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Suman Bery: Why AIIB could work for India

The Asian investment bank could transform development finance and enable Sino-Indian cooperation

Suman Bery 

Suman Bery

Last week in Singapore negotiators concluded discussions on draft Articles of Agreement of the nascent Asian Infrastructure Investment Bank (AIIB). India is a founding member and is expected to have the second-largest shareholding, after China.1 Global media attention has focused primarily on the challenge that the AIIB poses to the US-guided World Bank (and Asian Development Bank), and the initially somewhat sour reception the AIIB has received from the US authorities. By contrast I have seen relatively little commentary on India's own economic and political interests, as well as risks, in agreeing to be the second-largest shareholder in this venture.

The initial point of reference inevitably is the World Bank. For the benefit of non-specialist readers it is perhaps worth noting that the "World Bank" refers to a suite of linked but separate institutions. Of these the IBRD (the International Bank for Reconstruction and Development) is the original institution designed to support infrastructure investment at the end of the Second World War. The Articles of Agreement of the IBRD were agreed at the monetary conference in Bretton Woods, New Hampshire in December 1944 allowing the institution to begin functioning in 1945, seventy years ago.

The IBRD is today flanked by the International Finance Corporation, brought into being by the IBRD in 1956, and the International Development Association (IDA) which came into effect in 1960. Membership of the IBRD is a prerequisite for membership of either of these institutions, which differ in instruments from the IBRD while directed at the common purpose of sustainable and equitable economic development. The IFC lends to the private sector without requiring a sovereign guarantee from the host government, and therefore directly carries borrower credit risk on its books. It also largely has an independent staff from the IBRD. While IBRD and the IFC each fund their operations through bond issues (supported by their pledged capital base) the IDA channels grant funds provided by its richer sovereign members for social sector projects in poor countries, using the staff of the IBRD.

While the US has of course been in the lead at the World Bank, India's has played a significant role over these seventy years. India was present at Bretton Woods, and became a key borrower once the IBRD shifted its attention from European reconstruction to the larger task of economic development. IDA was invented in part because India ceased to be credit-worthy for IBRD lending. And as the late John Briscoe noted in these pages about a decade ago, India is relatively unusual in the many dimensions of its involvement with the World Bank Group: as founder, as major borrower, as an influential Board member and in the depth of its involvement at all levels in the staff of the World Bank. So there is a deep pool of tacit expertise on the nuts and bolts of development banking available to be deployed by India at the AIIB should there be interest and appetite in doing so.

As the new institution takes form India's interests can be partitioned into three spheres: political, financial and intellectual. The political element has been central in the foundation of all multilateral development banks. Thecold war in Europe and the fear of communist insurgency in other parts of the world were dominant factors in setting up the Asian Development Bank and the other regional development banks in the 1960s and 1970s, all the way till the European Bank for Reconstruction and Development was established in 1991.

Unlike Britain and the US (who jointly piloted the Bretton Woods conference) China and India have not been allies in war. Indeed they have significant (if currently dormant) bilateral security issues, and there have been well-publicised diplomatic skirmishes between the two countries at the Asian Development Bank. It is therefore bold, if risky, for India to partner with China in demonstrating its impatience with the governance deadlock in the established multilateral development banks (MDBs).

The financial sphere (together with associated equipment procurement) has multiple dimensions. As noted earlier, the IBRD was set up at a time when global capital markets had been destroyed by depression and war, and when infrastructure provision was seen as an essential state activity. In the intervening seventy years global finance has gone from being underdeveloped to arguably being hyper-developed, while the primacy of state monopolies in financing and operating infrastructure came under scrutiny. These issues converge on the issue of the sovereign guarantee. From press reports it is not clear whether the AIIB will model itself more along the lines of the IBRD, which by its Articles insists on a guarantee by the host sovereign, or along the lines of the IFC and the EBRD which do not.

This decision in turn will drive both scale and business model. In India at least there is considerable disillusion with the promise of public-private partnerships even as fiscal space for public infrastructure remains constrained. The impact of this PPP flirtation on the banking system has been near ruinous. Yet there is little confidence that the execution capabilities of the Indian public sector in infrastructure have improved significantly. Despite these misgivings my own vote would be for the AIIB to dispense with the sovereign guarantee because of the greater flexibility in types of financing this would permit.

Finally there is the potential intellectual role of the AIIB. Of the major MDBs the World Bank has gone furthest in judging that its primary contribution to economic development is through the spread of best practice, and that its financing role is primarily a sweetener for the dissemination of standards and ideas. Indeed, given the scale of Asia's infrastructure needs no amount of funding by the AIIB will be material except in the smallest countries. So the most important challenge facing the AIIB, not immediately perhaps but in time, will be to fashion its own distinctive perspective on what works in fostering development. It is in this sphere, more than finance, that collaboration between China and India could be truly transformational.

The writer is chief economist, Royal Dutch Shell. Views are personal
1. The AIIB is separate from the so-called BRICS Bank (now formally called the New Development Bank) to be located in Shanghai, where all five BRICS countries have equal shareholding. Mr K.V. Kamath was recently designated President.

First Published: Fri, May 29 2015. 22:29 IST