Valdai Club

The creation of new development institutions such as the BRICS bank and the Asian Infrastructure Investment Bank (AIIB) together with the emergence of regional development institutions resulted in a diverse set of international organizations that may transform the way development is supported and financed in the global economy. Indeed, the strategy of the development institutions themselves is likely to change as the rise in regional blocks and their development institutions calls for a coherent strategy of alliances and modes of cooperation that targets priority regions and industries of the global economy.

In the midst of the global economic slowdown the creation of AIIB may serve to address the notable imbalances in the global economy, including via greater provision of savings from Asia for infrastructure development in the developing world. At the same time the developed economies that succumbed to the “new normal” of lower growth may benefit from investment and infrastructure projects themselves – indeed, in today’s reality there may be a new role for development institutions in advanced economies. There also seems to be greater acceptance on the part of the developed economies of industrial policy as a way to promote higher growth. Furthermore, with nearly 20% of global GDP concentrated in economies with negative rates, the weakened banking sector in many advanced economies could use some support from the development institutions in promoting investment growth.

The Asian Infrastructure Investment Bank may serve the purpose of working jointly together with other development banks to address the “weak links” in the growth performance in the developing as well as the developed world. Importantly, as noted by AIIB’s President in the report to the Board of Governors on June 25th, the Asian Infrastructure Investment Bank does not seek to displace other institutions from the global podium but is instead seeking to work together with such institutions as the World Bank and the Asian Development Bank. Instead of “crowding out” each other’s investments as well as those of the private sector, development institutions need to cooperate in addressing the voids of development across the globe and in stimulating private sector participation.

The scope of operations of AIIB is likely to be more global than regional, which is made possible by the openness espoused by this institution in underscoring its readiness to accept new participants, including such key global players as Japan and the US. Accordingly, AIIB is likely to be a key player in financing infrastructure development in such trans-continental mega-projects as the One Belt-One Road initiative as well as in supporting growth projects across the globe. Given the tremendous infrastructure needs in Eurasia as well as the experience accumulated by other development institutions in the region (including the Asian Development bank and the Eurasian Development Bank), AIIB is likely to actively use the instrument of co-financing of infrastructure projects with other development institutions and the private sector.

Most importantly, the new development institutions such as AIIB point towards an important trend taking hold in the global economy, namely that of divergence of institutions and models of economic development. Back in the 1990s the economic development paradigm was dominated by the convergence towards the “Washington consensus” vision of the world and the pre-eminence of advanced economies in global governance institutions. The divergence in the evolution of institutions observed in recent years serves to achieve greater conformity between the economic and political country weights in global governance – countries such as China with substantial economic capacity may play a greater role in global governance despite the inertia of the quota revisions in Bretton Woods institutions.

Overall, in complementing the Bretton Woods organizations development institutions such as AIIB provide additional gateways to regulatory mechanisms in infrastructure development, conditionality and regional coverage and representation. In this respect the creation of AIIB is a crucial step towards a balanced and more sustainable globalism – the new development bank serves as yet another pillar of global governance that balances out the asymmetries of the “old governance regime”.