Infrastructure Financing and the Drive for Influence in Indo-Pacific

Ragul Palanisami
March 12, 2019


In recent years, infrastructure development has been given too much attention in the geo-economic strategies of various countries in Indo-Pacific. In line with this objective, many countries have created Development Finance Institutions (DFI) to provide risk capital for economic development projects. DFIs usually support projects in developing and underdeveloped countries that are not able to get finance from commercial lenders. DFI includes multilateral banks like Inter-American Development Bank (IDB) and Asian Development Bank (ADB). It also includes agencies like Overseas Private Investment Corporation (OPIC) of USA and Commonwealth Development Corporation (CDC) of the UK.

The development finance has been the forte of developed countries up until recently. With the recent Chinese initiative to create the Asian Infrastructure Investment Bank (AIIB) this monopoly is broken. China created AIIB (initial capitalization of about $100 billion) in 2015 to support infrastructure development projects undertaken under its own Belt and Road Initiative (BRI), which was announced back in 2013. It is argued that AIIB is a response to the failed Chinese attempts to bring reforms in the World Bank and International Monetary Fund (IMF).

Immediately after the AIIB initiative was announced, the Chinese government offered an open invitation to the United States to join it. Despite the offer, the Obama administration’s response to the Chinese initiative was cynical. Eventually, Obama administration kept the US out of AIIB citing governance and transparency issues. However, except for the Japanese, US failed to persuade rest of its allies to stay out of AIIB. This action along with the US decision to exclude China from Trans-Pacific partnership (TPP) reinforced the feeling in the Chinese establishment that the US is determined to contain its growth.

From a strategic viewpoint, Obama’s decision to stay out of AIIB doesn’t bode well for the United States, if the Chinese grand strategy in creating AIIB is to spread its influence in the vast swathes of Indo-Pacific. Another fear is that the rival institutions created by the Chinese would be a real challenge to the existing liberal order. The challenge is already visible in the manner in which the Chinese are propping up authoritarian regimes through unconditional finance. Moreover, the BRI is likely to pull the entire region into the Chinese orbit by galvanizing the prevailing intra-regional trade network. This would enable the Chinese to use geo-economic tools more often in future to punish any disobedient neighbors. Given the gloomy predictions, it would have been prudent for the United States to join the AIIB and steer its operations in a manner consistent with its interests.

Alternatively, Obama Administration signed TPP agreement with 11 other Indo-Pacific countries, which besides the economic advantages, was meant to safeguard the existing rules-based order in Indo-Pacific. The agreement was also intended to weaken the trade dependency of East and South-East Asian countries on China. The agreement was right on track until the moment when the Trump administration pulled out of it leaving the other 11 nations to mend themselves. This decision will leave the dual-structure of dependence – economic dependence on China and security dependence on the United States – intact in the Indo-Pacific for decades to come.

The TPP pullout has left the United States without any clear strategy in Indo-Pacific. Two strategic mistakes – rejection of AIIB membership and TPP pullout- has played into the hands of the Chinese grand strategy to establish a Sino-Centric order in the Indo-Pacific. Trump administration has tried to make amendments for the lost opportunities by announcing infrastructure-funding initiatives on its own and in partnership with Japan and Australia, both as part of the newly announced Free and Open Indo-Pacific (FOIP) strategy. With a very meager budgetary allocation of about $60 billion, this new US initiative is of no match to the Chinese BRI, which runs into about a trillion dollars in infrastructure funding. Acknowledging its limited potential, the Trump administration has touted the positive aspects of its financing model in comparison with the Chinese model.

Recently, President Trump has proposed that the US would rejoin the TPP but given his domestic support base, it looks highly unlikely. In the absence of US, Japan has taken the lead in pushing the TPP (henceforth termed as CPTPP) forward. It is yet to be seen if the Japanese would be able to achieve something worthwhile. Similarly, the Japanese have announced its own $110 billion ‘Quality Infrastructure’ initiative (PQI) to counter the Chinese influence in the region. Likewise, Australia has increased infrastructure investments in its neighborhood fearing increasing Chinese influence. All these individual initiatives signal a growing disillusionment with the United States as it failed to come out with a coherent strategy to meet the Chinese challenge in the Indo-Pacific. The way forward for the United States is to reassure its allies with a reinvigorated grand strategy, which would ensure the survival of the liberal order through renewed engagement with China, wherever deemed necessary.

*** The author is Doctoral Scholar, Centre for Canadian, U.S. & Latin American Studies (CCUS&LAS), Jawaharlal Nehru University, New Delhi. ***