Chinese institutionalism and the contemporary international order : how can IR theory explain the establishment of international financial institutions by China?

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Chinese Institutionalism and the

Contemporary International Order: How can

IR Theory Explain the Establishment of

International Financial Institutions by China?

By: Joris van der Klei

Universiteit van Amsterdam

24-06-2016

Student Number: 6151043

Programme: Power transition in the 21st century: the rise of China in international relations

Department: Graduate School of Social Science Supervisor: Dr. Julia Bader

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Abstract

In the last decade China regained its place as an influential player in international politics. One of the most notable achievements is the establishment of two international financial institutions, namely the New Development Bank (NDB) and the Asian Infrastructure Investment Bank (AIIB). The establishment of international financial institutions is a rare event, especially when a developing country, like China, is one of the main founders. Therefore there is an international debate about the real purpose of these financial institutions. On the one hand there is a group of countries that believe that there is a necessity for new financial institutions to create greater cooperation and more financial capabilities to foster economic growth. On the other hand there are countries like the United States and Japan that question the real Chinese intentions behind these institutions and believe the institutions are developed out of national interest. This debate also exists within the academic discipline of International Relations. The two main camps within this discussion are neoliberal institutionalists theory and structural realists theory. The neoliberal institutionalists believe that the establishment of institutions ensures cooperation and positive outcomes for all actors within the international system. Structural realists believe that the role of institutions in international politics is negligible and are established out of national interest. This thesis examines which IR theory gives the most fitting explanation for the establishment of financial institutions by China. The outcome is that neoliberal institutionalism contains the most explanatory power for the phenomenon, yet it cannot be said that it can explain Chinese institutionalism at its own. Structural realism also contains a part of the explanation, but from another perspective.

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Tables

Table 1: Empirical implication and empirical evidence 18 Table 2: Basic characteristics selected institutions 26

Table 3: Voting share existing institutions 31

Table 4: Voting distribution AIIB 46

Table 5: Outcomes 57

Abbreviations

ADB Asian Development Bank

AIIB Asian Infrastructure Investment Bank AOA Articles of Agreement

ASEAN Association of Southeast Asian Nations

BW Bretton Woods

BRICS Brazil, Russia, India, China and South Africa GDP Gross Domestic Product

H Hypothesis

IMF International Monetary Fund IR International Relations NDB New Development Bank

OECD Organization for Economic Co-operation and Development

UK United Kingdom

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1. Introduction

Over the last decades, China has experienced rapid development in many different arenas. It became the second largest economy in the world, reduced domestic poverty massively, created a thriving manufacturing industry, and became an international financial and political power, among other achievements (Brown 2015). These different kinds of development, together with the high ambitions of the Chinese leader Xi Jinping ensured that, nowadays, China plays a more visible and important role in international politics (Brown 2015). In the decades before 2010, China’s political focus was mainly turned inwards. The main ambitions were reducing domestic problems and creating sustainable economic development. Now that China has overcome many of these problems and created sustainable economic growth, the focus has shifted towards more internationally oriented politics. This is visible in China’s international behaviour. More often, China takes a prominent or leading role in international matters. China’s extraordinary economic growth and active diplomacy have already transformed Asian politics and power distribution, and it is likely that Chinese power and influence will increase even further (Ikenberry 2008).

A relatively new phenomenon in China's international behaviour is the establishment of international financial institutions. For years, international financial institutions were dominated by the US, Europe, and Japan. Institutions like the International Monetary Fund (IMF) and the World Bank were the most prominent institutions for economic development in developing and emerging economies, and did not experience any competition (Buira 2006). Now, there might be a change in the landscape of international financial institutions. In the last year, China was the force behind the establishment of the NDB and the AIIB. Both are international financial institutions providing loans for (infrastructural) development projects in developing countries (Maurant, et al 2015). In a short time, China, along with other emerging economies, established two financial institutions of average size compared to the existing institutional order.

This thesis is focussed on this process of founding the Chinese international financial institutions. The establishment of financial institutions the size of NDB and AIIB is a relatively rare phenomenon, especially since one developing country, China, plays a central role in the establishment of both institutions. Therefore, this is an excellent opportunity to research China’s underlying motivations and intentions.

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2 Because the institutions are recently established, there has been limited academic research on the topic. This is the research gap that this thesis aims to fill. International relations (IR) theory will be the tool used to explain the establishment of Chinese international institutions. Thus, this thesis tries to answer the question: How can IR theory explain the establishment of international financial institutions by China? 1.1 The Ongoing Debate within IR

Within the discipline of IR, there is an ongoing debate about the actual role and influence of institutions and institutionalism. Some scholars believe that the roles of institutions in international politics are marginal and overestimated, and serve the purpose of national interest (Mearsheimer 1995). There is also a group of scholars who believe that institutions are important in international politics and ensure cooperation and stability (Keohane 2012). This section treats some of the fundamental literature on institutionalism in the academic discipline of IR, and exposes the various standpoints in the discussion. Thereafter, the functions of and different perspectives on the institutions and China’s rise in the contemporary international order are discussed. Finally, I elaborate on the specific research gap that this thesis attempts to fill in.

The two main opponents in the academic debate on the influence of institutions in international politics are structural realist thinkers and neoliberal institutionalist thinkers. These two theories have dominated the academic discipline of IR for the past several decades. Structural realists argue that the role of institutions in international politics is negligible, that they are a reflection of the distribution of power in the world, and that institutions exist due to national interest (Mearsheimer 1995: 7). John Mearsheimer, a well-known realist, states that institutions have minimal influence on state behaviour and hold little promise of promoting stability and cooperation in the international system. The reason for these assumed flaws in institutions is that institutionalist theories all employ little empirical and historical evidence and have problems in causal logic. An important paradox exists here: although the reality does not work the way institutionalist theories suggest it does or should, these theories remain highly influential in the academic and political world. The reason for the popularity of institutionalist theories is that academics and policy makers who think seriously about foreign policy issues tend to dislike realism intensely because it clashes with their basic values. Realism is pessimistic; it

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3 describes a world of harsh competition and holds out little hope for making that world more benign. These characteristics are opposed to how most academics and politicians prefer to think about themselves and the world (Mearsheimer 1995: 47-48).

