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Developing Asia Beyond the Global Economic Crisis: Matching Growth with Poverty Reduction
Luncheon Keynote Address by Haruhiko Kuroda, ADB President, at The Jack Austin Centre for Asia Pacific Business Studies, Vancouver, Canada
Thank you Monsieur Tremblay.
Dr. Woo, distinguished guests, ladies and gentlemen:
It is an honor to be here this afternoon. I would like to thank our luncheon hosts—the Asia–Pacific Foundation of Canada, Heenan Blaikie Global Advisors, and the Segal Graduate School of Business for their gracious hospitality and fine preparations for this event.
I am pleased to talk with you today about how developing Asia has moved beyond the global economic crisis. Canada and developing Asia both weathered the crisis well. We may share some fundamental strengths. Canada's macro prudential financial regulatory environment ensured the excesses of financial communities elsewhere did not travel north. Following the 1997/98 Asian financial crisis, Asian authorities also reformed and restructured their financial systems to ensure prudential regulations—such as capital adequacy ratios—were met.
But developing Asia faces daunting challenges, not only to sustain the momentum of the recovery, but also to ensure balanced, sustainable, and inclusive long–term growth. In fact, I just arrived from the three–day summit on the Millennium Development Goals, or MDGs, at the United Nations in New York. Despite the region's notable achievements, Asia and the Pacific remains home to two–thirds of the world's poor.
ADB's vision is an Asia and the Pacific free of poverty. There are 1.8 billion people who live on less than $2 a day. Of these, 947 million are surviving on less than $1.25 a day. We are committed to reaching this goal through inclusive and environmentally sustainable growth along with promoting regional integration. And to do so, we are actively engaged with our developing member countries through policy dialogue, loans, equity investments, guarantees, grants, and technical assistance.
This afternoon I would like to discuss four critical issues: first, the short—term economic outlook and risks for the Asia and Pacific region; second, the challenge of rebalancing growth over the medium term; third, the need to close the region's massive and growing infrastructure gap; and finally, the additional long–term challenges of climate change.
II. Economic Outlook for 2010–2011
Developing Asia has emerged as a new engine of global growth. The speed and strength of developing Asia's economic recovery surprised many. ADB forecasts show developing Asia's gross domestic product growing by about 8% in 2010, well above the 5.2% rate last year. The region is well on track for a V–shaped recovery. As stimulus is gradually withdrawn, we see growth necessarily cooling a bit in 2011—although it should remain robust at over 7%. Many economies continue to outperform earlier forecasts. The Update to our flagship Asia Development Outlook, which will be released in a few days, will show this trend continuing.
The region's large economies have flexed their muscles. The economy of People's Republic of China is expanding at an annual rate of nearly 10%, using credit and investment to sidestep the global slowdown, and now tightening slowly to avoid overheating. India is projected to grow steadily slightly above 8% this year, while Indonesia continues to outperform forecasts, with GDP growth likely above 6%.
These three large economies—the People's Republic of China, India, and Indonesia—have over 2.5 billion people, or 37% of the world total. Sustained high growth brings with it poverty reduction and improved living standards. More importantly, rapid growth also provides huge opportunities and new markets for the world at large—critical at times like these, when traditional markets and demand have suffered significant shocks.
Developing Asia's remarkable performance not only pulled the region out of recession, but also steered the world economy toward recovery. Today, developing Asia accounts for about 28% of global GDP (in purchasing power parity terms). In fact, last year, without developing Asia's remarkable economic growth, the world economy would have suffered a deeper recession. For 2010, developing Asia's contribution to world growth is expected to be about 46%.
With tightening trade linkage across the Pacific, Asia's strong growth also benefits Canada. For example, Canada's exports to developing Asia nearly quadrupled from about $4 billion in 2000 to about $16 billion in 2009. This implies 5% of total Canadian exports went to developing Asia in 2009 compared to 1.5% in 2000. Therefore, robust growth and demand in developing Asia should help the Canadian and global economy.
