DEVELOPMENT: Testing the Waters for an Embryonic Asian Investment Bank

By Marwaan Macan-Markar Reprint | | Print |

Marwaan Macan-Markar

BANGKOK, May 18 2005 (IPS) - A regional U.N. agency is up against two formidable adversaries – the United States and Japan – as it tries to drum up support among Asian and Pacific governments to create a new financial institution, the Asian Investment Bank (AIB).

The call for this alternative funding body to the Manila-based Asian Development Bank (AsDB), which enjoys a monopoly on development funding in the region, was unveiled by the Economic and Social Commission for Asia and the Pacific (ESCAP) during the U.N. agency’s annual meeting, which ended Wednesday.

As the Bangkok-based ESCAP see it, the AsDB’s annual lending rate for development projects in the region falls far short of what Asian countries need to develop their infrastructure in order to advance on the road to progress.

In a document circulated during the week-long meeting, attended by ministers and government officials from 48 countries, ESCAP noted that the region needed over 200 billion U.S. dollars annually for infrastructure investment.

The AsDB only lends six billion U.S. dollars every year, an ESCAP official said, and a further 44 billion U.S. dollars are available from ”official and private sources” for all areas of development.

The AsDB is unable to meet the new financial challenges of the region, which is growing very fast but has an infrastructure that is ”lagging behind,” Kim Hak-Su, head of ESCAP, told reporters Wednesday.

He argued likewise on Tuesday morning during a session that focused on the search for new avenues to finance development in Asia.

”The Asian Development Bank was established in 1966, but the Asian economy has grown so fast (since then). It is time to look for other ways (of funding development),” said Kim. ”I believe the competition will be good. It would stimulate the (AsDB) to strengthen its work.”

The AIB will help boost the region’s financial sector, Kim added, since it ”could work with (the) private sector by co-financing and guaranteeing private investment financing.”

ESCAP’s initiative was not out of character for a regional U.N. agency that has a mandate to generate new economic and social blueprints to bolster development in Asia and the Pacific.

The AsDB, in fact, grew out of such a climate at ESCAP.

However the call to create the AIB was dismissed by officials from Washington and Tokyo as premature.

”We do not see the need for a new (financial) institution,” Richard Behrend, head of the U.S. delegation for ESCAP’s annual meeting, told delegates on Tuesday.

For Itsunori Onodera, head of Japan’s delegation, more answers were needed to understand the prevailing funding gap for development before the region plunged towards another financial entity. ”It will be difficult for Japan to support the (AIB) from the viewpoint of efficiency,” he said.

Both objections came from countries that have a huge stake in the Manila-based bank, since they are the AsDB’s major funders.

Yet the idea floated by ESCAP was backed by a wide range of countries, including Kazakhstan.

”The idea for the AIB is very interesting. I don’t agree with those who say that it will duplicate the work of the ADB,” Kassymzhomart Tokaev, Kazakhstan’s foreign minister who was also chairman of ESCAP’s annual meeting, told the media.

ESCAP’s case for a new financial institution in Asia on the lines of the European Investment Bank is built on factors other than the ”large financing gap” for development, the agency’s researchers point out. Among them are the AsDB being limited to lend to governments and its inability to completely fund large-scale trans-boundary projects, such as major highway and railway networks cutting across the continent.

Among such projects is the planned Asian Highway, a 140,000-kilometer network of roadways that will link 32 Asian countries, from Japan, on the eastern fringe, to Georgia, on the western end. The AsDB has agreed to fund the roadway linking Vietnam to Burma and Thailand to southern China.

The push for new financial resources has been shaped by a noticeable drop in private investment to fund infrastructure programmes since the Asian financial crisis, says Raj Kumar, head of ESCAP’s poverty and development division. ”It has slipped from 40 billion U.S. dollars in 1997 to 11.5 billion dollars in 2003.”

That slide was one factor that prompted ESCAP to review the prevailing funding-for- development pattern, he explained in an interview. ”While other aspects of the affected economies like growth has revived, infrastructure financing has not.”

According to Yung Chul Park, director of the centre of international commerce and finance at South Korea’s Seoul National University, the new institution will complement the work of the ADB, ”since it will be geared towards private lending for private firms involved in development infrastructure”.

”The ADB has no experience in private lending so one might as well create a new institution with a new mandate,” he told IPS. ”This will be more efficient than asking the ADB to combine its work lending to governments with private lending.”

ESCAP has already set its sights on the agency’s annual meeting in Indonesia next year to galvanise more support for the AIB initiative, since the theme for that gathering will be financing infrastructure development in the region.

”The issue of infrastructure in Asia is important and deserves study, but we just think that it is not possible on the basis of two numbers that were presented in the documentation – 200 billion (dollars) needed and 50 billion (dollars) in available funds – to conclude that a new institution is necessary,” Behrend, the U.S. official, told reporters.