With talk of a financial crisis now on the backburner, Asia needs to ensure its growth is not just stable, but also inclusive, says ADB President Haruhiko Kuroda. In an exclusive interview with IFR Asia, he urges policymakers not to waste this opportunity to focus on longer-term social goals.
IFR Asia: What do you hope to get out of the Manila meetings?
Kuroda: I think it is a good opportunity for governors to discuss medium- and long-term issues. In the past, because of the crisis, particularly after the Lehman shock, governors focused more on medium-term issues, such as recession and so on. Now, the crisis may not be completely over, but for Asia it’s not a crisis any more. So, governors will focus more on long-term issues, such as green growth, inclusive growth, regional integration and co-operation. As such, we expect governors at the upcoming meeting to focus on these important long-term issues rather than short- and medium-term issues, such as how to respond to the crisis. It presents a good opportunity for them to discuss these important long-term issues.
IFR Asia: What are your proudest achievements over the last 12 months?
Kuroda: I must say that I am, relatively speaking, satisfied with the ADB’s performance and the progress we’ve made – mostly because the last 12 months were very challenging. The global economy has been recovering from the financial crisis, but the European financial difficulties continue and the US economy is still facing some challenges.
China will probably expand around 8.5% this year. So, compared with 9.0–10.0%, this is certainly a significant slowdown. As for India, its economy is growing about 7%, again a significant slowdown relative to the previous expansion of 8-9%. Still, growth rates of 8.5% and 7.0% are still quite high. As things stand, most Asia Pacific economies are slowing, but still maintain high growth rates. This means there has been a significant reduction in poverty and improvements in social conditions.
IFR Asia: How about the ADB?
Kuroda: In the last 12 months, we have continued to improve the performances of our project programmes and we have also reviewed our public communications policy and improved the accountability mechanism – both of which are very important.
As for resource mobilisation, the Asian Development Fund – ADF11 – has, of course, been almost completed. It is not yet fully completed because, although a few donors expressed their wish to contribute at the last meeting, they could not come up with concrete figures. We expect them to indicate concrete figures before the end of this month. This means that, when the governors meet in Manila, the ADF negotiations will have been fully completed and we can show the final result. At this stage, we expect something like US$12bn in concessionary resources to be secured for ADF11, which is larger than ADF10 (although the final figure is not yet available). That is our target and, given the difficulties facing many traditional donors, especially the European countries, it will be a respectable result.
Our activities in Asia Pacific are going fairly well, although I admit we have faced, and will continue to face, a lot of difficulties in countries like Afghanistan and Pakistan. Afghanistan still has a very difficult security situation and Pakistan faces structural, as well as macroeconomic, challenges. Pakistan has faced two straight years of huge floods – something quite unusual. In the last 100 years or so, 2010 was the worst and then, last year, again! The floods damaged not just infrastructure, but also current production and Pakistan grew less than 3% last year because of the disruption. These countries face major difficulties and that situation will continue.
IFR Asia: Are the challenges today more social and environmental than economic?
Kuroda: That’s an interesting question. The economy remains important and growth continues to be necessary for social improvement. However, socio-political issues, such as income equality, climate change, harmonisation, gender and so on, have certainly been attracting more attention. As all Asian economies are doing well, people, naturally, tend to focus more on social issues. This is because, despite rapid economic development in the Asia Pacific, we have still so many social issues and some, like harmonisation and environmental degradation, climate change impact, income equality have been accentuated during rapid economic growth. However, at the same time, I think economic growth is still necessary. It may not be sufficient, but it is still necessary for social development.
This year, the theme of the annual meeting in Manila is inclusive growth through better governance and co-operation. It is growth, but inclusive growth, not just aiming for increasingly higher aggregate GDP growth, but more inclusive, equitable growth. So, in that sense, the theme of the meeting already shows great attention to social aspects.
IFR Asia: Does that mean the ADB’s mandate is also shifting?
Kuroda: Again, growth is absolutely necessary. So, we cannot neglect or disregard or pay less attention to growth, but, at the same time, we pay more attention naturally to social aspects – inclusive growth, environmentally sustainable growth, and so on.
In that sense, the ADB is paying more attention to social aspects, including income equality and environmental sustainability.
IFR Asia: When economies have been performing relatively well, does some of the political will to make changes disappear?
Kuroda: I think, in some sense, it is natural process. However, as high growth continues, rising income inequality, the intensifying impact of climate change and so on, already show that we have to pay more attention to such aspects. Already many major economies, like China, India and Indonesia, are gradually shifting their attention to more inclusive, environmentally sustainable growth. That is quite appropriate.
IFR Asia: Is the political will still there to act as a regional force, or are the individual countries too busy looking after themselves?
Kuroda: When things are going quite well, we tend to be more complacent – that’s natural human tendency. Take, for instance, the reform of state-owned enterprises in China. A few decades ago, the programme was really serious. Many SOEs were hugely inefficient, posting huge losses and so on. Now, however, most of the Chinese SOEs are making huge profits, expanding quite rapidly and investing hugely. Because of this success, SOE reform in China has slowed somewhat. SOEs still need substantial reforms. Many of them dominate in markets, such as heavy industries, natural resources, chemicals and infrastructure. No doubt, they have increased efficiencies, overcome redundancies and heavy losses to enjoy rapid expansion, but they still need more reforms. This has become, somewhat, more difficult because SOEs are apparently doing well. I think that, in a perfect market economy, SOEs should be corporatized and, eventually, privatised so as to introduce more competition into those sectors.
