“…the AIIB has stoked controversy because Asia already has a multilateral lender, the Asian Development Bank (ADB). Why is China creating a new development bank for Asia?
China’s official answer is that Asia has a massive infrastructure funding gap. The ADB has pegged the hole at some $8 trillion between 2010 and 2020. Existing institutions cannot hope to fill it: the ADB has a capital base (money both paid-in and pledged by member nations) of just over $160 billion and the World Bank has $223 billion. The AIIB will start with $50 billion in capital—hardly enough for what is needed but still a helpful boost. Moreover, while ADB and World Bank loans support everything from environmental protection to gender equality, the AIIB will concentrate its firepower on infrastructure.”
“But the real, unstated tension stems from a deeper shift: China will use the new bank to expand its influence at the expense of America and Japan, Asia’s established powers. China’s decision to fund a new multilateral bank rather than give more to existing ones reflects its exasperation with the glacial pace of global economic governance reform. The same motivation lies behind the New Development Bank established by the BRICS (Brazil, Russia, India, China and South Africa). Although China is the biggest economy in Asia, the ADB is dominated by Japan; Japan’s voting share is more than twice China’s and the bank’s president has always been Japanese. Reforms to give China a little more say at the International Monetary Fund have been delayed for years, and even if they go through America will still retain far more power. China is, understandably, impatient for change. It is therefore taking matters into its own hands.”
The Guardian also has a few interesting things to say about the new bank. In addition to echoing the Economist’s comments about competition between China and the US/Japan, it also argues:
“the world suffers from insufficient aggregate demand. Financial markets have proven unequal to the task of recycling savings from places where incomes exceed consumption to places where investment is needed.
When he was chair of the US Federal Reserve, Ben Bernanke mistakenly described the problem as a “global saving glut.” But in a world with such huge infrastructure needs, the problem is not a surplus of savings or a deficiency of good investment opportunities. The problem is a financial system that has excelled at enabling market manipulation, speculation, and insider trading, but has failed at its core task: intermediating savings and investment on a global scale. That is why the AIIB could bring a small but badly needed boost to global aggregate demand.”
In defence of the Asian Infrastructure Investment Bank
“Companies from Saudi Arabia and the United Arab Emirates together pulled in about $12 billion in trade financing over the past five years — 8.5% of the $141 billion global total — to help pay for nuclear reactors, industrial power generators and new fleets of Boeing jets. That includes a record-setting $5 billion loan to help Saudi Arabia build one of the world’s largest petrochemical complexes.”
The US subsidizes purchases made by the oil monarchies of the Persian Gulf? Big surprise, that is not a popular idea:
“The companies keep the profits if sales go well; taxpayers bear the risk of loss if not,” House Financial Services Committee Chairman Jeb Hensarling, R-Texas, wrote in The Wall Street Journal last week. “The bank is a small-scale example of a larger and more dangerous threat: the shrinking of the free-market economy and the rise of a progressive welfare state — with its attendant cronyism, public-private partnerships and spreading government economic controls.”
The rational however, is that by providing loans and guarantees, the ‘ExIm’ Bank is supposed to facilitate trade, increase US exports and support the US economy. It is also argued that the bank provides a necessary service because other states intervene in similar ways to boost the sales of their own products on foreign markets.
Nevertheless, there are still questions about which industries get support and how much of the profits remain in the US. ExIm claims the biggest category of US companies it works with is “small businesses”: http://www.exim.gov/about/facts-about-ex-im-bank
Hensarling and other critics on Capitol Hill, remain unconvinced.
The ExIm bank also provides an interesting example of the role that states play in promoting trade. To the extent that institutions like ExIm provide a strategic advantage of one country over another, trade is still being pursued on mercantilist terms, a zero-sum competition between states.
A gloomy look at Brazil’s economic woes and the state’s increasingly ineffective economic policy instruments:
“Faced with (two) poisonous options, a middle path is most likely. Interest rates will be too high for households and firms, so subsidised funding will grow. But they will be too low to protect the real, so swap costs will rise, too. Both subsidies put extra pressure on the government’s finances. By mixing monetary and fiscal policy in this way, Brazil is slowly rendering both ineffective.”
Here is Paul Krugman’s take on the Greece-Euro crisis:
“In the five years (!) that have passed since the euro crisis began, clear thinking has been in notably short supply. But that fuzziness must now end. Recent events in Greece pose a fundamental challenge for Europe: Can it get past the myths and the moralizing, and deal with reality in a way that respects the Continent’s core values? If not, the whole European project — the attempt to build peace and democracy through shared prosperity — will suffer a terrible, perhaps mortal blow.”
Analysis of the Syriza victory in Greece and what it means for the EU courtesy of the BBC:
“There are some things during the eurozone crisis that we were told would never happen.
The European Central Bank would never flood the market with new money, and Greece would never take a gamble with the radical left.
The past few days have overturned those assumptions, making this week a potential turning point in the recent history of the European Union.”
Greek elections: What now for the euro? http://www.bbc.com/news/world-europe-30906153
Note the interconnection of oil prices, the US dollar and political instability in Greece.
“Global oil prices on Monday collapsed under $50 for the first time in more than five years on the strong dollar, plunging equities, demand worries and plentiful crude supplies.
The renewed slump came as the Dow index stood down more than 200 points and European equity markets lost more than two percent on fears of a Greek exit, or so-called Grexit, from the eurozone.”