As Asia’s economies expand, their ability to finance their own development is also increasing. The ADB has grown in tandem, but it needs to provide more than just financing if it is to remain relevant.
Source: Reuters/Damir Sagolj
A Buddhist monk looks through the binoculars at Shwedagon Pagoda in Yangon
Asian economies are on track to expand by 6.9% in 2012 and 7.3% in 2013, according to the ADB’s latest estimates. Compared with the puny growth rates in the US and Europe, the region is performing well. At the same time, Asia’s two biggest countries are floating the idea of a new emerging-markets development bank. Is the ADB in danger of becoming irrelevant?
The short answer is, of course, an emphatic no. Almost 700m people in Asia still live below the poverty line, existing on less than US$1.25 a day. About the same number have no access to electricity. Estimates – admittedly from the ADB – call for US$8trn of infrastructure spending in the Asia Pacific region by 2020.
Asia may be producing much of the momentum for global economic growth, but a rising tide does not float all boats – or at least some float higher than others. Inequality is a major concern.
The ADB has increased its own firepower as a result of the capital increase in the wake of the 2008 global credit crisis, but it is also aware that it needs to adapt if it is to keep pace with the region’s development.
“The ADB is transitioning from pure infrastructure investment in a capital-surplus region. The demands for infrastructure are huge. So, there’s still room for our finance, but over time, the ability of these countries to generate their own resources or access the capital markets will increase. We need to sharpen our niche and act as a broker between countries in the region to encourage them to share their knowledge,” said ADB vice president Steven Groff.
China is a good example. In the mid 2000s, the ADB was engaged primarily in transport infrastructure projects, helping build highways to connect major cities. Its recent projects have shifted to include more technical assistance, education and training, and a focus on sustainable urban development.
“It sets the scene for what our engagement might look like in other countries as they progress through middle-income stages of development,” said Groff.
In China, and elsewhere, the ADB is encouraging member governments to shift their focus from improving the trajectory of growth to improving the quality of growth instead. It is promoting sustainable development and greater inclusiveness in a drive to provide countries with the tools that will allow them to avoid falling into a middle-income trap.
“The ADB’s mandate hasn’t changed, but there is more of a focus on quality projects,” said its managing director-general, Rajat Nag. Infrastructure finance is an essential part of the bank’s operations, but, increasingly, it is looking to provide its knowledge base alongside its financial resources. “Finance is still important, but it’s not everything. The region does have access to capital. Our job is to deliver finance-plus.”
The ADB is in the final stages of formalising a framework for its public-private partnership operations that will increase its focus on the PPP structure across a wider range of departments within the bank.
While, in the past, the ADB has focused on PPP projects where its own money is at stake, it is now working more to promote better understanding of the model and facilitate a wider range of projects, with a view to boosting the supply of well-structured, bankable projects.
“There is interest from institutional investors, but they are always asking: ‘where are the projects?’” said Nag. “There is a gap between aspirations and reality.”
“The money we can make happen is more important than our own resources,” he added.
Asia’s emerging economies have prospered largely on an export-driven model, shipping simple manufactured goods or raw materials to the more developed world. That model, however, requires there to be buyers overseas – something that the recent global financial crisis demonstrated cannot be taken for granted.
“Rebalancing growth is a major issue. That shift is taking place, but it needs to continue. Asia needs stronger social infrastructure, such as health insurance and pension funds, to take its growth to the next level,” said Nag.
ADB staffers are becoming accustomed to referring to the bank as a “catalyst”, hinting at its ambition of promoting development without using its own resources.
Key projects
It is making more use of its reputation for good governance – and its Triple A credit rating – to support key projects, while encouraging leaders to consider long-term issues, such as climate change and sustainable development. It is no accident that the tagline of this year’s ADB meeting is “Inclusive Growth”.
The ADB’s may have chosen its way forward, but there will be some bumps along the way.
While officials publicly welcome talk of another development bank from the BRICS grouping, the discussions in New Delhi earlier this year are also a sign that frustration is mounting in China and India, which remain minor shareholders in the institution behind the US and Japan.
“The ability of the developing BRICS nations to increase their capital shares in existing institutions is constrained. The suggestion of a BRICS bank is, at least, in part a reaction to those restrictions,” said Groff.
Asia, too, will find plenty of obstacles in its path. Boosting growth to over 7% is difficult enough; maintaining that number is a bigger challenge.
“An Asian Century is plausible, but it is not pre-ordained. Asia is still at risk of getting caught in a middle-income trap and other challenges. We’re not getting carried away,” said Nag.
