Some 3,000 members of the international financial elite gathered in Madrid last month for the 41st annual meetings of the Asian Development Bank. One measure of the meetings’ importance is seen in a leaked list of attending financiers that ran to 48 pages — including such serious players as Citigroup, Barclays, Goldman Sachs, Franklin Templeton, Clearstream, Standard Chartered, Sumitomo, Nomura, Mitsubishi, Banco do Brasil, BNP Paribas, Deutsche Bank, the Bank of America, the Bank of China, and other assorted bond traders, private-equity mavens, finance ministers, and central bankers.The ADB, which was launched in 1966, is headquartered in Manila, has some 2,400 international civil servants who work there and in 26 regional field offices from Afghanistan to Vietnam. Major American newspapers pay scant attention to the ADB.
But for anyone interested in trade and investments in the world’s fastest-growing and most dynamic region, the ADB is worth paying attention to. First, there’s a lot of money, not to mention the government backed credit guarantees with their Triple-AAA ratings. Last year, the development bank — which has doled out more than $130 billion in development assistance in the past four decades — lent $10.1 billion, of which $1.75 billion was channeled to the private sector, the ADB’s emerging new priority. For example, on April 25, as the financial movers and shakers prepared to fly to Madrid, the ADB announced that it had executed a $450 million loan to Coastal Gujarat power Limited, which is a wholly owned owned subsidiary of India’s giant Tata Power Co. Ltd. The project “is expected to be the first in a series of large energy-efficient power plants to help ease power shortages” across India, ADB officials announced.
During the May 2-6 meetings in Madrid, the ADB’s 67 member countries expressed overwhelming support for enhancing the bank’s involvement in private-sector oriented development projects over the next twelve years. Traditionally, the majority of the ADB’s financing has been directed to public development projects aimed at helping governments build such infrastructure as roads, dams, and irrigation projects. But now, the so-called Strategy 2020 is aimed at boosting the ADB’s private-sector funding, which presently accounts for some one fourth of the total lending portfolio, to about half of total expenditures by the year 2020. Everyone in Madrid applauded the new direction.
Well, not everyone. The United States, the ADB’s second largest donor after Japan, flatly refused to support the new plan. Why would the world’s largest market economy be the only one of 67 countries to vote against moving the development bank in an increasingly market-oriented direction? Moreover, there are other controversies associated with Strategy 2020. To some observers, the ADB’s new strategy could pit Asia’s weaker economies like Cambodia and Bangladesh against more rapidly developing Asian tigers like Vietnam and Thailand that are more attractive to the private investors the ADB will be working with. The poor Cambodians and Bangladeshis want to remain on the dole, and fear they will be left further behind. Others ask why emerging economic powers like China and India, which are able to attract major capital inflows on their own, need the ADB’s “corporate welfare.”
Let’s sort out the controversies.
Controversy number one begins with the attitude of Uncle Sam. In Madrid, representatives of the U.S. Treasury Department stood out for their lonely opposition to the new Strategy 2020.
The informal consensus of opinion in Madrid last month fumed that with Washington, it always seems to be, “my way or the highway.” True, complaints about “arrogant” and “tone deaf” American international economic diplomacy are (alas) hardly new. Nor did they begin with the man who has in so many ways greatly intensified them in the last eight years, President George W. Bush. But to this observer, the intensity of anti-American sentiments seemed to have reached a new intensity in Madrid.
While most of the resentments were expressed sotto voce on the sidelines, Spain’s Rodrigo de Rato jumped at the opportunity to embarrass the United States in public when he spoke at a financial seminar on May 5. I gave the former IMF managing director his chance by needling him as to whether he agreed that despite the many complaints about American high-handedness, still, at least the unpopular George W. Bush deserved credit for trying harder to wrap up the World Trade Organization’s Doha Round than griping Asians and Europeans, who never seem to really lead. Taking the bait, De Rato hotly retorted that maybe the lame-duck Bush administration still wanted Doha to succeed, but so what? What about the protectionist U.S. farm bill? What about the protectionist U.S. Congress, which had just shot down the piddling U.S.-Columbia bilateral trade deal on April 10, thus demonstrating that America’s claims to international economic leadership simply cannot be taken seriously? “You should be aware that right now everybody is waiting for a new administration” in Washington, De Rato sneered.
