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Should PRC Keep its Dollar Peg?

In this issueAgeing Asia 2

Dean Looks Ahead 3

Infrastructure’s Important Role 3

Interns’ Insights 4

Featured Book 5

Facilitating Trade 5

Bilateral Trade Agreements 6

Meeting Water Challenges 6

ICT Boosts Education 7

Advantages of Industrial Clusters 7

Coming Events 8

ADBI Newswww.adbi.org Volume 1 Number 2 April 2007

A s i a n D e v e l o p m e n t B a n k I n s t i t u t e

Ronald McKinnon, William D. Eberle Professor of International Economics at Stanford University, addressed over 50 invited guests and ADBI staff on 1 March. He talked about why the People’s Republic of China (PRC) should keep its exchange

rate pegged to the dollar, drawing on Japan’s experience from 1971 through the early 1990s.

The pressure to appreciate the renminbi is coming from the United States, which is experiencing a large trade deficit with the PRC, much as it had with Japan 30 years ago. Politicians, and many economists, argue that letting the renminbi appreciate against the dollar will raise the price of the PRC’s exports and help reduce this deficit. McKinnon expressed concern about this approach, noting that “as with Japan’s earlier experience, exchange rate appreciation, or the threat of it, causes macroeconomic distress without having any predictable affect on the trade surpluses of creditor economies.” He went on to say that an appreciation is both misplaced and dangerous as it does not address the root cause of the problem (i.e., US savings deficiency) and may hurt the PRC’s economy by triggering a deflationary spiral. McKinnon pointed to the Japanese experience of “serial appreciation,” which did not obviously affect its trade balance and caused Japan to go into just such a deflationary spiral and liquidity trap.

Many Asian countries, notably the PRC and Japan, suffer from “conflicted virtue” according to McKinnon. These countries are “virtuous” for having high savings, which the US uses to fund its trade deficit. This “virtue” results in the buildup of dollar claims that subsequently lead to pressure to

appreciate the lending country’s currency. Creditor countries are thus “conflicted,” worrying that such an appreciation will lead to deflation. In addition, McKinnon asserted, currency appreciation can leadto wage growth slumps and a negative risk premium.

McKinnon argued that policymakers and economists alike must “get rid of the notion you

The first of ADBI’s distinguished speaker seminar series

Many Asian countries, notably the PRC and Japan, suffer from “conflicted virtue”

Professor McKinnon urges policymakers and economists to “get rid of the notion you can manipulate exchange rates to handle trade imbalances.”

“... exchange rate appreciation, or the threat of it, causes macroeconomic distress without having any predictable

affect on the trade surpluses of creditor economies”

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can manipulate exchange rates to handle trade imbalances.” Instead exchange rates should be thought of as “instruments of monetary control.”

He stated that a monetary approach to exchange rate policy, which focuses on stabilizing the domestic price level, should be pursued. The experience of the yuan/dollar exchange rate between 1994 and 2005 provides anecdotal evidence that a fixed exchange rate can lead to stable prices at home, McKinnon said.

McKinnon stated that floating the renminbi “... would be a big mistake—leading to an upward

spiral in the PRC’s exchange rate, deflation (particularly in agricultural prices), and a zero-interest liquidity trap in the Japanese mode.”

The “biggest threat currently is not the sustainability [of the US trade deficit] in a financial sense, but protectionism in the US,” McKinnon concluded. However, given that politicians tend to focus on exchange rates, it is therefore important to get “... these international imbalances smoothed out but not with an exchange rate mechanism.” n

Download the presentation at www.adbi.org/event/2177.mckinnon.distinguished.speaker/.

Floating the renminbi “... would be a big mistake”

Ageing Asia: A New Challenge for the Region

Find more information at www.adbi.org/event/2187.ageing.asia.workshop/.

Many countries in Asia are now on the edge of drastic population ageing. To date, policymakers have sought to address these challenges purely from the standpoint of domestic policy; however, increasing regional integration implies that cross-border movements of capital and labor are likely to play an important role in mitigating ageing’s impacts. This underscores the importance of dealing with ageing both at the national and regional levels.

