Burgeoning banks can integrate economies

By Cecily Liu | China Daily Europe | Updated: 2015-07-17 09:05

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Political economist hails China's support for new, inclusive international institutions

The new international institutions now being driven by China have the potential to synergize global trade and, in turn, lead to a more connected world, according to Jean-Pierre Lehmann, a professor of international political economy at the International Institute for Management Development in Switzerland.

Initiatives such as the Asian Infrastructure Investment Bank and the BRICS Bank, both of which China is actively supporting, could be game changers, he says, as they help to bring countries once marginalized by existing multilateral institutions into full play.

"China has supported the growth of the BRICS Bank and the AIIB because it is not being accepted into existing institutions such as the World Bank and International Monetary Fund on the terms they deserve," he explains. "These new institutions have the potential to integrate the global economy in a way that it has never been integrated.

"Our dream is to create integration of economies, and through that, greater integration of societies. Now that China has become a major member of the international community, the ideas it has proposed should be supported."

Lehmann says he believes China's attempt to further integrate world trade, underpinned by the country's proposed Belt and Road Initiative, is encouraging: "It is a strategy not just for China, but a globalization strategy."

Put forward by Chinese President Xi Jinping in 2013, the initiative consists of two trade routes: The Silk Road Economic Belt and the 21st Century Maritime Silk Road. The belt will link China with Europe through Central and Western Asia, while the road is a maritime route through the Strait of Malacca to South Asia, the Middle East and East Africa.

These proposed routes are natural progressions of historic trade routes and will open up new territories, allowing parts of the world, especially countries in Central and West Asia and also Africa, to have better integration in global trade of goods and ideas, the professor says. "The world economy exists in trade blocs dominated by the countries in the NAFTA (North American Free Trade Agreement), Western and Eastern Europe, and East Asia. But there are still vast parts of Africa not so integrated, as well as all of Central and West Asia, so the (belt and road) will really open up new territories."

Another factor that makes China a natural leader to facilitate greater global integration, he says, is its situation of being positioned between developed and developing countries, which are not well integrated with each other.

"The dream of having a reintegration of Eurasia is quite recent, although such integration is not new. In the 15th and 16th centuries, we had trading from Xi'an to Venice. It was one part of the world economy," he says, adding that the proposed belt and road could shake the world economy the way railways did in the 19th century.

Lehmann is a well-known supporter of free trade, although he argues that it should rest on a rules-based multilateral framework. In 1995, he launched the Evian Group at IMD, an international coalition of corporate and government leaders to champion open trade.

The history of global trade has often repeated itself, going in cycles of different degrees of openness, he says, and it proves that trade leads to prosperity and protectionism harms economies.

China, for example, once enjoyed great wealth, estimated at more than 30 percent of global GDP. But its prosperity waned in the 19th and 20th centuries, Lehmann says.

In recent years, this situation has changed again as China started economic integration, marked by its joining the World Trade Organization. More encouragingly, he says, the country is taking active steps to facilitate further integration of the world economy, arising out of both necessity and its new sense of responsibility.

"China has not assumed leadership internationally until recently because it previously wanted to focus more on domestic issues," he says. "This changed with the leadership of President Xi Jinping, who is outward-looking in saying what China can bring to the world.

"There is also a necessity for China to expand globally because it has a large population compared with its share of the world's arable land. In the globalization process, China felt it had not been fully integrated into international institutions, which pushed it to support the growth of new ones."

As an example, Lehmann cites trade agreements such as the Trans-Pacific Partnership, which seeks to further integrate countries in the Asia-Pacific region. They are wrong to exclude China, he says. "It's a huge mistake, because you don't do a new trading arrangement on such a scale and exclude China, as it is exclusive, not inclusive."

The AIIB is promising due to its inclusive nature, he adds, and China has been successful in creating a vision that the other countries buy into. Even more encouraging is the support it has already had from existing institutions such as the World Bank, and both sides are taking the initiative to find out how the two institutions can complement each other rather than compete.

"China has been doing things right by ensuring the AIIB is open, transparent and has good management," Lehmann says, adding that the Chinese government's decision to invite Natalie Lichtenstein, who has spent most of her career as a legal adviser at the World Bank, to serve as the AIIB's initial general counsel is a demonstration of its openness.

In addition, the difference in focus between the AIIB and the World Bank and IMF is big. In particular, the new bank's focus on infrastructure is pragmatic and in line with many developing countries' economic objectives, and this allows institutions such as the World Bank to continue to focus on areas it has traditionally championed, including education and health.

Meanwhile, he says, the increasing growth of trade is also connecting societies through the exchange of ideas, culture and understanding.

For Europe, trade and other exchanges with China provide tremendous benefits, whereas trade disputes, which have emerged on several occasions in the past few years, are counterproductive and often are not based on logical arguments, he says.

One example is the months that followed the end of the multi-fiber agreement in 2005, he says, when European markets saw a surge in imports of Chinese garments and textiles. Uncompetitive European textile and garment producers, who had failed to restructure during the 10-year MFA phase-out period, complained that unfair Chinese textile imports were destroying Europe's industrial fabric.

Lehmann says such measures are not reasonable because it does not create a level playing field, and also this surge in Chinese textile imports into Europe was primarily from Chinese manufacturing subsidiaries of foreign companies.

"Although trade theory is relatively simple and the law of comparative advantage is straightforward, the degree of ignorance among politicians is astonishing," the professor says. "Whereas the harm it causes to uncompetitive businesses is small and the benefit to consumers is huge, the problem is that you can't easily mobilize the individuals who benefit (from free trade) to lobby for free trade."

On the whole, he says it is encouraging to see Europe being increasingly pragmatic and commercially oriented toward Chinese trade, as is demonstrated by a growing number of Chinese companies becoming established in European markets, such as Huawei, the telecommunications company.

"China and Europe's economies are complementary, and the flow of exports and capital will grow. The increasing level of bilateral investments will further integrate the two sides," he says.

Jean-Pierre Lehmann says it is necessary for China to expand globally because it has a large population compared with its share of the world's arable land. Cecily Liu / China Daily

Bio

Jean-Pierre Lehmann

Professor of International Political Economy at the International Institute for Management Development

Born: 1945, in Washington DC

Education: Undergraduate degree at Georgetown University, Science and Foreign Service, 1962-66

PhD at the University of Oxford, Japanese Economic History, 1967-70

Career:

1966-67: Freelance journalist

1970-80: Lecturer in Asian History, University of Stirling

1980-86 Professor of International Business, INSEAD

1986-91: Established the East Asian operations of InterMatrix, a consultancy

1991-97: Founding director of the Center of Japanese Studies at Stockholm University