Why Canada Must be Part of the AIIB

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4/1/2015 Why Canada Must be Part of the AIIB | Asia Pacific Foundation of Canada

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The announcement March 12 that the UK would join the new China‑led Asian Infrastructure Investment Bank (AIIB) ignited an intense debate around the world and in Canada. Luxembourg preceded the UK on March 11, Switzerland followed on March 13. France, Germany, Italy joined the movement on March 16. Since then, Austria, Turkey, and South Korea have committed to join the Bank and Australia has given a conditional commitment. After intensely campaigning

against the AIIB, the United States and Japan have recently signaled a willingness to engage the AIIB. With a deadline of March 31 set by China, the race is on. What will Canada do? What should Canada do?

Make no mistake: this battle around the AIIB matters greatly for the future of the global liberal order upon which we so depend as a trading nation; but not in the way we often assume.

The battle is often depicted in our public discourse as a mighty geopolitical confrontation between the U.S. and China, which also encompasses the Trans‑

Pacific Partnership (TPP), and security confrontations. This view is misguided.

The birth of the AIIB is primarily about the provision of new funds and of a new channel for infrastructure development in countries that have a dire need for roads, railways, ports, telecom infrastructure, and energy infrastructure, at a time when funding sources have been grossly insufficient. It is also about the ongoing reform of global economic institutions that sustain our international liberal order.

It is true that China is gleeful about the traction it is getting around the AIIB bandwagon. The AIIB (with an initial capital of US$50 billion, to be rapidly

increased to US$100 billion) will indeed become a major source of new funding for developing countries, with potentially a new approach to such funding. And it does offer an alternative channel to the World Bank and the Asian Development

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Why Canada Must be Part of the AIIB

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Bank, although with a narrower mandate.

But does it mean that the AIIB will challenge the high standards of Bretton Woods institutions and undermine the global liberal order? The answer is a clear no. First, the World Bank and IMF proved their own limitations during the Asian financial crisis of 1997‑2008 and during the 2007‑2009 Global Financial Crisis. There is a general consensus that they must evolve and reform. Global practices have not been optimal. Second, to fulfil their roles as keystone institutions of the global liberal order, these institutions (and others, like the Asian Development Bank) must legitimately represent the economic reality of the world.

Consider this: after being roughly stable for 50 years, the share of advanced OECD countries in the global GDP suddenly shrunk from 60‑to‑50 per cent between 2000 and 2011 (Purchasing Power Parity (PPP) basis). This reality has empowered the new rising emerging economies to demand a larger say in global governance.

Consider China: in 2000 its economy was roughly equivalent to 12 per cent of the U.S. economy. Today that figure is 60 per cent (nominal dollars). In PPP terms, China’s share of the global GDP was 16 per cent in 2014. Despite this, China’s voting rights in the IMF remain at 3.8% and 6.5% in the Asian Development Bank (ADB). It is not surprising then to see countries like China, India, and Brazil

demanding institutional reforms.

In 2010 in Gyeongju, South Korea, G20 finance ministers struck a deal to keep these institutions relevant and to perform a limited partial reform by shifting five per cent of voting rights toward emerging markets. That deal should have seen the China share move from 3.8% to 6.07% in the IMF. Yet, five years on, the deal

remains blocked by the U.S. Congress. Is it realistic to keep China’s share in major institutions at the three‑to‑four per cent level when its share of the world economy is 15 per cent? Does it allow the U.S. to retain the moral high ground and does it bode well for the future stability and legitimacy of the global liberal order?

Likewise, is it realistic to ask China to channel its vast currency reserves through development aid in the Asian Development Bank when its share in the ADB is kept at 6.5%, compared to 15.7% for Japan (and 5.3% for Canada), and when the President of ADB, by statutes, is always a Japanese national?

In sum, it is the absence of reasonable reforms in the global institutions that

undergird our global liberal order that has given an incentive to China to create a new channel for infrastructure funding.

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In this context and in light of key allies and partners all joining the AIIB, what should Canada do?

Canada must be a founding member of AIIB and sign up before March 31. Even though China will have a dominant share in the AIIB, the presence of a large

group of liked‑minded advanced democracies at its core will have a critical role in several respects.

First, it shows that we are consistent with our values and proclamations on the fairness and high standards of the global liberal order. Global institutions must adjust to reality to remain relevant. We support an initiative that plays a role in this necessary adjustment.

Second, it serves Canadian interests by placing Canada, along with the UK, France, Germany, Australia, and Korea at the core of this new institution, where they can ensure high levels of transparency, accountability, and compatibility with the World Bank and ADB.

We live through interesting times of great opportunities, great change, and great global risks. Since 2008, it is clear that our global governance infrastructure for the global economy is insufficient. As a mid‑sized trading nation, Canada depends on the global economy. Yet, the future health and stability of the global economy depends on the upgrading of the institutional infrastructure that sustains it. At a time of a new power configuration, such upgrading can only happen through clever co‑operation between emerging powers and established powers. This is a new reality of the last few years.

With its great human endowments and quality human capital, Canada can play a key innovative role in this systemic task. It may serve the public good but it will also put Canada at the core of the future infrastructure of the global economy.

This, in turn, will benefit handsomely all Canadian players, including business, policy‑makers, and universities.

The world is moving fast. Canada must be nimble and reactive and join the

handful of nations that are able to read and anticipate future global trends through proactive leadership. This is a time for institutional and global governance

entrepreneurship. Today, this means being at the core of the new AIIB.

Yves Tiberghien is the Director of the institute of Asian Research at the University of B.C.

and a Senior Fellow at the Asia Pacific Foundation of Canada.