Asian growth: beyond economics
Asians should be proud and happy: a little belatedly, the era of Asia is about to happen. By 2020, it will account for almost 45 per cent of total global gross domestic product, 35 per cent of world trade, be a major magnet for private capital and a force to reckon with in world affairs. Even better news is that poverty will be a thing of the past and most poor countries such as Bangladesh will have joined the ranks of middle-income nations.
These are some of the findings of a report by a group of 'eminent persons', including Larry Summers, the former US Treasury secretary and former Harvard University president, Supachai Panitchpakdi, former Thai deputy prime minister who is head of the UN Conference on Trade and Development, and Nobuyuki Idea, the retired Sony chairman.
It will not be effortless, they hasten to add, and their client, the Asian Development Bank, has to transform itself. The old idea of the bank handing out loans for projects has to change. Infrastructure spending remains vital and Asia needs to spend more than ever before, as much as US$4.7 trillion over the next 10 years.
The buzzwords of the new era, say these eminent people, are: ensuring growth is more inclusive, that it is environmentally sustainable and that it is no longer nationally focused, but regionally and globally driven. The ADB's task revolves around six core activities: infrastructure; financial development; energy and environment; regional integration; technological development; and knowledge management.
Their findings will be discussed at the 40th annual meeting of the bank in Kyoto this weekend.
Why does the report - or the ADB - matter? Is this not just a mere talk shop that can be ignored? Yes, there is a tendency, especially in fast-moving places such as Hong Kong, to believe that what is happening far away and in the medium term does not matter.
But an international city such as Hong Kong should be prudent. After all, economic success in Japan, India and Bangladesh or even North Korea means prosperity and potential markets; conversely, political breakdown, religious tension, riots and refugees spell a messy world that may spill onto our doorstep. I shudder to think how the markets may react to a hostile North Korea or Iran ready to deliver nuclear weapons.
Having made my own tour of Asia and the ADB, I am concerned about the report and the bank. The report is strangely bloodless - I am tempted to say gutless. There is no real feeling or understanding of what has made Asian countries and entrepreneurs successful, still less an explanation of why Indonesia, for example, continues to burn its forests and destroy its fragile environment. No wonder: the eminent people met just four times - in Frankfurt (twice), New York and Manila - and you can bet the last meeting was in the bank's headquarters, a safe air-conditioned 'Fort Apache'.
The bank, which has done some good things, is weak in understanding political dynamics. It is a pity it relied so heavily on economists for this report.
Even to take the relatively easy area of Asia's financial success, it is a scandalous failure that the region has more than US$3 trillion in foreign exchange reserves (60 per cent of the world total), far more than are needed for security, yet has poorly developed financial markets. This means that not only is Asia saving too much, but its reserves are being invested in financial markets outside the region. The eminent people would have done well to add someone like Andrew Sheng, former Malaysian central banker and Hong Kong regulator, now an academic, who has hands-on experience of the markets.
He said Asian capital markets were weak because of vested interests, bureaucratic inertia, corruption and other messy issues. International bureaucrats have too often assumed that the institutional framework is a given. He cites an Asia-Pacific Economic Co-operation study of capital markets that found 30 regulatory and systemic impediments to cross- border investment in Asian capital markets, ranging from technical matters, discriminatory treatment of foreigners, to difficulties of market access, quality of infrastructure, and laws and regulation.
Mr Sheng says developing strong Asian financial markets 'is so much more interrelated and complex than providing macroeconomic policy advice; it involves game theory and a greater grasp of local conditions and values' than typical World Bank, International Monetary Fund or ADB officials can cope with.
That is the confined world of financial markets. Imagine if you try to tackle the real world of bringing economic change to a Delhi slum or an Afghan village where the Taleban is threatening to destroy girls' schools.
A few years ago, during a visit to southern India with some ADB experts, they said that when it came to water supplies, '24/7 is the only way'. When we got to Chennai, the biggest metropolitan city in the south, people were queuing with buckets, pots and pans at tankers, for their daily water rations. Some laughed that they were better off than their neighbours in Bangalore, India's hi-tech capital, where they got water only every other day. One reason for the shortage was political infighting over water from the rivers, another was lack of investment and pandering to politicians.
And then there is the question of the ADB and whether it needs reform. For its 40-year history the bank president has been a retired Japanese bureaucrat from the Ministry of Finance. It may be impolite to ask - when the bank has its most intelligent and international president in the Tokyo- and Oxford-educated Haruhiko Kuroda - but, should it always have a Japanese at the helm?
Japan is crucial to Asia and its future, but one reason why Asia's financial development has lagged behind Europe's is that Japan has been narrow and ungenerous compared with a Germany that was prepared to sacrifice its currency for the good of Europe.
Kevin Rafferty is editor and principal author of Words into Action: Delegate Publication for the 40th annual meeting of the ADB