Why Is a Northeast Asian Development Bank Needed?

Summary of Discussions in the Northeast Asia Economic Forum1)

 

1. Introduction

1.1 The purpose of this paper is to answer the simple question: what is the proposal for the Northeast Asian Development Bank all about? It intends to explain why a Northeast Asian Development Bank is needed, and what is involved in realizing the proposal.

1.2 The exposition is based on the papers presented by the participants in the meetings and workshops of the Northeast Asia Economic Forum during the last nine years.

1.3 All the papers presented in the Annual Meetings of the Northeast Asia Economic Forum are listed in Annex I, and all the statistics regarding the ADB in Annex II are from the web site of the Bank.

 

2. How the Existing Regional Development Banks Were Proposed2)

2.1 IDB. Following the World Bank, the Inter-American Development Bank (IDB) was established in 1959 by the U.S. and 20 Latin American countries as the first multilateral development bank. The idea of establishing the IDB goes back to the first International American Conference in Washington, D.C., in 1890. The IDB might have been established earlier in the absence of the World Bank. Escalating political resentment against the U.S. in Latin America, including the Cuban revolution, also adversely affected earlier efforts to establish the IDB.

2.2 AfDB. The African Development Bank (AfDB) was inaugurated in 1964 by 33 African countries based on a study by the UN Economic Commission for Africa. The initiative for establishing the Bank came from politicians who were expressing aspirations toward cooperation and integration in various regional fora, such as the Organization of African States. The AfDB was entirely owned by developing African countries until 1982. However, the exclusion of non-regional industrial countries deprived the AfDB of both financial support and political advocacy.

2.3 ADB. The idea of establishing the Asian Development Bank (ADB) originally came from Japan and was officially initiated by the UN Economic Commission for Asia and Far East (ECAFE, later renamed ESCAP.) After three years of discussions under the aegis of ECAFE, the ADB began its operation in December 1966 with 31 member countries (of which 14 were non-regional members). Prior to 1965, the U.S. had been lukewarm to the idea of an Asian bank, on the grounds that the new bank would unnecessarily duplicate efforts and compete with the World Bank. The escalating Vietnam War, however, changed the U.S. policy. President Johnson called for economic development to spearhead his peace initiative in the region in April 1965, and shortly afterward supported the proposal to establish the ADB.

2.4 EBRD. A new development bank, the European Bank for Reconstruction and Development (EBRD), was established in April 1991 with 55 member countries (of which 23 are in the central and east European region where the Bank operates). The establishment of the Bank was initiated by European Community (EC) summits after the collapse of the former Soviet Union in 1990. The EBRD's main mission is to foster the transition toward market-oriented economies and to promote private and entrepreneurial initiative in the economies of central and eastern Europe, including the former Soviet Union, thereby helping their economies to become integrated into the international economic order. The U.S. was Luke warm about the EBRD but jumped on board when it looked like it would take off with or without the U.S.

 

3. History of the Proposal for the Northeast Asian Development Bank

3.1  The idea of establishing a Northeast Asian Development Bank was first introduced into the Northeast Asia Economic Forum by D. W. Nam in the meeting of the Forum in Tianjin on September 2-7, 1991.3)

3.2  Dr. Lee-Jay Cho, Chairman of the Northeast Asia Economic Forum, commissioned Dr. Burnham O. Campbell (Professor of the University of Hawaii, and former Chief Economist at the ADB) and Mr. Takeshi Kakazu (Professor of International University, Japan) to prepare a feasibility study of the proposal in 1991.

3.3  In the Annual Meeting of the Northeast Asia Economic Forum held in Yongpyeong, Korea, on September 26-28, 1993, Professors Campbell and Kakazu reported the result of their studies. Professor Campbell discussed the rationale of the proposed bank, while Professor Kakazu was concerned with the capitalization and the organizational structure of the Bank.4) Following the report of these studies and the ensuing general discussion, the meeting adopted the Yongpyeong Statement, which recommended that ¡°The Forum takes steps necessary to initiate consideration by the concerned governments of the Forum's study of the feasibility of a Northeast Asian Development Bank¡Šand that international organizations such as UNDP and ESCAP be asked to aid in initiating consideration of the proposed Bank.¡± Since the Yongpyeong meeting, the proposal for the Bank5) has been placed on the agenda in the successive annual meetings of the Forum.

3.4  Meanwhile, Dr. Campbell passed away and the feasibility study came to an end. Fortunately, the Forum found an exceptionally qualified person for the proposal in Dr. S. Stanley Katz, a former Executive Vice President of the ADB, who undertook to make his own feasibility study from the vantage point of his experience and insight in development financing. His finding was affirmative, and he produced a series of papers that have been presented at the Annual Meetings and workshops since 1994. These papers (listed in Annex I) have been a leading guide for the advancement of the proposal.

