"Crisis as Opportunity: Think Globally, Coordinate Regionally, Act Nationally"
Lecture by
Haruhiko Kuroda
President
Asian Development Bank
At the 2009 Global Public Policy Network Student Conference
13 November 2009
Lee Kuan Yew School of Public Policy, Singapore
I. Introduction
Distinguished guests, ladies and gentlemen,
It is an honor to be here for the 2009 Global Public Policy Network Student Conference. This is quite an audience, with students from the Lee Kuan Yew School of Public Policy, Columbia School of International and Public Affairs, London School of Economics, and Sciences Po Paris. I am delighted to be among so many of Asia's future business and political elite, and perhaps global leaders as well.
Today, I pose three questions. First, how has the global crisis become an opportunity for developing Asia? Second, how can the region restructure sources of economic growth to be more inclusive and contribute to the reform of the global economy? And third, how can Asia's response to climate change augment this process and help drive sustainable development in the future?
II. Crisis as Opportunity: A Wakeup Call for Developing Asia
The impact of the global financial and economic crisis on emerging Asia was part surprise and part wakeup call. The surprise was how well the region handled the external financial and economic shock. The wakeup call was that the crisis highlighted the need for Asia to assume greater responsibility and a greater role in the global theater to prevent future crises.
Asia's banks held very little of the toxic assets that sent the financial world reeling. And Asia had learned its lessons well from the 1997/98 Asian financial crisis. Its financial systems were well capitalized, budgets for the most part well-managed, and foreign reserves the highest in the world when the crisis struck.
Monetary and fiscal stimulus appears to have worked, with the region now showing signs of a V-shaped recovery. Developing Asia's GDP growth is expected to decrease from 6.1% last year to an estimated 3.9% in 2009, and is forecast to return to 6.4% next year.
The stimulus programs throughout the region are helping this along, giving domestic demand a boost, particularly in the region's most populous economies. But as our region returns to trend, exit strategies for fiscal stimulus must be carefully timed. If left too long, deficits will be unsustainable; if withdrawn too soon, the region's recovery could be derailed.
The global financial crisis exposed systemic weakness in the regulatory environment; and what many had already recognized as unsustainable global payments imbalances. In simplest terms, industrialized economies are borrowing too much, while emerging economies continue to build excessive savings.
Much has been said about reforming the global economic architecture. Sixty years ago at Bretton Woods, Asia had virtually no voice. Today, Asia's emerging economies are leading the world out of recession.
As I noted last month in Thailand, at the East Asia Summit, 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 influence the reshaping of the global economy has never been stronger. And with Korea hosting the G20 next year, there is no better time for Asian leaders to articulate their views on the reform process.
We at the Asian Development Bank agree with G20 leaders that financial oversight must be tightened over imprudent market practices. Loopholes in existing financial rules and regulations need to be filled. The financial system must rebuild a high quality capital base, mitigate pro-cyclicality, reform compensation practices, and improve over-the-counter derivatives markets, among others, to support global financial stability, which should be considered as a global public good.
The reformed global financial architecture will include enhanced global regulatory standards, stronger cross-border supervision, increased market transparency, and more effective global mechanisms for crisis prevention and management.
Aside from regulatory reform and correcting global imbalances, an important issue is the eventual restructuring of 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 and drawbacks. I said "eventual" because this is a long-term process. But the debate needs to begin now.
The crisis is also an opportunity for developing Asia because-like the aftermath of the Asian financial crisis-it illustrates the importance of accelerating regional cooperation and integration, dialogue, and institution-building. The foundation of strong, well-governed institutions leads the way toward effective regional cooperation. Emerging Asia is often called "institution-lite". But Asian countries have been following the road to cooperation largely based on consensus rather than on the rules-based structure in Europe, for example. Nonetheless, the region's forums for cooperation become stronger by the year. ASEAN, ASEAN+3, the East Asia Summit process, and yes, APEC as well. One current theme among leaders is: are more formal institutions needed for cooperation and integration?
One interesting example is the expansion and multilateralization of the ASEAN+3 reserve pool, or Chiang Mai Initiative. It is interesting because it could become the embryo of an important regional institution, complementary to the IMF. In May, ASEAN+3 Finance Ministers agreed on the structure, voting rights, and contributions to an expanded $120 billion facility, to be in place 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.
But none of these wide-ranging opportunities for our region can happen in the absence of solid national foundations. Good governance starts at home. Institutions for national governance need to be sound and strong, hold integrity with the public, and have common threads linked by the underlying principles of international best practices.
