Bangladesh joins the proposed Chinese sponsored Infrastructure Bank

Bangladesh joins the proposed Chinese sponsored Infrastructure Bank

The idea of the Chinese President came to fruition 24th October as 21Asian countries have signed in Beijing the Memorandum of Understanding as founding members to join the Asian Infrastructure Investment Bank (AIIB)

The countries that have joined the Bank are Bangladesh, Brunei, Cambodia, China, India, Kazakhstan, Kuwait, Laos, Malaysia, Mongolia, Myanmar, Nepal, Oman, Pakistan, the Philippines, Qatar, Singapore, Sri Lanka, Thailand, Uzbekistan and Vietnam. Chinese President Xi Jinping reportedly met the representatives of the 21 countries after the signing ceremony. State Minister of Finance and Planning represented Bangladesh.

The decision of Bangladesh to join the bank has been prudent one because the country needs good infrastructure-roads, bridges, railways, ports within the country to attract foreign investment . We all know how World Bank had let down Bangladesh in constructing the Padma Bridge (Bangladesh now is constructing the bridge with its own funds) and in future Bangladesh can ask the AIIB to provide funds for bridges and other infrastructure projects.

This new bank can help fill the vast unmet demand for productive economic infrastructure, especially in the emerging economies of Asia. In 2011, the OECD estimated that global infrastructure requirements over the next two decades will cost around US$50 trillion. Biswa N. Bhattacharyay, of the Asian Development Bank (ADB), estimates that developing Asian economies will need to invest US$8 trillion from 2010 to 2020, just to keep pace with expected infrastructure needs.

The Bank’s authorised capital is $100 billion while the initial subscribed capital is expected to be around $50 billion. The paid-in ratio will be 20 percent. It is reported that China will not seek to be the single majority shareholder and will not necessarily subscribe 50 percent of the capital. Moreover, China’s share ratio will be gradually diluted with more members joining AIIB in the future.

As agreed, Beijing will be the host city for its headquarters. The proposed head of the bank will be Jin Liqun, former head of the China’s sovereign wealth fund.

It is expected that the Prospective Founding Members will complete the signing and ratification of the Articles of Agreement (AOA) in 2015 and the Bank will be formally established by the end of 2015.

Why did China sponsor the new Bank?

China has not been satisfied with its current standing within the global financial institutions. The policies of World Bank, headed by a US national and IMF by a European, are largely controlled by the US and Western countries. For example, between 1993 and 2000, the United States was able to sustain a coalition of G-7countries that voted against World Bank lending to Iran.

As regards the Asian Development Bank (ADB), the policies are largely influenced by the US and Japan.

China – the world’s largest economy by some measures – has less voting power in the IMF and World Bank than Belgium, the Netherlands and Luxemburg. Reforms in global financial institutions were suggested in recent years providing due recognition of the contribution of China and other middle-income countries to the global economy and hence their due place in the decision-making process in the IMF and the World Bank. The reforms have not been undertaken as yet.

As regards loans of from the World Bank , statistics show that of the 66 countries receiving money from the World Bank for more than 25 years (most for more than 30 years), 37 are no better off today than they were before they received such loans. Of these 37 countries, most (20 in all) actually are poorer today than they were before receiving aid from the Bank.

Economists say that countries that have prospered over the past 30 years did so by freeing up the productive forces of their economies. The best examples are Hong Kong and Singapore. Even though a country like Singapore received a small amount of money from the World Bank, the evidence shows that what most effected economic growth was not World Bank aid, but economic freedom. Malaysia got out of the financial crisis in 1997 by rejecting the IMF’s advice.

As regards ADB, its strategy 2020, lists infrastructure development as just one of 10 strategic priorities together with softer initiatives such as climate change, social protection, governance, environment and gender. Through the rigorous implementation of environmental safeguards, ADB seeks to ensure the environmental sustainability of projects. This has become an impediment for many countries to receive loan from ADB.

As a result, many developing countries in Asia are not satisfied with conditional loans from the IMF and World Bank and China has realised that there is a need for a new bank for Asian nations.

Given the above background, in October 2013, just before the APEC meeting in Bali, Chinese President Xi Jinping announced the creation of the Asian Infrastructure Investment Bank (AIIB).

Opposed by the US:

The US is against the Chinese initiative to set up this Bank and following persistent U.S. lobbying against the AIIB, , a number of major Asian Pacific nations including Australia, South Korea, Japan and Indonesia did not sign as founding members to China’s AIIB on 24th October.. Australia says that the functions of the Bank are not transparen. No European countries have reportedly joined at this time.

China’s AIIB is seen as a challenge to the World Bank and Asian Development Bank, both of which count Washington and its allies as their biggest financial backers. Takehiko Nakao, the president of the ADB, reportedly said the AIIB should function in line with international governance, labor and environmental standards. He acknowledged there was an overlap of the AIIB’s role with that of the ADB.

China is keen to extend its influence and soft power in the region. So the creation of the AIIB is not just another front in the brewing geopolitical tension between China and the United States and its allies. This time, it’s both ideological — a battle between competing development models.

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