Asian Practice on International Financial Institutions: A Comparative Analysis of AIIB and ADB

Chen Chaofan, Frank

In 2016, China established the Asian Infrastructure Investment Bank (AIIB) with 57 founding members in Beijing, marking a new multilateral financial institution’s birth. Prior to the AIIB, the most influential regional financial institution was the Asian Development Bank (ADB), which was founded by Japan and the United States of America in 1966. In 2014, the BRICS (Brazil, Russia, India, China, and South Africa) also launched a multilateral development bank, the New Development Bank (NDB). Till now, Asia has at least three famous multilateral development banks that are serving, which marks the active practice of multinational financial cooperation in the Asia Pacific region.

In this paper, the author chooses AIIB and ADB as two typical cases of Asian practice in international financial institutions to see the similarities and differences between these two institutions and discuss the future development of AIIB and ADB. Firstly, the author will introduce the AIIB and ADB separately from their background and history, nature, missions and services, membership, strengths, and fame to understand both institutions. Then, the author will conduct a similarities and differences analysis based on the previous information and existing research. Finally, the author will draw a conclusion and discuss the future of AIIB and ADB cooperation.

Background of Asian Infrastructure Investment Bank: The Rise of China in the 21^st Century

Since China’s reform and opening up, the Chinese economy has experienced significant development. China joined the world system in the late 1990s and early 2000s with the remarkable entrance of the World Trade Organisation (WTO). China has become the world manufacturing centre and the biggest trade partner of many regions and countries through the years. China has also become richer and eliminated the extreme poverty in China.

With the continuous rise of Chinese economic strength, China is seeking an equivalent position in international relations and global governance. China is not satisfied with being a participant or follower of the current world system and institutions, it wants to show its bigger ambitions and vision to the world. Since President Xi came into power, he has been trying to portray a proactive China on the international stage. He raised the Belt and Road Initiative (BRI) around 2014, and soon won support within Asian countries and even beyond. The keyword of BRI is infrastructure, which meets the expectations of most Asian countries.

Infrastructure is the basic element of economic development for a country or region.   Asia is in its rising and rapid development period, and the Asian economy is active and dynamic. The development requires better infrastructure to support and provide necessary public services. However, due to the scale and nature of infrastructures, infrastructure construction costs are high and unaffordable for most Asian countries. Needs in infrastructure investment and loans keep accumulating in this region.

Due to the limitations in capital and functions of existing multilateral financial institutions, they cannot fulfil the great infrastructure needs in the Asian-Pacific region. China initiated the BRI project in 2013, aiming to reinforce the infrastructure investment in Asia and the countries in the Belt and Road. (Banyan, 2013) A new multilateral investment development bank in infrastructure is anticipated to solve the financial issue, and China is expected to lead.

AIIB: Nature, Mission, Membership, Strengths, and Fame

            Asian Infrastructure Investment Bank (AIIB) was founded in January 2016 and is located on Jinrong Street in Beijing. AIIB is not a game-changer to the existing international financial system. It is one of the institutions constructed under the Bretton Woods System, with the nature of the Keystone International Economic Organisation (KIEO), a Multinational Development Bank (MDB) and the International Financial Institution (IFI).

            The mission of AIIB is to invest in and support sustainable infrastructure. AIIB provides capital, new technologies, and new ways to help its clients solve infrastructure challenges and new areas, like climate change. Infrastructure is a critical topic in Chinese development ideas and the AIIB’s ideal. (Firzli, 2015) There is a saying, “Build roads before you get rich (要想富先修路)” in China, describing the emphasis on the significance of infrastructure to development. The President of AIIB, Jin Liqun, also expresses a similar view: “Infrastructure investments and connectivity are crucial for lower-income countries to regain a growth momentum and to achieve long-term sustainable development goals in the post-COVID-19 era, while also dealing with climate change.”

