Discussing the AIIB with Recent SAIS PhD Graduate Neil Shenai

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WASHINGTON — The Asian Infrastructure Investment Bank (AIIB) is getting a lot of chatter lately. Is it a threat to the World Bank or the Asian Development Bank? Or merely an alternative to these institutions? What is the primary purpose of the AIIB? The SAIS Observer sat down with Neil Shenai, a recent SAIS graduate completed his PhD in Global Theory and History and International Economics. Today he is an Professorial Lecturer at American University’s School of International Service. Learn more about his background at http://www.neilshenai.com.

What is the purpose of the Asian Infrastructure Investment Bank (AIIB)? Why is the People’s Republic of China (PRC) keen to promote this institution?

Like any SAIS answer, there’s usually a political and economic reason for why these things take place. The economic explanation is that China is now, or soon will be, the single largest trading partner of all the countries that comprise the member countries of the AIIB, if linear projections of growth hold. Also, we would state that infrastructure investment has a large multiplier, especially in less developed countries, and so you can argue that China’s involvement is driven by this economic calculus, that providing infrastructure investment can “crowd-in” other types of investment. You hear this phrase a lot among the development banks.

There’s this idea that investing in roads, power plants, and ports and all the other things that facilitate economic growth will lead to sustainable economic growth that will benefit China and these other countries as well. So that’s the economic rationale I will submit to you.

The political rationale is probably a little more interesting. China is a state that exists in the international system, which is fundamentally anarchic. In general, states tend to do what is in their material interest. Rising powers tend to want to command diplomatic and political weight commensurate with their level of power. You look at the development of states like the British imperium or the American imperium in the 20th century and what you may be able to argue is China’s emergence as a great power. Most emerging powers want to create fora through which they can exert influence on other countries.

By binding these other countries to China, it might create an opportunity for China to wield greater political influence there. It’s not a particularly charitable interpretation of what China’s intents are, but as a political theorist – China not as being China, but China being your garden variety great power, we’d probably expect this.

Something that you hear talking to people in Washington – and granted this is infrastructure development, so it’s more micro in its focus – but you have this seeming paralysis of the quota reform at the IMF. The Bretton Woods institutions don’t necessarily give a country like China, which, in purchasing power terms is arguably bigger than the United States in total size, the voting rights that they deserve. So, part of it is this competition with the Bretton Woods institutions.

There are two views. Are these going to be complementary institutions, or supplementary institutions? If they are complementary, then from America’s viewpoint that’s a good thing, because the more the capital that flows towards developing countries then all the better, because the marginal product of capital is higher in developing countries, which leads to more growth. The pessimistic, the supplementary view, is that this is China’s subtle attempt – or not so subtle attempt – to create a new economic architecture that is distinct from the architecture created by the West that has maintained a liberal monetary and trade order since 1945. Depending on your point of view, that will shade how you see the Asian Infrastructure Investment Bank.

The PRC has a disproportionately low voting share in the World Bank and the Asian Development Bank (ADB). Did the PRC found the AIIB because of its low voting share, or would it have sought to create new institutions anyway?

There are a couple of things at play here. It’s a counterfactual question. If we were more accommodating with China and its voting share, would we have prevented this from happening? There’s no way we can go back in time and replay history. Also, the question relies on a mono-causal reasoning – and it’s a perfectly reasonable question – but China’s motivations are multidimensional. On the margins, does Western unwillingness to afford greater weight to China in Bretton Woods institutions impact their decisions to unilaterally – or multilaterally, but outside the Bretton Woods framework – create new institutions? Absolutely, but on the margins. I don’t know if quota reform would have been sufficient, but I do know that on the margins, it would have made this type of behavior slightly less likely.

Will increasing the PRC’s voting share in the WB and the ADB decrease its incentives to form a new institution, or is there no turning back? While it’s difficult to predict the features that the institution will take on, do you view it as likely to be complementary or supplementary?

That’s a tough question. It depends on a couple things. The World Bank is going through a massive reorganization. As President Kim [of the World Bank] mentioned in his address at the Council of Foreign Relations in April of this year, he received many questions about dirty energy. Why doesn’t the World Bank lend for coal plants, etc. The more limitations the Bretton Woods institutions place on themselves, the more opportunities there are for regional players to fill in that space. If I’m Pakistan, and I want to build a coal-fired power plant because it’s the cheapest – but also the dirtiest – the World Bank won’t lend to me. That creates an opportunity for a regional bank to fill that hole. A lot will depend on the limitations that the Bretton Woods institutions place on themselves. We are not likely to lend to North Korea, Iran, or some of these other states for political reasons and for environmental reasons. The greater the Bretton Woods institutions limit themselves, the greater the opportunities there will be for regional banks.

The big question of the 21st century is: can the international order that was created by the five strongest states in 1945 maintain itself? The balance of power is much different now. European powers are still very wealthy, but there is not a lot of growth there and they have a lot of structural issues. America, for all of our faults, looks pretty decent. Japan is enormous, but they have their own set of problems. And you have the emergence of China and the resurgence of Russia.

The big question is: can China successfully be co-opted into the international order that the United States created after 1945, or will China seek to create its own order? The truth is, anyone who tells you they know is lying. We don’t know. But American policymakers are doing everything in their power – or should be doing everything in their power, I should say – to co-opt the Chinese into the existing order. This was very popular in both the Clinton and Bush administrations. President Clinton ignored China’s human rights record and certain non-compliance with certain norms of trade. He integrated them into the WTO. I think the extent to which China seeks to redefine the global order will be a direct function of how well we integrate them into the current order, and the extent to which they view maintenance of the current order as in their national self-interest. Accommodation is necessary for the maintenance of these institutions.

