Last year it was the eurozone, this year it was Japan. The country's influence loomed over this year’s Asian Development Bank (ADB) annual meeting, both in terms of its economic impact on the region and its influence on the ADB itself. And while the woes of the eurozone were not far from people’s thoughts, Europe did not dominate discussions as it had done the previous year, when delegates were worried about the impact the continent's troubled economies would have on their Asian counterparts.
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This year’s meeting struck a more positive note, as Asia’s growth story seems to be intact. “The mood last year was a bit more tentative,” said Rajat Nag, the ADB’s managing director-general. Although the crisis in Europe is far from over, he added that “it was not the catastrophe that we had feared".
Change at the top
Perhaps the most notable difference at this year’s meeting came in the form of the ADB’s new president, Takehiko Nakao, who joined the 4000 delegates in Delhi after being in his new job for less than a week.
Mr Nakao was nominated for the job by Japan’s finance ministry in March this year, in line with a tradition where Japan’s nominee becomes the ADB president. The previous eight presidents of the ADB have all been Japanese, prompting questions about Japan’s stranglehold on the top job. In theory, other member countries could have nominated their own candidates, but none did. But with the swift resignation of Haruhiko Kuroda from the ADB president, once he was appointed as the governor of the Bank of Japan, there was little time for other candidates to prepare a bid.
When asked about Japan’s monopoly on the position of ADB president, Mr Nakao acknowledged the post has always been held by an appointee from Japan’s finance ministry. “But this time we made it clear – [Japan's finance minister Taro Aso] said the selection should be open and merit-based. We do not have any problem if there are other candidates,” said Mr Nakao. Formerly Japan’s vice-minister of finance for international affairs, Mr Nakao is well known among ADB governors. He contacted many governments during the selection process to win support for his bid for the presidency and seemed keen to demonstrate that the appointment was fair. “I hope that I was elected based on my merits,” he said.
Such a comment is characteristic of Mr Nakao’s self-deprecating style. When The Banker asked him how the ADB would be different with him in charge, he replied: “I do not want to be too ambitious.” Mr Nakao went on to explain that the ADB’s policies have been established over a long time and if he were to change things right away, he would be acting on instinct alone. “It is not a safe thing to do,” he said. And after praising the achievements of Mr Kuroda, Mr Nakao compared himself to his predecessor. “Mr Kuroda is good at reading maths and philosophy books. I’m good at cooking – I know the prices of cabbages,” he said.
Tough times?
Such talk of cabbages was unexpected, but like former UK prime minister Margaret Thatcher – who, as legend has it, paid keen attention to the price of groceries – Mr Nakao presents himself as a leader in touch with the everyday economics of common people.
However, Mr Nakao has a lot more than the price of cabbage to worry about. The ADB’s finances are constrained and the bank looks set to struggle to lend at similar levels to previous years. In 2012, the ADB approved $9.4bn in loans, down by $1.3bn from 2011’s lending figure. In 2012, the bank’s net income also dropped to $142.5m from $609.5m in 2011. The bank’s annual report noted that part of this decrease is from a $336.6m writedown in the fair value of ADB’s derivatives and associated borrowings and a $121.9m decrease in operating income.
“The financial position of the ADB is sound at the moment but is constrained. The prevailing low-interest environment has resulted in low investment income and has limited the amount that can be ploughed back into equity for the bank,” said India’s finance minister, Palaniappan Chidambaram, in his speech at the opening of the ADB meeting. “I am afraid we may hit the wall in about three years,” he later added.
Mr Nakao noted that levelling the ADB’s lending is a challenge, “We are now working on this issue,” he said, but was unwilling to elaborate on the details of what was being discussed with the ADB’s member countries.
Period of transition
The ADB faces challenges with its resources not just in terms of its financial resources, but also its human resources, as a number of senior figures at the ADB are due to retire in the coming months. In his vision statement for the ADB, Mr Nakao said he would “unleash all the potential of its staff, the ADB’s most important asset, by making the best use of skilled and diverse talents”. Mr Nakao will have his work cut out in realising the potential of the ADB’s 3000-strong staff, as well as overcoming the perception that the organisation’s headquarters in Manila function as an extension of the Japanese finance ministry.
With Mr Nakao now in charge, the ADB is entering a period of transition and in many ways the relevance of the ADB in Asia depends on the course he decides to chart. The organisation’s aim of eradicating poverty feeds into many developmental issues, such as health, education and infrastructure. “It is very difficult to tell what is the single most important focus,” said Mr Nakao, who added that his priorities would be on poverty reduction and maintaining growth in Asia that is sustainable.
