Reflections on the JIIA Syposium on East Asian Community.

Yesterday (17^th) at Prince Hotel the Japan Institute for International Affairs convened a symposium on East Asian community. With the opening speech delivered by Hatoyama himself, and a promise to broadcast the entire proceedings both domestically within Japan and overseas, the event was quite high profile. I will discuss the significance of the symposium, and then reflect on some of the speeches and discussions.

Significance of the symposium:

The presenters themselves represented the cream of Asia’s Track II diplomacy. A point underlined by the fact, in addition to handshakes with the PM, Foreign Minister Okada will meet with the international academics after at dinner. Thus, the conclusions of the symposium will find a place (at least informally) in the policy-making process of Japan, and perhaps more broadly.

And interesting side point, there was a similar symposium at Aoyama Gaku-in on Friday (12^th) last week on East Asian community. This symposium was also populated with high level academics, such as Korea’s former Ambassador to the US Han Sungjun and China’s former Ambassador to France Wu Jianmin and Japan’s former Ambassador to the United Nations Taniguchi Makoto. There are simply too many high-level academics in Tokyo this week for sheer coincidence. This Friday meeting was a really by and for Japanese-only affair with most presentations in Japanese, although English translation was provided. Indeed, I was the only white person in the room who was not a presenter, suggesting that the outputs will only travel as far as Japan.

The nationality of the presenters at the JIIA symposium was also interesting and deliberate. First up, the representatives of Northeast Asia, Shiraishi Takashi (Japan), Gong Ro Myung (Korea), and Wang Li Zhou (China). With Hassan Wirajuda otherwise engaged, Tommy Koh (Singapore) was the only representative from Southeast Asia. Then came the ‘others’, TJ Pempel and Ezra Vogel (US), Rajiv Sikri (India) and Peter Drysdale (Australia). The consensus in the group of academics was clearly in favor of the East Asian Summit as opposed to the ASEAN+3, even Wang (China) was careful to note the value and significance of the 16 party grouping.

Hatoyama’s speech:

Hatoyama’s speech was good, but not ground breaking. That Hatoyama would chose to come (he was unable to come to the Friday meet at Aoyama) to this meeting is significant. It is a symbol that he continues to be interested in the EAc idea and is serious about promoting it. While no major policy shifts were announced, he did make clear his determination to “break open” Japan and pursue a kind of regionalism that will impact on Japan and the Japanese rather than an abstract elite level sort of regionalism. This implies a determination to trump local interests, particularly the agricultural lobby, in the pursuit of Japan’s greater economic and political interests in the region.

Panelist’s Discussions:

Shiraishi Takashi, is never bad to listen to. Shiraishi revealed that the Hatoyama administrations had recently approved of a plan to propose a regional scientific and technical community be established at the East Asia Summit. Another part of Japan’s efforts to lift the significance of the 16 party group and assert its leadership no doubt, but a valuable contribution no less. Shiraishi also identified the biggest problem of the East Asia Summit as the lack of any ‘big’ success. In contrast to the ASEAN Plus Three which will activate of the 24^th the Chiang Mai Initiatives, the EAS has managed only a series of moderate, non-headline grabbing initiatives such as the ERIA. I could not agree more.

Gong Ro-myung, put together a simple presentation focusing on one issue – regional security cooperation. Or more accurately, the lack there of. Gong stated that all the initiatives in East Asia on technical issues, economic and non-traditional security (pandemics, disaster relief, piracy etc) was not spilling over into cooperation in security. He contrasted this to the European experience, and urged the regional governments to let spill over occur. This idea is interesting because it suggests that security cooperation would be a nature occurring phenomena arising from other initiatives but that regional governments are actively preventing it. I imagine he was thinking about the North Korea issue, but this point is true to an extent also in Southeast Asia.

Tommy Koh, was challenged by Funabashi Yoichi (Asahi Shimbun) about the whether the ASEAN deserves to sit in the drivers seat of regional integration. Koh noted that the ASEAN position as driver is due to default, acknowledging that ASEAN not the best driver (ie hardly ideal) for integration but the only one that all were comfortable with.

ASEAN was also challenged by Vogel, who asked Koh is ASEAN was perhaps not up to the task of managing a real crisis (I think security is what he had in mind). In defending the honor for the ASEAN, Koh responded (revealing for first time apparently) by relaying a story about cyclone Nargis and Burma. In the aftermath of the cyclone, the military Junta in Burma initially turned down offers of international food aid, causing additional unnecessary hunger, disease and suffering for its people. ASEAN members confront the Burmese foreign minister (on Buddha’s birthday as the story goes) and demanded that he call his masters and tell them that Burma’s decision not to accept aid is harming the reputation of ASEAN, and that Burma must accept international aid. Like, in the event of Tsunami, ASEAN head of states were able to call each other immediately to coordinate response and help set up an international pledging conference.

While interesting, I do not think Tommy Koh’s response actually answered the question – or answered it indirectly. Managing cyclones and tsunami, which are both natural disasters, can be considered crisis management. But I feel the question was about security, and Koh’s deft side stepping of the issue merely re-enforced the view that ASEAN was in fact not up the task.

All in all, a highly interesting symposium. Thanks go to Yuzawa Takashi for setting up and the participants.

The Asian Develop Bank’s Regional Cooperation and Integration Strategy: Merits and Issues. Part 3

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

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.”

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.