Published daily by the Lowy Institute

Why Asia still needs a development bank

A dramatic increase in lending (up almost threefold from the year 2000) will increase pressure on the ADB to approve new loans and create a pipeline of bankable projects.

Photo: Sasint/CCO Public Domain
Photo: Sasint/CCO Public Domain

It is easy to forget that Asia still hosts most of the world’s poor people given the region's remarkable economic success in recent years. Yet almost half of the world’s extremely poor people (326 million out of a global total of 766 million) still live in South and East Asia, according to the World Bank.

Most of Asia’s developing countries are now middle-income countries. However, this categorisation can be misleading as it sets a low bar for prosperity. To become middle-income, these countries only need achieve an average gross national income (GNI) per person of around $4000 or less. This stands in stark contrast to the OECD GNI average of around $38,720 per person.

So while the concept of 'poor countries' may have become less relevant in Asia, there are still many poor people. Poverty is often hidden in lagging regions of otherwise increasingly prosperous countries or in excluded populations including ethnic minorities. The slowing of some previously dynamic economies underlines the lesson that development trajectories are rarely linear and that people get left behind.

This is why Asia still needs its own development bank. Since it was founded, the Asian Development Bank (ADB) has evolved from its initial focus on promoting food production and rural development to supporting large infrastructure projects and the adoption of poverty reduction as its primary focus. The 50-year-old bank has as a long history of development projects and advice (successes and failures) and high standards. This sets it apart from new players in the region like the Asian Infrastructure Investment Bank.

The ADB has its work cut out for it. The benefits of infrastructure connectivity (which has a direct impact on poverty) in the region have not been fully realised. At the same time, the very concept of development is changing in a region increasingly threatened by the effects of climate change. Further, Asia is facing two major demographic shifts: ageing populations and rapid urbanisation. There is very real concern among governments that Asia will 'become old before it becomes rich'.

Fortunately, the ADB has a replenished capital base to start to address these challenges. In 2017, the ADB merged its non-concessional and concessional arms in order to increase its overall lending. It now expects to lend $20 billion for development focused projects in the region by 2020, leveraging that amount into $40 billion through co-financing. This dramatic increase in lending (up almost threefold from the year 2000) will also increase pressure on the ADB to approve new loans and to create a pipeline of bankable projects.

Asian countries are no longer financially dependent on development banks and foreign aid. They can draw on alternative sources of international finance as well as their own domestic resources to fund many of their development and infrastructure needs. But these new sources of finance are unable to replace the work of the ADB, let alone meet the vast infrastructure financing deficit across the region. The region is desperate for bankable projects and the knowledge, technical expertise, and policies required to implement such projects.

The ADB will need to continue to experiment with new lending modalities to best leverage its lending muscle and better catalyse and improve domestic investment. As well as engaging directly with the private sector, it needs to look at lending to governments in new and innovative ways. At the same time, the bank should not forget about its concessional lending to low-income countries.

Despite the criticisms of some members and frustrations of some partners, the ADB has delivered good outcomes throughout its lifetime, contributing to the remarkable economic and social change across the region. But it cannot be idle and must have confidence in its role as a facilitator of good development across the region.

The authors' new report, 'Strengthening the Asian Development Bank in 21st Century Asia' is available here.

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