Institutional Responses to Asia’s Development Challenges

Remarks by Kurt Tong, Principal Deputy Assistant Secretary
Bureau of Economic and Business Affairs, U.S. Department of State

Distinguished Seminar Series, Asian Development Bank Institute

Thank you, Dr. Yoshino, for that kind introduction. It is a real pleasure to be here today at the ADB Institute, which is considered one of the finest think tanks in the region. I am here to discuss with you all some of the key challenges and opportunities surrounding the coming decades of economic development in Asia and the Pacific. In particular, I look forward to considering together how we can utilize all the region’s evolving institutions to maximum benefit, for the people of this region, and for the governments and private businesses that serve them.

My special thanks go to Peter Morgan and the staff of the ADB Institute for making this opportunity possible. Peter is one of the top economists in this region, and I remember him well from the dark days of the economic crisis of the late 1990s, when we both were working here in Tokyo. It seems right that he is now playing a key role at this fine institution.

The Faces of Asian Development

So, “institutions” is the word for the day. But what do I mean by institutions? There is the narrow meaning of the word, referring to actual organizations seeking to accomplish some specific goal. And there is the broader, more abstract meaning, describing a set of rules or norms at some place and time that govern and shape how people interact in some area of endeavor. Today I use the word “institutions” with both implications, and I will – briefly I hope – consider both specific institutions such as the Trans-Pacific Partnership, APEC, ASEAN and the Asian Development Bank, as well as the broader values and sets of rules that we aspire to in this region.

Indeed, the challenges of 21st century Asia require an even stronger set of institutions and economic arrangements than we have now. We need these institutions, in particular, to support shared approaches to the key challenges of sustained economic growth and regional economic integration. Asia’s economic development is increasingly trans-boundary in nature. The challenges we face are also trans-boundary and multi-faceted in nature. So the answers to these challenges also need to be collective. This provides the region a priceless opportunity to work together towards shared solutions.

Asia’s economic development still has many faces. Despite areas of great wealth, the region remains home to some two-thirds of the world’s poor – 1.6 billion people who live on less than $2 a day and more than 800 million living on less than $1.25 a day. Inequality is also on the rise.

In addition, the threat of natural disasters and epidemics, and the challenges of natural resource management and rising energy demands, pose significant challenges. The Asia and Oceania region, for example, accounts for 38 percent of global energy consumption – a number which will continue to grow rapidly – as well as over 45 percent of global CO2 emissions.

This region also faces huge gaps in infrastructure development. It has been calculated that about $8 trillion in infrastructure projects are needed between now and 2020 – a staggering sum. Asia also remains exposed to corruption, and other internal and external risks – which make continued reform, regional integration and the strengthening of institutional capacities absolutely critical.

Yet, at the same time, on the positive side of things, the bright light of accelerating Asian economic integration, South-South cooperation, enhanced digital connectivity, and expanding free trade agreements, are all contributing to increased investment, as well as more regional trade. This enhanced investment provides pathways to address and overcome these development challenges.

In fact, ever-deeper economic cooperation among investors and traders continues to drive rapid growth in Asia. The OECD predicts annual GDP growth for the ASEAN-10, China, and India to average 6.5 percent from 2015 to 2019. Growth momentum remains notably robust in the 10 ASEAN countries, and is expected to average 5.6 percent over that same time period.

U.S. Objectives in the Region

So there are many positive signs for Asia’s future growth. But the complex challenges of the region will require attentive and pro-active government policy to ensure that this potential is fulfilled. Asia will need good policies, a strong architecture, and vibrant institutions, and it will also need good partners.

Speaking of good partners, let me first touch on the U.S. role in the region’s economic policy, and our objectives, before saying more about the present and future of the key institutions of this region.

The United States, it almost goes without saying, has a strong commitment to promoting Asia’s economic growth and prosperity – which is so closely tied to our own national growth and prosperity. And our efforts to support private investment, public investment, and trade and technological development all closely complement and strongly connect with the work of the nations on this side of the Pacific.

