A crack in the global order

While most European eyes are focused on Greece’s economic turmoil a potentially more significant development is unfolding on the other side of the world. In Beijing delegates from 50 countries have recently attended the signing ceremony of the new Asian Infrastructure Investment Bank.

The bank will lend billions of dollars to help develop Asian infrastructure but that is not the main reason its foundation is so important. It is rather that America made a concerted attempt to block the bank’s creation but failed. So the AIIB’s establishment represents a crack in the long-standing US-led global order.

Many leading figures within America saw Washington’s actions as a monstrous blunder. The US put its influence and prestige on the line, without having any necessary reason to do so, and lost. China was keen for America to participate in the institution but the Obama administration declined the invitation. Nevertheless, many other countries, including Britain, resisted American pressure and agreed to participate. Indeed the UK government was publically rebuked by an American official.

Larry Summers, a former US Treasury secretary, was blunt in his criticism of US policy towards the AIIB in an assessment published in the Financial Times in April. “This past month may be remembered as the moment the United States lost its role as the underwriter of the global economic system,” he said.

Robert Zoellik, a former president of the World Bank and US Trade Representative, referred to it as “a strategic mistake” and an “embarrassing experience”.

Stephen Roach, one of the leading American experts on the Asian economy, said the Obama administration had made a “major strategic blunder” . He also helped to put US opposition to the new institution into its broader context: “The US Congress has repeatedly dragged its feet on IMF reforms. And lending programs of the US-dominated World Bank have done little to address infrastructure deficiencies in any part of the world.”

Both of these points are important. For years the US – often working in concert with Europe – blocked proposals for the developing world to have a greater say in the International Monetary Fund and the World Bank. Both institutions reflected the realities of the mid-twentieth century, when the poorer countries had marginal economic weight, rather than the early twenty first century.

China was not the only country to be kept marginalised within these institutions. For example, in 2012 all African states backed Ngozi Okonjo-Iweala, the Nigerian finance minister and a former World Bank managing director, to be the new president of the World Bank but the US stuck by the convention that every head of the organisation should be American. Similarly Europe has insisted on maintaining the tradition that the IMF chief should always be European.

The lack of infrastructure lending by the World Bank also helps provide the backdrop to the creation of the AIIB. Global demand for infrastructure investment is enormous according to the World Bank’s own estimates. Yet in relative terms its lending is modest.

Of course China’s promotion of the AIIB is at least partly motivated by a desire to increase its own influence in East Asia. Beijing is not acting out of altruism. But Washington’s clumsy attempts to contain China have, paradoxically, weakened the global order that America created.

This is my latest blog post for Fundweb.