moral: Do not begrudge others what you cannot enjoy yourself.
If the GOP still followed internationalists like ex-senator Richard Lugar, this might still be ratified, but it really is too late to affect the new Chinese-led Asian bank.
Given that all our key allies except Japan have spurned us, we should now follow Rogers’ advice and “know when to fold em.” The bank is going to get off the ground, and we have a better chance of achieving our objectives inside the tent than out.
That brings us to the second question. Why should Minnesotans care? Building port facilities in Bangladesh or roads in Myanmar isn’t going to affect the average farm machinery dealer in Fergus Falls or real estate agent in Roseville, is it?
No, not directly and certainly not immediately. But the economic growth of our state over the past 25 years, particularly in farming, mining and forest products, has been driven far more by economic growth in Asia than most people realize. If durable Chinese-paced growth were to spread across South Asia, from Pakistan to Vietnam, markets for Minnesota’s primary products would grow sharply and higher-tech manufactures such as medical technology also would benefit.
A resurgent China may seem a threat to many, but in the short- and long-run we and the rest of the world are much better off with an Asia that is growing in prosperity than one that remains mired in dire poverty.
The degree to which the new infrastructure bank will spur such growth is an open question. I personally think it is being oversold. But other observers I deeply respect, including Financial Times pundit Martin Wolf, in a typically lucid March 25 column, argue the bank can play a vital role.
In “The Gambler,” Rogers captured the essence of international economic and political diplomacy in his lyrical observation that, “the secret to surviving is knowing what to throw away and knowing what to keep.”
At this juncture, from the point of view of Minnesota as well as our nation and the world, the expected benefit-to-cost ratio of U.S. participation versus continued opposition is such that we need to toss our truculent approach and maintain some degree of influence in the new bank.