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"Asia and China: Growing Together?"

Keynote Speech by
Haruhiko Kuroda
President
Asian Development Bank

At the Center for Global Development/Institute for International Economics

23 June 2005
Washington, DC

I.  Introduction

Thank you, Mr. MacDonald, for your very generous introduction. And thanks to all of you for the warm welcome.

It is a great pleasure to join you today. I am delighted, of course, to be in the company of two esteemed experts in international economics - Dr. Nicholas Lardy of the Institute for International Economics, and Dr. Peter Timmer of the Center for Global Development. Both Dr. Lardy and Dr. Timmer have a special focus in Asia, and I look forward to hearing their views on development in the region.

Let me also express my heartfelt appreciation to your two organizations for providing me with this opportunity to talk about Asia, and China. It is always a challenging subject, for Asia is a region of incredible diversity - in economies, cultures, attitudes, governments, growth capacities and myriad other factors - making any generalizations virtually impossible.

Asia is a region of great promise. Yet it is also a region of deep economic and social disparities, both within and across countries.

As I will explain shortly, China's dynamic growth is a powerful force for development of the region as a whole. The challenge for all Asian countries is to seize the opportunities offered in this new era of Asian dynamism to achieve sustained growth and improve living standards for all Asian people.

II.  ADB in Asia

Over the past several years, Asian countries have become increasingly interdependent, and their economies increasingly integrated. Asia's integration has been driven by opportunity and necessity.

In the 1980s and '90s, increased foreign direct investment and decentralization of multinational firms across Asia in the 1980s and '90s provided a unique opportunity to boost intra-regional trade. In East Asia, for example, intra-regional trade has grown from less than 35% of all trade in 1980 to 54% in 2003.¹ This is significantly higher than the NAFTA region, where intra-regional trade represents 46% of all trade.

The 1997 Asian financial crisis highlighted the region's interdependence as the crisis spread from one country to another - and thus, the necessity of integration to protect Asian economies against the risks of interdependence. One important response to the crisis was the Chiang Mai Initiative, which provides liquidity support through a network of bilateral swap agreements. This initiative was led by the Association of Southeast Asian Nations or ASEAN group of countries, along with China, Japan and Korea - collectively known as ASEAN+3. The ASEAN itself consists of Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Viet Nam.

ASEAN+3 has also put in place a number of mechanisms to support policy dialogue and promote open discussion on financial and economic issues, and strengthen the region's resilience.

One of the fundamental causes of the 1997 financial crisis was over-reliance on the banking sector as the source of financial investment, coupled with maturity and currency mismatches - the double mismatch problem.

Emerging economies tend to borrow short term bonds in foreign currencies for long-term investment in domestic currencies. Short-term liabilities may unexpectedly face difficulty of roll over, creating a maturity risk, and currencies may unexpectedly depreciate, creating a currency risk - hence, the double mismatch.

In order to address this issue, ASEAN+3 has implemented the Asian Bond Markets Initiative to mobilize the region's vast pool of savings for direct, efficient use in the region's long-term investment. This not only reduces the double mismatch problem, but also facilitates smooth intra-regional investment.

ADB has supported the ASEAN+3 initiatives in a variety of ways. One example is the issuing of local currency bonds in a growing number of countries.

ADB has also supported the efforts of many countries as they join together to lay the foundations for closer trading relationships, intra-regional investment and mutually beneficial economic growth.

For example, countries in the Greater Mekong Subregion - Cambodia, the People's Republic of China, Lao People's Democratic Republic, Myanmar, Thailand, and Viet Nam - have been tremendously successful in putting aside political differences to focus on improving the lives of their people. In less than a decade, the Subregion has emerged as a strong regional entity, and one of the fastest growing regions in the world.

It is also serving as a model for development in South Asia and Central Asia, where the prospects for the future are very promising. Already, the two subregions have joined together in an effort to connect landlocked Central Asia and seaports in South Asia via Afghanistan. Under this partnership, Afghanistan could become a regional hub, and a critical link between South Asian and Central Asian markets.

Asian economies are making steady progress. The freer flow of goods and investment, along with improved competitiveness through financial integration and trade liberalization, are moving the region towards a true economic community.

III.  China's Emergence as a Regional Economic Force

The People's Republic of China, as a powerful engine of regional growth, has also contributed to Asia's economic integration.

Over the past 25 years, China's economic performance has been spectacular. From 1979 to 2004, China's real GDP grew by an average 9.4% a year, and external trade by an average 16.7%². And we expect to see continued growth for China in the range of 8.5% to 8.9% over the next two to three years.

By the end of 2004, China's total GDP reached $1.7 trillion - 10 times what it was in 1979. China today is the world's seventh-largest economy at market exchange rates, and the fourth largest in terms of trade.³

Much has been said about China's export competitiveness and its crowding-out of exports from other countries', particularly developing countries.

