Asia must lead way

Following a rebound in economic growth, Asia is better placed than ever to play a leading role in the global economy. In an exclusive interview with IFR Asia, ADB President Haruhiko Kuroda has called for Asian countries to show more responsibility in addressing global issues, such as climate change and

IFR Asia: Is there any key agreement you hope to get out of this year’s annual meetings?

Kuroda: I hope there will be no difference of opinion as far as medium­and long­term issues are concerned. Climate change, food security and energy security are global issues, and developing countries in Asia must squarely address these. I hope there will be an emerging consensus that developing countries in Asia also certainly need to make significant contributions.

Asia has recovered very rapidly – over half the global growth in the last couple of years is attributable to emerging Asia – and Asian countries also have to be responsible for global issues. Asia’s role in overcoming the global financial crisis is well known, but, going forward, there are many more difficult challenges to address, like climate change, how to reduce inequality between countries and within countries, how to make economic development more compatible with global growth, and how to address global imbalances. There are many challenges where developing countries must be more responsible. […]

It is a very good time to discuss long­term issues, such as sustainability, inclusiveness of development. Last year, we were hopeful of a strong recovery after 2009, which was the worst year for the region. So, we were more concerned about the recovery. Now that there has been a recovery and economic growth promises to continue, we can look more at medium­and long­term issues. Inflation, of course, is a short­term issue, but we can discuss more.

IFR Asia: How would you characterise the last 12 months? Is inflation now your biggest concern?

Kuroda: Developing Asia recovered from the aftermath of the global financial crisis very rapidly. So, last year was one of the most robust growth periods that developing Asia experienced. Growth was quite strong, but, at the same time, inflation accelerated in many countries in the region. The inflation rate reached double digits, or close to double digits, in some countries, so it has become a serious problem. I suspect that this year the number one challenge facing many developing countries in the region is inflation.

This inflation is not just be due to domestic overheating or some bottlenecks. In many developing countries, inflation is partly because of hikes in global commodity prices – food and oil have risen very sharply in the past 12 months. So, all in all this year, we expect relatively high growth to continue, although there will be some deceleration from last year, while inflation may continue to be challenging. Last year, the recovery was the main policy objective, but, this year, the number one challenge and main policy objective will be to contain inflationary pressures.

IFR Asia: How has that affected the ADB’s activities in the last 12 months?

Kuroda: In 2009, which was really a crisis year, we extended a large amount of extraordinary loans to developing countries. In 2010, we were sure that the recovery was taking place, but, at the same time, we continued to support governments that were providing a counter­cyclical fiscal stimulus and targeting support for the poor. Gradually, we shifted from the crisis response in 2009 to more medium­term development support. The share of programme loans declined quite substantially and, instead, we increased our usual kind of development assistance to improve infrastructure, to improve education and to improve the financial sector and so on. So, in terms of the ADB’s assistance, we shifted; if we did not completely return to normal, then something like halfway back to normal. It means that, this year, we are very much focussing on medium­and long­term development assistance, rather than crisis loans and budget assistance.

Of course, if food prices continue to rise and oil prices reach crisis levels, then we might be again requested to provide some extraordinary support. But I still think and hope that oil prices and food prices will peak out at some stage. Certainly, in the last few months, rice prices have fluctuated and have risen, but, in recent weeks, they have declined. So, I hope food prices – while they may not sharply decline – will not go up much further. Oil prices depend very much on the evolving situation in the Middle East and North Africa. So far, there has been great uncertainty and prices have risen, but, again compared with 2008, when oil prices reached US$147 per barrel, it is still not as serious. So, we are concerned, but, at this stage, the commodity price hike is not derailing economic growth in developing countries.

IFR Asia: What, if anything, can the ADB do to help with food prices?

Kuroda: In the short term, there are only a limited number of actions the ADB can take. For instance, in 2008, we provided some emergency loans to certain countries – mainly low­income nations – that were taking measures such as targeted ones for the poor and we provided budget support. At this stage, the situation is not so serious. We also argued that food exporters should not restrict exports because that would simply exacerbate the situation. Many Asian countries actually banned rice exports in 2008, but, fortunately, Thailand – the largest rice exporter – continued to export rice. That must have mitigated the impact on Asia. So, another thing we can do is provide policy advice that could improve the situation in the region – never adopt an export ban, and never accelerate a food price hike by increasing stocks at the height of a price hike.

I understand some South­East Asian countries have been discussing if they can build up some stocks of staple foods at least to reduce the range of price fluctuations in the long run. There is a strong argument for that, but there is also some cautionary argument. I think in the medium to long term, this could be quite helpful and the ADB can, if requested, provide technical assistance and even financial assistance.

In Asia, the scarcest resource is water. In many countries outdated, outmoded irrigation systems still exists. So there is some room for the improvement of irrigation systems and also for the improvement of various fertilisers. However, in the long run, food prices may still be on a rising trend and this is a really serious problem. More than half the global population lives in Asia, but only about 30% of the world’s water resources are in the region. Farmland is also limited because of urbanisation and industrialisation. Actually, farmland in Asia has shrunk over the last couple of decades. So, this is going to be a big challenge.

IFR Asia: Where do you think Asia’s next major crisis will come from?

Kuroda: Energy security and energy problems are big concerns. Asian countries will continue to struggle to develop clean and renewable energy to satisfy their high growth from economic development on the one hand and, at the same time, reduce greenhouse gas emissions.

