For a former vice finance minister for international affairs of Japan, Hiroshi Watanabe is unusually outspoken.
So, as president and CEO of the Japan Bank for International Cooperation (JBIC) – an arm of Japan’s official development assistance programme, one of the biggest in the world – he is in a unique position to say that he does not take Asia’s continued economic success for granted.
Watanabe has been tipped as a possible successor to ADB president Haruhiko Kuroda, a man who has similar views to his own. While such speculation is not something he is prepared to talk about, Watanabe notes that new heads of the bank often take over part way through an existing president’s term. (Kuroda has applied for a new term as president.)
In any event, he says that he is not ready to leave JBIC yet. A reorganization that will give it greater independence will be finished by April 2012, and continuity of leadership will be important during the period of transition.
Watanabe has nevertheless staked a claim to becoming a key figure in Asia’s development and has drawn up a list of priority issues that need to be dealt with – in some areas of which he’s already had some success. “I’ve submitted these ideas to several prime ministers, and some of the issues are already integrated into their national plans,” he says.
They include the need for better universal education to improve income distribution in Asia, as well as agricultural reforms and infrastructure strengthening.
Income distribution – or maldistribution – across Asia is a real concern to Watanabe. Social stability is often taken for granted in the region because of its overall economic success. But he reckons that social tensions exist beneath the surface that could erupt one day into disturbances similar to those that spread across the Middle East recently.
“Unfortunately, some Asian countries have very unevenly distributed income,” he says. “This is going to create social instability, especially where the bottom layer of society has a very low level of income, which means they’ll be heavily affected by the hike in food prices. Income redistribution measures of some kind need to be adopted.”
One way of tackling social unrest is for Asian governments to make improved social provision via education, medical care, pension schemes and other supports such as unemployment pay, Watanabe says.
THE JOYS OF TAX
Another approach is to address income redistribution through the tax system. “Emerging countries are too heavily dependent on value added taxes and they should adopt more progressive income tax. That way redistribution can be achieved automatically. Japan achieved income redistribution this way to an extent that some people saw it as a ‘hidden Socialist’ country.
“The ratio between the highest and lowest paid in Japan is only 10 to one,” he says. “In China and India the difference is more than 10 to one. China and India are too dependent on VAT and corporation tax. China is coming round to the idea of achieving income distribution by making income tax more progressive, but India’s situation is very different.”
Watanabe worries about future food and water shortages across Asia and other developing regions of the world. “This is potentially a big problem,” he says. “People in China and India are demanding more and more food, and this trend is definitely going to continue in coming years.
Demand pressures and also climate change as well as what he calls the ‘monetization’ of food markets will send prices higher, says Watanabe.
“The low rate of return in developed financial markets will force investors to seek a higher rate of return elsewhere,” he says, describing how monetization works.
“In the past, investment went into emerging economies where it raised stock and asset prices, but now there is monitoring of capital flows and so increases in emerging market asset prices will be more limited. Investors are going to seek an alternative source of income, and this unfortunately is through the mineral and food markets.”
Similar concerns were highlighted by the G24 developing countries group and by the Brics (Brazil, Russia, India, China and South Africa) nations at meetings in April. The G24 said commodity prices had reached levels higher than the previous peak in 2008, and that “structural, cyclical and financial factors all appear to play a role in explaining recent trends and increased volatility.
“The sharp spike in commodity prices, especially of fuel and food, is a source of concern for many developing countries,” the group said. “These increases will accentuate inflationary pressures, pose a renewed threat to the poor and vulnerable, exacerbate social tensions, and add significantly to fiscal and import burdens, endangering growth prospects.”
Watanabe believes there are troubles ahead that need to be dealt with now: “Within two or three decades we are going to have shortages of food, especially in Asia. China and others are going to make huge demands from the international market,” he says.
“Japan has been importing huge amounts from other countries, but if China reaches the same level of consumption as Japan, who is going to supply the demand? We need some improvement in the efficiency of food production.”
Watanabe believes agricultural investment needs to be stepped up, and this is one of the priorities of his proposed development agenda for Asia.