The Asian Infrastructure Investment Bank (AIIB) is an international financial institution proposed by China. AIIB is regarded as a rival for the IMF, the World Bank and the Asian Development Bank (ADB) which the AIIB says are dominated by developed countries like the USA and Japan. In this Article We will explain everything about AIIB and also why India has joined it and the likely challenges AIIB will face in future.

What is AIIB?

• The ‘AIIB’ is the Asian Infrastructure Investment Bank, a new multilateral development bank first proposed by Xi Jinping in a speech to the Indonesian parliament in October 2013.
• At the time, Xi explained that ‘to support the process of interconnection and integration of the economic development in the region, China has proposed to build the Asia infrastructure investment bank and provide financial support to infrastructure development in developing countries in the region.’
• The bank was formally established on October 24, 2014 in a ceremony in Beijing where 21 founding members signed the bill.

Functions of the AIIB:

The AIIB has broad functions, similar to other MDBs.  Under its Articles of Agreement, the AIIB’s functions include:

(i) Promoting public and private investment in the Asia region for development, in particular for infrastructure and other productive sectors;

(ii) Utilizing the resources at its disposal for financing such development in the region; and

(iii) Encouraging private investment  that contributes to economic development in the Asia region, in particular in infrastructure and other productive sectors, and supplementing private investment when private capital is not available on reasonable terms and conditions

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Why was AIIB is established when the IMF and World Bank are already there?

The Asian Infrastructure Investment bank (AIIB), the new kid in the development lender’s neighbourhood is a both the result and reflection of changing political economic equation of an increasing multi polar world. The necessity and the differential design of AIIB can be enumerated as follows:

#1. Economic

1. To begin with China is sitting on a huge pile of unutilised cash and is looking for markets to invest it to earn from the otherwise idle money. Funding projects through AIIB is a structured way to do it.
2. Investment focus of AIIB will be sector and region specific unlike IMFs and ADBs of the world. AIIB specifically will be an financial enabler for sponsoring infrastructure in Asia
3. With Yuan’s entry in SDR it makes sense to loan Yuan to spread its global availability.
4. Asian infrastructure development needs huge investment (estimated $ 800 Bn annually) which certainly cannot be supplied by IMF alone.
5. The boost to Asian Infrastructure provides a market for Chinese firms with excess capacity in cement and steel lying ideal post slowdown.

#2. Political

1. Unlike IMF, AIIB does not adopts quota system ie decision making power is not proportionate to contribution, thus it is more democratic. Well, err, China and democracy do not go hand in hand, undeniably Chinese interest will be loudest.
2. IMF and ADB funding comes with the vested interest of western world like “free” market economy, forced structural reforms, skewed intellectual property rights etc. AIIB’s loan provides an alternative to circumvent western influence during financial emergency.
3. IMF is increasingly going green with increasing western focus on cleaner and renewable energy (off course with only limited heed to CBDR call), which might not be appealing to nations which are yet to release their quota of developmental pollution. Well, AIIB is here to help.
4. Presents the benevolent face (most possibly farcical) of the otherwise ruthlessly pragmatic and openly aggressive china.

Why has India joined the AIIB?

There are many reasons for it, a few of them being:

1. India is preparing to start a large number of infrastructure projects, but they’re short of money, so they need help from China. Of course they can get money from ADB or WB, but they also need to find a balance between China and USA.
2. It’s a great chance to develop economy links between India and China. These two countries both have huge market, and they also keep a rapid growth of economy.
3. Though AIIB is a Chinese-lead financial institution, India is welcomed to play a important role in it. It’s the reason why the UK, Germany and France all want to be a member of AIIB.
4. The AIIB gives countries like India and China the historical opportunity to enter and reform a bastion where they have been traditionally denied entry.

Difference between AIIB and NDB

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Challenges that AIIB may likely face in Future?   

China will face many challenges in future while implementing the AIIB .The major challenges include:

1. Non Participation of USA and Japan: The United States and Japan remain non-committal to the AIIB, althoughthat is an improvement from their previous firm opposition. The AIIB will probably function well without the participation of the United States and Japan. But the participation of these two countries is important for China since it will help improve the new bank’s credit rating and give it added legitimacy.
2. Security issues: Security will be another major challenge. For example, most of the loans which will be given under AIIB would be to projects in central Asia however there is a challenge of who is going to protect so many projects covering so many countries as this region has some of theworld’s most vulnerable and conflict-ridden territory.
3. Fear of NPA: Many recipient countries in Asia have poor credit, which means many projects may be promising at the beginning but will be difficult to pursue. Agreement and consensus are reached at the top levels of government, but implementation is at the local level. Local governments often do not care about the central government’s policies and do not always cooperate with foreign investors.

References:

• The Economist
• The Diplomat
• Corbettreport