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Challenges Facing New Bank

May 13, 2015

The founding members of the Asian Infrastructure Investment Bank have been busy hammering out a framework for the institution. They’re aiming to have an agreement on its establishment in place by the end of next month. The 57 members from Asia, the Middle East, Europe, and elsewhere have to figure out the ratio of their contributions and set governance rules, among other tasks.

Chinese leaders proposed the bank because they said the development needs of Asian nations aren’t being met. And while many countries in this region see the AIIB as a force for good, some, including Mongolia, are wary the loans may include conditions.

Through the heart of the Gobi Desert in Mongolia, a railway link is being built. It has only one purpose: to carry coal to China. Mongolia’s economy is underpinned by its rich reserves of coal, copper and other natural resources. The question is how to export them.

The solution for Mongolia lies in railroads and a network stretching 5,600 kilometers is planned. The idea is to connect the new tracks with existing lines in China and Russia, allowing Mongolia’s coal to be carried to export markets.

The first phase began two years ago with work on 225-kilometer line running from a coal mine in Mongolia to the border with China. But the project has made little progress, due to a shortage of funds. A Chinese company is expected to provide additional funding.

The Mongolian government is also pinning its hopes on moving the project forward using China’s proposed AIIB. “Mongolia was one of the first countries to declare it wants to join the bank,” says Yondon Manlaibayar of the Mongolian Ministry of Foreign Affairs. “It will offer great opportunities to help our efforts to improve our infrastructure.”

Analysts say the Chinese see opportunities, too. Funding from the bank could help develop new railway and road links with Mongolia and other parts of the world. The eventual goal is to create a huge economic bloc that includes Russia and countries in Europe. “Mongolia will play an essential role in building an economic belt linking China with Europe, via Russia,” says Jia Jinjing of Renmin University of China.

In order to receive investment from a Chinese company, Mongolia agreed to change the tracks to make them the same width as China’s railway system. The tracks in Mongolia are 9 centimeters wider. For China, changing the tracks would smooth the way for exports. But for Mongolia, having a double standard will complicate its railway operations.

Some people in Mongolia are concerned about China’s growing influence on their country. “I’m worried that China might end up dominating Mongolia’s economy,” one resident said. Another said “if Mongolia’s trade is handled via China, it would put us at a disadvantage.”

Similar concerns are also being voiced by lawmakers. Parliament member Khaltmaa Battulga said “the aim of the AIIB is to promote China’s policies abroad through infrastructure-related investments. Even if the investments bring in massive amounts of money, they will only be used to pay for Chinese workers, and none of it will stay in Mongolia.”

It’s clearly a dilemma for Mongolia. Improving its infrastructure to boost its economy may expose it to greater economic influence from China.


Masahiro Kawai, professor at University of Tokyo and former dean of the Asian Development Bank Institute, spoke with Aki Shibuya and Sho Beppu in the studio.

Shibuya: What would you say about the concerns among some in Mongolia, and perhaps other nations, about AIIB loans and the influence of China?

Kawai: With Mongolia, it is a case of bilateral assistance, between China and Mongolia. In the case of bilateral assistance, usually the donor’s intention dominates. On the other hand, in the case of a multi-lateral bank, assistance is just that, multi-lateral, which means that one particular country’s intention may not dominate. Having said that, China is expected to hold the largest share, about one third, of the bank, which is very big. This means that China can exercise some influence through the AIIB to realize the intentions of China’s policies.

Beppu: In the case of Mongolia, I think they should have known that they would have influence exercised upon them. But Mongolia was one of the first countries to announce their intention to join the bank. Why are other countries joining AIIB? Do you think there is a kind of frustration with the current financial organizations?

Kawai: I think so. According to a study by the ADB and ADB Institute, Asia has a huge infrastructure investment demand, amounting to about $750 billion per year. It is a huge amount. ADB has been providing about $13 billion, and the World Bank has been providing about the same amount. So the new bank is expected to provide more money. In addition, even when the World Bank ADB can provide funding, they require very rigorous standards regarding the environment and human impact of infrastructure projects. And processing of investment loans for so many developing countries takes a long time. So many developing countries are welcoming AIIB, because of the potential to fill that investment gap and provide speedy loans.

Shibuya: Japan and the US have contributed billions of dollars to international financial institutions. But they have held off on joining the AIIB. And they are challenging the transparency of the AIIB. What’s your opinion of their position?

Kawai: I share their concerns somewhat at this point, because the ADB and World Bank have been operating by exercising very strong governance and applying high standards to lending operations. So they feel that the AIIB can be a kind of a threat to the existing system of providing development loans for developing countries.

Beppu: But they could have joined earlier so they could have exercised their influence.

Kawai: That’s right. In my opinion, they should have. In particular, Japan could have joined the negotiations that started in April, so that Japan could exercise some influence in the process of founding AIIB. Actually, the 57 countries are now negotiating the articles of agreement, which will define the nature of AIIB. If Japan had joined the talks and felt that it had been successful in making a good bank, then it could have signed on. But that is not the case now.

Beppu: If the World Bank or ADB cooperates with the new bank, would it be a good way to influence AIIB?

Kawai: Definitely. I think cooperation between the World Bank and AIIB and with ADB would be an excellent opportunity to make AIIB a truly productive international organization.