On the other side of the spectrum is a group of neoliberal institutionalist thinkers such as John Ruggie and Robert Keohane. These scholars are convinced that liberal institutionalism provides the basis for political authority, conceived as a ‘fusion of power and legitimate social purpose’ (Keohane 2012: 125). Institutions and rules can facilitate mutually beneficial cooperation, within and among states. The social purpose of neoliberal institutionalism is to promote beneficial effects on human security, welfare, and liberty as a result of more peaceful, prosperous, and free world. They justify the use of power in constructing institutions on the basis of this social purpose. Institutions serve a crucial social purpose because they are essential for ongoing cooperation that represents the interests of most, if not all, people (Keohane 2012: 126-127). Simply stated, institutions ensure peace and prosperity and are beneficial for all actors within the international system.

Having discussed the central debate about institutionalism in IR, I now turn to the role of institutions and institutionalism in the rise of China in contemporary international politics. There are several neoliberal institutionalists such as John Ikenberry and Shaun Breslin who believe that China will try to reshape the rules and institutions of the contemporary international order rather than challenge it. John Ikenberry states that reshaping the international institutional order is only possible through the existing norms and institutions set out by the United States (US) because they are widely accepted all over the world and beneficial for most of the actors within the system, including China. An important statement he makes is that ‘The road to the East runs through the West’ (Ikenberry 2008: 25). This means that if China wants to become a key player in international politics or even the hegemon, it would need to adapt within the institutional framework that was established by the US. This would result in a bipolar system, or a system in which China would be the leader, yet the system itself would still follow the rules and norms developed by the US. If Ikenberry's ideas are true, the new Chinese institutions would act as an addition to the existing international institutions and would be open for integration within the world order set out by the US (Ikenberry 2008).

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4 Shaun Breslin (2013) also believes that China seeks a gradual modification of the Pax Americana (the contemporary world order), not a direct challenge to it. This is not because China is satisfied with the global status quo; on the contrary, China is dissatisfied with the current power distribution but wants to push for change in a responsible manner that does not destabilise the international system (Breslin 2013: 616). One of the ways in which China wants to change the global distribution of power, mainly in the major international financial institutions, is through participation in the Brazil, Russia, India, China, and South-Africa (BRICS) process1. The main motivation for Chinese participation in the BRICS initiative is to express joint dissatisfaction that the global power shift has not been accompanied by noteworthy changes in the major (financial) institutions of global governance.

While China has clearly articulated the need for global governance reform in several ways, the existing international order has actually served the country quite well. The Chinese leaders have done much to ensure that China has become an established part of the US-ruled international order. China largely integrated itself into the global order by joining existing institutions, and also adopted many of the dominant norms and practices (Breslin 2013: 629). Despite continued Chinese integration into the existing international order, China articulated reformist goals at the G20 meeting in 2008. China stands for the reform of international financial institutions, and states that efforts should be made to increase the representation of developing countries (Breslin 2013: 631). Thus, China’s goal regarding the international order is, on one hand, integration as a respective member, and on the other hand, slowly reforming the system and securing a greater voice within the system and its institutions.

Stephan Haggard (2014) believes that the future of the existing international institutions looks more pessimistic due to China’s growing influence. Ikenberry and Breslin both see a slow and stable change in international institutions: the existing institutions will not be replaced, but reformed. Haggard believes that the increasing

1_{The BRICS is a group of developing countries containing Brazil, Russia, India,}

China and South Africa. These countries work together to reinforce their diplomatic and economic weight on the global stage as counterweight to the Western dominated international order (Qobo & Soko 2015: 278).

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5 influence of emerging powers like China can have a more direct negative impact on Western-established institutions than expected. This is because in contemporary international politics the standard arguments of neoliberal institutionalism do not necessarily offer the solace that they once did. According to Haggard, there are three distinct grounds for the decrease in Western institutional power. First, two of the most important rising powers in international politics are (semi-) authoritarian regimes (China and Russia). They are characterised by foreign policy discretion, nationalist strategies of legitimation, and the lack of transparency and checks on leaders (Haggard 2014: 3).

The current international institutions are mainly based on the principle that all member states are democratic; if authoritarian regimes play a more significant role within these institutions, the grand strategy of the institutions will change. Second, developing states bring different domestic structures, institutions, and preferences to the table. Therefore, bargaining becomes more complicated, which can lead to more contentious politics within the international institutions and a higher risk of deadlock (Haggard 2014: 15). Third, from an economic perspective the growth of demand in emerging countries has also created patterns of increased trade among developing states, trade that is outside the reach of the advanced states. Thus, emerging states become less dependent on the institutions provided by the advanced West. The development of emerging markets plays a significant role in the power of international institutions, developments over which the US and its allies exercise limited influence (Haggard 2014: 4).

The main point of Haggard’s argument is that it cannot simply be assumed that the US-led institutions will maintain their importance and power. There are plausible arguments for the decline of importance of US-led institutions. China could use this decline of influence to create a new institutional framework that gives more power to emerging states.

This thesis will attempt to determine which theoretical perspective is most fitting for contemporary Chinese institutionalism. The phenomenon is very timely and therefore mostly unexplored in the academic literature. As described above, there are different perspectives on the role of institutions and institutionalism. The establishment of new international (financial) institutions on the scale seen recently does not happen often. Therefore, this is an opportunity to explore which theoretical

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6 perspective in an ongoing debate in the discipline of IR is the most fitting in the contemporary situation.

Another important reason for researching the establishment of the NDB and the AIIB is that these institutions present a concrete policy problem for many, particularly Western countries. The field of global finance has been dominated by the US since the end of World War II (Grieco 1988). This Chinese initiative is the first time that another country is clearly trying to create a serious alternative to the Western-dominated financial institutions. Many Western countries are considering joining the AIIB and could potentially join the NDB in the future. Therefore, it is necessary to understand the actual nature of the Chinese initiative. If China simply wants to strengthen its national interests, it would not be beneficial for Western countries to join the new Chinese institutions. However, if the NDB and the AIIB complement the existing institutional framework, it would be advantageous for Western countries and all countries in general to join the institutions.

