An Asian Bank for Reconstruction and Development?
The financial crisis has dashed hopes of regional cooperation and left the region dependent on the IMF. Hong Kong, which has weathered the storm better than the rest of the region, could host an Asian multilateral development agency.
During the 1990s, there were rising hopes that the Asia-Pacific region would free itself from the economic leadership of the West. The tiger economies were booming, and their leaders increasingly assertive of the "Asian way" - a eclectic brand of capitalism that combined certain economic freedoms with a basic mercantilism and an authoritarian social outlook. The 21st century was to be the Pacific Century, if not the Asian century.
The financial collapse of many of the East Asian economies, and the deepening malaise of their strongest role model, Japan, dashed these dreams. Initially leaders like Malaysia’s Dr Mathahir, railed against the disaster as a western-inspired plot, and called for an "Asian monetary fund" to support the countries in difficulty. However, as the disaster mounted, it became clear that countries in the region, even if they had the resources, lacked the will to help one another, or even faith in the region’s ability to impose discipline upon itself. The Asian monetary fund idea was diluted in November’s meeting in Manila to a mere exchange of data and mutual oversight ("a kind of neighbourhood watch scheme" in the words of Lee Hsien Loong, the head of the Singapore Monetary Authority). Regional organisations ASEAN and APEC had little to contribute in the crisis. The Asian Development Bank, headquartered in Manila with an Institute in Tokyo, also had little to contribute. A proposal to use the Singapore dollar instead of the US dollar for intraregional trade also appeared to lack support. Indeed, there are signs that the use of the US dollar in the region has actually increased.
Regional leaders thus had no choice but to call in the International Monetary Fund (IMF), and accept its discipline. The IMF certainly responded swiftly, and on a large scale; some US$100 billion has been committed to the three countries that have accepted its tutelage: Thailand, Indonesia and Korea. Yet despite this vast injection of resources, there is hardly gratitude in the region. The people in the countries concerned are smarting under the onerous restrictions the IMF has placed upon them; in Indonesia, at time of writing there is uncertainty as to whether IMF support will even continue. And - notwithstanding US reluctance to provide funding - the IMF’s regime is felt to be a form of economic imperialism from the west.
Nor is the IMF’s intervention without its critics in the west. Some economists feel that the IMF has been too ambitious, embarking on major structural reform programmes where there was only a requirement, and a mandate, for liquidity support ¹. Others feel that it has been insufficiently transparent; others again question whether it has the intellectual resources to tackle three major country crises simultaneously, in addition to its ongoing commitments.
Yet, whether the IMF’s programmes are good or not, there is simply no alternative on offer. Asian leaders have been reduced to complaining that the West was doing too little to help them. The paucity of local resources to handle the crisis is perhaps most tellingly revealed by the way a single western economist, called in like a latter-day Rajah Brooke to deal with the pirates of the financial markets, almost succeeded in turning around the entire national monetary policy of Indonesia, a country of 200 million people. The crisis exposed not only the unbalanced development model of many countries in the region, but also a deeper lack of balance in intellectual development. Even Hong Kong, relatively unscathed economically by the crisis, had little intellectual contribution to make to its resolution.
Reducing the deficit: Europe’s example
To fill the intellectual deficit, the region needs to develop its intellectual resources through the establishment of a credible development institution. Europe’s experience provides a model. When at the end of the 1980s the iron curtain separating Eastern from Western Europe came down, and it became apparent how vast would be the task of reconstructing the former communist countries, an institution was set up specifically to facilitate economic transition: the European Bank for Reconstruction and Development (ERBD).
The ERBD is a multilateral development bank (MDB) owned by more than 50 countries, including not only European states, but also Japan, the US and other OECD nations. The bank’s mission is to foster the transition towards market-oriented economies and to promote private and entrepreneurial initiative in central and eastern European countries committed to and applying the principles of multiparty democracy, pluralism and market economics. The ERBD acts as a catalyst of change by helping its countries of operations to implement structural and sectoral economic reforms, including demonopolisation, decentralisation and privatisation.
