Regional Cooperation in Northeast Asia

-The Need for A Development Bank

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A text of speech  prepared for a meeting
  in September, 2003

 

Northeast Asia-Past and Present

As we are well aware, Northeast Asia has an unfortunate historical background in which there have been several wars in the region in the past two centuries. Needless to say, the historical background hampered in many ways regional economic, as well as political, cooperation in the region. This explains why there is no significant institutional arrangement to date for regional cooperation in Northeast Asia. More specifically, while the APEC map is covered by three sub-regional groupings: NAFTA, ASEAN, and ANZCER (Australia-New Zealand Closer Economic Relations Trade Agreement), there is no such sub-regional cooperative body in Northeast Asia.

Today, the area covered by Japan, South Korea, and eastern part of China has become one of the three pillars of the world economy together with the North America and the EU, while the western interior of China, Mongolia, North Korea and Russian Siberia still remain as a development frontier. Yet these countries are known to be treasure troves of mineral resources of every variety, not to mention their water, fishery, forests, agriculture, land, and people.  In particular, Siberia has about 32% of total world natural gas deposits.

The economic disparity between the developed and less developed areas implies a great potential for development which can be realized by means of transfer of capital, technology and managerial skill from the market oriented developed areas to less developed parts in transition. Hence Northeast Asia as a whole, in my view, promises in due course to become one of the most dynamic spot in the world economy.

The Areas for Regional Cooperation

In order to realize the great potential of economic development, however, countries in the region have to make concerted effort, overcoming various political and social barriers in the way of regional cooperation. In fact, there are many areas in which the mutual benefit can be derived for all countries in the region by means of joint effort and undertakings, which include: building up infrastructures in transportation and communications; enhancing energy security; protection of environment ; institutional reform for the market economy; reducing institutional barriers in the flow of goods and services; and  better access to international  money market for development financing.

 Let me highlight some of them. In the area of land transportation, the scheme of the Asian Highways was proposed and accepted by ESCAP in May 2002. In the area of railway, it is regarded highly desirable for Northeast Asia to make Korean peninsula a land bridge between Japan and Europe through Trans Siberian Railroad (TSR) and the Trans China Railroad (TCR) as soon as possible. Currently North and South Korea are working together to connect two main lines of the Korean railroads to the Siberian railroads that lead to Europe through the TSR. When the connection is completed and necessary improvements in facilities and service are realized, it will take 17 days to transport cargo from Japan to Finland, compared with 30 days in the case of maritime transport. Korea also can reduce shipping time by more than 17 days to reach Europe by switching from the marine route to the Siberian railroad.

Energy development is another area for regional cooperation. Energy security is a matter of concern for Japan, Korea, and China. At present, Japan depends on the Middle East for 85% of its oil imports, and the dependency is about 77% for Korea. China turned to net importer of oil, beginning in 1993, currently depending on the Middle East for 54% of the import requirement, and dependency ratio is expected to rise to 77% in 2020. Hence the exploration and use of natural gas from Siberia will be inevitable sooner or later to reduce the unilateral dependency of the three countries on Middle-East. The pipeline network connecting supply sources in West and East Siberia with China, Korea, and Japan has been under discussion among the countries concerned, which, I believe, will eventually materialize into a regional development project.

The Need for Creating a Regional Development Bank

Whatever we do to carry out  cooperative ventures in the Northeast Asia, we end up with  financial problem. So, let me now turn to the issue of   financial cooperation.  Prerequisites for economic development is to provide for  infrastructures. Yet, given the meager domestic savings, it cannot be done without the aid of foreign capital. The major source of foreign capital for infrastructure development is known to be the World Bank and ADB and other multilateral development banks.  However, their financial aid to developing countries in Northeast Asia  has been on the receding trend in recent years. For example, the world Bank’s lending to China in 2002 was $1.733 million which was, however, more than offset by repayment and interest cost of $1,806 million, recording a negative net transfer of $73 million. As for the ADB, total annual disbursement of   loan  has been declining every year from the peak of  $8.7  billion in 1998 to 3.8 billion in 2001.[1]

Given this situation, it   is imperative for Northeast Asia  to install an institutional mechanism by which to attract additional resources to the region from the international money market. For this reason the Northeast Asia Economic Forum in which I am involved has been discussing the idea of establishing a Northeast Asian Development Bank (NEADB-needy bees ) since Tianjin Meeting in 1991. The proposal has been receiving an increasing attention from the countries concerned on both academic and government levels.

Unfortunately, I have no time available to explain the contents of the proposal in detail but some of them may be revealed when I address two  key questions raised in the discussion of the proposal in the Northeast Asia Economic Forum in the past ten years.