1.2 Outline and Findings

The thesis uses the following structure in order to answer the research question. First, a definition of ‘institution’ is needed, which is given in the theoretical chapter after the introduction. Then, the theoretical chapter elaborates on the two main IR theories that are being tested, namely neoliberal institutionalism and structural realism. The core principles of these theories will be described in the theoretical chapter. Next, the methodology used to answer the research question is outlined. The operationalisation derived from theory is explained, followed by the corresponding empirical evidence and the data sources that are being used. Then, the new Chinese institutions NDB and AIIB are briefly introduced, as well as the existing institutions, which are the IMF, World Bank, and the Asian Development Bank (ADB). Thereafter, the research methods and selected data are expounded. Then, the most important part of the thesis is presented: the empirical analysis. Finally, the thesis finishes with conclusions and recommendations for further research in the future.

I find evidence that supports both theoretical perspectives. Some empirical evidence supports neoliberal institutionalist theory. For instance, there is a great demand for financial institutions with a focus on infrastructure development, which reveals a gap in the existing institutional framework. Also, the AIIB already works

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7 together with the existing institutions on joint projects to complement the institutional framework. Furthermore, the institutional design of the NDB is very much in line with neoliberal institutionalist theory; the voting and capital share of the NDB is equally divided among the founding member states. However, there is no certainty that this will remain the case in the future.

Meanwhile, there is also empirical evidence that speaks for structural realist theory. For example, the existing institutions are dominated by the US, Europe, and Japan. Redistribution of voting share is taking place, but not at the same pace as the shifting world economy. Therefore, China is forced to take matters into its own hands to strengthen its position in international financial institutions. The AIIB is strongly dominated by the Chinese; they possess by far the largest voting share, host the headquarters, and provided the first president. Also in line with structural realist theory is the fact that at first glance the new Chinese institutions appear to fill in this infrastructure gap, yet nowhere is it specifically stated that both institutions must invest in infrastructure. Their main focus lies with infrastructure, but they can invest in any economic sector, as long as it ensures sustainable economic development. Therefore, the institutions can be used as tools to conduct Chinese foreign policy objectives in nearly any economic sector.

The conclusion derived from these findings is that there is explanatory power in both theoretical perspectives. Although it seems that the neoliberal institutionalist theory is the most fitting, it cannot explain the phenomenon by itself. Therefore, both theories are essential to fully elucidate the establishment of new Chinese financial institutions.

2. Theoretical Framework

This chapter explains in greater detail the basic principles of the theories that are being tested. First, a clear definition of ‘institution’ is given. Then, the basic assumptions of neoliberal institutionalism and structural realism and their respective derived hypotheses are described. Finally, the advantages and disadvantages of the theories are analysed.

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8 2.1 Defining Institution

Institution is the main concept in this thesis, and an important and widely used idea in the discipline of IR. There are many different definitions, and the concept can be used in a variety of ways. Therefore, it is necessary to give a clear explanation and definition of how ‘institution’ and ‘institutionalism’ are used in this thesis. According to scholar Hedley Bull (1977), there are two types of institutions in IR: primary and secondary. The first type consists of organic institutions such as sovereignty, non-intervention, territoriality, nationalism, international law, diplomacy, and great power management. They are composed of principles, norms, and rules that underpin deep and durable practices, and are the foundation and social structure of international society. Primary institutions are constantly evolving, usually slowly and with a great deal of continuity. The second group of institutions includes regimes and intergovernmental organisations. These institutions are recent, instrumental, mainly state-designed expressions of the underlying structure of contemporary IR (Bull 1977). The United Nations and the IMF are examples of secondary institutions.

Secondary institutions will be the central focus in this thesis. More precisely, when discussing institutions, I am referring to international organisations. Therefore, all institutions mentioned in this thesis need to comply with Chittharanjan Amerasinghe’s (2003) definition of international organisations. This definition enumerates the following characteristics of an international organisation: establishment by some kind of international agreement among states, possession of what may be called a constitution, and containing apparati separate from the members. In addition, it is important that the organisations are established under international law, and that states and governments are the predominant members (Bouwhuis 2012: 453). All institutions considered in this thesis are an international agreement among states, with binding rules by which the member states must abide. Furthermore, all institutions must have an office and employees who work in the service of the institution itself, not for a government. Thus, they are independent organisations with their own management and regulations. States are the members of these institutions, rather than other non-governmental organisations or commercial companies.

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9 2.2 Neoliberal Institutionalism

The principal statement in neoliberal institutionalism is that variations in the institutionalisation of world politics exert significant impacts on the behaviour of states. Patterns of cooperation and discord can be understood in the context of the institutions that help define the meaning and importance of state actions. Neoliberal institutionalism does not argue that states are necessarily highly constrained by international institutions, but that state actions depends to a considerable degree on prevailing institutional arrangements. A central claim of the theory is that the ability of states to communicate and cooperate depends on institutions; these institutions vary historically, across issues, in nature (they can be financial, developmental, environmental and so forth), and in strength (the degree to which their rules and norms are specified and legitimate around the world). Neoliberal institutionalism argues that cooperation through institutions can lead to mutual benefits for more than one state. In IR theory, mutual benefits for more than one state are called absolute gains. States are able to gain power through cooperation, not necessarily at the expense of the power of other states (Keohane 1989).

The most relevant aspect of neoliberal institutionalism in this case is its claim that institutions allow states to cooperate. From this theoretical perspective, Chinese institutionalism can be explained by a lack of cooperation between China and other actors within the field of global finance. If cooperation within the existing institutions is inadequate, China and other actors could miss out on the mutual benefits they provide. Thus, China wants to promote cooperation by establishing new institutions. This assumption leads to the following hypothesis:

(H1) The Chinese government pushed for the establishment of new financial institutions because there is inadequate cooperation between China and other states in existing international financial institutions.

