Asian Infrastructure Investment Bank: What does It Mean for Indonesia?

Regina Cara Riantoputra | Staff Divisi Kajian KANOPI 2015 | Ilmu Ekonomi 2014

Last November, Jokowi formally announced that Indonesia would be joining the recently founded Asian Infrastructure Investment Bank, or AIIB. Like the World Bank (WB) and Asian Development Bank (ADB), the AIIB is another multilateral financial institution that will provide capital in the form of loans for various countries to finance development projects. What differentiates the AIIB from the other two aforementioned banks is that the AIIB’s focus will be narrowed down solely to Asia and solely to infrastructure projects. The other primary difference is the key stakeholders behind these banks – the World Bank is controlled by the United States, the Asian Development Bank is most heavily influenced by Japan, while the AIIB is being led by China.

The news has been recently flooded with the controversy of this all-new AIIB. The U.S. and Japan have criticized China’s initiative of creating a new international financial institution, seeing it as a Chinese effort to exert more control over the global loanable funds market and the international economy as a whole. They’re not wrong. The establishment of the Chinese-led AIIB certainly does give China a lot more influence over Asian development, taking away some of that control from the U.S. and Japan. In addition, the U.S. and Japan have also claimed that the AIIB lacks recognition of proper environmentally-friendly development standards, since China is infamous for developing its economy at the cost of its environment.

But what does all this mean for Indonesia? Given the previously mentioned concerns, was the decision to join AIIB the right choice?

There are reasons to argue that it wasn’t. Indonesia needs to maintain positive relations with the United States and Japan, as both are amongst the most powerful countries that could significantly contribute to Indonesia’s speedy development. It’s also definitely true that Indonesia is currently being pressured to engage in sustainable development that considers the wellbeing of the environment, and should therefore stick with development projects that have strict environmental regulations in place.

However, it’s difficult to believe that the AIIB’s projects will disregard the environment, because even though the institution is being led by China, it will also be scrutinized and influenced by pro-environment European countries like the U.K., France and Germany. These countries have been granted the status of “founding members”, meaning they will be able to influence the terms upon which investments will be made, while will likely include environmental standards.

In contrast, the prospective benefits that can be derived from Indonesia’s membership in the AIIB push us to believe that Jokowi’s decision to join was a good one.

Firstly, Indonesia desperately needs another source of funding for infrastructure, especially in light of the momentum provided by Jokowi’s recent election. Jokowi has promised to construct 2000 kilometers of new roads, 10 airports, 10 new ports and establish 10 new economic zones, which will need at least USD 300 trillion to see through. The World Bank and Asian Development Bank will not be able to provide this kind of funding, especially due to political complications, and thus any alternative source of funding is good news for Indonesia. Given that many Western countries have joined the AIIB and will be injecting a lot of capital towards it, hopes are high that the AIIB will be able to loan more funds for Asia than the World Bank and ADB can offer.

Secondly, being a member of multiple international financial institutions puts Indonesia in a position to choose. The fact that AIIB is competing with the World Bank and ADB might actually be good for us, as these three banks would compete to provide the best loan packages for a range of countries including Indonesia, which provides us with the ability to choose which bank caters to Indonesia’s interests the most instead of only being able to fall back on a single international financial institution.

Third, China is a more dependable source of funds for investment compared to the United States, because China’s vested interests in Asian infrastructure directly benefit Indonesia and other surrounding nations, e.g. investments in the new Silk Road.

We can conclude that Indonesia’s pressing need for swift implementation of infrastructure development necessitates our membership in the AIIB. Any source of additional funding is good news for us. Bring on the AIIB!

References:

http://www.thejakartapost.com/news/2014/11/12/should-indonesia-join-aiib.html

http://www.reuters.com/article/2015/03/23/us-asia-aiib-indonesia-idUSKBN0MJ09R20150323

http://www.internationalaffairs.org.au/australian_outlook/jokowi-pledges-support-for-the-asian-infrastructure-investment-bank/

http://theconversation.com/why-everyones-joining-the-asian-infrastructure-investment-bank-39256