3.5  In the Annual Meeting of the Forum in Yonago, Japan, in 1998, a committee was formed to expedite the outreach to policy makers in governments and international organizations to obtain their support.

 

4. Why Is a Northeast Asian Development Bank Needed?

4.1  The major arguments in favor of establishing a Northeast Asian Development Bank, put forth by the Forum participants, can be summarized as follows:

4.2  The benefit of transforming Northeast Asia from a series of essentially unconnected political entities into an integrated economic whole has received wide attention in recent years. Northeast Asia promises in due course to become an important source of much-needed minerals, metals, energy, and other natural resources. Concurrently, it will develop into a vigorous market for capital goods, plant and equipment, services, and technology, which will be needed--and will require financing--to advance the region's economic growth and development.

4.3  However, for the most part, the infrastructure in Northeast Asia's northern areas falls short of widely understood and accepted adequacy thresholds. A recent East-West Center study6) estimates that the cost of the region's infrastructure investments will amount to some US$7.5 billion a year. The East-West Center's study projected that under optimal conditions, financing for Northeast Asian infrastructure forthcoming from, (1) private-sector credits and investments, (2) bilateral official assistance, and (3) the multilateral development banks (Asian Development Bank and World Bank) might amount (at a maximum) to $2.5 billion a year. The region's financing gap would thus amount to some $5.0 billion a year. If the region's infrastructure investment and its overall development are to proceed as rapidly as possible, 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 outlined above. It is necessary therefore to install an institutional mechanism by which to attract additional resources to the region from the international money market. This situation provides both the rationale and the justification for the proposed Northeast Asian Development Bank (NEADB).7)

4.4  The region is a treasure trove of natural resources of every variety--minerals, energy, water, forests, agriculture, land, and people. Resource-short nations, such as South Korea and Japan, would benefit from participating in the development and use of these resources. 8) In this connection, Mr. Taro Nakayama, former Minister of Foreign Affairs of Japan, in his keynote address at the 1998 Forum Meeting in Yonago, Japan, put great emphasis on the need for the regional cooperation for energy development and supported the idea of creating an NEADB.

4.5  East-West Center studies show that the economic integration of the region will proceed rapidly if regional networks of the communication and the transportation systems of individual countries are well established. This would require a long-term regional investment program within the framework of multilateral coordination and cooperation. Such a multilateral undertaking could go smoothly if a regional development bank plays the role of intermediary and coordinator in connection with its lending activity. It has been observed that if there had been an NEADB to finance the Tumen River Area Development Program, involving China, Russia, and North Korea, and sponsored by the UNDP, the project would have made much progress.

4.6  The NEADB will benefit all participants. Developing members will get access to the financial resources--a multiple of their respective amounts of capital contribution. Non-borrowing or donor members would presumably be granted preferential status in bidding and supplying equipment and services for NEADB-financed projects. The return from providing a variety of goods and services would be a multiple of the amount of the country's capital subscription to the NEADB paid in hard currencies. 9)

4.7 Relative to its benefit to member economies, the financial burden to be born by donor countries, for the establishment of the NEADB, is relatively small in terms of cash payment. In the case of ADB, the paid-in capital accounts for only 7% of the total subscribed capital, the remainder being ¡°callable capital,¡± which has never been called. The callable capital is a safety net against risks involved in the banking operation. Between 1966 and 1998, the ADB has been able to mobilize more than $87 billion 10)in the international money markets--twenty-five times as much as the amount of the paid-in capital, as will be seen in more detail in Section 12 below. No private bank can match this performance with such a small paid-in capital. This makes another case for establishing the NEADB.

4.8  The private sector can tap financial resources in the international money market to some extent. But, given the reality in the region, it will be narrowly limited without intermediation of a multilateral development bank, by means of payment guarantees, co-financing, or sponsoring a consortium.

4.9  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, and educating and training public officials in the region. In particular, establishing a data base for the whole NEA which will contain, among others, information on natural resources in terms of volume, quality, geographic distribution, state of exploration etc. will be of a great value to countries not only within but also outside of the region. Moreover, the education and training are particularly important for the region, because the former socialist countries--China, Russia, Mongolia and North Korea--are in need of such technical assistance in the interest of fostering economic reforms toward the market-oriented economies.

4.10 The NEADB presents an opportunity for countries to enhance their political and economic status, both within the region and globally. At present, the APEC map is covered by three sub-regional groupings: NAFTA, ASEAN, and ANZCER (Australia-New Zealand Closer Economic Relations Trade Agreement). Northeast Asia remains the only area that is not covered by any sub-regional cooperative body. The NEADB would provide a means of regional economic cooperation, gaining prominence within and outside the region. In this connection, the Japanese idea of creating an Asian Monetary Fund will carry real meaning, when the scope and degree of using the yen as an international reserve currency are widened through the operations of the NEADB.

