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"Prospects and Challenges for the Asian Economy and the Role of Private Sector"

Speech by
Tadao Chino
President
Asian Development Bank

At the Joint Meeting with the South-East Asian Chamber of Commerce, The Swiss-Chinese Chamber of Commerce, The Swiss-Korean Chamber of Commerce, and Economiesuisse
Zurich, Switzerland
13 February 2002

I.  Introduction

It is my honor to be with all of you, prominent business executives in this country. I would like to express my sincere appreciation to the organizer for inviting me to this very important gathering.

First, I would like to briefly touch upon the profile of the Asian Development Bank (ADB) and some highlights of our activities.

ADB was established in 1966, and today the membership totals 59 countries, 43 of which are in Asia and the Pacific, 14 are in Europe, and two are in North America. ADB's headquarters is in Manila, Philippines, and we have 22 overseas offices, including one in Europe.

About 80 percent of ADB's lending is from its ordinary capital resources (OCR), which comprises paid-in capital, reserves, funds raised through borrowings, and accumulated retained income. About 20 percent of ADB lending is from its Special Funds resources, including the Asian Development Fund (ADF), which is a special window for loans on concessional terms to our poorer developing member countries (DMCs). ADB's technical assistance (TA) activities help to maximize ADB's development impact, and many TA projects are funded as grants, which rely on contributions from our member countries, including Switzerland. I would like to express special thanks to the Government and people of Switzerland who have been supporting ADB since 1967 through capital subscriptions, contributions to ADF, and other special funds.

In 2001, ADB approved $5.4 billion, in 76 loans and three equity investments. ADB also provided $140 million grants to finance about 250 TAs. Highlights of ADB's assistance in 2001 include: emergency assistance of $500 million for earthquake-struck Gujarat, India; and assistance for the countries affected by the aftermath of the September 11 events, including Pakistan and the Central Asian Republics. ADB has also been playing an important role in the efforts to assist Afghanistan. ADB co-chaired the Conference on Preparing for Afghanistan's Reconstruction held in Islamabad in November 2001. ADB prepared the Preliminary Needs Assessment for Afghanistan's recovery and reconstruction, in cooperation with the World Bank and the UNDP. The Needs Assessment was presented at the recent International Conference on Reconstruction Assistance to Afghanistan in Tokyo. ADB has already opened a liaison office in Kabul. ADB has sent a mission to Afghanistan that has been discussing with the Afghan Interim Authority and many stakeholders in Afghanistan.

It has been three years since I came to ADB. Let me briefly tell you what ADB has done since I came to ADB. The past three years have been very challenging, both for the Asia and the Pacific as well as for me and the ADB. When I took office in January 1999, the aftermath of the Asian financial crisis was still felt. The most pressing challenge facing ADB at that time was how to help bring the Asian economies back on a firm track toward recovery and how to assist the poor and vulnerable, who suffered the most in the financial crisis. With this challenge in mind, (1) ADB declared poverty reduction as its overarching objective, and the Board of Directors unanimously approved the Poverty Reduction Strategy in November 1999. Based on this basic strategy, (2) I initiated negotiations with donor countries to replenish the Asian Development Fund, our window for concessional lending for poorer Asian countries, because the Fund had almost been exhausted. In 2000, thanks to our member countries including those in Europe, the ADF replenishment was concluded very successfully. (3) In 2001, we achieved another milestone: ADB adopted the Long-Term Strategic Framework 2001-2015, which will guide ADB's strategic directions and operations over the next 15 years to help achieve the International Development Goals by 2015. (4) After a year of consultations and preparations, ADB launched in January 2002 a major reorganization to strengthen the country focus of our operations. These are only a few of the long list which ADB has accomplished recently in order to reduce poverty and improve the quality of life of people in Asia and the Pacific. I would like to note that ADB has received constant support and cooperation from our member countries during these challenging times, and Switzerland's contribution has been highly appreciated.

