With UK's move to join China-led bank, will Australia and the EU follow suit?

British Prime Minister David Cameron and Chinese President Xi Jinping at a bilateral meeting. The U.K. became the first major Western country to apply to join the Asian Infrastructure Investment Bank as a founding member. Photo by: Crown Copyright

The United Kingdom’s unexpected decision to join the China-led Asian Infrastructure Investment Bank will likely trigger a snowball effect, with holdouts like Australia and the European Union following suit, according to Australian foreign policy and development experts.

With its announcement Thursday, Britain became the first major Western country to apply to join as a founding member of the $100 billion multilateral bank.

“We have taken the decision to become a prospective founder member of the AIIB to address a real investment need in Asia. It is in all of our interests to strengthen growth in this region and by taking this decision early on the U.K. is leading the way in influencing the AIIB’s founding processes to ensure that international best practice on safeguards and governance is met,” a representative from the British Treasury told the Financial Times.

The multilateral development bank aims to finance infrastructure projects in Asia, and is largely considered a competitor of the Asian Development Bank and, to some extent, the World Bank. But the hesitation to sign on as a founding member has often been pinned on traditional donors’ concerns that a China-led bank will have a weak governance structure and poor safeguards.

“Quite obviously, China has improved the governance structure that they are proposing for [AIIB],” Australia’s Finance Minister Joe Hockey said in a doorstop interview.

Foreign Minister Julie Bishop isn’t so sure, however, telling Australian media that the Coalition government still has some concerns around governance and shareholding, stressing that “those matters” are constantly being discussed and reviewed with China “in a very constructive way.”

Geopolitics, not governance

But Australia’s hesitation is not really about governance, according to Stephen Howes, director of the Australian National University’s Development Policy Center.

“Treasury’s always supported joining, it’s been foreign affairs that have opposed … so it’s really for geopolitical reasons,” the economics professor told Devex.

The U.K.’s move has now reduced the geopolitical cost of Australia joining and upsetting its key ally the United States, according to Howes. The United States reportedly lobbied hard for the southern nation to remain on the sidelines with other holdouts like Japan and South Korea.

But the decision is still one of economics versus the political architecture of the Asia-Pacific region, according to Andrew Carr from the College of Asia and the Pacific at the Australian National University.

“Australia is currently asking a number of questions,” Carr said. “Are the standards of the AIIB acceptable and how will it influence the architecture, security and economy of the region. With the United Kingdom joining, it makes it easier for Australia to accept.”

Lowy Institute research associate Philippa Brant agrees.

“The U.K.’s decision sends a positive signal to other countries like Australia and South Korea that the U.K. is confident that any concerns about structure and governance arrangements can be addressed,” said Brant, who has researched Chinese aid in the Asia-Pacific.

Signing on to the bank could create “a snowball effect” as well, according to Howes.

“The more countries join, the stronger the institution will become, the more reason there’ll be for other countries to join,” he stressed. “With this I can see Europe joining, with Europe joining it’s hard to see Australia not joining.”

The case for joining early

Negotiations with potential founding members were supposed to end in October 2014, but as the AIIB’s Multilateral Interim Secretariat increased active consultations with other countries, the deadline was extended to March 31.

According to Carr and Brant, joining early would give Australia an important role as a regional leader, warning that Canberra could potentially lose its ability to create influence the longer it stays out.

“Chinese economic assistance and investment is going to continue to grow, and Australia can have more influence over those decisions if it is part of a multilateral framework — even one that is Chinese-led — than if China only engages bilaterally,” Brant said.

Howes also pointed out that the U.K.’s move could potentially reduce China’s dominance at the bank, which will largely be determined by a country’s gross domestic product. The former World Bank economist also believes joining as a founding member will give Canberra a say on the bank’s constitution, noting that “amending the constitution of one of these banks is extremely difficult.”

But while it is an important decision for Australia to make, Carr does not think it is necessarily urgent.

“There has been talk that China has given Australia to the end of 2015 to make a decision on their involvement which would still secure for them a leadership role,” he shared.

But AIIB still ‘problematic’

Marc Purcell, executive director of the Australian Council for International Development, said it now appeared a matter of time before Australia would join, with negotiations occurring on concessions the country could gain.

But he said the establishment of the AIIB was “problematic.”

“China would have been better to extend their funding through the Asian Development Bank,” Purcell told Devex. “This duplicates the existing bank and has poorer safeguards against the social and environment impacts from infrastructure projects.”

The executive director pointed to China’s poor track record, including lack of compensation for poor communities and sacrificing of national parks for infrastructure, and said Australia needs to factor this in as part of its decision.

“There is an attraction in developing countries like China sharing their knowledge with nations such as Malawi. They have a valid experience to share growing from one of the poorest economies to one of the strongest,” he said.

Purcell emphasized, however, how China’s meteoric rise came at the expense of the environment and the communities that had to be displaced in the name of development.

“The Chinese model needs to be questioned,” he stressed. “It is not sustainable.”

Australia’s relationship with China and the Asia-Pacific region has developed steadily since the 1980s, moving from a getting-to-know period to being actively engaged with the region.

But the political dynamics have changed significantly in the past 35 years and Carr predicts the decision to join AIIB will be the first of many such decisions Australia needs to make on the politics of the region.

“This is a premonition on more debate on the role of China in the region,” Carr said.

Will the U.K.’s decision to sign on as a founding member of the Asian Infrastructure Investment Bank encourage other holdouts to join as well? Let us know by leaving a comment below.

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About the authors

  • Cornish img

    Lisa Cornish

    Lisa Cornish is a freelance data journalist based in Canberra, Australia. Lisa formerly worked with News Corp Australia as a data journalist for the national network and was published throughout Australia in major metropolitan and regional newspapers, including the Daily Telegraph in Melbourne, Herald Sun in Melbourne, Courier-Mail in Brisbane and online through news.com.au. Lisa has recently been awarded the 2014 Journalist of the Year by the New South Wales Institute of Surveyors.
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    Alys Francis

    Alys Francis is a freelance journalist covering development and other news in South Asia for international media outlets. Based in India, she travels widely around the region and has covered major events, including national elections in India and Nepal. She is interested in how technology is aiding development and rapidly altering societies.

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