The Need for A Development Bank in Northeast Asia

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An address before the Boao Forum for Asia Conference
2-3 November 2003, Hainan, China

 

Mr. Chairman:

  Coming from the northeastern part of Asia I may share with you some of my thought on the issue of financing economic development in Northeast Asia.

< The Need for Regional Cooperation >

Today, the area covered by Japan, South Korea, and eastern part of  China has become one of the three centers 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 less developed areas are known to be treasure troves of mineral resources of every variety, not to mention their natural gas, water, fishery, forests, agriculture, land, and people. In particular, Siberia has about 32% of total deposit of the natural gas in the world.

In the age of globalization, private capital within and outside the region  can play a vital role in developing these areas by means of trade, investment, and technological transfer. For the role to be played successfully, however, investors and entrepreneurs must be reasonably certain that their investments will be supported by an adequate platform of infrastructure—highways, railways, pipelines and air transportation; ports and harbor facilities; telecommunications systems; dependable energy generation and distribution, water and sewage facilities, etc.

. <The Need for Creating a Regional Development Bank>

The immediate problem, therefore, is how to finance the regional infrastructure projects which are not generally amenable to private and commercial financing.  It is self evident that developing countries have a great need for foreign capital to supplement their meager domestic savings to finance infrastructure projects. However, financial resources made available by the World Bank and ADB in recent years falls far short of the requirement. 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. (For the ADB’s lending to developing countries, see Table 1, in the appendix.)

It is evident that this projected funding gap must somehow be filled.  It is highly unlikely that additional funds can be made available for this purpose by the “traditional” sources including private investment and commercial lending. It is necessary therefore 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 Asia 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.

Since I have no time available to explain the contents of the proposal in detail I would like to refer you to a booklet titled “Why is a NEADB is Needed” distributed to you for further information, and I would welcome your questions later on.  Here I may address very briefly only two key questions raised in the discussion of the proposal in the Northeast Asia Economic Forum during 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 have shown in the attached paper that it need not be a great concern for major countries in the region if we follow the precedence of ADB and other multilateral regional 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 2). 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 2 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 illustrated in Table 3 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 to be paid in installment over five years.

Question2. 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 [1] 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 characteristics of Northeast Asia are so evident that no explanation seems to be necessary. Suffice it to say that the World Bank and the 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.

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 institutions. 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.

 <Concluding Remarks>

At any rate, we have now increasing number of supporters in political as well as academic community in Japan, not mention of other countries in the region.  In the final analysis, the decision depends on the insight, vision, and the political will of the leaders in the countries concerned.

 

Thank you.

    

 Appendix

 

 Table 1,   ADB’s Financial Aid to Developing Countries

in Northeast Asia in 2002:

(in Million U.S. Dollars)

 

Loans

Technical  Assistance

Grants

Equity Investment2

Cumulative Lending1

China

868.5

13.2

6.4

10.0

12,163.0

Mongolia

34.1

3.5

3,2

0

539.2

Kazakhstan

0

2.1

0

0

467.0

Kyrgyz

15.0

2.7

0

0

517.2

Tajikistan

70.3

2.7

0

0

172.9

Uzbekistan

236.5

4.0

0

0

695.5

N. Korea3

0

0

0

0

0

Total

1,224.4

28.2

9.6

10.0

14,554.8

1.      As of the end of 2002

2.     Approval basis

3.      Non- member of the ADB

  

 

Table 2, 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 3,  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

* Assuming  distribution of  shares : 60% for regional, 40 % for non-regional countries.

* In Case  2,   80% of the  subscribed capital is assumed to be callable capital and 20% as Paid-in capital.

* In Case 3, total subscribed capital of $40 billion  is comparable to the current  subscribed capital of ADB.  80% of the subscribed capital is assumed to be callable capital.

* If  we assume Japan’s share is twice as large as the average share for 6 member countries  in view of its much larger  GDP size,  or foreign assets, its  share will be  $2 billion in Case 1.

 

 

 


[1] The Inter-American Development Bank (IDB); The African Development Bank (AfDB); The Asian Development Bank (ADB); and The European Bank for Reconstruction and Development (EBRD).