II.  Current Situation and Outlook for the Asian Economy

Suffered seriously by the Asian financial crisis which started in 1997, developing Asia as a whole experienced in 1998 the postwar lowest growth of 0.2 %. However, in 1999, it was able to realize very stable and firm growth by registering a growth rate of 6.4%. Robust growth of 7% was also achieved in 2000. The background of this V-shaped recovery is as follows:

First, structural reforms in the financial and corporate sectors introduced after the 1997 Asian financial crisis helped raise confidence toward the Asian economies. Second, many Asian economies became more resilient against external shocks owing to the increased foreign exchange reserves, the reduced external debt, in particular, the short-term debt, and the shift to more flexible exchange rate regimes. Third, there was growing demand for information technology (IT) related products, especially in the United States. And exports from Asia started rapidly increasing in the latter part of 1998.

However from around the spring of the year 2000, as a result of excess investment in the US IT industry, stock prices, particularly the NASDAQ index, began to decline. This also started to affect Asian stock markets. By the latter half of 2000, the US economy already began to show slower growth due to the sluggish IT sector, among other factors.

During 2001, the near-term growth prospects for developing Asia were revised downward because of the deeper and more synchronized global slowdown, which has been further aggravated after the September 11 terrorist attacks.

Real economic growth among ADB's developing member countries (DMCs) is now estimated to have fallen from 7.0 percent in 2000 to 3.4 percent in 2001. However, the economic performance across developing Asia in 2001 was uneven. The newly industrialized economies such as Hong Kong, China and Singapore experienced the sharpest slowdown, followed by Southeast Asia. India and the People's Republic of China (PRC), however, continued to post relatively robust growth. We expect that developing Asia as a whole, which fell to 3.4 percent in 2001, will make a modest rebound to 4.5 percent in 2002 to with a stronger performance in 2003.

Among the four NIEs, Hong Kong, China; Singapore; and Taipei,China have experienced contractions in real GDP, ranging between -3.0 percent and -0.4 percent in 2001. South Korea, on the other hand, has maintained a positive GDP growth rate of 2.0 percent in 2001. South Korea is faring better than other NIEs because, as a larger economy, it has a larger domestic market and a more diversified export sector, whereas the other NIEs are somewhat more dependent on the hard-hit IT sector or trade-related services. In 2002, as the global economy is expected to begin recovering and the electronics market improve, all four economies are projected to show positive GDP growth rates ranging from 1.0 percent to 3.6 percent.

Recent economic performance and near-term outlooks vary from one country to another among ASEAN countries. Malaysia has been expected to experience a significant slowdown, with a 0.8 percent real GDP growth rate in 2001 because of a drop in exports of electronic products and the knock-on effect on private consumption and gross fixed investment. Depending on the extent of the US economic recovery, particularly the IT sector; the effect of the ongoing fiscal stimulus packages; and the extent of continuing domestic inventory adjustment process, GDP growth in Malaysia is expected to go up to 3.1 percent in 2002. The key challenge in achieving sustainable economic growth is to improve technical skills and infrastructure in the IT sector to help the economy move up to more sophisticated product lines. Thailand has also experienced a slow GDP growth of 1.5 percent in 2001, as the impact of the global economic slowdown has been more serious than expected, causing considerably weaker export growth, and domestic demand remains sluggish. In 2002, GDP growth is likely to pick up to around 2.5 percent, partly owing to the ongoing fiscal stimulus measures for Fiscal Year 2002. Thailand's growth prospects largely depend on progress in financial sector reforms and corporate debt restructuring, as well as the recovery of the global economy.

In the case of the Philippines, the negative effect of the global economic slowdown, although more pronounced than expected, has been largely offset by firm domestic demand. GDP growth has been expected to remain modest but steady at 2.7 percent for 2001, and 3.0 percent for 2002. The real challenge for the country is how to manage a large public debt burden, relatively high inflation, and exchange rate volatility.

