Sebastian Mallaby talks about “Saving the Bank”, about the flaws in the system, about the possibilities for the institution to both do and be better. China agreed and felt that Bretton Woods institutions weren’t changing fast enough to accommodate the new look of international economic powerhouses, so they created their own global financial institution, the Asian Infrastructure Investment Bank (AIIB). Mallaby also talked about the world spending too much time creating new institutions as opposed to updating good ones that already existed so I doubt that China’s AIIB is a solution in his eyes.
The new bank is structured to ensure that decision making control will stay firmly with Asian nations and that borrower nations will have a voice in decisions that was lost in the World Bank and the IMF. The AIIB is popular, plenty of Western powers have joined the bank and will participate according to its rules. It also enjoys the major backing of Chinese capital. Commentators have said that the world is big enough and the demand for global institutional lending great enough that there is room for both the World Bank and the AIIB (The Economist). Demand isn’t the real concern about the AIIB; the concern is what AIIB will do to the rules and the practices for global lending institutions and what type of market share the AIIB will draw. The AIIB creates two real challenges for the World Bank: 1) the potential loss of major revenue and 2) pressure to reduce loan conditionalities that address major global issues on a national and local level. Conditionalities that are also popular with many donor states.
The presence of strong financial backing, reduced project standards, and a structure that gives more control to lenders means that the AIIB will challenge the World Bank for clients and control of the market. If borrowers can get the same low rates without having the stringent reporting requirements or the imposition of ‘Western’ values, what will keep them as customers of the World Bank? Plus, the AIIB is targeted (at least at first) on Asian lending. Why is this an additional issue? Because those countries aren’t just World Bank clients, many of them are the Bank’s most profitable clients. They are the safer repayment bets and their projects are more likely to stay on track than the World Bank’s lending average. The World Bank needs these safe loans because the revenue from those loans fund the Bank’s operations and provides the opportunity to make higher-risk loans to countries in desperate need for capital in order to develop. Loans that the World Bank makes because no other institutions will. If the World Bank loses its safest customers to another institution, it may lose its ability to serve the demands of those that need its help the most.
World Bank grants and loans come with rules about transparency, good governance and environmental protections among other rules that potential borrowers often view as inconvenient and intrusive. Based in Chinese preferences and their history, these issues will not play into AIIB considerations. The World Bank could consider reducing its conditionalities, backing off on its commitment to high environmental standards or good governance, in order to preserve its business interests. But the World Bank is not a business, its goal is to use its financial capital in order to reduce poverty, promote good governance, and ensure environmental protection. To give up those things would send the Bank into an identity crisis and there’s no guarantee that doing so would prevent a fiscal crisis. Ceasing to impose those criteria for projects would upset many Western governments, governments who are major donors to the Bank. Finally, giving up its conditionality provisions, specifically those of environmental standards and good governance, would be a loss to the global governance and to global citizens. For such a large institution to quit promoting these standards would make it harder for other institutions to continue to do so. It would also mean that projects would go forward without environmental protections, needlessly endangering the world further. Without good governance standards, money would be wasted and projects would be less able to serve the people they were intended to benefit. The World Bank performs a global public service with its loan conditionalities and abandoning them would a huge hit to global movement for progress.
Now, it is not necessarily all bad news for World Bank supporters. The competition also has the potential to force structural reform of the institution to make the Bank more inclusive and more reflective of current global realities. Reforms like the ones Mallaby is asking for. The World Bank is outdated in that sense and if the AIIB can force the World Bank to update, then there is a silver lining for the World Bank supporters. But silver lining cannot save the bank if it loses major revenue streams or is forced to sacrifice core values in order to sew that lining.