The Mises Economics Blog: The Circle Bastiat (vonmisesblog) wrote,
The Mises Economics Blog: The Circle Bastiat

Oh Good, Another World Bank

Obama’s recent trip to Beijing revealed that China is ready to begin the operations of the Asian Infrastructure Investment Bank (AIIB)—another international financial institution in the dazzling panoply of development banks—as early as next year. The AIIB is supposed to finance infrastructure projects in the Asia-Pacific region, in the ballpark of $8 trillion over the next decade. Plans for the multilateral bank have been developing since October 2013, when, tired of waiting for Western philanthropy, China began to gather the support of 21 partner countries. In fact, Beijing has been complaining for a long time that the tight purses of the World Bank and the IMF are not satisfying the financial needs of its growing economy, or those of its neighbors. The US has voiced concern about China’s project over the past year, claiming that the standards and procedures of the AIIB are not transparent enough, and thus, its activity might end up crowding out the good work of the two Bretton Woods institutions.greaves

At least, that’s the official story. But if you read between the lines, the narrative unfolds somewhat differently.

First, China and other Asian economies need these reserve pools in the first place because of their growing budget deficits (naturally, spending cuts are out of the question). As some have explained, the $50 billion lent to all countries every year by the World Bank only covers Indonesia’s infrastructure spending plans by 2019. Thus, with the WB and IMF controlled by the US, and the Asian Development Bank under Japan’s foot, China and others feel they aren’t getting their share of the pie. Second, the US is not really worried about transparency at AIIB—the Fed has written the book on how to keep your dealings secret—but about China’s plan to use a part of its dollar reserves to fund these development projects. If the plan is carried through, the AIIB will become China’s own inflation subsidiary, with power to decide who gets flooded with credit in US currency. In the meantime, the United States has no share in the vote, and can only look forward to some price increases.

The rationale for both China’s decision and US’s reaction lies, in fact, with the workings of the current international monetary system. Mises (2010, 81-82) explained the underlying political problem of global fiat inflation:

…the question is who gets the additional money? Everybody, every country, would say the same thing: “The quantity we got is too small for us.” The rich countries will say, “As the per head quota of money in our country is greater than it is in the poor countries, we must get a greater part.” The poor country will say, “No, on the contrary. Because they have already a greater part of money per head quota than we have, we must get the additional quantity of money. […] There will be a tendency toward higher prices in those countries that are getting this additional quantity and those who receive it first will be in a position to pay higher prices. So other people will want more, you know. And the higher prices will withdraw commodities and services from the other nations which did not get this new money or not a sufficient quantity of it.

World leaders, it seems—unlike many economists—do not think inflation has no effect on the distribution of wealth. In fact, control over the printing press is the cornerstone of most geopolitical games states play.

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