The Hindu Business Line : ADB: Fighting for survival, but losing focus

It is difficult to decide whether the Asian Development Bank (ADB) is fighting for its survival or for a new identity. It seemed it had more relevance in the earlier decades. There was goal congruence among major donors Japan and the US, even if they were driven by Cold War objectives.

Now the region is witness to newer rivalries and alignments. Globally, there is a southern shift in economic balance. Some Asian countries are success stories and don’t need capital any more. Given this turnaround, Prof William Easterly, a former World Bank economist, commented in the Wall Street Journal: “ADB must change or die.”

The ADB won’t die. Mr Harushiko Kuroda, a respected Japanese banker, heading the ADB will not allow it. He has been trying to breathe new life into it for some years. Mr Kuroda wanted to turn the ADB into a focal agency or the regional equivalent of the IMF to ensure Asian financial integration and stability. This was anathema to the US. Mr Kuroda had to retract when it was discussed in the annual meeting held at Hyderabad in 2006. Instead, he promised to bring a longer-term strategic framework for the ADB.

Strategic framework

He appointed an Eminent Persons Group (EPG) to prepare a long-term strategic framework (LTSF). In its report, the EPG explained that the ADB’s original mandate of providing capital was obsolete in a capital-surplus region. It went on to identify newer roles such as acting as a broker between global lenders and borrowers in the region. Unfortunately, however, the group tended to sidetrack its regional-cum-developmental role.

The response to the EPG Report in the Kyoto Meeting (May 2007) was negative. Many countries, including India, wanted the ADB to retain its central focus on poverty alleviation. The US delegate emphasised that the ADB should aim to serve the poorer countries that continue to need its assistance.

After the Kyoto Meeting, it was hoped that Mr Kuroda would give up on the long-term strategy and pursue more mundane issues such as regional development and growth. But he would not relent on his attachment to the LTSF; nor would the US, in its opposition to it. Differences over the ADB’s long-term strategy have widened since. Other issues have also cropped up, souring relations.

Major failings

Unfortunately, the ADB has its own share of failings. It is accused of lacking in expertise and managerial skills, as was shown by its handling in Afghanistan. Its senior staff are demoralised and seeking other pastures.

Many NGOs and activists have criticised it for lowering standards on environment and rehabilitation. Two US Congressional committees warned that ADB’s project evaluation standards were being lowered to unacceptable levels (Financial Times, March 9, 2008). This comes about due to competitive lending with China, as in Cambodia.

There are doubts over its excessive zeal over privatisation in areas such as water and power. In a disturbing report, Financial Times (‘ADB warned on private equity investments, April 27, 2008) provided details of arrangements with private equity companies located in tax havens. The ADB’s internal evaluation team faults them as risky and in excess of permitted levels.

These have strengthened the opposition ranks. Early in January, for the first time ever, the US representative did not attend the board meeting of the ADB. This was to protest the way its affairs were managed and the agency losing its operational focus. Since then, the American disenchantment is more open.

In the second week of April, the US voted against the long-term strategy in a board meeting. The UK abstained. However, the rest of the board approved it. It was carried as, unlike in the IMF, the US has no veto in the ADB. The US continued to voice its criticism about the long-term strategy and wanted further improvements such as increased focus on the very poorest in the region and a better results measurement framework.

Focus on poor

A major difference related to the US view that the ADB was concentrating more on middle-income countries such as India and China, and less on poorer countries. The ADB management countered this, clarifying that while loans to poorer countries were on softer terms, those to middle-income countries were market-linked. This would not assuage the US and has led to doubts over US co-operation.

At the annual meeting held in Madrid earlier this month (May 3-6 ), the US reiterated its reservations. It referred to lack of accountability in ADB operations and the ADB paying more attention to the amount of funds loaned than to the effectiveness of aid. The US representative attacked the LTSF as “one which was completed without a budget in place and lacked a clear assessment of how future investment projects might evolve over time.” Despite US opposition, the LTSF was approved. The victory, though, may be pyrrhic.

Funding worries

At Madrid, Clay Lowery of the US Treasury would not give any commitment for capital increase. If the capital base is not increased, the ADB cannot continue with its funding programmes beyond 2010. US funding in the coming years seems doubtful.

If Mr Kuroda and his senior colleagues had paid more attention to the emerging food crisis threatening regional stability since January and less attention to pushing the LTSF, they could have avoided a lot of embarrassment in the Madrid meeting.

As Asia Times reported, “Three words – high food prices – emerged like a gate-crasher at an event held by the ADB in the Philippines capital that was billed as a celebration of the bank’s new vision for poverty eradication in Asia.” This was in a seminar of Governors to discuss the LTSF just days before the Madrid meeting. More than any other issue, it was the food crisis that overshadowed the meeting and “the concerns about food security have relegated the LTSF into a corner.”

India’s Finance Secretary, Mr Subba Rao, said: “Rising food prices are a threat to food security and a threat to poverty reduction and we stress that food security must be adopted as a challenge of the LTSF.”

Mr Kuroda should have gone to the Madrid meeting with a totally revamped programme, concentrating more on regional (read, agricultural) development on an emergency footing. Unfortunately, its timid response to regional assistance was late and inadequate.

Part of the problem, not solution

ADB will consider budget support to hard-hit countries to alleviate fiscal pressures and assist imports of food-grains and inputs. The actual quantum would depend on member contribution and “could be sizeable but not enormous.” These offers are a pie in the sky. As a long-term measure, what Asia requires is a new green revolution. Sadly, the ADB lacks such a vision or a plan. Its document relies on trade promotion and commodity exchanges, a la neo-liberals.

The ADB lacks credibility for other reasons. As some critics suggest, it failed to foresee the food crisis and, truly, it did not happen overnight. There are academics who suggest that the ADB was a part of the problem and not a solution. They blame the conditions attached to ADB loans for, in part, creating the crisis.

In its programmes, the ADB exhibits greater zeal for privatisation than the Washington Twins. At Madrid, the Finance Minister, Mr P. Chidambaram, had to ask the ADB “not to rely solely on private sector for funding infrastructure projects and to continue to engage with the public sector.” In sum, if the ADB has to gain credibility and a new identity in the region, it will have to rework its strategies extensively.

(The author can be reached at subrabhama@gmail.com)

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