Illustration: Liu Rui/GT

Over the past three decades, the structure of the global economy has undergone substantial changes in favor of emerging countries like China and India. In fact, China, India and some ASEAN countries have been the engines of the world's growth for the past couple of decades.

The rise of these new economic powers is not duly represented in the development agenda of multilateral financial institutions like the World Bank and the IMF. Therefore, emerging countries are trying to complement their own programs and development agenda with new financial institutions.

In this regard, China is certainly leading from the front. The recent announcement of the setting up of the Asian Infrastructure Investment Bank (AIIB) by China, along with 20 other Asian countries, to help build regional infrastructure, particularly trade-related infrastructure, is a welcome step and perfectly complements the existing New Development Bank (NDB) by BRICS countries.

The NDB and the AIIB serve two major purposes. For one thing, they make up a fresh source of funding for developing economies without solely depending on Bretton Woods institutions, which generally put rigid conditions for market reforms. For another thing, they can work as a counterbalance in the emerging multipolar world to the dominance of institutions like the IMF, World Bank and the Asian Development Bank (ADB), which are dominated by developed Western countries and Japan.

They may also help emerging countries earn their rightful place in the governance of Bretton Woods institutions.

Though the NDB and the AIIB are at the nascent stage, and have limited resources, the rise of China as an economic power and its effort to lead the development needs of developing countries is quite clear.

China contributes $41 billion to the contingency fund of BRICS, apart from its equal contribution to the initial $50 billion funding. These are, it seems, real efforts for creating a new balance of power, which has been so far discussed but never implemented.

The AIIB may be seen as a rival to the ADB and other multilateral financial institutions but, in reality, it is a complement.

China may have multiple objectives in promoting the AIIB, but it is completely justified economically. This is the Asian century; and Asia will remain the world's growth engine with its large consumer base, abundant manpower and under-utilized natural resources. However, sustaining high growth, especially productivity growth in manufacturing, needs huge infrastructure investment across Asian countries.

Infrastructure connectivity, particularly trade infrastructure, which the AIIB intends to finance, will reduce trade and transaction cost, and thereby boost trade among Asian countries. For example, ASEAN intra-trade is around 25 percent of their total trade, much less than trade among the main members of the EU, which is 60 percent.

ASEAN's trade with China now represents 14 percent of its total trade. Developing and upgrading infrastructure, transport, communication, and trade logistics, would facilitate further trade. As it appears, the AIIB would focus on trade-related infrastructure, which is crucial for supply and value chain production across Asia.

In Asia-Pacific countries, very little has been invested until 2013, save in China. Therefore, the infrastructure deficit is huge, and an annual investment of $1 trillion is required in infrastructure just to maintain the current growth rate.

An ADB study estimates that Asia-Pacific countries require investment of around $8 trillion in infrastructure between 2010 and 2020 to sustain the current growth rate. Not surprisingly, the Global Competitiveness Report 2013-14 ranks major Asian economies poorly: China, India and the Philippines rank 48, 85 and 96 respectively on the infrastructure index.

The financial need for infrastructure development in the Asia-Pacific region is huge, but the ADB, led by Japan and the US, lacks the required capital.

Therefore, any step to augment existing funding sources for infrastructure development in Asia is a welcome step. Although the initial capital pledged for the AIIB is small, we can hope that the total capital will increase as things fall in place.

Though China's initiative is a welcome step and proves its eagerness in leading Asia's development objectives, appropriate steps should be taken to ensure the right governance structure for proper representation of members and best practices for lending.

The author is an associate professor at the Institute of Economic Growth, Delhi University. pravakarfirst@gmail.com