Am I optimistic or pessimistic? If history provides any guide, emerging powers in the global system tend to lead to instability. But this is an endogenous question. We are the makers of history. If we can learn from our mistakes, then maybe we can integrate China. That’s why the SAIS degree is so important. You guys will be the ones making decisions about this.

Voting shares in the AIIB will be weighted by a member country’s capital contribution. Due to the size of its economy – and the non-participation (or exclusion) of other large economies such as Japan, the US, and the EU – the PRC will possess a large, and possibly veto proof, voting share in the AIIB. Asian countries seem to be cautious about their commitment to the bank. While 21 countries participated in the inaugural meeting, it appears that no chief executive besides Xi Jinping attended the ceremony. Many member countries are eager to receive investment, but are they willing to join an institution where one country enjoys a dominant position?

Just looking at the list of countries that have signed on, especially the huge swaths of Southeast Asia, these countries are going to have to make. Looking at 2009, it seemed that Chinese policymakers sensed weakness and distraction on the part of the United States. The global financial crisis and the wars in Afghanistan and Iraq damaged our credibility and hurt our cachet with the Chinese. We looked very human. You look at their behavior in 2009 to 2011, and then you saw the reflexive response of these Southeast Asian countries, which was to seek the United States as a balancing power. What does that tell you?

On the one hand, that tells you that they’re just like China. They’re poor and they want to become rich. They share that goal, and the Chinese provide a huge ladder of opportunity. But you have to balance that against the very real fear of political dominion. Sometimes those goals coincide with one another. Sometimes raising your GDP can help you maintain some level of independence, sometimes they contradict each other, like accepting loans from a sovereign country, such as China, that confers political influence to them. If they construct some dam, and 60 percent of the board is populated by creditors, who happen to be Chinese, then the Chinese, in effect, have control over that asset.

These countries have to make a choice. They are in a tough position. They need Chinese money but they don’t want political control to be ceded to them. That’s a tough situation. My advice to any of these heads of state would be to tread carefully. We don’t know what a Chinese imperium will look like. We have a pretty good understanding of what an American imperium looks like. Each country has to make their own choice.

Where would the AIIB headquarters be located? Seating it in the PRC may stir anxieties that the AIIB is a stalking horse for PRC regional domination. Yet would another country welcome a Chinese presence?

My gut feeling is Beijing. Maybe Singapore. Maybe a city like Kuala Lumpur. I sense that China wants to turn Beijing into a kind of imperial capital, much like Washington is our capital. But that’s just speculation. Physical place matters in diplomacy. Space and place conjure up images of prestige.

Will there be a reaction to the AIIB? Will this accelerate the Trans-Pacific Partnership (TPP)?

Again, the effect will occur on the margins. The case for the TPP is made marginally stronger after the invention of this particular bank. There are a couple of images of analysis. You can analyze things at the system level, the state level, and the individual level – things like the psychology of leaders, etc. To give you the intrastate level of analysis, I think the TPP is a function of US domestic politics. A lot will be clarified if Republicans win the Senate in November and are willing to play ball with President Obama on trade. In conversations with people in government and think tanks, there is a sense that we are going to book TTIP and TPP in Obama’s second term.

Is passage contingent on Republicans winning or losing the U.S. Senate?

It’s contingent upon resolution, one way or the other. The idea is that Republicans, in general, are pro-trade and that enough of the Democratic caucus is pro-trade, and the President is pro-trade, given that these are his trade deals. The issue is that these things are easier to get through with so-called “fast-track” negotiation authority. It’s unclear if Republicans are willing to give that to President Obama. But if they get swept into office and do nothing for two years, even on these issues that appear to hold broad, bipartisan support, they could damn their national chances in 2016. I’m not an expert on American politics. I’m just interested in it like any SAIS student, but I think it can get done for that reason. I think the AIIB helps the case for its necessity, absolutely.

Two personal questions. You are a recent SAIS PhD graduate. What’s the most important thing to know before seeking a SAIS PhD?

Getting my PhD was the single best decision I made for my professional life.

The most important thing: always have a good attitude, or try to have a good attitude. And try to stay humble. Because you will be humbled. A PhD is different from a terminal masters because you are expected to create knowledge. MA students are customers, they keep the lights on. So professors respect them from that perspective alone. As a PhD student you’ve crossed the aisle. You’re no longer a customer. You’re now part of the sales force. And you’re the lowest member of the totem pole. My biggest growing pains in the PhD program were always when I thought I knew more than I did, or where I thought I knew more than my advisors. Humility is the most important thing. To be successful requires a lot of perseverance and self-discipline and those two qualities are more easily cultivated if you understand that setbacks can be temporary if you work through them.

You’re a big Buffalo Bills fan. Did hydrofracking save the Bills?

Terry Pegula [the billionaire fracker and new owner of the Buffalo Bills NFL team] is the perfect owner of the Buffalo Bills. Did hydrofracking save the Bills? Terry Pegula made a lot of his money off fracking and New York is very anti-fracking. It’s ironic that this fracking magnate who made all his money in other states bought a team that serves the political goals of Governor Cuomo, even though Governor Cuomo opposed his business.