2.3 Structural Realism

The second theory that will be tested in this thesis is structural realism, often simply called realism. According to John Mearsheimer (2006) this theory gives a simple explanation as to why states exhibit certain behaviour in the international system based on five assumptions. The first assumption is that the international system is anarchic: there is no centralised authority that stands above states. (On the

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10 state level the legitimate government is the centralised authority; there is no legitimate government on the international level.) The main actors within this anarchic system are great powers (US, China, and Russia). The second assumption is that all actors in the system possess offensive military capabilities, which leads to the third assumption that states can never be certain of the (military) intentions of other states. The fourth assumption is that the main goal of states is survival, which implies territorial integrity and autonomy. The fifth assumption is that states are rational actors; they want to maximize their prospects for survival. They act out of national interest to ensure their own survival. Furthermore, states can only gain power relative to one another: if one state gains power, another one loses power (Mearsheimer 2006: 73-75). This statement of relative gains is the opposite of the neoliberal institutional perspective in which absolute gains (positive outcomes for more than one state) are possible.

National interest and maximizing the prospects for survival are central concepts within realism. Keeping these concepts in mind, the following hypothesis is a suitable explanation for Chinese institutionalisation:

(H2) The Chinese government established the new financial institutions in order to strengthen its position in international financial institutions.

2.4 Advantages and Disadvantages of the Selected Theories

The aim of this thesis is to determine the most fitting theoretical explanations for Chinese institutionalism. This search becomes straightforward when theories are being used that are complete, clear, and have great explanatory power. By applying neoliberal institutionalism and structural realism, two of the major IR theories that have dominated the academic discipline over the last decades are addressed. Of course, there are other IR theories that seek to explain Chinese financial institutionalism. However, because of the prescribed length of this thesis and the ongoing central debate within the discipline of IR, the focus here is limited to neoliberal institutionalism and structural realism. It is notable that both theories share some important commonalities. Like realists, neoliberal institutionalists seek to explain state behaviour by examining the nature of the decentralised international system. They both see the international system as decentralised and anarchic, and thus take state power seriously. In addition, both theories are system-based, which means

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11 that they explain why different states behave similarly and, despite their variations, produce outcomes that fall within expected ranges (Keohane 1989). The similarities in the basic elements of the theories are favourable for this research, because this allows for easier comparison. Both theories give a persuasive but different explanation for Chinese institutionalism. Therefore, both likely contain truths regarding the establishment of Chinese financial institutions. However, it is also likely that one of them is more fitting for explaining the phenomenon.

There are also disadvantages in using these two theories. For example, there is realist critique of neoliberal institutionalism. The principal argument is that neoliberal institutionalism misconstrues and therefore misunderstands the realist analysis of the impact of international anarchy. Liberal institutionalism fails to address the major constraint that anarchy places on the willingness of states to cooperate, which is identified by realism. Therefore, the theory’s optimism about international cooperation is likely to be proven wrong (Grieco 1988: 487). In other words, neoliberal institutionalism assumes that states have a high willingness to cooperate because it would be beneficial for all actors, while realists believe that this willingness to cooperate is unlikely. States always act out of national interest, and cooperation could be more beneficial for the other actors in the system due to its anarchic nature. Neoliberals fail to consider the threat of war arising from international anarchy. Therefore, cooperation is not as likely as the theory assumes (Grieco 1988: 487). Thus, the actual strength and descriptive power of the theory is questionable.

The disadvantage of realism is obvious: it does not tell a great deal about institutionalism and cooperation in general. Explaining cooperation and institutionalism through realism is possible, but only with the national interest argument. Realists marginalize the role of international institutions, and believe that the roles of institutions in international politics are overestimated: they are based on self-interested calculations of the great powers, and they have no independent effect on state behaviour. Realists therefore believe that that institutions are not an important cause of peace; they matter only at the margins (Mearsheimer 1994: 7). There is no sub-discipline within realism that focusses on institutionalism, as in liberalism. Realism is strongly focussed on competition and states taking advantage of each other, which leaves little room for a concept like institutionalism, which is based on cooperation and absolute gains. Explaining the establishment of institutions with a

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12 theory that negates their role is challenging. Nevertheless, because of the simplicity of realism, it is still able to provide a suitable explanation. This is interesting in this case, considering the fact that academic literature often describes the rise of Chinese financial institutions with arguments substantiated by realism. This becomes evident in later sections of the thesis.

3. Methodology

This chapter expounds the research methods and the data that are used to test hypotheses H1 and H2. The general methods that are used are content analysis and an academic literature review. Broadly defined, content analysis is an approach to the analysis of documents and texts that seek to quantify content in terms of predetermined categories and in a systematic and replicable manner (Bryman 2008: 275). The texts that I use for content analysis are the Articles of Agreement (AOA) signed by the member countries of the NDB and the AIIB and several policy papers and academic articles on the establishment of the new institutions. These are examined for characteristics supporting neoliberal institutionalism or structural realism. In addition, different types of primary data, policy documents, academic literature, and news articles are analysed to find evidence for the existence of empirical implications, which are derived from the hypotheses and corresponding theoretical frameworks. The following chapter explains the different kinds of empirical implications and corresponding pieces of empirical evidence used for the content analysis, and the data used to determine the empirical evidence.

3.1 Operationalisation: Neoliberal Institutionalism

Neoliberal institutionalist theory, which is represented by the hypothesis ‘The Chinese government pushed towards the establishment of new financial institutions because there is inadequate cooperation between China and other states in existing international financial institutions’ (H1), assumes that there is a need for more cooperation between China and other states in existing international financial institutions. In other words, the establishment of the new institutions is necessary to meet this demand for cooperation. Cooperation is the central concept of the hypothesis, and therefore a clear definition is essential. Cooperation means that two or more actors (in this thesis more than two) are working together (through institutions)

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13 for mutual benefits (Cambridge Dictionary 2016). Inadequate cooperation means that China’s cooperation with other actors is insufficient. It is irrelevant whether this inadequate cooperation arises from China’s actions or from the actions of other parties.

