55th ADB Annual Meeting (2nd Stage): From Pandemic to Recovery - Ideas for Change in Asia and the Pacific

Transcript

Zeinab Badawi: Hello, everybody in Manila, and to our viewers wherever you are watching this. I am Zeinab Badawi. Welcome to the Asian Development Bank’s 55^th Annual Meeting of the Board of Governors, which is being held in a hybrid format in Manila. This is the second year of our curtain-raiser chat with President Masatsugu Asakawa. Last year, Manila, like everywhere else, was still in lockdown and the threat of COVID loomed in Asia and right across the world. Today, we see how the vaccine rollout has changed the trajectory of the pandemic and while COVID is still around, life has gradually gone back to normal in a lot of countries in the Asia-Pacific region. But, new challenges have emerged with the Russian invasion of Ukraine in February this year, for instance.

Here to talk about the work of the Asian Development Bank in addressing these challenges in the region is the ADB President, Masatsugu Asakawa, better known of course as President Masa for short. Hello, President Masa. Greetings from London to you in Manila. It is great to see you again, albeit virtually for now. As you can all see, thanks to technology, you and I President Masa seem to be in one location having a chat, but in fact, I am here in London and you are in Manila. Lovely to see you. How are you?

President Masatsugu Asakawa: Thank you, Zeinab. I am also delighted to see you once again after one year and also, especially this year I am really looking forward to seeing you in person.

Zeinab Badawi: Absolutely. It has been quite a year, hasn’t it, actually, President Masa, since we last spoke?

President Masatsugu Asakawa: Yes, that’s right.

Zeinab Badawi: You took over in 2020 January when COVID was causing you lots and lots of challenges and it just seems to go on and on for you. We are seeing new challenges emerge, which we will be talking about in the course of our conversation, but just give me an overview. How are you doing and how is the Bank?

President Masatsugu Asakawa: Thank you. Well, a couple of things. First of all, I have served in office as ADB President for over two years now. And first, I would like to really appreciate all the member countries who supported my re-election last year. So, this is my second term already. Secondly, I am extremely proud of what we achieved and how we delivered our operations to our DMCs (developing member countries) in our region during the pandemic period. I am so thankful and grateful for the dedication and professionalism of our staff who made it possible. Like you mentioned, for two and a half years, actually, I saw almost nobody working here in this building, so our headquarters has been shut down.

But due to the improvement of the COVID-19 situation in Manila and the Philippines, we are now returning to headquarters, finally after two and a half years, so I am so excited to see my staff in my office, in the corridor, in the cafeteria and face-to-face.

Zeinab Badawi: Yes, I bet. So, as we said, it has been quite a year. We have seen a lot of upheavals on the world stage, the Russian invasion of Ukraine has helped trigger an energy crisis, we see rising inflation, we see food insecurity. We will talk about all that in a moment but just first of all, tell us what does the energy crisis mean for developing Asia?

President Masatsugu Asakawa: Not only energy crisis but also food crisis is there and COVID-19 threat is still there. Actually, developing Asia experienced a negative economic growth rate of negative 0.8% in 2020 due to the COVID-19 pandemic and it was the very first economic contraction which happened in this area for the last 60 years. In 2021, it rebounded to 6.9% and this year, 2022, ADB projects 4.3%. The reason for the rebound we saw last year includes a couple of things. First, the very mild health impact of the Omicron variant. Second, progress of vaccination in this area and third, very robust, strong performance of exports throughout this region.

However, the pace to recovery varies among economies and remains very, very uneven among economies. So, we have to bear in mind I think four possible downside risks to the economic outlook of this region. First, slowing down of China’s economy due to the very stringent zero-COVID policy. Second, still a possibility of emergence of a more lethal COVID-19 variant. Thirdly, economic negative impact caused by the Russian invasion of Ukraine, as you mentioned, Zeinab. And fourthly, instability in the financial market due to the very aggressive rapid monetary policy normalization by some advanced economies.

Zeinab Badawi: Okay, you have given us an overview there of just what the situation is like globally and what it means for Asia. Let us just quickly go back then to COVID. You mentioned the slowdown in China and of course, we are still seeing lockdowns regionally in parts of Asia, including particularly in China. How much is COVID still a priority for you at the Asian Development Bank?

