Cited: We missed the AIIB Party … now what?

As cited in National PostPDF

Rana Sarkar notes my work on a Canadian development finance institution (DFI): “There are real returns to this strategy. Economist Brett House notes the U.S.’s Overseas Private Investment Corporation returns $8 in benefits for $1 lent.”

We missed the AIIB Party … now what?

Rana Sarkar

Toronto – Last week marked the tipping point for the China-led Asian Infrastructure Investment Bank (AIIB) with Britain and Australia and now a crush of applicants covering much of the globe. No April Fools — we missed the deadline.

Against Washington’s frets, 40 nations will contribute $100 billion to address Asia’s $10-trillion infrastructure deficit. Along with the new $50-billion BRICS bank and $40-billion Silk Road Fund, the AIIB is a key piece in Beijing’s geo-strategy, but also fills a pressing need for new capital at a moment where voting reform within the U.S.-led IMF and World Bank is not forthcoming.

For new joiners it’s better to be in than out and to directly shape the ground rules — setting the environment, social and governance standards and ensuring top table rights in the new bank’s lucrative project supply chain and informal networks.

Broad membership will be a big relief to Beijing’s nervous neighbours. The U.S. should also take comfort as the large OECD presence (and the moderating logic of large groups) will invariably ensure the AIIB plays nice in the sandbox of multilateral institutions.

Now visibly late to the party, we should start talks to join as soon as possible. And to make up for our late arrival, we need to do much more.

The new institutional architecture and alliances in Asia are far from set. The region continues to adjust to both China’s rise as well as the impact of this century’s global security and economic shifts.

Canada should use this second “Bretton Woods” moment (as we did in the first) to get creative.

A smart strategy is being useful in meeting Asia’s many crisis needs — amplifying our perceived strength in soft as well as hard infrastructure — including governance, managing pluralism, public health, regulation, air, water, food and resource management, engaging the next generation of entrepreneurs through institutions, programming, events and even the use of contests and prizes.

A first instalment on a new approach is finally creating a Canada Development Finance Institution (DFI). It’s an idea that’s been on the table for decades but was most recently revived by the Canadian Chamber of Commerce. Canada is alone amongst its G7 peers in not having a DFI. In not unrelated news, we also bottom out the G7 with our mere 1.5% of FDI stock in the region.

But the real opportunity here is to create a DFI 3.0. It could solve at least two needs: First, to fill a project finance gap; secondly, to build an innovative ecosystem connecting Canadians directly to transformative companies, social ventures and entrepreneurs in the region, and become a co-ordinator of development innovation already underway.

Missing in our capital mix is a catalytic capital provider, capable of lending at near-sovereign rates and capable of taking up earlier stage projects, building out the ecosystems and filling capital gaps before projects have the scale and risk-profile for others to step in. This will also entice more Canadian private companies.

There are real returns to this strategy. Economist Brett House notes the U.S.’s Overseas Private Investment Corporation returns $8 in benefits for $1 lent.

Our task is to build a next-generation DFI absent of legacy with a nimble, open culture stealing a beat from (and sharing talent and program with) the best NGOs and startups looking to fix complex problems in new ways. The mandate could also include venture funding working closely with crowd funders and NGOs to achieve development and innovation-led growth — apply smart capital and capacity to amplify success.

The best global DFIs (including Britain’s Commonwealth Development Corporation) are already moving in this direction recognizing that Asia is also the site of innovation on an epic scale, but often best nurtured on a small scale.

In this century our prosperity at home is conjoined with our ability to connect with game changers abroad not just for our own security, but to co-learn.

There is no silver bullet here, only silver buckshot.

Competition for soft power and influence requires us to show up in Asia on the ground floor, get innovative and make parallel and creative bets.

National Post

Rana Sarkar is a senior fellow and board co-chairman of the Munk School of Global Affairs and National Director High Growth Markets at KPMG.

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