ADB president Haruhiko Kuroda does not mince his words when asked what is top of his agenda as the Bank turns 40: “The future of Asia”, is his terse reply. The Bank’s governors have set about reviewing how the region has changed over the past four decades, what the ADB has achieved and where it should be headed in the future. They now have before them a roadmap in the shape of a new and comprehensive report on the Bank.
That report – the so-called Eminent Persons Group or EPG report – calls for a “new ADB” to serve the future needs of a new Asia – one that will weigh more heavily in the global balance of economic power and political influence in a decade or so. The report is a “bold” one, Kuroda tells Emerging Markets. “Implementation will not be easy but the target year is 2020, so we have time,” he says. “But it cannot be business as usual in the next 10 years: Asian societies are changing rapidly, and we will need to change and improve our policies and strategies.”
Reading between the lines of the report, it is easy to see that the EPG envisions a very different institution, if the ADB is to deal with the multiple and varied issues confronting a region where emerging giants like China and India are challenging not only Japan for pole position but also North America and Europe. The shareholding structure of the ADB will need to reflect these emerging realities, the report suggests.
The ADB will need to be a smarter, more sophisticated, better staffed, more adequately financed and more flexible institution and, even if it does not shift its headquarters from Manila, it will need to disperse its activities around the region, so that it can attract into its ranks more high flyers capable of dealing with the demands of a region that is fast going up-market, the report suggests.
Former US treasury secretary Lawrence Summers and former German deputy finance minister Caio Koch-Weser were among those EPG members who were most worried about the ADB’s ability to recruit top talent while it is headquartered in the Philippines, well-placed sources told Emerging Markets. This is likely to be among the most sensitive of issues when ADB governors (finance ministers and central bank heads) discuss the report in Kyoto.
But a key problem – one which the EPG skated around in diplomatic fashion – may prove most tricky for the ADB in the longer term. This is how to make shareholding and Board representation among the 48 developing member countries and the 19 non-regional member countries of the ADB better reflect changing realities. In particular, how to achieve more balanced power sharing among what will be the three economic giants of Asia within a decade or so: Japan, China and India.
Consensus
There must be “more equitable burden sharing” within the ADB, to reflect more fully the Bank’s “Asian heritage”, the EPG said, hinting at a future realignment of shareholdings within the Bank, although it noted too that the Bank must retain the support of non-regional members. Kuroda claims that few policy conflicts have arisen so far within the ADB Board, because most decisions are made by consensus. But some country representatives point to the small but powerful caucus of Japanese advisers that all ADB presidents have gathered around them as evidence of Japan’s de facto dominance of the institution.
There may be “some potential demand” for changes in the structure of representation within the ADB, Kuroda acknowledged to Emerging Markets. But “at this stage, as far as I know, we have not heard any complaints by either borrowers or donors. I don’t think there is any particular divide among members. We try, and almost always succeed, in reaching a consensus. From my experience at the ADB, we can usually agree, particularly on important issues, so there is no pressure to change the capital structure.”
Vice-president Lawrence Greenwood, a former US state department official, agrees that most decisions are made by consensus. “All country directors have power,” he tells EM. China and India, he notes, are behind the US and Japan (the two biggest shareholders in the Bank) in voting representation, but both have their own seat on the Board (unlike smaller countries that share a common executive director). “Both are very actively involved in the Bank. And both have been among the biggest borrowers in the last few years.” As such, “they also have influence.”
Whenever China or India speak about an issue at the ADB, they are listened to “because they have been so successful, and people like to look at what works,” says Greenwood. “In that sense too they are gaining influence within the Bank. Another way you gain influence is by providing donor assistance. China gave $30 million to the last replenishment of the Asian Development Fund. They have also created a $20 million trust fund to help alleviate poverty. That is another way of having a voice in the institution.”
Chinese aid
But however much consensus there may be within the ADB Board over the approach to multilateral development issues, differences are looming among members when it comes to bilateral assistance. China has earned criticism in parts of the world development community for certain loans it has made to already indebted African countries, and while there are no such heavily indebted (or HIPC) countries in Asia, there are questions over the nature of Chinese aid to certain Asian countries, officials say.
Asked about problems that have occurred in certain regions over Chinese aid, Greenwood says: “I don’t worry about those so much as the nature of the projects that China will be looking at [in Asia] and how they will be doing it. That is more of an issue for us as opposed to the African issue – the free rider debt problem.” There have been criticisms in Philippine media, he notes, over China’s funding of a water project in Manila on which the ADB had done feasibility studies. There were suggestions that China had taken advantage of the ADB’s work to “get into the Philippines quickly”.