Asia does not need to radically change the course of ongoing reforms, but rather to sharpen them, fine-tune them, and move them to the next level. The agenda varies from country to country, economy to economy, depending on the stage of development. But all must continue to move forward to ensure financial stability, free trade, an attractive investment climate, and effective public goods like education, health, and old-age security.
The opportunity to move to a much higher level of development is there for those who will think globally, cooperate regionally, and act nationally.
III. Rebalancing the Sources of Economic Growth
To do this though, patterns of development must change. The crisis highlighted the fact that the industrialized world, including the US, has too much external debt. And emerging economies, particularly those here in Asia, have too much savings. Asia can do its part by promoting policies that shift the sources of economic growth more toward domestic and regional demand, rather than relying excessively on export-driven growth. This can boost consumption and investment in emerging Asia as industrialized countries begin to save more and restart the process of reducing deficits. And this fits in nicely with the G20 commitment to launch a framework for a strong, sustainable and balanced global economic growth.
Openness to foreign trade and capital flows provided the world unprecedented economic growth over the past 60 years. Developing Asia's economic success, including the robust growth that raised incomes and reduced poverty, likewise depended on its outward orientation. But the scope and structure of this openness must be broadened to support developing Asia's economic resilience and sustained development.
During the Asian crisis in 1997/98, the massive reversal of foreign capital inflows showed the risk of excessive financial openness. A key lesson learned from that crisis was the need for strong domestic institutional capacity-that is, sound and efficient financial systems-to effectively manage financial globalization.
However, the region's recovery from the crisis 10 years ago came at the expense of an over-reliance on extra-regional demand. Since the current financial crisis hit the world's real economies, this dependency has battered exports, reduced capital inflows, and slashed growth in remittances. A key lesson from the current crisis is that policy makers need to address the geographically unbalanced structure of flows in trade, capital, and people.
Looking ahead, Asia must develop mechanisms to safeguard domestic economies against excessive or unbalanced openness. Policies that build domestic demand and enhance regional cooperation will bolster the resilience of the region's economies and reduce vulnerability to external shocks.
Strengthening intraregional trade, for example-especially for final goods-can help reduce overdependence on exports to industrial countries. It can provide an additional engine for both short-run recovery and long-term growth. Doing this means boosting domestic economies through a wide range of rebalancing policies. These include removing barriers to intraregional trade, particularly behind-the-border obstacles to freer trade in goods and services; and promoting regional cooperation to institutionalize concrete and specific ways to expand intraregional trade.
Effectively managing financial globalization can ensure that capital flows are less destabilizing to the region's economies. This means shifting the composition of foreign capital to less volatile longer-term inflows. The way to do this is to improve the investment climate; strengthen domestic financial markets with proper oversight mechanisms; maintain appropriate levels of foreign reserves; and establish regional capital markets. This will better tap and mobilize the region's ample resources for productive regional investment.
It is also crucial to move forward on regional policy coordination, especially on exchange rates. A coordinated regional strategy on exchange rate policy could help resolve the important issue of exchange rates among regional currencies. Aside from contributing to better macroeconomic management, coordinating exchange rate policies would increase intra-regional trade and lessen the fear of losing export competitiveness between neighbors. This also supports shifting sources of economic growth toward greater domestic and regional demand.
The development of effective, reliable social safety nets-health, education and pension systems, for example-will reduce the tendency for precautionary savings. This will allow for greater consumer spending while also helping establish systems to serve as a fallback for the vulnerable. Support for such public goods needs to be strengthened.
IV. Climate Change: a Clarion Call for Sustainable Development
But there is one global public good that is increasingly taking center stage. That, of course, is climate change.
Asia and the Pacific have already felt the first shocks of climate change. There has been an increase in monsoon intensity, rising sea levels, more frequent and severe tropical storms, extended droughts and heat waves, and melting of the Himalayan glaciers. The combined effects of these trends are putting agricultural production at risk and imposing myriad other costs on the region's economies.
A recent ADB study shows that climate change impacts could reduce the combined GDP of Indonesia, Philippines, Viet Nam, and Thailand by 7% annually by the end of this century. Significant costs would be felt well before then. Another ADB-commissioned study carried out by the International Food Policy Research Institute found that irrigated rice yields across Asia will fall 27% by 2050, with irrigated wheat production down by a staggering 46% unless climate change adaptation measures are taken. This will make grains worldwide more expensive, and will obviously disrupt food security.