President Masatsugu Asakawa: Thanks. In fact, as everybody knows, the Omicron outbreaks have been very short-lived in general and milder than the previous waves. Actually, the number of COVID-19 cases in this region have dramatically dropped, declined. ADB also responded very quickly to this pandemic. In April 2020, we announced a US$20 billion COVID-19 comprehensive assistance package. Also in December in the same year, 2020, we announced an additional financial instrument for procurement of vaccines by developing member countries with the amount of US$9 billion.

So far, in total we have committed US$33 billion to support our DMCs, developing member countries, to fight against COVID-19 pandemic. Out of this US$33 billion, US$10 billion was for very quick disbursing budget financing called CPRO, COVID-19 Pandemic Response Option. And US$8 billion was for private sector financing, including very short-term trade financing, and US$4 billion was for vaccine financing. For now, as you mentioned, Zeinab, we are not completely out of the woods, yet. So we will continue to provide those budget financing, private sector financing, and also vaccine financing in addition to the ordinary project financing as necessary.

Zeinab Badawi: Yes, you are right. People talk about oh, the post-COVID world and so on, but we still see travel restrictions in the Asia-Pacific region, which has particularly had an impact on those countries that rely a lot on tourism, for instance. In some cases, that has not gone back to what it was like in pre-pandemic levels, so very interesting to know that the Asian Development Bank is still very much thinking about how to deal with the fallout from COVID.

But you also mentioned one of the challenges as a result of the Russian invasion of Ukraine, of course. Ukraine, a big supplier of grain and so on globally. This has had a big impact on food prices in a lot of countries in the Asia-Pacific region, especially those that rely a lot on food imports and also the strength of the dollar has sent these food bills soaring. And we are seeing a lot of food insecurity, sadly, which is going to fuel inequality, which I know, President Masa, is something which is very important to you, wanting to close the gap between the haves and the have-nots. So, how can your region deal both in the short and long term with this food insecurity/food crisis?

President Masatsugu Asakawa: A very important point. Actually, the Russian invasion of Ukraine has posed a very serious risk to the economic outlook of this region, obviously. There are two kinds of risks, one is direct impact and indirect impact. Direct impact through trade, capital transactions with Russia, and also remittance coming from Russia has been relatively limited for developing Asia as a whole, except for a couple of countries in Central Asia, Caucasus, and Mongolia, who have traditionally maintained a very close trade and economic linkage with the Russian Federation.

On the other hand, the indirect impact and indirect risk has been locked through a very, very steep price increase in food and energy. I am quite sure importers, import countries of food and energy will see this year’s import bills are much, much more expensive than last year’s, which means adding inflationary pressure on the economy. Actually, a number of central banks in this region have already started to raise policy interest rates to quell the inflation pressure, which would add additional constraints on economic growth prospects of this region. Also, indirect impact includes the deterioration of market sentiment, which would depress consumers’, producers’, and investors’ confidence.

So, flight to safety and tighter financial conditions globally might spur some sort of capital outflow movement from this region. Together with the steep increase in food prices, the possible reduction of fertilizer supply by Russia would have a significant impact on the agriculture production of this region as well. This has become a very serious concern in terms of food security, as you mentioned rightly, so this is exacerbating the already-challenging situation due to the economic fallout of COVID-19, some political unrest, notably in Afghanistan and Myanmar, and droughts and other adverse weather events linked to climate change.

In response, ADB has tried to respond to these new challenges through various measures and we will continue to provide ordinary project financing, policy-based loans, budget financing, and also financing for private sector. Quite recently, we have enhanced one of our existing financial instruments called CSF, Countercyclical Support Facility, which would provide emergency financing to support DMCs to expand their countercyclical fiscal expenditure to mitigate the shocks coming from external events like food insecurity, and so on.

Those are short-term measures but in the long term, we are reviewing now our projects in our pipeline for DMCs to see how we can support our DMCs to build very strong, robust, and sustainable food systems through climate-smart agriculture, digitalization of food value chains, and nature-based solutions.

Zeinab Badawi: Interesting. You talk about the direct and the indirect impacts but also the short-term emergency responses that you are making at the Asian Development Bank for those countries that really need assistance, but how it is also influencing your long-term goals and the importance of putting in place those building blocks to ensure that in the long-term you do have food security, as you say, through climate-smart agriculture and so on. Very interesting that it has really concentrated your minds in making sure that you do try to go down that path. So, you mentioned it is not just the Russian invasion which has triggered the food crisis.