Of course, there are several risks to this positive outlook. The first would be a jolt to the recovery in advanced economies. Even if they can avoid a double dip, there are several nagging, and possibly long term issues: high unemployment in the US and Europe, the weak US housing market, the effects of needed fiscal consolidation, and the risk of another round of prolonged deflation in Japan, to name a few.
Second, capital flows in and out of developing Asia could become destabilizing and complicate macroeconomic management. Robust economic growth means Asia will tighten monetary policy before other regions. In fact, several economies—such as India, Thailand, and Malaysia—have already raised policy rates. Higher yields could draw excessive—and potentially volatile—capital flows to the region. Authorities will need to be watchful that asset prices do not get out of hand, and try to limit speculation by encouraging longer–term investments rather than short–term and volatile "hot" money.
Lastly, the timing, pace, and policy mix in withdrawing stimulus are critical. There may be risks associated with unwinding and unintended consequences of exit policies. Appropriate exit policies should address the underlying concerns over how to sustain recovery and resume strong growth and development. Two issues are key: first, rebalancing the sources of growth; and second, increasing resilience by providing adequate yet environmentally sustainable infrastructure support.
III. Rebalancing Growth
Rebalancing the sources of economic growth more toward domestic and regional demand is an integral part of sustaining developing Asia's rapid growth. It can also contribute to resolving the large global payments imbalances that helped set off the global crisis.
Global imbalances, largely driven by current account deficits in the US, suggest that household balance sheets need significant restructuring. And this means a reduction in US consumption in the years ahead. Given the uncertainty of external demand then, developing Asia must strengthen both domestic and regional demand to fill the gap. This could involve demand–side policies that encourage household expenditure and increase private sector investment, as well as supply–side policies that promote small and medium–sized enterprises and service industries catering to domestic demand. The emphasis will differ from one country to another. The People's Republic of China, for example, needs to boost consumption, while the Association of Southeast Asian Nations, or ASEAN, needs a better investment climate.
More broadly, Asian authorities should continue to remove remaining barriers to intra-regional trade, particularly behind–the–border obstacles to freer trade in goods and especially services. This is particularly important if Asia is to be the ultimate consumer of its final products. Rebalancing does not mean fewer exports. In fact, it will have the opposite effect—expanding markets to include increasingly affluent consumers within the region.
There are three general components to a rebalancing strategy for developing Asia. First, emerging Asia needs to increase domestic and regional demand relative to output, and switch expenditures toward greater imports from both external and intra–regional sources.
Second, Asia needs to further enhance both trade and investment. A comprehensive trade liberalization and facilitation program should be pursued that emphasizes agriculture and services. It should address remaining distortions and impediments to trade—including those associated with labor mobility and capital flows. Following ASEAN's lead in forming a free trade area, consolidating the multitude of free trade agreements within Asia, starting perhaps with East Asia, may have merit.
Regional cooperation is an important challenge facing Asia as its economies become more integrated. Asia needs to broaden the scope and structure of economic openness to increase its economic resilience and promote sustained development. Greater coordination of fiscal, monetary, and exchange rate policies within the region will further strengthen the stability of the regional economy.
ADB will continue our support towards rebalancing the economy through finance, policy dialogue, knowledge sharing, and capacity building. ADB is committed to assisting regional groups, such as the ASEAN, the South Asian Association for Regional Cooperation (or SAARC), and the Central Asian Regional Economic Cooperation (or CAREC), on their efforts in infrastructure connectivity, trade, finance and investment, and regional public goods.
IV. Upgrading Infrastructure
Let me now turn to another significant challenge — Asia's massive infrastructure gap. We estimate that the region will need US$8 trillion over the next 10 years for infrastructure to support current levels of economic growth. The global economic crisis deeply affected infrastructure development. Commitments to invest in infrastructure with private participation in developing countries grew only 10% year–on–year in the first half of 2009, followed by a 22% increase in the third quarter. This growth, however, was selective and concentrated in large energy projects in only a few countries.
Public–private partnerships, or PPPs, are critical to addressing this massive challenge. While private investment in infrastructure is recovering following the global financial crisis, much needs to be done.
