Partnerships

FRANKFURT — On the sidelines of the 49th annual governors’ meeting of the Asian Development Bank in this city last Monday, ADB President Takehiko Nakao signed a memorandum of understanding on co-financing for road and water projects.

The other signatory was Liqun Jin, the Chinese president of the Beijing-based Asian Infrastructure Investment Bank (AIIB).

“I am very pleased to have this framework of collaboration with a new and strong partner in Asia,” Nakao said. “ADB has been working closely with AIIB throughout its establishment process. We will further strengthen our cooperation in promoting sustainable growth, reducing poverty, and combating climate change in the region.”

The first project to be funded is the 64-kilometer M4 or motorway in Pakistan's Punjab province. A journalist asked Nakao if China, which initiated the AIIB, picked Pakistan for the first co-financing project because Islamabad is friendly with Beijing.

It was, of course, a polite way of asking whether geopolitical tensions would play a role in selecting development projects for ADB-AIIB co-financing. Nakao skirted the question, saying only that there were several projects considered, but the M4 was the most mature.

Last week in Manila, I asked Nakao if regional security was a concern for development efforts in Asia as the ADB turns 50.

He said regional tensions affect trade, and “how to keep the peace is very important.”

Of the eight conditions outlined by Nakao for economic development, the eighth is “political stability, security, and good relations with neighboring countries.”

Nakao pointed out that Asia has developed rapidly in the past half century in a regional environment that has been largely peaceful. Vietnam, Cambodia and Myanmar opened up, and even Mindanao, he noted, has seen some progress in the peace process.

“Security conditions have been stable in the past 50 years,” he told me. “Asia must continue to maintain and have this stability in politics and geopolitics.”

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 Nakao, the ninth ADB president, is Japanese like the rest of his predecessors. He is finishing the three and a half years of the five-year term of his predecessor Haruhiko Kuroda, who left the ADB in 2013 to become governor of the Bank of Japan. Nakao recently announced he would seek a new five-year term when the current one ends this November. So far, no one has come out to challenge him, and he told me that he had the support of many ADB shareholders.

When he first sought the ADB presidency, Nakao was challenged by a Chinese. While the ADB has done an impressive job of assisting Asia in its development efforts, the failure of China to break the unbroken Japanese leadership of the region’s largest multilateral development bank is widely believed to have prompted Beijing to initiate the creation of the AIIB. The new kid on the lending block is seen by many as an extension of the long-running rivalry between the two Asian giants.

 Nakao has steadfastly refused to pit the ADB against the AIIB. He stressed to me that ADB equity is about $50 billion larger than that of the AIIB, which is just starting out. With the merger of the ADB’s Asian Development Fund operations and its ordinary capital resources starting 2017, the bank’s lending capacity will double from $13 billion in 2014 to over $20 billion by 2020.

Instead Nakao has moved to make the AIIB a partner, with the co-financing scheme the latest of these efforts.

“It’s not appropriate to say ADB is Japanese-controlled,” Nakao told me, pointing out that even if Japan has the largest capital share of 15.7 percent in the bank, this accounts for only 12.8 percent of voting power. (The US ranks second with 15.5 percent capital share and 12.7 percent voting power.)

China is third, with 6.5 percent capital share and 5.5 percent voting power. But it is also one of the largest borrowers, receiving $1.7 billion out of the bank’s total $16.3-billion lending last year - the bank’s second largest loan after India – apart from another $300 million to the private sector. The funds went mostly to climate-related and other environmental projects.

“China wants to continue to borrow from us,” Nakao said, adding that he wanted the ADB to continue being part of China’s development efforts. “China wants to be engaged with the ADB.”

 He does not see China graduating from ADB funding at least until 2020, even as he expressed hope that Beijing would increase its share in the bank’s lending capacity.

Nakao stressed the importance of having the international community engage with China in confronting climate change, promoting inclusive growth and other development efforts.

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When the AIIB was being organized (and the Philippine government was agonizing over whether or not to join), Nakao had said the ADB was ready to cooperate with the new bank as long as it would abide by international rules and best practices in development lending.

Last week when I asked him about this, he said the AIIB has been playing by international rules. “We can cooperate with AIIB,” he told me.

 AIIB’s Jin, for his part, said here last Monday, “I am delighted to take a further step forward in our partnership with ADB. AIIB looks forward to deepening our already strong relationship and expanding our collaboration as we seek to address the significant infrastructure financing needs in the Asia region.”

China’s economy continues to decelerate. But despite the slowdown in the region’s largest economy, Nakao sees strong long-term growth potential for Asia, with an expanding middle class seen to boost consumption. This year Asia’s growth is projected at a robust 5.7 percent.

For Asian countries to realize their full growth potential, Nakao said here, they must maintain sound macroeconomic policies; invest more in infrastructure, human capital and technology; develop efficient financial markets, and improve the business climate.

The ADB will continue playing a significant role in attaining those goals. And it will do so with its partners, among them the AIIB.