Rebounding Asia and the Pacific: Forging the Path Forward - A Conversation with ADB President Masatsugu Asakawa

Video | 27 April 2023

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As a curtain raiser to the 56th Annual Meeting of the ADB Board of Governors, ADB President Masatsugu Asakawa and international journalist Zeinab Badawi discussed ADB’s economic outlook for Asia and the Pacific and the challenges ahead for the region.

President Asakawa touched on a range of issues including food security, climate change, and dealing with external shocks such as the Russian invasion of Ukraine. He also spoke about the various reforms that ADB is undertaking to introduce innovative climate financing, expand its lending capacity, and restructure the organization to better meet the needs of its developing member countries.

The 56th Annual Meeting of the ADB Board of Governors will be held in Incheon, Republic of Korea, from 2 to 5 May 2023 under the theme “Rebounding Asia: Recover Reconnect, and Reform”.

Transcript

Rebounding Asia and the Pacific: Forging the Path Forward
A Conversation with ADB President Masatsugu Asakawa and Zeinab Badawi

Zeinab: Hello everybody. I'm Zeinab Badawi. And a big warm welcome to you all to the curtain raiser event for the 56th Annual Meeting of the Board of Governors of the Asian Development Bank that will be held next week from the 2nd to the 5th of May in Incheon, the Republic of Korea. 

And this is the third year of “A conversation with President Masatsugu Asakawa,” which is steadily becoming a highlight in our calendar. Today, we're going to be focusing on “Rebounding Asia and the Pacific: Forging the Path Forward.” 

Hello, President Masa, lovely to see you just days before the Annual Meeting. And once again, thanks to technology, it seems that we're in one location in the ADB's library. But actually, you are in Manila and I'm in London. Tell me, how have you been and how are things at the ADB? 

President Masa: Hi, how have you been? Well, on these days, there are a couple of things which makes me feel happy. First of all, I am now able to go on mission without any restriction. So last year, I visited Indonesia a couple of times because of the G20 Presidency and also, I visited Uzbekistan, Sri Lanka, South Korea (Republic of Korea), Cambodia and (a) couple of nonregional countries in Europe and the US. This year, I have been to  India and Bangladesh to see prime ministers, finance ministers, to talk to them directly, which is completely different from talking to them via a screen. 

Second of all, I am very happy that we finally reopened our headquarters here in Manila in September last year and I asked every staff to come back. Nowadays, during lunch time, the cafeteria is very much crowded, and I like it. 

Zeinab:  I also hope you managed to get something to eat.

President Masa: And also, I asked the staff to come back to Manila and after they came back to Manila, I allowed staff to work from home 2 days per week.  I hope that this kind of flexible and new way of working would contribute to the improvement of staff's efficiency, job efficiency. 

And thirdly, as you rightly mentioned, this year South Korea is kind enough to host our Annual Meeting in Incheon, in person.  In-person meetings are taking place for the first time after 3 years. So, I'm very much excited to see many governors, alternate  governors and to talk about ADB operations and also, the challenges they are facing. 

Zeinab: Well, it's wonderful to open this conversation on such a happy, upbeat note and to hear about everything that you're doing or your globe-trotting and people coming back to headquarters in Manila. And that makes me think that actually, we are generally in the Asian Pacific region beginning to see that life has gone back to normal, pretty much. And that, you know, COVID is very much behind us for good—we hope so. Then give us an overview, President Masa, of how you see the economic situation in the region. 

President Masa: Yeah, the economic growth of [] developing Asia in 2022, last year, was 4.2%, down from 7.2% in 2021 and this year, in 2023, ADB predicts it at around 4.8%. So, it went down from 2 years ago, but compared with other parts of the world, the economic growth rate is relatively high and inflation rate is contained relatively low. So, I would say developing Asia has been growing at a very robust and steady pace, although we have to bear in mind a couple of risks involved. 

Zeinab: Well, what are those risks then, President Masa?
 
President Masa: First of all, the economic prospect of advanced countries like US and Europe. As you know, the Fed has raised their policy interest rate a couple of times to quell inflationary pressures. And quite recently, the US Fed already started to slow down the pace of interest rate hikes. But it's not clear yet whether those advanced economies will end up successfully with a so-called soft-landing scenario or, fall into recession due to the persistent inflationary pressure in the service sector and so on. And also, this rapid pace of interest rate hikes has really tightened global financial conditions. 

