The Hindu Business Line : Helping Asia meet new challenges

In 2006, the management of Asian Development Bank (ADB) set up a Committee of Eminent Persons, headed by Mr Supachai Panitchpakdi, (now Director-General of the United Nations Conference on Trade and Development and formerly Director-General of World Trade Organisation), to provide views on the future of the region and the role of the ADB.

The Group considered the key driving forces of change that have occurred in the region and examined the development prospects.

The report of the eminent persons points out that in the four decades since ADB was established, the situation has changed dramatically. The need then was to have an institution that would raise resources in the US and European markets and use them for development in Asia.

Today, Asia has joined the list of countries that invest abroad. The flow of resources is now from Asia to the West, instead of the reverse. The report notes that Asia now represents nations that account for more than 35 per cent of global GDP in purchasing power parity terms. Strong growth and macroeconomic stability have led to an impressive decline in poverty.

While 35 per cent of people in Asia lived on less than $1 a day in 1990, only 19 per cent did so in 2003.

Despite this, the report notes that ADB continues to operate on the basis of the model adopted at the time of its inception. The ADB must, it argues, evolve rapidly to suit the region's new and fast changing economic political environment.

Growth projections

According to the report, the major Asian economies are likely to continue to exhibit high growth and become largely middle-income countries that have, by and large, overcome absolute poverty. They will continue to become more integrated regionally and globally.

They will be led by the private sector and driven by the markets with private capital flows, the dominant sources of external capital and private investment leading the way domestically.

They will need significant reform of public sector institutions and strategies to ensure that the fruits of growth are widely shared. And with greater cross-border trade and investment flows, well-developed and robust financial systems will become more crucial to the development and well-being of these countries.

Projections prepared by the group and its staff estimate that the region will account for more than 25 per cent of global GDP in nominal dollars in 2020.

In purchasing power parity terms, this would translate into 45 per cent of global GDP. Only about 10 per cent of Asia will live in absolute poverty — that is, below $1 a day. The region will become more urban, with the majority of people living in mega or medium-sized cities, raising new social and environmental issues.

The region will remain capital-surplus, with some countries having surplus savings and others requiring external capital to achieve a higher investment rate to fuel economic growth. Asia will continue to have large accumulated reserves. In 2020, the continent will account for one-third of world trade, compared to the US' 8 per cent.

Asia will continue to attract foreign capital from the rest of the world. Barring unexpected crises, private flows will dwarf official flows.

The report is realistic enough to point out that history shows that the economic environment can change unexpectedly. But, barring such unexpected impediments, the region's record over the past 40 years shows that the positive vision for 2020 is realistic.

Even if some of these goals are not realised fully by 2020, they may be delayed only by a few years.

A few risks

The report cites a few risks that policy-makers have to be aware of. First, the risk that global imbalances may unravel and put at risk global economic growth. The dominant view is that markets can correct imbalances in an orderly manner. But these are risks of sudden corrections or excessive adjustments in currency values and of a sharp slowdown in the US.

In that case, world economies will suffer an unexpected setback. And Asian economies, as the most open and most dependent on the US, would be affected disproportionately. There is also the risk of higher protectionism in the US and Europe.

The region will naturally need to prepare itself to meet such challenges. Besides, it has also to be prepared to see that unexpected political conflicts do not derail progress.

The ADB has to refashion its role to meet a new situation — countries that are no longer capital-short in a general sense or poor in an absolute way. It has to concentrate on doing what needs to be done to help new Asia meet its challenges. It has to change its old vision, which now, in a sense, represents a mission accomplished.

The vision proposed by the Group expects that the ADB in its new role will have to do a lot with clearing infrastructure bottlenecks. Most Asian economies already suffer from poor infrastructure services, particularly in transport, power, water and sanitation.

The challenge is to overcome these bottlenecks, to upgrade and expand infrastructure to meet the fast expanding needs of more competitive economies.

Over the next 10 years, Asia needs to invest $3.7 to 4.7 trillion, which is at least 50 per cent higher than the current investment rate. ADB will have to focus on this.

Similarly, another important vision of the new ADB will be to ensure that rise in disparities, which is inherent in economic change, is mitigated — because countries have to protect themselves against political backlash, which results from uneven economic growth.

Mitigating disparities

Even after countries have graduated out of low income, they will need to find ways to eliminate the remaining pockets of poverty.

This will require first improving social indicators in which they still lag behind, including the Millennium Development Goal. ADB has to concentrate on overcoming extensive residual poverty by adopting more inclusive growth.

The new ADB will have to help Asia's financial markets develop. Even today, Asia raises capital mostly for the more developed capital financial markets of the developed countries.

It is necessary that ADB should focus on strengthening the financial market structure of the emerging Asia. The new ADB will also have to be to ensure that Asia's fast growing economies expand in a manner, which is environmentally sustainable.

Unless the resource intensity of the Asian economic growth is reduced significantly, the security of supplies and prices for such products will remain an important global issue.

Finally, the new ADB will have to focus on global and regional integration. A regional monetary integration is mentioned, but not definitively advocated.

Another important role for the new ADB will be in the region of innovation and technology development. The new global economy will be driven by knowledge and innovation. As Asian economies move to higher incomes and climb the ladder of development, their competitiveness will be determined less by low wages and harder working labour and more better ability to master technology and produce higher value goods and services.

The new ADB should ensure that countries have even greater emphasis on innovation, technology development and higher education.

Obviously, the transformation of Asia from the economic laggard, which it was in 1960 to the success it is today, calls for similar transformation in the ADB's role also.

There is a great deal in the report, which will have to be discussed and decided upon at the ensuing May 2007 meet of the ADB Board.

Hopefully, a renewed ADB will perform better than even the current institution and raise Asia to a higher level of economic and social well-being.

More Stories on : RBI & Other Central Banks | Economy

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
No development in Doha Round

How Jet Airways landed Air Sahara

Judges as case managers

India-Bangladesh FTA prospects

In pursuit of excellence and inclusion in education

How not to value your employees

Helping Asia meet new challenges

TDS rate hike

Reverse mortgage