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Plugging the gap

Interview: Gabriel DomínguezApril 15, 2015

The new China-led financial institutions are set to provide funding for infrastructure projects in underdeveloped Asian countries. But how badly is regional development financing needed? DW speaks to WRI's Denise Leung.

Infrastrukturprojekte in China
Image: picture-alliance/dpa/A. Bradshaw

The BRICS New Development Bank (NDB), the Asian Infrastructure Investment Bank (AIIB), and the Silk Road Fund are all international initiatives spearheaded by China over the past months that symbolize Beijing's growing influence in providing development funding and potential new sources of financing for developing countries.

While the initiatives have been criticized by some as a way for Beijing to challenge Western-backed institutions such as the World Bank or Asian Development Bank - viewed by some as dominated by Washington and Tokyo - there are others who believe these new development banks may have a positive impact on emerging economies.

In fact, more than 40 countries have already announced their intention to join the AIIB - set to be launched by the end of 2015 - as founding members, including some of Europe's largest economies, with the US and Japan being notable absentees.

In a DW interview, Denise Leung, an associate at the Finance Center of the World Resources Institute (WRI), talks about how these new institutions could help step up development in Asia and point to the environmental and social safeguards that should play a role is these new institutions.

Denise Leung World Resources Institute
Leung: 'Current international finance is insufficient to meet the region's infrastructure needs'Image: World Resources Institute

DW: How large is the need for infrastructure development in Asia?

Denise Leung: Infrastructure is crucial to promote benefit sharing and economic growth. In Asia alone, the overall need for national infrastructure investment is estimated to be about $8.22 trillion for the period between 2010 and 2020.

Current international finance is insufficient to meet these infrastructure needs. For example, in 2014 financial year, the World Bank's overall spending on infrastructure was $24.2 billion, and the Asian Development Bank's total spending across all sectors was $21 billion.

While exact infrastructure needs vary by region and country, Asia needs increased infrastructure investments across the board, including in energy, water, and transportation. The rapid growth of a number of Asian cities has also put pressure on existing infrastructure, necessitating expansion and increased efficiency.

In your view, what role could these new infrastructure banks play in this context?

Today's infrastructure investment needs far exceed the amount of finance currently available. Existing available capital will not meet this financial need - new financial institutions like the AIIB and the NDB, a bank initiated by the BRICS countries, are stepping in to fill the gap.

Together, they will bring hundreds of billions of dollars of new investments to Asia. In addition, from the information they have provided, the banks will give a greater voice to developing country members than current levels at existing international financial institutions (IFIs).

In terms of economic power and population, emerging economies are underrepresented in existing IFIs like the World Bank and Asian Development Bank.

Brazil, Russia, India, China and South Africa (BRICS countries) together comprise 21 percent of the world economy and 43 percent of the world's population, yet their voting power at more traditional IFIs does not meet their size.

Symbolbild IWF senkt Wachstumsprognose für Deutschland
'Emerging economies are underrepresented in existing IFIs such as the International Monetary Fund'Image: picture-alliance/dpa

For example, they collectively hold 14 percent and 11 percent of voting shares in the International Bank for Reconstruction and Development and International Monetary Fund, respectively.

But the new financial institutions will allow developing countries to take a more active role in global development finance.

Which Asian countries need such infrastructure financing the most?

Over 700 million people in Asia live below the global poverty rate; more than half of the global poor live in South Asia. A number of the world's least-developed countries are located in Southeast Asia, including Cambodia, Laos, and Myanmar.

In poor countries as well as across the region, increased infrastructure is crucial to supporting market development, improved environmental and social conditions, and increased connectivity to the rest of the world.

For example, Laos is a landlocked country that could benefit from increased access to other countries and global ports. Increased infrastructure investment there could improve railroads, set up transportation hubs, and increase trade and investment, among other benefits.

What are the potential risks of such institutions and how can they be avoided?

The new actors in development finance have the advantage of learning from decades of experience from existing international financial institutions and setting a new international standard. As they move forward with their operations, they will need to ensure that the infrastructure projects they fund do not generate pollution, damage health or otherwise harm people or the planet.

The biggest risk faced by these institutions is that they do not build on the experiences of others.

But this can be avoided by taking advantage of their position as new actors to learn from and improve on the successes of existing IFIs while avoiding the challenges that they faced.

What role will environmental and social safeguards play in these new financial institutions?

The world needs emerging economy-led development banks, both to scale up the level of investment and give developing countries better representation in development finance. It is important that new development banks emphasize sustainable development and help shift the world onto a growth path that both protects the environment and benefits local communities.

The creation of clear and well-enforced environmental and social safeguards is a crucial step to sustainable development and should be embedded into the operations of these new banks.

Infrastructure costs money, and funding development in an environmentally and socially sustainable manner also costs money. These new banks can fill that funding gaps and also provide opportunities to set a new standard for environmental and social policies.

All new development banks should be asking two main questions: How can we increase green investments, and how can we develop strong safeguards so that all of our projects are done in a sustainable manner that facilitates economic, social, and environmental development?

Bildergalerie Hochgeschwindigkeitszüge China CRH380
'Increased infrastructure across the region is crucial to supporting market development'Image: Reuters

How will these banks account for transparency?

The AIIB and NDB are still being formed, so their commitment to transparency remains to be seen. As they formulate their policies, they should consider a range of aspects, including whether the information regarding investment decisions will be publicly available, whether there will be a grievance mechanism and an independent accountability mechanism and what the expectations for stakeholder engagement policies are.

Addressing these questions in their policy framework will help create clear lines of accountability and transparency.

Denise Leung is an associate at the Finance Center of the World Resources Institute (WRI).