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 the second of those, the free rider problem. Here, the ADB has sought to resolve regional countries’ concerns about a free rider in two ways.
Firstly, in cases where the client countries’ are unable to reach a consensus on burden sharing, (what this means practically is that the countries’ pledges sum to less that 100% of the expected cost of a projects), the ADB has sought to “pay the difference” from its own pockets. Of course, the ADB is unable to simply provide compensatory cash payments to the “losers” of any project, and so Bank has been required to use a more round-about method for achieving the same. Specifically, the ADB has sought to lengthen the shadow of the future by “bundling” each individual regional project in with other such projects. This bundling allows the ADB to spread out the ‘losses’ over time. Of course, in any one project some country/s might “get” more than others, but with the ADB taking a longer term view and communicating its vision to the client-nations, these individual projects can go ahead with each country feeling that it is being treated fairly. But it is hardly optimal, despite the best of intensions, and may likely create its own set of problems.
Indeed, it is precisely because the ADB is not mandated and equipped to function like the European Commission’s Structural Funds mechanism that the ADB is having difficulty with effectively and efficiently evening out the costs and benefits of regionalism.[1] In the future this might be changed; having the ADB adopt such a role is indeed a logical extension of the RCI, but for the time being the ADB risks institutional overreach in its attempts to help the poor of Asia to help themselves.
The second way the ADB has sought to ameliorate the free rider problem is rather to get someone else to “pay the difference.”[2] Here, however, there are only two candidates; Japan and China. This is because neither the US or Europe are much interested in such schemes, indeed it seems that the US is unfriendly towards the regional cooperation agenda.[3] These two regional powers have both the necessary deep pockets and deep political interests in the region to allow taking on such a role, but of course there are very obvious risks.
The most obvious of these risks is that these Great powers will start to play games in southeast’s backyard. This is precisely what has happened with North-South corridor and the East-West corridor. The North-south corridor (funded by China) links Yunan Province to the Mekong. While the East-West corridor (funded by Japan) opens an better access to the same markets for Japanese goods arriving by sea (likely at the port of Da Neng in Vietnam).
More insidiously, China has become skilled in taping the regional allowances outlined earlier, usually in combination with its own PRC Special Fund, to direct the ADB towards financing regional projects that benefits China. One example involves a project aimed at “facilitating sustainable, environmental-friendly regional power trading in the greater Mekong subregion”, co-financed by the ADB and the PRC Special Fund. The purpose of this project for “developing the hydropower plants for exporting power to Yunan province or other potential hydropower sources for inclusion in the power trade” to the tune of 2mil.[4] Another example involves providing trade negotiation training via Regional Technical Assistance to countries with which the China is in the process of negotiating trade deals. Which ought to raise some eyebrows.
The ADB is risking its reputation by letting, or appearing to let, the big powers influence and direct the RCI. If the RCI is to be “done right”, and to win approval and acceptance which will see it live past the end of Kuroda term, the ADB will need to maintain scrupulous, and unquestioned, ethnical standards. As always it is a question of money however. If the ADB is to undertake such regionalist activities, then it ought to be given the resources to successfully do so.
[1] Giovanni Capannelli, "East Asian and European Economic Integration: A Comparative Analysis," in Working Paper Series on Regional Economic Integration (Manila: Asian Development Bank 2009).
[2] "Regional Cooperation and Intergration Strategy," (Asian Development Bank, 2006). See, Article 94. “Additional financial resources will also be required. Two types of financial resources are needed to implement the strategy effectively. First, with regard to the lending component of the strategy, for the immediate future, it is proposed to use existing OCR and ADF resources within available headroom and to catalyze additional public funding (particularly from larger economies).”
[3] The US is one of the few countries willing to be on record as opposing a proposal at the Board of Directors, for its own reasons the US has consistently voiced its opposition to regionalist approaches. The US opposed the creation of the Regional Cooperation and Integration Fund on the 22 March, 2007. However, US opposition can also look mean-spirited, such as the opposition in November 2005 to a Communicate-able Disease Control Project for the Mekong.
[4] "Indicative Rolling Regional Cooperation Operations Business Plan," (Manila: ADB, 2007). 8, 22
Showing posts with label ADB. Show all posts
Showing posts with label ADB. Show all posts
Friday, 2 October 2009
Monday, 28 September 2009
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.”
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.”
Friday, 25 September 2009
The Asian Develop Bank’s Regional Cooperation and Integration Strategy: Merits and Issues. Part 1
In 2006, the Asian Development Bank’s (ADB) president Kuroda announced a new ‘regional’ platform in the Bank’s development strategy. The Regional Cooperation and Integration Strategy (RCI) as it is known, is now three years old. It is time to reflect on the problems it has confronted and managed, successfully or otherwise, and to examine how it might fare from here on.
