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A major shift in global power has been slowly developing over the past 18 months and is now coming to fruition as China puts the finishing touches on the new Asian Infrastructure Investment Bank (AIIB). The AIIB is a direct rival to the post-World War II world order principally the World Bank.

China has been able to successfully get countries across the world to sign on the bank even key American allies including France, Germany, and the United Kingdom. The United States has been joined by Japan and Colombia in holding off on even applying for membership.

The shift of power east is causing concern throughout the US establishment perhaps most pronounced from former Treasury Secretary and Wall Street consultant Larry Summers who painted the growing membership of AIIB in apocalyptic colors.

This past month may be remembered as the moment the United States lost its role as the underwriter of the global economic system. True, there have been any number of periods of frustration for the US before, and times when American behaviour was hardly multilateralist, such as the 1971 Nixon shock, ending the convertibility of the dollar into gold. But I can think of no event since Bretton Woods comparable to the combination of China’s effort to establish a major new institution and the failure of the US to persuade dozens of its traditional allies, starting with Britain, to stay out of it.  

This failure of strategy and tactics was a long time coming, and it should lead to a comprehensive review of the US approach to global economics. With China’s economic size rivalling America’s and emerging markets accounting for at least half of world output, the global economic architecture needs substantial adjustment. Political pressures from all sides in the US have rendered it increasingly dysfunctional.

Summers blames US political divisions as well as the decentralized aspects of federalism for the US decline in power saying both the right and left have stymied expansion of World Bank and IMF power by not supporting the adoption of its rules at home and that federalism creates too many different authorities for international investors to deal with.

Summers also offered, ironically given his own history, that the “global agenda” offered by the Western system relies too much on “elite concerns” to the exclusion of the “working class.” No kidding? Wait until he finds out about this guy Larry Summers.

In any case, the empowerment of the Western financial and business elite has led to little benefits for workers in the West over the previous generation. A little diminishment of power by a rebalancing of the global economy could even help workers in the West by forcing multinational firms to stay more anchored in their home territory and, whilst being trapped, force them to distribute gains more equitable…