The United States is working hard to promote a regional economic and trade architecture that is rules-based and provides an open, free, transparent and fair framework for trade and investment, which will deepen the region’s economic integration, as well as allow U.S. businesses to tap into opportunities in the region.

As you all know, the trade and investment opportunities created by U.S. businesses have been a foundation for regional growth and development that has never wavered for over half a century. The United States remains the single largest source of foreign direct investment in the Asia-Pacific region, with the stock of U.S. investment reaching $622 billion in 2012. We also remain the biggest and most important market in the Asia-Pacific, and the United States continues to do over $1.4 trillion in trade in goods and services in the region.

Importantly, the U.S. government has helped further increase economic integration by passing and implementing the KORUS Free Trade Agreement – still the best FTA in this region – and by vigorously supporting ASEAN’s economic integration, and by bolstering APEC. Of course, now in 2015, our highest priority for deepening regional economic integration is the Trans-Pacific Partnership, which will not only lower tariffs, but also address a wide array of 21st century trade and investment issues. This agreement will help our economies be more closely knit, and also more modern at the same time.

Meanwhile, U.S. public finance and development assistance efforts in this region continue to work to promote expanded trade ties, inclusive and green growth, poverty reduction, and food security, as well as the expansion of entrepreneurial activity and the economic empowerment of women. The United States is proud to be a founding and leading member of the Asian Development Bank. Meanwhile, regarding bilateral grant aid, my government’s Fiscal Year 2016 foreign assistance request would expand funding to the East Asia and Pacific region to $845 million from $780 million two years earlier, an 8 percent increase despite tight U.S. budgets.

Institutions for Trade and Investment

So let me turn to some of the key cooperative institutions of the region, starting first with the institutions focused on trade and investment, before turning to those aimed at leveraging public sector and private sector finance to aid sustainable economic development.

The Trans-Pacific Partnership (TPP)

Expanding trade has created a bright future for billions around the world. Between 1991 and 2011, as developing countries doubled their share of global trade, nearly a billion men, women, and children were lifted out of poverty. In the United States, international trade has added 10 percent to America’s GDP.

The Trans-Pacific Partnership trade and investment agreement that is currently in the final stages of negotiation will unite approximately 30 percent of world trade; 40 percent of global GDP; 50 percent of projected global economic growth; and 800 million consumers.

Importantly, TPP will establish a higher level of worker rights and environmental protection across partner countries.

Through TPP, we can also articulate a shared vision on a range of important issues, such as protecting intellectual property and promoting digital trade.

TPP will also be the first FTA to specifically promote small and medium enterprises, tackling head on the trade and investment barriers that hit small businesses hardest, such as lack of transparency, and complex regulatory frameworks.

By the year 2030, we expect there to be 2.7 billion middle class consumers across the Asia-Pacific region. Concluding this agreement will give businesses and workers in the United States and Japan – as well as the other 10 members -better access to those consumers. And it will give those consumers better access to high-quality goods and services – ranging from food to health care to entertainment.

From a purely economic perspective, the benefits of TPP for the United States and Japan will be substantial: the renowned independent Peterson Institute estimates that Japan’s annual GDP gains from TPP will be close to $100 billion in 2025, and export gains will be near $140 billion by 2025.

For the United States, the same study predicts that income benefits of TPP will be close to $77 billion per year, and by 2025, a concluded deal would generate an additional $123 billion in U.S. exports.

But in focusing on the calculated economic benefits, we must not overlook the fact that trade policy and foreign policy are inextricably linked. And it is difficult to overstate the strategic importance of countries with 40 percent of global GDP declaring – with one voice – that the global rules for doing business in the 21st century must and will change for the better, and will reflect and address the emerging economic issues that we all face.

And finally, to anticipate your questions – yes, we are going to get TPP done! I think we are approaching the stage where progress will be seen week by week, rather than month by month. Lots of smart people from all 12 TPP economies are working hard to get this done, and based on my 25 years of experience in this line of work, I am entirely confident we will succeed.

Association of Southeast Asian Nations (ASEAN)

As important as TPP is, and it is our top priority for 2015, the TPP is not the only critical trade and investment framework experiencing a milestone year.

