The U.S. Flunks Playground Politics
April 6, 2015
While your two columnists grew up about 2,000 miles apart, in our (long ago) childhoods we both experienced a common playground dilemma. When a peer didn’t like his place in a basketball or soccer game, he would threaten to take his ball and go home—which would leave the rest of us with no ball and thus no game. This hardball-negotiations tactic worked—Billy and his ball would stay, with teams reconstituted to his liking—so long as one critical condition held: no one had another ball. Discover an alternative to Billy’s ball and we all waved goodbye to Billy and his ball while restarting a more enjoyable game.
These playground politics came to mind after watching the United States’ attempts over the past six months to dissuade countries from signing up with the Asian Infrastructure Investment Bank (AIIB) that is being organized by China. The Obama administration, troubled by the very existence of the AIIB, tried to take its proverbial ball and go home—only to discover that dozens of other countries wanted to stay in the game. What followed has been, in the words of The New York Times, a “stampede” of countries to join the AIIB, all of which another publication characterized as “a diplomatic fiasco.”
As of last week 30 countries had the status of “prospective founding members” while another 26 had signaled their intention to apply to become members. This list includes a number of long-standing U.S. allies: South Korea, Australia, the United Kingdom, Germany, France, and Italy. The lone non-U.S. holdout among major economies is Japan, which reflects not just U.S. pressure but also the country’s long-standing rivalry with China. Even the leaders of the World Bank and the International Monetary Fund have voiced rhetorical support for the AIIB.
The bank, which China initially capitalized with $50 billion, says it will focus on developing the following sectors: energy and power, transportation and telecommunications, rural infrastructure and agriculture development, water supply and sanitation, environmental protection, urban development, and logistics. With financial support to come from all of the other members, the AIIB may well become a major force in financing infrastructure projects throughout Asia.
The U.S. resistance to the AIIB is not easy to decipher because it has never been articulated in public (the preferred route has been selective leaks to the media). As best we can surmise, a leading concern is that the AIIB might encroach on the turf of the World Bank and the Asian Development Bank (ADB), both of which finance infrastructure projects.
One might here ask why China wouldn’t simply want to direct its $50 billion to the World Bank and/or the ADB. The playground perspective suggests an obvious answer why. China has grown increasingly grumpy about running with the likes of the World Bank ball because the United States is not giving China enough playing time.
The world’s two largest intergovernmental organizations in finance, the World Bank and the International Monetary Fund, are each governed by the votes of the member countries. But neither functions by one country, one vote. Rather, in organization member-country voting rights are allocated according to complicated rules that incorporate a number of factors—only one of which is the size of each country in the world economy. As we and others have recently observed, in purchasing-power-parity terms today China’s gross domestic product probably exceeds that of the United States. Are the voting shares of China and the United States broadly similar in the Bank and the IMF? Hardly.
In the World Bank the United States currently holds 16.28 percent of the overall votes, China just 4.87 percent. In the IMF the United States currently holds 16.75 percent of the overall votes, China just 3.81 percent. Moreover, last December the U.S. Congress refused to include in its spending legislation provisions both to add new U.S. funds to the IMF and to reform its voting structure to rebalance voting rights more towards fast-growth emerging markets such as China.
Commensurate with its growing economic stature, China is seeking a larger role in the world’s financial architecture. Is anyone surprised that in light of the current voting-rights situation, China decides to start—and invite others to—a new game? Actually games, plural. China is also a founding member of the New Development Bank, which was officially launched last year by the BRICS (Brazil, Russia, India, China, and South Africa) to finance infrastructure and sustainable development. China is also contributing $40 billion to a “Silk Road” fund focused on infrastructure in Asia.
The Obama Administration may also have a geo-strategic concern, with China expected to use the infrastructure financing to build goodwill with countries throughout Asia. And that goodwill, goes this logic, will come at the expense of the United States. Maybe. But will blocking billions of dollars in infrastructure investments win the U.S. goodwill in Asia—or anywhere else?
The playground politics have obscured what is most important about the AIIB and related efforts: meeting Asia’s massive infrastructure challenge. The Asian Development Bank has estimated that the region needs $8 trillion in infrastructure spending from 2010 to 2020. That need cannot be met solely by institutions like the World Bank, in part because they have a broader remit than infrastructure financing. The AIIB and other institutions can play a valuable role in creating the direct and collateral benefits of infrastructure development: unlocking opportunity, fostering commerce (domestic and cross-border), attracting foreign investment, and promoting economic development.
Having threatened to go home with its ball only to realize other countries are happily waving goodbye, the United States may look to have no good options. Let us suggest two. One is supporting voting reform in existing institutions like the World Bank and the IMF. The other is trying to join the AIIB. Doing so would require the U.S. Congress to appropriate money for a contribution, however, which it is unlikely to do. And there is the more-fundamental issue of whether the AIIB would welcome the U.S. joining. As anyone on the playground can tell you, once you threaten to take your ball and go home you might not be welcomed back.
Articles © 2015 Matthew Slaughter and Matthew Rees. All rights reserved.
Publication © 2015 Trustees of Dartmouth College. All rights reserved.