The ADB has been advocating regional integration as key to reducing the developing country gap with middle-income nations and promoting more inclusive growth and so on. In some areas, such as the Greater Mekong Sub-region, co-operation and integration has advanced quite substantially, but, since the low hanging fruit has already been acquired, further integration is going to be more challenging. After all, in the past 10–15 years, most sub-regions in APAC – East Asia, South Asia, Central Asia – had seen quite rapid economic growth. The only exception is the Pacific region, which has grown quite slowly. Population increase is very high, but poverty has not been reduced much and economies remain very fragile. They rely on fisheries and subsistence-kind of agriculture and tourism, and none of them have shown much growth in the past few years.
However, all other sub-regions have shown strong growth and there are sub-regional frameworks across all of Asia. GMS has been the most successful, but CAREC has also made quite significant progress, while South Asia is now making progress.
Myanmar is now looking to overcome 25 years of isolation and it is a big country with a population of 60m. The land itself is roughly double Japan. It has abundant natural resources, as well as human resources. As Myanmar sits between China and India, between South-East Asia and India, its location is very strategically important. I think the SEA regional co-operation and the South Asia regional co-operation can also benefit from having Myanmar as a member.
IFR Asia: When will the first ADB projects be agreed there?
Kuroda: There are two related issues. One is, of course, ADB’s ownership by 67 member governments. When and if we start normal relationships with member governments and we start financial assistance in Myanmar, there must be a consensus between our shareholders – the regional shareholders and the non-regional shareholders. At this moment, it appears that such a consensus is likely in the not-so-distant future, but there is insufficient consensus among shareholders. So, while small technical assistance could be given quite quickly and a policy dialogue could be started, financial assistance – for projects in Myanmar – requires greater consensus among our shareholders.
The second issue is that Myanmar has accumulated a significant amount of arrears with the ADB. As a financial institution, the ADB cannot resume lending unless and until the member government clears its arrears. That situation is the same as far as other multilateral institutions are concerned. There is a way to resolve this, but the member government will be required to make extra efforts, otherwise the arrears will prevent us from extending any financial assistance.
I think bilateral donors, like Japan, have the same problem – arrears, but they can be more flexible. While they must follow internationally established rules, they can also provide grants or even cancel debt. We have very strict rules for dealing with these arrears problems.
IFR Asia: What’s your reaction to talk of a BRICS development bank?
Kuroda: I understand BRICS leaders agreed in New Delhi to consider seriously forming a development bank and asked their finance ministers to make feasibility studies. I think it is a good move. On the one hand, there are already so many development banks and only five global MDBs – the World Bank, African Development Bank, the ADB, Inter-American Development Bank and the EBRD. However, there are many sub-regional development banks. In Latin America, there are quite a few, including CAF, the Caribbean DB. In a different context, the Islamic Development Bank, headquartered in Saudi Arabia, operates in all Islamic countries around the world.
One point is that it is quite natural for the BRICS to have their own development bank. Another is that there is a huge need anyway for development assistance. Infrastructure requirements alone are huge and certainly no single development bank can finance all such projects. If there is another BRICS-managed development bank, they can handle their huge infrastructure needs themselves.
It’s not just the five multilaterals. There are many regional and sub-regional development banks in the world.
IFR Asia: So, it wouldn’t conflict with the ADB’s mandate?
Kuroda: I don’t think so. We co-finance quite a number of projects with the IsDB and collaborate with the World Bank, and the needs are huge. So, one additional bank – even if it is a big bank – would not make things difficult for other banks or face tough competition. One additional bank would be quite helpful, I think.
IFR Asia: The Philippines is hosting this year’s annual meeting. What more does it need to do to catch up with its neighbours?
Kuroda: I think you can point to a few things that are in favour of the Philippines.
Firstly, macroeconomic conditions in the country have improved significantly over the last several years. The country used to have high inflation and a budget deficit, but, now, the inflation rate is quite low and it has a surplus. Although growth last year was relatively low, largely reflective of the supply chain disruption from the Japanese earthquake and the South-East Asian floods, I think it could reach 5% this year. So, low inflation, a large current account surplus, high growth and small fiscal deficit are all plus factors. Also, the banking sector is quite healthy and sound. Macro conditions have improved greatly. Many people think the Philippines still has low growth, high inflation, exchange rate depreciation, but the reality is the exact opposite – it is a good macroeconomic performer.
Secondly, there are huge human resources. The population, I think, now stands at more than 90m. Most of the people can speak English and are highly educated. Natural resources, yes, they have a lot. So, the potential is there.
However, it is true that the country as lagged behind many other Asian and South-East Asian nations. That is down to some challenges, particularly institutional capacity and governance. Also, unlike the countries on the Indochina peninsula, the Philippines is made up of thousands of islands and it requires substantial investments in transport and energy that tend to raise costs for the manufacturing sector. There are ways to overcome these problems: the current government has been very keen to improve governance and the investment climate, and is trying to improve infrastructure in the country. So, there is huge potential – unrealised potential – but the government has been making strong efforts to overcome those hardships.
Once those problems are solved, I think the country can grow quite rapidly and improve the living standard of people rather rapidly. It can grow not just 5%–6%, but 7%–8%, although, in order to do so, the economy needs good governance and there has to be better infrastructure.
I understand many Japanese companies are coming back. In the 1970s and 80s, the Philippines was always the first country where Japanese companies invested and then, of course, they turned to Thailand, Malaysia, Indonesia, with China next and now Vietnam. However, Japanese companies are coming back to the Philippines.
This year, there should be more than 4,000 participants at the Annual Meeting. Many of them will come from Asia, but there will also be many from the Western hemisphere and Europe. Companies are quite interested in the Philippines as an investment destination.
