Besides the hard power of military might and the soft power of cultural contact, there is another kind of power: that of global leadership in the economic realm.
It’s a mantle that the United States was compelled to assume after World War II taught them the cost of isolationism, and they rose to the challenge in 1944 by playing a key role in establishment of international institutions through the Marshall Plan, the United Nations, and the Bretton Woods system (Frankel, 2015). Underpinned by the IMF and the World Bank (colloquially referred to as “The Bank”), with the U.S. dollar at its heart, the latter institutionalized America’s geopolitical supremacy, leaving the old imperial power, the UK, to step aside. (Subacchi, 2015)
While it managed to retain and enhance its status as a superpower for a few decades, especially during Pax Americana after the fall of the Soviet Union, the U.S. seems to have been slow to realise that the static Cold War order does not apply to the world of today.
As the “Asian Century” dawns upon the world, will America’s insecurity about its global influence trump its idealistic rhetoric once again?
U.S. Engagement in Asia (or lack thereof)
America tried to address the rise of Asia with the announcement of a “rebalancing” act in early 2012. However, as the founder of modern Singapore – the late Lee Kwan Yew – stated (Wyne, 2015) in a rather pointed assessment of the so-called “Asia pivot” policy:
“Americans seem to think that Asia is like a movie and that you can freeze developments out here whenever the United States becomes intensely involved elsewhere in the world. If the United States wants to substantially affect the strategic evolution of Asia, it cannot come and go.”
This lack of effectiveness in engaging Asia is also reflected in the functioning of the U.S.-led global economic architecture, that has faced criticism not only during the recent global financial crisis, but in fact since the Asian financial crisis of the 1990s, largely blamed on the Washington Consensus – the set of free-market principles that influences the policies of the IMF, the World Bank, the U.S., and the U.K. (Subacchi, 2015).
This ineffectiveness is a result of the failure to keep step with the rapidly rising China and India. As an example, consider that U.S. votes on the IMF executive board outnumber those of India by about 9 to 1 and at the World Bank by about 6 to 1, and the President of the World Bank is always an American citizen. And even though this was acknowledged by the members of the G-20 in 2010, the U.S. Congress has blocked the reforms for fear of dilution of American authority, and they remain unimplemented as of April 2015 (Vickery & Kugelman, 2015).
Similarly, de facto and explicit policy decisions have limited U.S. ability to meet the booming infrastructure and energy demands that developing countries are demanding right now (Runde, 2015).
In fact, the IMF is so disliked in much of the developing world, that its rigid adherence to market reforms is often suspected of being an instrument to keep poor countries down, not lift them out of poverty (Financial Times, 2014).
Establishing The New Bank
Dissatisfaction among emerging countries with the existing global financing framework has led to the creation of a new and potentially disruptive player in the development banking landscape, the Asian Infrastructure Investment Bank (AIIB), with a stated mission to “focus on the development of infrastructure and other productive sectors in Asia.” (Chakravorti, 2015)
The emergence of AIIB – under Chinese leadership – prompted a senior Japanese Finance Ministry official to construe that the Bretton Woods system is not functioning anymore amid the growing presence of emerging economies: “It is a natural and historical conclusion. We cannot continue to sit with our legs crossed and we have to start listening to their words instead.”(Sakamoto, 2015)
Establishment of institutions such as the BRICS’ New Development Bank and AIIB – mirroring the multilateral organisations that govern the global development agenda – is already being seen as another stone in building the foundations for a Sino-centric financial system. (Financial Times, 2014) This is in line with the push for the Renmibi as reserve currency, reflecting China’s role not only as a leading engine of global economic growth, but also as the world’s largest creditor (Subacchi, 2015).
In doing so, China is challenging America’s ability to provide the needed liquidity to support international trade and finance, lately undermined by massive debts. China’s choice to launch an institution of its own also reflects the Bretton Woods institutions’ failure to rectify its skew toward the incumbents. With 12% world GDP and a 3.8% voting share in the IMF and World Bank, China did not really have much else of a choice (Sheng & Geng, 2015).
AIIB: International Reaction
The new infrastructure bank saw a “veritable stampede to be part of the founding membership” (Browne, 2015), attracting 57 founding member countries, including the UK, Germany, France, South Korea, Israel, and other close allies of the U.S. The institution was even lauded by the World Bank Group President Jim Yong Kim, saying there was a "massive need" for new investment in this area. (Wang & Qing, 2014)
As the movement continues to attract economic might (“Russia may become third largest AIIB participant – deputy minister,” 2015), it is clear that despite the relatively small size of working capital, the AIIB poses a credible alternative to incumbent development banking systems that have been largely unchallenged for 70 years. And while this gave the international media an opportunity to highlight the changing balance of economic power (“The Guardian view on the Asian Infrastructure Bank,” 2014), this emerging institution also saw former U.S. officials admit that “China was always going to go ahead with the bank, regardless what America thought.” (Browne, 2015)
But what did America think?
The U.S. reaction has been described as a “classic incumbent’s sequence”, from mounting a defensive campaign poised for failure, to reinforcing a defensive strategy by pursuing the Trans-Pacific Partnership, a 12-nation trade pact, without China (Chakravorti, 2015).