There are several empirical implications in neoliberal institutionalism that can show inadequate cooperation between China and other actors within international financial institutions. The two implications that will be used in this thesis are a cooperation gap in the existing institutional framework, and an institutional design that facilitates cooperation between new and existing institutions.

What is meant by ‘a cooperation gap in the existing institutional framework’? International institutions tend to specialise in a certain issue. This can be any specific area, be it agriculture, infrastructure, economic development, education, and so forth. It may happen that one of those issue areas is underrepresented in the international institutional framework. This can be because existing institutions find this specific issue less relevant, or do not have the financial capabilities to invest in projects in this arena. When there is demand for institutions with expertise and financial resources on a specific issue, but there are not enough institutions with the capabilities to meet this demand, this can be called a gap in cooperation in the existing institutional framework. The Chinese government might find it necessary to fill in this gap, which could lead to the establishment of new financial institutions.

The other empirical implication is the design of the new institutions. According to neoliberal institutionalism, these institutions would be designed to promote cooperation with other states and institutions, leading to mutual benefits and absolute gains for all actors in the international system (Keohane 1989). If the new institutions were established to facilitate cooperation, their institutional design would reflect this.

3.2 Empirical Evidence and Data: Neoliberal Institutionalism

There are several pieces of empirical evidence that can be found to confirm the existence of a gap in the current institutional framework and an institutional design that facilitates cooperation. The empirical evidence that is used to find this gap consists of the following: the need for institutions with more expertise or specialisation in infrastructure development, and possible insufficient financial capabilities to finance infrastructure projects by the existing institutions. (Table 1,

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14 which is found at the end of this section, gives a clear overview of the empirical implications, and the list with empirical evidence.)

The data sources used to trace these two pieces of empirical evidence are policy and working papers published by the existing institutions, more specifically, the World Bank and the ADB. Subsequently, statistics provided by the World Bank and ADB about infrastructure development projects are analysed. Academic literature is used to provide additional background information. All these data sources will be examined to uncover a cooperation gap in the existing institutional framework.

A number of pieces of empirical evidence attest to an institutional design that facilitates cooperation. These include the fact that new institutions are easily accessible for new member states, a high degree of cooperation between existing and new institutions, an equally divided voting distribution, and a fast adaptation to a changing world order. If the new Chinese institutions were established to foster cooperation among existing and new institutions and among countries, it would be evident that the new institutions are easily accessible for new member states. The more member countries an institution has, the more cooperation the institution creates. The same is true of a high degree of cooperation between existing and new institutions. If the new institutions aim to promote cooperation and fill in a cooperation gap, it would be necessary to work closely within the existing institutional framework. If cooperation is the motivation behind the establishment of the new institutions and not Chinese national interest, it would be unnecessary for China to possess a relatively high amount of voting power within the institutions. The institutions would exist in order to create absolute gains for all countries that are members of the institution. Therefore, the voting distribution would be relatively equally divided among the member states. The last piece of empirical evidence, a fast adaptation to a changing world order, would also be observable if the new institutions were intended to increase cooperation. China and other emerging economies are unsatisfied with the slow rate of change within the existing institutions (Buira 2006). If its true goal is promoting cooperation, China would most likely design the institutions in such a way that they adapt faster to the changing world order than the existing institutions.

The data sources that are used to outline the empirical evidence are mainly the AOA of the new institutions. The AOA provide a clear overview of the institutional design of the new institutions: they give information about the functions and

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15 purposes, organisation, management, accessibility, and voting distribution within the institutions. News articles and academic literature supplement this analysis. Because the institutions are relatively new, they have not yet published working papers on any (infrastructure) development projects. Therefore, information about shared projects and cooperation with other institutions must be found in news articles and academic literature.

3.3 Operationalisation: Structural Realism

Structural realism theory, which is represented by the hypothesis ‘The Chinese government established the new financial institutions in order to strengthen its position in international financial institutions’, assumes that China created these institutions out of national interest.

The concept of national interest cannot be separated from the concept of power, especially within realism, so in order to discuss national interest, the concept of power needs to be specified. The reason for the strong connection between these concepts is that, according to realists, states act in accordance with their national interests, which are simply the pursuit of power. In realism, power begins with military and economic strength and the ability to influence less powerful states, but almost as important is the ability to achieve self-control and maintaining the state’s sovereignty (Morgenthau 1993: 4-6).

There are several empirical implications that can be derived from structural realism. The following three will be used in this thesis: China is dissatisfied with its position in existing institutions, the new institutions are designed to compete with existing institutions, and the purposes and functions of the new institutions strengthen Chinese national interest. If China is dissatisfied with its position in existing institutions, the government could decide to establish new institutions in order to give China a significant voice in international financial intuitionalism out of national interest. This dissatisfaction could have arisen from uneven distribution of voting power within existing institutions or the impossibility of reforming existing institutions to make them more suitable for the contemporary situation in international politics.

The second empirical implication is the design of the new Chinese-established institutions. If the institutions were created out of national interest and thus relative gains, they would be designed to compete with the existing financial institutions and

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16 China’s main rivals in international politics, the US and Japan. They would not support cooperation between all international financial institutions but would operate individually to achieve their purposes. The purposes and functions of the new financial institutions are the third indicator of establishment out of national interest. If the purposes of the new institutions mainly strengthen Chinese national interest, their establishment can point towards the goal of increasing Chinese power on the international level. For example, if the institutions finance projects that are mainly beneficial for Chinese economic development, such as infrastructure to promote Chinese export or development of the Chinese manufacturing industry, it is evident that this is predominantly motivated by national interest.

