[Tsung-Ling Lee, (S.J.D (Georgetown)), is a post-doctoral fellow at National University of Singapore.]
“…I think we screwed up.” Former U.S. Secretary of State Madeline Albright‘s response to the Obama administration’s refusal to join the Asia Infrastructure Investment Bank (AIIB), the China-led initiative for financing infrastructure projects from Myanmar to Russia, suggests a deep anxiety about the world financial order. While many operational aspects and details about governance structure of the AIIB are yet to be publicly expressed, many commentators speculate that the AIIB may mark a new global economic order, particularly when viewed as part of Beijing’s broader economic agenda: the creation of new regional and global economic institutions, including the New Silk Road initiative and the BRICs-led New Development Bank, institutions which arguably will challenge the monopoly of the World Bank and the IMF — the two major international financial institutions within the Bretton Wood system.
The AIIB, which came into existence after China’s frustration at the slow reform process of the International Financial Institutions (IFIs), set out as its goal to finance developmental projects in Asia, with China providing the majority of capital. The IFI reform stagnates largely due to the resistance from the US Congress, refusing to support the change of the Banks’ shareholder voting system currently privileges the US. Many critics thus perceive the Bank as a channel for the first world to promote and embed neoliberal orthodoxy abroad. The AIIB initiative highlights a shifting role of the Bank in an increasingly crowded international economic landscape. Some commentators even go further and suggest that the US’s sphere of influence in the global policy domain of finance is diminishing decisively, evident by the diplomatic success of China in attracting many of the US’s key allies in joining the AIIB. This blog post analyzes the AIIB through the lens of the Third World Approaches to International Law (TWAIL).
The IFIs’ Development Model
Historically, TWAIL scholarship has been hostile towards IFIs, which are perceived as instrumental in protecting the interests of the first world at the expense of the third world. Critical TWAIL scholar B.S. Chimni, for instance, argues that the IFIs, as part of a growing network of international institutions, constitute a nascent global state that serves the interests of transnational capital and powerful states at the expense of third world states and peoples. Professor Makau Mutua, for example, argues that under the guise of sovereign equality, international law and institutions perpetuate existing structural inequality in furthering the interests of the first world. Despite that in theory both the IMF and the Bank are explicitly prohibited from engaging in any political affairs of its member states, in practice they have evolved from existing purely as apolitical institutions to having considerable powers in influencing economic policies of the developing countries.
One notable example of the IFIs’ penetrative power beyond global economic life is the Bank’s widely criticized Structural Adjustment Programs (SAPs) in the 1990s. As a condition of borrowing, countries that sought the IFIs’ financial assistance were required to embark upon radical economic reform: reducing government spending, privatizing state-own enterprises, liberalizing trade and foreign investment.
However, the neoliberal view embraced by the IFIs tends to neglect the specific social, economic, cultural and political contexts of the recipient state. The neglect has seen a widening of social inequalities, in addition to the apparent failure of SAPs in achieving its promised economic success. With many recipient states driven into debt, devastated by increased food and fuel prices, intensified unemployment, and crumbling of health services, the SAPs had worked in the interests of the first world, who are also the majority shareholders of the IFIs. With many recipient states worse off than they were initially, the uneven distribution of benefits and costs as consequences of the SAPs became a salient point of contention for critics of the IFIs, most vocally among TWAIL scholars. This is primarily because the IFIs reproduced the colonial experience for recipient states; they also relocate the decision-making process from recipient states to international civil servants. The latter is even more worrisome from a legal perspective, because the process occurred without an external check-and-balance, where the IFIs are hold responsible for their hegemony policies that have further disadvantaged weak states.
The apparent failings of the neoliberal development model endorsed by the IFIs had seen an eruption of political discontent that prompted a sharp policy turn within the IFIs. Beginning in the 1990s, the Bank embraced a governance paradigm that relies on stable institutional environment as a foundation to equitable distribution of wealth and to remedy poverty. This had seen the IFIs engaged in law reform in many recipient countries under the rubrics of “technical assistance”. The shift to the governance model also occurred as part of the IFIs’ attempt to salvage their institutional credibility. The Bank’s focus on governance has opened a greater space for structural intervention. The Bank now embarks on reform projects with greater emphases on improving environmental sustainability, embedding the rule of law, and enhancing participation in the decision-making process. The World Bank Institute’s Worldwide Governance Indicators and Doing Business, for instance, provide quantitative assessments on the openness of the regulatory environment for business. While both projects are not binding on the state, they are widely seen as authoritative, and increasingly are used as a proxy for the quality of a legal system.
In the TWAIL view, the law reform projects undertaken by the Bank, which focus specifically on the ability of legal system to facilitate market transaction, further entrench a capitalist order. Problematically, for TWAIL scholars, the economic integration of market occurs without much political contestation from the affected community. Thus, not only the governance model masks the Bank’s actual reach beyond its legitimate realm of economic regulation, such reach is arguably barred under Article IV(10) of the Bank’s Article of Agreement, which explicitly prohibits the Bank from interfering in the political affairs of its member states.
AIIB: Ending IFI hegemony? (more…)