Sustainable Economic Development and ADB's Role

Lecture by Haruhiko Kuroda, ADB President, at the University of Indonesia, 13 June 2011, Jakarta, Indonesia

I.  Introduction

Dean Firmanzah, distinguished guests, ladies and gentlemen: Selamat Siang. Thank you for the opportunity to be here today.

We work and live in the most dynamic region of the world. That certainly was not the case 45 years ago when ADB was established. In less than two generations, Asia has been transformed from an impoverished economic backwater to a global hub of economic dynamism.

But this remarkable success has brought new challenges to Asia. The gap between the rich and poor has widened in most countries. While many have the option to live in urban centers, our new megacities are fraught with logistical nightmares—from inadequate housing, sanitation, utilities and public transport, to major traffic congestion and pollution. Our region is at a critical juncture. Yes, we continue to seek sustainable economic growth and development. But, more than ever, Asia’s development should be socially inclusive and environmentally sustainable. This is our challenge and our responsibility.

Today, I will examine some areas that will define sustainable economic development as we move forward in what could be an Asian century. I will also highlight the roles ADB plays in this process. First, however, let me briefly touch on developing Asia’s near term economic prospects and risks, and its long-term potential.

II.  Economic Outlook, Risks, and Future Prospects

By and large, developing Asia weathered the recent global financial crisis very well. The region’s real economies were hit hard, but the downturn was temporary and recovery was swift. Today, Asia is moving beyond recovery and normalizing growth. Last year GDP in developing Asia grew a robust 9.0%, showing a V-shaped recovery. As the region unwinds fiscal and monetary stimulus, ADB forecasts a more moderate but still high expansion of 7.8% in 2011 and 7.7% next year.

The three large economies should continue strong growth. The People’s Republic of China (PRC) is forecast to grow by 9.6% this year—a welcome moderation from last year’s 10.3%—as policy makers reduce new credit to tackle overheating. India’s economy is also performing well, with growth forecast at 8.2% this year and 8.8% in 2012. Indonesia, too, continues to show strength from strong domestic demand. It is one of the few countries in Asia where we expect stronger growth this year instead of moderation—with GDP forecast at 6.4% from last year’s 6.1%.

The solid recovery, however, is not without risks. Rising inflation is an immediate challenge. The strong recovery and rising oil and commodity prices have led to the buildup in inflationary pressures. At the same time, as monetary tightening to combat inflation boosts interest rates, the differential with the US rates is widening, drawing potentially volatile capital flows to the region. This complicates the inflation fight, threatens to create asset price bubbles, and increases pressure for currency appreciation. These risks could derail the outlook or threaten the region’s financial stability. However, policy makers are handling them well and taking appropriate actions where necessary.

As for the longer term, let us do some crystal ball gazing. Asia today stands at the cusp of a great transformation. According to an ADB commissioned study, by the middle of this century, if its growth momentum can be sustained, Asia could account for over 50% of global output, trade, and investment; eradicate poverty; and enjoy widespread affluence. Such a transformation has the potential to generate a six-fold increase in per capita income for some four billion Asians, reaching levels similar to those found in Europe today.

This “emergence of Asia,” spectacular as it is, is not new. It is in fact a “reemergence.” Many tend to forget that in the early 19th century, Asia accounted for some 60% of total global output. The industrial revolution created what we now call the “advanced economies”. Subsequently, the revolution in technology, information, and communication has helped even the playing field. And as Asia embraces economic openness and structural reform, it has re-emerged as a key engine of global growth.

III.  How to Build Sustainable Growth and Development

That this may turn out to be an Asian century is certainly plausible. Yet it is by no means pre-ordained. Asia’s quest for prosperity will require much more than simply high growth. Asia must ensure that its evolving growth paradigm benefits as many people as possible—rich and poor, male and female—providing broader access to expanding economic opportunities. Inequities adversely affect the pace of growth, and its impact on poverty reduction. If it is to realize its potential, Asia must formulate strategies to sustain growth momentum, continue to improve livelihoods, and work toward more inclusive growth.