3.4 Empirical Evidence and Data: Structural Realism

The first empirical implication, that China is dissatisfied with its position in existing international institutions, can be traced on the basis of two pieces of empirical evidence. The first is an uneven distribution of voting power within existing institutions. If the voting power within the existing institutions is relatively unbalanced and unfavourable for China, it is likely that China is dissatisfied with its position. The second piece of empirical evidence is an assertive Chinese attitude in existing institutions. If China is dissatisfied with its position, it is likely that its attitude towards and within the institutions would become more assertive. These pieces of empirical evidence will be examined by analysing the voting shares of the existing institutions, the data for which can be found in their statistics databases. Working papers of the World Bank and academic literature will be used to determine (historical) changes in the voting distribution. The other piece of empirical evidence, a more assertive Chinese attitude in existing institutions, is evaluated through academic literature. Evidence of a change from a more cooperative attitude to a more assertive one is sought. If the Chinese attitude recently became more assertive, this may indicate dissatisfaction with its position in existing institutions.

The second theoretical implication, a competitive institutional design, will be evaluated based on two pieces of empirical evidence. The first one is that China possesses a relatively large amount of voting power in the newly established institutions. This piece of evidence will be tested through the AOA of the new institutions. If China holds relatively high voting power, or the voting rules are

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17 constructed in such a way that they are favourable for China, this would confirm an unbalanced voting distribution.

The second piece of empirical evidence that the institutions are designed to compete with existing institutions is a discouraging attitude towards the US and Japan joining. As the US and Japan are the main forces behind the existing institutions, if China wants to compete with them, it would not embrace the US or Japan joining the new institutions; on the contrary, the new institutions would strengthen China’s national interest and balance against the power of the US and Japan. This empirical evidence is tested by analysing the AOA of the new institutions, as there is a special section within these articles that treat the possibility of membership for new countries and the maximum amount of voting power they could obtain. This analysis is supplemented with academic literature.

The last empirical implication that is in line with H2 is whether the goals and purposes of the new institutions strengthen Chinese national interests. The two pieces of empirical evidence that will be used to find confirmation for this implication are: Chinese policymakers dominate the leadership of new institutions; and projects and policies of the new institutions strengthen Chinese national interests and are a tool to pursue foreign policy objectives. Both these pieces of empirical evidence would indicate a high degree of national interest. If this empirical evidence is actually present it is more plausible that the underlying goals and purposes of these institutions strengthen China's national interest. The AOA are helpful data to analyse the leadership, projects, and policies of the new institutions. However, the AOA might be subjective because the institutions themselves publish them. Therefore, news articles and academic literature will be added to complete the analysis of these empirical implications.

Table 1 on the next page shows the empirical implications derived from neoliberal institutionalism and structural realism, and the corresponding pieces of empirical evidence.

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18 Table 1: Empirical implications and empirical evidence

Empirical Implications Empirical Evidence (H1 Neoliberal

Institutionalism) A gap in the existing institutional framework

Need for institutions with expertise in infrastructure

Insufficient financial capabilities to meet the demand for infrastructure projects

(H1 Neoliberal Institutionalism) An institutional design that facilitates cooperation

New institutions are easily accessible for new member states

Voting distribution relatively equal

High degree of cooperation among existing and new institutions

New institutions adapt relatively easily to changing world order

(H2 Structural Realism) China is dissatisfied with its position in existing institutions

Uneven voting distribution in existing

Assertive Chinese attitude in existing institutions

(H2 Structural Realism) An institutional design that competes with existing institutions

China possess a relatively large amount of voting power

Discouraging attitude towards US and Japan

(H2 Structural Realism) The purposes and functions of the new institutions strengthen national interest

Chinese dominate the leadership of the new institutions

Projects and policies of the new institutions strengthen Chinese national interests and are used for the pursuit of foreign policy objectives

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19 3.5 Disadvantages of Using Method and Data

There are always disadvantages of using certain methods and data. The main disadvantage of the method content analysis is that it may not be as objective. The empirical findings derived from the content analysis are clearly affected by the types of data that are being used. The primary data sources (AOA, statistics, working and policy papers) will emphasise the need of the new institutions to cooperate and complement the existing institutional framework. The secondary data (academic literature and news articles) is more focused on China’s competition with the US to create a leading role in international financial institutionalism and China’s national agenda. So, the primary data is mainly in line with H1 and the secondary data is mainly in line with H2. The problem that occurs is that the secondary data should be based on the primary data and therefore it is risky to draw concrete conclusions out of the secondary data. Then again, because the institutions themselves publish the primary data it is also risky to draw concrete conclusions out of the primary data. Therefore all the outcomes within the empirical research just strengthen or weaken the hypotheses, it is impossible to confirm one hypothesis and eliminate the other. This research will affirm the relevance of a hypothesis or will slightly weaken the relevance, but would not give concrete evidence that one is true and one is false.

Another disadvantage of using content analysis is that it is a purely descriptive method. It describes what is there but does not tell anything about the reason why a certain event or phenomenon took place. Content analysis describes, rather than explains (Sociological Research 2016). So, this research method will mainly give a description about the establishment of new Chinese financial institutions but would not give an explanation right away. However, because this thesis is aiming at explaining Chinese financial institutionalism through IR theory it does not matter that content analysis does not have great explanatory power. The two IR theories that are being tested contain the explanation for Chinese institutionalism. The content analysis is just used to examine which theory is likely to give the most fitting explanation.

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20

4. Introduction to the Institutions

In this section the basic information on the institutions analysed in this thesis will be discussed. The five international financial institutions that will be used as examples are the NDB, the AIIB, the World Bank, the IMF, and the Asian Development Bank (ADB). All cases meet the criteria for international organisations (as described in the definition of ‘institution’ and ‘institutionalism’ discussed in the theoretical framework)

The NDB and the AIIB are the main case studies in this thesis as they represent Chinese international financial initiatives. The World Bank, IMF, and ADB make up the existing regime of global finance and will be used to test several empirical claims derived from the hypotheses. The NDB is an international financial institution established by China in cooperation with Brazil, Russia, India, and South Africa (in combination with China, referred to as BRICS). The NDB case is interesting due to the fact that it is the first international financial institution established by the BRICS group, and the first commitment towards greater institutionalisation among BRICS countries (Qobo & Soko 2015: 279). The way in which the governance of the NDB is structured also makes it a unique case; this will be discussed in the next section.

