Banking on Acceptance: China and the Asian Infrastructure Investment Bank

The Beijing-headquartered Asian Infrastructure Investment Bank (AIIB) opened in January 2016, establishing itself as the newest member of the multilateral development bank community. Commonly billed as “China’s answer to the World Bank,” the AIIB aims to invest in infrastructure and other productive sectors across the Asian continent. Concerns about China using the AIIB as a front for its strategic and economic objectives plagued the bank’s planning stages and initial months of operations, but such concerns were difficult to substantiate before the bank had funded any projects. The recent announcement of the AIIB’s first four funding projects suggest that, while China is using the bank to its advantage, it is also maintaining the bank’s legitimacy as a multilateral institution.

China officially proposed a multilateral infrastructure bank for Asia in 2013, an announcement that received an unenthusiastic response from the United States and Japan. Both countries were concerned that founding a new bank, not necessarily beholden to “international standards of governance and transparency,” could provide China with the opportunity to exert disproportionate influence over Asia’s development agenda.

These concerns were substantiated in 2015 when it was announced that China would be the largest stakeholder in the bank, with a 26% voting share, after funding $29.78 billion of the AIIB’s $100 billion capital. Given that major changes to the bank, including capital increases or alterations to the governing structure, must be approved by a supermajority totaling 75% of the voting share, China effectively possesses an informal veto power over many AIIB decisions. However, Beijing has been keen to assuage worries of Chinese dominance. The chief of the bank stated that China will not seek to increase its voting share – in fact, he alluded that China’s voting share may decrease over time as more members join. In addition, China will not possess a formal veto power, a stark contrast to the United States’ formal veto over structural changes within the World Bank.

That said, Chinese interests were clearly supported when the AIIB began to consider development project proposals, the first of which were approved in June 2016. They included revitalizing slums in Indonesia and upgrading the power grid in Bangladesh, as well as constructing and improving roads in Pakistan and Tajikistan. While these projects will undoubtedly benefit China, they also show that AIIB’s reputation as a multilateral bank will not be undermined to serve solely Chinese interests.

To understand how the AIIB benefits China, it is necessary to look at Chinese development in the larger context of the country’s One Belt, One Road (OBOR) initiative. Inspired by the ancient Silk Road, OBOR seeks to connect China with trading partners through Asia, the Middle East, and Africa via an “economic land belt” and a “maritime road” that links Chinese ports to those of other countries.

The AIIB, as a formal investment institution with international support to increase regional prosperity, is partly a way to fund OBOR. It is therefore unsurprising that the AIIB’s projects for Pakistan and Tajikistan are directly related to OBOR.  Both projects call for the construction and improvement of roads, which is critical to trade between China and other Asian countries.

But consistency with OBOR’s objectives does not mean that these projects are simply moves by China to increase its regional influence. Rather, the AIIB has chosen to co-finance all of these projects, except the one for Bangladesh, with other multilateral agencies including the Asian Development Bank (ADB), the European Bank for Reconstruction and Development (EBRD), and the World Bank. Co-financing mitigates the risk that the young AIIB and its stakeholders are accepting and eases concerns in the international community regarding the transparency and governance standards of the AIIB. Cooperating with respected multilateral agencies ensures that the AIIB will, at least for these projects, comply with accepted international standards. This compliance strengthens the bank’s standing among multilateral institutions.

Still, some are convinced that the AIIB is prioritizing Chinese interests at the expense of regional prosperity. In particular, there is concern that AIIB rejected a project for India in favor of a road construction project for its strategic ally, Pakistan. However, the president of the ADB, which is the lead financer of the project, stated that there are “so many projects in the list in many countries. It just happened that the Pakistan project was approved first because it could be done quickly.” That this statement comes from the ADB strongly suggests that financing for the Pakistan project was not a case of the AIIB favoring China’s regional allies. Given Japan’s tenuous relationship with China, the Japan-backed ADB would have little incentive to finance a project in Pakistan if it believed that it would solely aide Chinese interests.

