Institutional Hedging in International Relations: China’s Creation of the AIIB

• In Event: Regional Organizations: Causes and Consequences

Abstract

Why did China create the Asian Infrastructure Investment Bank? Why did various countries respond to China’s initiative differently? We offer a new type of strategy that we call institutional hedging to explain China’s actions and the international response. Institutional hedging is distinguished from liberal integration and institutional balancing approaches and sheds light on why and how a rising state might create new institutions. Institutional hedging refers to the creation and reforming of institutions that can be adapted for multiple purposes to generate new policy options. We argue that the story of China’s building of the AIIB is logically linked to how other countries might respond to the rise of China. Combining insights of the possible strategies of rising powers from the exit-voice model of political economy, we argue that China is not pursuing an intrinsic “exit” strategy. Instead, China has adopted an institutional hedging strategy whereby China creates new options while using its ‘voice’ to prompt reforms within established institutions that preserve the option to ‘exit’ at a later point.

Authors

• Clayton J. Cleveland, The College of the Holy Cross

• Xiaoyu Pu, University of Nevada, Reno