“There still are some unanswered questions about how China will fit into the development plans of [Asian] countries, and to what extent their projects will follow the same kind of international standards, for example on environment and resettlement” that are adopted elsewhere, says Greenwood. “Financing from China is a combination of development finance and export finance. [Meanwhile], the bilateral function toward various countries is increasing, and that’s a relatively new phenomenon. It is therefore of great interest.”
The ADB is examining how to accommodate China’s emerging role as an aid provider to poorer Asian countries. “There are a number of ways of looking at this. Maybe we should do more of this kind of project preparation and not worry about who finances it at the end of the day,” says Greenwood. “One of the major problems is that there are not enough bankable projects in the region, so in some ways having Chinese money do it is one way to create more bankable projects.
“We are still working it out, and we are in discussions in the Bank about how we might expand our work in this area. We have not come up with any concrete plans yet, but one idea would be for a private-sector sponsor to pay for work done by the ADB. Co-financing is something that we would be very interested in. We have had discussions with China on co-financing, and they have said they would be interested in looking at it.”
Japan’s bilateral aid does not present such problems, notes Greenwood. “The way they do their development financing is in very close coordination with other donors and with the government’s development plan. Over the years, Japan has become very well integrated into the donor community. A whole architecture of donor coordination has developed. Japan is very much part of this, but China being a new donor is only just beginning to move into these areas. We and other donors are encouraging China to be part of [the architecture].”
If China attracts criticism over some aspects of its bilateral aid policies, it earns praise in other areas. Greenwood cites, for example, China’s determination to deal with energy conservation and environmental issues. China also gets praise for its record of dealing with corruption: it is “very strict” in dealing with corruption issues that could arise in ADB projects there, says Greenwood. “We are impressed by their thoroughness,” he adds, although there are problems at times at local government level.
Corruption
Corruption has become a bigger issue at the ADB since it adopted an anti-corruption and governance action plan last year. “The ADB is the first multilateral development bank [MDB] to adopt a governance and anti-corruption policy,” Kuroda tells Emerging Markets. Since then, other MDBs have followed suit, he notes. Asked whether the Bank has withheld loans on corruption grounds, Kuroda says: “Sometimes we have suspended our operations or even cancelled operations. But the causes are quite diverse. It is important to engage developing countries because disengagement is not very productive.”
Hesitation over lending in a few cases did not prevent the ADB from achieving a record increase in its overall lending last year. In the 12 months to December 31, 2006, the Bank approved $7.4 billion for a total of 80 loans and 67 projects, with most assistance going to financial sector projects. Apart from financial services, the ADB identified road transport, energy, urban and rural infrastructure and energy as “core sectors” for future assistance.
Asked whether the ADB can handle loan demand running at such record high levels – especially now that China and India are among the biggest borrowers – Greenwood admitted to EM that “this is a key question.” What the Bank is asking itself is, “In the light of the very large increase in spending last year, what do we do about human resources, and do we have the right skill mix,” he says. “These are big issues that we are discussing within the Bank.”
The geographical area covered by the ADB is vast – embracing giants like China and India, the whole of South-east, South and Central Asia and the Pacific Island economies with hugely differing needs – and some have questioned whether the Bank is up to the task of dealing with them all. “We have been looking more broadly at these questions,” Greenwood says. For example, “Is there a need for a special infrastructure fund or an infrastructure bank?”
The Eminent Persons Group did not run with suggestions that Asia needs more than one development bank. Several years ago, one of Greenwood’s predecessors, former ADB vice-president Stanley Katz, drew up a report on behalf of the North-east Asia Development Forum for a new development bank for the sub-region. This would have been a separately capitalized institution catering to the needs of parts of China, Mongolia, the Korean peninsular, the Russian far east and even parts of Japan.
There is opposition to the idea within the ADB. “I would argue that rather than create a new institution, why not go with those that you already have and expand them,” says Greenwood. “Katz has proposed a new bank, but my personal view is that I don’t quite understand the need for new institutions. There are a lot of financial institutions already, and a lot of development funding is going to have to come from the private sector [rather than from new public institutions].”
For a detailed analysis on the Eminent Persons report see Moment of truth for Asian Development Bank