As more than 5,000 delegates from all over the world attend the 50th Annual Meeting of the Asian Development Bank (ADB) Board of Governors, which ends on Sunday, in Yokohama, Japan, it is time for the bank to reorient its business operations.
Founded as a financial institution to alleviate poverty in the Asia-Pacific region, the bank has provided catalytic non-concessional and concessional loans, grants, and technical assistance to governments and the private sector in developing member countries.
During the past five decades, the ADB’s primary focus has evolved from promoting agricultural production to supporting large infrastructure projects and strengthening of regional connectivity programmes. As a result, many countries in Asia have been successful in establishing a virtuous cycle of fast economic growth, stability, and prosperity.
Average annual GDP growth in the Asia-Pacific region has hit close to 7% in recent decades, despite the negative effects of two major economic crises. Cumulative net foreign investment in the last 20 years was nine times as high as in the previous two decades. About 600 million people in the region are estimated to have been moved out of extreme poverty over the last four decades.
Fifty years into ADB’s operations, the Asia-Pacific region faces an entirely new set of developmental dilemmas. The benefits of infrastructure development and connectivity have not been fully realised, as the composition of investment flows into the region is highly uneven. Foreign direct investment remains focused on natural resource extraction, and most infrastructure investments in recent years have been geared towards telecommunication services, leaving huge unmet needs in energy, water, and transport infrastructure. The basic concept of development itself is challenged by climate change risks. And the middle-income trap is very real and hard to solve.
Clearly, there is a role for the ADB to address these issues, even though developing countries in the region can seek required capital from a wide range of private and public institutions, including the newly established Asian Infrastructure Investment Bank.
The strengths of ADB
Asian in its character, the bank has its own unique strengths. It administers in a style that respects consensus and harmony, with a strong bureaucracy and strict hierarchy that are reminiscent of Japanese values. Every president of the ADB to date has been Japanese, while the United States is the second-largest non-borrowing shareholder. Among all of its borrowing shareholders, China, India and Indonesia have more ownership of the bank than others, although they hold significantly less influence than either Japan or the US.
Japan has contributed roughly 50% of all the development funds for concessional lending in the past five years. Nonetheless, the ADB has solid equity capital that can sustain non-concessional lending operations for many years to come without shareholder contributions.
The multilateral nature of the bank positions it well in terms of legitimacy, ownership and development effectiveness. Bilateral development projects are often fragmented and respond to the domestic political agenda of the donor country, and not always the priorities of recipient countries. By grouping together 67 shareholding countries, the ADB’s governance structure gives its operations a less politicised and more technical character than bilateral donors, strengthening its legitimacy in the eyes of developing member countries.
With nearly 70% of shares owned by Asia–Pacific countries, and eight out of 12 elected resident directors and the president coming from the region, the ADB is the largest development institution dedicated solely to the region. As such it can foster a comprehensive development vision for the region and promote national activities to realise that vision, rather than simply financing atomised individual projects without a regional perspective.
The ADB’s staff are predominantly from the region, giving it a repository of specialised knowledge and an understanding of Asia. The bank has the scale and credibility to play an important convening role among governments and the private sector.
Challenges from new needs
The ADB has two lending windows — market-based non-concessional loans to middle-income countries, and concessional loans and grants to low-income countries at below market rates. Lending from the bank’s market-based non-concessional finance window has been declining, which poses a major challenge to the institution in the longer run. As more countries are about to move into the middle-income category, it is challenging for the ADB to remain useful to them due to the increasing sophistication of their public administrations and demands for niche services from the bank that cannot be offered by other private institutions. The ADB has not yet been able to adopt to this new reality, and as a result is not well-positioned to support fast-growing middle-income countries.
Another reason why some large low- and middle-income economies are less inclined to borrow from the ADB is its highly bureaucratic and inflexible operating style. Delays represent a significant opportunity cost, especially for projects with high economic and developmental impacts. It should come as no surprise that some borrowers are willing to pay higher interest rates in exchange for accessing resources in a matter of weeks, rather than the two years or more between the beginning of loan preparation and the first disbursement by the ADB. Slow procedures are a result of an Asian culture of risk aversion and an obsession with process, derived largely from mandates and controls.
