I’ve recently celebrated my first anniversary of working in China, and I can wholeheartedly say it has been fantastic so far. In particular I have been lucky enough to be surrounded by supportive and enthusiastic colleagues. To be very honest, I had worried about a challenge summed up well by a Chinese saying that “two tigers cannot live on one mountain”. When I joined UNDP China I knew I would be working alongside deputy country director Patrick Haverman (another regular blogger on this website) and there was potential for confusion about our roles. We needed to make sure we complemented and added value to each other. Of course, it took a while to work out, but it seems to be going well so far.
This same saying about one mountain and two tigers has been on my mind recently when thinking about the new financial institutions that China and other emerging economies have recently created – the New Development Bank (NDB) and the Asian Infrastructure Investment Bank (AIIB). Let me explain.
In every official discussion or media report about the NDB and AIIB, they are always set out as intended to be complimentary to existing institutions such as the World Bank, IMF, and the Asian and African development banks and so on.
But like me, while it’s all well and good saying this, is it really happening in practice? The fact is, when I joined UNDP a year ago, I had a fairly defined portfolio, and through trial and error Patrick and I have worked out where working together on problems really makes sense and doesn’t. Is there such a strong foundation, a territory for the NDB and AIIB to roam slightly separately?
Here’s an example, brought to my attention when Donald Kaberuka, former president of the African Development Bank, visited the UNDP China office recently.
Dr Kaberuka said he thinks a special role for the AIIB and NDB should be financing large regional projects. Indeed, such projects are badly needed. In Africa for example, the Grand INGA dam project – which would be larger than China’s huge Three Gorges Project, providing clean energy for hundreds of people – has been little more than a dream since the 1970s. But why? Regional projects like INGA suffer from many complex problems, but one major problem is getting the finance to work. When an organisation like the African Development Bank or World Bank is trying to finance a project, they don’t just have to look at the financial credibility of the project itself, they also have to look at the income classification of the country or countries the project will be in. But the latter kind of classification is uneven.
As an example, Ghana, Togo, Benin and Nigeria are next to each other, and could arguably benefit from a regional project. However, Togo and Benin are classified as Low Income Economies, while Nigeria and Ghana are lower Middle Income Countries. As is explained in this blog post this means that the two groups of countries are eligible for different types of finance at different interest rates from existing banks like World Bank. This makes regional projects difficult – as it is more complex to blend all the different types of finance.
But why are these classifications used in the existing banks anyway? Well, existing banks get a lot of their money from developed countries, who have a historic target for giving 0.7% of their GNI to a particular list of the poorest (i.e. lowest income) countries in the world. This list is based on these classifications and reviewed every three years. The existing banks use the list – and therefore the income classifications – to ensure the finance they get from the developed countries to spend meets this target.
The great news is that the NDB and AIIB are brand new, and the money they have to lend is from countries like China. Countries like China don’t have to meet the 0.7% GNI target, and therefore don’t have to use the “list”. This means they – and the new banks – can avoid the complications created by income classification all together. This may make it easier for the new banks to make regional projects a reality and an area of specialization. It could help them become complementary in practice and not just rhetoric.
This is just one idea that has come up for how – to go back to the Chinese phrase – several financial “tigers” could roam on one mountain to deliver development. But there are many other ideas that have been shared and will continue to arise over the coming months. The key will be for the new banks to continue consulting far and wide, and test out different approaches – just like Patrick and I did at the UNDP China office. Indeed, they can come to UNDP for such ideas, as we have a very wide network of country offices who are eager to help.
I’m hoping that in one more years’ time, as I approach my second anniversary at UNDP China, more and more tigers will continue to roam on the development mountain.