ASEAN – as both a political entity and an economic entity – is another absolutely critical regional institution. From the U.S. perspective it is hard not to be excited about ASEAN, representing as it does a market of about 620 million people who produce more than $2.4 trillion in GDP and buy almost $100 billion of U.S. exports.

ASEAN boasts exemplary stories of economic development. Vietnam, for instance, has lifted millions out of poverty through market-oriented reforms and dramatic expansion of trade and investment since the signing of our bilateral trade agreement and WTO accession. Singapore has one of the most advanced and competitive economies in the world, and Malaysia is fast approaching its goal of becoming an advanced high-value economy by 2020.

Access to U.S. markets has historically been highly beneficial to Southeast Asia’s economic growth and development. Not only does the United States remain among ASEAN’s top trading partners, but our two-way trade is growing fast, topping $216.1 billion in 2014.

Even more important than trade flows is the commitment U.S. companies have made to growth in ASEAN. U.S. corporations have for a long time been the biggest single source of foreign direct investment in ASEAN, with over $200 billion in foreign direct investment stock.

As I noted, this is a transformative year for ASEAN as it seeks to launch the ASEAN Economic Community (AEC) by the end of 2015.

The United States continues to cooperate with and support ASEAN efforts to create the AEC, including through a five-year $18 million technical assistance program for the ASEAN Single Window customs project.

In 2014 we also launched the U.S.-ASEAN Business Alliance for Competitive Small and Medium Enterprises, a public-private partnership between USAID and the U.S.-ASEAN Business Council.

The Lower Mekong Initiative is another major part of our commitment to the region. Involving half of the ASEAN member states, it is a major commitment to help meet the water, food, and electricity needs of five nations, while protecting a vital river. Through the Friends of the Lower Mekong, we have also helped organize major donor countries to coordinate and maximize the collective impact.

Let me note something important here: although the TPP currently involves only four of the ten ASEAN economies, and APEC includes only seven, the United States is firmly committed to the concept of ASEAN centrality in Asia. This has implications on the political and security front, of course. But in the realm of economic policy it means this: we are committed to cooperating with and supporting the economic growth of all the members of ASEAN. And, as I often say, we want ASEAN to “be more ASEAN.” We share ASEAN’s dream for it to be more integrated, and become a single, powerful and prosperous market.

Asia-Pacific Economic Cooperation (APEC)

So, then, let me say a word or two about APEC, an incredibly valuable institution that is experiencing new energy and purpose in recent years.

My own experience with APEC stretches back a decade, but peaked in 2010 and 2011 when Japan and the United States hosted APEC in back-to-back years. We used close teamwork between Tokyo and Washington to put the organization firmly back on track toward effectively building regional consensus on shaping the rules for sustainable growth, and for regional economic integration in the Asia-Pacific.

APEC is drafting the rules of the road, and strengthening a rules-based system in this region. Beyond core trade and investment issues, APEC also addresses a broad range of other important economic, energy, and environment issues – from anti-corruption to good regulatory practices and global value chains. It is working on the digital economy, health systems, and climate change issues.

People sometimes criticize APEC for “mission creep.” But if you look at it closely in recent years, you will see not only the “primordial pool” that produced TPP and other such historic initiatives, but you will also see that APEC has notched solid and practical achievements in areas such as reducing carbon emissions through deployment of clean energy technologies, and expanding economic opportunities for women. APEC has also helped outside the region, giving birth to the world-wide Information Technology Agreement as well as, arguably, the new negotiations aimed at reducing tariffs on environmental goods.

As the host for APEC 2015, the Philippines is focusing on four priorities: 1) enhancing the regional economic integration agenda, 2) fostering small and medium enterprises’ participation in the regional and global economy, 3) investing in human capital development, and 4) building sustainable and resilient communities. These are great priorities, and will contribute mightily to world-wide discussions in 2015 of how to enhance inclusive economic growth even as we continue to foster globalization.