4.11 Economic development and the concomitant increase in economic interaction among the region's member countries could translate into greater political stability within Northeast Asia. By the same token, membership in the NEADB would impose the responsibility to participate and to work cooperatively within the Bank's institutional systems and structures? a much needed learning process for the Northeast Asian countries. 11)

 

5. Political Implications for Some Countries

5.1  Obviously Japan has a great economic interest in the rapidly expanding Chinese market and elsewhere in the Northeast Asia. Japan will compete with the United States and EU in advancing its economic interest, which implies that multilateral understanding and coordination may be called for to avoid possible frictions. Apart form the economic consideration, the creation of the NEADB will provide Japan with an opportunity to make a part of her huge and chronic trade surplus with countries in the region available for the economic development of the region, to which Japan has a long standing political debt. It will enhance the leadership role of Japan, not only in the region but also globally. Furthermore, in dealing with North Korea for normalization of diplomatic  relation with Japan, which will inevitably involve grant in aid and loans, multilateral, rather than bilateral, approach will be more productive and effective in inducing North Korea to carry out needed economic reform.

5.2  The United States also cannot ignore the vast economic opportunities in the region. By participating in the NEADB the U.S.would have an institutional base for multilateral cooperation and coordination involving multiple nations. Apart from the economic consideration, the U.S. is expected to continue to play the traditional role of the counterbalancing power in the interest of preserving peace and security in the region. In particular, U.S. foreign policy toward North Korea is known to be a policy of engagement, with the implication that the U.S. and other OECD countries are expected to extend economic aid, provided, of course, that North Korea gives up its military ambitions. Here again the multilateral, rather than bilateral, approach is deemed more effective in inducing Pyongyang to gradually open its economy to the outside world and carry out economic reforms. The establishment of the NEADB fits this purpose perfectly. The U.S would be able to pursue its foreign policy at much less economic cost than would be the case without a development bank in the region.

5.3 The economic exchange between the two Koreas has been increasing rapidly, if not smoothly, in recent years under the "sunshine policy" of the D.J. Kim administration, The problem for South Korea is that its wherewithal is rather limited in helping North Korea develop  its economy, given its status as a mid-income country, and also limited  in influencing Pyong Yang to carry out economic reforms by itself  without multilateral involvement.. South Korea, therefore, has good reason to welcome creation of  a NEADB. However, it should be noted that creation of the Bank is in no way dependent on the attitude of the North Korea. If the North fails to qualify the membership of the Bank, it would be quite possible to establish the Bank without North Korean membership because the Bank is for the region, not for a particular regime.

5.4  The PRC will be one of the major borrowers from the NEADB. This giant country is saddled with many economic problems, including the disarray in its public enterprises, outmoded mode of governance, and abject mass poverty in the inland areas. China, therefore, has much to gain from the NEAD through access to financial resources and technical assistance. At the same time the role of the PRC is crucial in maintaining peace and security in the region and elsewhere in the world as well. The NEADB would be able to help promote mutual understanding and cooperation between China and the rest of the member nations.

 

6. Shareholders

6.1  The prospective regional shareholders of the NEADB are: the PRC (including Hong Kong and Macao), Japan, South Korea, North Korea, Mongolia, and Russia. Participation by Taiwan as a regional member-economy is highly desirable, in view of its economic strength. China may follow the precedent under which Taiwan is a member of the ADB.

6.2  An argument has been made in the Forum that regional members should include not only the central governments but also provincial governments. This argument points out that only some provinces of China and Russia are situated in Northeast Asia geographically and that the number of regional members, when limited to the central governments, is small and fixed. This proposal will be reviewed in Section 10.

6.3  The United States is expected to be the major participant among the non-regional members. Australia, New Zealand, and the European Union are other welcome candidates for membership. The door may be open to any country or organization that wishes to join, to make the NEADB truly international.

 

7. Capital Structure

7.1 In reference to the capital structure of the ADB, we may make a distinction between four components of the Bank's capital resources. First is the authorized capital: that is, the amount of capital, evidenced by shares, that the Bank has been authorized by its members to offer to sell to its member countries. This aggregate is determined by the Board of Governors representing its members. The ADB started with $6 billion in shares, which was figured out on the basis of 0.5% of the aggregate national income of the regional member countries. Applying the ADB formula to the NEADB and using the latest GDP data available, Professor Kakazu estimated in 1992 that the required capitalization of the NEADB would be in the range of $15-20 billion, compared with ADB's $23 billion in 1992. 12)

7.2  However, the authorized capital of the ADB was increased several times thereafter and reached the current level of $48.4 billion as of September 30, 1999. In my own calculation, 0.5% of the aggregate GDP of the regional members of the NEADB for 1997 was about $35 billion, suggesting that the initiating authorized capital for the NEADB would be around $40 billion (Table 9, Annex 2). Let us take $40 billion as a working assumption.