The ERBD provides finance for projects in the transition countries of Europe, especially for countries that do not attract much private sector investment. However, more than money it provides technical cooperation, helping to prepare the project, and even supporting its implementation. The ERBD contributes technically to the development of financial markets in the countries it serves, for example by product innovation. It also provides broader training and educational programmes, especially for financial intermediaries, to facilitate the development of the soft infrastructure that is crucial to the success of development.
In its work the ERBD follows operating principles:
Why an MDB?
What does the ERBD contribute in Europe that the private sector cannot? In the aftermath of the Second World War, when the IMF and the World Bank were created, most development capital was provided by the public sector. Now, however, the position is reversed: private capital flows dwarf the contribution of the multilateral agencies. However, although very large, private capital flows are uneven. Some countries receive very little, or do not receive enough in areas like infrastructure that will make the best long term contribution to development. Therefore, recognising that the private sector will ultimately play the dominant role, MDBs can contribute by helping governments create conditions that will attract private sector investment. In this specific role, MDBs have advantages that the private sector itself does not have²
Essentially, in the early stages of development there is a need to provide public goods - services that are beneficial to society as a whole but whose value is difficult to capture commercially - and as a public institution an MDB is better positioned to provide such goods than the private sector.
The establishment of an institution like the ERBD must also be justified against its competitors from the public sector: the other MDBs. Why cannot the World Bank, for example, do the job?
Competition between MDBs could lead to duplication of resources and competition for marginal projects. Yet the objectives of the various MDBs are not identical - the main objective of the World Bank, for example, is the relief of poverty - and there are obvious advantages in an agency dedicated to a specific region. The world’s development needs are greater than the ability of even several MDBs to supply them. The ERBD in fact draws on support from the World Bank. Even if there is a degree of competition, this is not without advantages in sharpening the performance of the respective institutions.
An Asian MDB?
An Asian Bank for Reconstruction and Development (ARBD) could be established. Hong Kong, the leading exponent of market economics in the region, would be its headquarters, and Hong Kong could make a major contribution to its capital and resources. Yet it should be a multilateral agency, with shareholdings and support from as many countries in the region as possible.
The ARBD would model itself on the ERBD: it would aim to finance projects that further the transition of region to market economies. Some countries in the region parallel those of central and eastern Europe in being in transition from communism to capitalism. Others are capitalist, but distorted by monopolies and arrangements favouring particular social groups. The ARBD would not attempt to duplicate the work of the IMF in introducing macroeconomic adjustment programmes. Rather, it would work as a catalyst, sponsoring individual projects and facilitating the development of human capital and institutions through educational and research support.
To have a chance of working, the ABRD would have to draw heavily on expertise from the west. Senior staff, techniques and knowhow would have to come initially in large part from outside the region, in order to give the institution credibility and independence. However, one of its key tasks would be to facilitate the emergence of local expertise, including personnel on which the bank itself could draw in future years.
Hong Kong, having come through the Asian crisis relatively well, has a chance to capitalise on its position. At present, Hong Kong appears content to exploit the opportunities presented by China and the other emerging economies of the region in a more or less opportunistic way. However, as Hong Kong’s costs rise, and as the continuance of Asia’s recent high growth appears less certain, Hong Kong has to add more value. Intellectual content is an important factor in the transition process which has been lacking in the region until now. The establishment of an ABRD in Hong Kong could fill the content gap and strengthen Hong Kong’s role within a more prosperous region.
¹ Trying to do too much, Martin Feldstein, Financial Times, 5 March 1998
² Financing development in a world of private capital flows: the challenge for MBDs in working with the private sector, J.de Larosiere, ERBD, 1996
Reproduction of this paper is permitted with proper attribution to the Hong Kong Democratic Foundation