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Obama abandons allies on AIIB

Updated: 2015-03-24 08:00
By Kevin P. Gallagher (China Daily)

The Obama administration is looking increasingly left behind as it defies its closest allies and the US president's own party on foreign economic policy in Asia. The Obama administration rebuked the United Kingdom for agreeing to participate in negotiations for the Asian Infrastructure Investment Bank, even though the new institution would fill a major gap in Asian infrastructure needs.

At the same time, Obama abandoned his own party in an attempt to ram through authority to finalize the Trans-Pacific Partnership agreement, a trade deal with Pacific Rim countries that would bring little economic benefit and high economic cost either to Asia or the United States.

In the wake of the global financial crisis of 2008-9, China offered its newly acquired financial prowess to help boost Western-led financial institutions such as the International Monetary Fund and the World Bank. Although the Obama administration backed reforms at these institutions that would have given China more say, it has done little to counter an intransigent US Congress that, under Republican leadership, has failed to pass those critical reforms.

Already stuffed with low-yielding US Treasuries in need of a higher return, China has decided to go its own way. That is why China is establishing the AIIB with an initial capital of $50 billion and a Silk Road Fund with $40 billion. Both are aimed at investing in infrastructure projects in Asia and beyond. In 2014, China also established the New Development Bank, along with Brazil, Russia, India and South Africa. This institution has an initial capital of $100 billion.

These moves, intended to diversify the global funding landscape, come on top of financing that China's own development banks already provide across the world. The China Development Bank has $100 billion in capital and more than $1 trillion in assets.

China's more intense global engagement - generally something not just welcomed, but demanded by the US government and politicians in Congress alike - does have some surprising consequences in the real world: The China Development Bank and the Export Import Bank of China now provide more loans to Latin American governments than the World Bank and the Inter-American Development Bank - and more loans to Asia than the World Bank and the Asian Development Bank.

In this light, China-backed finance has the potential to be nothing short of a 21st century "Marshall Plan", and couldn't come at a better time. Western-backed financial institutions have not been able to increase their capital in proportion to the growing needs in the world. According to some estimates, development banks fall short of providing lending for poverty alleviation by $175 billion a year.

The World Economic Forum projects that by 2020 about $5.7 trillion will need to be invested each year into green infrastructure in developing countries. Not only will this require shifting the current $5 trillion into a greener direction, there will be need to increase $700 million more each year to make the shift happen.

Washington can hardly complain about its sideline status. It was invited to take part in the AIIB. The US has lobbied Australia, the Republic of Korea, Indonesia, as well as European countries not to join in. The UK has decided - and so have France, Germany and Italy - that it would be foolish not to be part of these efforts. The ROK and Australia are now considering joining in as well. Others are bound to follow and leave the US standing alone.

Obama's official complaint is that the AIIB will not replicate the transparency and anti-corruption norms, as well as the safeguards for social and environmental protection found in Western banks. This claim doesn't even pass the laugh test. Negotiations for the AIIB are not even underway yet - and the US move means it is foregoing an active role in the negotiations where these issues will be on the table.

The US has long demanded that other major countries share the burden of global initiatives and institution building. Now that China has stepped up to the plate, Obama is passing up an opportunity for the US to take part in a legacy-making 21st century "Marshall Plan".

On top of that, he is alienating Asians, Western allies and his own party. The US government should be embracing the AIIB and abandoning the TPP, not the other way round. Hopefully, our global allies and Obama's own party will help him see the light.

The author is a professor of global development policy at Boston University's Pardee School for Global Studies.

The Globalist


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