The Asian Develop Bank’s Regional Cooperation and Integration Strategy: Merits and Issues. Part 2

As outlined last week, the ADB’s RCI strategy confronts two problems which the close country focus does not, specifically coordination problems arising from negotiating with multiple actors at once, and the free rider problem. Today I will address one those, coordination.

With regard to the issue of coordination, the ADB has sought to resolve the issue by, in most cases, simply taking the initiative itself.[1] Because it can not be expected that the countries of the Mekong sub-region would be able to design and agree upon a project amongst themselves, the ADB designs (in part or in whole) for them a regional project. The ADB of course would also consider proposals from a regional or sub-regional body, such the Pacific Islands Forum (PIF) , Economic Research Innovation Asia (ERIA) or Central Asian Regional Economic Cooperation (CAREC, humorously pronounced Car-wreck), but even here is it likely that these body would refer to documents which the ADB had prepared in their planning.

While smoothing over the coordination problem, this new function of the ADB invites its own set of risks for the region’s development. By both recommending projects and offering to fund them, the ADB creates a situation in which aid clients might find it difficult to refuse, a sort of moral hazard.

This is because the money offered is ostensibly “free.” The funding for regional projects is sourced not from the countries’ national quota (envelop), but rather from a regional “allowance”. This is due to an institutional innovation which created within each regional department of the ADB a regional cooperation envelope independent of the national allotments. It might be difficult for national governments in these still developing to turn down which they may not have the way withal to soundly judge, and even if they believed that the project might not produce any real gain, explaining such refusal is an unwanted domestic political risk, regardless of regime type. On the flipside of this, moral hazard of a sort also arises because, if any one country turns down a project, it means that its neighbors must also go without. Thus there is the potential for external pressures to shape each country’s decisions. (This might be simply called the fear of being a party-pooper).

Thus the balance of power in the relationship in fact lies with the ADB, as the incentives are structured such that agreeing to any project, no matter its actual utility, is seemingly less costly (economically and politically) than refusal – particularly when compared with the balance of power in negotiations and the incentives structure in the country-level approach. The ADB needs to be aware that its client are, under the rubric of the RCI, more likely to accept any regional proposal made. Thus the ADB must be more careful that what it offers is based on sound judgment of the utility of each regional project and not to become memorized by a regional vision of its own creation. One idea might be to have the World Bank invited in review such cross-border projects and to peer review these projects effectiveness, paying close attention to poverty reduction.

Part 3 will be out soon with the last section.

[1] Mid-term Strategy, Article 39 “the rationale for RCI is premised on significant externalities, benefits that transcend national borders. This requires innovative funding arrangement because the distribution of benefits and costs among the partner countries is not always balanced. In the absence of an honest broker/facilitator, individual countries would not bear the cost of providing public goods from which the benefits would primarily flow to other countries.”