The NDB and AIIB: A New Chapter for Multilateral Development Banks?

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by Anna Lee

aiib-and-adb-leadersThe sun has barely risen on 2016, yet there is a whirlwind of new activity in the world of multilateral development banks (MDBs). The Asian Infrastructure Investment Bank (AIIB) is open for business and is expected to begin projects later this year. Meanwhile, the BRICS (Brazil, Russia, India, China and South Africa) made their first contributions worth $750 million to their New Development Bank (NDB), which launched in July 2015. The BRICS are optimistic about the future of the NDB and AIIB, but parts of the world remain ambivalent about their arrival.

The World Bank, International Monetary Fund (IMF) and Asian Development Bank (ADB) released statements welcoming these new institutions, but Western stakeholders have expressed skepticism about the purpose of the new banks. The NDB and AIIB are the first multilateral development banks to emerge in decades, and policymakers are concerned about how they may affect existing Bretton Woods institutions (the World Bank and IMF), U.S. influence, and the structure of the international order. Predictions of slowing economic growth among the BRICS also cast doubt on the future of these new institutions.

Representatives from both institutions have emphasized how the next few years will be crucial for their future. The Bretton Woods institutions and Western states will also be watching closely and adjust their strategies accordingly. Since the actions of these banks will affect the global economy, it is prudent for both traditional and new institutions to actively work together. To accomplish this, a new U.S. approach to these MDBs may be necessary.

Gaining Momentum or Losing Steam?

The establishment of the NDB and AIIB did not come without initial obstacles. The NDB formed almost one and half years after its initial announcement due to internal disagreements over funding and management. The U.S. also reacted very strongly against the formation of the AIIB, lobbying to prevent U.S. allies such as Australia and South Korea from joining. Despite these setbacks, it appears that both institutions have materialized: the payment of tranches to the NDB is a sign of progress in accordance with their lenders’ agreement, and many U.S. allies applied for AIIB membership in 2015. While both institutions are steadily picking up steam, whether they progress or derail depends on a number of internal and external factors.

On one hand, the AIIB has been internationally lauded for emphasizing a one-country, one-vote representation in comparison to the Bretton Woods institutions and the Asian Development Bank, and for focusing on the expertise of their candidates for leadership positions. On the other hand, this diverse group of countries and leaders may find it more difficult to reach agreements than more cohesive groupings. Future projects will need to closely monitored at every step to prevent the risk of devolutions into administrative squabbling. At the same time, the NDB has faced criticism for conducting its business with very little transparency or civil society participation. Not only is the NDB’s development project queue non-existent, but its lack of clarity regarding environmental, social, labor and human rights safeguards is troubling for some observers as well.

Turmoil among the BRICS may also create complications for the fledgling NDB and AIIB. Russia’s economic struggles have been compounded by economic sanctions resulting from its involvement in Ukraine, and Brazil’s economy suffers from an expanding government corruption scandal and the Zika epidemic. Trade turnover between China and Russia is declining as well, with a reported drop of 27.8 percent in 2015. China’s export-oriented economy is also slowing down tremendously. As a primary contributor to both the NDB and AIIB, this could place many potential development projects in peril of stalling.

The global economy has also experienced two major changes: a significant drop in crude oil prices and the inclusion of the Chinese yuan in the Special Drawing Rights (SDR) basket of currencies held by the IMF. As commodity-export focused countries, emerging economies tend to be at the greater mercy of the whims of both international market booms and declines – the latter of which is exemplified by the recent decline of crude oil prices, which slid even further with the lifting of sanctions on Iran. The addition of the Chinese yuan to the IMF’s SDR basket has placed Beijing’s stock markets in the spotlight, increasing pressure on China to depreciate and clarify communications on its currency’s exchange rate.

Threat or Opportunity?

All of these issues add to existing doubts about the integrity and capabilities of these new development banks. NDB President Kundapur Vaman Kamath stated that the organization’s “objective is not to challenge the existing [Bretton Woods] system as it is but to improve and complement the system in our own way,” but many analysts perceive these MDBs as competition for traditional institutions. Some also doubt the necessity of these new banks; what can these new banks offer that the World Bank and IMF cannot?

With the physical headquarters of the NDB and AIIB located in Shanghai and Beijing respectively, the U.S. in particular perceives the risk that China will use the banks to forge a regional order around itself at the cost of the broader international order. This concern is partly fueled by the fact that China possesses a veto over AIIB decisions, even though its president, Jin Liqun, has stated that China will not use it. Even so, the NDB and AIIB reflect more than China’s interests as the other BRICS’ desire to attain greater influence in the World Bank and IMF drove the formation of the new banks. While the BRICS recently increased their voting quotas and entered the ranks of the largest members of the IMF, together they still lack the more than 15 percent needed to gain veto power.

Many MDBs share the purpose of allocating financial resources for economic development, and this is no different for the NDB and AIIB. Nonetheless, it is crucial to remember that the purviews of these banks differ. The World Bank provides assistance that works toward reducing poverty in accordance with the UN Millennium Development Goals, which includes investments in infrastructure, while the IMF provides assistance to maintain global financial stability. The NDB and AIIB, by comparison, focus their attention on infrastructure development. The narrower scope of these new institutions indicates that economic development does not have to be a zero-sum game; they could instead represent opportunities to complement existing World Bank and IMF programs. The banks may even be able to more effectively understand local economic conditions and areas in need of policy reform than more mature economies, a field where the IMF and World Bank have long been criticized.

Push On, or Push Back?

The new MDBs face a risky future if the next few years are not planned well. The NDB and AIIB have made ambitious goals for their operation: promises of equal representation and a “lean, clean, and green” institution are enticing. Because these banks will be under close scrutiny, they will need to prove they can fulfill these promises without resorting to undercutting practices in order to gain legitimacy. This is especially relevant considering that both banks are headquartered in China, which has faced internal problems of major corruption and environmental damage.

If support can be garnered in Congress, the U.S. should elevate these banks with a show of support whether financially or through support for joint projects with the World Bank and/or IMF. Not only would this improve relations with the BRICS, it would also boost U.S. standing with nations benefiting from the services of the NDB and AIIB. It would also help ensure that these banks develop in a way consistent with the standards of long-established Bretton Woods institutions. Cooperation at this point offers little to lose and much more to gain when the goal is the stability and longevity of the international order.  

Anna Lee is a Global Governance Analyst at the Streit Council. Photo credit: Asian Development Bank

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