AIIB and NDB - Exit and Voice

With hindsight, 2014 may well be noted as the year when serious competition has been built into multilateral development banking, especially for the World Bank and the Asian Development Bank (ADB). The new BRICS bank, officially called the New Development Bank (to be headquartered in Shanghai), has been launched at the sixth summit of the BRICS countries, held in Brazil in July 2014. The bank will have starting capital of US $50 billion, with Brazil, Russia, India, China and South Africa initially contributing US $10 billion. End October 2014, more than twenty Asian countries (including India and, a month later, Indonesia) signed as founding members a Memorandum of Understanding to create the Beijing-based Asian Infrastructure Investment Bank (AIIB), which specified the authorized capital of the AIIB as US $ 50 billion, half of which is paid in by China. Both new institutions are intended to concentrate on funding infrastructure projects.

The recalibration of the world economy (OECD 2010; Quah 2011) - with the centre of gravity shifting toward East Asia – is still not reflected in the executive councils of the multilateral development banks. The current imbalance of capital shares and voting rights in the existing multilateral banking system to the detriment of emerging market and developing countries (EMDCs) is well documented by Vestergaard and Wade (2014) who also show that the scope and pace of governance reforms have been dismal in the established international financial institutions (IFIs). Moreover, the EMDCs can have little hope that the advanced countries relinquish their control on the Asian Development Bank and the World Bank in particular through meaningful voice reform (Vestergaard und Wade 2013).  

The more imbalanced the system is in terms of representation and voice, the higher the pressure to rebalance toward fairer representation through creating institutions parallel to the established multilateral banks. The creation of AIIB and NDB corresponds to exit in Hirschman´s antinomy (Hirschman, 1970). Both exit and voice carry cost. The cost of exit is fragmented multilateralism. The cost of voice in an imbalanced system is the incapacity to influence priorities, principles and procedures in multilateral development lending. As the BRICS nations succeed to organise shadow institutions to the established Bretton Woods system, the value of EMDCs´ exit option may make voice in the established system relatively less attractive, even though it will probably increase the effectiveness of voice. Voice and exit are complements once exit has been organised (by creating new shadow institutions), but are substitutes when seen from the perspective of the initial decision to exercise voice or to organise exit (Gehlbach 2006: 402). Hirschman´s concept of loyalty by a country to the established system (say, to safeguard military protection by the United States) is reflected in a greater cost of exit. That explains why some Asian countries failed to join the AIIB after intense pressure from the US Treasury.

References

Gehlbach, S. (2006), “A Formal Model of Exit and Voice”, Rationality and Society, 18(4), 395–418. DOI: 10.1177/1043463106070280.

Hirschman, A.O. (1970), Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States, Cambridge, MA: Harvard University Press.

OECD (2010), Shifting Wealth, Perspectives on Global Development, Paris: OECD.

Quah, D. (2011), “The Global Economy’s Shifting Centre of Gravity”, Global Policy, 2.1, 3-9 DOI: 10.1111/j.1758-5899.2010.00066.x

Vestergaard, J., and Wade R. H.  (2013), “Protecting Power: How Western States Retain the Dominant Voice in The World Bank’s Governance”, World Development, 46, 153-164.

Vestergaard, J., and Wade R. H.  (2014), “Still in the Woods: Gridlock in the IMF and the World Bank Puts Multilateralism at Risk”, Global Policy, DOI: 10.1111/1758-5899.12178.