Why America should join the AIIB

The United States, along with Canada and Japan, has been conspicuously absent from the discussions regarding the establishment of the Asian Infrastructure Investment Bank (AIIB). A total of 57 countries – from Europe, Asia, and Latin America – have joined the Chinese-led effort to spend $100 billion on roads, rail lines, bridges, and harbors throughout the region. But President Barack Obama’s administration has remained reluctant to join – much to the bewilderment of China’s government.

Continuing to maintain that stance would be a mistake. The US has an opportunity to influence the AIIB’s design without looking like it is reversing course. In exchange for participating in the institution, the Obama administration could and should insist that the AIIB focus on financing infrastructure projects that reduce carbon-dioxide emissions and meet the highest environmental standards.

The need for infrastructure investment in Asia’s emerging economies is vast. Generally, as a country’s household income rises, the share of spending on food declines, while spending on transportation rises sharply. And most developing countries in Asia have reached an economic stage at which large segments of their populations will soon be able to afford cars and plane travel for the first time.

According to research I conducted with my colleague, Tomas Hellebrandt, average household income in Asia’s emerging economies will double over the next two decades; in the meantime, spending on transportation will quadruple. The choices being made now regarding what kind of infrastructure to build – subway systems or roads; green energy or coal power – will have a major impact on the world’s ability to keep climate change in check.

The US and China have a common interest in ensuring both that economic growth in Asia remains strong and that CO2 emissions are curbed. The two countries are also seeking concrete initiatives that will showcase their ability to work together, and they have already established a track record of cooperation on environment-related issues. Just last November, Obama and President Xi Jinping issued a joint announcement on climate change, outlining their respective policies and describing their shared initiatives. It is important that that momentum be maintained in preparation for the United Nations Climate Change Conference in Paris in December.

Fortunately, both countries seem to recognize the importance of finding a way forward regarding the AIIB. Japan, America’s main Asian ally, issued a competing announcement in May that it would offer $110 billion for “high-quality infrastructure” projects in Asia over the next five years. But the US position seems to have softened somewhat in recent months. In April, Obama stated that the US is not opposed to the AIIB, and that he would be “all for it” if high international standards for lending projects are met.

It is pointless to attempt to divine whether China’s effort to establish the AIIB reflects a desire to strengthen its global standing or is aimed only at advancing the country’s narrowly defined commercial interests. The most likely explanation is that both motives are at work. There can be no doubting, for example, that China has a keen interest in allocating its vast stockpile of savings to productive use on projects undertaken abroad.

To be sure, Western China still needs to be urbanized and modernized, but that market may soon become too small, at least relative to Chinese companies’ formidable ability to deliver infrastructure projects. Meanwhile, as neighboring countries develop economically, new opportunities for regional trade will be created. Commercial ties may also help preserve political stability in the region, especially if the fruits of economic development are perceived by all to be shared in a reasonably fair manner.

Decisions like the one the US is facing – whether or not to join the AIIB – should not be based on speculation about other countries’ motivations, but rather on an estimation of what can be accomplished by choosing one way or the other. By participating in the AIIB, advanced economies will be able to influence its operations, ensure that its processes are transparent, and put in place incentives for projects that preserve the world’s natural resources and control climate change. The US is well placed to play a constructive role in that endeavor.

This article is published in collaboration with Project Syndicate. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Paolo Mauro is a senior fellow at the Peterson Institute for International Economics.

Image: The People’s Republic of China flag and the U.S. Stars and Stripes fly on a lamp post. REUTERS/Hyungwon Kang.