It was a perfect storm, wasn’t it, President Masa? We saw, as you said, those extreme climatic conditions, we have seen the floods in South Asia with hundreds of thousands of people affected in Pakistan, we have seen the droughts in many parts of China. I believe the Yangtze River is at its lowest level since 1865. That is quite extraordinary, isn’t it? So, I know that you are obviously really at the forefront of thinking about climate change at the Asian Development Bank.

You went to COP26 in Glasgow in Scotland and you are very much involved in the ETM, the Energy Transition Mechanism, which is trying to accelerate the move away from fossil fuels towards clean energy, and you are working with your international and regional partners to that end. We all know that energy demand is going to double in Asia by 2030, so I want to know just what you are doing to try to support the ETM, the Energy Transition Mechanism, to not only build back better but build back greener?

President Masatsugu Asakawa: Thank you, Zeinab. As you mentioned, it is kind of an uncomfortable truth that the Asia-Pacific region is accountable for more than half of global greenhouse gas emissions. Also, it is true that this region remains as one of the most vulnerable regions [to] natural disasters. So, I keep on saying that our fight against climate change in this region will be won or lost. Last year was the year of COP26 and I went to Glasgow. So before I went to Glasgow, we had a serious discussion inside the Bank to discuss what kind of contribution ADB could make or ADB should make.

We made a couple of very important decisions. First, climate financing. We elevated our ambition from US$80 billion to US$100 billion of cumulative climate financing from 2019 to 2030. So, US$100 billion over 12 years, which is a big challenge for us but we see also our investment in green growth is an opportunity to keep advancing development to reduce poverty while maintaining our path for a low-carbon transition. Second, we need to enhance access to affordable, reliable, and sustainable energy sources while promoting low-carbon transition.

So, to that end, we revised ADB’s so-called Energy Policy, which was very old. This new Energy Policy we adopted before COP26 last year and under that new policy we officially decided to withdraw our financing for any new coal-fired power plants. Also, this new Energy Policy commits ADB to support a just transition for all the people in affected communities. And thirdly, ETM. Including ETM, we are working on a couple of very innovative financing instruments but the ETM is one of them.

The issue is as follows, Zeinab. In our region, there are so many coal-fired power plants already existing and operating. So many, and they are relatively young. Young means less than 20 years old. 90% of those young coal-fired power plants are said to be here in Asia, so if we do not do anything, they just stay on for another 10 years, 20 years and even 30 years from now. So, what we need is to let them retire early, earlier than originally scheduled. So, ETM will do that job. ETM is a very innovative financing mechanism which combines commercial financing provided by financial institutions with highly concessional financing or grant money provided by donor countries or philanthropies.

It is called blended financing to achieve low-cost financing. By utilizing the low-cost financing, any expected return from each coal-fired power plant could be achieved in a shorter time horizon. That is how ETM could let those existing coal-fired power plants retire early. Also, ETM could unlock investment in renewable energy, clean energy so that they can promote the smooth transition from coal to renewable energy in each country. We are piloting ETM in the Philippines, Indonesia, and Vietnam right now. And our work in Indonesia is truly leading in the context of their presidency for G20 this year.

I am quite sure this is going to be a successful model in this region, in the Asia-Pacific region, then it could be, it should be replicated in other parts of the world, like in the African continent and in the South American continent and so on. I hope this ETM will become one of the most powerful carbon reduction models in the world.

Zeinab Badawi: Really fascinating. It is clearly a very visionary and ambitious program you have with the Energy Transition Mechanism. Really fascinating and as you say, you have got this pilot project and it will be interesting for other regions in the world to see how you do proceed with that. I think that is a very, very innovative thing you are doing there at the Asian Development Bank.

So, talking about the importance of investments and so on, especially when it comes to climate or addressing the food crisis, when we spoke last year I know you are very passionate about this topic, Domestic Resource Mobilization. You spent many years in the Ministry of Finance in your native Japan. But talking about all these things, one says to you, President Masa, how can you say that domestic resource mobilization, taxation and so on is a priority for you at the Asian Development Bank, given all these challenges?

