As its economies have matured, and liberalisation has seen trade barriers progressively fall, a new challenge has emerged for Asia-Pacific economic integration – connectivity.
The physical infrastructure enabling the movement of goods, services, capital, information and people across borders has failed to keep pace with the region’s high-speed growth and industrialisation.
In recent years, China has made addressing these so-called ‘infrastructure gaps’ a focal point of its foreign policy in the region.
Given Australia’s profound economic, social and political enmeshment with Asia, government and business need strategies for how to engage with the transformations these Chinese connectivity efforts will produce.
The infrastructure gaps plaguing Asia are a widely known problem.
The region has a strong set of international institutions connecting its economies, including ASEAN (Association of Southeast Asian Nations), APEC (Asia-Pacific Economic Cooperation), their associated policy dialogues, and more than 50 bilateral free trade agreements.
But when it comes to physical connectivity – roads, rail, air and sea ports, energy and telecommunications linking economies – there is a worrying undersupply. These infrastructure gaps have become one of the principal barriers to trade, investment, economic integration and development in the region.
Best estimates indicate Asia-Pacific economies will need to make a staggering $1.5 trillion of infrastructure investments per year, every year, from now until 2030.
In a historic move, China has taken the lead in efforts to close these regional gaps.
In late 2013, the Chinese government unveiled two regionally focused infrastructure initiatives.
The first was the Belt and Road Initiative (BRI), which promised to build new infrastructure platforms connecting Europe, Africa and the Middle East to Asia.
The second was the Asian Infrastructure Investment Bank (AIIB), the world’s first multilateral bank exclusively dedicated to infrastructure projects.
These initiatives were part of a new phase in Chinese foreign policy, where it intends to go from being an ‘institution taker’ to ‘institution maker’ in global economic governance.
China is unique in focusing its foreign policy efforts on infrastructure and connectivity, as this is a domain other major powers and international organisations in Asia have hitherto not prioritised.
Importantly, the BRI and AIIB offer distinct and functionally differentiated models.
The BRI is a broad mobilising initiative, under which Chinese agencies are supported to develop in regional infrastructure projects through bilateral negotiations with host countries on a case-by-case basis.
Conversely, the AIIB is an inter-governmental development bank with 66 members, which makes loans to infrastructure projects under a rules-based policy framework with multilateral governance oversight.
In essence, the BRI offers a Chinese-led bilateral model, while the AIIB is a regionally led multilateral organisation.
While both initiatives aim to close infrastructure gaps, they offer two different governance models to solve this common problem.
These Chinese initiatives have posed a dilemma for Australian government and businesses – how to balance opportunities against potential risks?
On one hand, these are very welcome initiatives: they promise to add at least $140 billion to the Asian infrastructure funding pool, and signal China’s intention to work cooperatively with partners to solve a pressing regional problem.
Given the protectionist headwinds sweeping the global economy today, their positive impact should not be understated.
On the other, there are also distinct risks facing Australian participation:
• One concerns project governance, and how the economic, social and environmental risks of complex cross-border infrastructure will be managed.
• Another concerns institutional competition, and the need to ensure these initiatives support rather than detract from the work of other regional governments and organisations.
• A third are geopolitical risks, as these initiatives have become linked to issues of rivalry and conflict between China and other great powers in the region.
Australia is not alone in facing this dilemma. Indeed, practically every country in Asia is currently having a policy debate about how to best engage with China’s new infrastructure initiatives.
However, this debate has proven especially challenging in Australia. Viewing the initiatives as an economic opportunity but strategic risk, Australian policy has at times vacillated and, at others, been ‘half-in, half-out’.
This is not an outcome that will enable Australia to engage with these transformative initiatives, or have an effective voice to shape their future development in ways compatible with its national interests.
Australia would benefit from a clear, coherent and externally communicable policy on participation in China-led infrastructure initiatives.
The AIIB provides such a mechanism for Australian government and businesses.
The body can function as a ‘governance guarantee’, which reduces the risks facing regional infrastructure projects.
This is due to the unique features that distinguish the AIIB from the BRI:
• The AIIB has a well-defined and transparent set of governance policies, which ensures international best practices are maintained and evaluated for all funded projects.
• It has formal partnerships with several other development banks, particularly the Asian Development Bank and World Bank, which brings in trusted and high-capacity partners.
• As a multilateral, rather than Chinese-led, institution, its projects have a degree of legitimacy and regional buy-in that reduces the risk of political tensions.
In this way, the role of the AIIB in an infrastructure project offers a guarantee to involved parties it will be subject to good governance, involve reliable partners, and is less likely to be a source of geopolitical risk.
The AIIB provides an ideal mechanism for Australian actors to confidently participate in China-backed infrastructure in the region.
There are several steps Australia can take to make use of the AIIB in this manner.
First, Australia needs a clear policy on engagement with Chinese infrastructure projects, which can be communicated to external parties.
There is considerable ambiguity – both in the region, and in China – over where Australia sits. This prevents Australia participating in, let alone shaping, the future of regional connectivity schemes.
Second, Australia should leverage its founding membership of the AIIB to augment the role of the new bank.
A key area is the AIIB’s ‘Project Preparation Special Fund’, where Australian technical capacity in project design could make a major impact.
Third, Australia can work with third parties – particularly Indonesia, Vietnam and India – to develop and pitch projects to the AIIB.
This will ensure the bank has a ready pipeline of well-designed projects, as well as improve Australia’s bilateral economic relations with these key partners in the region.
Importantly, we must remember the policy stakes are high.
In the past five years, efforts to transform connectivity in Asia have rapidly gathered pace. And for the first time in its history, China is taking the lead to help address a key regional economic problem.
This is a positive development, and one Australia cannot afford to sit out. Yet transformative infrastructure projects inherently pose risks.
Australian government and businesses need to find ways to participate in a manner that reflects the country’s commitment to transparency, good governance and a rules-based regional order.
An AIIB-based strategy provides the governance guarantees that make such Australian engagement possible.
This article has been adapted from a speech delivered to a Belt and Road Initiative symposium hosted by the Australia-China Relations Institute and Deloitte at the University of Technology Sydney.
Jeffrey Wilson is Senior Lecturer in International Political Economy and a Fellow of the Asia Research Centre at Murdoch University, Perth.