Governments should strengthen legal and regulatory frameworks, for example, to attract investors to join public-private partnerships in infrastructure development. Private sector investment depends on stable and predictable frameworks. Thus, workable arrangements and financing procedures are essential.
Many infrastructure projects tend to be large and complex, involving a multitude of investors and complex co–financing arrangements. It is critical that the views of different stakeholder groups are well understood, and that they participate in project design. ADB is playing a vital role in facilitating infrastructure financing. ADB is mobilizing concessionary resources, catalyzing private sector investments, and maximizing the use of market–based mechanisms, such as the carbon and insurance markets. By doing so, we hope to help fill the gaps in financing, capacity building, and knowledge that our developing member countries face in infrastructure development.
It is also important to continue developing domestic capital markets and encouraging local currency lending. For example, local pension funds could be tapped as a source of long–term local currency funding for infrastructure projects. ADB has supported the Asian Bond Markets Initiative, which has been working to deepen domestic capital markets and promote local currency bond issues for widening both the issuer and investor bases in the ASEAN+3 countries. Credit enhancement, such as the pilot $700 million Credit Guarantee and Investment Facility, which was established by ASEAN+3 and ADB this year, will also make it easier to promote public–private partnerships.
Closely linked to these efforts is building infrastructure that supports environmentally sustainable growth. And that is part of the challenge of addressing climate change.
V. The Challenge of Climate Change
Developing Asia's rapid growth has come, in significant part, at the expense of the physical environment. Deforestation, land degradation, and water and air pollution are the "shadows" of this growth. They degrade living conditions even as incomes increase. With further economic growth and social equity being crucially dependent upon climate change, how we deal with the challenges posed by climate change remains a key to economic resilience.
Asia needs to ensure growth is "green." One of the clearest ways is to promote clean energy, or more specifically, to advance energy efficiency and expand the use of renewable energy sources. This can be done by setting energy efficiency targets, promoting renewable energy, and providing incentives for high efficiency power plants.
Asia's cities must also be made more liveable. Upgrading urban planning is essential, particularly in mass transit, land use, and water management. Equally essential is sustainable management of the large and critical ecosystems in the region.
Asia must act to mitigate and adapt to the impact of climate change. A recent ADB study shows that the costs of climate change could reduce the GDP of larger Southeast Asian economies by up to 7% at the end of this century. Asia is vulnerable as a result of rapid population growth, urbanization, and industrialization that is causing environmental degradation.
Climate change is also a grave threat to water resources. Freshwater resources continue to shrink and there is a general lack in urban water management efficiency. Water shortages are expected to affect 40% of developing Asia's population by 2030.
ADB has a wealth of experience in renewable energy, energy efficiency, waste management, and urban transport projects, to name a few. We also work with our developing member counties to address the challenges of climate change. And we are helping build a climate—change resilient Asia.
In light of the looming water crisis, ADB's "Water for All" policy is especially relevant. Our Water Financing Program increases investments and supports reform in managing rural water, urban water, and river basin water. Through the program, we have provided sustainable access to safe drinking water and improved sanitation to more than 130 million people in Asia and the Pacific in the past five years.
ADB is also active in responding to disasters. The recent floods in Pakistan proved devastating. Nearly 20 million people were affected, while an estimated 80,000 livestock have perished and 2 million hectares of crops were under water. In response, ADB is committed to contribute at least $2 billion to the recovery over the next two years, while establishing a trust fund to provide a vehicle for other development partners to channel their contributions for reconstruction support.
In closing, while developing Asia continues to surge forward in economic growth, its development challenges remain daunting. Rebalancing growth, promoting public–private partnerships—both large and small—to meet the massive infrastructure needs, keeping growth sustainable and more resilient, and ensuring that development is also environmentally sustainable, must be the priorities for the new decade, especially as we move forward in meeting MDG targets. Together, and in partnership with advanced countries like Canada, Asia will be better able to meet these challenges and fulfill the vision of a prosperous and poverty–free Asia and Pacific region.
I look forward to your questions.