President Masatsugu Asakawa: Thank you very much, Zeinab. This is really one of my most favorite topics. Well, due to the long-lasting, low interest rate environment and also fiscal expansion to deal with the COVID-19 pandemic, in almost every country, the fiscal situation got worse. The fiscal situation means fiscal deficit situation and also public debt situation. That was inevitable, in a sense, but I am quite sure that in the process of recovery from the pandemic, I think the timing would come to every country to change gears from fiscal expansion to fiscal consolidation.

Of course, each country should pick up the right timing to do so. Timing cannot be too early, it cannot be too late, but I am quite sure the timing will come. So, in that process, I think DRM, domestic resource mobilization, is very, very important, which means how to raise domestic tax revenue. Domestic resource mobilization, DRM, is significant from two perspectives.

One is, it is very necessary to make [the] social welfare system of that country robust and financially viable. For example, aging. Aging is coming to every country sooner or later. In order to cope with aging, what is needed is to introduce a very well-designed and robust public pension scheme and also a public medical insurance scheme and so on. In order to make those social welfare systems financially viable, it is much better to rely on domestic resources, rather than depending too much on external financing. That would simply worsen the debt situation, the debt sustainability of that country.

Secondly, tax policy is good policy, not only to increase tax revenue in general but to achieve each of the development agenda laid out by SDGs (Sustainable Development Goals). For example, it might be a good idea to utilize progressivity of the income tax scheme to address the income inequality issue, which I am quite sure got worse during the pandemic. Also, it might be a feasible policy option to rely on carbon tax, environmental tax to address the climate change issue. So, these are only two examples but there are many ways where tax policy can contribute to the long-term development agenda laid out by the SDGs.

Zeinab Badawi: Very interesting how you say these fundamental services that governments provide – welfare, healthcare and so on – you can’t rely on external finance for that and therefore, you really have always been a very strong advocate, haven’t you, of a progressive tax system, because as you say, to address the inequality, which sadly we have seen expand during the COVID pandemic. But also, talking about finance, there was this historic global tax agreement last year to make the international tax system fit for the 21st century’s digitalized and globalized economy.

So, tell me, how can countries in the Asia-Pacific region benefit from this global tax agreement, which is supposed to be implemented next year, and how can you at the Asian Development Bank support its implementation?

President Masatsugu Asakawa: Yes, thank you. I really would like to emphasize the importance of international tax cooperation exemplified by the BEPS (Base Erosion and Profit Shifting) project, which you mentioned. A so-called two-tier approach, which has been agreed by G20 and by a wider group of countries -130 plus countries in October last year was really epoch making. The second pillar, pillar 2, was striking in the sense that participating sovereign nations all agreed that large, multinational enterprises, MNEs, should be taxed at least 15% anywhere.

But actually, it is the first pillar, pillar 1, that would generate more tax revenue for developing countries. Pillar 1 relocates taxation rights over those large MNEs, multinational enterprises, from their country of residence to the market economy where they do business and make profit. One of these days, they can make profit even without any physical presence in that country. We call it PE, permanent establishment, but they can make profit even without any PE by utilizing digital technology, e-commerce and so on.

So, pillar 1 would enable a market economy, including developing countries, to impose a fair amount of taxation on those multinational enterprises that are making profit without any PE. So, I think developing countries should really take full advantage of this historical agreement to ask a fairer tax burden on the digital economy. As I mentioned, that last year we launched the so-called digital tax hub at ADB to promote tax policy dialogue, promote coordination among development partners, knowledge sharing, and also promote discussion on international tax cooperation.

So, I hope many countries will join this tax hub to have a very active discussion on both DRM, domestic resource mobilization, and ITC, international tax cooperation.

Zeinab Badawi: No, I knew about the digital tax hub and it is really good to know that you are really pursuing this with a lot of vigor. Of course, regional cooperation, coordination and integration has been so fundamental to what is being done by the Asian Development Bank over the decades and it has really been instrumental, hasn’t it, in helping to lift millions of people out of poverty through cross-border trade and investment and all the rest of it? But when you are talking about this tax hub and the need for international cooperation, I wonder if you think that that is really viable, given that particularly after COVID, we have seen a real retreat from globalization and people are looking at localization, regionalization. Some people are saying globalization is dead in all but name. What is your view?

President Masatsugu Asakawa: I remember last year I said that globalization will come back and despite the new challenges that have emerged due to the Russian invasion of Ukraine, I still think globalization will come back. If that is the case, what we need to do is to enhance our regional cooperation. It should be transparent and open and that would support the rejuvenated globalization. More concretely, I can think of a couple of areas where we should, we could enhance our regional cooperation effort.