The global economic slowdown does not seem to have affected Indonesia as seriously as other Asian economies, and GDP growth in 2001 has been projected at 3.2 percent owing to household and public sector spending, as well as a modest recovery in private investment. GDP is expected to grow by 3.9 percent this year; however, real challenges facing Indonesia are political uncertainties and low investor confidence which have weakened the rupiah over the past year, and hampered a recovery in foreign investment flows. Domestic economic weakness has limited the extent to which the authorities can use fiscal and monetary policy to boost domestic demand in the wake of the current slowdown in export growth. We all hope that the installation of the new government in July 2001 will allow the Government to focus on these economic issues, and restore investor confidence.

In the case of the People's Republic of China (PRC), although the global economic slowdown led to a steep decline in demand for its exports in 2001, this has been largely offset by a strong recovery in domestic investment and consumption. PRC's economy is likely to be less affected by external shocks due to its relatively low dependence on exports and its strong domestic demand. Its GDP growth remained high at 7.3 per cent in 2001, and is projected to be at 7.0 per cent in 2002. The key challenge facing PRC is the need to create an environment that is more conducive to business and investment. This includes, among others, improvement of the legal and regulatory framework, transparency and disclosure in both public and private sectors, and strengthening of auditing and accounting.

India, another large economy in the region, has also been less affected by the global economic slowdown than most DMCs, and has maintained relatively robust growth thanks to strong domestic demand. GDP has been estimated to have grown by about 5 per cent in 2001 and is projected to grow by around 6 per cent in 2002 as industrial and service sector growth regain momentum. Sustaining growth in India's private sector requires strengthening of the public finances. There is a need to reduce the fiscal deficits and, at the same time, the quality of public investments needs to be improved. The chronic fiscal deficits push up the real interest rates and crowd out private sector investment. In addition, timely provision of quality infrastructure such as highways and public utilities is essential for promotion of private sector activities. On the revenue side, the Government has also room for further improvement of the tax system and its administration. Other important challenges facing India are reforms in the two key areas, agriculture and the power sector.

III.  Responses to Challenges of the 21st Century

In addition to the difficulties created by the current global economic situation, there are a number of important challenges that we face in the 21st century. Let me touch upon some of these challenges.

Poverty Reduction

The first challenge is poverty reduction - providing opportunities for a better life for the poor. This challenge is particularly acute in Asia that is home to two-thirds of the world's poor. Every person has the right to live with dignity and hope for a better life in the future. Poverty reduction is important not only from a humanitarian viewpoint but also from a human resource development point of view; reducing poverty means empowerment of people; it contributes to strengthening the capacity of members of society as valuable resources. Better-developed human resources mean tomorrow's social and economic development.

Empirical evidence clearly shows that poverty has been reduced the most and at a more rapid pace during periods of faster economic growth. The private sector, through investment and job creation, can play a vital role in meeting the challenge of poverty reduction.

Globalization

The second major challenge is responding to the ongoing globalization. Globalization opens up opportunities for developing countries, facilitating wider and faster access to resources, capital, technologies, as well as know-how and markets. On the other hand, globalization also comes with associated risks. Globalization may bring in financial volatility, and even social and economic disruptions. Asian countries should not, however, turn their backs to globalization. Instead, they should try to prepare themselves to ease the integration into the global market. For this purpose, both public and private sectors would need to adapt their procedures and practices to meet international standards in accountability, transparency, and disclosure. Private sector companies will have to be more alert to quickly changing global situations and must capture newly emerging business opportunities. Private sector companies will also have to strengthen their international competitiveness while trying to find ways to minimize risks.

ADB has been assisting our DMCs in maximizing the benefit of globalization while minimizing the associated risks. ADB's assistance includes strengthening the financial sector; developing capital markets; improving banking supervision; promoting regional cooperation; and providing adequate social protection, education and training.

Regional Cooperation

The third challenge is promotion of regional cooperation. Regional cooperation beyond national boundaries contributes to realizing economies of scale, enhancing complementarity among neighboring countries, and ensuring regional peace and stability. ADB has been actively supporting various regional and subregional cooperation initiatives in Asia and the Pacific.

