By Anthony Rowley
A row between the ADB and the US over the bank’s long-term strategy could undermine meaningful efforts for reform. But not if bank president Haruhiko Kuroda can help it
A bitter dispute between the United States and the Asian Development Bank over the multilateral agency’s lending policies and role is threatening to cast a shadow over efforts to overhaul the 40-year-old institution.
In mid-April, Washington voted against the ADB’s long-term strategy, which charts the policies it hopes to adopt until 2020. Following the vote, the US point-man at the ADB, Curtis Chin, said he doubted the bank’s ability to implement its plans, given its current human resource and systems deficiencies.
Despite the US stance and British abstention, the rest of the 12-member board approved the bank’s long-term strategy ahead of the ADB’s Madrid annual meeting, where the strategy will be discussed by the bank’s governors. But the concern remains that the policy vote could mean Washington will drag its feet on funding commitments for the bank’s soft loans arm, the Asian Development Fund (ADF).
Recent attacks on the bank – which has been the butt of repeated criticism from Washington and other non-regional shareholder
capitals in past decades – follow Chin’s January broadside, when he slammed the ADB’s “opaque” appointments process, and its alleged failure to hire new talent from outside the bank. Two former US executive directors, Paul Speltz and Linda Tsao Yang, weighed in with criticisms of the bank’s budgetary process and other aspects of its administration.
Meanwhile Canada and some European shareholders have also questioned the appointments process at the ADB, while Britain insisted that the bank conduct a human resources review by the end of this year, as well as a staff survey, and threatened to withhold funds from the bank. Even the World Bank, IMF and the IDB have urged the ADB to respect the importance of independent oversight after Kuroda blocked a recommendation by a board committee extending the term of the head of the bank’s operations evaluation department.
Standing ground
Yet the criticism has done little to dampen ADB president Haruhiko Kuroda’s confidence that the bank can secure a new long-term mandate for its operations in Asia – with the additional funds to support them. Under his tenure, the bank has already stepped up lending sharply, and should a global economic slowdown ensnare Asia, the ADB stands ready to help, Kuroda tells Emerging Markets in an interview.
The ex-Japanese civil servant is standing his ground: “Our budgetary and human resource policies have evolved over the years, and as far as budget-making and implementation is concerned, I am confident the ADB is one of the most transparent and efficient institutions in the world,” he says.
“Human resource policies have been under discussion, and when ADF 9 [the proposed replenishment of the ADF] was discussed, quite a few HR issues were take up by management. Management committed itself to make a number of reforms, and these have been carried out.”
ADB human resource policies match or surpass those of other multilateral institutions in transparency and fairness, Kuroda claims. He also rejects criticisms that the bank is suffering from high staff turnover. “One of the reforms we have introduced is an enhanced separation policy,” he says. “Staff with superfluous skills were asked to leave, with compensation. That was strongly requested by shareholders, and a significant number left the bank. We are now recruiting many more staff with needed skills, particularly in private-sector [development] and [with] financial sector expertise.”
Kuroda hopes the bank’s annual meeting in Madrid will focus on the ADB’s new long-term strategy rather than on recent criticisms of its policies, and from the European side at least, criticism appears to have died down. One ADB executive director representing a group of powerful European shareholders told Emerging Markets that the ADB has “gained quite positively” in terms of responding to shareholder demands for reform. The bank is “moving toward reform”, he says. “Some say this could happen faster, but we should not forget the regional and cultural background.”US executive director Chin declined to comment for this article.
Baptism by fire
This was not the first baptism of fire for Kuroda since he took over the helm of the ADB. Last year he and Masahiro Kawai, another former Japanese finance ministry bureaucrat, whom Kuroda appointed to head up the ADB’s regional integration initiatives, came under fire from the US and Europe. In particular, their attempts to create an Asian currency unit (ACU) were seen as a threat to the dollar and as treading on the toes of the IMF.
The ADB has come to expect shareholders to make demands for reform whenever the bank seeks donations for the ADF, for which it is currently seeking a major replenishment.