7.3 The second component of the capital is the subscribed capital--the amount that member countries actually subscribe to. The subscribed capital is divided into two parts: paid-in capital and callable capital.

7.4 The paid-in capital, the third component, 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. For some smaller, poorer countries, a part of the paid-in amounts could be paid in their national currencies, with a ¡°maintenance of value provision¡± to take care that depreciation of national currencies would not adversely impact the Bank's capital structure. 13   If the ADB format is followed, the paid-in capital for the NEADB would be $20 billion.

7.5 The fourth component, called ¡°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 by shareholders. The initiating callable capital for the NEADB would be $20 billion.

7.6 It should be noted that the proportion of the paid-in capital in the ADB's subscribed capital underwent a sharp decline over the years from the initial 50% to 5-10%. The paid-in portion has varied with the several capital replenishments, marking even zero percent in one capital replenishment. The result is that the paid-in capital accounts for only 7% of the total subscribed capital (as of September 30, 1999, see Table 4 in Annex II). It follows that the cost of creating and operating the NEADB in terms of the cash disbursement for capital subscription is not very large.

 

8. The Cost of Participation

8.1 The cost of participation in the form of equity investment for the Bank depends on (1) size of subscribed capital (2) distribution of the subscribed capital between the regional and non-regional members, and (3) the criteria for allocation of shares among regional members.

8.2 We can assume a varying amount of the initiating authorized capital for the NEADB. For the illustrative purpose. we may assume  either $40 billion, comparable to the size of the current authorized capital of the ADB ($48.4 billion as of  September 30, 1999), or much lesser amount of $20 billion -in consideration of reducing cost of participation.

8.3 As for the allocation of subscribed capital we may take reference to the ADB in which the regional members accounted for 63% and non-regional members for 37% at the end of September 1999 (Table 1, Annex II). We may reasonably assume, in the case of the NEADB, 60 % for the regional and 40% for the non-regional members.

8.4 The allocation of the shares among regional members may be determined in reference to the size of GDP, per-capita GDP, foreign exchange reserves, and the fiscal condition of individual countries in the region. Without any given formula and relevant data, it is impossible to estimate the cost of participation for the individual member countries at this moment. However, we can at least infer an order of magnitude for the major regional member countries under varying assumption. The following table summarizes our findings under the three sets of assumption regarding the three factors mentioned earlier.

Hypothetical cost of participation

                                                                                    (in $billion )

 

Case I   

Case II

Case III

(A) subscribed capital

     20

    20

    40

(B) Callable capital

     10

    16

    32

(C) Paid in

        regional

        non-regional

     10

       6

       4

      4

      2.4

      1.6

      8

      4.2

      3.2

4 countries average

       1.5

      0.6

      1.2

4 countries are: Japan, China, Russia, and South Korea

8.5  Case I -  total subscribed capital of $20 billion allocating 60% to regional and 40% to non-regional members; subscribed capital is to be divided between 50% for paid in and another 50% for callable; and the paid capital would be paid in 5 year installment as in the case with ADB. In this case the paid in capital for regional members is $6 billion which is to be allocated to the regional members. If we ignor Mongolia and North Korea for the moment for the sake of simplicity, the average share for each of the four countries (Japan , China, South Korea, and Russia) would be $1.5 billion.( if Taiwan is accepted as member, the average will decrease to $1.2 billion) Since the average fails to take into account the difference among countries in economic strength, and it may be viewed as a theoretical maximum for China, South Korea, and Russia. Suppose Japan takes up twice as much as the average in consideration of its economic strength, the average of the remaining three countries would be reduced to $1 billion whereas Japanese share will increase to $3 billion. In other words Japan should pay $600 million each year for five years, and the remaining 3 countries $2-4 million each year for the five year period, depending on the estimate of economic strength of each country.

8.6   Case II -   Now suppose the subscribed capital of $20 billion is divided into 20% for the paid in and 80% for the callable capital, instead of 50-50 division. The proportion of the paid in capital becomes smaller, but still much larger than the current 3-97% ratios in the ADB. In this case the paid in capital is reduced to $2.4 billion and the average for the 4 countries to $600 million. If Japan takes up twice as much as the average, its annual paid-in will be $2.4 million for five years. If the U.S. follows the ADB precedence of equal share($1.2 billion) with Japan, the remainder for the rest of non-regional member will be only $400 million.

8.7   Case III -   What would happen if the subscribed capital is raised to $40 billion and the ratio between and the paid-in and callable is 20-80 % ?  As shown in Table , the average paid-in for 4 countries is $1.2 billion which is less than that in the Case I. Since the size of the subscribed capital determines the limit of borrowing of the Bank in the international money market, it can be said that the Case III is more recommendable.

