The Asian Infrastructure Investment Bank and the Banco del Sur:

Two examples of financial regionalism

Oscar Ugarteche, Tesalia Valencia Belén

02/09/2015

Opinión

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The Asian Infrastructure Investment Bank (AIIB), proposed by China, presently with 57 founding members, is an alternative multilateral institution for the financing of infrastructure in emerging economies, principally in Asia, from the building of roads and airports to communication antennas and economic housing (1). This differs from the Banco del Sur, whose preoccupation was the recirculation of savings and international reserves within South America, the Asian Bank is preoccupied with including countries that have the technology to build the kind of infrastructure that Asia needs for the XXI century. As they are less worried about the draining of resources and more with the quality of new infrastructure, China has promoted the incorporation of European members, to the indignation of the United States. For the [US] Treasury, this bank competes with the World Bank, something that the Banco del Sur would not have done.

Although neither the United States nor Japan are in the list of founding members, the presence of France, Germany, Italy and Norway has been a diplomatic coup for China, since the support of the big economies of Europe represents an increase of power and influence of the Asian giant in the West, something that at the same time is a great challenge for the traditional multilateral institutions such as the Asian Development Bank (ADB), controlled by Japan and the World Bank (WB) headed by the United States. The [US] Treasury accused the United Kingdom of "constant accommodation" with respect to China and challenged it to renounce this idea (2).

In Latin America, the mere impulse of the Banco del Sur (Bank of the South) led to the conversion of the Corporación Andina de Fomento (CAF) into the Latin American Development Bank. With thirty-five years of experience, the old CAF went from six members (Venezuela, Colombia, Ecuador, Peru, Bolivia and Chile) plus fourteen private banks, to 16 Latin American countries, two European ones, Spain and Portugal, plus fourteen private banks. From Latin America several countries are missing regardless: Guatemala, El Salvador, Honduras y Nicaragua, which marks the separation between Central and South America, that for us begins with Costa Rica.

Perhaps the most important feature of the CAF Banco Latinoamericano de Desarrollo is that it has private banks and the IDB as shareholders. Because of the way the data is presented in their balance sheet for 2014 it is difficult to determine how much of the bank belongs to private South American banks plus the InterAmerican Development Bank. The countries whose private banks are more important in the CAF are Ecuador (Banco del Pacífico y Banco de Guayaquil), Peru (Banco de Crédito, BBVA Continental, Scotiabank and the Banco Internacional del Perú INTERBANK), Colombia (Banco DAVIVIENDA SA, and the Corporación Financiera Colombiana, SA).

The Asian Infrastructure Investment Bank, (AIIB) has fifty-seven founding government members, including thirty-seven Asian and twenty European. For the Asians, the presence or absence of the United States in their membership is not as decisive as it is in Latin America, where the difference is between a Pan American scheme and a regional one and where the asymmetry gives the northern neighbour a weight that it would not have in Asia. The opposition of the United States to the AIIB could be understood as an expression of weakness of the United States in world influence. The initial size of the assets of the AIIB is some 100.000 million dollars, something like five times greater than that of the IDB, twelve times that of the Banco Latinoamericano de Desarrollo, three times that of the BNDES of Brazil and two-and-one-half times that of the World Bank. There are obviously other possible options for financing the AIIB, such as inter-bank loans and the emissions of bonds, so that with a similar leverage to the BNDES it could turn into a trillion dollar bank, the biggest bank in the world (3). The total assets of the Word Bank group comes to 353,000 million US$ for 2014.

The initiative of a Bank dedicated to investment for infrastructure, together with the Fund for the Silk Route and the new BRICS bank, ratified by the Chinese Parliament on June 24 2015 (4), has to do with a change towards a new world economic order characterized by the preventive oversight of China. Each institution alone is no threat to the global financial power of the United States. Added up they are an element to be taken seriously.

The main engine of growth of the Asian giant has been construction, which recently lost force as the process of urbanization has been waning. It is as if China, conscious of not being able to continue accumulating packages of stimuli oriented to investment in infrastructure in their own territory, is attempting to export this model of development to the rest of the emerging world through these three institutions.

Another economic motivation is associated to the use of the renmimbi (RMB), given the money of reference of the AIIB is the RMB, and with this they will continue pushing the accumulation of financial assets in yuan beyond Chinese borders and affirming the internationalization of their currency. For both reasons the United States protested the British and European presence there.

Finally, having taken the idea from South America, China and the Asian countries have been able to establish a powerful regional multilateral financial apparatus, while Brazil is still debating the Banco del Sur. Apparently if MERCOSUR/Brazil does not benefit directly, it is not an issue taken to be taken into account and the Banco del Sur does not bring any direct benefit to Brazil that it cannot get through BNDES. The Chinese success is an interesting case that shows Latin American diplomatic myopia. It appears that some countries want regionalism, but don’t want to finance it!

24/06/2015

- Oscar Ugarteche, Peruvian economist, Works at the Instituto de Investigaciones Económicas, , Mexico. Member of SNI/Conacyt. Coordinator of the Observatorio Económico de América Latina (OBELA) http://www.obela.org

- Tesalia Valencia Belén, member of the OBELA project, IIEc-UNAM.

[1] AIIB www.aiibank.org