The Asia Bank Freakout

Lost amidst the news of the Iran deal is a simmering controversy—actually more like a total Establishment freakout—over China’s initiative to start the Asian Infrastructure Investment Bank (AIIB), which China would dominate. It appears to be an attempt by China to set up a regional international finance structure to rival the U.S.-dominated World Bank and International Monetary Fund. The U.S. opposes this initiative, because it supposedly threatens to upset the delicate balance of international finance (heh), but the real reason is that it indicates the rising global influence of China, and the diminishing influence of the U.S. Despite U.S. pressure against AIIB, several of our closest European allies have chosen to join the bank. What did the Obama administration expect they would do in the face of Obama’s obvious desire to shrink American influence in the world? China is openly “gloating” about our failure to prevent Germany, France, Italy, and Britain from joining the AIIB.

Lawrence Summers typifies the freakout of the U.S. Establishment in an op-ed in the Washington Post today: “This past month may be remembered as the moment the United States lost its role as the underwriter of the global economic system.”

Horrors! Although many friends and sensible people (like Charles Krauthammer) are alarmed about China’s attempt at financial hegemony, I’m not sure I see the reason for the total freakout. For one thing, perhaps a little competition in international finance will be a good thing for the U.S. Although it is very nice to be able to borrow large amounts of money in your own currency, this has had the effect of blunting the kind of global financial discipline that comes sooner or later to all profligate nations. Because of the dollar’s role as the global reserve currency, it means “later” for us: we can behave like Greece (or Detroit) a lot longer than Greece (or Detroit) which will make the eventual reckoning that much more painful and difficult.

But there’s another reason I like the AIIB idea: it will break the stranglehold environmentalists have placed on World Bank support for energy projects in the energy-hungry developing world. Because of green pressure, the World Bank will not finance any new coal plants or dams. Summers takes oblique notice of this problem in his article:

With U.S. commitments unhonored and U.S.-backed policies blocking the kinds of finance other countries want to provide or receive through the existing institutions, the way was clear for China to establish the Asian Infrastructure Investment Bank. . . It sometimes seems that the prevailing global agenda combines elite concerns about matters such as intellectual property, investment protection and regulatory harmonization with moral concerns about global poverty and posterity while offering little that speaks to those in the middle. Approaches that do not serve the working class in industrial countries (and the rising urban populations in developing ones) are unlikely to work out well in the long run. (Emphasis added.)

My guess is that a China-led AIIB will have no problem financing environmentally incorrect projects in the developing world, and for that reason alone maybe we should look more kindly on the whole idea.