Asian economies must avoid falling into the so-called middle income trap. While bolstering trade and investment around the region, we must keep innovating to create products attuned to our development needs. While continuing to improve the livelihoods of our citizens and lifting millions more out of poverty, we also must confront issues such as aging populations and massive waves of urbanization. And all of this must be done in an environmentally sustainable manner, with minimal damage to our planet—particularly in the race for scarce resources such as water and food. Good governance and transparency are also critical—without these the region’s ability to grow and prosper could be seriously jeopardized.

So what are the areas critical for sustaining inclusive economic growth and environment-friendly development? Let me touch on seven issues.

First is rebalancing. The concept of rebalancing is very much disseminated by ADB in recent years. The global payments imbalance, although not the main trigger of the global financial crisis, played a part in undermining global macroeconomic stability. To help resolve it, Asia needs to increase domestic and regional demand, and import more from both external and intra-regional sources.

Second, Asia needs to further enhance trade and investment. East Asia and Southeast Asia can focus on intraregional trade and corresponding investment to boost domestic demand. Further trade liberalization and improved trade facilitation should address remaining distortions and impediments to trade—including those associated with labor mobility and capital flows.

Third, enhanced regional cooperation and integration is key. Broadening the scope and structure of economic openness will increase economic resilience and promote sustained development. While the proliferation of free trade agreements within Asia and across its subregions has helped increase intraregional trade, there is need for consolidation. Greater coordination on fiscal, monetary, and exchange rate policies will further strengthen regional stability and facilitate economic growth. The proposed Asian Financial Stability Dialogue among ASEAN+3countriesJapan, Korea and People’s Republic of China would becomean attractive platform for coordinating supervisory and regulatory developments and monitoring potential vulnerabilities.

Fourth is upgrading infrastructure. The region will require something like US$8 trillion over the next 10 years for infrastructure to support current levels of economic growth. Investment in transportation, roads, railways, water, energy, and other services stimulate the economy and create jobs. It also narrows the rural-urban divide. Public–private partnerships or PPPs are critical in addressing this massive investment challenge. While private investment in infrastructure is recovering following the global financial crisis, more needs to be done. For example, governments should strengthen legal and regulatory frameworks to attract investors to join public-private partnerships. Private sector investment depends on stability and predictability. Innovative arrangements and financing procedures are essential.

Fifth is to deepen and broaden financial systems. Creating an investment climate so Asia’s savings are drawn to Asian investment needs will support both the region’s economic growth and help resolve global imbalances. Deep local and regional bond markets will be able to attract sizeable investments for long-term needs—especially for infrastructure. Increasing access to finance should spread investment and business opportunities beyond urban centers to rural areas, and especially to small and medium enterprises—which are proving to be the core of increased domestic demand growth. This will help balance growth, making it more inclusive and sustainable.

Sixth, Asia needs to ensure growth is "green." Asia's rapid economic expansion has come at the expense of the physical environment. As developing Asia continues to grow, we must ensure that we leave a sustainable environment and development legacy to future generations. We see around the world evidence of climate change and climatic volatility. Rising sea levels, higher temperatures, desertification on one hand and increased floods on the other, can all have dramatic effects, forcing large numbers of mostly poor people to migrate.

The economic and social implications of climate change could be very serious. A recent ADB study focusing on Southeast Asia estimates that, if nothing is done, the total cost of climate change for Indonesia, the Philippines, Thailand, and Viet Nam could reach as high as 6.7% percent of their combined GDP each year by 2100.

Sustainability cannot be achieved unless the world moves onto a low-carbon, climate-resilient development path that embraces both mitigation and adaptation. Development must go hand-in-hand with adapting to and mitigating climate change; if not, we risk far-reaching environmental, economic, and social setbacks.

