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By all accounts, poor infrastructure is the biggest stumbling block for achieving higher economic growth. Lack of roads, highways, power, ports, airports and water has acted as the main deterrent to attracting foreign direct investment, especially in the South Asian region.

The first initiative to address the needs of developing and emerging market economies for infrastructure was the establishment of the New Development Bank by BRICS in Shanghai. This was announced at Fortaleza, Brazil, in July 2014 and marked a paradigm shift in the global financial system towards a new economic order in which the role of the IMF and the World Bank will be considerably diminished. And now the creation of the Asian Infrastructure Investment Bank (AIIB) has reinforced the trend. The AIIB was announced October 24, 2014, by China along with 20 other Asian countries which signed the MoU. The bank will be functional from 2015. Undoubtedly China wants to be the global leader in the global financial architecture and has the means to do so. It has huge forex reserves ($3.3 trillion) and has experienced steady growth for more than three decades. In the past, developing countries relied on Asian Development Bank, the World Bank and the IMF for their financial needs which dominated the multilateral lending operations in the world.

The IMF and the World Bank especially laid down conditions for their loans given to developing countries which often meant deviating from their own development agenda. Reforms included strict adherence to fiscal deficit goals, privatisation, opening up the economy, cutting subsidies and government expenditure. But today the developing countries are increasingly turning towards China to aid them in their quest for building infrastructure. And China has been helping Pakistan, Sri Lanka, Nepal and Bangladesh in building roads and ports.

As for India, the AIIB is going to offer further options and availability of finance for its immense infrastructural needs. India will need $1 trillion for five years beginning 2014-15. The AIIB has all our neighbours as members and also include central Asian countries like Mongolia, Kazakhstan and Uzbekistan. All need a huge amount of money for infrastructure development and with paid up capital of $50 billion and authorised capital of $100 billion, there is scope for loans for the entire region. Basically the two banks-NDB and the AIIB — will help in creating a new financial architecture that is based exclusively on the development needs of global South. It will be catering to their development goals but the governance and operating principles will naturally take time to be established. Gradually with a much more democratic set-up, the set of 21 countries may wean from the multilateral financial institutions like the IMF and the World Bank and ADB.

The World Bank and ADB are of course much bigger and well established. ADB, which has Japan as the biggest stake-holder, has a subscribed capital of $162 billion and the World Bank has $233 billion. Both give loans for diverse projects to governments as opposed to the AIIB, which will lend only and exclusively for infrastructure projects. President Xi Jinping recently said: "I believe the setting up of the AIIB will be an enrichment of existing multilateral institutions. We have to learn from the World Bank and ADB and other existing multilateral development institutions their good practices and useful experiences". But there is no doubt that the AIIB is set to give competition to the World Bank dominated system.

What has united the developing countries is the fact that the IMF has not undertaken reforms in its voting rights and quotas that BRICS demand. Under the IMF quota system, each member country is assigned a quota or monetary contribution that is supposed to reflect the country's relative size in the global economy as measured by GDP. The quota also determines each member country's voting power.

After the reforms the IMF's quota would double to $720 billion but the developed economy's quota and voting power would fall. BRICS gave the IMF $75 billion for quota reforms in 2010 (with India contributing $10 billion) which have not taken place to date. If reforms do take place, China would become the third largest quota holder at the IMF and Brazil, Russia and India would all become top 10 quota holders.

The AIIB will have voting rights based on benchmarks which will be a combination of GDP and purchasing power parity. Based on these China and India will be the biggest stakeholders.

Since the AIIB has been perceived as a challenger of the two Bretton Woods institutions (IMF and World Bank), US Secretary of State John Kerry asked Australia to abstain from joining. Indonesia and South Korea as well as Japan also were absent from the group of 21.

Considering India's immense infrastructural needs, the AIIB has opened a fresh window for financing in which there will hopefully be fewer conditions and hassles. All other less developing countries will also be able to access loans easily which will help them strengthen their infrastructure which in 2012 required an estimated $8 trillion. Clearly, the developing countries are joining hands to create banks of their own and will have less to do with the monetary policies of the US and the stranglehold of the IMF and the World Bank on their economies. As a group, the AIIB will be powerful in leveraging funds from global financial markets and in general avoid the turmoil in the financial markets due to changes in the US monetary policy, especially important in the aftermath of the global financial crisis.

Jayshree Sengupta
14 November 2014
(The writer is a Senior Fellow at Observer Research Foundation, Delhi)

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