The impact of climate change on Asian economies will be pervasive, requiring significant increases in public expenditure, as adaptation financing becomes routine. This includes increased allocations for disaster risk management, flood control, enhanced river basin and coastal ecosystem management, climate proofing infrastructure, and dealing with health-related effects.
The global cost of climate change adaptation in developing countries is recently estimated by the World Bank at from $75 billion to $100 billion per year until 2050. The developing world wants industrialized countries to finance these costs as part of the UN climate change agreement being negotiated next month in Copenhagen. But estimates of the funding needed to transform the region's energy economy and transport systems away from its heavy reliance on coal, oil and gas are even higher.
Climate change adaptation, mitigation, and transformation are crucial to both global and regional sustainable development. Just as the region needs to rebalance to strengthen intraregional trade, there is an economic opportunity in rebalancing to address climate change. Improving energy efficiency, expanding the availability of renewable energy sources, and switching to cleaner fuels will improve developing Asia's energy security, economic competitiveness, productivity, and the quality of life.
For our part, ADB is expanding efforts to help the region's developing economies move into less carbon-intensive and more climate-resilient development. Our new Energy Policy makes ADB's support for clean energy a top priority. In fact, our Strategy 2020, which guides our actions over the next decade, places the promotion of "environmentally sustainable economic growth" as one of our three strategic agendas-along with inclusive development and greater regional economic integration.
ADB has long experience in helping to mitigate the emissions of greenhouse gases, which are causing global warming. Our investments in clean energy increased from $226 million in 2003 to $1.7 billion last year. And we expect these investments to reach $2 billion a year by 2013. A good example of the projects we support is the Philippines Energy Efficient Light Project, which is expected to save $100 million in fuel for power generation each year while reducing annual carbon emissions by 300,000 tons.
Singapore has been a leader in climate change mitigation. Improving urban transport through well-planned mass transit systems is key, and Singapore should be proud of its system. ADB's Cities Development Initiative for Asia and our new Sustainable Transport Initiative are helping transfer the lessons from Singapore and other progressive cities across the region to urban areas that need assistance.
The Clean Development Mechanism, established under the Kyoto Protocol, is also helping finance greenhouse gas reducing investments across developing Asia. It provides a way to lower carbon emissions efficiently using the global carbon market. In 2006, we launched our Carbon Market Initiative to provide up-front technical and financial support to developing Asian countries for investment in low-carbon energy and other technologies. More recently, we have created the Future Carbon Fund to provide similar support for clean development projects that are expected to qualify under the rules of the post-2012 global agreement on climate change.
We are also working to help overcome barriers restricting private capital flows into mitigating climate change. We have invested $100 million in seed capital to help establish five private equity funds, an investment we expect will catalyze as much as $1 billion in additional private capital. And we are working with the United Nations Environment Program (UNEP) to help smaller enterprises get access to seed capital for renewable energy and energy efficiency development projects.
Deforestation is another important source of carbon dioxide emissions. Together with land degradation, it can sap the productivity of rural economies while leading to the irreversible loss of bio-diversity and other services in healthy ecosystems. But sound land and forest management also holds the potential to help tackle global climate change. This is because properly conserved and expanded forests and agricultural systems are able to sequester carbon dioxide on a massive scale. Present rates of deforestation account for about 18% of annual greenhouse gas emissions.
Those negotiating a post-2012 global climate agreement are considering the creation of a vastly expanded forest carbon market that would recognize the principle of "avoided deforestation." Under such a program, developing countries could attain credits equal to the reduction in their deforestation rate compared with historical trends. This approach has the potential to generate tens of billions of dollars in annual financing for rural development and forest conservation in Asia.
ADB is committed to helping the region better manage its forests to develop this potential. And we are using our experience to help developing economies of the region avail of the global carbon market.
V. Conclusion
These twin challenges of global economics and global climate change are, I believe, among the greatest challenges Asia will be facing into the next decade. We need to use the global financial crisis as an opportunity to articulate not only what is good for Asia-but what is good for the world as well. As was done after the 1997/98 Asian financial crisis, Asia must move forward on reforms that build on national priorities to bolster the regional agenda while strengthening domestic demand as a more powerful source of economic growth. A firm commitment to tackle climate change through adaptation, mitigation and transformation efforts will also contribute to the region's sustainable development.
As future leaders in Asia and the world, each of you must also play your role as you leave these halls for the ever-evolving world outside. Your role in keeping inclusive development and economic growth on track and on the public agenda cannot be understated.
I wish you all the very best in your endeavors, and I look forward to your questions.
Thank you.
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