Schoolyard Politics

When I was in fourth grade, freeze tag was all the rage. After school we would dash outside, and the first one to the playground would stand and shout, “Freeze tag, I’m the shoemaker!” Everyone would gather round, and the self-elected shoemaker would use some ditty to decide who was ‘it’.

Did you have something like this? The image of huddles of kids in a dusty playground is seared into my mind.

Occasionally, there would be tension. Someone else would want to be the shoemaker, and start their own game. Sometimes there would be two or three shoemakers all vying for players in their game.

Strangely enough, the same playground politics are being played out on an international scale. Remember when I wrote about China and the World Bank; how China plays a significant role in multilateral development financing?

Maybe not. If the last three words of the previous sentence are new to you, here’s a quick history lesson:

After World War II, a bunch of countries got together to figure out how to rebuild the world they had just trashed with bombs and trenches. There weren’t any banks that were big enough to loan to countries to rebuild cities and highways, so they decided to make a World Bank. Everyone would put money into the bank based on the size of their economy, and just like any other startup, investing bought voting shares. They also decided that they wouldn’t do anything without 85% agreement.

In 1944, the US had a 17% share in the Bank. They were the shoemaker. In fact, due to some unwritten convention, every World Bank president has been American.

Now, at the other end of the playground, China has been getting jealous. They’ve been growing like mad for a decade, and in 2010 they asked if they might have a bit more of a place at the table. After intense negotiations, they got  a paltry 1.65% of the vote, the US not giving up anything.

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Left shows pre-reform, right shows post-reform.

Last fall, China’s economy officially outsized the US economy. Having the largest economy in the world and being stuck at 4% is pretty unfair. So, like a schoolyard kid, China finally had enough and said “I’m playing my own game”.

Asian Bank Agreement Signed By Nations; Snubbed By Others
Xi Jingping just can’t take it anymore.

Reports of the Asian Infrastructure Investment Bank (AIIB) started surfacing in late 2013. Originally, China began by asking it’s neighbors to become founding members. Then they opened up the invitation to the rest of the world.

The response was unprecedented. Like grade school boys, all the kids lined up to be friends with the new cool kid. Everyone from Austria to Kyrgyzstan. Even North Korea applied! (they were rejected)505e47e4-9a17-453f-a2ac-183efe44d26c

The US wasn’t happy about this. They urged all their friends not to play. But the threshold broke in March, when the UK announced that they were in. Everyone else followed: France, Australia, Norway, even Taiwan and Israel applied! Canada is “considering it”, while Japan remains the last holdout.

The list of founding members will be finalized on the 15th. See the latest here.

Why is this significant?
– First off, I don’t want to demonize the US here; their concerns about the lack of social and environmental safeguards are important, especially when it comes to the types of big infrastructure (dams, roads, power plants) that this bank will finance. The AIIB will probably not opt for sustainable development.

– This isn’t just a financial move for China, it is a monetary move. All the US debt to China is in dollars, making China extremely vulnerable to the US (imagine that I owe you a million Jacob-bucks, but I decide how much a Jacob-buck is worth). An international bank that is denominated in Renminbi gives China a lot more global power, an important first step for the so-far reticent superpower.

– Finally, before we get too hyped about the “rise of China”, let’s remember that they’ve been the dominant economic power for all but the latest 200 of the last 2,000 years.

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