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UPDATE: ADB Rediscovers its Role
The Asian Development Bank held its annual meeting in Bali this week, comforted by calamity. That is not to suggest that it wills crisis upon its members, simply that regional or global crises are a reminder of the value of multilateral institutions. Much the same could be said of the World Health Organization as the swine flu epidemic haunts the globe.
The ADB is in demand again, as a source of funds, as a catalyst in regional cooperation, and even as an economic policy mentor. This does not mean that it has escaped from its image of being a ponderous institution headed by Japanese bureaucrats stuck out in the dreary Ortigas district of Manila. But there is no doubt that perceptions are changing.
The Bali meeting of its governors – the finance ministers of member countries – saw agreement on the tripling of its capital to US$165 billion and an increase in lending commitments of 50 percent to US$16 billion over the next two years. Much of this will be fast-disbursing loans to enable governments to bridge budget gaps left by falling revenues, increase public infrastructure spending to offset weak private investment and exports, and provide social safety nets to protect against rising unemployment. In particular, disbursements from its soft loan Asian Development Fund, which was replenished last year, will be front-loaded – spending to be focused heavily on the next two years.
Of course spending extra money may not be easy, particularly for projects rather than policy-based budget support. But the money and intent are there. And so is the demand, including from middle income countries which had been tending to prefer borrowing elsewhere.
Two years ago, the ADB was struggling to identify what its role should be in an Asia which, with some notable exceptions, appeared to be prospering and in which private capital was readily available. This too was an Asia which had learned its lessons from the Asian crisis and now kept a tight rein on foreign debt and maintained big foreign exchange reserves to protect against export downturns and currency market squalls.
Potential borrowers from its ordinary capital resources either had access to equally cheap money from elsewhere, and without the bureaucracy and conditionality of the ADB or simply did not have the local resources and organization capability to use the foreign exchange funds available from the ADB. The need of the poorest countries eligible for loans from the Asian Development Fund remained as big as ever but these resources were limited by the willingness of the developed members to put up hard cash – rather than simply callable capital as is the case with the ADB's ordinary resources.
But the wheel has turned again and now ADB funds are being earnestly sought by countries that again see it as a source of funding as other sources either dry up or look problematic. Countries which had thought they had comfortable external positions now find that exports are collapsing and currency stability is being questioned. Meanwhile fiscal situations have deteriorated drastically too as tax revenues fall. Without access to funds, particularly of a quick disbursing sort, they may have to cut rather than increase government spending in the face of the crisis.
The ADB alone has limited resources but this is an occasion where with the World Bank, and in some cases the IMF as well, it can have both an immediate impact on government recurrent spending, and help sustain long term investment in roads, education etc. All these multilateral institutions were given a big boost by the recent G20 Summit in London. The IMF has had to focus its efforts mainly on the financial stability of debt-distressed countries of eastern Europe but in Asia the need is for loans to sustain growth.
This crisis is different from the Asian one. Then it was a fast acting, home-grown balance of payments and financial sector crisis. This is more global, slower to develop and affecting the real economy more than a financial sector which in most of Asia is relatively comfortable. However, the need for resources is no less, perhaps not so much to plug panics as to ensure that governments can run counter-cyclical policies and step up social programs to offset rising unemployment.
The ADB meeting was also the occasion for the ASEAN+3 group (The 10 ASEAN members plus Japan, China and Korea) to announce an ambitious program of cooperation. In itself, this also showed how the rivalry between China and Japan for regional influence was having a positive impact, with both keen to throw money into cooperative projects.
The biggest of these was the announcement in Bali of a USUS$120 billion fund to protect regional currencies from market instability and providing space for countries to enact appropriate stabilization policies.
China and Japan will both contribute US$38.4 billion (with US$4.2 billion of China's contribution to come from Hongkong) and Korea US$19.2 billion. The ASEAN members will be able to borrow from the fund in amounts ranging between 2.5 and five times their own contributions.
The fund was negotiated under the Chiang Mai Initiative which was established after the Asian crisis but until recently had made rather modest progress. Now however this big leap forward in effect makes it into a kind of east Asian IMF. For now at least it is complementary rather than competitive with the IMF – but that could change depending on how quickly the IMF gives Asian nations a bigger role.
Part of the IMF formula is a surveillance mechanism to try to keep economies on sound fiscal and exchange rate paths. The group intends to establish its own mechanism but meanwhile will rely mainly on the ADB's economic monitoring plus ASEAN's own very modest efforts.
The ASEAN+3 group is also putting money directly into the ADB to create a Credit Guarantee Mechanism for Asian corporate bond issues. The ADB has been in the forefront of efforts to develop local currency bond markets and cross border trading in them. Many obstacles, including tax and exchange controls, remain but progress has been made and this fund should further enhance it. Inadequate bond markets have been a major reason why Asians have been investing their surplus savings in the west rather than funding badly needed infrastructure projects in the region.
At the broadest policy level, the ADB can also claim to deserve to be listened too. Two years ago it was warning that the region remained much more dependent on western markets than it liked to believe. Much intra-regional trade was in components for finished products sold in the west, as the export collapses of recent months have shown.
Now the ADB is preaching the need to focus on domestic demand to restore growth rather than assuming that the over-borrowed western consumers will return to their past free-spending ways. It also recognizes that regional trading arrangements are no substitute for global ones under the World Trade Organization. Indeed, the fact that the ADB has various non-Asian members helps it keen an international rather than overtly pan-Asian view. Meanwhile Asian control limits friction with non-Asian members.
However, for the future there is likely to be a push by some Asian members, notably China, to enhance their positions within its management at the expense of Japan in particular but also of India. Thus far the ADB has always had a Japanese president just as the World Bank has had a US boss and the IMF a European. But those traditions are everywhere coming in for criticism.The current president, Haruhiko Kuroda, has been unusually activist, particularly pushing regional cooperation issues and is generally well regarded. But grumbling about the institution's ponderous ways is unlikely to go away and may even intensify now that expectations of its role have been raised. So do not assume that Kuroda's successor will be another Japanese.
Indeed, if the Japan/China rivalry is to be harnessed most effectively, a president from a third country may be both desirable and possible.