However, over the past few years, China has shifted from being an export competitor in the region to being a primary destination for regional exports. From 2001-2003, spurred by strong processing exports and domestic demand, China's imports from Asia in US dollar terms have risen by an average annual rate of over 31%. Thus, China is contributing significantly to both trade expansion and creation, and is presenting new and unprecedented opportunities for exporters in both developed and developing countries.

With its sheer size and rapid move up the value-added chain, China's emergence as a manufacturing base has greatly modified the global competition landscape. In the short run, economies that are slow to adapt to the changing global environment could face a more direct competition. Some structural adjustments will be necessary. However, over the medium to long-term, the opportunities offered by China's economy for Asian exporters will be immense, and more than enough to compensate for these challenges.

One might wonder if China's rapid rate of growth can be sustained. And, indeed, there are challenges here as well. Sustaining rural income growth, stimulating small and medium-sized enterprises development and speeding up banking reforms while maintaining macroeconomic stability are, in my view, among the most important in the short term.

However, I am confident that these challenges can and will be met, and that China is well positioned to sustain robust growth over the next decade or so.

Similar observations can now be made about India. In terms of purchasing power parity, China is likely to be the world's largest and India the world's third-largest economy by 2025. Further progress with trade liberalization would allow India to benefit from the dynamism of East Asia, and vice versa.

The parallel emergence of these two countries offers enormous potential for regional development. With Southeast Asia acting as a bridge between two of the world's most populous and dynamic economies, the realization of a new era of sustained Asian growth, well beyond the expectations of prior generations, is within our reach.

IV.  The Daunting Poverty Challenge

What is critical now is to increase our efforts to include all Asian people and all Asian countries in the region's growth - to ensure nobody is left behind.

Given the success I have outlined, it will come as no surprise that the Asia and Pacific region has made significant progress in reducing absolute poverty. Between 1990 and 2002, the total number of poor dropped from about 920 million to around 690 million. The region as a whole is very likely to meet the Millennium Development Goal of halving income poverty by 2015.

Looking at the non-income Millennium Development Goals, huge challenges remain. 71% of all the world's people without access to improved sanitation live in Asia. Nearly 6 out of every 10 people who lack safe water live in Asia. Well over half of the world's undernourished, and of those living in slums, live in Asia. And 43 out of every 100 children who die before reaching age 5 are born in Asia.

Many sub-regions of Asia have a larger problem than Sub-Saharan Africa. South Asia, for instance, has more undernourished people, more people without access to proper sanitation, and more people living in slum conditions than Sub-Saharan Africa. East Asia and the Pacific have more people without access to safe water and sanitation and more people living in slums than Sub-Saharan Africa.

Moreover, HIV infections are likely to become a critical issue in South and South East Asia - a threat that has economic consequences, as well as high human costs. These two regions together are projected to have nearly as many infections as Sub-Saharan Africa by 2015.⁴

The message, I think, is clear: If the Millennium Development Goals are not achieved in Asia, they will not be achieved at all. Even on income poverty, while the region as a whole may reach the target, many countries may fail to do so. And those that do will still have deep pockets of poverty within their borders. By 2015, the region is still expected to account for about one-half of the world's poor.

Several measures need to be taken if, in the 10 years that remain, Asia is to achieve the Millennium Development Goals. To begin with, these Goals must be built into national strategies and programs for poverty reduction. Sufficient resources must be allocated for the purpose, and effective monitoring mechanisms must be established to track progress.

The growth momentum in the region has to be sustained. There is no alternative. In developing Asia, a 1% increase in household income is associated with a 2% decline in poverty.

Amongst other measures, investments in infrastructure must be expanded with public efforts supplemented by private sector participation. This is a critical challenge, with infrastructure investment needs estimated at $250 billion a year. Regional sharing of knowledge, experience, and good practices, and intra-regional flow of resources and expertise also can play an increasingly important role. Regional cooperation and integration can reduce income disparity between countries and within countries.

While Asia can do much on its own, this huge task requires the support and cooperation of the international community. As the region's partner in development, ADB is committed to increasing our efforts to assist our developing member countries in achieving their development goals. This includes, among other things, taking a larger role to help close Asia's massive infrastructure gap, and being more proactive in the area of regional integration.

We are committed to working with all partners - our developing member countries, other development institutions, the private sector, civil society and the international community - to build a thriving regional economy and, ultimately, an Asia and Pacific free of poverty.

V.   Concluding Remarks

Ladies and gentlemen, let me close by saying that China and Asia are growing together, and the benefits of growth are substantial - for Asia, and for the world. The challenge ahead is ensure those benefits are widely shared among the people in the region.

The Center for Global Development, the Institute for International Economics and the Asian Development Bank share a deep and abiding interest in the region's development. It is up to all of us to keep the spotlight not only on Asia's success, but on its struggle to achieve greater equity, more opportunity and a better quality of life for all.

Thank you.

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