From last year, both short-term and long-term yields have risen, and the risk premium has increased, and quite recently we saw signs of strains in the banking sector both in US and Europe. As a result, the central banks in our region also started to raise policy rates, which would strain the growth momentum of each country as a consequence. 

Zeinab: [No,] You're absolutely right. I mean, from my position here in London, I can see that there's so much turmoil in the financial markets as you say that stress on some banks and economies, inflationary pressures, and interest rate hikes and so on. And of course, it has a ripple effect on your region, and also, another big impact on your region has been of course what's been happening in Ukraine. February was a year since the Russian invasion of Ukraine. So, and the impact has been felt throughout the world, of course. But just give us an idea of how it's affected the Asia-Pacific region. 

President Masa: Well, talking of the Russian invasion of Ukraine, initially we worried about its negative impact on some countries in Central Asia, Caucasus, and Mongolia who maintain very close trade and economic ties with the Russian Federation. But so far, these economies have proved to be very resilient. They are doing OK. On the other hand, the steep increase in energy price and food price exacerbated by Russian invasion of Ukraine has really aggravated the balance of payment of a couple of vulnerable countries [in that region] like Pakistan and Sri Lanka, so we are closely monitoring and maintain close communication, especially with IMF and World Bank, as to the most updated economic and financial situation. 

And more in general, we are very much concerned about the food security issue. The data says that in our region, 425 million people were affected by hunger even in 2021, one year before the Russian invasion of Ukraine. So, we need to address the hunger issue especially for the poor and vulnerable urgently, while developing long-term solutions to improve the food security issue. 

To that end, ADB announced a $14 billion financial package. That was September last year, which includes both short-term measures and long-term measures.

Short-term measures include very quick-disbursing  budget financing through what we call the CSF—counter cyclical support facility—to support our DMCs or developing member countries to provide food and necessities urgently for the vulnerable and the poor. Long-term measures include investment in the agricultural sector to make the agricultural system in our DMCs more robust and resilient through climate, agriculture, nature-based solution, and the further utilization of digital technology in food supply chains. 

Zeinab: So important isn't it, that you're pursuing those two things in tandem, the immediate help, the budgetary support now, as well as maintaining that long-term vision in ensuring that you can actually achieve food security in the long term. Very important. I want to look at China for a moment please, President Massa, because of course it's the biggest economy in the region. And what happens in the Chinese economy of course has a ripple effect throughout the entire Asia-Pacific region. So just tell us how you see the Chinese economy affecting the economic outlook. 

President Masa: The Chinese economy declined sharply from 8.4% in 2021 to just 3% in 2022,  mainly due to the very stringent zero corona (COVID-19) policy and also some challenges they are facing in the property sector. But now, they have exited from the zero COVID policy. So, this year, 2023, we expect the Chinese economy will recover. ADB predicts a 5.0% growth rate for China this year. This is good news for commodity exporting countries to China and also, for the countries who have close ties with Chinese economy in terms of supply chain networks and tourism. 

One thing we have to bear in mind is, there is a rather upside risk. If and when China's economy will end up with even stronger growth rate than we are currently predicting, that might add additional inflationary pressure on crude oil price and other commodity price and so on. So that's the upside risk we have to bear in mind. 

Zeinab: Worry there, of course, already putting pressure on energy prices, which already have had a lot of pressure put on them. President Masa, you at the Asian Development Bank, along with all multilateral development banks, or MDBs for short, are coming under increasing pressure really by their members to contribute much more to public global goods such as climate and health. And they're urging change and reform. So, what are you doing at the Asian Development Bank to change and reform to meet these challenges? 

President Masa: Yes, I clearly recognize that MDBs including ADB are strongly expected to play a more active role to take care of the global public goods like climate change issue, global health issue and so on. But one thing I'd like to stress is that our short-term crisis response like COVID-19 pandemic, food crisis, and long-term investment agenda like climate change, poverty alleviation agenda, quality infrastructure and so on—they are not mutually exclusive. We may have to do both things such as these at the same time whenever necessary. Climate change is a good example. When our global economy recovered from COVID-19 pandemic, it was inevitable that global greenhouse gas emissions also increased. So, let's start with climate change. It's a really uncomfortable truth that this region, the Asia and Pacific region, is one of the most vulnerable regions against natural disasters. We saw what happened in Pakistan and Bangladesh last year and so on.