As witnessed in the Asian financial crisis, volatility has negative impacts on domestic financial systems and corporate sector. This can have negative impacts when domestic policies, frameworks and organizations are weak. To avoid such impacts, each country must carry out appropriate macro-economic policy management, strengthen regulations and supervision, and continue structural reform in the corporate sector. As far as the Asia and Pacific region is concerned, we have witnessed increasing interdependence in terms of trade, investment, and finance between Asian countries. There is a need and scope for greater regional cooperation and integration to meet the challenges of globalization and maximize the benefits of recent progress in market-oriented reforms in the region.

ADB has been actively supporting various regional and subregional cooperation initiatives in Asia and the Pacific such as: the Greater Mekong Subregion (GMS) program for Cambodia, Laos, Myanmar, Thailand, Vietnam, and Yunnan Province of PRC; the Brunei-Indonesia-Malaysia-Philippines East ASEAN Growth Area (BIMP-EAGA); the Indonesia-Malaysia-Thailand Growth Triangle (IMT-GT); the South Asia Subregional Economic Cooperation (SASEC) Program among Bangladesh, Bhutan, India and Nepal; the Central Asian Regional Economic Cooperation Program among Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, Uzbekistan and PRC; and subregional cooperation initiatives in the Pacific.

The GMS Program was initiated in 1992, and has successfully institutionalized the process of subregional cooperation and established a framework of cooperation in eight priority sectors. These priority sectors include transport, energy, telecommunications, trade, investment, environment, human resource development and tourism. Up to now, ADB has committed more than $800 million to the GMS Program in loans and technical assistance grants. In the transport sector, for example, ADB is financing the Phnom Penh-Ho Chi Minh City Road Project and the East-West Corridor Project linking Lao PDR and Viet Nam. Subregional cooperation in telecommunications has been in close partnership with the private sector, and feasibility studies have been completed for telecommunication links among the six GMS countries. In the energy sector, the Theun Hinboun Hydropower Project was the first public-private joint venture in Lao PDR, which also provides electricity to neighboring Thailand.

As part of the SASEC Program in South Asia, ADB has launched a number of initiatives, including a private sector forum for regional cooperation in the Eastern South Asia Subregion. Examples of ADB-financed infrastructure projects which have substantial subregional benefits include: the West Bengal Corridor Development Project, the Fourth Road Improvement Project for the east-west highway in Nepal, the Northwest Road Improvement Project in Bangladesh, and several other regional cooperation activities. ADB is also investing in Lafarge Surma Cement, the first subregional private sector project, which will transport limestone from Meghalaya, India, to a cement plant in Bangladesh through a cross-border conveyor system.

In Central Asia, ADB has been providing technical assistance since 1997 to encourage regional economic cooperation. In view of their landlocked location far from the markets of industrialized countries, strengthening regional economic cooperation is especially important for realizing the development aspirations of these Central Asian countries. Their economic growth depends largely on developing new trade relations within the region, and on establishing new trading partners and transport links to markets in industrialized countries. Our early activities under the Central Asian Regional Economic Cooperation Program concentrated on identifying infrastructure constraints, as well as policy bottlenecks which constitute impediments to cross-border trade and traffic especially in the three priority sectors of energy, trade and transportation. Based on this assessment, ADB has finalized its Central Asian Assistance Plan for 2001 to 2003 which emphasizes the needs, first, to encourage poverty-reducing economic growth, second, to address governance issues, and, third, to support greater involvement of the private sector as part of all of its regional cooperation activities in Central Asia. ADB is also trying to adopt a subregional cooperation approach such as the Central Asian Regional Economic Cooperation Program towards reconstruction priorities in Afghanistan.

