The Hindu Business Line : A new role for the ADB

The Asian Development Bank should focus on how best it can reduce poverty. While the Bank may work for Asian currency cooperation and other regional collaborations, these can dilute the ADB's focus of helping individual countries that still need its help. K. SUBRAMANIAN looks at the tasks ahead for ADB in the context of the southern shift in economic balance.

In the early years of its establishment, the Asian Development Bank (ADB) was viewed as an agency for promoting regional growth. Over the years, its emphasis has shifted from infrastructure projects (in the 1960s), to agriculture (the 1970s) and to social sectors in the 1980s. Though there was apparent goal congruence between the US and Japan, its major donors, the approach was political and was anything but economic. The Cold War objectives of the US were subsumed in the ADB agenda; and Japan dovetailed its aid programmes to carve out zones for economic expansion in East Asia.

With the end of the Cold War, the US-Japan goal congruence disappeared and the ADB turned rudderless. When the Washington Consensus was the ruling mantra, the relations with regional development banks such as the ADB came under strain. The ADB was expected to become a `regional mimic' and push through structural adjustment programmes.

Promoting Private Capital

The Asian crisis created another schism. The US was lukewarm in its efforts to rescue the distressed East Asian countries and rejected the proposal of Japan to create an Asian Monetary Fund to bail them out. Since 2003, another siege was mounted on the ADB. The pressure was to promote alternative financing mechanisms through private capital markets a la the World Bank. The claim was that it would radically reform the operations of the ADB. For discerning critics, it was evident that the intention was to promote private capital and reduce the role of public investment.

The malaise of the ADB is that it suffers from a structural warp. Though it is enjoined to serve regional aspirations, its shareholding structure is dominated by major powers that seek to serve their own interests. Japan's objective has been to promote regional financial integration to ensure its domination. It has been assiduously pursuing the idea of an Asian Monetary Fund (AMF) since 1997.

Mr Eisuke Sakakibara, a former Vice-Minister of International Affairs, has explained that the AMF idea was formulated by Mr Haruhiko Kuroda who was then Director of the International Bureau in the Ministry of Finance and later Vice-Minister for International Affairs (Asian Monetary Fund Proposal, Phillip Y. Lipsey, Stanford Journal of East Asian Affairs, Spring 2003). Currently, Mr Kuroda is the President of the ADB. He was unanimously elected in 2004. He has been crusading for the idea with all the intellect, maturity and caution he could command as a seasoned bureaucrat. Japan has been pursuing the idea in two parallel forums: first through the research division of the ADB; and, second politically, through the Chiang Mai Initiative (CMI) of Asean+3.

Currency Integration

The ADB's involvement has resulted in a number of high-quality research publications to facilitate debate and policy-making. The latest document discussed in the 40th Annual ADB Meeting (May 4-7) in Kyoto dealt with "The Post-Crisis Sequencing of Economic Integration in Asia." The political drive for Asian currency integration is provided by the CMI.

It is on the perception that the process needs political will and is plagued by collective action issues. Since 2000, when it was signed, the CMI has surpassed expectations and surprised critics. China was initially reluctant to join and its later entry has strengthened the process considerably. It awaits the entry of others such as India. Swap volumes have increased as also their composition. The CMI is viewed as a guarantee against future currency crisis.

The idea of an Asian bond market has taken shape.Many technical groups are studying the problems of developing a common market for bonds. The endeavour is to multi-lateralise the CMI in the coming years together with the strengthening of regional surveillance and establishment of a central reserve pool (Economic Integration in East Asia: Trends, Prospects and a Possible Road Map, Praduma B. Rana, Senior Advisor, Office of Regional Economic Integration, ADB, July 2006).

The US has not been supportive of these efforts. It does not view with favour the rise of regional agencies reducing the primacy of the IMF and the Western financial dominance.

In the paper earlier cited, Prof Lipsey narrates how when Japanese Minister Sakikabara unveiled the AMF proposal in 1997, the then US Deputy Treasury Secretary, Prof Larry Summers, called him directly at his residence at midnight and angrily started, "I thought you were my friend." Since then, Prof Summers seems to have changed his views and become a champion of emerging economies. He has been cautioning them over the high cost of accumulating reserves.

US Antipathy

The antipathy of the US to Asian currency cooperation has persisted over the decade. It came in public view again at the ADB meeting held in Hyderabad in May 2006. There was a clear divide on the ADB's role in financial integration in Asia. Western countries wanted the ADB to stick to its original mandate of poverty relief. Asian members were keen that it should promote financial integration. The US Treasury Undersecretary, Mr Tim Adams, vetoed the idea commenting, "I worry about mission creep in this institution." He would indeed have taken note of the unity among Asian countries on currency issues.

Sadly, Mr Kurodo did not win the day. He conceded that the issues were complex and riven with differences within Asian countries. He promised to get back with a more detailed study. He also responded to the criticism about the need for a long-term strategy for the ADB and to convene a panel of "eminent persons" seeking guidance. Thus was born the EPG. The EPG was chaired by Dr Supachai Panitchpakdi, Secretary-General of UNCTAD and formerly of the WTO. Prof Summers was one of the members and his hand is writ large over its pages.

Many analysts have commended the report as `original', `provocative', `innovative', etc. Many others differ. The report is rich in rhetoric and low in content. It is flawed and derogates and even diminishes the role of the ADB. It shifts priorities away from national concerns, including in the most important area of poverty reduction.

Though it recommends linking of lenders and borrowers within the region, it tries to make the ADB a broker, an area in which the Bank has neither the competence nor the ability to compete with major international banks. In making this recommendation, the EPG seems unaware of global realities. Ultimately, the ADB may end up as one more tier between banks and borrowers and push up the cost of loans. There are thus concerns over "transaction costs."

Financial Asymmetry

Asian surpluses have been created by an asymmetric financial architecture and unless the asymmetry is dressed, the ADB cannot do it on its own.

The EPG Report makes no mention of such issues as regional integration, and currency cooperation, which have been studied for many years within the ADB. It talks of infrastructure, clean fuel, sustainable development, knowledge management, and so on. These are later day balloons floated by interested parties and there are no concrete programmes for implementation nationally or regionally on equitable terms.

By and large, there is a bunker view with the unstated premise that market forces could resolve them. If the market can do it, why create development banks regionally or internationally?

When the report came up for debate in Kyoto, there was a revolt against it. The ADB was under pressure "not to abandon the region's poorest." Afghanistan pleaded that Asia's growth had bypassed fragile states such as itself, and the ADB should continue its involvement.

India took the stand that "helping reduce poverty must remain its fundamental objective." India's Acting Governor, said: "We have concern that this regional cooperation, while important, might dilute the ADB's focus of helping individual countries."

The US delegate emphasised that "the ADB" should focus on how best it can serve the poorer countries that continue to need its help. He went on to add that the ADB should not compete with the private sector and "when the private sector can take over... . ADB should step aside and declare victory."

The EPG report will be confined to the archives of the ADB. However, work on currency cooperation and related issues would go on in the CMI and elsewhere, regardless of the US. The southern shift in economic balance would ensure progress on that front and add momentum to it.

(The author, a former Finance Ministry official, has extensive experience in international, financial and trade issues.)

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