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Why the U.S. should back China’s new ‘World Bank’ for Asia

Construction cranes are see near Pudong financial district of ShanghaiConstruction cranes are see near Pudong financial district of Shanghai
China's slowing construction sector is weighing on manufacturing across the country.Photograph by Carlos Barria — Reuters

In a recent op-ed in The Financial Times, Larry Summers criticized the U.S. for not backing the creation of a new China-led international bank that would finance major infrastructure projects across the Asia Pacific region; the former U.S. secretary of treasury decried it a “failure of strategy and tactics” and called for “a comprehensive review of the U.S. approach to global economics.”

Summers’ pointed words followed those of another Clinton Administration alumnus. Madeleine Albright, America’s former top diplomat, who late last month said the United States had “screwed up” in its unsuccessful efforts to dissuade other countries from supporting the Asian Infrastructure Investment Bank.

Both Summers’ and Albright’s remarks came as diplomats and business executives from Asia and Europe have embraced the bank. Great Britain, Germany, France, Italy, South Korea and Australia, are among more than 40 nations who have brushed aside the White House’s concerns over the intentions of the bank and whether it will follow “high quality, time-tested standards.” China will provide much of the AIIB’s initial $100 billion in funding. The bank is expected to be up and running by the end of this year, helping finance transport, water, energy and other infrastructure projects.

Going forward, the U.S. and Japan, which also has withheld support, may well seek to save face and work with the bank. Such a move will be good for all parties, but for the bank to be successful, leaders should bear a few measures in mind:

With the bank’s focus on infrastructure development instead of on the broader goal of poverty reduction, it is important that policies and procedures be put in place to ensure that infrastructure investments do not lead to the unintended impoverishment of thousands of people or significant harm to the surrounding environment.

Given their size and scope, major infrastructure projects such as hydroelectric power plants and road networks can lead to forced resettlement of communities and the loss of traditional livelihoods, such as in agriculture and fishing. I saw this during my own visits to a range of power and transport projects in my oversight role from early 2007 to the end of 2010 on the Board of Directors of the Asian Development Bank.

Strong social and environmental safeguards are needed to make sure development projects are done in a sustainable manner. Views and input from affected communities should be incorporated in a meaningful way from the earliest stages of project design. Otherwise, poorly designed projects can contribute to social and environmental harm, costs overruns for borrowers and ultimately unrest and delayed or cancelled projects.

The new bank should move quickly to prove skeptics wrong. It has the chance, for example, to demonstrate that it can be more effective than the World Bank and other regional development banks in financing infrastructure while addressing legitimate community concerns about relocation and compensation for any loss of housing or income.

Recently, the World Bank admitted to “serious shortcomings in the implementation of its resettlement policies,” adding that it plans to fix its problems with a “plan that will improve the oversight and management of resettlement practices to ensure better protection of people and businesses affected by bank-funded projects.”

The new Asian Infrastructure Investment Bank has the chance to develop strong, new and effective accountability mechanisms all shareholders would support. A strong independent evaluations department not beholden to any single shareholder must be part of that. Mechanisms to review and ensure compliance with the bank’s own rules are also critical.

As Summers noted, it is time for the US to wake up to a new economic era. Strengthened engagement with Asia and all its major financial institutions must be part of that.

Curtis S. Chin, a former U.S. Ambassador to the Asian Development Bank, is managing director of advisory firm RiverPeak Group, LLC.