            AIIB now has 105 approved members across Asia and beyond. Among them, 46 members from the Asian-Pacific area, 45 members from other areas and 14 members are prospective members (5 are regional countries, 9 are non-regional countries). (AIIB, 2022)

            Six years since its inception, AIIB has made a reliable image to the world. Three major international credit rating agencies, including Standard & Poor’s, Moody’s, and Fitch, granted the highest AAA credit rating to AIIB. (Lichtenstein, 2019) And the AIIB has already secured a total of us $100 billion starting capital in financing from member countries’ contributions, which provides the AIIB with a firm foundation in financial strength. However, if we compare with ADB and World Bank, the AIIB’s starting capital is equivalent to two-thirds of ADB’s and half of World Bank.

History and Background of Asian Development Bank: The Rise of Japan after World War II

After World War II, Japan came into a new period of its development. With the help of the United States, Japan developed its industries and economy rapidly and became one of the Asian Four Tigers. After World War II, the wars in Asia did not stop at once. In the 1950s, the United States launched the Korean War, fighting with North Korea and the Soviet Union behind it. Japan was seemed to be one of the critical strategic depots for the US military, manufacturing various industrial goods. Japan also played an essential role in the Vietnam War in the 1960s. Japan developed rapidly into a regional superpower with strong economic and geopolitical influences. (Wan, 2016)

            In 1956, then Japan Finance Minister Hisato Ichimada had suggested to the United States that the development projects and financing issue could get support from a regional financial institution. However, the US shows a low interest in this proposal. In the 1960s, the idea of a regional financial institution kept developing. In the late 1960s, the preparation had started and in the early 1970s the US provided $1.25 million. The bank was established in 1966 with 31 founding members and started providing loans and support to developing countries. Japan also sees it as an opportunity to show its capacity and willingness to show its leadership in the region. (ADB, 2017)

ADB: Nature, Mission, Membership, Strengths, and Fame

            Asian Development Bank (ADB) was established in December 1966 in Mandaluyong, Philippines. ADB is a traditional regional multilateral financial institution of the Bretton Woods System, and the nature of it is also the KIEO, MDB and IFI, which is the same as the AIIB.

            The mission of ADB is to eradicate poverty and promote prosperous, inclusive, resilient and sustainable Asia and the Pacific. Poverty reduction in developing countries has been the core mission of ADB since its establishment. ADB provides financial and technological assistance and loans in mainly six areas: education; environment, climate change and disaster risk management; finance sector development; infrastructure; regional cooperation and integration and private sector lending. (ADB, 2014) The general socio-economic developments are the main theme of ADB’s operation.

            In the beginning of ADB, the bank had 31 members, including the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) and some non-regional developed countries. By far, the membership number of ADB has risen to 68, comprising 49 regional members and 19 non-regional members.

            The ADB is one of the most influential regional development banks, winning a high reputation within different fields. Three major international credit rating agencies also granted the ADB with the highest AAA credit rating. ADB has $ 160 billion starting capital, which is ahead of $100 billion of AIIB’s but behind $223 billion of the World Bank. (S.R., 2014) However, the strength of ADB is relatively strong in regional financial institutions.

Similarities

AIIB and ADB are all Asia’s practices of multinational financial institutions in existing global financial systems, and they are all proposed and serving the Asia-Pacific region. We can find a lot of similarities.

            First, the nature of AIIB and ADB is similar, or even the same. They are all the regional multilateral financial institutions under the existing Bretton Woods System established since the end of World War II.

            Second, the services of AIIB and ADB are similar. Both AIIB and ADB focus on the Asian-Pacific region and provide assistance to countries or projects needed with financial, knowledge, and technological resources to help develop regional socio-economic development. Also, both AIIB and ADB are kind of supplementation to the service deficiency of the World Bank in the Asian-Pacific region.

            Thirdly, the leading countries of AIIB and ADB are all Asian countries. AIIB was proposed and established under the lead and strength of China, while the ADB was becoming a reality through the efforts of Japan and some Southeast Asian countries. The headquarters of AIIB and ADB are also located in Asian cities, Beijing and Mandaluyong. Most countries in the Asian-Pacific regions are also members of AIIB (46 regional members) and ADB (49 regional members).

Finally, we can learn from the historical background of both institutions that these two banks are also the presentation and ambitions showing of the rise of China and Japan in the region. Countries in their rise would like to show their leadership and ambitions. (Lichtenstein, 2019)

To conclude, we can learn that AIIB and ADB share many similarities in nature, services and functions, leading countries, regional participation, and the incentives behind the establishment.