U.S. priorities for APEC in 2015 include initiatives and commitments that will: 1) advance trade and investment liberalization, including free and open trade of digital products and improvement in the ease of doing business; 2) protect the environment and increase cooperation on climate change, including work on illegal, unreported, and unregulated fishing and promotion of the use of renewable energy; and 3) support disaster resiliency, including ways to improve the movement of humanitarian goods across borders; among other priorities.

In recognition of the private sector’s role in advancing the region’s economic goals, APEC has also established the APEC Business Advisory Council, or ABAC. As you probably know, ABAC presents recommendations to APEC Leaders in an annual dialogue and advises APEC officials on business sector priorities and concerns.

Organization for Economic Cooperation and Development (OECD)

One last institution worth mentioning before turning to development finance is the Organization for Economic Cooperation and Development. Unfortunately, there are still only a handful of countries in this region that are members of the OECD – Japan, Korea, Australia and New Zealand. But the OECD launched its Southeast Asia Regional Program in May 2014 and has kept up a steady rhythm of events in the region, with the first meeting of the program’s Steering Group scheduled for next month in Jakarta.

The OECD also has robust relationships with China, India, and Indonesia, all “Key Partners” to the OECD since 2007. Looking ahead, 2015 offers a number of opportunities for partners to engage with the OECD to further economic and governance reforms throughout the region.

Institutions for Development Finance

So, finally, let me discuss the Asia-Pacific region’s institutions for promoting sustainable growth through cooperative public finance, as well as the leveraging of private finance for public benefit.

Multilateral Development Banks (MDBs)

Global and regional multilateral development banks, or MDBs, are the bedrock of today’s development architecture. Over seven decades, these institutions have evolved to meet the changing scale, scope, and diversity of challenges to economic growth and stability. The “secret” to the success of the MDBs is a set of core standards that reflect decades of collective experience and lessons learned. The United States, for its part, continues to work with the MDBs to modernize their practices and standards.

The existing set of MDBs – the World Bank, ADB and its regional cousins – has prioritized transparency and sound governance in their own operations and in the standards they set. By requiring extensive consultations with policy makers, members of civil society, affected communities and others; by releasing information about their activities to the public; by carefully evaluating their impact and results; and by insisting on the direct oversight of an engaged board of directors, these institutions set a high standard.

These institutions also help ensure debt sustainability and curtail the cycle of debt dependency that has plagued countries in the past. They have adopted environmental and social safeguards to match current best practices so that project design and implementation address adverse environmental and social impacts and maximize positive outcomes. We believe these safeguard policies are an integral part of the comparative advantage of the Banks, and add value beyond financing, as well as comprise a key component of risk management for both the borrowers and the lending banks.

The existing MDBs also have high standards for project procurement to ensure that scarce development resources are used effectively and efficiently. With leadership from the World Bank, procurement standards are being modernized to provide better value for money and enhanced international competition.

Related to all this, the United States asks countries to maintain sustainable levels of debt. But when debt proves unsustainable – as a last resort – we have worked through the Paris Club – another important institution – on debt workouts, which helps return a country to debt sustainability so that debt markets can function again. The Paris Club has been more active in Africa and Latin America than in Asia. But in 2013, for example, a Paris Club debt workout for Burma played a key role in helping that country re-engage with the international community.

While today I am talking mainly about cooperative regional institutions, I should note here that – bilaterally – the United States also supports countries’ access to development financing through loans, loan guarantees, as well as our vibrant and extensive private capital markets. And the United States, of course, like other nations, has an export-import bank, and a window to provide insurance for U.S. companies investing overseas. We also have an excellent, if small, agency that provides grants to developing countries to work with U.S. companies in designing infrastructure and other public and private development projects.

New Institutions and Economic Initiatives:

I want to say something more about the role of the private sector in a moment, but let me now turn to the topical question of new and emerging development finance institutions.

Several new institutions and economic initiatives seem poised to join the existing architecture I just described, including the Asian Infrastructure Investment Bank (AIIB) and the BRICS’ New Development Bank. The primary mandates of these new institutions will be to finance infrastructure.

