The Asian Infrastructure Investment Bank (AIIB), a multilateral development bank (MDB) that aims to support the building of infrastructure in the Asia-Pacific region, has quickly filled a vacuum left by traditional MDBs that have become bloated and inefficient. Since the 2008 financial crash, traditional multilateral development banks have neglected their duties to guide and fund developing nations. Given the ineptitude of the administration-heavy MDBs and the failure of the banks to account for every developing region, AIBB has been forced to find innovative solutions to typical MBD problems, such as “often slow and overly bureaucratic ways of the traditional lenders and their slow pace of representational and operational reform,” according Gregory Chin in an article about the AIIB.
For most MDBs, board structures revolve around a host country. In the case of the International Monetary Fund (IMF) and the World Bank, the board structures center around the United States, which developing nations to adapt a similar board configuration. In contrast, the AIIB does not revolve around a host country, allowing the bank a more flexible transition between countries, directly tailored to their needs. This fluidity is innovative in that it allows other nations to take initiative and adapt the AIIB to future scenarios, preventing one nation from controlling a dominating share of the bank.
There are critics who reject the structure of the AIIB. Currently, China has a 28.7 percent voting share in the AIIB, which suggests the country may use its influence in the AIIB to push its political ideologies and shut down dissenters. However, to assuage these fears of a dominant national influence, Chinese officials in Beijing offered to forgo veto power and reduce their own voting shares to less than one-quarter (if the United States or Japan agreed to join). While neither country joined the AIIB by the opening deadline, President Jin Liqun was quick to assert China will forgo its veto ability anyway to reassert the AIIB’s objective of creating a bank that is “inclusive and transparent” with a focus on the “achievement of common development.”
Perhaps the most polarizing feature of the AIDD is that it “functions on a non-resident basis,” according to Gregory Chin, a professor of political science at New York University. In general, the role of a resident board is to act as another layer of control over management. The AIIB has no need to follow this antiquated practice, as resident boards in various MDBs act as a political check on every decision taken, which confuses the line between board and management. By streamlining the resident board, which accounts for between 3 percent and 7 percent of operating budget in conventional banks, the AIIB can allocate greater funding to other operations. In the World Bank, for example, the resident board costs about $70 million annually, creating an environment in which “resident boards often slow down decision-making, sometimes unnecessarily…having nonresident boards may help to streamline decision-making processes,” according to David Dollar of the Brookings Institution.
In terms of significance to developing member nations of the AIIB, the innovative capital structure of the AIIB is the most tangible difference between the AIIB and other traditional MDBs. The AIIB’s initial capital base of $100 billion indicates it is a medium-size MDB. In comparison to the Asian Development Bank’s (ADB) capital base of about $160 billion and the World Bank’s $223 billion, the AIIB’s capital base seems insufficient and lacking. However, the AIIB spans the gap between capital bases through its capital structure set up. For reference, shareholders pay MDBs through either paid-in capital or callable capital. Paid-in capital is the payment of the capital to the MDB from the onset, while callable capital is compromised of the funds that shareholders agree to provide when necessary. Callable capital acts as an I.O.U. where the promised number of funds is only given up when needed for a project. Paid-in capital is the preferred form of contribution to MDBs as it speeds up the loan process and distribution of capital for projects.
Most MDBs have approximately a 5 percent paid-in capital fund, limiting the bank’s efficiency and speed on development projects. In contrast, the AIIB’s larger 20 percent paid-in capital fund exponentially raises their efficiency, allowing the AIIB to ramp up lending quickly. To give context, the ADB has an immediately available fund of $8 billion, the World Bank has $11.2 billion and the AIB holds a paid-in capital fund of $20 billion. This gap only increases every year with nearly 30 nations waiting to join the AIIB while the World Bank’s and ADB’s growth has stagnated. In projects where time is of the essence, AIIB’s innovative capital structure allows them to be efficient in lending and project developments, whereas other MDBs would delay payments and projects until all the necessary capital has been acquired from the callable capitals of shareholders.
Some critics argue that this structure only allows China to funnel money into its allies even more efficiently. However, based on the AIIB’s recent projects in India, whose industrial rise directly threatens China’s economic dominance, this is not the case. In the bank’s first two years of operation, half of all proposed projects are in India, ranging from highways to power plants. In addition, there are multiple projects in indirect rival countries, such as NATO ally Turkey and NATO partner Georgia.
In response to growing concerns of China’s historical struggles with sustainability, AIIB officials were quick to assert that the AIIB will be “lean, clean, and green.” To this end, the AIIB has published the “Environmental and Social Framework (ESF),” which it invited environmental organization to review and improve. In addition, the AIIB reassured shareholders that its operations would satisfy the latest international agreements on sustainable development, such as the 2015 Paris Agreement on Climate Change and the United Nations 2030 Agenda for Sustainable Development.
A key defining factor of the AIIB is the types of projects it takes on. Since the 2008-2009 financial crash, MDBs have refused to fund large infrastructure in developing nations, preferring risk-averse loans in stable countries. Even by the 1980s, MDBs had started shifting their focus away from large infrastructure projects and towards the development of less capital-intensive investments, like legal and political ministries. Under the overwhelming support of developing nations, the AIIB will focus on “big-ticket investments” such as power plants, highways and railways, which will greatly improve the quality of life for citizens. This investment strategy puts the power of the bank into the hands of the member nations, where the benefits will be reaped by millions of citizens.
While the AIIB has multiple innovative features that are not seen in existing MDBs, its most important aspect is giving a voice to previously underserved developing nations. Although still a relatively young bank, the AIIB represents a new golden standard that can be summarized by its modus operandi: “lean, clean and green: lean with a small efficient management team and highly skilled staff; clean, an ethical organization with zero tolerance for corruption; and green, an institution built on respect for the environment.”