Representatives of the US Senate judiciary and House financial services committees, for example, have urged Hank Paulson, the US Treasury secretary, to demand that the bank sticks to tougher environmental and social criteria. The lawmakers are threatening to make replenishment of the bank’s development fund conditional on “a successful outcome of the safeguard policy update”.
But recent criticisms of the bank reflect more of a concerted effort by non-regional shareholders to curb the influence that Japan (co-equal largest shareholder in the bank along with the US) exerts over policy-making and senior appointments at the ADB, sources say.
Senior Japanese financial officials have told Emerging Markets that Japan’s resistance to Kuroda’s possible nomination for Bank of Japan governor earlier this year hinged on fear that Tokyo might lose the right to nominate future presidents of the ADB if Kuroda left the bank before completing a full term. There was anxiety in Tokyo that a Chinese national might be favoured by some non-regional shareholders, one official said.
Long-term strategy
The long-term strategic framework (LTSF), which sets out a roadmap for the ADB for the period 2008 through 2020, has been the subject of “hot discussion” says a European executive director. The document embraces some of the recommendations of an Eminent Persons Group (EPG) whose findings foresaw an expanded, re-staffed and more sophisticated bank serving middle-income countries. To meet the needs of a region that by 2020 will account for no less than 45% of global GDP and 35% of world trade, the new ADB must abandon its narrow focus on fighting poverty and support “faster and more inclusive” growth, raise productivity, foster technological development and knowledge management, the EPG said.
Boardroom approval
Kuroda remains insistent on the right of the ADB board to approve the LTSF. “This kind of long-term strategy should be discussed and adopted or approved by the Board rather than the governors,” he says, implying that he does not expect the plan to be derailed at the annual meeting. Accordingly, the new strategic plan was revealed in early April, with a broad focus, as Kuroda says, upon “inclusive growth [in Asia], environmentally sustainable growth and regional cooperation and integration.”
The document emphasized that “poverty reduction can only be sustained if more people are economically productive, economic growth takes place in a well-managed natural environment, and neighbouring economies work within larger and freer markets to achieve shared interests through cooperation.”
By 2012, it said, 80% of ADB lending would be in five core operational areas – infrastructure, the environment, regional cooperation and integration, finance sector development and education. By 2020, about 50% of bank operations would be in private-sector areas and 30% in regional cooperation and integration. The ADB would operate on a more selective basis in health, agriculture, and disaster and emergency assistance.
Kuroda’s dream of seeing the ADB help Asia move towards monetary integration and the eventual goal of a common currency was not mentioned, he points out.
“As far as monetary cooperation is concerned, I don’t think a common currency or even a common currency unit is likely to be instituted soon in Asia. We have to be realistic.”
Regional cooperation and integration initiatives are being pursued aggressively by the ADB under other headings, however, such as infrastructure projects linking Asian economies across borders through transport networks plus hydro and other power projects as and soft infrastructure initiatives aimed at harmonizing customs procedures and other regulations.
Last year the bank’s total lending and grants to public-sector projects increased by 38% to $9.8 billion, while its lending to the private sector rose by 26% to $1.8 billion. The higher spending was matched by criticism from non-regional shareholders and other multilateral institutions aimed at ADB’s hiring policy and pace of reform.
Kuroda does not believe the aftermath of the US subprime crisis will necessitate a repeat of its actions during the 1997 Asian crisis, when it had to spend billions of dollars on emergency loans. “I think at this stage none of the developing countries in Asia are likely to be hit by problems in the global economy or by spreading financial turmoil,” he says. “However, international financial institutions such as the ADB must be ready to address any shocks or difficulties arising in the global economy. I am quite sure that if some necessity arises, the ADB can provide appropriate assistance.”
This might involve calls on shareholders for additional capital. “We have been stepping up financial assistance in developing member countries, and last year our lending level reached more than $10 billion,” he says. “What we call headroom is reducing, so if this slowing trend [in the global economy] continues, at some stage we may need some capital increase or enhancement. If necessary we can shift priorities and reshuffle projects and programmes so as to match with new needs which might arise.”