The Asian Development Bank Faces Radical Change

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As the World Bank knows to its current woe, it can be a disadvantage to be headquartered a few blocks from the White House, and to have a controversial American like Paul Wolfowitz at the helm. Its little brother among multilateral institutions, the Asian Development Bank, has the opposite problem: decades of leadership by low profile Japanese and a location in Manila, one of Asia’s least cosmopolitan capitals.

But on its 40th anniversary the ADB has surprised itself by coming up with a radical paper on its future. There is no guarantee that the proposals of a six-member Eminent Persons Group, headed by former WTO head Supachai Panitchpakdi and including former US Treasury Secretary Larry Summers, will be adopted. Institutions are hard to change, not least given the ADB’s diversity of membership, which includes developed donor countries from Europe and elsewhere along with Asian recipient nations scattered from Armenia to Tuvalu. But the ADB is trying to face up to the fact that it must either change or allow its slow-moving bureaucracy and high overhead to fade gradually away.

The premise of the report, initiated by the ADB’s unusually proactive president Haruhiko Kuroda, is that by 2020 most of Asia will have moved from low to middle income status and hence the bank’s focus on poverty alleviation will be much less relevant. At the same time, Asia’s high savings rate will have ended the bank’s role of bringing in capital from the non-Asian developed world. It may still have a role in distributing savings from surplus to deficit areas, but it is a different region than it was 40 years ago.

East Asia already has a huge capital surplus which may diminish as populations age, but seems unlikely to disappear for at least 25 years. Meanwhile the improved savings position in most of south Asia looks likely to be sustained as the fertility rate continues to fall and the size of working to dependent populations rise. Even now, the ADB’s role in capital transfers is quite small. Although it has a $59 billion balance sheet, disbursements net of repayments in 2006 were just $2.2 billion. However that was a big improvement on previous years which saw repayments exceed disbursements, reflecting the fact that the more successful borrowers do not need the bank so much while the needy have problems implementing projects. Overall loan approvals rose 28% in 2006.

The Eminent Persons Group may be overoptimistic about future Asian growth. There are still huge swaths of poverty in Asia, and weak states from the Caucasus to the South Pacific. If anything, say critics of the report, more soft loans are needed if these regions are to progress. Meanwhile the current abundance of private global capital may not last, in which case intermediation by the likes of the ADB will remain important for several populous countries in south and Southeast Asia, as well as those on the fringes who are often disadvantaged by geography and resources.

However, the report is almost certainly right in seeing that the ADB’s future role should be focused on a few issues, notably cross-border infrastructure, the environment, regional cooperation and financial market development ‑ all areas in which a multinational organization has an important role to play. The group also says it should move some operations from Manila to more dynamic locations.

The bank has already made some significant contributions to cross border transport links in Southeast Asia and has played a catalytic role in the development of regional bond markets.

ADB economic reports, overseen by Chief Economist Ifzal Ali, are often more realistic than the boosterism characteristic of national governments and investment banks. Last year its Asian Development Outlook took a critical look at the tangle free trade deals proliferating in the region and urged more regional support for the World Trade Organization’s Doha Round. This year the Outlook has warned that the growth of intra-regional trade may not be quite the shield against a US recession that is often assumed because so much of it represents exchange of intermediate goods by companies using Asian cross-border manufacturing systems but whose final products still depend heavily on the US market.

On financial issues, there is a lot more the ADB could do to encourage cooperation on currency and trade issues, particularly in East Asia. Although an ASEAN plus Three (China, Japan, South Korea) group exists, it is often given to platitudes. While ASEAN backs the Chiang Mai initiative calling for central banks to cooperate with currency and reserve swaps to prevent another regional crisis, it is in effect fighting the last war, not the current one. A meeting of the group’s finance ministers in Kyoto had nothing to say on the pressing issue of the yen’s weakness against other Asian currencies and the impact of the yen carry trade on financial market volatility.

The ADB itself has made successful efforts to develop regional bond markets and cross-border trading in bonds, however, central banks are still reluctant to buy each others’ paper rather than load up with ever larger amounts of US debt.

The ADB could also play a role in trying to establish a common framework for the many politically-motivated bilateral trade pacts that are being slapped together in the name of free trade. It could also use its lending weight not only to speed development of renewable energy but also to promote common environmental standards in the region.

Developing a truly regional focus will not be easy given ADB’s power structure. Japan has traditionally held the president’s chair and is by far the bank’s most generous supporter. But Japan’s leading role tends to make China, and to a lesser extent India, jealous if not suspicious. There is a need to rebalance the power both within the Asian members and between them and the non-Asian countries. But that is hard to achieve and even if it can be done it will not necessarily lead to the ADB being allowed a larger role in cross border issues.

Another test of regional commitments will come with the next replenishment of its soft loan window, the Asian Development Fund. Soundings are just beginning on targets for contributions. While middle income countries may have a decreasing need to borrow from the bank at its quasi-commercial rates, there is still a huge need for loans to the poorest countries such as Bangladesh. With western aid donors and the World Bank focusing mainly on Africa (which gets half of the World Bank’s soft loans) Asian countries need to come up with more funds for their poorer neighbors. The borrowers will be looking to see whether China as well as Korea and the relatively prosperous ASEAN countries (Malaysia, Thailand and Singapore) step up with funds.

However ADF funding can never be entirely divorced from voting power and influence within the bank. Given the nature of multilateral institutions, it is much easier to hold up change than achieve change. Now that Kuroda and the report have opened the way to revisiting the role of the ADB, it will be up to its governors to decide whether they really want it to change or will find it easier to let it drift slowly into irrelevance.