In effect, the United States is informing fast-growing Asian nations: We are not going to increase official funding for your important needs anytime soon; we are also going to prevent the institutions we control from increasing their funding for those needs; and lastly, we are going to admonish others from devising other ways of funding you. No wonder that Asian governments have jumped on the AIIB bandwagon. Australia, Indonesia and South Korea were conspicuously absent from inauguration ceremonies last year when they shared U.S. concerns. But now they have all warmed to the idea of joining the AIIB (Indonesia became a founding member, while Australia and South Korea have applied for membership). Moreover, ADB and World Bank officials have extended a cautious welcome to the new China-led bank, saying they see room for collaboration. But the clearest signal of the AIIB’s appeal has come from officials in Taipei, who have announced that Taiwan, too, will join the organization as Taipei, China. If Japan also joins — as is now expected — it will leave the United States isolated among major donor nations.
Not only does the United States endanger its own regional influence through its refusal to participate, it also threatens private American investment. Unlike most types of private investment, infrastructure projects tend to have extremely high up-front costs and longer maturities. This leaves infrastructure investors much more vulnerable to sovereign risk, regulatory instability, shifting political winds, and the threat of expropriation. For this reason, multilateral development banks play a critical role in attracting private infrastructure investment to developing countries through “additionality,” that is, by contributing their own funding, bringing financing partners into specific deals (through syndications or co-financing), and by using risk guarantees and other tools. Importantly, multilateral development banks cannot offer support to investors from non-member countries. Should the AIIB develop its own system of risk insurance and partial guarantees, they will not be available to American investors.
Asia, the United States — and for that matter, the whole world — would be better off if the United States were to participate in the AIIB. What better way to encourage the Chinese to implement a transparent regime that adopts global best practices in financing infrastructure than to be a voting member? If anything, China’s move towards multilateralism should be welcomed. Rather than rebuke others for joining, the U.S. should consider doing the same?