How China is undercutting the U.S.'s domination of the global financial system

As the biggest player in the World Bank and the International Monetary Fund (IMF), the U.S. has long set the terms and provided much of the resources for loans and investment in the developing parts of the world. But China just spearheaded the creation of a new counterpart to those institutions — the Asian Infrastructure Investment Bank (AIIB) — that is already undermining the U.S.'s clout.

Despite America's opposition to the new project, last week saw a rush of major countries to China's side, including France, Germany, Britain, Switzerland, Australia, Brazil, Ukraine, India, the Philippines, South Korea and Egypt. All are looking to get in as one of the bank's 46 founding members.

The AIIB will have $50 billion to play with off the bat, and is authorized to eventually issue twice that, with the aim of encouraging the construction of roads, bridges, railways, and other public infrastructure. Japan, which holds the presidency of the Asian Development Bank — another counterpart to the World Bank and IMF — was pretty much the only other major country to sit out.

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Former Treasury Secretary Larry Summers said the turn of events "may be remembered as the moment the United States lost its role as the underwriter of the global economic system." Writing in The Washington Post, Summers laid the blame for U.S. failure at the feet of the right (for blocking needed reforms to the IMF) as well as the left (for restrictions on lending based on concerns with environmental and labor issues and such).

Mohamed El-Erian, the chairman of the Global Development Council, fingered domestic political polarization in the U.S., which has destroyed our ability to even pass a sensible budget, much less contribute to IMF and World Bank reform or funding.

All of which is fair. But there's also another story here, namely the West's long love affair with austerity.

The East Asian financial crisis in the late 1990s, for instance, wrecked several poorer economies in the developing world. In exchange for aid and loans, those countries were forced to cut safety net spending and public investments, and to bring their budgets into balance. The price of survival was, essentially, the channeling of their economic wealth away from their own people and into the pockets of Western governments and wealthy Western creditors.

Ironically, many developing countries in Asia responded by stocking up on reserves to ensure against a repeat of that scenario. That's driven up the value of the U.S. dollar, and opened up our trade deficit with the rest of the world.

Austerity was also the reigning philosophy of Europe's powers-that-be in the aftermath of the 2008 crisis. By sucking demand out of national economies when they were at their weakest and most vulnerable, the European elite scuttled the economic recovery throughout the continent.

In the U.S., meanwhile, the Republican Party remains obsessed with austerity as a be-all-end-all goal. (Just look at its latest budget proposals!) Pushback from the Democrats and a surprisingly ambitious Federal Reserve has arguably saved the U.S. economy from Europe's fate. But that obsession has been a major factor in the polarization that El-Arian blames for crippling America’s international credibility, and driving many allies into the arms of the AIIB.

In contrast, China's political culture shows little of the West's infatuation with austerity.

When it became clear that the 2008 crisis was serious, China dropped a big stimulus package with none of the tortured hemming and hawing that plagued the U.S.'s response. Its safety net, while a crazed and often inefficient patchwork of systems, already includes unemployment insurance, minimum income guarantees, near-universal health insurance coverage, a minimum wage, individual pension accounts, and more.

It has also expanded massively over the last two decades: Between 2003 and 2013, the country’s medical insurance system went from covering 13 percent of the population to nearly everyone. Minimum incomes have expanded to 50 million Chinese residents in poor rural areas; around 700 million Chinese people now have a pension; and the minimum wage has increased enormously.

Interestingly, China is addressing high inequality with an "austerity agenda" that's almost the mirror opposite of the West's. Namely, crackdowns on graft, corruption, and other forms of ostentatious living by government officials and the country’s ruling elite — an outgrowth of the Communist Party's concern with maintaining its legitimacy.

In short, China has many problems. But they do not appear to include a blind moralistic panic that public spending is some sort of mojo-sapping act of economic self-destruction.

America has genuine concerns about the AIIB, such as how it will balance growth against labor standards, property rights for vulnerable populations, and environmental concerns. But austerity is not among them. It's a policy of pure self-immolation, with no countervailing benefit, driven by the needs and fixations of obtuse elites.

You can hardly blame the rest of the world for welcoming a new institution that does not have a history of being mesmerized by austerity's siren song.