First, obviously, trade and investment. We should restore our strong regional trade, vibrant capital transactions across borders, and also deepen the regional value chain which has been a driving force for the very strong economic growth and economic transformation in this region for years. Despite the border closures and travel restraints introduced during the COVID period, countries in this region have reopened and reconnected already.

Another good example is the signing of RCEP (Regional Comprehensive Economic Partnership) in November 2020, and actually, RCEP itself has come into effect as of January 1st of this year. That was a very strong signal, strong commitment, by this region for open and free trade and investment systems. Of course, we have to make sure that the benefits coming from open trade systems could lead to everybody, including low-income countries, land and/or sea-locked countries, small-to-medium-sized enterprises,  and the vulnerable and poor.

Second area, is that we should really enhance our cooperation to build resilience, especially against regional health security risks. For example, coordination among national regulators and surveillance agencies could be enhanced to ensure exchange of information and real-time monitoring of emerging outbreaks. Also, vaccination itself could be conducted more effectively regionally.

And thirdly and finally, I think we should really enhance our regional financial cooperation. I am afraid the risk will continue for abrupt capital outflow and/or strong currency depreciation due to the very aggressive monetary policy tightening, especially by the Fed (US, Federal Reserve). Of course, compared with the days of the Asian Financial Crisis 1997-1998 in this region, the current account position has been improved and foreign reserves have been accumulated sufficiently, so resilience as a system, as a whole, against financial turmoil has been enhanced compared with those days. But still, nonetheless, it is always better to be vigilant against the very fragile capital movement and to try to enhance our financial cooperation in the region, including that of ASEAN+3.

Zeinab Badawi: Very interesting, and you mentioned the Fed there, the Federal Reserve in the United States, of course, and the dollar is the strongest it has been for such a long time, year and years, and of course, that is causing a lot of problems for those countries in the Asia-Pacific region which are heavily indebted because, of course, it makes their debts so much more expensive and it causes lots of problems in the way that you have illustrated. But it is good to see that despite all the problems, you are still sticking to your guns, President Masa, that globalization, regionalization, and regional cooperation and coordination is still the answer and that we should not lose sight of that in all sorts of ways.

I also remember when we spoke this time last year, you said that you had been able to get around a little bit but you did express your frustration that you were not able to go out to the region to meet your partners and also officials and politicians and so on. So restrictions have eased a bit, of course, in the past 12 months, so you have been travelling quite a bit, so maybe just share some of your reflections on where you have been and why you have gone there and what you have discovered.

President Masatsugu Asakawa: Yes, thank you. I have resumed going on missions, mostly to developing member countries, DMCs, and also non-borrowing member countries. For example, in March, I went to Sri Lanka because Sri Lanka was supposed to host our Annual Meeting in Colombo in May this year. And obviously, due to the very difficult economic circumstances they are facing, we had to postpone it, but taking that opportunity, I visited one university in Colombo and met with a bunch of people, boys and girls, who were being trained for jobs in the renewable energy sector.

Looking at their seriousness and looking at their smiles on their faces, I strongly felt that the renewable energy sector could be a major pathway for the bright future of Sri Lanka once the current economic difficulty is overcome. Also, I went to Uzbekistan to see the great Silk Road area where I once again strongly felt the huge potential for economic regional cooperation of that area. So, all these experiences reminded me that the ADB success will depend on individuals, personnel of the region and also a trusted partnership, trusted presence of ADB in that region, which we have provided for the last 50 years. I am more than happy to continue to do so under these very difficult circumstances.

Zeinab Badawi: President Masa, you talked about the students at the university in Colombo in Sri Lanka, despite all the problems that the country faces having a smile on their face and still being optimistic about the future and engaging with you, it is a bit like that. Despite the fact that you have got so many things you have to tackle, the problems and the challenges, you always do it with a smile on your face and with a very, very human touch. I thank you very much, I really enjoyed having this conversation with you.

So, until then, thank you so much indeed. It has been fascinating talking to you in this curtain-raiser for this year’s annual gathering. It is goodbye from me to you. I am here in London, you’re in Manila. Does not look like it, but that is the way it is, so bye-bye.

President Masatsugu Asakawa: Okay, bye-bye. Thank you, Zeinab.