Question 1. Would it not be too expensive to fund and launch a new sub-regional bank ?

In answer to this question I would argue that it need not be a great concern for major countries in the region if we follow the precedence of ADB and other multilateral   development banks  in the capitalization. Referring to the capital structure of the ADB, the subscribed capital was increased several times after its inauguration in 1964, reaching the current level of $47.2 billion as of December, 2002. 

The subscribed capital is divided into Paid-in Capital and Callable capital. (Table 1). The paid-in capital represents actual cash payments by the member governments in exchange for the Bank’s shares. In the initial capitalization of the ADB, 50% of the total subscribed capital was to be paid in over five years. The callable capital is the non-paid-in portion of a country’s subscription. It represents a commitment on the part of the country to pay cash for the remaining shares, if and when the Bank needs the funds to service its borrowings in the capital markets. So far, neither the World Bank nor the regional banks have ever exercised the callable provisions, and they never expect to have to do so in the future. It is a form of “safety-net” commitment that would require no disbursements of cash by shareholders.

As shown in Table 1 in the appendix, the ADB’s paid- in capital is only $3.3 billion or 7% of the subscribed capital, the remainder or 93% being callable capital. The ADB started with subscribed capital of one billion dollars of which 50% was paid–in capital. But in the subsequent increase in subscribed capital, the portion of the paid-in capital was consistently reduced so that it reached the current 7 %. On the basis of $3.3 billion, the bank has been able to mobilize as much as $87 billion (net of the Special Fund) for Asian developing countries, using as leverage the confidence of lenders in the sovereign states. This is the basic difference between commercial banks and an official multilateral development bank.

 I have shown in the  Table 2  in the  appendix  that, the capitalization of $20 billion for NEADB  in line with ADB precedence will require major share holders like Japan to share some 1-2 billion  dollars to be paid in installment over five years.

Question 2. Would it not unnecessarily duplicate the business of the existing development banks when the NEADB is added?

Before answering this question we may ask ourselves first why have the four existing development banks been established, notwithstanding the purpose and function of the World Bank. The major reason is that regional development banks were needed to better suit the unique characteristics and needs of the respective regions in question. The salient features of Northeast Asia are so evident that no explanation seems to be necessary. Suffice it to say that the World Bank and ADB cannot possibly meet the specific needs of the region by themselves, simply because China and Russia are disproportionately too large to be adequately dealt with within the purview of their operations.

Apart from the financial activities, the NEADB would be entrusted to carry out diverse auxiliary functions, including research on the region’s economies, studies on policy issues, collecting and disseminating information, establishing a data base for the whole NEA, and educating and training public officials in the region, which will be of a great value to countries not only within but also outside of the region.

Secondly the NEADB would neither overlap nor duplicate the activities of the existing multilateral development banks. It would supplement the capital transfer activities of these international financial organizations (IFI), and it would in actuality open a much-needed new channel for transferring financial resources from international capital markets to this region.  In so doing, it would also provide a welcome opportunity for overseas bond holders to diversify their holdings with new, secured NEADB bonds. In the operational area, the proposed Bank would coordinate closely with the existing international financial institutions in the selection, allocation and funding of national and regional infrastructure projects.

In the final analysis, the key to success of this proposal seems to depend on  the insight and vision of  political leaders in the countries concerned. In closing, let me say that regional economic cooperation in the matters I have cited is a win-win strategy not only for countries in the Northeast Asia but also for the rest of  the world  simply because the all regions are so closely linked together. It is our common experience that the salutary effect of economic development in one region necessarily spills over to other region through trade and investment. So speeding up economic development through regional cooperation and the expansion of trade and investment between regions are the royal road to preserve peace and prosperity in the world.

Thank you for your attention.     

    

 

Appendix

Table 1, Capital Structure of ADB: At the end of 2002

 

Amount

( in $billion)

%

Authorized Capital

47,288

 

Subscribed Capital

47,234

100

             a. Callable Capital

43,912

 93

            b. Paid-in Capital 

 3,322

  7

 

Table 2,  Illustration of Capital Cost 

 

Case 1

Case 2

Case 3

Authorized Capital

20.0

20.0

40.0

Subscribed Capital

        a) Callable Capital

       b) Paid-in Capital

 Regional

       Non-regional

20.0

10.0

10.0

 6.0

 4.0

20.0

16.0

4.0

2.4

1.6

40.0

32.0

8.0

4.8

3.2

The average share of regional members 

1.0

0.4

0.8

  

[1] The figures quoted here are from the web site of the banks.