After decades of sustained high growth, as China’s economy overtakes the United States, it marks the first time in three centuries that a non-English speaking, non-Western, non-liberal democratic country is the world’s biggest economy. Beijing holds the world’s largest reserve assets and China is also now the biggest trading partner for about twice as many countries as the U.S. In keeping with the historical norm, political power will shift to realign with the changed economic center of gravity.

Meeting in Beijing on Oct. 24, 21 Asian countries decided to establish a new Asian Infrastructure Investment Bank based in Beijing with an initial capitalization of $50 billion. The U.S. raised concerns about the bank’s governance, environmental standards and debt sustainability, and lobbied security allies and economic partners to stay aloof.

Despite U.S. and Japanese opposition, the number of AIIB member countries has climbed to 57, prompting China to double its initial investment to $100 billion. At 25-30 percent, this will be the single largest share (India will likely have the second largest) and give Beijing a de facto veto over the bank’s decisions. Eschewing the costly and cumbersome World Bank model, the AIIB will have a non-resident board that meets occasionally in Beijing and can convene in videoconference.

The stampede of applications from Western governments in Europe and Australasia to become founding members of the AIIB before the end of March deadline, in defiance of U.S. objections, marks a stunning success for China over a petulant U.S. and surly Japan. The latter succeeded in isolating themselves instead of China. Washington was caught off-guard and irritated by the rush of its Western allies to join the AIIB in a sign that they prioritized commercial relations with Beijing even at the cost of antagonizing the U.S.

A senior U.S. official voiced concern “about a trend toward constant accommodation of China, which is not the best way to engage a rising power.” Most of the world wants neither conflict nor “constant accommodation” with China, but engagement with it.

The futile U.S. efforts were seen by Beijing as just one of many attempts to deny due international space to China in security, trade and international financial policy domains. The real reason for U.S. opposition was fear that the bank’s creation was a Chinese ploy to dilute U.S. and Japanese control of the global and Asian banking system. Since the 1980s the advanced countries who control the World Bank and the International Monetary Fund (IMF) have used them to implement the Washington Consensus of economic and political liberalization and deregulation insensitive to local political and economic realities.

The resulting conditionality often imposed extreme hardships on the poor recipient countries without matching development gains. Remember the Jakarta placard from 1997: “I M Fired”? The one-size-fits all prescriptions of market fundamentalism were progressively discredited and discarded in many parts of the world. The World Bank’s numerous critics charge that it has failed to lift countries out of poverty and instead has generally deepened poverty and created dependency, although foreign creditors have done well from its projects.

In addition, the operations and governance structures of the IMF and World Bank are seen as rigged against the developing countries and skewed toward the industrialized bloc. The Euro-Atlantic dominance of these cumbersome institutions was increasingly misaligned with changes in the international economy and their stewardship has been not entirely responsible (who chose Dominique Strauss-Kahn as IMF head?). The Asian Development Bank (ADB) was established in Manila in 1966 and has 67 members, including 48 from Asia and the Pacific. The U.S., Japan and China have holdings of 15.7, 15.6 and 5.5 percent respectively.

China’s voting share in the IMF is under 4 percent when it makes up 12 percent of world GDP. By contrast Britain and France have over 4 percent IMF voting shares with economies one-third China’s size. The Group of 20 had tried to redress the IMF’s democratic deficit by agreeing in 2009 to a 5 percent quota shift from developed to developing countries, which would have raised the latter’s share to 48 percent. The proposal has languished in the U.S. Congress for six years and counting.

The BRICS (Brazil, Russia, India, China and South Africa) are emerging powers whose rapidly growing economies, substantial populations, military capabilities and expanding diplomatic reach translate into rising power profiles. They pose a challenge to the U.S.-dominated global architecture comprising the United Nations, World Bank and IMF trinity. At their sixth summit in Brazil last year, they agreed on the details of a New Development Bank. Headquartered in Shanghai, its first president will be Indian. They also created a $100 billion Contingency Reserve Arrangement for developing countries. While the BRICS bank has a global mandate, the AIIB is exclusively regional.

Developing countries have responded with evident enthusiasm to the creation of the AIIB because it expands their borrowing choices. There is a major global infrastructure deficit — Asia alone is estimated to require $8 trillion in infrastructure finance over one decade — and they have faced inadequate access to infrastructure capital, and insufficient voice and vote in the ADB, World Bank and IMF. Having two Asia-focused banks will let them access low-cost investment funding from the ADB backed by the developed world’s high credit ratings as well as from the AIIB on less stringent terms.

Given the IMF and World Bank’s governance deficiencies, they are unimpressed by U.S. criticisms of the AIIB. As for coddling nasty regimes, well, does the pot call the kettle black? Think Marcos, Suharto and Mobutu of the Philippines, Indonesia and Zaire.

The growth of the BRICS-created and China-based and -led parallel global financial architecture is evidence of intent and ability to rewire the global governance system so that it no longer runs through the west. The new banks are a direct challenge to the existing institutions dominated by the Euro-Atlantic and Japanese allies in the world’s most dynamic economic region.

Japan’s proposal for an Asian Monetary Fund after the 1997 Asian financial crisis was stillborn against U.S. objections. Today China and the BRICS are able to shrug off U.S. dissent. The war to compel China (and India and Brazil) to abide by the U.S.-designed and controlled post-1945 liberal international economic order is well and truly lost.

As China pushes back the U.S. strategic footprint in Asia, the AIIB will institutionalize its growing penetration of the Asian and global economies. It is hard not to see it as part of the continuing process of the displacement of U.S. hegemony with a Sino-centric economic order. As the changing center of economic gravity translates into shifting geopolitical clout, Washington is being forced to play catch up and adjust from a strategic accommodation of China to collaboration with it as equals.

There is also a salient lesson for the world’s security architecture, one that China should heed as much as anyone else in relation to permanent membership of the U.N. Security Council. If existing institutions prove to be reform-proof and fail to realign their structures and procedures to the changing distribution of power in the real world, history doesn’t stop; the institutions become history.
Ramesh Thakur is a professor in the Crawford School of Public Policy, Australian National University.

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