The AIIB is increasingly perceived as an institution that complements other development efforts, as evidenced by co-financing and support from other multilateral banks and the membership of other global powers such as Australia and Germany. Such acceptance is beneficial to both the multilateral development industry and China. Increased membership could augment the capacity of the AIIB to contribute to infrastructure development, leading to greater prosperity for China and the rest of the continent. Such a prospect is certainly motivation for the AIIB to continue to seek success not only in its project outcomes, but also in the eyes of the global development community.

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Making Room in the Development Sandbox

The era of Western run foreign assistance is over. Throughout the history of foreign assistance, big development agencies like USAID have called the shots, touting stories of untrustworthy governments and issues of national security as justifications for entirely Western run development schemes.  The rise of South-to-South cooperation and support from developing economies has shifted power in the world of international development. There are many articles that either sing the praises of USAID or tear it down; this is neither. Policy makers must recognize a new wave in international development and consider alternative options to government assistance.

North-to-South aid relationships have been the status quo for as long as foreign assistance has existed. In the past, the North provided the funds, personnel and program structure, and the South provided the location and beneficiaries. But the dynamic is shifting.  Power blocs of emerging economies–like Brazil, Russia, India, China and South Africa (BRICS)–are the new frontiers of global development.  On the growing list of South-to-South programming, Thailand is granting loans to Cambodia, India has started technology sharing programs, and Brazil started infrastructure programs in Paraguay.

In terms of real numbers, the U.S. is still the global leader in ODA and money contributed to foreign assistance, but we aren’t very popular. A number of academics from “developing” countries recently criticized the heavy hand of the United States in foreign assistance programming and decried what they refer to as the “cycle of dependency.” Thinly veiled arguments against South-to-South programming have also emerged from Western development heavies like Jeffrey Sachs and Paul Collier. These practitioners are disputing academics, like Zambia’s Dambisa Moyo, who have called for an African run development plan.

Internationally and domestically, USAID is no stranger to criticism. In 2011, 156 Republican Congressmen called for a drastic defunding of the agency. While defunding one of the largest development agencies in the world may seem brash and ill advised, it is clear that people are displeased with the current norm in development. Recently, USAID came under fire for poor financial accountability and low program achievement. In 2014, an audit of a $88.5 million program in Afghanistan detailed low objective achievement and possibly misappropriated funds. A financial audit, however, could not be conducted due to a lack of funds.

All of this is not to say that USAID is the enemy, the agency has achieved tremendous feats: 850,000 people have been reached through the HIV/AIDS prevention program and 15 million primary school children have been targeted and included in global literacy programs. The emergence of a new development dynamic is not a goodbye to USAID. As South-to-South Cooperation continues to grow, surely USAID will grow and change with it.

Beyond ODA: Integrating Philanthropy into the Post-2015 Development Agenda

Last month, representatives at the United Nations Third International Conference on Financing for Development agreed to a number of proposals to fund the upcoming Sustainable Development Goals. Collectively known as the Addis Ababa Action Agenda, these proposals cover a range of financing sources, from domestic tax revenues and official development assistance to private sector financing and philanthropy. The Agenda also included measures to support international trade and capacity building. World leaders now hope that the financing mechanisms laid out in the AAAA will encourage countries to adopt both the SDGs and a climate change accord scheduled for negotiation in Paris this December.

 

Secretary General Ban Ki-Moon congratulates delegates on adopting the Addis Ababa Action Agenda. Source: UN Economic Commission on Africa
Secretary General Ban Ki-Moon congratulates delegates on adopting the Addis Ababa Action Agenda. Source: UN Economic Commission on Africa

 

The SDGs are a proposed set of 17 goals that are meant to provide benchmarks for a variety of development issues over the next 15 years. The goals cover poverty, hunger, health, education, gender equality, energy, the environment, and a host of other global challenges. Each goal is accompanied by a number of targets that serve as tangible metrics of a country’s progress towards the SDGs. These new goals are a follow up to the Millennium Development Goals, a 15-year set of eight benchmarks that world leaders agreed to back in 2000. To improve their drafting process for the new goals, the UN organized the largest consultation program in its history that combined government input with surveys of the general public.

