PARAG KHANNA
SEPTEMBER 7, 2016
The Asian Infrastructure Investment Bank (AIIB) is China's answer to the multi-trillion dollar infrastructure spending gap in Asia. However, many see the bank as an extension of Chinese geopolitical influence. As leaders from Group of 20 (G20), representing 85 percent of global GDP, met in Hangzhou China last weekend, The Cipher Brief sat down with Parag Khanna, author of “Connectography: Mapping the Future of Global Civilization,” to discuss the merits of the AIIB and how American policymakers should deal with the bank.
TCB: In your book, Connectography, you talk about how it is incorrect to view international trade and economics in the framework of national competition. Is that still true in the case of something like the Asian Infrastructure Investment Bank (AIIB), which is often seen to be in direct competition with Western institutions?
PK: The AIIB is infrastructure as a tool of grand strategy, it’s infrastructure as a tool of foreign policy, it’s infrastructure as a tool of empire-building and hegemony, and within that there are competitive dynamics. But, first and foremost, it’s a Chinese project that is multilateralized, in the same way that the North Atlantic Treaty Organization (NATO) is an American project that is multilateralized. This is why I refer to the AIIB as the “new NATO of the East” in Connectography.
However, the AIIB doesn’t just compete with western institutions, it also overlaps because its membership overlaps with western organizations. You could never have imagined members of the Warsaw Pact also being members of NATO - that would make no sense. But today, you have American allies like South Korea, Australia, Canada and all of Europe joining the AIIB, which makes Washington’s head explode. But that reaction misses the fact that we no longer live in a set of rigid blocs because infrastructure is connecting all of these regions. Even though we think of individual countries and alliances as competing, in reality they are also collaborating.
TCB Then how do competitive dynamics play out in a situation like this where infrastructure conjoins the competitors?
PK: Once infrastructure is built, there’s a competition to control it, and that’s a process I have termed “tug of war.” Infrastructure like a pipeline or a highway or an internet cable is similar to a rope in a tug of war competition in that you’re trying to gain the maximum share of that rope. In this case, not the physical rope but the value-added of that rope - the economic activity and wealth that it represents. We see that happening, for example, with gas pipelines in Ukraine. Before Russia actually invaded Ukraine, there was a constant tug of war over revenues from gas transit through Ukraine. That was a commercial tug of war between Russian and Ukrainian oligarchs and state-owned gas companies. Actually even companies that united mutually corrupt Ukrainian and Russian oligarchs, including even the heads of state of these countries. So it really shows how multilayered, overlapping, and murky this all is.
TCB: Going back to the AIIB, can you speak more about the organization itself, its mission and planned operations?
PK: There’s a worldwide recognition of the need for fiscal stimulus and things like infrastructure and job creation. This is something that the IMF, the World Bank, the G20, just about everyone, now agrees is really necessary. So there’s no longer any real debate on that. The AIIB is planning a lot of spending, it’s already committed to $150 billion and every quarter they are going to announce a number of new initiatives and investments. That is very significant and it’s going to generate a lot of momentum.
On the downside, there’s still a lack of clarity on issues like governance and project supervision. From the outside point of view, there’s definitely still confusion about how this is going to play out on the ground but that is not really a critical problem. When the World Bank launches projects, many of those projects fail also. Transparency, clarity, good governance - these don’t guarantee that projects will actually be executed.
I do think the AIIB plans will be executed, but the real issue is the fact that host countries like Tajikistan may not manage their new infrastructures well. They’ve had things like this built before, new roads, new rail lines, etc. but without the proper training and oversight, local maintenance can be a problem. What you want to do is build some notion of developing local skills, transferring knowledge, and funding the continuity of operations, management, and upkeep into the financing model.
TCB: To address the concerns with AIIB, is this organization really a threat to the U.S and Western institutions like the World Bank, IMF, etc.?
PK: No.
My strongly held view is how could you oppose infrastructure investment and development for underdeveloped countries? That’s the whole point of the World Bank - the whole point of multilateral institutions in general, whether eastern or western. So, if supporters of these institutions are philosophically opposed to the AIIB, then they are opposed to development for underdeveloped countries.
The only question is whether the AIIB represents the highest possible standard of project finance or not. But the fact is that this is really an open field of debate. There is no gold standard. There are principles, like the Equator Principles of the IFC, that attempt to create built-in standards for these projects but, on the ground, all of this goes out the window. There’s even a debate about whether we should have these kind of guidelines because they can substantially raise the costs of getting things done.
There is no right answer but the AIIB has said repeatedly that it intends to maintain the highest level of standards and most of its staff actually comes from the Asian Development Bank (ADB) and the World Bank. You’re not going to take people who have decades of experience in implementing high standard projects and just throw all that out the window. We should be focused on one thing and one thing only, and that’s execution. Getting it right, not just sitting in Beijing or Washington and talking about it. That’s the first point.
The second point is that there will be perpetual political risks, obstacles, and backlash. If you take a very recent example, President Islam Karimov of Uzbekistan is now officially dead. Now, the lifelong leader of the most populous country in Central Asia is dead, the Kazak President, Nursultan Nazarbayev, will eventually die as well, and others will probably follow. These are the type of unforeseen events that you just can’t plan for when you’re preparing long term projects.
However, the fact is that these countries needed this infrastructure spending 20 years ago and they need it now. They were incapable of doing it themselves then and they’re incapable of doing it themselves now. Not much has changed and that’s why, ultimately, my view of the world is guided by one principle, which is supply and demand. These places still have the demand and China still has the supply. By that simple equation, these projects will move forward.
TCB: So at the end of the day, how will the AIIB change the map in Asia for U.S. interests and, in your mind, what is the best way for U.S. policymakers to react?
PK: Justin Trudeau, the Prime Minister of Canada, arrived in Beijing for the G20 meeting and the first thing he announced was that Canada is joining the AIIB. So the fact that Canada is joining the AIIB means that America can also join. If I were in charge, I would do an about face and reverse America’s formal opposition, skepticism, and attempts to persuade allies not to join the AIIB. I would say, drop the act and join the AIIB because you’ll never be able to influence its policies unless you’re a member. This would also put China on the spot by saying ‘hey, are you actually going to let us join or not?’
I also believe, and Obama shares this belief, that it would be great if China joined the Trans Pacific Partnership (TPP) treaty. Asian countries are going to move forward on all of these projects with or without the U.S. We need to accept that and try to shape this momentum towards our interests.
The U.S. needs to be a part of TPP if it wants to shape Asian economies and it needs to be part of AIIB if it wants to shape the way that China pursues infrastructure spending around Eurasia. That is number one: just join and see what happens. We’re an Asian power, a Pacific power, we’re an investor, so we should want to do it. That’s the most important thing that I would suggest.
The second point is that we need to pick which countries we think we’re going to be able to have the most influence over in Central Asia and East and Southeast Asia through the next 5 years. That’s not the way that our diplomacy currently operates. Our diplomacy is very focused on countries where we have a specific mission or presence, like Afghanistan, but we don’t have a regional policy. China, on the other hand, does have a regional policy. So I suggest that we develop a proper regional policy that thinks of these countries as interlocking and thinks about what we want to see evolve in that region and how are we going to make that happen, on our own or together with other countries. This seems obvious but we just haven’t done it yet. Repeated administrations in Washington have either not done this at all or, if they have, they haven’t done it well. Grand strategy is all about having a broad vision and then implementing policies to achieve it, but we don’t even have a vision yet.
There is more, but if we can’t do these two things then there’s really no point.
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