International Economic Institution’s: ADB, BRICS Bank, AIIB

Asian Development Bank

  • The Asian Development Bank was conceived in the early 1960s as a financial institution that would be Asian in character and foster economic growth and cooperation in one of the poorest region on the Earth.
  • A resolution passed at the first Ministerial Conference on Asian Economic Cooperation held by the United Nations Economic Commission for Asia and the Far East in 1963 set that vision on the way to becoming reality.
  • The Philippines capital of Manila was chosen to host the new institution, which opened on 19 December 1966, with 31 members that came together to serve a predominantly agricultural region. Takeshi Watanabe was ADB’s first President.

Role and Aim of ADB

  • The ADB aims for an Asia and Pacific free from poverty. Its mission is to help developing member countries reduce poverty and improve the quality of life of their people. Despite the region’s many successes, it remains home to a large share of the world’s poor: 330 million living on less than $1.90 a day and 1.2 billion on less than $3.10 a day.
  • ADB in partnership with member governments, independent specialists and other financial institutions is focused on delivering projects in developing member countries that create economic and development impact.
  •  As a multilateral development finance institution, ADB provides loans; technical assistance and grants. ADB also provides development assistance, policy advisory and financial resources through co-financing operations.
  • ADB operations are designed to support the three complementary agendas of inclusive economic growth, environmentally sustainable growth and regional integration.
  • ADB employs its resources in the core areas of infrastructure, environment, regional cooperation and integration, education and financial sector development.

New Development Bank

At the fourth BRICS Summit in New Delhi (2012), the leaders of Brazil, Russia, India, China and South Africa first proposed the possibility of setting up a New Development Bank to mobilize resources of infrastructure and sustainable projects in BRICS and other emerging countries and developing countries.

At the fifth BRICS Summit in Durban (2013), the leaders of BRICS countries agreed on establishing NDB. It was also decided that the initial contribution to the bank should be used to finance infrastructure in BRICS.

At the sixth BRICS Summit in Fortaleza (2014), the leaders of BRICS signed the agreement to establish NDB. In the Fortaleza declaration, the leaders stressed that the NDB would strengthen cooperation among BRICS and will supplement the efforts of other global multilateral institutions like World Bank for global development and collectively work for achieving the goal of strong, sustainable and balanced growth.

The Fortaleza Declaration further said:

“The Bank shall have an initial authorized capital of US$ 100 billion. The initial subscribed capital shall be US$ 50 billion, equally shared among founding members. The first chair of the Board of Governors shall be from Russia. The first chair of the Board of Directors shall be from Brazil. The first President of the Bank shall be from India. The headquarters of the Bank shall be located in Shanghai. The New Development Bank Africa Regional Centre shall be established in South Africa concurrently with the headquarters.”

Need and Significance of New Development Bank

  • The creation of NDB was felt because of the discriminatory attitude of the West towards the developing countries. The BRICS member countries accounting for almost half of the world’s population and about one-fifth of global economic output have only 11 per cent of the votes at international financial institution like the IMF. Both the WB and the IMF are based on the weighted voting system, which provides the rich countries with a big say in the management. There are informal arrangements whereby the American is always at the top in the WB; while the European is in top position in IMF. In those monetary institutions, the developing countries don’t have enough voting rights.
  • The expectation is that the NDB with its total capital of $100 billion would meet short term liquidity requirement of the member countries. An effort has been made to avoid China’s dominance on the bank; for which India is made the president of the bank for the first six years and after this Brazil and Russia would have turns with five years each.
  • The New Development Bank is not just about setting up yet another
    bank. It represents a new political will among new and emerging powers
    in the world to challenge the old architecture of growth.
  • Over the last 20 years, it has been obvious that the growth impetus has
    shifted to Asia and also Africa. The World Bank and the IMF, dominated by the US and Europe, cannot function with limited voting powers for the new tigers. BRICS seeks to challenge their power structure.
  • The setting up of the New Development Bank and the $100 billion currency stabilization fund will signal the emergence of new
    international currencies to challenge the US dollar’s hegemony.
  • In the initial years, the Chinese yuan will get internationalized first, followed by the Indian rupee after about a decade of strong growth in India’s economic and trade shares. Even though the dollar will continue to remain the biggest international currency for the foreseeable future, its share will start falling as the yuan rises. The world will have the dollar, euro, the yen and the yuan as it main currencies over the next decade. The dollar will not remain the only option for the settlement of global trades, especially when intra-Asian, African and Latin American shares of global trade start picking up in the decades ahead.