 

The Addis Ababa Action Agenda, a vital part of the new development goal drafting process, is a step towards recognizing the role of international philanthropy and the private sector in supporting global development. The agreement makes several references to the importance of the private sector in economic growth, particularly the role of the financial sector in enabling small businesses. Furthermore, Article 10 of the agreement explicitly lists philanthropies and foundations as vital members of the “global partnerships” that are required to meet the SDGs. This is a substantial improvement over the funding section of the MDGs, which overwhelmingly relied on official development assistance and did not reference to international philanthropy.

 

However, there is still a lot more that the Addis Ababa Action Agenda and the SDGs could do to support philanthropy’s vital role in development. In June, the CGP cohosted the Conference on Policy Coherence for Mobilizing Private Financial Flows for Sustainable Development with the OECD Development Center. The purpose of this conference was to discuss how to best utilize private funding for the SDGs in the lead up to the Third International Conference on Financing for Development. Dr. Carol Adelman, director of the CGP, provided a number of recommendations, summarized below:

 

  • Efforts to measure private financial flows and to publicize philanthropic best practices should be increased
  • Private and philanthropic actors should be included in drafting the SDGs
  • Innovation should be the primary criteria for creating public-private partnerships as part of the SDG targets for global partnerships
  • Philanthropy should be recognized as a unique source of development practices rather just an additional funding source for official development goals
  • Countries should strive to improve their legal environments for investing in both for-profits and not-for-profits
  • Intergovernmental organizations should facilitate the distribution of private resources to developing countries by evaluating best practices and identifying successful ventures

 

Though these suggestions were not explicitly included in the Addis Ababa Action Agenda, countries looking for ways to finance their SDG efforts should still consider them. Many of these suggestions simply entail engaging with the private and philanthropic sectors, and collecting new data. However, some countries may balk at evaluating their legal environments. A major finding of the CGP’s new Index of Philanthropic Freedom is that laws created to serve the legitimate interests of the state, such as capital controls and illicit financial flows legislation, often hinder philanthropic efforts as well. Examining their legal requirements will require states to evaluate the benefits of combating illicit finance or managing volatile financial flows against the benefits that come from international philanthropy.

 

As Dr. Adelman noted in her comments, 80% of the developed world’s economic engagement with the developing world comes from the private sector, philanthropy, and remittances. The Addis Ababa Action Agenda is an important first step in acknowledging these essential flows and how they can help meet the SDGs. But the international community needs to go further in developing a more holistic funding plan for the SDGs, and the recommendations made at the Conference on Policy Coherence are an excellent place to start.

The Philanthropic Potential of the Gulf Cooperation Council

In the near future, the countries of the Gulf Cooperation Council (Saudi Arabia, the United Arab Emirates, Qatar, Kuwait, Bahrain, and Oman) could become a new and influential new source of international philanthropic activity. In all of these countries, a strong culture of giving exists alongside rapidly expanding wealth. Some of the GCC’s most affluent citizens are already realizing this philanthropic potential. But in order for all segments of these societies to effectively engage in philanthropy, the governments of the GCC need to create a more conducive environment for giving.

 

The Abu Dhabi Fund for Development and the Egyptian Ministry of Health announce the completion of the Sheikh Zayed bin Sultan al Nahyan Hospital in Egypt. Source: Abu Dhabi Fund for Development
The Abu Dhabi Fund for Development and the Egyptian Ministry of Health announce the completion of the Sheikh Zayed bin Sultan al Nahyan Hospital in Egypt. Source: Abu Dhabi Fund for Development

 

The Islamic tradition of philanthropy provides a strong foundation for such an environment. Zakat, one of the five pillars of Islam, requires Muslims to give 2.5% of their annual income to charitable causes. Sadaqa, voluntary giving above the level of Zakat, is also considered one of the foremost virtues in Islam. The influence of these religious practices on giving is reflected in the data, which estimates that Muslims worldwide give between $200 billion and $1 trillion in Zakat and Sadaqa annually, though most of this money is given locally through unofficial channels. The six countries of the GCC account for a substantial share of this giving, and as they continue to grow wealthy through oil, their impact on global philanthropy could also grow accordingly.

 

Among political and business elites, the GCC already gives on a level comparable to the elites of similarly sized developed nations. In 2013, donations of over $1 million in the GCC totaled $1.84 billion, compared to $2.24 billion from the United Kingdom. Furthermore, most of these philanthropic activities are international in nature, with $1.75 billion of these large donations going to overseas charities. Although the GCC still lags behind developed nations in the number of donations per capita over $1million, wealthy citizens of the GCC clearly don’t face significant restraints to their charitable giving.

