Breaking the Washington Consensus?  The Rise of ‘Alternative’ Development Banks

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The United Kingdom scuttled much of its trans-Atlantic partnership with the United States this week, when it became the first G7 country to join the China-led Asian Infrastructure Investment Bank (AIIB) over US objections.  European countries France, Germany, and Italy followed suit, with Australia and South Korea now re-evaluating their positions to consider joining the USD $50 billion capitalized AIIB. Japan is holding firm on its alliance with the United States in refusing to join the AIIB.  United States National Security Council spokesperson Patrick Ventrell declared that “any new multilateral institution should incorporate the high standards of the World Bank and the regional development banks…we have concerns about whether the AIIB will meet these high standards, particularly related to governance, and environmental and social safeguards.” As I write from my temporary office here at the Centre for Asian Legal Studies (CALS) at the National University of Singapore Faculty of Law, commentaries proliferate on this debacle and the alleged waning geopolitical influence of the United States, most recently from Kishore Mahbubani, Dean of the Lee Kuan Yew School of Public Policy, who declares all these events “a sign of American decline”.  It is not the first indictment on America’s lessening hegemonic grip in the face of China as a rising power. Joseph Weiler’s magisterial Keynote at the 2014 ESIL conference showed how the conflation of politics, cultural cleavages, economics, and moral authority essentially presaged the end of Pax Americana.   More detail to these themes also resonate from a recent 2014 edited book by political science and international relations scholars Vinod Aggarwal and Sara Newland, showing how both the United States and the European Union have deployed various strategies of engagement, cooperation, and confrontation with the rise of China.

Whichever brush we use to describe the decision of key US allies such as the UK and Europe to join the AIIB (e.g. defection from US alliances, or strategic policies towards engagement with China as a rising power), the more interesting international legal phenomenon here is the impact of the rise of the AIIB (and other rival new development banks in the future) on the decades of dominance of the Washington Consensus in international development finance law.  Will the rise of ‘alternative’ development banks such as the AIIB break the stranglehold of the Washington Consensus on international development lending? And if so, what will the AIIB replace it with?  Would the AIIB and new ‘alternative’ development banks necessarily spell sea changes in ensuring compliance with international environmental and social norms and treaty standards throughout international development projects in developing countries?  While the AIIB has been hailed as a needed balance to American dominance in international development lending, China has also been quite opaque thus far on the actual contours of the AIIB’s governance and the terms of its international development lending policies.  And it is precisely this nebulousness that the US appears to interpret as a slide towards the lowest denominator in social inclusion, and the protection of environmental and social safeguards in international development lending.  Never mind that the World Bank is doing its own soul-searching and internal review on this score as well by calling for a long overdue review of its environmental and social safeguards policies, with World Bank President Jim Yong Kim recently warning of the surge of forced resettlement from Bank projects.

The rise of new ‘alternative’ development banks such as the AIIB and the contemplated BRICS bank creates an opening not just to dilute the powerful (almost monopolistic) reach of the United States on international development finance policies, but also to engage all international finance powerhouses – established or emerging – in reforms over global standard-setting in the international development finance ‘soft’ and ‘hard’ law. For over sixty years since the post-war global reconstruction period and in tandem with the evolution of the modern UN Charter era, Washington Consensus policies have dominated reform prescriptions for developing country borrowers.  These policies focus on ten points as the core focus of lending by international financial institutions that heavily depend on US capital (the trio of the World Bank, the International Monetary Fund, and the US Treasury): 1) fiscal discipline; 2) public expenditure priorities; 3) tax reform; 4) financial liberalization; 5) exchange rates stability; 6) trade liberalization; 7) increasing foreign direct investment; 8) privatization; 9) securing intellectual property rights; and 10) a reduced role for the state. Both the much-maligned IMF conditionality and World Bank conditionality rules prevalently applied to international development finance lending all flow from the same tenor and content of the Washington Consensus policies.  The creation of the AIIB will certainly be watched closely in the coming days to see if these core principles of international development finance lending will be replicated among the new ‘alternative’ development banks.

The Washington Consensus policies hearken very much to a Hayekian libertarian ideology for development, where development was to be achieved from expanding and freeing global markets, thereby enlarging global wealth and, by implication improving overall welfare. This turn of the Washington Consensus policies towards neoliberalism itself is fodder for irony, considering that British economist Lord John Maynard Keynes – the father of Keynesian interventionism – was the foremost architect (along with his US counterpart Harry Dexter White) in establishing the World Bank.  In his 1944 address to the delegates of Bretton Woods, Lord Keynes was explicit that the World Bank should be established both for reasons of ensuring continued growth and productivity, as well as to affect employment and conditions of labour:

I will not say that the establishment of the Bank for reconstruction and development is more important than the Monetary Fund but perhaps it is more urgent. U.N.R.R.A. [the United Nations Relief and Rehabilitation Administration] will provide funds necessary for relief and rehabilitation in the days immediately following liberation but it will not provide finance for more permanent reconstruction and the restoration of industry and agriculture. To fill this gap is one of the main purposes of the Bank which we have been working at in Bretton Woods. Its other main purpose is the development of the less-developed areas of the world in the general interests of the standard of life, of conditions of labour and the expanse of trade everywhere. . .

The proposal is that it is up to the rest of us to stand behind the credit of the devastated and undeveloped countries and take—each of us—our share in guaranteeing the lenders from ultimate loss. There are many careful provisions to safeguard the guarantors from excessive loss, but the whole world will join together in a mutual credit insurance pool… Resources will be available to reconstruct the liberated areas. Buying power will be available for the output of manu­facturers in every country physically capable of meeting the demand. A powerful means will be provided for the maintenance of equilibrium in the balance of payments between debtor and creditor countries. There has never been such a far-reaching proposal on so great a scale to provide employment in the present and increase productivity in the future. . [Statement by Lord Keynes on the proposed Bank for Reconstruction and Development (1944), Italics added.]

On sheer capitalization terms alone, the new $50 billion capitalized AIIB and the contemplated ‘new’ development bank from the BRICS (Brazil, India, China, South Africa) nations – while important in and of themselves, cannot yet frontally compete with the capital and resources of the established trio of the Washington Consensus – the World Bank at around US$329 billion (as of 2011), the International Monetary Fund at around US$831 billion (as of 2012), and the US Treasury at US$18292.2 total taxable resources (as of 2012).  On capitalization terms alone, the new AIIB is not yet firmly positioned to be join the ranks of the foremost players in global development finance, as compared with fellow regional development banks, such as the Asian Development Bank at around $79 billion as of 2013; the European Bank for Reconstruction and Development at around $55 billion as of 2012; the Inter-American Development Bank at $171 billion as of 2010; and the African Development Bank at nearly $100 billion as of 2012.  Setting the geopolitical hegemonic discourses aside, it was certainly a fair point for the United States to bring up the question of environmental and social safeguards, transparency, and accountability in international development finance lending practices.  It is these precise issues that vividly remain at the core of deep reform questions for the established international development financial institutions such as the World Bank and the International Monetary Fund.  The AIIB and the contemplated BRICS bank are in no way immune from the same governance and international duties of States to restore economic, social, and cultural rights, environmental and social safeguards, inequality reduction, and social protection back as the fundamental objectives of international development lending.

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Moshe Hirsch says

March 19, 2015

Dear Diane, thanks for a very interesting post.
Further socio-political pluralism in international financial institutions is certainly welcomed but as you hint, the crucial question is what kind of 'conditionalities' will be adopted in the AIIB's lending programs. And perhaps we may have some indication from other regional development banks such as the African & Inter-American banks?