By Mohamed A. El-Erian
Asia wants a new specialized bank to fill the gaps left by the World Bank and the Asian Development Bank. In contrast to its last effort to create a supranational monetary institution back in the 1990s, it might actually succeed.
Asian countries have long felt underserved and misunderstood by the World Bank and the International Monetary Fund, initially set up after World War II to, respectively, fund development projects and help governments manage temporary financial difficulties. In the midst of the 1997-1998 Asian financial crisis, they sought to establish an Asian monetary fund designed to respond better to the needs of the region. Amid considerable international opposition, notably from the U.S., they ended up with a collection of less ambitious financial arrangements, such as a multilateral currency swap mechanism known as the Chiang Mai Initiative.
There were good and bad reasons for the opposition. The U.S., and to a lesser extent Europe, felt that an Asian monetary fund would undermine global cross-border coordination and would be too vulnerable to the kind of political pressures that arise in crisis situations. China, for its part, seemed rather noncommittal.
The U.S. and Europe also wanted to maintain the power that their historical domination of the IMF and the World Bank afforded. So they preferred to promise Japan and other Asian nations reforms to the existing institutions, as a means of forestalling the creation of a new one over which they would exercise limited direct control. The reforms, though, haven’t been deep enough to satisfy Asia's needs, and confidence in the process has been undermined further by the U.S. Congress' failure to pass what everyone admits is only a modest set of changes in representation and voice.
Now, Asian countries are seeking to establish the Asian Infrastructure Investment Bank. Its objective would be to channel regional financing into infrastructure development that helps Asia at both the national and regional levels. As such, it would pursue the kind of multicountry projects whose implementation has so far been frustratingly slow, damping the development of Asia as a whole. It would also enhance regional policy collaboration in an area where different regulatory and legal regimes frustrate the common good.
This time around, the initiative is led by China, whose economic power and financial influence are much greater than they were in 1997-1998. The country is ready to lead by example when it comes to financial resources, promising upfront commitments of tens of billions of dollars. The West, for its part, is still recovering from the 2008 financial crisis and is hence less able to impose its will. With the recent stalling of limited reforms to the IMF, the West cannot credibly promise an adequate revamp of the existing institutions.
Whether or not Asia's new development bank will be effective is another question entirely. Much will depend on whether the founders are able to cope with six challenges: let meritocracy, rather than politics and national entitlements, determine key appointments and decisions; properly blend developmental and commercial objectives; find replicable ways to exploit public-private partnerships; make sure projects are environmentally and socially sustainable; ensure a supportive regulatory and legal structure for investments; and deploy a modern, evidence-based set of analytical and financing tools.
The new institution would also need to work well with its existing counterparts, particularly the Asian Development Bank, the IMF and the World Bank. Rather than duplicate what is being done elsewhere, it needs to focus on filling gaps and correcting market and institutional failures, and do so while still encouraging member countries to reform the bigger multilateral institutions.
Asia has a chance to do today what it couldn’t do in the late 1990s. Ability, though, does not guarantee success. A lot of challenges must be overcome if the initiative is to truly benefit the region, and not just serve as a political statement.
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