The AIIB is selected as a case study because this project is one of China’s most notable initiatives establishing an international financial institution. China is the main driver behind the establishment of the bank and the project can be seen as the first solely Chinese attempt to create an international financial institution (Bob 2015). Besides, the AIIB presents a concrete policy problem for many entities, mainly Western countries. Western countries are already (dominant) members in the existing institutional framework. There is an ongoing debate in these countries over whether it is beneficial or necessary to join the new Chinese institutions, or whether it would only strengthen the Chinese position in international financial institutionalism.

The World Bank and the IMF are the original Bretton Woods (BW) institutions2, and have exercised great influence on the international order since the end of World War II. They can be seen as the main financial institutions in

2_{The United Nations Monetary and Financial Conference held at Bretton Woods in}

1944 led to the establishment of the IMF and the World Bank, for that reason they are called the Bretton Woods institutions (Buira 2006: 1).

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21 international politics (IMF 2016). Therefore, they are the most relevant institutions in global finance and essential to consider as existing institutions in this thesis.

The last existing institution selected for this analysis is the ADB. The reason for the selection of this case is its regional focus. The ADB is a regional development bank focussed on providing developmental loans to Asian countries. For the last several decades, the ADB was the main actor in the Asian financial institutional framework (Rathus 2008). Thus, this institution is necessary to consider in this thesis.

The upcoming section introduces the examples in greater detail so it becomes clear what the institutions actually stand for, when they were established, and what their goals are, along with further basic information. Understanding the backgrounds and histories of these institutions is important before starting the empirical analysis.

4.1 The New Chinese-established Institutions 4.1.1 New Development Bank

The establishment of the NDB is inseparable from the emergence of BRICS. Therefore, a short introduction of the historical evolution of the BRICS grouping is necessary. BRICS is a group of developing countries consisting of Brazil, Russia, India, China, and South Africa. In the last decades, all these countries have been on an upward trajectory due to high economic growth rates and a large demographic growth. Through this common growth, collaboration arose among countries that have few cultural and political similarities. They also share a dissatisfaction with the Western dominance in international institutions and the perceived refusal of the West to share global power, but to varying degrees. The dissatisfaction with the contemporary world order and the desire to amplify their voice and strengthen their representation and influence in international institutions brought the BRICS countries together (Qobo & Soko 2015: 278).

The NDB is one of the first substantive agreements of the BRICS project and confirms the seriousness of the group of developing countries. The conception of the NDB began in 2012, and its official realisation took place in 2015. This makes the NDB, like the AIIB, a relatively new international financial institution. The bank focusses on long-term development financing in BRICS countries and other developing countries. Also like the AIIB, the NDB has a central focus on support for infrastructure projects, which lead to sustainable economic development. The NDB

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22 has a planned capital stock of US$100 billion, but is starting with an initial subscribed capital stock of US$50 billion. The capital stock is equally distributed among all BRICS member states. This means that the stock share and voting power are also evenly distributed among the BRICS member states. So, no member state within the NDB holds veto power. This is only true of the initial subscribed capital stock. The bank also comprises a Contingent Reserve Arrangement, a special commitment providing money exchange, though only when relevant countries submit an application and meet the requirements. China contributes the biggest share for the reserve arrangement, 41%, so it has the most voting rights within this special fund (Wenxing 2016: 27).

The first president of the NDB will be Kundapur Vaman Kamath, an Indian private sector banker, but the member states will take turns leading the bank (Financial Times 2015). Every president shall serve a five-year term, meaning that each of the founding member states will lead the bank for five years and then switch leadership. The bank headquarters will be based in Shanghai, and the bank will also open regional offices; the first one will be in Johannesburg, South Africa (Articles of Agreement NDB 2014: 2). The NDB is in the start-up process. Several loans and related projects are already assigned, and will be treated in the empirical analysis, but in general there is no information about completed projects, simply because there are none. Therefore, no pronunciations can be made about the projects of the bank so far.

4.1.2 Asian Infrastructure Investment Bank

In 2013, China announced that it would establish the AIIB to provide accessible loans for infrastructure projects in Asia. It is important to note that the AIIB mainly focusses on infrastructural development in the Asian region. Most countries in the region responded positively to China’s proposal, and many countries around the world pledged to join the bank. The US and Japan, however, took a more cautious approach to joining. From the beginning, the US and Japan questioned China’s motivations, intentions, and ability to establish high-standard, well-functioning international financial institutions.

Yet, in March 2015, the United Kingdom (UK) announced that it would join the AIIB; this decision ensured that other Western countries also signed up for the bank. In total, 57 countries joined the AIIB as founding members (Bob 2015: 1). The founding members are divided into regional members and non-regional members. The

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23 bank consists of 37 regional members: these are all Asian members, plus Australia and New Zealand. There are also twenty non-regional members: these are mainly European countries plus Brazil, Egypt, and South Africa (Articles of Agreement AIIB 2015).

The Authorized capital stock for the bank will be US$100 billion, making it a moderately sized international financial institution. China will become the largest shareholder of the bank and will contribute 30% of the total capital, which means that China will possess a voting power share of around 26%. The bank headquarters will be located in China—Beijing, to be exact—and the first president will also be Chinese. At the beginning of 2016, Jin Liqun was appointed as first president of the bank, a former vice minister of finance in China’s Ministry of Finance and a former vice president of the ADB (Kawai 2015: 5). More information about the governance structure and voting distribution are presented in the empirical analysis.

The Chinese introduced the bank as a multilateral development bank conceived for the 21st century. The foundation of the bank is built on the lessons learned from existing multilateral development banks and the private sector. The goal of the bank is to be clean and green, with a small, efficient, and highly skilled staff. The AIIB will be a modern, knowledge-based institution focussing, as already mentioned, on infrastructure development and a variety of projects connected to infrastructure, for example, energy and power, transportation, telecommunications, water supply, and logistics. There is not much information about completed projects because the bank just began operating and is still in the starting phase (Kawai 2015: 6).