So, I always say our fight against climate change would be won or lost in this region. As I mentioned last year, ADB already elevated our ambition from $80 billion to $100 billion of cumulative climate financing for 12 years from 2019 to 2030. So, $100 billion for 12 years means $8.3 billion per year on average. And our actual climate financing in 2021 was $3.5 billion, which is well below our target, mainly due to the pandemic. But in 2022, last year, it increased to $6.7 billion and I'm quite sure this year, we will exceed $7.0 billion, and we will do our best to meet our ambition of $100 billion cumulatively by 2030. 

Also, I'd like to emphasize that we aim at investing at least one third of this $100 billion ambition, which means $34 billion, in adaptation as well. At the same time, as I mentioned the previous year and last year as well, we decided to withdraw our financing from new coal-fired power plants. But still the issue remains that in our region there are so many coal-fired power plants already existing and operating and they are relatively young. So we have been working on one very innovative financial instrument called ETM—Energy Transition Mechanism—to let those existing corporate coal-fired power plants retire earlier than originally scheduled by utilizing so-called blended financing, which is a low cost financing, and I'm very happy to tell you, at the margin of the G20 summit meeting in Bali in November last year, we  signed an  MOU (memorandum of understanding) to specify one concrete coal power plant in Indonesia called Cirebon in West Java, a 660 megawatt plant, to be retired early under this ETM mechanism as a first example. And I'd like to expand this application of ETM to other projects in Indonesia and also in other countries of the region as quickly as possible. 

Zeinab: I remember the ETM, you announced it at COP (Conference of the Parties) 26, didn’t you, to support green growth and energy transition? So lovely to hear about the progress you're making on that. But you've also got some other initiatives or instruments that you need in your toolkit to scale up that climate action as well as your other development goals. So, what are those? 

President Masa: Yes, MDBs are also strongly encouraged to invest more and more in climate change arena, right? And that's why we elevated our ambition to $100 billion, but also, we have been working on another type of innovative financial instrument called IFCAP. [Sorry for many abbreviations, but] IFCAP stands for Innovative Financing Facility for Climate in Asia and Pacific. IFCAP is an instrument to increase ADB's climate financing by utilizing a guarantee mechanism, which simply means whenever any borrowing country fails to repay its debt to ADB, donor countries as a guarantor will pay to ADB on its behalf. So, from ADB's point of view, we have no risk at all. 

The beauty of this mechanism is that whenever $1 of ADB’s climate financing is guaranteed by any donors, we can expand not only $1 but $5, for example, of climate financing. So, leverage ratio is one to five in this case, for example. And furthermore, when we provide additional $5 climate financing, then we expect, I expect, that further financing will be coming from other MDBs, other bilateral donors, and other private sector financial institutions in the form of cofinancing, private financing, and so on. That would be great. So, we are aiming at launching this IFCAP mechanism at this Annual Meeting in June this year. 

Zeinab: Wonderful. So IFCAP, you heard it here, the Innovative Finance Facility for Climate in Asia and the Pacific, yes, it rolls off the tongue. Well, I look forward to the launch now. President Masa, MDBs are again being urged to lend and give more to the developing world. And I know you have talked about the assistance. You have given a great deal of it for COVID relief. And I know that multilateral development banks have CAF. CAF, which is the Capital Adequacy Framework, which kind of gives you guidelines about how much risk you can take on in trying to pursue your development goals and how much you can lend to developing countries. So, what are you doing at the ADB to really try to expand your lending capacity to those DMCs because that is just so important?

President Masa: Yes, thank you. [Yeah.] We are also currently updating our CAF, Capital Adequacy Framework, this year in order to expand our lending capacity by optimizing our balance sheet. And at the same time, we are carefully reviewing the recommendation made by the G20 Independent panel. It may be a bit too early to draw a firm conclusion at this stage, but I am of a strong impression that ADB shareholders do not wish to change the overall risk appetite of ADB at this time. So, I expect that new CAF coming out of this year's review will continuously protect AAA rating of ADB to ensure that the investment confidence be maintained and to ensure ADB has a sufficient capital to continuously lend even at a time of crisis without relying on so-called shareholder capitals. That said, I would like to tell you that we are taking this opportunity to update our CAF to comprehensively review further options to optimize our balance sheet. And actually, we have done already a couple of measures to that end. For example, we concluded already two so-called exchange exposure agreements with Inter-American Development Bank to reduce our country concentration risk twice already, once in 2020 and the second time in 2022, with the total amount of $2.5 billion. Also quite recently, we introduced the so-called $1 billion Master Insurance Framework as to our nonsovereign operations with five global leading insurers to risk transfers. Also as I mentioned, I'm very proud that ADB has shown a great appetite for innovative financial instruments like IFCAP, which would increase our investment financing by utilizing guarantee mechanism. 