8.8   At any rate, it seems safe to say from the foregoing inference that the total cost of participation will be in the range between $1.2- 3.0 billion for Japan and $0.4-1.0 billion for the remaining 3 countries to be paid in the five year installment., and the cost of participation need not be viewed as one of the major obstacles in establishing the NEADB. What is needed most is the political will to advance economic development in the Northeast Asia.          

 

 9. Distribution of Voting Power and Decision Making

9.1  Capitalization of $40 billion will be evidenced by 4 million shares valued at $10,000 per share.

9.2  In the case of ADB, 20% of the voting power was distributed to all member countries equally, and the remaining 80% according to the percentage share of the subscribed capital. (In the case of the World Bank 10% of the total voting power was distributed to all members equally.) As a result, the voting power of small and poor countries is greater than their respective capital contributions. 14)

9.3  Every multilateral development bank has a Board of Governors, comprising men and women of ministerial rank from the all member countries, which is the highest decision-making body and meets every year to deal with important policy question.

9.4  Daily operation of the bank is mandated to a Board of Directors representing the shareholding governments. The ADB has a resident board of directors composed of 8 regional and 4 non-regional directors. There is an opinion in the Forum that the NEADB may not need a resident board of directors; the bank may instead have quarterly meetings of its board of directors with people drawn from senior levels of the key ministries. This would minimize the cost of operation of the Bank and "would be a considerable improvement over current cumbersome resident board arrangements that were adopted when the donors didn't know how the development bank idea would work. What has happened over the years is that board appointments have become trophy positions awarded as political payoffs and board members act as high paid loan officers." 15)

9.5  As for the election of the member of the Board of Directors, in the case of the ADB, 8% of the regional shareholding is needed to elect a Director, whereas non-regional countries need 17% of the non-regional stocks to elect one. Countries with smaller shares have to band together in ¡°constituencies¡± to make up an adequate share. The ADB Charter allows each director to cast as many votes as he received, so that each director represents, in a fairly exact way, the various countries that combined to elect the director. If a director's constituencies want to vote in different ways on a given issue, the director's vote can be split to reflect these differences. 16)

9.6  Except probably for AfDB, none of the existing regional development banks are controlled by the regional borrowing countries. In the case of the ADB, although regional countries hold 63% of the ADB shares, OECD countries account for more than 50% of the total.

9.7  In the NEADB, China, Japan, South Korea, and the United States would be qualified to elect their respective directors. It is desirable, from the viewpoint of fostering sound banking practices, for the NEAD to have a good number of non-regional directors, as they are likely to be more familiar with western practices and standards for banking operations.

 

10. Participation of Provincial Governments

10.1  As mentioned earlier, it has been suggested that provincial governments should be allowed to participate, together with central governments, in the capitalization and operation of the NEADB. No conclusion on this matter has been drawn yet in the Forum. For illustrative purposes, I may offer one example.

10.2  A provincial government may join in the capital subscription, together with its respective central government, and would then become a member of the Board of Governors. This arrangement would provide the provincial government with the opportunity to participate in policy making. A problem with this arrangement is that it may make NEADB bonds less attractive to bond buyers (and the interest cost would be higher) for the reason that part of its callable shares were held by non-sovereign governmental units (since they can't issue specie to honor callable obligations). One way of dodging this problem may be to limit the combined capital subscription of provincial governments to, say, 10% of the total subscribed capital of the Bank and accordingly limit total borrowings(of all sorts) of the Bank to 90% of the total subscribed capital, so that 100% of the Bank's borrowing is covered by the subscribed capital of the central government. Any how, this problem requires further exploration.

10.3  In the election of a Director, a provincial government is likely to be a small shareholder and to join its central government in the election of a Director. In that case, it may be stipulated that if the combined shareholding exceeds a certain proportion in the total subscribed capital, say 16%, both the central and the provincial governments can elect one director each. Since the number of regional countries is small and fixed--unlike the ADB--the addition of a provincial director may not make the Board of Directors too large.

10.4  The primary purpose of the provincial government in participating in capital contribution may be to get access to a loan and technical assistance from the Bank. In the case of a loan application, it should be made mandatory for the Bank to acquire a payment guarantee from the central government. By doing so, the Bank's assets would be secured, while the central and provincial governments have the opportunity to coordinate their possible differences before bringing the application to the Bank.

 

11. Staffing

11.1 Staffing is a sensitive issue and may be considered in terms of competence, regional allocation, country allocation according to voting shares, and location of the NEADB headquarters.

11.2 In the case of the NEADB, however, the utmost emphasis should be placed on competence rather than nationality or region. The regional member countries should keep in mind that Northeast Asia is less developed in terms of management and governance, particularly in the sophistication of public officials; they have to learn a lot from outside of the region.

11.3  The ADB currently has 1,966 employees from 46 countries, of whom 676 are professionals (as of September 30, 1999, see Table 8, Annex II).

