Aid for Trade Initiative—the Asia-Pacific Experience

Speech | 14 June 2011

Speech by Haruhiko Kuroda, ADB President, at the Regional Review Meeting, Jakarta, Indonesia

I. Introduction

Honorable Minister of Trade, Republic of Indonesia, Mari Pangestu, Honorable Director-General Pascal Lamy, Honorable Ministers, distinguished participants, ladies and gentlemen,

I am delighted to join our co-hosts from the Government of Indonesia and the World Trade Organization in welcoming you to this regional review meeting on Aid for Trade.

After a swift recovery from the global crisis, developing Asia continues to experience robust economic growth. This is encouraging and serves to highlight the region's remarkable development over the past four decades. High growth must be maintained to alleviate hardship for the millions who remain impoverished. Supply chains and regional cooperation and integration are powerful engines for future growth and poverty reduction. And aid for trade continues to be essential in ensuring equitable growth as the region completes its transformation and increasingly contributes to global prosperity.

Mr. Lamy deserves recognition for tirelessly pursuing the Doha Round trade talks. Breaking the Doha stalemate will foster confidence in a rules-based world trading system, which helped define Asia's rise as a global factory. While a comprehensive Doha deal that significantly reduces trade barriers is economically beneficial, any Doha package with a strong development focus would be desirable by the end of 2011. We also need to be on guard against increasing signs of protectionism, which can hamper the region's trade.

II. Poverty Persists Despite Robust Economies

Developing Asia has largely moved beyond the crisis. While domestic demand was strong enough to supplant stimulus and foreshadow the region's return to "normal" growth, it was the revival of world trade that ignited and then consolidated the region's swift recovery. Our Asian Development Outlook 2011 forecasts aggregate ASEAN growth of 5.5% in 2011 and 5.7% in 2012. For developing Asia as a whole—which includes robust expansions in the economies of the People's Republic of China (PRC) and India—growth is forecast at 7.8% this year and 7.7% in 2012. These forecasts are subject to several risks, including inflation, volatile capital flows, and the fragile recovery in advanced economies.

Although developing Asia has done well, the healthy numbers can hide the fact that our region remains mired in persistent poverty. Asia remains home to the majority of the world's extreme poor. We cannot afford to be complacent. Rising inflation and spikes in prices of food and fuel most significantly affect the poor, who spend about 60% of household income on food. ADB estimates that a mere 10% increase in domestic food prices can push an additional 64 million people back into poverty.

Much of Asia's success emanates from a handful of rapidly industrializing economies and the economies of PRC and India. But 37 of the region's low income and least developed economies lack adequate supply-side capacity to fully reap the benefits of trade liberalization.

It is not just the quantity of growth that matters, but its quality. Inclusive growth is essential. We need to move toward greater equity in development, reducing the gap between those who benefit and those left behind. Without this focus, low income countries will remain shackled to poverty, with others falling prey to the middle-income trap. And trade is a critical element of the process.

III. The Importance of Supply Chains and Regional Integration

Currently, stimulus from external demand appears quite fragile. Increasingly important is the role of intra-regional trade within developing Asia and the Pacific. In East Asia, for example, well over half of total trade is internal.

Underlying this is the spread of Asia's supply chains and production networks, which have propelled Asia's rise as global factory over the past several decades. This was mostly private sector led. Production processes were dissected and each segment relocated to the most cost-effective location, thus improving efficiency. Several factors—including falling trade barriers and logistics costs, technological progress, and rising factor costs at core production locations—spurred decentralization to the most cost-effective places.

Take the example of Japan. The economic impact of Japan's earthquake and tsunami has disrupted portions of Factory Asia. And, with its importance as trading partner, ASEAN has felt its effect. Yet, the medium-term impact may be relatively small because the massive reconstruction process will create stronger demand in Japan, and affected companies throughout the region will make necessary adjustments.

It is vital that we work together so that production networks can spread more broadly across Asia and the Pacific, specifically to its least developed countries. With trade conditions still skewed across the region, removing bottlenecks is critical.

Insufficient infrastructure connectivity and high transportation costs and limited access to trade finance impede trade. Where infrastructure is good, supply chains expand rapidly. There is no question that Asia's trade competitiveness relies on the availability of dependable, fast, and cost-effective transport supported by seamless interconnectivity. To cite one example, the completion of the Greater Mekong Subregion East-West Economic Corridor in Savannakhet province of the Lao PDR was associated with a 35% decline in the incidence of income poverty over 6 years, according to a recent study. This case illustrates how the region's least developed countries can best benefit from Aid for Trade.

Linking fragmented markets to increase market size also promotes efficiency. It is a core benefit of regional cooperation and economic integration. ASEAN aims to establish an ASEAN Economic Community by 2015. Removing residual barriers to trade and investment, mutually recognizing skills and qualifications, and enhancing cross-border trade in services are critical prerequisites for a single market. Other subregions in Asia and the Pacific can learn from ASEAN's experience.

IV. Aid for Trade and ADB

Promoting supply chains requires increased resources. And this is where Aid for Trade can effectively contribute to trade-led growth. More generally, we must consistently make the case for greater Aid for Trade for the region. That is why we welcome the first Co-chair's Report.

The formation of this Regional Technical Group is part of the region's strategy to raise the profile of Aid for Trade globally. This first Co-Chairs Report will be part of the region's presentation to the 3rd Global Review on Aid for Trade in Geneva next month. Let me highlight two key points:

First, a regional approach backed by national strategies will ensure that available assistance is used most effectively for maximum benefit. This approach has worked successfully in the past, as ASEAN and the Greater Mekong Subregion amply illustrate. Common elements include the creation of economic corridors, fostering public-private partnerships, donor coordination, and effective monitoring and evaluation.

Second, we must continue to seek additional concessional finance for well-designed projects and programs with high rates of return. We of course recognize the fiscal positions of many donors, particularly traditional donors. Accordingly, Aid for Trade must combine concessional finance with less concessional assistance where appropriate. In fact, a blend of these resources—including private sector participation—is optimal for meeting middle income and least developed country needs.

ADB has significantly increased its resource allocation to Asia and the Pacific under our long-term strategic framework, Strategy 2020—which has inclusive growth, environmentally sustainable growth, and regional economic integration as its three strategic agendas. Last year, for example, ADB provided $17.5 billion in development assistance, including cofinancing, to the region—a significant increase compared with 2005, when the WTO Aid for Trade Initiative was launched. Our expanded trade finance program , which supported $2.8 billion in trade last year remains an important part of ADB's assistance for aid for trade. We are also targeting 30% of our total assistance for regional projects and programs by 2020.

In a world of rapidly evolving trade policies, harnessing cutting-edge knowledge is also crucial. In this regard, the new Asian International Economist Network is a practical means of bringing together trade ministers, trade officials and the research community.

V. Conclusion

To conclude, Asia and the Pacific has come a long way. But our challenge is to continue to reduce poverty. Reinforcing and expanding supply chains and production networks offer a way to integrate the least developed economies with those that are growing more rapidly. Removing bottlenecks requires more and better targeted Aid for Trade. This Regional Technical Group report is one important contribution to this process. And ADB stands ready to consistently make Asia's case for Aid for Trade.

Thank you.