Zeinab: Fascinating. I mean the DMCs really do need all those kinds of instruments and innovative ideas that you are talking about. Now I also understand that the ADB has developed a new operating model, which is going to be implemented this year. So just set up for us what it is and how you think it's going to enhance your work and how far is this part of the ADB's evolving process, its evolution.

President Masa: Thank you, Zeinab. Yes, for the last 3 years, I would say we have gone through various initiatives like CTI (Cultural Transformation Initiative), KMAP (Knowledge Management Action Plan), Resident Mission Review, Technical Assistance Review and so on. [So] I think it's about time for ADB to go through the necessary structural change to support those initiatives. Actually, the current structure, organizational structure of ADB was introduced in 2002, 20 years ago. [So ]I'm quite sure that there are so many areas to be upgraded, to be fixed so that ADB would be able to better accommodate the ever-changing needs of our clients and also to implement our Strategy 2030 more efficiently and effectively. And for example, we declared to be a climate bank for Asia and Pacific. We mean it. Then we would like to see some necessary organizational change, which will support that ambition. We also keep on saying that it's our strength to provide both sovereign lending and nonsovereign lending on the same balance sheet. It’s true. But I'd like to see some necessary organizational restructuring to further integrate those two operations more closely. One thing we should be careful of is that organizational restructuring of this magnitude does not happen so often. It cannot be implemented in one day. Actually, full implementation might take a couple of years and we should be extremely careful not to disrupt ongoing ADB operations as much as possible. But nonetheless, I'm really excited to embark on a new journey of ADB and the new operating model in a couple of weeks.

Zeinab: Yeah, I think that's sums it up really. So, it really will help you implement your strategies so much more. So, we look forward to seeing how that's all going to progress this year. Now President Masa, I can't have a conversation with you without mentioning domestic resource mobilization. I know it’s one of your long-term passions and your real expertise in this area. We've talked about it before. You've talked about how you can strengthen it through international tax cooperation in the past and so on. But I just wonder if you could give us some thoughts on domestic resource mobilization this year? In the current context that we've been discussing. 

President Masa: Thank you, Zeinab, for that question. The governments in our region have been facing quite an unexpected accumulation of public debt and shrinking tax revenues. The COVID-19 pandemic exposed the strong need for substantial investment in the health sector, education sector and social protection programs. So, we definitely need more predictable and stable revenue flows, and those revenue flows should come from domestic resource mobilization from tax revenue rather than relying too much on external financing. If you look at the tax-to-GDP ratio in this region, the ratio is relatively low, lower than other parts of the world. Sometimes some countries are below 15% threshold, which is generally recognized as a minimum level to achieve sustainable development. So definitely, there should be some room to improve tax policy to raise more tax revenue, and there should be some room to improve the tax collection function more efficiently and effectively. 

One more thing [I'd like to address,] I’d like to stress, is the importance of ITC. ITC means international tax cooperation. Under this globalized world where cross-border transactions are inevitable, I think countries should really meet international tax standards to avoid non-double taxation. Non-double taxation simply means tax is not paid anywhere in the world. That should be avoided. Pepsi is a good example. The so-called two pillar solution agreed among almost 140 countries in October 2021 was epoch-making, especially pillar one which should be beneficial for developing and emerging economies in the Asia and the Pacific region, because pillar one would enable market economies, market countries to impose fair amount of corporate taxation on foreign large multinational enterprises doing business in that country and making profit in that country even without any physical presence. Traditionally, international taxation rule said you can impose a corporate tax on foreign companies only if the foreign company has some kind of physical presence. We call it PE—permanent establishment—in your country. But nowadays, big multinational enterprises can make profit even without any PE by utilizing digital technology, by utilizing e-commerce and so on. I believe that Asian countries would continuously host many, many multilateral multinational enterprises from now on. So countries should really take advantage of this historic agreement as much as possible. But regrettably, 26 developing member countries of ADB did not join in the BEPS agreement. So, through the original tax hub we established in 2021, I'd like to further promote tax policy discussions to raise more tax revenue and the discussion on how to make our tax administration more effective and efficient and encourage our DMCS to participate in the BEPS agreement. 