The theme of this year’s annual meeting was ‘development through empowerment’, another topic that encompasses many areas of the ADB’s work. When asked to clarify what this year’s theme actually means, Mr Nag explained that it focuses on the quality of economic growth. “It basically means if growth has to be sustainable, it has to be inclusive. It has to mean that people are educated enough, are skilled enough and are well enough to benefit from the growth,” he said, adding that a sense of empowerment comes when people are educated, skilled and healthy.
Old heads
Added to the ADB’s challenges is the economic environment in which it is operating. Mr Kuroda’s presence was felt in many ways at this year’s annual meeting. He was in attendance at the meeting, and aside from being the former ADB president, his influence on the region was felt at a much wider level because of his recent actions as governor of the Bank of Japan.
Under Mr Kuroda’s watch, the ADB nearly tripled its total operations from $7.4bn in 2005 to $21.6bn in 2012. Likewise, at the Bank of Japan, Mr Kuroda has expanded the central bank’s balance sheet, and has also embarked on an aggressive course of quantitative easing.
There are fears that such loose monetary policy will have ramifications for the rest of the region. When asked about concerns about asset bubbles building in Asia, Mr Nag said: “This is something to watch,” adding that inflationary pressures were on an uptick in developing Asia. He noted, however, that if the quantitative easing in Japan – and in other advanced economies – means that these countries start to grow again, then it is good for Asia.
Paul Sheard, chief global economist at Standard & Poor’s, applauded Mr Kuroda’s recent actions as Bank of Japan governor. He noted that as well as controlling price stability and managing inflation expectations, a central bank has to send a strong and clear message to obtain that objective. “It needs to make the message credible. Prior to Mr Kuroda, the message was that [the Bank of Japan] could not manage deflation,” said Mr Sheard. “The Bank of Japan was undermining its ability to end deflation,” he said, adding that Mr Kuroda’s announcement of quantitative easing, and that more would follow if the first round was not enough, was a “positive development for Japan and the world”.
Moving up the value chain
Japan’s influence in Asia also stretched to other discussions about the future course of Asia’s development. As an advanced economy that has successfully moved up the production value chain, Japan is held up as an example for developing countries that are moving to a consumption model of economic growth.
Mr Aso said: “Asia’s middle class is showing an appetite for consumption,” adding that such a trend is led by strong domestic demand. However, at the same time Asia is facing the issue of rising wages, and cheap labour can no longer be relied on as the region’s main competitive advantage. “To remain competitive, Asia must evolve. Asia must reform,” said Mr Aso.
Thiam Hee Ng, a senior economist in the ADB’s office of regional integration, noted that China is now moving up the value chain and is making products such as cars and electronics. This is having an impact on markets such as Vietnam and Bangladesh, which have now picked the manufacturing work lower down the chain that was traditionally done by China. With these changes, Mr Ng noted, some countries in Asia that have so far been left out of Asia's manufacturing surge may be able to move into the production chain. This is similar to the impact of Japan’s development – and the later development of tigers such as South Korea and Taiwan – which, as it moved up the value chain, had an impact on the manufacturing sector in other countries in the region.
Mr Ng notes that Asian producers now have an advantage because the consumers of their goods are closer to home. In the past, a factory may have been making trainers that were exported to the US, but these days the Asian companies are making products for Asian consumers.
Andrew Sheng, president of the Fung Global Institute, also noted that in the past Asians bought products that were designed for Western consumers that just happened to be sold in Asia. Now, however, things are changing and Asian markets “are creating not just copycat innovation – which every economy goes through – but also creating their own brands and own ideas,” he said.
This is a point on which Raghuram Rajan, India’s chief economic advisor, agreed. In the past, he noted, emerging markets were at a disadvantage. “Today the demand is in Shanghai. If you want to know what ladies want to wear [in China], the companies here [in Asia] have an advantage,” he said.
Further steps
Challenges remain, however, in order for Asia to move from being an exporter to catering to its domestic demand. “Emerging markets have never been able to manage demand well. It is difficult to change horses in mid-stream,” said Mr Rajan.
An ADB report – Beyond Factory Asia – notes other issues that the region faces, such as a shortage of skilled workers, which in turn leads to the importance of the right kind of education. How Asia can address these challenges was discussed at one of the sessions at the ADB, along with the need for innovation and use of technology for Asia to move beyond ‘factory Asia’ and to become a ‘knowledge economy’.
Advancements in technology – such as three-dimensional printers – are making such a transition easier. Mr Rajan noted how it is now technically possible to renovate, using 3-D printers, an entire slum out of environmentally friendly material. Such notions may seem far-fetched, but there are a number of technological innovations that are making it possible for Asia to address the needs of the region.
The needs of the region are numerous, as are the challenges of the ADB. And as the region waits to see the impact of Japan’s monetary policy on Asia, the ADB’s member countries will also be watching to see the direction in which Mr Nakao will be taking the ADB itself.