 

12. Long Term Potential of a Development Bank

12.1  A regional development bank cannot be matured over night. It takes a long time before it reaches its full potential. Looking at the experience of the ADB, however, we can fathom the extent to which a development bank can make financial contributions to the economic development of the region in which the bank operates.

12.2  Table 6 in Annex II summarizes the ADB's financial activities during the 32-year period from its inauguration in 1966 up to the end of 1998. They include lending ($77 billion), equity investment, equity underwriting, technical assistance, and co-financing, all of which added up to more than $100 billion.

12.3  Table 7 also shows how the ADB mobilized financial resources from various sources to finance lending activities during the same period. The major sources are subscribed capital ($48 billion), borrowings ($34 billion), and reserves and net income. In addition to ordinary capital resources, the ADB also received a Special Fund ($21 billion) from the donor countries to assist developing member countries on concessionaire terms. All sources add up to more than $110 billion.

12.4  What is to be noted here is that although the subscribed capital constitutes the biggest part of the ADB's financial resources, 93% of it was callable capital, the remaining 7% being paid-in capital. In other words, the 93% does not represent cash payment but a form of payment guarantees by the member governments. The 7% or $3.3 billion represents the actual cost of creating and running the ADB incurred by all member countries. On the basis of $3.3 billion, the bank has been able to mobilize as much as $87 billion (net of the Special Fund) 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. One can argue that it is a worthwhile undertaking for a government to establish a development bank where it is needed and thereby help developing neighbors as well as itself.

 

13. Conclusion: Who Is To Take the Initiative?

13.1  As seen in the beginning of this paper, the initiative for creating a development bank was taken by political leaders, the UN organizations, or a summit meeting spurred on by the specific conditions and problems confronting the region in question.

13.2  There have been some discussions in the Forum as to who should take the initiative to propose the establishment of the Northeast Asian Development Bank. Some suggested that the UNDP may take the initiative, since it is committed to the Tumen River Area Development Program and is facing serious funding problems.

13.3  Others suggested that Japan or Korea should take the initiative. But Japan may not be forthcoming unless the United States is favorable to the idea. Some participants said Korea may be able to persuade Washington on the grounds of common policy toward North Korea and American interests at stake in the region. If the U.S. gives its blessing, Japan will go along.

13.4  On the other hand, if Japan takes the initiative and all other Northeast countries follow (which is very likely), the United States would not abstain. A submit meeting among Japan, China, and Korea would provide an opportunity to discuss the matter.

13.5  There was also an observation that China could exercise its own influence and leverage vis-a-vis Japan and the U.S. in support of the proposal for the NEADB.

13.6  In the final analysis, the key seems to lie in the hands of either Japan or the United States and the decision depends on the insight and the courage of the political leaders concerned in the region.

 

14. Frequently Asked Questions

Q 1. All Asian countries except North Korea are members of the World Bank and the ADB, while Russia is a member of the EBRD. Would it not unnecessarily duplicate the business of the existing development banks when the NEADB is added? What is your impelling reason for proposing to set up another development bank?

A1.1 As explained in Section 2 above, the projected financial resources available from the traditional sources, including the World Bank and the ADB, fall far short of the requirement for building up the region's infrastructure, which is the basis for economic development and regional integration among the countries in Northeast Asia. On the other hand, there is a variety of financial sources in the international money market. The problem is how best to tap the sources of financing: i.e., how to mobilize and transfer from international capital markets to the region. After thoroughly examining a range of alternatives, it has been concluded that a new financial mechanism able to intermediate long-term capital from international capital markets to Northeast Asia offers the best prospects for achieving this objective. This needed capital intermediation function therefore provides both the rationale and the justification for the proposed Northeast Asian Development Bank. 17)

A1.2. The NEADB would certainly duplicate some business of the existing development banks. The question to be asked here is: why have the four existing development banks been established, notwithstanding the purpose and function of the World Bank? The major reason is that the banking business by nature is not suitable to a monopoly, domestically or internationally. Regional development banks were needed to better suit the unique characteristics and needs of the respective regions in question. The salient characteristics and needs of Northeast Asia are too well known: the region is the Asian continent's last major economic frontier. It includes parts of China and Russia, which are disproportionately large in terms of territorial area and population, and Mongolia and North Korea, which remain marginal in international economic relations. These four countries are currently in transition to the market-oriented economy, beset with concomitant economic issues. On the other hand, China is emerging as an economic giant in terms of the size of its GDP, the 6th largest in the world, as of 1997. China's east coast area, Japan, and Korea form an industrial zone which is often referred to as one of the most dynamic regions in the world economy. The problem is how to integrate the three economies and propagate growth elements to the inland China and to the Russian Far East, Mongolia, and North Korea. No doubt, the ADB and the EBRD have made significant financial and technical contributions to the economic development of countries in the region, yet they 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. These regional characteristics calls for an NEADB to better meet the regional needs, not only in economic but also in geopolitical terms.

