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Thursday, April 9, 2015
Kenneth Rogoff: A Different Take on the new Chinese Development Bank (AIIB)
Former IMF Kenneth Rogoff writes a new article in which he questions how well the new Chinese led development bank will actually work. Below are some quotes from this new article which you can read in full here. After the quotes, a few comments.
"With China set to lead a new $50 billion international financial institution, the Asian Infrastructure Investment Bank (AIIB), most of the debate has centered on the United States’ futile efforts to discourage other advanced economies from joining. Far too little attention has been devoted to understanding why multilateral development lending has so often failed, and what might be done to make it work better.
Multilateral development institutions have probably had their most consistent success when they serve as “knowledge” banks, helping to share experience, best practices, and technical knowledge across regions. By contrast, their greatest failures have come from funding grandiose projects that benefit the current elite, but do not properly balance environmental, social, and development priorities.
Dam construction is a leading historical example. In general, there is a tendency to overestimate the economic benefits of big infrastructure projects in countries riddled by poor governance and corruption, and to underestimate the long-run social costs of having to repay loans whether or not promised revenues materialize. Obviously, the AIIB runs this risk."
. . . . .
"While the world should generally welcome China’s initiative, the real question is what kind of aid developing Asia needs. Anyone who has worked in developing countries understands that weak institutions and poor governance are often far bigger obstacles to growth than a lack of funds. And, however great a project looks on paper, practical implementation is often a sobering experience. Costs invariably far exceed initial estimates, and planners often woefully underestimate the skills and funding needed to ensure maintenance and repairs."
. . . . .
"Given the legacy of problematic loans and projects funded by Western-led infrastructure banks, it is reasonable to ask whether another one is needed, as opposed to reforming existing institutions. Still, if the AIIB views itself mainly as a knowledge bank, rather than a funding vehicle, it could provide real added value. We should evaluate the AIIB by how it chooses and fosters projects, not just by how much financing it provides."
Actually making any major reforms is not likely to happen. This is one reason the US Congress is reluctant to send any more new funding to the IMF. Just looking at how things are going right now, it seems unlikely this stalemate between Congress and the IMF will change any time soon. If that changes, we will cover it here.