Asia's answer

Asia's answer

Features Interviews Project & Infrastructure Finance China

With $100 billion pledged exclusively to infrastructure, in close to three years of existence the Asian Infrastructure Investment Bank has expanded outside the continent reaching 87 members. And seven Latin American countries have submitted their membership applications to join AIIB: Argentina, Bolivia, Brazil, Chile, Ecuador Peru and Venezuela. Jin Liqun, one of the architects of the Asian development bank, talked to LatinFinance about the bank’s role in and outside Asia.

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LatinFinance: The AIIB, has grown in leaps and bounds driven in large part but not exclusively by the rise of China. How do you characterize the bank’s mission?

Jin Liqun: The purpose of this new bank is on its mandate. Some people were worried over the impact on existing institutions, some were worried about a race to the bottom if this new bank does not adopt very high standards particularly environmental protection, human rights, social issues. There were lots of issues and I knew it was crucial to communicate with the rest of the world. First, why should we have a new multilateral bank when we already have two institutions that are working? If you look from a historical perspective, GDP in 1944 [when IMF and World Bank were created] was much smaller. [Now] the GDP of Asia and the world is much bigger so obviously these two institutions would find it very hard to meet the needs of these Asian countries. The backlog of development projects called for a new multilateral institution.

This bank should reflect the development experience of so many Asian countries thereby complementing efforts of the World Bank rather than competing head-on against those existing institutions.

LF: In practice the other MDBs historically have had their primary focus nevertheless in infrastructure.

JL:. When in 1980 the Mexican crisis broke out I was on the board of the World Bank. [At the time] it had to review its development approach towards economic restructuring and social development, which is absolutely necessary, the problem is you cannot handle both so they had less and less money for infrastructure.

If you look at Asian countries, they spend a lot of money on infrastructure without creating debt problems. Why? Because they borrow to invest, they don’t borrow to sustain consumption which was the problem in Latin America.

And if you look at the debt problem of so many countries you will find the issue is not the debt itself it is macroeconomic, it is where you put the money.

LF: Is there an emphasis on public versus private sector split in terms of the investment strategies?

JL: Debt is debt. My view is whether it is a sovereign or private it is the same as it ultimately depends on the viability of that economy.

Some countries are very poor and depend on concessional funding. Is that country condemned to depend on foreign aid? I don’t think so. You can break the cycle and help them do something to sustain its economy. Our strategy is to help a country look at their potential source of growth and help them break the cycle of dependence on aid and the debt problem.

LF: But will you actively support private sector development as well?

JL: Yes of course. What I was driving at was even if you help the private sector you have to make sure that the project can help the economy generate income. I do not think infrastructure investment is the panacea, it is necessary but not sufficient condition. You must make sure that a project is well designed, implemented, on schedule, of high quality and the project must be able to help sustain the economy thereby avoiding debt.

LF: What relevance does an Asian infrastructure bank have for Latin America?

JL: Over the recent decades, the economic link between Latin America and Asia has substantially increased. Asia’s experience is very inspiring; and Latin American countries also think it is better to have new channels of communication with the rest of the world not just with North America but also with Africa, Asia.

If you look at the product mix you will find Latin American and Asian countries are very good in terms of complementarity. And given the enhanced relationship and investment in infrastructure in Latin America, you will find it’s actually not that far away if we further improve the capacity of railways and ports. China has imported huge amounts of agricultural products from Argentina, Mexico, Brazil; and the economic relationship with other Asian countries is also growing. It’s interesting to note Latin American countries do not seem to have very close relationships amongst themselves. This is reflected in the lack of communication between roads, railways and airline services. Because of a lack of economic complementarity intra-Latin American trade accounts for only 15% of the region’s trade.

That is why I feel there is strong interest in Latin America in working with Asia, that is why we have some prospective members of the region in our bank.

LF: What is your vision of AIIB involvement in Latin America and of the 7 countries that are prospective members. How do you see this developing?

JL: We hope by the end of this year the parliaments [of prospective members] will approve [membership], and to my knowledge the parliaments in those countries are supportive.

We can also work with the World Bank and the IDB, investing in infrastructure projects together. That can help us diversify risks and also facilitate improvement of Latin America’s infrastructure.

LF: What are your expectations about lending targets in the region?

JL: We have 100 billion dollars registered capital and at this stage lending to non-Asian countries is 15%, so it’s not much. My idea is we should increase the lending from 15% to 25% but we need to show the benefit for Asian countries, we can invest in non-Asian countries as long as it’s good for Asia.

LF: What would you expect Latin America membership to become?

JL: It is not the absolute amount which matters, it’s the enhanced relationship and it’s the catalytic role we can play. Latin American countries’ investment in infrastructure is a paltry 3% of their GDP and maybe you can raise this to say 5% or 7%. Perhaps this infrastructure development can also enhance the intra region trade and economic relationship, our involvement can be catalytic.

LF: Is there anything about the Asian experience in infrastructure finance and investment that you think would be particularly relevant to the Latin American experience in terms of AIIB’s involvement?

JL:. If you look you’ll find in Asia we have more poor countries [than Latin America]. If there’s any experience that might be relevant for Latin America it’s that first of all the resource allocation is important. Asian countries over the last couple of decades have really done a lot in improving infrastructure to remove the bottlenecks.

The propensity to save is stronger in Asia than in Latin America and Asian countries have tried very much to balance investment taking care of economic development and social, so this might be something that might be relevant to Latin America.

LF: Governance reform: What has the AIIB learned from the debate on governance reform in Washington?

JL: We are very clear that the existing international financial system is good, but it’s not perfect. What we need to do is to continue to contribute to the improvement of the system. We are primarily focused on infrastructure investment which will promote development, and if we help with poverty reduction it’s indirect it’s not direct intervention. We try to remain compact, we don’t want to spread ourselves too thin so that it’s more manageable and more cost-effective.

LF: The lack of US involvement is a positive or a negative?

JL: Regardless of US membership we are working together. BNY Mellon is our clearing bank and we work with quite a number of American financial institutions, so the government is not involved but corporate America is involved. LF