Fight against Terrorism

The fourth challenge is fighting terrorism. The events of September 11 hit the world very hard. Many precious lives, of different races and nationalities, have been lost, and the world economy has been seriously affected. The world is now united in fight against terrorism and we must strengthen it. At the same time, human wisdom should be able to tackle the root causes of terrorism. Although there may be many different causes, and poverty itself has no direct link with strife or terrorism, poverty, together with inequality, exclusion, lack of access to opportunities for a better life, and loss of hope, can be a breeding soil for severe strife and terrorism. Fighting poverty in Asia, in cooperation with the Governments and the private sector in the region, ADB will continue its best efforts to make Asia a place where all people can live with dignity and hope for a better tomorrow.

IV.  Collaboration between ADB and the Private Sector in Asia

I would now like to discuss how we at ADB are seeking to work more closely with the private sector to address these challenges.

One of the most important and effective channels for ADB's collaboration with the private sector is through commercial cofinancing. Between 1970 and 2001, ADB mobilized a cumulative total of $36 billion cofinancing for 580 ADB-funded projects, of which about $9.2 billion, or 25 percent, was provided through commercial cofinancing from the private sector. European companies account for 14 percent of the total commercial cofinancing,

Another important area where the private sector has been playing an important role is ADB's overarching objective of reducing poverty, which is the basis of our Poverty Reduction Strategy. One of the main mechanisms we have for achieving this goal is to promote pro-poor, sustainable economic growth by facilitating private sector development. With this underlying goal in mind, ADB adopted the Private Sector Development Strategy in early 2000 which is designed to promote development of the private sector by emphasizing three, mutually-reinforcing and complementary strategIThrusts:

First, we support governments' efforts to create enabling conditions for the private sector. Key areas include regulatory, legal and judicial reforms, privatization, capital market development, competition policy, and labor market policies. For example in China, we provided technical assistance for water tariff reforms and for a competitive bidding process. This led to the development and financing of the Chengdu Water Project, the first BOT water supply project in the country and a model project, expected to be replicated in other countries in the region. This project included investments from Europe.

Second, ADB plays a direct role in "crowding in" the private sector by generating business opportunities through our public sector activities. In Bangladesh, for example, we provided assistance for the unbundling of the power sector, which created investment opportunities for the private sector. As a result, a number of independent, private power producers have committed to invest in power generation to ease the country's severe power shortages.

Third, ADB's private sector window is designed to catalyze private investments. We support direct private sector investments in infrastructure, financial institutions, and investment funds. European companies have invested in many of ADB-supported private sector projects. Recent examples include: the Thai Recovery Fund for a total project cost of $100 million, Manila North Expressway in the Philippines for a total project of $378 million, Grameen Phone Project in Bangladesh for a total project cost of $124 million, and Lyonnais Vietnam Water for a total project cost of $138 million.

V.  Conclusion

Asia accounts for more than 50% of the world population. In terms of its economic strength, Asia has been developing over the decades. In 1960, Asia including Japan accounted for only 10% of the global GNP. However, as a result of the long-term economic growth in Asian countries, Asia's share increased substantially. Asia now accounts for one-fourth of the world GNP. Increase in the GNP share from 10% to one quarter is a remarkable development. This trend will continue because developing Asia as a whole is the most rapidly developing region of the world.

Average annual per capita income for the whole of mankind stands at $5,000 today. On average, per capita income for developing Asia is only $1,000. Most of the Asian countries have potential for further development. Developing Asia has been referred to as the fastest growing region of the world for quite some time except in 1998, and will remain so for many years to come. Although Asia accounts for more than 50% of the world population, currently it only accounts for one-fourth of the total GNP in the world. The 21st century or next hundred years could witness Asia's GDP grow from its current one-fourth of world GDP, gradually approaching to one half of it. At the same time, Asia will continue to be attractive as the fastest growing market.

The Asian economy, as evidenced by the Asian financial crisis, recent global economic slowdowns and the September 11 incidents, will continue to face difficult situations in the future. And yet, with its abundant potential for growth, with lessons learned from Asian financial crisis, and with on-going economic reforms, as well as with support of all shareholders and all stakeholders, these difficulties will be overcome. ADB is grateful for Switzerland's support to ADB and to Asian countries, and wishes to cooperate more closely with you in the future.

Thank you.