 Q2. How about creating a Special Fund for Northeast Asia within the ADB instead of setting up an NEADB? That would avoid waste of resources resulting from the duplication of business and poor management by inexperienced staff, as well as limited absorptive capacity on the part of the borrowers.

A2.1 The magnitude of the issue before us does not lend itself to a Special Fund in the ADB. Nothing short of a full-fledged bank would be able to solve the financial problem in the region, as shown in Section 2.2. Moreover it is doubtful whether it would be politically feasible for the Bank to set up a Special Fund on a regional base.

A2.2  A major defect of a Fund for NEA at the ADB is that it produces no multiplier effect-- it can only be a straight pass-through of funds provided by donors. No funds can be borrowed in capital markets overseas. Donors are not likely to provide the billions of dollars required annually to fund the region's infrastructure needs. Moreover, we attach an especial importance to the Bank's prospective role in regional economic research, training, technical assistance etc., and a potential complement to the proposal for a Asia Monetary Fund.

A2.3 The management of the NEADB should be entrusted to well-qualified senior staff recruited from anywhere in the world on the basis of competence, without regard to nationality or region, as is the case with most of the development banks.

A2.4 The problem of absorptive capacity on the part of the borrower is common to almost all multilateral financial institutions. That is why they offer some programs of technical assistance on project evaluation, project management, planing techniques, etc. In addition, the NEADB should put particular emphasis on the training of public officials, particularly from the countries in transition to the market economy, to foster sound economic management.

Q3. Why do you try to stick to the traditional notion that building infrastructure is the business of the government? The current trend is that more and more public infrastructure is built by private investment with its own financing, which may turn out to be more efficient than public undertakings. The Northeast Asian countries should learn to rely more on private initiative and market principle, rather than on government-supported financing. What is your opinion in this regard? 18)

A3.1 It is true that we can find some cases of private investment in public infrastructure, and we believe the government should encourage such private investment wherever feasible. UN statistics show, however, that most private direct investment went into production and processing plants, equipment, and services; only a relatively small amount was made available for infrastructure. The reasons are self-evident: infrastructure investments typically carry high repayment risks and involve long and uncertain returns. They are therefore attractive to very few private investors. East-West Center projections indicate that under even the most favorable assumptions, private investment in infrastructure in Northeast Asia would cover only a small fraction of the region's prospective requirements

A3.2 Another point to be noted is that private investment has the danger of distorting the country's infrastructure priorities. Private investments in, for example, telecommunications infrastructure may be quick and easy. On the other hand, few if any private investors would be interested in investing in irrigation systems or in secondary farm-to-market roads? which may reflect more accurately the country's priorities.

A3.3 A further point to be noted is that the benefits of infrastructure are ¡®social¡¯ and long-term in nature. That is, investment returns in the form of economic surpluses accrue over a period of twenty, thirty, or more years. Private investors, however, typically expect to recover their investments within a considerably shorter period, perhaps five to seven years. To do so, they must impose user charges--tolls on highways, long distance telephone charges, etc.--that are higher than warranted by the economics of the specific project.

A3.4 A final point is that in most countries (the United States and Japan included), infrastructure is seen as generating a ¡®social return--that is, the benefits of the investment accrue to the country's or region's citizens as a group rather than to particular individuals. However, if the infrastructure investment is built and ¡®owned¡¯ by private investors, social returns are converted into private profits. Instead of economic surpluses being devoted to improving living conditions or increasing domestic savings and investments, they end up in the hands of private individuals. These returns often leave the country in the form of private remittances and are thus an unrequited drain on the country's savings and foreign exchange resources.

A3.5 The proposed new NEABD would avoid these kinds of private infrastructure investment disabilities. The Bank would undertake financing for projects that are demonstrably responsive to the priorities and needs of the region and countries concerned. By ensuring an appropriate match between financing terms and conditions and project characteristics, the Bank could avoid both the need for high user fees and charges, and for disproportionately large payments of interest and principal. In addition, social returns would not be siphoned off by private overseas investors but would remain within the country where they are generated, to be used for public purposes.

Q4.  How do you define Northeast Asia, since the territories of China and Russia also form parts of South Asia and Europe, respectively?

A4.1 There is no need to define Northeast Asia in terms of an exact geographical demarcation. In the political context, Northeast Asia refers to China, Japan, the two Koreas, Mongolia, Russia and Taiwan. For operational purposes, it may be possible to define the jurisdiction of the Bank so that it covers only parts of China and Russia. This is a matter to be discussed by the Board of Governors of the Bank.

