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Asian Development Bank: The first 50 years

In 1997 blame for the Asian crisis was sheeted home to incompetent and often-corrupt leadership. This book gives a different and more accurate explanation.

Railway modernisation in Uzbekistan (Photo: Flickr/ADB)
Railway modernisation in Uzbekistan (Photo: Flickr/ADB)
Published 10 May 2017 

The ADB has just published a history to celebrate its first 50 years, written by ANU economist Peter McCawley. This detailed narrative of the ADB’s institutional evolution is told against a background of extraordinary change in Asia. In 1966, the colonial period was barely over for some countries and still unresolved in several. The cold war was at its height and Asia was an important battleground – the American role in Vietnam was entering a new and tragic phase. China was in the throes of the Cultural Revolution. Indonesia was experiencing hyperinflation. The Four Tigers (South Korea, Hong Kong, Singapore and Taiwan) had begun their extraordinary journey out of poverty, but this had hardly registered on global consciousness. At this seemingly unpropitious moment, Japan – itself just emerging from its post-war reconstruction and a neophyte in global institutions - set out to create a multilateral financial institution which would steer global capital into the region to foster economic development.

Much of the 500-page text records the institutional development of the Bank itself: its nine Presidents (all Japanese), physical expansion of its Manila headquarters, its capital expansions and widening membership. Over time the focus of the Bank shifted from pure project financing - largely for infrastructure - to a wider role of technical assistance, policy advocacy, facilitator of bond-market development and active promoter of regional economic integration.

The institutional story is for aficionados of global governance (and has special relevance with the rise of the Asian Infrastructure Investment Bank, China’s answer to the Japan-dominated ADB). This review focusses on just one element of this book: the background narrative of Asia’s economic development and the changes over this 50 years in both practice and thinking about the challenge of development. This is described in a parallel story running, chapter-by-chapter, alongside the institutional history.

In the 1960s, thinking about economic development in Asia was greatly influenced by the experience in the Indian sub-continent. The key issue was feeding the growing populations, so agricultural productivity was central. At the same time the Japanese experience of industrialisation, set off in the Meiji Restoration a century earlier, provided an alternative way forward. Already there was discussion of the ‘flying geese’ model of development: as the lead goose (Japan) moved further out towards the technological frontier, the following geese could take over the simpler levels of industrial technology. In Indonesia, for example, there was discussion of whether the country could break out of its ‘agricultural involution’, whereby population growth was absorbed in progressively less-productive agricultural employment, rather than shifting into labour-intensive industry. But to make the shift, capital was needed. Thus attracting capital from the global financial markets was seen as essential: hence the need for a development bank which could tap advanced financial markets and use its credit-standing to channel these funds to countries without commercial borrowing capacity.

In the 1960s, few foresaw that most of the necessary saving would in fact be domestically generated in later decades, with almost all of these countries putting in extraordinary saving performances. In fact the international development banks have not provided much of the huge funding that drove the growth performance. While the ADB’s annual loan approvals have increased  from $US42 million in 1968 to $US17.4 billion last year, this represents substantially less than 1% of the GDP of Asian developing economies excluding China. Over time, more of these economies were successful enough to borrow in their own name in commercial markets.

Meanwhile the ‘green revolution’ (high-yield crop strains) reduced concerns about feeding the population, while at the same time requiring better agricultural institutions and infrastructure. Similarly, the shift to industrial development and services, necessary to provide productive employment, required more complex institutional and governmental structure. Thus began the debate about the role of governmental intervention, regulation and markets. Much of Asian opinion saw a substantial role for governments, while the ‘free market’ arguments were becoming louder in advanced economies (effectively promoted by Margaret Thatcher and Ronald Reagan). In practice most of the success stories of Asia (Korea, Singapore, and China) had a heavy element of governmental intervention, often via trade protection, special regulations and subsidies for favoured sectors.

Over time the central role of markets in allocation and pricing came to be increasingly accepted, although the doctrinal aspects of free markets found few supporters. Policy rhetoric often explicitly disavowed ‘neo-liberalism’ (i.e. unrestrained free markets). Well before the ‘Washington Consensus’ was formalised in 1989, a middle-of-the road pragmatic policy mix was practised in many Asian economies. Budgets and inflation were kept on a tight rein. Active policies promoted domestic industry, but often with an export focus which imposed efficiency requirements and price restraint. Exchange rates were tightly controlled, but the importance of keeping international competitiveness was recognised. Foreign capital flows were largely open. State-owned enterprises remained important, but with increasing pressure to operate on commercial principles. Powerful commercial groups flourished, often thanks to patronage of authoritarian rulers. That said, the usual conflicts between good economics and populism were often resolved in favour of sensible, if imperfect, economics. By the time the 10 principles of the Washington Consensus were articulated in 1989, they had already been widely accepted as desirable objectives (‘motherhood and apple pie’), even if actual policy implementation fell short.

This progress came to a sudden halt in 1997 with the Asian Crisis. At the time, the main blame was directed at incompetent and often-corrupt leadership, with ‘crony capitalism’ held culpable. The ADB’s volume gives a different and more accurate interpretation of the causes. Certainly, corruption and administrative incompetence played an important role. But the preceding decades had seen these economies responding to the pressure to open up to foreign capital flows, while at the same time globalisation was multiplying the volume of flows. In the five years preceding the Asian Crisis, the inflow became a torrent. Largely short-term volatile lending pushed up asset prices and exchange rates, opening substantial current account deficits. The institutions of prudential financial supervision were still rudimentary. When foreign sentiment changed, this vulnerability led to dramatic capital reversals and exchange rate collapse which bankrupted banks and enterprises.

For the first decade after the crisis, international opinion maintained the view that the problems were largely domestic deficiencies rather than volatile capital flows or the intrinsic instability of financial sectors. The 2008 Global Financial Crisis shifted this view. It brought home the universal reality that fragile financial sectors can set off profound crises, even in advanced economies.

So what has changed in developmental thinking in 50 years? First, spectacular transformation out of poverty is possible (there were doubters in the 1960s), but this requires good policies, a minimum level of administrative competence and growth-friendly institutions. ‘Convergence’ is not an automatic or mechanical process: not every country will embark on the journey, and even those that make early progress may be caught in the ‘middle-income trap’. The opportunities provided by globalisation are as real – and vital - as ever: without international trade and foreign direct investment, transformation is severely hobbled.

The concerns of economic development have become far more complex, with multiple objectives going well beyond the simple notion of combatting poverty. The challenge now is to foster growth and ongoing transformation while addressing income maldistribution, environmental degradation, climate change, gender balance, social demands and a ‘Christmas tree’ of competing objectives, each with its own insistent proponents.

The gap between rich and poor countries has narrowed spectacularly over fifty years, as have other measures of progress such as education, health and longevity. One simple measure of the closing gap between rich and poor is given by the changing contribution to global growth from the emerging economies. In the second half of the 1970s, they accounted for less than 20% of world growth. Now the contribution is over 70% and their continuing success has become a major determinant of global growth.

Contribution to Global Output and Consumption Growth (%)
Source: IMF World Economic Outlook April 2017 (Chapter 2)

The big contributors here have been China and India, but this can be generalised to say that Asia has been far more successful than Latin America or Africa in this transformation. This volume tells not only the story of the ADB, but the story of that success.

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