The news agency Reuters reported yesterday on China’s creation of the Asian Infrastructure Investment Bank (AIIB), which is supposed to rival the World Bank and the IMF. With China’s rising economic power, does the AIIB represent a viable alternative to underdeveloped countries in desperate need of capital or would it be a failure like its Western counterparts? It is being touted as China’s attempt at making obsolete the IMF and World Bank, but what would be the extent of its reach?
The AIIB is a brand new global development bank that promises to impose less stringent metrics on its borrowing countries. Unlike the IMF and the Wold bank who insist on political reforms and privatization efforts from borrowers, China’s new world development bank is only asking for transparency.
The burning question that any reasonable banker would ask is what would the bank do in case of default? The IMF and the World Bank were an extension of colonial Orange dominance through finance. They collectively sentenced less developed countries to a life of perpetual debt and poverty. In my estimation, the AIIB won’t fare much better. Based on the value systems that currently motivate China, the bank will be an extension of RED Chinese dominance, i.e, in the case of default China will occupy the debtor country, loot its resources until the debt is paid off. China employs these tactics today in the form of exchange; resources for development. Unfortunately, the values of Confucianism are not the motivating factors in China’s new expansionist policies. This is Red lenders and Red borrowers who understand each others’ language, and understand the brutal consequences of default.
In the past, similar, well-meaning, world-changing efforts like this were announced to great fanfare, but never materialize in the long term. One might ask the question of what happened to the BRICs bank that was supposed to save less fortunate countries when it was announced less than 2 years ago? 3 of its 4 founding countries are having significant economic challenges at home. Russia and Brazil’s economies are experiencing tremendous setbacks while India is dealing with its own issues of slow growth leaving China as the only brick left in the original BRICs bank.
It remains to be seem whether China’s slowdown will make the AIIB a reality. If it continues its reforms towards a free market economy, it will spell disaster for their short term goals (as I pointed out in this interview with Newsweek Magazine). Part of China’s movement towards a free market economy will involve Orange metrics and transparency that will uncover Trillions in toxic and non-performing assets that have to be written off. After China’s balance sheets reflect those new realities, I highly doubt they will still have the appetite for highly speculative lending to foreign countries without the traditional collateral. We’ll have to wait and see. The waiting, this time won’t be long.