Would China Have Launched the AIIB If Congress Had Approved IMF Reforms? Yes.

Does anyone really believe that China would have shelved its newly launched, $100 billion Asian Infrastructure Investment Bank (AIIB) if Congress had approved the International Monetary Fund (IMF) “Reform Package” negotiated by the Obama Administration in 2010?

That’s what proponents of the IMF reforms would have you believe as they fired off a new round of high-powered salvos aimed at embarrassing congressional opposition to their desire to nearly double regular IMF lending.

In what can only be termed fear-mongering, Treasury Secretary Jacob Lew told Congress last month that the U.S. is “losing clout at the International Monetary Fund” and that “Congress is undermining U.S. economic and national-security interests by failing to approve a five-year-old international deal for major governance overhauls at the IMF.”

Conservatives argue that “the fund already has enough firepower” and that the justification for the lending increase (if there ever was one) “has now disappeared.” American Enterprise Institute economist Desmond Lachman goes on to note that as “the global economy recovers and Europe builds its own bailout reserves, the IMF doesn’t need more cash.” An increase in IMF lending would increase “the risk of ‘moral hazard’” and permit governments to “rely on emergency backstops rather than budget discipline.”

This month it was former Harvard president and Obama economic adviser Larry Summers’s turn to deploy the alarmist rhetoric. In a Washington Post op-ed, Professor Summers insisted that “passage by the Congress of authorization for IMF reform is imperative” as a political step “to reassure investors about populist threats in a number of countries and provide investor protection and backstop finance.” Yet he makes no substantive case to defend that assertion and does not address the moral hazard issue at all.

The reality is that the Chinese fund infrastructure projects in developing countries to benefit their own elites, and they have been doing it for a long time, as chronicled in The AEI–Heritage China Investment Tracker. China may also be trying, as suggested by The Economist, to use the new bank to expand its influence “at the expense of America and Japan.” Maybe so, but if that is the case, it makes it even less plausible to assert that the new bank has anything whatsoever to do with IMF reform. Lew and Summers are reaching to make the link in an effort to justify a reform that would weaken the U.S. position at the IMF and which, therefore, has little support in Congress or among the American people. Best to judge that reform on its own merits. The AIIB has nothing to do with it.