BackBanking on Asia’s future
Banking on Asia's future
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Ten years after the 1997 financial crisis, Asia is prospering again, and stands on the cusp of a historic transformation. By 2020, Asia—defined as East Asia and the Pacific, South Asia and Central Asia—will have largely conquered poverty, will have the largest share of global GDP in terms of purchasing power parity, and will remain a large exporter of capital. In this new Asia, traditional forms of development assistance—transferring capital from external donors—will become outmoded. New models will be needed to address the region’s new needs in the next phase of its development. These are the main conclusions of the six-member Eminent Persons Group set up by Asian Development Bank (ADB) president Haruhiko Kuroda, of which we were a part.
The region is again the world’s highest-growth region. Between 1990 and 2004, the incidence of poverty declined to 19% from 35%. Asia is also outperforming other regions in terms of the share of global trade and private financial inflows. Severely short of capital 40 years ago, Asia has racked up a capital surplus and accumulated massive foreign exchange reserves. China is the prime example, having moved from being a recipient of a large amount of concessional financing as recently as 1997 to becoming a large bilateral donor. China and India are producing large outflows of equity capital. Never before in the world’s economic history has such a populous and diverse region made such progress in such a short time.
Given the strong fundamentals, we expect major economies in Asia to continue to enjoy high growth. They will become more integrated regionally as well as globally. They will be led by the private sector and driven by markets, with private capital—domestic as well as foreign—the dominant source of investment. We visualize an Asia that is dramatically transformed by 2020. It will have conquered widespread poverty in most countries, with more than 90% of its people living in “middle-income" countries. In a turnaround from 1980, its average income per capita will be comparable with Latin America’s. Its share of global GDP will approach 45% and its share of world trade, 35%.
But tempering this positive picture is the fact that some of the fastest-growing countries will still have large numbers of poor people. Asia will continue to have many low-income or fragile economies with large development challenges. They will continue to require support from donors.
The rapid rise of the major Asian economies, particularly China and India, has also made them key players in major issues such as carbon emissions and energy security. In the interest both of their own people and of the larger global community, they need to confront these head-on, beginning immediately—and at incomes well below those with which the developed countries have started to address them.
In this transformed Asia, the main policy challenges will change fundamentally, from fighting extensive poverty to tackling issues arising from economic success. The central issue will be: How can they best raise productivity and create better paying jobs while minimizing problems posed by rapid growth? And the traditional model of development banking—transferring outside official capital—will become redundant. All development institutions in the region, multilateral as well as bilateral, must embrace this new reality, or face extinction.
The Eminent Persons Group advises that ADB must change radically. The new ADB should help tackle issues critical to further development of the newly? “middle-income" Asia by offering a more balanced blend of knowledge and financial assistance. To address the remaining pockets of poverty, its primary emphasis should be on supporting higher and more inclusive growth, rather than fighting absolute poverty through donor funds. As a financial intermediary, it should connect lenders and borrowers from within the region, instead of its past primary role as a conduit for transferring outside capital.
Its new mandate should be driven by three complementary strategic directions: moving from fighting extensive poverty to supporting faster and more inclusive growth, from economic growth to environmentally sustainable growth, and from a primarily national focus to a regional and ultimately global focus. Overall, ADB must transition from its poverty alleviation agenda to one of improving the countries’ productivity and creating jobs.
Finally, the character of the institution and the roles of its members must evolve with changes in the economic environment, and the relative responsibilities and contributions of the regional members should reflect the new economic realities. This would lead to more equitable burden sharing and underline more fully ADB’s Asian heritage.
The Wall Street Journal
Supachai Panitchpakdi is secretary general, Unctad. Larry Summers is a professor at Harvard University. Comment at theirview@livemint.com
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