Thus, what began with the Obama administration advising its allies not to join the new bank (Perlez, 2015), even expressing “anger” towards its special friend for doing so (Watt, Lewis, & Branigan, 2015), concluded with a tepid statement to a joint news conference with the Japanese Prime Minister Shinzo Abe, merely saying "It could be a positive thing, but if it’s not run well it could be a negative thing." (Mason, 2015)
The Ghost of American Leadership Future
According to former U.S. Treasury Secretary Larry Summers, the AIIB’s establishment “may be remembered as the moment the United States lost its role as the underwriter of the global economic system.” (Sheng & Geng, 2015)
The U.S. should never have opposed joining the AIIB in the first place, because:
a) Asia needs more help with infrastructure investment than the present system can afford,
b) China can play a useful leadership role, and
c) participation of countries with high governance standards can help prevent cronyism, corruption, and environmental damage oft-associated with large-scale infrastructure projects (Frankel, 2015).
It is clear that the AIIB is poised to have disproportionate access to fast growing investment and development funding opportunities in Asia, and the opportunity costs of not participating could be quite high, with both economic and geopolitical dimensions.
America must come to terms with the reality that the world has changed. The longer it remains in a state of denial, the more damage it will do to its interests and its global influence. This is not to say that they should not be casting any doubts on the openness and fairness of the impending China-led order. But the way to do that is by engaging China on this issue of reform of global governance, not by attempting to sabotage its efforts.
Development of the AIIB may also be seen as a part of “peaceful rise” of China, wherein it isn’t withdrawing from the Washington institutions, but is rather supplementing them. This further supports a case for accommodation, not confrontation. (“The Guardian view on the Asian Infrastructure Bank,” 2014)
We come back to a warning issued by the late Mr. Lee long before the AIIB took shape, that the U.S. would have to contend with a resurgent China, not only according it a growing role in shaping the norms and arrangements of world order but also, in time, accepting it as an equal player on the global stage. (Wyne, 2015)
Thus, containment is not an option in the Asian century. Stubborn opposition to China will lead to America further losing its ability to shape what comes next, and will lead to a fragmented global community. As Henry Kissinger warned, if a Cold War were to develop between the countries, it “would arrest progress for a generation on both sides of the Pacific.”
Browne, A. (2015, April 29). Obama on the Beijing-Led AIIB: All Just a Misunderstanding. Wall Street Journal. Retrieved from http://blogs.wsj.com/chinarealtime/2015/04/29/obama-on-the-beijing-led-a...
Chakravorti, B. (2015, April 20). China’s New Development Bank Is a Wake-Up Call for Washington. Retrieved May 1, 2015, from https://hbr.org/2015/04/chinas-new-development-bank-is-a-wake-up-call-fo...
Financial Times. (2014, October 30). Beijing’s challenge to the world of Bretton Woods. Financial Times. Retrieved from http://www.ft.com/intl/cms/s/0/db2dcaf8-6042-11e4-88d1-00144feabdc0.html...
Frankel, J. (2015, April 23). Asian Games Are Not Zero-Sum. Retrieved May 1, 2015, from http://www.project-syndicate.org/commentary/china-usa-imf-reform-by-jeff...
Mason, J. (2015, April 28). Obama says not opposed to China-led AIIB but cites governance concerns. Reuters. Retrieved from http://www.reuters.com/article/2015/04/28/us-usa-japan-aiib-idUSKBN0NJ25...
Perlez, J. (2015, April 11). New China-Led Bank Pledges to Fend Off Graft. The New York Times. Retrieved from http://www.nytimes.com/2015/04/12/world/asia/new-china-led-bank-pledges-...
Runde, D. (2015, April 30). AIIB And US Development Leadership: A Path Forward. Retrieved May 1, 2015, from http://www.forbes.com/sites/danielrunde/2015/04/30/aiib-us-development-l...
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Sakamoto, M. (2015, April 18). AIIB rise reflects new economies. The Japan Times Online. Retrieved from http://www.japantimes.co.jp/news/2015/04/18/business/aiib-rise-reflects-...
Sheng, A., & Geng, X. (2015, April 27). The AIIB and Global Governance. Retrieved May 1, 2015, from http://www.project-syndicate.org/commentary/aiib-china-global-leadership...
Subacchi, P. (2015, April 10). American Leadership in a Multipolar World. Retrieved May 1, 2015, from http://www.project-syndicate.org/commentary/china-united-states-global-g...
The Guardian view on the Asian Infrastructure Bank: the US should work with it, not oppose it | Editorial. (2014, October 26). Retrieved May 1, 2015, from http://www.theguardian.com/commentisfree/2014/oct/26/guardian-view-asian...
Vickery, R., & Kugelman, M. (2015, April 27). With AIIB, US Shot Itself in the Foot on Indian Infrastructure. Retrieved May 1, 2015, from http://thediplomat.com/2015/04/with-aiib-us-shot-itself-in-the-foot-on-i...
Wang, A., & Qing, K. G. (2014, July 8). World Bank welcomes China-led infrastructure bank. Reuters. Retrieved from http://www.reuters.com/article/2014/07/08/us-china-world-bank-idUSKBN0FD...
Watt, N., Lewis, P., & Branigan, T. (2015, March 13). US anger at Britain joining Chinese-led investment bank AIIB. Retrieved May 1, 2015, from http://www.theguardian.com/us-news/2015/mar/13/white-house-pointedly-ask...
Wyne, A. (2015, March 23). What Would Lee Kuan Yew Do? The New York Times. Retrieved from http://www.nytimes.com/2015/03/25/opinion/what-would-lee-kuan-yew-do.html
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