A perceived weakness in sustainable development knowledge and policy advice also limits recipient countries’ demand for the ADB’s financial services. Both low- and middle-income country officials increasingly seek out international knowledge and best policy practices as much as, or more than, pure financing. This is a key attraction of the World Bank, which to some extent offsets its lengthy and bureaucratic loan procedures.
The ADB’s mid-term review of Strategy 2020 highlighted knowledge products as critical, and called for consciously and actively blending knowledge with financing. While this may be a laudable aim in light of its limitations, it does not spell out how this will happen in operational terms to provide unique added value to clients, which is essential for maintaining close relationships with senior officials in member countries.
For recipient countries, it is not the volume of knowledge products that is important, but their relevance. The ADB is not well known for its knowledge services, when compared with the World Bank, the International Monetary Fund, international think tanks, and private consulting firms.
The ADB’s financing of private-sector activity is growing rapidly and has a very high potential development impact. But it also carries risks. The bank expects to increase its lending to 50% of annual operations by 2020, although it is not clear how much is expected to be delivered in the form of non-sovereign lending. A sharp increase in private sector activity should be matched by the bank’s internal human resource capacity. If not, it could weaken the overall portfolio of public lending. Private-sector financing operations are inherently riskier than sovereign guaranteed loans, but this should not be a reason to shy away from them. The ADB’s job is to assume the risks in the interests of development effectiveness, while paying close attention to the de-risking tools needed.
Moving forward
Given the multiple challenges and the declining role of official development assistance in overall capital flows, and the emergence of new sources of finance, the ADB should constantly reorient its business operations. But clearly the ADB continues to have an important role in shaping quality growth and filling infrastructure gaps. The bank can overcome the obstacles by starting work immediately on the following five agendas.
The ADB should work towards more representative governance with a greater voice for Asian members. It should remain an Asian bank, enabling giving countries like China, India, and Indonesia to have more influence. The sheer geographic size of these countries and other middle-income countries make them crucial for regional development. Moreover, they will continue to host the vast majority of poor people. They have a unique opportunity to shape more joint-up approaches to quality growth.
Then, the bank should reform its lending-approval process such that it seeks the minimum level of information and review required to achieve the developmental goals of poverty reduction. A streamlined risk-based approval process will be essential to remain efficient. Its country offices should be empowered to make decisions and directly negotiate with officials.
The bank also needs to do more to provide intellectual leadership in the region. Strengthening the role of its knowledge departments with increased funding will enable them to become centres of excellence on Asia-specific knowledge on poverty reduction, sustainability, and infrastructure connectivity unique to the region and its needs. It should develop more concise knowledge products that cannot be easily delivered by regional think tanks, universities, and private consultants. The bank should also provide timely policy briefs on key issues along with research that address complex ongoing challenges.
Moreover, the ADB should take a more active role in initiating projects that combine the strengths of the private sector and developmental effectiveness with strong economic rationale. The bank’s staff — especially country directors and private sector specialists based in the country offices — should be actively involved in selecting the private-sector projects that suit the ADB’s long-term strategic goals and targets.
It should keep the operational focus on inclusive sustainable growth and infrastructure connectivity, by playing a strong role in facilitating development of policies, programmes, and co-financing that are essential to reducing the gaps, estimated to be US$8 trillion.
To achieve these reforms, the ADB needs high-quality professionals. However, it has been burdened by rigid staffing quotas and a hostile and opaque hiring process, which needs to be abandoned in favour of innovation, dynamism and adaptability.
The bank has a competitive advantage over other old and new international development institutions. But it has to work harder with a clearer vision, greater confidence, and more flexibility, to maintain its legitimacy at a time of shifting power balances in the Asia-Pacific region and globally.
Venkatachalam Anbumozhi is a Senior Energy Economist at the Economic Research Institute for Asean and East Asia (ERIA), based in Jakarta.