 

But the real potential for philanthropic growth comes from the growing middle class of the GCC countries. Although there is no data on philanthropic flows for each country, economic data suggests a huge potential for middle class giving. According to the IMF, Qatar, the UAE, Kuwait, Bahrain, Saudi Arabia, and Oman all have per capita GDPs comparable to those of countries in the OECD’s Development Assistance Committee.

 

Source: IMF.
Source: IMF
Source: IMF
Source: IMF

 

Yet philanthropic data would probably show that the countries of the GCC lag behind the DAC in terms of international giving, largely due to the governmental obstacles to philanthropy that non-elites face. The Center for Global Prosperity recently surveyed the giving environments in Saudi Arabia and Qatar as part of its new Index of Philanthropic Freedom. Of the sixty-four countries surveyed for the index, none scored lower than Saudi Arabia and Qatar, ranking 64th and 63rd respectively. In both countries, and most likely in the other countries of the GCC, civil society organizations face an intimidating legal environment, in which government regulators have complete authority to shut down any CSO they view as subversive. CSOs are a primary destination for donations from middle class citizens looking to give, and so environments like those in Saudi Arabia and Qatar diminish the giving potential of these citizens.

 

The philanthropic potential of the GCC should not be underestimated. These six countries have the resources to make a significant humanitarian impact, thanks to their growing wealth and charitable culture. However, while the wealthiest citizens in the GCC are already supporting philanthropy with billions of dollars in donations, the rest of the region’s citizens need their governments to provide better support for the development of CSOs before they can give with the same freedom as those at the top.

North Korea: Economy at the Crossroads

North Korean vendors sell goods in the Chaeha Market in Sinuiju in this screen grab from a video obtained on Aug. 18 by the Chosun Ilbo from a North Korean source.

The “hermit country” is one of many apt descriptors for the Democratic People’s Republic of Korea (also known as North Korea). A recent string of iron fist moves by the new supreme leader, Kim Jong-Un –including the public execution of some eighty citizens (including his own uncle) and inveterate attempts for developing missiles and nuclear weapons – has reaffirmed its path towards isolation. There have been tantalizing signs, however, that this regent is considering something of an open-door policy. Since 2011, Chairman Kim has pursued the establishment of over a dozen of economic development zones, encouraged family-based farming, and invited in foreign investors by normalizing the exchange of foreign currency in private markets.

Such seemingly aberrant policies from the last remaining communist dynasty are in fact a recommencement of the economic reforms that were alight from 1999 to 2003. And to most people, it was already a decided fate due to the disintegration of the Eastern-bloc, a stronghold for the North’s industrial architect, and the clobbering by natural disasters that led to the de facto collapse of the North’s state-socialist economy.

Much remains unclear about how far North Korea wishes to walk the fine line between a market economy and a planned socialist economy. To some, the country has followed, or at least attempted to follow the classic equation of a market economy – decentralized resource allocation, price arbitration by supply and demand, free market entry, and competition. Throughout the varying stages of reform, the government restructured much of the administrative structure of state-owned enterprises (SOEs). The “socialist goods exchange market” was introduced to permit SOEs to independently decide the means of exchanging goods at the market price, the self-accounting system was enacted to warrant SOEs’ greater autonomy. As a result, SOEs are now evaluated based on their profits than the execution of state plans. Farmers’ markets, the centrifugal force to the country’s marketization, too, were legalized, and even unleashed the birth of other municipal markets. As previously mentioned, efforts to recruit foreign investors to generate vibrant economic environment are swirling as well.

On the other hand, the new administration still has not let go of certain desires that would put a serious halt to marketization. In 2009, the North Korean government introduced a new currency, allowing the people to exchange their old money for new at a rate of 100 to 1 as a deliberate attempt to revamp the state planned economy by collecting money from the non-national sector. Even more telling  is that the government budget takes up over 60% of the national GDP, and the Central Bank in charge of the supply and demand of money operates largely under the commanded plan.

