The Beginning of a New Era? The Implications of the Asian Infrastructure Investment Bank

An image of Beijing’s Central Business District, the likely home to the headquarters of the Asian Infrastructure Investment Bank. 2005. (39degN/Wikimedia Commons)

Usually when it comes to the G7, what America says, goes. With vehement American opposition to the Chinese proposal of an Asian Infrastructure Investment Bank (AIIB), the G7 countries, composed of strong American allies and the most influential economies in the world, unanimously decided not to join the organization. However, in a stunning betrayal, on March 12, the UK broke G7 decorum when it announced that it would join the AIIB as a non-regional founding member, immediately opening a window for the organization to join the prestigious alphabet soup of international organizations such as the World Bank, Asian Development Bank and the IMF. The UK’s decision led to a cascade of membership announcements over the following days starting with France, Germany, Italy, Switzerland and Luxembourg: a complete shattering of the G7’s agreement. The next week, Austria, South Korea and Turkey all applied to be founding members.

America has historically dominated the world of international finance ever since the 1944 Bretton Woods Conference, which established the IMF and International Bank for Reconstruction and Development (part of today’ World Bank). Officially, the Bretton Woods institutions are completely independent entities. But, in reality, America plays such a large role that it is hard to say that these organizations are not influenced by, if not virtual arms of American power. The World Bank focuses on financing projects that alleviate poverty and bring about economic development, and the US is the largest stakeholder with nearly 20% of the voting power. The US also has significant power with 17% of the voting power in the IMF. In the World Bank-inspired Asian Development Bank, the voting breakdown is similar, with the US holding 15% of the voting power. Brazil, Russia, India and China, among other developing countries, rightly clamor for a greater say in international finance, but Congress has repeatedly and unexpectedly delayed the reforms that would expand the voting power of developing countries like China.

The AIIB threatens to shift the current paradigm by creating an organization that has the potential to overturn the current hierarchy of power in international finance. After all, the AIIB will be the first major international financial organization not led by America or an American ally. China’s publically announced intent for the AIIB is simply to further development in East Asia; Asia requires $8 trillion of government and private investment for infrastructure projects by 2020 to maintain current growth rates. But beyond benevolently spurring economic growth in Asia, the AIIB will aggrandize China’s state power. As International Relations and Political Science scholar John Mearsheimer pointed out, international institutions are merely tools for states to influence the global community. By creating an institution of their own efforts, with the backing of many European powers, China will have the opportunity to significantly expand its already sizable portfolio of “soft-power investments.” Such investments will attract developing countries that have had grievances with America and the West, or have limited say in the current financial system.

One example of a potential AIIB project is the New Silk Road initiative, which is a series of land and maritime infrastructure projects across the Asian continent. Combined with the concerted effort to develop trade policies and trade ties, the New Silk Road will further entrench China’s centrality in Asia and the world economy. Investing in maritime and coastal infrastructure along the Pacific and Indian Ocean could also lay the groundwork for China to pursue its “string of pearls” strategy of gaining favorable harbors and/or stations to support overseas commerce and a more offensive and active naval strategy.

The challenge the AIIB poses is symbolic of macro problems regarding American foreign policy toward Asia. Not only does the AIIB look viable, but also a string of European allies joined. To rub salt into the wound, Christine Lagarde, director of the IMF, announced her institution’s support for the organization. America lacks any uniform vision with its allies on how to approach the rise of developing powers, which proves America’s inability to garner the same level of diplomatic clout it had in the past. America’s formula for success has been its strong economic and military might, as well as its successful diplomatic efforts in accruing allies. The AIIB episode suggests that China is using this formula to become more influential and powerful at the expense of American hegemony.

With all this said, America needs to be more engaged with the world. It needs to be vigilant in reforming the IMF and the World Bank to take into account the shifts in economic power and the changing times. By doing so, it will eliminate incentives for developing countries to flock to untested organizations that promise a greater voice. More importantly, reform of the IMF and the World Bank voting system will further legitimize and strengthen the current system, since developing countries will undoubtedly offer key insight and guidance. After all, developing countries are frequently the recipients of the policies and aid of the aforementioned organizations. America’s dominance in the global financial system is not necessarily rooted in having the most votes. The system itself is an American creation, and thus to maintain American power is to maintain the legitimacy and clout of the institutions that make up that system.

Additionally, America requires a different mentality toward foreign relations. Relying on its “superpower” status to win diplomatic victories and maintain the status quo is no longer a viable strategy. Had the US swallowed its ego and joined the AIIB, it would have diluted Chinese power in the organization and, more importantly, prevented the embarrassing betrayal by its allies. It would have made sure that the AIIB would not become an aggressive and anti-IMF/World Bank organization. Given the vehement criticism of the bank, America has all but eliminated the chance to join the organization without losing face. The world has entered into a new era, and in order to be a true leader, America needs to see the rise of developing countries and their accompanying demands for a greater voice as opportunities to embrace positive change in the current international financial structure. Doing so will not only strengthen economic development, but also ensure that America’s legitimacy and influence lasts through the 21st century.

The views expressed by the author do not necessarily reflect those of the Glimpse from the Globe staff, editors, or governors.


Kenneth Lee

Kenneth Lee is a Senior double majoring in International Relations/Global Economy and East Asian Area Studies at the University of Southern California. On campus, he is a fellow at the USC Korean Studies Institute where he has written and presented on the research papers regarding South Korea’s nuclear weapons program and its economic history. He was the Vice-President of Competition for MUNSC, USC’s Model UN team, attending conferences around the country. He also participates in the USC Teaching International Relations Program, teaching students international relations at local high schools. Kenneth was also chosen to participate in the Fulbright US-UK Summer Institute and studied at SOAS in London in 2016.