China’s plans to set up the Asian International Investment Bank have demonstrated that the United States has lost its way and is rapidly forfeiting claims to global financial, economic, political and moral leadership. Questions also have to be asked about the wisdom and leadership of the World Bank and Asian Development Bank and about the chief Asian supporter of the U.S. — Japan.

From the moment the project was mooted, Washington’s responses have been woeful, more or less wishfully hoping that the bank would go away. Even in mid-March, U.S. Treasury Secretary Jack Lew demonstrated his failure to understand the wisdom of that old adage if you are in a hole, stop digging. Lew urged European countries not to join the AIIB. He was too late: Germany, France, Italy and Luxembourg had already announced that were rejecting U.S. opposition and would join the United Kingdom in becoming founder members of AIIB before the March 31 deadline.

The weeks before Lew’s comments, an unnamed senior U.S. official took the unusual step of talking to the Financial Times explicitly to condemn the U.K. for breaking ranks and announcing it was joining AIIB. “We are wary about a trend toward constant accommodation of China, which is not the best way to engage a rising power,” grumbled the American official.

Who, however critical of China, can blame Beijing for feeling squeezed out of the international financial system principally because of opposition from Washington? China has given an object lesson in economic growth, rising from abject poverty 35 years ago, to become the world’s biggest or second biggest economic power, depending on what exchange rate is used. In per capita terms, China lags, but it has given development lessons to the world.

Its huge pile of foreign exchange reserves, now worth almost $4 trillion, have helped to keep the U.S. afloat in difficult times through purchases of U.S. Treasury instruments.

It has poured money into Asia, Africa and Latin America, admittedly with mixed results. Fred Hochberg, chairman of the U.S. Export-Import Bank, put the figure of lending by Chinese state institutions at $670 billion in the last two years alone (against $590 billion by the U.S. Ex-Im in the 80 years of its history).

Other experts dispute whether the figure is as high as Hochberg claims, but China is a massive lender. Its two principal lenders, China Development Bank and the Export-Import Bank of China provide more loans to Asia than the World Bank and ADB, and more to Latin America than the World Bank and Inter-American Development Bank.

Myanmar has received $20 billion, Russia $30 billion, Ukraine $18 billion and Venezuela $65 billion. Chinese lending to Latin America since 2005 has reached $120 billion, while African countries have received more than $50 billion, according to calculations by regional specialists. Critics say Beijing practices “checkbook” foreign policy.

In return for China’s efforts to play a bigger economic role in the world, the Group of Seven, the top economic club of nations, invited Russia, but not China, to join. After long and painful negotiations, in 2010 a deal was concluded to give China a 6 percent share in the International Monetary Fund, still below Japan and way below the U.S.’ effective veto share of 16.47 percent.

But the U.S. Congress has refused to approve the plans, even though the reshuffle of shareholdings will not cost America any money. So, China languishes on 3.8 percent of the IMF, below Japan, Germany, France and the U.K. China’s share of the global economy is 16.5 percent on a purchasing power parity basis, slightly higher than the U.S., or 13.3 percent expressed in market foreign exchange rates.

Beijing got the sop of becoming a founder-member of the Group of 20 countries, which claim to represent 85 percent of the global economy. But the G-20 has shown itself to be unwieldy with too many hangers on, including the heads of the IMF, World Bank, EU, ASEAN, African Union, and without a permanent secretariat.

On the other side of the equation, the world, particularly Asia, cries out for infrastructure investment, transportation, energy and telecommunications. The Asian Development Bank estimated the infrastructure needs of Asian countries at $8 trillion between 2010 and 2020, far too much for the ADB to meet.

Beijing has been busy building institutional arrangements to channel its money. Besides the $100 billion New Development Bank (BRICS bank) and the $40 billion Silk Road Fund, in 2013 China came up with the idea for the AIIB, which was formally launched in October 2014. Chinese officials hope the bank will open its doors for business and make its first loans this year.

Initial capital is $50 billion, but is likely to be doubled. As of late March, the European countries and New Zealand had joined along with 26 Asian and Middle Eastern countries. Australia initially declined but may reconsider and join along with South Korea after the decision of the major Europeans. This would leave the U.S. and Japan as the leading countries on the outside.

Although nominally welcoming any new bank that would finance infrastructure development, Washington questioned whether a Chinese-led bank headquartered in Beijing and with China owning as much as 49 percent of the shares would be open or transparent or follow international best practices.

America fears the bank will promote Chinese political, economic and commercial purposes, even though Beijing has persistently promised that the AIIB would be “open, inclusive, transparent and responsible.”

In being the first European to defect from U.S. leadership, George Osborne also claimed that the U.K. wanted to join to ensure that the AIIB was ethical, transparent and efficient. This was received skeptically in China, with one blogger claiming that Britain was Washington’s thug for hire.

China’s decision to break with the so-called Washington consensus and set up its own infrastructure bank also puts the established Bretton Woods institutions in a bad light, although Christine Lagarde, head of the IMF, has pleaded and begged with the U.S. Congress to pass the 2010 agreement on shareholdings. She endorsed the AIIB and pledged that the IMF would cooperate with it.

Leaders of the World Bank and ADB have been more muted and said that there are plenty of infrastructure projects to go round. Both the Washington and the Manila banks have moved away from big infrastructure projects that used to be their wherewithal, and instead emphasize softer targets like “Our Mission is to combat poverty.”

Japan has been caught off guard. Chief Cabinet Secretary Yoshihide Suga this month tried to pour cold water on the project, asking whether AIIB would be able to ensure fair governance or lend for sustainable projects. Given that the U.K., Germany and France have decided to climb aboard the AIIB, should Japan now join to influence the bank from within and not be left out of China’s infrastructure express?

Finance Minister Taro Aso raised the possibility of Japan joining if conditions are right, but Tokyo should be asking if its jealous determination to cling to the ADB presidency was a factor in persuading China to set up its own bank rather than channel funds through the ADB.

The biggest questions remain for Washington. Congress is to blame for failing to approve plans to give Beijing a bigger role in international financial institutions. Belatedly, some experts at Washington think tanks have recognized that AIIB is on its way to being a reality and suggested that the U.S. should eat humble pie and apply to join. However, opposition in Congress makes this a nonstarter.

U.S. President Barack Obama must take the blame for not understanding how Beijing felt miffed at being squeezed out of the World Bank and IMF — or at Japan for insisting on dominating the ADB. He also failed to respond to China’s determination to go ahead with AIIB, and to the support in developing Asia for the project.

Not for the first time, Obama has shown he can talk eloquently, but does not have a political clue how to get things done.

Kevin Rafferty was managing editor of the World Bank in Washington 1997-99.

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