We know that there are fairly large coal reserves in Asia, but coal is the worst polluting among fossil fuels. There is technology with which coal can be utilised with less air pollution and less CO2 emission, but that technology is still very expensive. Some Asian countries – the Central Asian Republics, Caucasus countries, Indonesia, Malaysia – have significant amounts of oil and gas reserves, but they are in the minority. The majority – including China, India and Pakistan – are already importing a lot of oil and gas. If their economies continue to grow, they will have to import more gas and more oil from abroad. At the same time, it is not just OECD countries that have to reduce their CO2 emissions: developing countries have already become big greenhouse gas emitters. Countries like China and India are so big that climate change will affect them quite significantly. So, they cannot have a free ride.

IFRAsia: Given that economies are fairly robust, is the ADB’s enlarged capital base sufficient, and is it big enough to meet the demands of the next crisis?

Kuroda:That depends on the crisis. If it is so huge, of course, we may need substantially more capital, but, at this moment, such as crisis is unlikely in the next couple of years – hopefully. Our capital was tripled in 2009. So, I think, for the time being, our capital is enough for our operations.

The second point is that the ADB is an institution and, as such, there are some limits to expanding. You can increase your financial resources, you can employ more people and increase your human capital, but still there is some limit because you have to maintain your integrity. You are not just quantitatively increasing your amount of loans, because that could undermine the quality of your loans, and of your services, and the integrity of your institution. So, after tripling our capital base, I think it’s appropriate for us to solidify our efforts rather than ask for another increase.

IFRAsia: How do you think the role of the ADB has changed as countries, such as China, become richer?

Kuroda: There is already a discernible trend in that our operations are moving towards the west. China is still a large borrower, but it is not the largest borrower any more. The largest borrower is India. South­East Asian countries used to be large borrowers, but many of them have reduced their loans, while some others, like Vietnam, Cambodia and low­income nations, have increased their borrowings. We have substantially expanded our operations in countries like Afghanistan, the Central Asian Republics, Armenia and Georgia. Even in China nowadays, we have, basically, no projects in coastal areas; our operations have moved towards the western part of the country and the poorer provinces.

IFRAsia: Is there a sense that countries like China are competing with what the ADB does through their own bilateral arrangements?

Kuroda: I don’t think so. If you look at Latin America or the Middle East or Africa, there are quite a few middle­income developing countries, which are borrowing from agencies, such as the World Bank, but, at the same time, are providing bilateral assistance. China, as well as Thailand and Malaysia, have contributed to the Asia Development Fund – a concessional assistance fund replenished every four years. We welcome those relatively high­income or middle­income countries that provide direct or indirect assistance to less­developed, poorer countries.

IFRAsia: Regional integration has always been one of your key missions. How much progress has been made?

Kuroda:Asian economic integration has four pillars: infrastructure, finance, trade, and the provision of public goods. Infrastructure co­operation has made significant progress in the last 12 months or so, especially in the GMS [Greater Mekong Sub­region], but also in the Carec [Central Asian Regional Economic Co­operation] region. Basically, trade co­operation is limited to East Asia only. There is an argument for a free­trade agreement in central Asia, but there has not been such significant progress.

Financial co­operation, again, is limited to East Asia. The Asean+3 countries have made significant improvements to the Chiang Mai initiative. It is not just a network of individual arrangements any more, it is a single, multilateral agreement. Also, financial contributions to the CGIF [Credit Guarantee Insurance Facility] have already been made by Asean+3 and the ADB to guarantee corporate bond issues, and I hope that can be started within the next couple of months. There has not been much change to regional public goods provision, although, when SARS or avian flu or various communicable diseases erupted, the ADB provided assistance with the World Health Organisation. So, at any time, we are able to provide that kind of assistance.

There have been some significant changes and progress in the last 12 months, but we have not yet reached very comprehensive integration.

IFRAsia: Europe has had its own problems with the sovereign debt crisis. Is that still the way Asia should be going?

Kuroda: I think so. Several years ago, one famous international economist argued that, early in the 22nd Century, there would be far fewer currencies and central banks in the world. At the moment, there are 170 or so, but, certainly, with the increasingly rapid, large­scale flow of capital, 170 currencies will not make sense in 100 years. In Asia, there are more than 60 currencies, so that situation should certainly change, but it is a long, long process. At this moment, there is no blueprint, unlike in Europe 40 years ago, but already economists are starting to discuss this issue, and I think that’s good.

However, I have to stress there must be a common market before there is a common currency – and there is no common market in the region. Asean is aiming to create an Asean economic community by 2015, but there is no discussion to create a common market at the Asean+3 or Asean+6 levels. That means the creation of a common currency cannot be made within a couple of decades. In Europe, it took more than three decades since the common currency was first discussed. A common currency in Asia is several decades away.

IFR Asia: Are you looking forward to the Hanoi meetings?

Kuroda: Oh yes. Vietnam has become a middle­income country and its economy is developing quite fast, but, at the same time, it faces many challenges. At the moment, inflation is its biggest challenge. Also, it has to make its economic development more inclusive and more environmentally sustainable, and become a member of the Asean community.

Many finance ministers from around the region will participate in the meeting and I’m sure they will discuss the short­and long­term economic outlook and how to control inflation either through domestic fiscal and monetary policy and/or currency appreciation, which could mitigate the impact of high commodity prices. So, a whole range of macroeconomic development issues will be discussed. There are also a lot of long­term issues, such as energy security, food security, water security, climate change and inclusive growth. Naturally, governments from around the region will discuss these and it is a very good time to do so.