To ensure green growth, clean energy must be promoted to advance energy efficiency and expand the use of renewable energy sources. Asia's cities must also be made more livable. Upgrading urban planning is essential, in particular mass transit, land use, and water management. Equally essential is sustainable management of the large and critical ecosystems in the region.

The seventh critical issue is the need for greater development of human capital, which fits well with Indonesia’s call for more “people-oriented” programs within ASEAN. While developing Asia has generally done well in attaining the Millennium Development Goals for education, much work remains to be done to reach the levels of advanced economies. In fact, what is more important and fundamental to the success of rebalancing is the need to shift the education system to one that is more flexible, cost-efficient, equitable, and of higher quality. In basic and secondary education, increasing access and improving quality and equity will be even more important. For workers, skills training and retraining will need to be strengthened to make them more flexible and relevant. In higher education, a stronger emphasis on sustainable expansion strategies and diversification, and more investment in science and technology education are needed.

IV.  ADB’s Mission, Vision and Operations

ADB plays an active role in all these seven areas. Our vision of an Asia and Pacific region free of poverty is underpinned by our long-term strategic framework, Strategy 2020, which focuses our operations on three strategic development agendas—inclusive economic growth, environmentally sustainable growth, and regional integration. We believe poverty reduction can only be sustained if more people are economically productive, economic growth takes place in a well-managed natural environment, and countries work within larger and freer markets.

ADB’s partnership with Indonesia in the area of green growth is well demonstrated by several notable projects. Among them are projects to promote energy efficiency, improve sanitation, enhance the investment climate, strengthen public financial management and governance, and improve access of the poor to public services.

ADB’s assistance to developing member countries includes support for policy dialogue in regional and sub-regional forums such as ASEAN, the South Asian Association for Regional Cooperation(SAARC), and the Central Asian Regional Economic Cooperation(CAREC); and mobilization of funds, including private sector funds, for infrastructure development. ADB has been working with ASEAN to establish an ASEAN Infrastructure Fund (AIF) to mobilize the region’s savings, including the foreign exchange reserves, to narrow the development gap and enhance connectivity. The ASEAN Finance Ministers’ Meeting in Bali, Indonesia in April welcomed the progress made toward the establishment of the fundthis year.

ADB promotes financial inclusion of households and small and medium-size enterprises (SMEs) which have had limited access to financial services. We do so by broadening the financial sector and diversifying its services to meet diverse financial needs of businesses. We also help deepen financial markets to enhance access to long-term finances and risks capital. In particular, we support the Asian Bond Markets Initiative of ASEAN+3 to issue local currency bonds in several ASEAN countries, including the recently established Credit Guarantee and Investment Facility.

And we are strongly committed to supporting our developing member countries in addressing climate change. We invest in clean energy, sustainable transport, and urban development to reduce greenhouse gas emissions and improve the quality of life in vulnerable communities. We promote sustainable land use and forest management practices to improve the well-being of rural communities and protect biodiversity. Our support for building climate resilience in water and agriculture enhances food security. And we also provide technical assistance to strengthen institutional and human capacity, governance, and policies to address climate change.

Finally, ADB knows from experience that education plays a critical role in long-term sustainable development. In particular, we target support to girls, children of the poor, and other vulnerable groups to help them continue education. And we support comprehensive reforms that redirect education and skills development to better meet the needs of social development and labor in the future.

V.  Conclusion

In closing, Asia’s rapid growth and expanding footprint in the global economy bring with it new challenges, responsibilities, and obligations. As a responsible global partner and leader, the region needs to take greater ownership of the global commons, including an open trading system, stable financial system, climate change mitigation efforts, and peace and security.

In this context, the role of Indonesia’s is important. As a member of the G20 and the chair of the ASEAN this year, Indonesia can play more active role in the region and the world.

ADB remains a reliable and honest partner to our developing member countries—as we do here in Indonesia—and will continue to support their pursuit of a better, healthier and prosperous region in the years to come.

Thank you.