Asian Infrastructure and Investment Bank
Asian Infrastructure and Investment Bank
is a new multilateral financial institution founded to bring countries together to address the need of deficient infrastructure across Asia. AIIB is a brain child of China. The prime aim of the AIIB is infrastructure development. By establishing interconnectivity across the Asia through advancement in the construction of infrastructure and other productive services, the AIIB can stimulate growth and economic development in the Asian Region.

Focus Areas of AIIB

The AIIB And the China

China has been growing rapidly for a long time, but an important shift in its growth pattern occurred at the time of Global Financial Crisis of 2008.

During the years preceding GFC, China’s GDP grew at an average rate of 11 percent. The Current Account Surplus was 10 percent of the GDP during all these years. In the six years since the GFC, the external surplus has fallen sharply into the range of 2-3 percent of the GDP.

China’s growth rate is no doubt impressive as compared to the Rest of the World, but has lost its upward trajectory and has fallen to a new normal of 7-8 percent post-GFC. The reason for fall in China’s growth are; overdependence on exports which lost its momentum post GFC, falling productivity of Chinese investment (for example; if earlier, an investment of 20 percent by Chinese firm produced an 1 percent increase in GDP, but now an investment of 20 percent by Chinese firm only produces 0.7 percent increase in GDP).

China’s response to these growth changes are partly internal and partly external. On the external side, China is coming up with multilateral investment institutions like AIIB and NDB to finance its falling growth. The plan is to develop infrastructure in and out of China which has the potential to create more jobs, increase the productivity of investment and increase exports of China. The AIIB and NDB are the institutions that will finance China’s new infrastructure projects.

AIIB and Emerging Economies

The AIIB is largely welcomed by China’s Asian neighbours as they believe it has the potential to integrate Asia further through the construction of roads, highways, pipelines and railways.

The allies of China in Asia are also seeing AIIB and other Chinese initiatives as a set back to the United States. They believe that the US has for long dominated the Asia-Pacific and now it’s time for the US to recede its influence from Asia-Pacific. They see the rise of China as a game changer in the region. The Chinese allies follow the erstwhile dream of ‘Asia for Asians’.

Although, the US has been pressurizing its key allies in Asia, not to join the AIIB, but had received a major setback when its key allies like South Korea, Australia, Japan and Even the United Kingdom joined the initiative.

The most important reason of many Emerging Countries joining the AIIB is their long-term dissatisfaction with the working of the Western Dominated Multilateral Institutions like World Bank and the IMF.

The EMEs believes that the governance structure of the existing international financial institutions was biased towards the Western Countries and doesn’t take care of their needs. They further argue that the existing structure is evolving too slowly and doesn’t capture the realities of the 21st century in which the main drivers of global growth and investment are Emerging economies like China, India, Turkey, Indonesia, Brazil and Nigeria etc.

Their arguments get weight when one sees how slowly reforms are being done in IMF. The US CONGRESS still holds the veto power in the functioning of the IMF.

The EMEs frustration with the World Bank and IMF is not just about the governance structure and the United States weight in them, but also comes from the fact that the international institution has long ignored the demands of EMEs regarding the construction of infrastructure in their regions. Over the years, the key recommendations of the EMEs regarding growth and development has been rejected by the World Bank and IMF.

The AIIB and the NDB, therefore, gives much-needed leverage to the EMEs to break the dominance of the US and Europe dominated International Institutions.

 

By
Himanshu Arora
Doctoral Scholar in Economics & Senior Research Fellow, CDS, Jawaharlal Nehru University

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