Of course, some might wonder how significant this new RCI approach is in terms of actual effect on the ADB’s operations and overall development strategy. In fact, the RCI is a very significant departure from the ADB’s prior practice. In the 2012 Strategy paper the ADB declared its intention to have 30% of its operations “regional” in the near future. Since the ADB loaned roughly four and a half billion dollars to East Asia in 2008, nearly twice that of the World Bank, thus we should be expecting at least one billion in regional projects annually. This is a lot of money in both relative and absolute terms for East Asia, and it is important that the regional strategy deliver at least as much as a national strategy, if not more.
Let it also be noted that the RCI is itself a new idea. The World Bank, the basic reference point for economic development thinking and practice, has favored a so-called country-level approach; under which each country has its own development strategy and applies for/receives loans independently of its neighbors. There are benefits to prescribing individual remedies to individual aid clients, and while a great deal of work (especially poverty reduction) can be achieved with such a close-country focus, there are costs. The most obvious cost is that under such an heuristic, cross-border infrastructure or technical assistance, which can have a great (and cost-effective) impact on economic development and living standards might be missed. To see such opportunities a different pair of glasses are needed, specifically those with a ‘regional’ tint.
This is where the RCI approach has its value added. While the World Bank continues to be, rightly so, the leading development bank at the individual country level, the ADB has an opportunity, indeed a responsibility, to find those worthwhile projects hidden in the spaces between its regional member countries. This function is even laid out in the Charter of the ADB, although it has until now played down this role.
However, a regional strategy is by its nature more complicated and difficult to manage than close-country approach such as the WB favors. Whereas a country focus would limit the number of actors at the table to two (ADB and client), a regional strategy necessarily involves bringing more actors to the table. This is a case of “two is company, three is a crowd”, as the addition of even one extra country at the table significantly complicated negotiations.
Let us take the example of a road construction project. If the road were to be country-level project then only the ADB and client would have to agree, for a total of one agreement. If however the road were to link two countries, such as the southern economic corridor from Thailand to Cambodia, then Thailand and Cambodia must agree, Thailand and the ADB must agree and Cambodia and the ADB must agree (total of three agreements). Let us say the project involves another country, the road also passes through Laos say, then the total number of agreements required is six. Thus, each additional country involved exponentially increases the complexity, costs and risks of negotiations. This is a “coordination problem” as it is know in the literature.
Moreover, since each country will benefit to differing degrees, each country wishes only to pay its “fair” share. Or put another way, no country wishes to subsidize others’ costs. In addition to whatever local political problems of distrust that might exist, this fear of a “free rider” (while strictly rational) will likely prevent real cooperation. This is because without some guarantee that any loss incurred in the regional project will be covered (insured?) by the winners, each country is unwilling to commit its resources. Let us not forget that these countries are genuinely poor, and will therefore jealously guard their meager resources, certainly in preference to gambling on the good faith of neighbors. This is a sort of “free rider” problem (or perhaps a “stag hunt”).
So how has the ADB sought to resolve these two issues; coordination problems arising from negotiating with multiple actors at once, and the free rider/stag hunt problem implicit in the new RCI strategy? And how much success has the ADB had? The answers to these questions are to be found in Part II, due Monday.
Of course, some might wonder how significant this new RCI approach is in terms of actual effect on the ADB’s operations and overall development strategy. In fact, the RCI is a very significant departure from the ADB’s prior practice. In the 2012 Strategy paper the ADB declared its intention to have 30% of its operations “regional” in the near future. Since the ADB loaned roughly four and a half billion dollars to East Asia in 2008, nearly twice that of the World Bank, thus we should be expecting at least one billion in regional projects annually. This is a lot of money in both relative and absolute terms for East Asia, and it is important that the regional strategy deliver at least as much as a national strategy, if not more.
Let it also be noted that the RCI is itself a new idea. The World Bank, the basic reference point for economic development thinking and practice, has favored a so-called country-level approach; under which each country has its own development strategy and applies for/receives loans independently of its neighbors. There are benefits to prescribing individual remedies to individual aid clients, and while a great deal of work (especially poverty reduction) can be achieved with such a close-country focus, there are costs. The most obvious cost is that under such an heuristic, cross-border infrastructure or technical assistance, which can have a great (and cost-effective) impact on economic development and living standards might be missed. To see such opportunities a different pair of glasses are needed, specifically those with a ‘regional’ tint.
This is where the RCI approach has its value added. While the World Bank continues to be, rightly so, the leading development bank at the individual country level, the ADB has an opportunity, indeed a responsibility, to find those worthwhile projects hidden in the spaces between its regional member countries. This function is even laid out in the Charter of the ADB, although it has until now played down this role.
However, a regional strategy is by its nature more complicated and difficult to manage than close-country approach such as the WB favors. Whereas a country focus would limit the number of actors at the table to two (ADB and client), a regional strategy necessarily involves bringing more actors to the table. This is a case of “two is company, three is a crowd”, as the addition of even one extra country at the table significantly complicated negotiations.