 

ANNEX I¡¡

List of Articles on the NEADB Presented at the

Meetings of the Northeast Asia Economic Forum

 

Changchun and Tianjin Meeting in 1991

Vladivostok Meeting in 1992

Yongpyeong Meeting in 1993

Niigata Meeting in 1995

Honolulu Meeting in 1996

Ulaanbaatar Meeting in 1997

Yonago Meeting in 1998

Tianjin Meeting in 1999

ANNEX II

(Source of statistics on the ADB: http:www.adb.org.)

¡¡

Table 1. Distribution of Shares of the ADB,

(as of Sept. 30, 1999)

¡¡

Number of Members

% Share

 Regional

41

 63.414

    Northeast Asian

 5

 28.374

    Other Regional

36

 35.040

 Non-Regional

16

 36.586

 Total

57

100.000

¡¡

¡¡

¡¡Table 2. Northeast Asian Members' Shareholdings in the ADB,

(as of Sept. 30, 1999)

 Country

% share

¡¡

 Japan

16.006

¡¡

 China

  6.069

¡¡

 Korea

  5.167

¡¡

 Mongolia

  0.015

¡¡

 Taipei

  1.117

¡¡

 Total

28.374

5 countries

 

Table 3. Non-regional Shareholdings in the ADB,

(as of Sept. 30, 1999)

 country

% share

¡¡

 U.S.A.

16.006

¡¡

 Canada

  5.365

¡¡

 Others

14.215

¡¡

 Total

35.586

16 countries

¡¡

 

Table 4. Ordinary Capital Resources

(as of 30 September 1999)

¡¡

US$ million

 Authorized capital

48,444.18

 Subscribed capital

47,874.38

 Callable

44,507.20

 Paid-in

  3,367.18

 Outstanding debt

26,097.82

 Reserves and unallocated net  income

  7,255.62

 

¡¡

 

Table 5. Special Funds Resources Committed

(as of 30 Sept. 1999)

 Special Funds

US$ million

 Asian Development Fund

21,351.37

 Technical Ass. Special Fund

   807.12

 Japan Special Fund

   849.31

 ADB Institute Special Fund

    34.74

 Total committed

23,042.54

¡¡

 

Table 6. ADB¡¯s Financial Activities (1966-1998)

 Financial Activities

US$ million

 Total Lending

77,335.0  

 Equity Investment

574.2  

 Equity Underwriting

40.5  

 Technical Assistance

1,613.0  

 Co-financing

29,563.8  

 Total

109,126.5  

¡¡

 

 

Table 7. ADB¡¯s Resources (1966-1998)

 Resources

US$ million

 Ordinary Capital Resources

90,633

     Subscribed Capital (at end of period)

48,456

     Borrowings (gross)

34,922

     Reserves and Unallocated Net Income

  7,255

 Special Fund Resources,

21.990

     Asian Development Fund

20,535

     Technical Assistance Special Fund

  0,721

     Japan Special Fund

  0,734

 Total

112,623

¡¡

 

Table 8. ADB Staff (as of 30 September 1999)

 Nationalities

    46

 Professional

   676

 Supporting

1,290

 Total

1,966

¡¡

 

Member Economy

Area

(1000 sq km)

Population

(million)

GDP

(billion US$)

GDP

per head

$

Visible exports fob

(billion US$)

Visible imports fob

(billion US$)

China

9,561

1,244.2

902.0

860

182.7

136.4

Hong Kong, China

1

6.5

163.8

25,200

188.1

209.2

Japan

378

126.0

4,812.1

38,160

409.2

307.6

South Korea

99

45.7

485.2

10,550

138.6

141.8

Russia

17,075

147.7

394.9

2,680

88.9

71.4

Chinese Taipei

36

21.7

283.4

13,060

121.7

107.8

Mongolia

1,565

2.6

5.6

2,200

0.4

0.4

North Korea

120

21.3

22.0

900

0.9

1.9

Total

28,835

1,615.7

7,069.0

-

1,130.5

976.5

 

Sources: APEC

1. The Economist: Pocket World in Figures: 2000 edition

2. The APEC Region Trade and Investment, Nov 1998

3. GDP and Trade Figures are for 1998

4. Figures for GDP of Mongolia and North Korea are for 1997, and trade figures for North Korea are for 1996. Source : the World Almanac 2000, New York Times

 

 

 

Table10. Hypothetical Share Allocation of Regional Members in the NEADB

¡¡

ADB

 

NEADB

Regional

Members

¡¡

% share in total subscribed ADB capital

% share

in Northeast Asian Total

Subscribed capital

(US$ million)

Paid-in capital

(US$ million)

1/5 payment a year for 5 years

(US$ million)

Japan

16.006

56

13,440

6,720

1,344

China

6.069

21

5,040

2,520

504

South Korea

5.167

18

4,320

2,160

.432

Mongolia

0.015

1

240

120

24

Taipei

1.117

4

960

480

96

Russia

-

-

-

-

-

North Korea

-

-

-

-

-

Total

28.374

100.00

24,000

12,000

2,400