Published daily by the Lowy Institute

Time for ADB members to rethink their approach

Other ADB members make room for China and India to have a larger shareholding and say.

Salme Village in Nepal with a bridge financed by the Asian Development Bank to the right (Photo: Flickr/ADB)
Salme Village in Nepal with a bridge financed by the Asian Development Bank to the right (Photo: Flickr/ADB)
Published 23 Feb 2017 

The Lowy report by Annmaree O’Keeffe, Jonathan Pryke and Hannah Wurf on Strengthening the Asian Development Bank in the 21st Century is an important document. It is one of the best, independent reports on the Asian Development Bank currently available in Australia.  Unfortunately that is easy to say, because there are not many other independent assessments on the ADB.

Yet the ADB is important for Australia and its relations with the countries in Asia. It deserves more attention.

There was a short article in The Economist last December with the theme ‘The incumbent, 50 years old and under pressure from China’. This rare report on the subject by The Economist noted that while all the focus had recently been on the establishment of the China-backed Asia Infrastructure and Investment Bank (AIIB), this was still a fledgling, while the incumbent development bank in the region - the ADB - is a relatively large institution with an impressive track record, but it is under pressure. The article is right, the AIIB has received all the publicity and political attention. The ADB has been overlooked.

So it is pleasing to have this very good report by O’Keeffe, Pryke and Wurf. It is to be hoped that it attracts interest and encourages debate about the future of the ADB because, as the authors have clearly demonstrated, Asia still needs a development bank.

The ADB can continue to make a positive contribution to combating poverty in Asia and promoting the economic development of the region. But to do so, it has to change. The pressure to change comes both from competition (the AIIB) and, more fundamentally, from the need for the bank to respond to the significant changes that have taken place in Asia.

But to say the ADB has to change does not mean it has to give up its strengths or weaken its standards. On the contrary. The report is absolutely right to recommend the ADB should remain neutral in an increasingly fraught geopolitical environment and maintain high standards and oversight of its lending program.

Nevertheless the ADB’s President, Takehiko Nakko, is also right when he says the ADB has to change to be a ‘faster, stronger, better’ bank. But change is always difficult in a multilateral institution which has to accommodate the often-conflicting views of member countries.

The report recommends that the ADB should stay within its mandate. Any multilateral body should stay within the mandate set by its owners. But a major challenge facing the ADB may be that its owners will have differing views as to what should be the ADB’s priorities. As the report notes ‘ADB shareholder views ranged ambitiously over a wide territory of development priorities’. This was evident in the recent replenishment negotiations for the ADB’s concessional arm, the Asian Development Fund, when Japan advocated that the ADB should take a stronger role on regional health issues, but this was resisted by a number of other countries.

The report is right in recommending that the governance of the ADB has to change, and in particular regional members such as China and India need to play a bigger part in the ADB. But this will only happen if other members make room for China and India to have a larger shareholding and say in the bank. Hence one of the biggest changes required in the ADB is the attitude and policies of its members towards the bank. This includes Japan giving up at some stage its stranglehold on the ADB presidency.

Improving the governance of the bank involves more than ‘chairs and shares’ – that is changing the representation of countries in the bank and their voting shares. The internal governance of the ADB has to change, and again this requires members changing their approach to the bank. In particular, countries have to move away from trying to micro-manage the ADB’s management.

Members of the ADB should set the goals for the ADB, outline what is expected from management, then give management the freedom to get on and deliver on those goals and hold them accountable for their performance.

In this regard, one recommendation in the report I don’t agree with is the call for an increase in ADB staff. Staffing levels should be left to ADB management.

The report is right in recommending that infrastructure should continue to be a focus of the ADB. But the ADB has to move away from its traditional focus on balance sheet lending if it is going to make a significant contribution to meeting Asia’s infrastructure needs. Its direct lending will only meet a tiny part of Asia’s infrastructure needs.

The ADB should increasingly focus on facilitating greater private sector infrastructure financing in Asia. This will require more co-financing operations, more direct involvement with the private sector, and more effort on project preparation. There is much talk about the need to develop pipelines of ‘bankable infrastructure projects’ in order to attract private sector financing. The ADB should get on and make this happen.

The ADB faces big challenges and there should be more discussion and debate on its role in the 21st century. Hopefully the recent Lowy report will help encourage and facilitate greater interest in the ADB.

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