The AIIB is poised to inject some $50 billion in capital resources into the system, which we understand will be primarily targeted at filling the $8 trillion infrastructure gap in Asia between now and 2020 that I referred to earlier. China’s Silk Road initiative has also been recently announced, to create a $40 billion fund for building roads, ports, electric power networks, pipelines, and other infrastructure and to create a land link from China to Europe via Central Asia, as well as enhancing sea lanes to the Middle East via the ASEAN states.

As these new institutions emerge and begin to help address the gaps in infrastructure financing in the region, the region will in turn need to work towards collectively designing those institutions in a way which meets Asia’s collective challenges, and at the same time ensures the standards and safeguards which will make Asia’s development stable and sustainable for the long-term.

There is a myth out there promoted by some in the media that the United States is opposed to the AIIB because China is taking a leading role in its design and implementation. That is not true. We welcome China’s economic rise, and its willingness to contribute to region-wide development.

However, we also do believe that each new addition to the existing architecture, both globally and in this region, should be designed to add value to the system as a whole, and have a clear, complementary role alongside existing MDBs. Any new institution should also incorporate the same set of core standards, and implement them from the outset.

One big opportunity in this regard is co-financing. Co-financing projects with one or more of the existing MDBs, like the Asian Development Bank or the World Bank’s Global Infrastructure Facility, would be particularly valuable for the AIIB, especially during the AIIB’s initial years of operation. This partnering could allow the AIIB to establish sound practices, exchange lessons learned, and also have access to a pipeline of well-structured, bankable projects.

In short, the United States stands ready to welcome new institutions into the international development architecture, provided they share the international community’s strong commitment to complementing the existing MDBs and maintaining time tested and ever-improving standards.

A final key point here is to consider the role of the private sector: as important as the MDBs are, regional needs for infrastructure development far out-strip the resources they can provide. National governments, of course, but also the private sector, will have to play a central role.

Private sector finance through mechanisms such as public-private partnerships, or PPPs, is a particularly striking and important opportunity. There is a paradox here. Economic forecasters see an “infrastructure gap” of unfunded needs. But private financiers complain about the relative absence of fully designed, “bankable” projects in which to invest. The most urgent imperative here is not necessarily to find more public cash, but rather to make improved efforts to bring private financing to bear on the problem. Fortunately, governments such as the Philippines are working hard to come up with workable rules for public-private partnerships to help meet their needs.

Conclusion

Ladies and gentlemen, amid all these efforts to build the economic institutions and architecture of this region, I hope it is clear that the United States is committed to remaining deeply engaged and to helping shape these institutions to help meet Asia’s development challenges.

President Obama has made seven trips to East Asia as President, most recently to Beijing for the APEC Leaders Meeting; and to Nay Pyi Taw and Rangoon for the East Asia Summit and U.S.-ASEAN Summit. The President is deeply committed to his Asia rebalancing strategy, and firmly believes that America’s trade and investment ties to Asia are critical to our future economic growth, and to generating American jobs.

The Obama administration has supported this region’s progress in many ways, such as increasing our direct engagement with ASEAN, which we see as a pillar of the international order. As an indication of this, President Obama set the precedent of appointing ambassadors to ASEAN, which others have now followed.

We support, have hosted, and actively participate in APEC, which is an economic pillar of the Asia-Pacific region. APEC has done a lot to speed recovery from the global financial crisis, to empower women economically, and to ensure that growth is inclusive – helping to grow the middle class throughout the region.

And we are going to get TPP done! The rest of the world will marvel at this diverse group of economies reaching agreement on a high-quality, comprehensive and thoroughly modern set of trade and investment rules.

And on development finance, we will continue to be extraordinarily active. We are also ready to welcome new institutions into the international development architecture, provided that they share the international community’s strong commitment to complementing the existing system and maintaining time-tested and ever-improving principles and standards.

The United States looks forward to continuing to find ways work together to help ensure that regional and multilateral institutions, and Asia’s changing economic architecture, contribute to the growth, stability, and development that we all desire for this generation and for the future.