No time for rich world to quibble over ADB capital

PUBLISHED : Tuesday, 17 February, 2009, 12:00am
UPDATED : Tuesday, 17 February, 2009, 12:00am

How times change. It is only a couple of a years since commentators were wondering whether the world's multilateral lending institutions - bodies like the International Monetary Fund and the regional development banks - would soon be irrelevant; done out of a job by rapid economic growth and the spread of private sector financing.

Today they are more in demand than ever, as the economic slump threatens to plunge millions back into poverty while the credit crunch means that private funding for development projects has all but dried up.

Now the multilaterals face the opposite difficulty. Although plenty of countries would like to borrow from them, they are suffering from a dire shortage of capital which is constraining their ability to lend.

In this part of the world, the Asian Development Bank finds itself bumping up against its US$55 billion capital ceiling. After lending a record US$10 billion in 2007 (see the first chart below) the Manila-headquartered bank expects to make a further US$12 billion in new loans in 2009 and to see demand for its financing rise sharply over coming years. In response it is asking shareholders to increase its capital base, ideally to US$165 billion.

For Asia, with its US$4 trillion in foreign exchange reserves, this really shouldn't be a problem. Asian governments wouldn't even need to stump up the cash. All contributors need to do is to earmark a portion of their foreign reserves as ADB capital, and the bank would then be able to borrow against that in international markets.

However, nothing in the world of multilateral politics is quite that simple. When the ADB was founded in 1966 it was the developed countries which contributed most of its capital and which took the biggest equity stakes.

The tides of institutional change turn slowly, and today the ADB's capital structure is still dominated by the developed economies. The US and Japan are the biggest shareholders, with 16 per cent each, followed by the European Union with 15 per cent. In contrast, developing Asia's giants, China and India, hold 6 per cent each, roughly the same as Australia (Hong Kong owns 0.5 per cent).

As a result, proposed changes need the backing of non-Asian developed economies if they are to be approved, and that can prove difficult.

In recent months, the ADB has drawn withering criticism from the US government over a host of issues, from its internal governance, through its funding plans, to the extent of its private sector operations and the large amounts it lends to the region's more advanced developing economies like China and Vietnam (see the second chart).

ADB managing director general Rajat Nag vigorously rejects the criticisms. Internal oversight is being strengthened, he says, while loans to the region's more advanced economies and participation in private sector projects are essential to the bank's central job of poverty reduction.

He points out that ADB loans to projects in Asia's richer developing economies are made at market rates, and bring with them a wealth of technical know-how and a valuable focus on environmental and social best practice.

Mr Nag also defends the ADB's private sector operations. Estimating that developing Asia needs some US$300 billion a year in infrastructure investment over the next 10 years, he says ADB involvement in projects acts as a powerful magnet for badly needed private capital, attracting investors reassured by the ADB's due diligence and best practice guidelines.

Mr Nag's arguments are unlikely entirely to dispel the criticisms that some of the ADB's activities are politically driven and inefficient.

Even so, given the severity of the international slump, developed world doubts should not be allowed to hinder the ADB's capital increase.

After all, if the developed economies are so dubious about the role of the ADB, they can always agree to a reduction in their shareholdings and to allow developing Asia to fund more of its own development bank, which the region can now easily afford to do.