Growing Together: Economic Integration for an Inclusive and - escap

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CHAPTER FOUR 95 Enhancing regional financial cooperation intermediating large amounts of funds into the domestic economies in the wake of the 1997-1998 crisis, have been scaled back or virtually shut down. 3 Since the 1997-1998 crisis, economies in the region have become increasingly wary of maturity or currency risks and have thus equipped themselves with an arsenal of tools to make their economies more resilient to any similar attacks in the future. These tools include a rapid accumulation of foreign exchange reserves and the development of hedging instruments. Foreign exchange risk is typically hedged through well-developed non-deliverable forward (NDF) markets or through forward markets, while the markets for swaps, another hedging vehicle, are relatively less developed and hence less liquid in the region. 4 Several economies, such as China, India, Indonesia, the Philippines, the Republic of Korea and Taiwan Province of China have well developed NDF markets, while Thailand has developed an effective forward market. Making local currencies deliverable offshore reduces the need for NDF markets, as is illustrated by China, which made the RMB officially deliverable in Hong Kong, China since July 2010. Offshore markets also reduce transaction costs. However, they could also provide a vehicle for destabilizing currency speculation. The development of such markets, thus, requires the introduction of measures to reduce such risk, including an initial limitation of the channels through which a domestic currency can flow to offshore markets, and stringent requirements of documentation of the underlying transaction. Furthermore, the establishment of offshore markets for different products should also be gradual. As evidenced by the recent experience of China with the so-called dimsum market for RMB denominated bond issues in Hong Kong, China, offshore bond markets can grow rapidly. On the other hand, offshore equity markets may take longer to establish because the functioning of any equity market depends on the facilitation of secondary market trading, a piece of infrastructure which has not yet been developed offshore. Finally, to boost offshore lending in local currencies, it is crucial to enhance efficiency in the domestic banking system to make interest rates attractive compared to other currencies. In any event, the consensus across the region is that any steps towards liberalization of capital flows should be gradual and taken with great care. There is no one-size-fits-all recipe for the process. Robust regulatory frameworks, supervisory systems and the development of deep financial markets capable of absorbing potentially large capital flows are prerequisites to move in that direction. While putting in place these prerequisites, it should be noted that the liberalization of capital flows is a long term undertaking and that there are other urgent priorities for which regional financial cooperation is much needed. These are (i) strengthening resilience to external shocks, (ii) realizing efficiency gains and (iii) using regional funds more effectively. Financing infrastructure development Across the region, infrastructure is financed from a variety of sources. These include governments, national, bilateral and multilateral development agencies, and financial markets. More recently, private investors have been taking a greater share, especially through public-private partnerships (PPPs) in providing financing. Notwithstanding the multiplicity of financing sources, there are large financing gaps in the Asia-Pacific region. Direct disbursement from the budget Governments are often the best placed to invest in infrastructure because, compared with the private sector, they can look beyond financial returns. Indeed, government financing is justified when it corrects for market failures, such as in the case of public goods, natural monopolies or externalities. Governments are also best placed to finance, for instance, rural roads which are accessible to all users and where no fees are charged. Some services such as water supplies are natural monopolies that are more appropriately delivered by central or local governments. And in several cases, it is only the government
that can account for externalities, both positive, such as network externalities, or negative, such as emissions of pollutants or other damaging environmental effects and, therefore, it is best placed to provide the financing. However, even if governments wish to invest in infrastructure, they may have limited capacities to do so. One constraint could be difficulties in accessing funding or a desire to limit the size of the public debt. Although public debt ratios are not particularly high in the Asia-Pacific region, governments wishing to take on significantly more debt to invest in infrastructure would need to ensure that they can do so in a sustainable way in projects with high social returns. In general, government financing is desirable as long as the social return is higher than the private return. Beyond that, government expenditure can lead to an inefficient allocation of funds. National development bank lending Many governments invest in infrastructure through national development banks. This may help reduce governments’ budget constraints because development banks are generally funded not only from government budgets but also by issuing governmentbacked bonds – although the guarantees still constitute a contingent liability for the government. Development banks have institutional advantages since they can employ specialized personnel to manage funding and lending activities. In addition to funding national infrastructure projects, national development banks typically invest in other developmentrelated activities, such as agriculture, rural development and public services, and finance small and medium-sized enterprises or micro-enterprises. Some development banks are extremely large and during the global financial crisis were used for countercyclical spending. The Brazillian Development Bank (BNDES) is the world’s largest and most effective development bank. In 2010, it lent more than five times as much as the World Bank (table IV.2). Bilateral and multilateral agencies Poorer countries tend to rely on bilateral and multilateral agencies for investment in infrastructure. Some of these agencies offer support, especially to the neediest countries, in the form of grants, but more typically they provide long-term loans, usually co-financing with national governments, other agencies or the private sector. In Asia and the Pacific, ADB is one of the principal multilateral sources. It signs country partnership strategies with governments and subsequently offers them funding for infrastructure projects according to country allocations and sectoral priorities. Most ADB loans are on commercial terms from its ordinary capital resources (OCR), but the Bank also offers loans on concessional terms through its Asian Development Fund. The ADB also finances private-sector projects without government guarantees, though in 2010, such lending made up less than 15 per cent of its new lending. Such loans are also often accompanied by technical assistance to help design and implement projects. In addition to supporting national governments, the ADB promotes regional cooperation in infrastructure. The CAREC programme, established in 1997, for example, focuses on infrastructure projects in the area of transport, energy, trade facilitation and customs services. Since 1991, there have also been proposals to set up a North-East Asia Bank for Cooperation and Development with the participation of China, the Democratic People’s Republic of Korea, Japan, Mongolia, the Republic of Korea, and the Russian Federation, but the idea has yet to bear fruit. More recently, the leaders of Brazil, the Russian Federation, India, China and South Africa (BRICS) proposed at their March 2012 Summit in New Delhi to establish a BRICS Development Bank to finance infrastructure development in developing countries. Private-sector funding Infrastructure investment also comes from the private sector. Indeed, this is generally more efficient than public disbursement, particularly when the financial returns are likely to be high and investment costs 96
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ii Photo by Warren Field
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iv Growing Together articulates a n
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vi The following experts prepared t
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viii CONTENTS (continued) Page Chap
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x FIGURES I.1. Real rates of growth
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xii TABLES I.1. Transitions from mi
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xiv ABBREVIATIONS (continued) CEPA
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xvi ABBREVIATIONS (continued) RCM R
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xviii The term “Pacific” in thi
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xx opportunities for all social gro
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xxii Many of the labour flows withi
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xxiv development gaps. Land routes
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xxvi development agencies and priva
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xxviii weighted mean Gini coefficie
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CHAPTER ONE 1 UNDP Photo The case f
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CHAPTER ONE 3 FIGURE TITLE The case
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CHAPTER ONE 5 The case for regional
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CHAPTER ONE 11 The case for regiona
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CHAPTER TWO 19 Towards a broader in
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CHAPTER TWO 21 FIGURE TITLE Towards
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Page 170 and 171: 139 Annex Technical notes Photo by
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References 145 Photo by Warren Fiel
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References 147 __________ (2009). E
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References 149 Brenner, Cath (2009)
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References 151 __________ (2010b).
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References 153 Hertel, T., ed. (199
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References 155 __________ (2005). P
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References 157 Quah, Danny (2010).
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References 159 Thailand, National E
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References 161 United Nations, Econ
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References Photo by Warren Field 16
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