Let us take the example of a road construction project. If the road were to be country-level project then only the ADB and client would have to agree, for a total of one agreement. If however the road were to link two countries, such as the southern economic corridor from Thailand to Cambodia, then Thailand and Cambodia must agree, Thailand and the ADB must agree and Cambodia and the ADB must agree (total of three agreements). Let us say the project involves another country, the road also passes through Laos say, then the total number of agreements required is six. Thus, each additional country involved exponentially increases the complexity, costs and risks of negotiations. This is a “coordination problem” as it is know in the literature.
Moreover, since each country will benefit to differing degrees, each country wishes only to pay its “fair” share. Or put another way, no country wishes to subsidize others’ costs. In addition to whatever local political problems of distrust that might exist, this fear of a “free rider” (while strictly rational) will likely prevent real cooperation. This is because without some guarantee that any loss incurred in the regional project will be covered (insured?) by the winners, each country is unwilling to commit its resources. Let us not forget that these countries are genuinely poor, and will therefore jealously guard their meager resources, certainly in preference to gambling on the good faith of neighbors. This is a sort of “free rider” problem (or perhaps a “stag hunt”).
So how has the ADB sought to resolve these two issues; coordination problems arising from negotiating with multiple actors at once, and the free rider/stag hunt problem implicit in the new RCI strategy? And how much success has the ADB had? The answers to these questions are to be found in Part II, due Monday.
Friday, 10 July 2009
Xinjiang、Uighers and the Asian Development Bank
The news of this week seems to be focused on the violence rocking Xinjing, a province in the far west of China. This domestic political problem of the PRC might at first glance have little to do with the ADB, but this is not quite the case.
Firstly, the ADB is more involved in China's Western development than the World Bank, and indeed provides a better statistical picture of the economic problems there. The most significant of these problems is inequality. Income inequality in Xinjiang province is the worst in China, moreover Xinjiang on the whole is lagging behind the more developed Eastern provinces. Worse, this income inequality seems to be favoring the Han majority Chinese over the Turkic speaking Uigher minority. No surprise then that violent protesters and calls for secession from the PRC crop up again and again.
China has recognised the problems of inequality as a source for social disruption, and under Hu Jintao (formerly a Tibet hand), China has begun to focus on the vast interior. The ADB, and Japan in the ADB, have played no small role in this about face of the Chinese Government. Until the mid-nineties China would hear nothing about the need for social/environment development in the Central provinces and continuously prioritized the industrial development of the Eastern provinces. In the aftermath of the 1995 Lop Norr nuclear tests (coincidentally in Xinjiang Provence), Japan become increasing concerned that their ODA/Aid and the ADB's loans were subsiding the Chinese military. Japan's concerns about the Chinese military, and nuclear weapons specifically, prompted the GOJ to produce a new ODA/Aid Charter. Japan also took the fight to the ADB, and started to push for the ADB to prioritize the West and Central provinces and poverty reduction focused loaning to the social and environmental sectors, both geared towards less direct military spillover.
Eventually, China came to agree to these terms - although a new sector of so-called social infrastructure had to be invented as a compromise in the early 2000s. China recognised that the ADB would have greater legitimacy in dealing with Xinjiang and the Xinjiangese development problems than the Central Government in Beijing, especially due to the difficult race relations between the Han Chinese and minority Uighers. This has brought the ADB increasingly into Xinjiang. But while the ADB is focused on development, it is clear that its operations in Xinjiang are for reasons of domestic and international politics.
Firstly, the ADB is more involved in China's Western development than the World Bank, and indeed provides a better statistical picture of the economic problems there. The most significant of these problems is inequality. Income inequality in Xinjiang province is the worst in China, moreover Xinjiang on the whole is lagging behind the more developed Eastern provinces. Worse, this income inequality seems to be favoring the Han majority Chinese over the Turkic speaking Uigher minority. No surprise then that violent protesters and calls for secession from the PRC crop up again and again.
China has recognised the problems of inequality as a source for social disruption, and under Hu Jintao (formerly a Tibet hand), China has begun to focus on the vast interior. The ADB, and Japan in the ADB, have played no small role in this about face of the Chinese Government. Until the mid-nineties China would hear nothing about the need for social/environment development in the Central provinces and continuously prioritized the industrial development of the Eastern provinces. In the aftermath of the 1995 Lop Norr nuclear tests (coincidentally in Xinjiang Provence), Japan become increasing concerned that their ODA/Aid and the ADB's loans were subsiding the Chinese military. Japan's concerns about the Chinese military, and nuclear weapons specifically, prompted the GOJ to produce a new ODA/Aid Charter. Japan also took the fight to the ADB, and started to push for the ADB to prioritize the West and Central provinces and poverty reduction focused loaning to the social and environmental sectors, both geared towards less direct military spillover.
Eventually, China came to agree to these terms - although a new sector of so-called social infrastructure had to be invented as a compromise in the early 2000s. China recognised that the ADB would have greater legitimacy in dealing with Xinjiang and the Xinjiangese development problems than the Central Government in Beijing, especially due to the difficult race relations between the Han Chinese and minority Uighers. This has brought the ADB increasingly into Xinjiang. But while the ADB is focused on development, it is clear that its operations in Xinjiang are for reasons of domestic and international politics.
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