Creative destruction

AIIB: The first international financial institution of the 21st century

In 1945, a group of 43 nations led by the United States, then the world’s dominant economic power, created the International Bank for Reconstruction and Development (now part of the World Bank Group) and the International Monetary Fund – the “Bretton Woods institutions” – to promote reconstruction after World War II. However, the global economy has evolved much faster than the operations of either the Bretton Woods institutions or some of their regional siblings like the Asian Development Bank (ADB), the African Development Bank (AfDB), the Inter-American Development Bank (IDB), and the European Bank for Reconstruction and Development (EBRD).

What happens when official international financial institutions (IFIs) fail to respond to a changing environment? The same thing that happens to firms that stop innovating. New, more competitive institutions (firms) arise that compel them to change or – like dinosaurs – become extinct. We may be witnessing this process of creative destruction right now. Last month, a group of 57 founding nations led by China signed the articles of agreement to establish the Asian Infrastructure Investment Bank (AIIB) with an initial subscribed capital of $100 billion

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