Such emotions aside, it turned out that the U.S. wasn’t quite as isolated as it first appeared. The Americans’ explanation for their refusal to vote for Strategy 2020 cited practical concerns that the new strategy called for member governments to ask their taxpayers to pour in additional billions of dollars into the ADB’s coffers, without any hard numbers to justify major new budget expenditures. I asked Clay Lowery, the assistant U.S. Treasury secretary for international affairs, about this at a May 6 press conference. “This is a planning document,” Lowery said of Strategy 2020. “In this case, the [ADB’s] management did not have the allocation of resources: what is your budget? What is your plan for the out years?” At the end of the day, Lowery said, “we voted our conscience and voted against.”
The reservations that Lowery cited were shared, at least to some degree, by other ADB members. Switzerland and the United Kingdom abstained, basically expressing the same reservations that Lowery cited. And officials of some important countries that voted for Strategy 2020 expressed some reservations, even if in muted diplomatic tones. His country had approved the new direction, noted Germany’s Karin Kortmann, a member of the ADB’s board of governors, while carefully adding a warning that “implementing it needs to be made clearer.” And Nick Sherry, Australia’s head of delegation in Madrid, suggested that “it is timely for ADB to review the resources it requires to implement this strategy,” cautioning that the bank “needs to be careful” to ensure that it has the capabilities to insure a high quality of assistance to developing countries. “That is why, before considering a contribution to a general capital increase, Australia will need to be confident” that the ADB’s “existing capital is being used as effectively as possible,” Sherry emphasized.
Speaking of how to use capital most effectively, that’s the second controversy associated with Strategy 2020.
To some critics, the ADB’s new emphasis on financing private-sector projects suggests corporate welfare. Asia is awash in capital inflows, the argument reasons. China alone attracted more than $90 billion in foreign investments last year, a number that dwarfed the $1.3 billion lent by the ADB — and was tenfold the ADB’s total lending throughout the region. Who needs whom?
In March, 2007 a panel of “eminent persons” laid the foundations for Strategy 2020 in a report to ADB President Haruhiko Kuroda. (The panel was headed by Thai international civil servant Supachai Panitchpakdi, a former director-general of the World Trade Organization who now heads the United Nations Conference on Trade and Development. The brainy Kuroda, who has both a law degree and a doctorate in economics, is a former official with Japan’s finance ministry; by tradition, Japan has always picked the ADB’s head, much as the U.S. selects the president of the World Bank, which is headquartered in Washington, D.C.)
The Supachai-led panel’s report, at least to the critics, had numbers in it that undermined the new strategy. “By 2020 we envision a dramatically transformed Asia” that “will have conquered widespread absolute poverty” for more than 90% of Asians, the eminent persons declared. Asia’s share of global GDP, some 20% in 1980, will have more than doubled to 45% in the next dozen years. Twenty years ago, Asia’s share of global trade flows was about 16%; twelve years from now that share will rise to roughly 35%. And best of all, Supachai and his wise men forecast, Asia “will remain a magnet for private capital flows.”
To the critics, instead of preparing to declare victory over poverty, the ADB is now busy doing what all bureaucracies do when their original missions start to lose their rationale: reinventing itself, looking for another long half-life.
The ADB’s defenders basically respond by saying they don’t see corporate welfare, they see market failures in a region that still has many daunting problems associated with poverty. Some 600 million Asians still try to eke out livings on less than $1 a day, according to the Strategy 2020 document, which adds that “one of every two individuals in the region — or 1.7 billion people — remains poor, as measured against the $2-a-day benchmark.” In Madrid, Subba Rao, India’s finance secretary, said that there are more people in Asia who remain impoverished than in all of Africa. If the current crisis stemming from rising prices for essential commodities like rice is not alleviated, Rao declared, another 100 million Asians could be pushed back into deep poverty. With such daunting problems, ADB officials maintain, come market failures associated with the reluctance of private investors to take risks on their own.Private capital follows ADB financing and its credit guarantees, not the other way around, the officials insist.
Whether readers will attribute the ADB’s new direction to unnecessary “corporate welfare” or welcome increased financing aimed at correcting “market failures,” it is clear that the ADB will continue to play an important role in some of the most intriguing emerging markets in the world. But it is unlikely that many members of the American reading and viewing public will be aware of the important ADB-related issues that will continue to play out.
A leaked list of attendees reveals there were 355 journalists who attended the ADB’s annual meetings in Madrid. Reporters came from all over: including Sweden, South Korea, Singapore, Hong Kong, China, Germany, Japan, France, and of course Spain. A radio from Kyrgyzstan dispatched a reporter. Even little Nepal sent three.
Along with CNN correspondent Alan Goodman and Christine Cavolina of Institutional Investor, I was one of only three U.S.-based journalists who flew to Madrid.