Unsurprisingly,  the North has chosen to focus on export-oriented growth by employing its cheap, disciplined labor and rich natural resources for realizing a successful transition to a market economy. This requires strong international cooperation which the North probably cannot cultivate in the current political atmosphere. Its obstinate stance on nuclear weapon development has triggered international criticism and severe sanctions. China no longer serves as the North’s safe haven as China’s own standoff with the U.S.-Japan alliance has pushed China to pursue a friendly relation with South Korea. In a nutshell, despite Commander Kim’s currency reform and semi-free market formation to attract foreign capital, a political environment with high security risks and low incentives for investment is probably detrimental enough to shoo capital inflows.

One stroke of luck for North Korea lies in that it is located at an economically dynamic center, having China, South Korea, Russia and Japan as its neighbors. As the North has an economically and politically deficient position to start with, the reform will presumably come slowly and with much confusion, and thus in desperate need for external assistance. Amidst the ever intensifying political tension in East Asia, the North’s construction of a healthy economic system could build momentum for breaking this tension and building more cooperative relations. It is unclear what North Korea will choose to do at this crossroad. Its commitment to impartial economic reforms through relatively loose foreign policies could be a cornerstone for upending its infamous history, and realizing peace both at home and abroad.

Haven “Of the People, For the People, By the People”

It sounds reasonable to assume that a high crime rate correlates with political, economical, and social turbulence. But Nicaragua, a country lying in the center of Central America, defies this apparent logic. Despite its reputation as the second poorest country in the western hemisphere, Nicaragua has made remarkable strides in public security compared to its regional neighbors, the Northern Triangle– El Salvador, Guatemala, and Honduras. In 2012, the homicide rate in Nicaragua was 11.3 per 100,000 persons, less than one-third of the rates seen for its three northern neighbors.

From CentralAmericanPolitics

Nicaragua’s public safety profile is an even bigger surprise once you consider its economic, political, and geographical reality. As mentioned, Nicaragua’s living standard is one of the lowest among its regional neighbors with almost half the population in unemployment and homelessness. The wage rate for police officers, set at $120 a month, as well as their availability, 18 per 10,000 persons, is just as bad as the country’s poverty level. Politically, it has only been forty years since the revolutionary knock-over of the Somoza family dictatorship, and the foreign-intervened guerilla war against the subsequent authoritarian Sandinista regime. Such a short history of recovery is a fair enough excuse for Nicaragua to have security irregularities as past remains. What takes people aback the most is probably that Nicaragua has eschewed violence by drug traffickers and youth gangs like the MARAS or BARRIOS that have defined Central and South America for centuries. While Nicaragua shares a border with Honduras, a country pegged as one of the most dangerous areas in the world with the largest presence of the Maras, it has little identified indigenous terrorism and organized crimes.

It is neither stellar sociopolitical stability nor geographic prerogative that undergirds Nicaragua’s peace-mongering environment. Then, what? The most sounding answer lies in “preventive, proactive, community-oriented police model.”

Four decades of civil war the in Northern Triangle occurred at the end of the twentieth century, though they all differed in intensity, nature, and longevity. These conflicts caused these nations to develop national security policies that engagee the military in reactionary and repressive fashion. In contrast to their iron-fist policies, Nicaragua’s police system, while still retaining the pattern of military engagement in public security, proactively seeks to create a safe social environment. For example, the Nicaragua National Police (PNN) has created specialist bodies for youth violence and intra-family and sexual violence, which take up 20% of the national crime rate. These bodies carry out comprehensive three stage responses – transforming local environments, cooperating with local NGOs and health centers for victim support, and vocational training and education.

Even more telling of the country’s success, is the community-oriented aspect of the police model. A 1995 Constitutional Reform has given the PNN its own General Directorate and greater independence, which allows it freedom from political games. Under the centralized leadership, its operation is enrooted in a strong police-society partnership in a decentralized manner. There are usually broad channels of communication with local residents such as community assemblies and direct linkages with the people. In each district, there is a sector police chief, responsible for paying door-to-door visits to residents, building close ties with them, and inviting them for neighborhood watch activities. Among 100,000 volunteers nationwide assisting the PNN in both crime detection and victim support are some professionals like law and psychology students, as well as some experienced former gang members and victims of violence, and NGOs. The fact that Nicaragua has social culture of parochialism and small-township, resulting in close community ties, complements the picture.

