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Order from Chaos

Welcome the new AIIB

One of the more interesting and fun assignments I had while working in the research department of the World Bank was to travel around India and interview local government officials about their experiences with the bank. The universal view was that the technical quality of the staff was excellent, but that the usefulness was undermined because the institution was slow and bureaucratic. Whether it was studies or projects, they materialized too slowly to be really helpful. “Mr. Dollar, the combination of our bureaucracy and your bureaucracy is deadly,” was the pithy summary of an official in Lucknow who had 20-plus years of experience working with the World Bank.

In thinking about how to react to China’s initiative to start the Asian Infrastructure Investment Bank (AIIB), we should start from the premise that the existing multilateral development banks are not perfect. They have evolved over time, and much of that evolution is positive, developing environmental, resettlement, and anti-corruption safeguards that are important for ensuring that projects have net benefits and are sustainable. However, the fact that the development banks are constantly reviewing and revising these policies is an indication that they are not perfect. In recent years, developing countries have turned away from using the multilateral banks to finance infrastructure projects because they have found the banks overly risk-averse and bureaucratic in the implementation of their safeguard policies. I think that one reason that there has been such a positive response to the AIIB among developing countries is a hope that the new bank can be more efficient than the existing ones.

The United States has a legitimate interest in ensuring that the new bank does not undermine an international system that has in fact served developing countries very well. But diplomatically, it was a mistake to suggest that countries should hold off on participation until assured that the new bank would have good safeguard policies. The new bank is more likely to have good safeguard policies, as a broad range of developing and developed nations have decided to participate; nearly all developing nations of Asia have joined, as well as countries like Australia, South Korea, and the U.K. 

I would also argue, based on experience, that evaluation and transparency are more important than the policies on paper. It is important to have honest evaluation of the projects financed by the new bank, and this is best done with some kind of evaluation unit that is independent of management and reports directly to the board of directors (the country shareholders). Those evaluations should be made public, as should project documents such as environmental and social assessments.

There is some risk that the creation of new institutions such as the AIIB will take us towards a world of competing institutions and economic blocs. But it is more likely that the AIIB will have a lot of similarity with the existing development banks, will co-finance projects and cooperate with them, and perhaps even stimulate positive reform that makes the whole development bank system more effective. We should welcome China taking this initiative and help it succeed.

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