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"Designing a Framework for Effective Governance"

Keynote Address by
Haruhiko Kuroda
President
Asian Development Bank

At the ADB/ADBI Conference on Asian Architecture and Global Governance

29 October 2009
ADB Headquarters, Mandaluyong City, Philippines

I.  Introduction

Distinguished guests and colleagues, ladies and gentlemen,

I am pleased that ADB and ADB Institute are co-hosting this important conference on Asia's developing regional architecture and global governance.

Today, I would like to speak on three issues. First, how can Asia play a constructive role in reshaping the global financial and institutional architecture? Second, how can existing regional institutions, however embryonic, act as building blocks for strengthening Asia's economic integration and its voice on the global stage? And third, how can the region's governments continue reform at the national level, where there is maximum leverage to ensure good governance?

II.  Asia's Role in Reshaping the Global Institutional Architecture

Last Sunday in Thailand, at the East Asia Summit, I commented on the region's representation at the G20, now the premier forum for global economic cooperation. Six of the East Asian Leaders present were at the Pittsburgh G20 Summit in late September. With about one-third of the total G20 participating countries, Asia's opportunity to take on its rightful role in reshaping the global economy has never been stronger. And with Asia as host to the G20 next year, there is no better time to articulate our views on the reform process.

This is critically important. Sixty years ago at Bretton Woods, Asia had no voice. Today, Asia's emerging economies are leading the world out of recession. It is in Asia's interest to use its influence at international forums like the G20 in these deliberations.

Basically, the issues fall into two categories: one is fixing global savings and investment imbalances; and the second is reforming the financial regulatory framework.

The crisis has clearly shown that global payments imbalances are unsustainable. The industrialized world, including the US, has too much external debt. Emerging economies, particularly those here in Asia, have too much savings. We can do our part by promoting policies that shift the sources of our growth more toward domestic and regional demand. This can boost consumption and investment in emerging Asia as industrialized countries begin to save more and restart the process of reducing deficits. This fits in nicely with the G20 commitment to launch a framework for a strong, sustainable and balanced global economic growth.

There is also the challenge of restructuring the global monetary system. There are several proposals on the table. The United Nations'-sponsored Stiglitz Commission has called for a new global reserve system. There are several options-and each has its merits. We all know that this is a long-term process, but one that should be examined now. I am glad to see it is one of the topics on today's conference agenda.

On the regulatory framework, G20 leaders have called for tightening financial oversight over imprudent market practices and filling the gaps in existing financial rules and regulations. They call for building high quality capital and mitigating pro-cyclicality, reforming compensation practices to support financial stability, and improving over-the-counter derivatives markets, among others.

The reformed global financial architecture will include enhanced global regulatory standards, stronger cross-border supervision and market transparency, and effective global mechanisms for crisis prevention and management. I should add that this includes enhanced capabilities of international financial institutions, such as the IMF, and regional development banks like ADB. Last April's general capital increase has given ADB the wherewithal to better fulfill its role.

III.  Regional Institutions-Building Blocks for Economic Integration

Even as Asia expands its constructive role globally, it needs to accelerate its regional agenda. The foundation of strong, well-governed institutions leads the way toward effective regional cooperation. One very positive example is the expansion and multilateralization of the ASEAN+3 reserve pool, or Chiang Mai Initiative. This could become the embryo of an important regional institution. In May, ASEAN+3 Finance Ministers agreed on the structure, voting rights, and contributions to the expanded $120 billion facility, to be implemented before the end of this year. Importantly, they also agreed to establish an independent regional surveillance mechanism. This will initially involve expanding current ADB and ASEAN Secretariat work that objectively monitors economic performance and assesses financial vulnerabilities. But what is most impressive is that the carefully negotiated institutional structure approved by the 13 ASEAN+3 members-could provide the basis for future rules-based regional institutions.

Other regional initiatives include the ASEAN+3 Asian Bond Markets Initiative, which is helping develop local currency and regional debt markets. A Credit Guarantee and Investment Mechanism should help bring investment grade corporate issuers and public-private partnerships to market. This will be an important financing tool as we tackle the huge demands in such areas as cross-border infrastructure development.

The Asian Infrastructure Financing Initiative is a co-financing tool that can increase cooperation across developing Asia by building financial arrangements that could develop into an institutional framework. To date, the initiative has attracted pledges of $4.5 billion.

It is also crucial that we move forward on regional policy coordination, especially on exchange rates. With regional currencies under increasing pressure to appreciate against the US dollar, a coordinated regional strategy on exchange rate policy could resolve the important issue of exchange rates among regional currencies. Aside from contributing to better macroeconomic management, such coordination would bolster intra-regional trade and lessen the fear of losing export competitiveness between neighbors. This supports the process of shifting sources of economic growth toward greater domestic and regional demand. Using the ASEAN+3 finance ministers process to address this issue will also fortify the forum that, as mentioned, has already tackled reserve pooling and bond market development.

These are the types of regional initiatives that could form the building blocks for the 21st century Asian, if not global, financial architecture.

IV.  Strong National Governance is Key

I believe that as we move toward better and more effective global governance-with Asia playing its expanded role-strong national governance is essential. It is the core component for the regional cooperation that will give us an effective voice in promoting global reform.

Institutions for national governance need to be sound and strong, hold public integrity, and have common threads linked by the underlying principles of international best practices.

We do not need to radically change the course of our ongoing reform. But we need to continue building. The region needs to advance on the reform-minded overhaul we began after the 1997/98 Asian financial crisis.

In general, Asia's banking systems are now more robust and less vulnerable to sudden external shocks. It is time to look toward a macro-prudential framework that can help avoid excessive systemic risk from creeping into financial systems. This is part of continuing regulatory reform best pursued nationally, where there is the greatest leverage for success.

Progress on corporate governance has been good, but can be accelerated as well. And we need to continue to improve the investment climate by removing obstacles, legal or otherwise, to doing business within and across emerging Asian economies.

V.  Conclusion

As we address the issues of global governance and the form Asia's institutional architecture should take, we need to think globally, coordinate regionally, and act nationally. This decentralized approach may be the most effective way for the present.

In closing, I look forward to your discussions on these important issues. But more importantly, I look forward to the recommendations you will come up with for increasing regional financial stability in the context of improved global governance and the institutional development of the region's economic and financial architecture. As our region continues to lead the global recovery, your views will certainly contribute to the process of articulating what is good for Asia-and what is good for the world.

Thank you.