Somewhere in Beijing, Xi Jinping is pumping his fist like he just won the lottery. On April 15, the China-led Asian Infrastructure Investment Bank (AIIB) announced its official approval of 57 prospective founding members. As of that date, the bank was also set to raise $100 billion dollars in initial capital, with half of that figure being supplied by the Chinese government. Since the bank’s unofficial announcement in 2013, China has taken on an impressive, responsible role befitting of a rising world power. Yet even more noticeable is the blow the United States’ credibility has taken, thanks to its staunch opposition to the project. Seldom in international relations does U.S. policy fall so painfully flat on its face. The rise of the AIIB, however, seems to be one of those rare instances.

Indicative of U.S failure is the list of Prospective Founding Members, which are not limited to Asian powers or China’s closest allies such as Pakistan and Russia. The bank’s membership has brought together historically bitter rivals, including Iran and Israel, as well as Pakistan and India. Most astounding, however, is the fact that despite staunch pressure and condemnation from the Obama administration, some of the United States’ closest allies have signed on, including South Korea, Germany, France, New Zealand, Australia and even the United Kingdom, with Japan and Canada as the only two major powers yet to agree to the bank’s terms.

It is also important to remember that the AIIB is set to serve an important function in the Asia-Pacific Region. A 2010 report by the Asia Development Bank (ADB), a similar intergovernmental financial institution, forecasted a need of $8 trillion between 2010 and 2020 to meet physical infrastructure demands, with 51 percent being spent for electricity, 29 percent on roads and bridges and 13 percent on improvements to lacking telecommunications networks.

Skeptics, namely Washington, have cited the fact there already exists two well-established development banks in the region––the World Bank and the ADB. While there is certainly validity to the argument of oversaturation, unlike its counterparts the AIIB is geared less toward poverty reduction and more directly toward infrastructure development. Furthermore, the reality is that the World Bank and ADB’s lending capacities sit at approximately only $300 billion and $11 billion, respectively, figures far short of the $8 trillion that is required over the decade. Therefore, it should come as little surprise that World Bank president Jim Yong Kim has been nothing but supportive of the AIIB, stating, “We welcome any new organizations. We think the need for new investment in infrastructure is massive.”

The Obama administration has also voiced concerns over the governance and oversight of the AIIB, citing equal representation and environmental oversight as two potential problems. Yet the ADB and World Bank have been faced with similar problems of their own. In fact, one of the ADB’s largest projects, a coal power plant in Mae Moh, Thailand, is considered by Greenpeace to be one of the worst ecological offenders in all of Southeast Asia. As for the World Bank, a 2010 report by the United States Senate Committee on Foreign Relations noted the institution’s poor record of “achieving concrete development results within a finite period of time” and needed to work on “strengthening anti-corruption efforts.”

While it is naive to assume the AIIB will have a spotless pro-environment, corruption-free record, the fact that the bank is still in its inaugural stages means there is room to effectively work on stamping out these issues that would be more difficult in already established institutions. Indeed, at the bequest of some of its European founding members, the AIIB leadership has already begun drafting a series of environmental standards for its projects, including requiring Environmental Impact Assessment documents (EIA) and environmental management plans (EMP) in order to receive funding.

The final and most pressing concern for the U.S. government is what it sees in China using the AIIB as both a hard and soft power tool, threating the historically U.S. controlled World Bank. There should be little doubt that the AIIB is, in part, an attempt by China to force its way into a heavily U.S.-dominated scene. As Zhao Changhui, economist at the state-owned Export-Import Bank of China, candidly admits, “the founding of AIIB is a challenge to the U.S.’s economical and political dominance. It’s also a challenge to the establishments controlled by the U.S., such as the World Bank.” Yet such statements pose little threat to the United Sates. China, the world’s second largest economy, is an ascendant power that is eager to claim the authority it proportionally deserves due to its size. Rather than fight a losing battle, the United States ought to join the AIIB. As an active member, the United States would be able to work with the other members, many of whom are allies, to shape the direction of the bank in a mutually beneficial manner.

But first, the United States must loosen its fears of a rising China and the implications of the AIIB. Many in Washington perhaps fear the bank’s establishment as the formal decline of American financial supremacy. Yet China is not in the same position that the United States was in when it formed Bretton Woods at the end of the Second World War. The United States and Europe are simply too powerful to be overshadowed in such a way by China, which lacks the unipoliarity of the post-war United States. On the eve of Japanese Prime Minister Shinzo Abe’s White House state dinner on April 28, President Obama took a cue from Chinese culture and attempted to save face, remarking that the AIIB “could be a positive thing.” This about-face only further highlights China’s upper hand.