Differences

Differences between the AIIB and ADB could be categorised into four areas: the core missions, operation approaches and current loan proportion, governance, membership and their capacities.

            First of all, the core missions of AIIB and ADB are different. AIIB is a development bank that focuses on infrastructure, climate change, and sustainable development challenges. ADB is an institution that puts poverty reduction in their core mission to promote the inclusive socio-economic development of Asian-Pacific regions. The AIIB focuses more on one specific area of socio-economic development, the infrastructure, while the ADB is implementing a similar function of World Bank to promote general development.

            Secondly, the operation approaches and current loans proportion of AIIB and ADB are different. (Cook, 2020) The AIIB basically focuses and finances the infrastructure constructions, like the railway, highway, dam, and electricity system. AIIB provides financial resources on the unit of project, but not country or the general field. On the contrary, the ADB focuses on six socio-economic development areas, including education; environment, climate change, and disaster risk management; finance sector development; infrastructure; regional cooperation and integration; private sector lending. (ADB, 2014) Eighty per cent of ADB’s loans go to the above six areas. Also, the ADB provides service in the unit of area or country. The differences in operation approaches could be seen in the current operation status quo. AIIB are the project-based institution with approving 108 projects in total from 2016 to 2020. (AIIB, 2021) The total loans amount of AIIB is 22 billion USD. ADB is providing its loans to countries, and the total loan amount is over 193 billion USD. The largest five lending countries of ADB are India, China, Pakistan, Bangladesh and Indonesia. (ADB, 2022)

            Thirdly, the governance of AIIB and ADB is different. AIIB is led by China with dominant 26.5856% voting right, while India and Russia share 7.6048% and 5.9817% as second and third influential countries. AIIB also has internationalised leadership. (AIIB, 2022) The President is Chinese, and the other Vice Presidents and senior officers are coming mostly from outside China and Asia. There are Vice Presidents from the UK, Russia, India, Germany and Indonesia, and Chief Officers from Brazil, Germany, New Zealand and Sweden. (AIIB, 2021) The leadership of AIIB is very diverse and international. (Lichtenstein, 2019) ADB is under the joint leadership of Japan and the US. They share the equal 15.571% voting right. China and India are the second and third impactful countries in ADB governance with 5.437% and 5.347% voting power. The President is all Japanese, and the role of the United States plays a great role in ADB’s governance.           

            Finally, the membership number and capacity of AIIB and ADB are different. AIIB has 105 members, 46 from the region and 45 from outside the region. ADB has 68 members, 49 of whom are regional members and 19 non-regional members. AIIB has a larger number of non-regional members than ADB, while ADB has more regional members than AIIB. Russia is not a member of ADB, and Japan is also not a member of AIIB. As for the members’ capacity, the author measures it by calculating the GDP proportion of members to the World GDP. AIIB’s members share 63% of world GDP with 78% of the world population, while the ADB members occupy over 70% of world GDP. AIIB’s members are mainly developing countries, but the ADB has members like Japan and the United States, which are the biggest and third-biggest economies of the world.

Conclusion and Discussion

            AIIB and ADB are two most influential and critical regional multinational financial institutions. Understanding both institutions and knowing the similarities and differences are a critical topic for international society. This article tries to provide an overview of the AIIB and ADB, then make a comparative analysis of the AIIB and ADB similarities and differences.

            For similarities, the AIIB and ADB share common features in nature as Bretton Woods institutions, services and functions for Asian-Pacific region, Asian leading countries, high regional participation, and the incentives behind their establishment. As for the differences, four aspects have been pointed out: core missions, operation approaches and current loans proportion, governance, membership and their capacities. The understanding in comparison will help us further analyse the development of both institutions.

            As the similarities and differences of two institutions are relatively clear, the AIIB and ADB should develop dislocated and complementary. Coordination will be required in the future. We are also delighted to see that AIIB and ADB have already delivered some projects jointly, which provides strong confidence to the Asian-Pacific society to show their determination to cooperate rather than compete. (AIIB, 2022)

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