Zeinab: Yeah. You keep on mentioning the BEPS agreement, of course, just to help people with their acronyms here. It stands  for base erosion, profit shifting. And just to remind everybody, fascinating. And you're right to emphasize the fact that you need that kind of domestic resource mobilization at a national level where you increase your ratio of tax to GDP so that you can meet all those sustainable development goals as well as you say, the kind of international tax cooperation that you've been talking about there. And we also spoke last year about the importance of resilient and connected economies and also, we talked about the future of globalization. And you expressed a lot of optimism there that globalization is going to flourish and isn't at all dead. And reports of its death are greatly exaggerated. So, what are your thoughts about it this year? You're still optimistic?

President Masa: Yeah, right. Let's focus on the future global supply chain network, which is a good example of globalization. As you know, the global and regional supply chain network has been a driving force for the very strong economic growth in this region for the last two decades. Firms and countries are involved throughout the production process, forming what is sometimes referred to as “Factory Asia.” As a result, the regional trade boomed, and the economic growth rate was 6% per year on average before the pandemic. And, the population or number of people living below the absolute poverty level, which is defined as $2.15 per day, dramatically reduced by 80% from 1.3 billion people in 1999 to 187 million people in 2019. 

Amid that progress, global and regional supply chain faced several challenges. First, the global trade, regional trade really slowed down right after the global financial crisis some 15 years ago. And second, trade once again stagnated for the last 3 years, initially due to trade tensions and then due to the COVID-19 pandemic. But despite those challenges, I do think that our regional supply chain, especially in this Asian region, has proven to be very strong, very resilient. And I think strong resiliency of our regional supply chain in this region is one of the reasons why the inflation rate is relatively low compared with other parts of the world. 

Also, please be reminded that regional supply chain was a key to the production of vaccines, PPE (personal protective equipment) and other medical supplies during the COVID-19 period, and it should be also noted that value added created by supply chains is increasingly generated outside of traditional manufacturing areas, in such areas as intellectual property and services. So, looking ahead, as globalization comes back and as our global trading systems moves to new normal, I do believe that global and regional supply chain network will once again play a key role in the process of recovery from the pandemic and other crises. So, the strategy should be to invigorate our open and free trade systems. Also, the strategy should be built on the clear understanding where the value added is created by incorporating a new type of supply chain linked to intellectual property, services, and innovations. Now I do believe that this type of new supply chain will provide a new opportunity to take part in the global trading system, especially for low-income countries, small and medium-sized enterprises, and the poor and vulnerable. 

Zeinab: Fascinating. Always true. You can always turn challenges into opportunities, can't you, President Masa?

So finally, President Masa, I must ask you, you mentioned at the beginning of our conversation that now that COVID travel restrictions have been lifted, you can really travel so much more. I wonder if you could just pick one highlight of your travels for us.

President Masa: Yes, last year I had opportunity to go to Cambodia [where I had the opportunity] to visit one senior high school outside Phnom Penh, to which ADB provided some financing for their STEM program. STEM stands for science, technology, engineering, and mathematics, and I was glad to meet many teachers and students involved in that program, and I’m extremely happy to see that they are focusing on education of girls and training of female teachers. I had a brief chat with one [girl] student whose name was Monica. Monica told me what kind of subject she’s actually studying more under this program, and also, she told me her future career plan [that she would pursue] after graduation. As we spoke, she smiled wholeheartedly. [So] I strongly felt that I saw the bright future of Cambodia in her shining face and in her shining eyes. And they affirmed my firm belief that investment in human beings is the most crucial thing to do to achieve inclusive and sustainable development. 

Zeinab: That’s absolutely a very moving account there. I love this story of Monica in Cambodia whom you met there. And it reminds me, actually, of what the late former UN Secretary General Kofi Annan once said. And he said: “To educate girls is to reduce poverty.” President Masa, it has always it's been a pleasure to talk with you and to listen to your insights and experiences. And I'm sure the Annual Meeting in the Republic of Korea would be an all-around success. And I look forward to seeing you there. Till then, keep well and don't work too hard, though I know you won't listen to me, and you'll be working round-the-clock. As usual, thank you. To you and everyone else who's been watching this conversation from me, Zeinab Badawi. 

President Masa: Goodbye. Thank you, Zeinab. See you in Incheon. 

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