4.2 The Existing Regime of Global Finance

4.2.1 World Bank and International Monetary Fund

The United Nations Monetary and Financial Conference, which took place at BW over seventy years ago (1944), led to the establishment of the World Bank and the IMF. This moment was foundational for international financial institutionalism, as the most powerful financial institutions of our time were created. Therefore, the World Bank and the IMF are treated together in this case study introduction; these two institutions cannot be seen separately from each other. The IMF was created to promote international financial cooperation, in order to sustain economic activity and

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24 prevent the adoption of measures destructive to national and international prosperity. The World Bank was created to assist in the reconstruction of countries ravaged by the war, and to finance the development of the less-developed world (Buira 2006: 1).

Today, the World Bank and the IMF still play a fundamental role in international politics. Although the institutions are suffering from a loss of legitimacy and credibility because of the expansion of financial markets, the rapid growth of emerging market economies, and the unbalanced government structure of the institutions, they are still chief actors in international financial institutionalism (Buira 2006: 1). The IMF still plays a key role as promoter of international financial cooperation, and the World Bank remains the leading bank that provides loans for less-developed countries to encourage economic development. Based on the total capital subscriptions (IMF US$368 billion and the World Bank US$283 billion), they are by far the biggest financial institutions in the contemporary international order. Also, as both institutions have 188 member countries, the World Bank and the IMF are the biggest international financial institutions in the field (Kawei 2015: 9).

The prime critique of the World Bank and the IMF is the Western domination within the governance of the institutions. The original distribution of votes in both institutions was a reflection of each member country’s comparative economic strength at the end of World War II, which was based on a mix of reserves, international trade volumes, and national income. Therefore, developing countries possessed a small amount of voting power within the institutions, while developed countries dominated the institutional governance (Griffith-Jones 2002: 1). Although the voting distribution was revised several times in both institutions, developing countries still possess relatively few voting rights, and the developed world still dominates the governance.

The US holds the largest voting shares in both institutions: it possesses 16,66% voting share in the IMF, and virtually the same amount (17,13%) in the World Bank (IMF 2016b). This makes the US the biggest actor within the institutions, giving it a veto right in the IMF and the major voice in the World Bank. Of course, the US is also the biggest capital contributor of both institutions, but nonetheless there is much of international criticism on the privileged position of the US in the institutions. Additionally, headquarters of both institutions are located in Washington D.C., which also confirms the American dominance within these institutions (Buira 2006).

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25 4.2.2 Asian Development Bank

The ADB was established in 1966 with the main goal of fostering economic growth and cooperation in Asia. So, unlike the World Bank and the IMF, the ADB is a regionally focussed international financial institution. The bank's annual lending volume is around US$6 billion, and the total capital subscriptions are around US$160 billion. The bank is based in Manila, the Philippines, and is composed of 67 member countries: 48 regional members, from the Asia-Pacific region, and 19 non-regional member countries, most notably the US (ADB 2016a). Unlike the NDB and the AIIB, the ADB is not focussed on a specific development topic, such as infrastructure; the ADB is focussed on Asian economic development in general. This focus is realised by providing loans (at favourable but near-market rates) and providing assistance to developing countries in the Asian region (Rathus 2008: 88).

Japan is the major shareholder within the ADB and accounts for 15.7% of the total shares, followed by the US with 15.6% of the total shares. China is the third largest shareholder with 6.5% of the total shares (ADB 2016b). The governance of the ADB is striking in that all eight presidents of the bank have been from Japan, and seven of them served at the country's Finance Ministry (Caixin 2016). It is no coincidence that Japan is the major shareholder and provided all the bank’s presidents. The ADB was the major diplomatic initiative that Japan took in the 1960s within the US-led international order. Therefore, the US is the second shareholder in the bank; it would be inconceivable for Japan to proceed with the ADB without the support of the US. In that period of time, the US was the clear leader of the international order, and setting up an institution like the ADB without support of the US was nearly impossible. Thus, Japan needed the US to share the burden of the capital share; in the 1960s there were no other Asian countries with the financial power to guarantee such an amount of capital. Through this combination of factors, a Japan-US-led Asian development bank was established (Wan 2016).

Today, the ADB is still an important player in Asian development. Many projects, on various topics such as agriculture, transport, energy, infrastructure and education are financed by loans provided by the ADB. At this moment, the ADB is lending more in the Asian region than the World Bank, making it a highly relevant institution with a strong reputation among its members. Because of the arrival of the AIIB, and to a lesser extent the NDB, the ADB is moving towards providing expertise rather than finance. The ADB is the region’s most institutionalised organisation, and

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26 wishes to stay relevant for Asian development. The arrival of the new institutions makes it less necessary to provide large amounts of loans, and therefore the bank is likely to shift towards a more knowledge-based policy, providing developing countries with technical assistance for development projects (Rathus 2008: 98).

Table 2: Basic characteristics selected institutions

NDB AIIB World Bank IMF ADB

Year Established 2015 2015 1944 1944 1964 Headquarters Shanghai, China Beijing, China Washington D.C., US Washington D.C., US Manila, Philippines President Indian, Kundapur Vaman Kamath Chinese, Jin Liqun American, Jim Yong Kim French, Christine Lagarde Japanese, Tekehiko Nakao Member Countries 5 57 188 188 67 Capital Subscriptions US$100 billion US$100 billion US$283 billion US$368 billion US$163.5 billion Major Shareholders Brazil, Russia, India, China, & South Africa China, India, Russia, Germany, & Korea US, Japan, China, Germany, France, & UK US, Japan, China, Germany, UK, & France Japan, US, China, India, & Australia Key decisions 66% Majority 75% Majority 80% Majority 85% Majority 75% Majority Major task Infrastructure

development in BRICS and emerging economies Infrastructure development in Asia Economic development and poverty reduction Macroecono mic stability and international monetary cooperation Economic development and poverty reduction in Asia

Source: Kawai 2015, Articles of Agreement NDB 2014 & Articles of Agreement AIIB 2015

Chinese institutionalism and the contemporary international order : how can IR theory explain the establishment of international financial institutions by China?