Aminta Granera Sacasa

Nicaragua is not completely spared from the threats of violence. There are still 25,000 or so youth gangs. They are small in scale and often do not have foreign connections. But it is a logical sequence that the Mara gangs, contained in the North for now, may move south and reach these youths, especially at the wake of the Central America border control agreement which allows free movement of citizens between Nicaragua, El Salvador, Guatemala, and Honduras. Threats from a Mexican Mob, the Zetas cannot be ignored, as well. The persistence of low income, high poverty level further “legitimizes” participation in cocaine smuggling and investments. Above all, fraud in 2008 municipal elections, and the Police Directorate’s neglect of the limit on a five-year term, a writ-large departure from democratic order, pose a greatest disturbance to the philosophy of the country’s legal system.

Nicaragua has done a fair job so far, fair enough for the neighboring countries to learn from, though not replicate, its police model. Whether it will continue to be exemplary depends first on the collective effort by its regional partners to contain and ultimately eradicate organized crime groups. What remains of greater importance is to strive to live by a pillar that ensures equality of all people both politically and economically.

Overpromise and Under-Deliver: Growth in Mexico

Over the past three decades, and despite great hopes to the contrary, Mexico’s economy has under-performed. In the early 1908s, Mexico introduced aggressive political and economic reforms in an attempt to gain footing among the world’s strongest economies. These reforms embraced global markets and decreased the state’s role in the economy. An independent central bank was introduced along with more developed financial markets, as the country faced a tough macroeconomic stabilization period. Additionally, the country liberalized foreign trade and investment by privatizing nearly 1,000 state-owned enterprises. By 1994, Mexico joined the OECD, a sign that the country was on the right track. Despite these efforts, Mexico has  seen capita income grow by an anemic 1.1%  per annum over the past 25 years. Compared to other countries with similar economies (see below), Mexico’s relative stagnation seems all the more acute..

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 In 2012, Enrique Peña Nieto took office as Mexico’s 57th President, eager to tackle the country’s growth challenge. So far, President Nieto seems to be heading in the right direction promoting an ambitious reform agenda that seeks to not spur economic growth, but also develop and enforce anti-monopoly regulation. The President’s agenda highlights two main reforms: energy and education. His education reforms target the quality of working educators by introducing a series of rigorous tests that may cost teachers their jobs if they fail. The energy reforms aim to reduce the market share of Pemex , which will go along way in strengthening the energy sector through increased competition.

President Peña Nieto intends to have all reforms approved by the end of 2014, but this is just half the battle. The most challenging part of these reforms will be enforcing all the regulations once implemented and winning over the general population.

Early last year, Elba Esther Gordillo, the powerful leader of Mexico’s teacher’s union, was arrested on massive charges of embezzlement of over 2 Billion Pesos (159 Million USD). The arrest came the day after President Nieto signed the education reforms into law. Shortly after, thousands of teachers stormed the streets to protest the education reform package. This forceful disapproval of the president’s reform agenda is a much-needed reminder that optimism for growth in Mexico is far from reality, and that Peña Nieto still has much to accomplish.

According to researchers at the Wilson Center’s Mexico Institute, the principal cause of Mexico’s stagnant growth is misguided education reform and dismal worker productivity. Worker productivity in Mexico has failed to increase over the past three decades despite the steady increase in school enrollment over the past five decades (see figure below). Educational facilities in Mexico focus on teaching cognitive skills rather than the technical skills that employers demand. The lack of technical skill-focused education in Mexico has lead to disappointing levels of worker productivity. This will continue unless the government seeks further reform focused on increasing the quality of educators and the type of education, not just the amount of people who receive an education.

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In the past, the government’s answer to dismal growth has been disjointed. The Mexican Government has managed isolated efforts with no comprehensive strategy to patch up the economy. This erratic policymaking has led to many conflicting reforms, hindering growth in an economy that has been dreaming of development for decades. President Peña Nieto’s aggressive reform agenda brings newfound optimism for growth in Mexico. In his four remaining years in office, Peña Nieto is expected to accomplish what many have failed to do. Is it finally Mexico’s time to shine?