Against this backdrop, ADBI will hold a seminar on Ageing Asia: A New Challenge for the Region on 7 May, in conjunction with the Asian Development Bank’s 40th Annual Meeting of the Board of Governors. A half-day workshop

on Ageing will follow at ADBI on 8 May, for the benefit of policymakers and researchers in Tokyo. The workshop will provide an opportunity to i) Discuss the current status and characteristics of

ageing in Asia; ii) Draw out its domestic and regional implications;

and iii) Explore feasible policy responses, particularly

in the area of regional cooperation. A distinguished panel of experts is being

assembled for the afternoon workshop (see Table), which will end with closing remarks by Haruhiko Kuroda, President of the ADB. n

Workshop on Ageing Asia Program 8 May 2007

Notes: (*) signifies participants at both the ADB Annual Meeting seminar and ADBI workshop.

lSession I The Impact of Ageing on Asian Development

Speaker:DAVID CANNING,* Professor of Economics and International Health, Department of Population and International Health, Harvard University Discussant:EIJI TAJIKA, Professor, Public Economics Program, School of International and Public Policy, Hitotsubashi University

lSession II Ageing, Saving, and Fiscal Policy

Speaker:CHARLES YUJI HORIOKA,* Professor of Economics, Institute of Social and Economic Research, Osaka University Discussant:NAOHIRO YASHIRO, Professor of Economics, International Christian University

lSession III Cross-Border Movements of Goods and Capital Caused by National Differences in Population Ageing

Speaker:RALPH C. BRYANT,* Senior Fellow, The Brookings Institution Discussant:JAYANT MENON, Senior Research Fellow, Asian Development Bank Institute

lSession IV Economic Challenges of Ageing in East Asia: Prospects of Regional Cooperation

Speaker:MASAHIRO KAWAI, Dean of the Asian Development Bank Institute Discussant:YOSHIHISA UEDA, Vice President, Japan International Cooperation Agency

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Dean Looks Ahead

Infrastructure’s Role in Reducing Trade Costs

The study is expected to be completed by the end of July 2007. View related information at www.adbi.org/event/2160.reducing.trade.costs/.

Singapore’s Business Times featured a 10 February article on ADBI Dean Masahiro Kawai. The following are some of the Dean’s words from the article, “Working towards Asian integration,” by Anthony Rowley.

“[ADBI focuses] on research and capacity-building. For research the focus is on long-term, structural issues, while capacity-building is designed to strengthen capacities and skills on the part of developing economies. There are four areas of (interest): poverty reduction; regional cooperation, private sector development and governance. The issue of regional cooperation and integration is highly relevant to all of these. Because of my academic interest in regional cooperation and integration, I would like to focus particularly on this.

“Actually there is an increasing demand on the part of developing member countries for regional

cooperation in the area of infrastructure… We will look not only at physical infrastructure but also the software component of infrastructure—the surrounding institutional and regulatory environment, governance of infrastructure corporations, the implication of infrastructure for regional cooperation and integration, how infrastructure can reduce the costs of doing business and of international trade. We shall also look at the financing of infrastructure, how Asia’s massive savings can be mobilised to finance the potential demand for infrastructure in Asia which the ADB estimates to be US$3 trillion over the next 10 years or US$300 billion a year.” n

Improved infrastructure reduces commercial distribution margins thereby narrowing the gap between producer and purchaser prices. Moreover, infrastructure can expand the scope for domestic absorption and for supply to export markets, leading to economies of scale. ADBI is conducting research on the role of infrastructure in reducing trade costs to examine how infrastructure can be a cost-effective means of lowering trade costs and thereby promoting growth and regional cooperation.

In January, a two-day workshop conducted at

ADBI in Tokyo was convened with a team of researchers from PRC, India, Indonesia, the Kyrgyz Republic, and Malaysia, and inter-national experts in trade cost analysis. It was agreed during the workshop that the final report of the study will comprise an overview, a cross-country analysis of the effects of seaport development on reducing trade costs, and country case studies that will show evidence of how better infrastructure leads to lower shipping costs, faster movement of goods or delivery of services, and lowered variability of shipping. n

The results of the study “will validate, and hopefully accelerate, the virtuous cycle between infrastructure and regional cooperation,” ADBI Dean Masahiro Kawai told the research team in his welcome remarks.

Find more speeches by Masahiro Kawai at www.adbi.org/speeches/.

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Departing Interns Reflect on Time Spent in Tokyo

In February, ADBI said farewell to three interns from ADB developing member countries. As students in the FASID-GRIPS* Joint Masters Degree Program in International Development Studies, they completed internships at ADBI as part of their course of study.

Describe the accomplishment you are most proud of from your time at ADBI.

–Mary Ann A: I am most proud of the assistance I provided for the 9th ADBI Annual Conference on Infrastructure for Regional Cooperation. It is a very important event for the ADBI and thus I am honored to have contributed to its success.

–Waruna A: My exposure to ADBI’s capacity building and training activities enabled me to acquire more knowledge on international development and to understand effective utilization of ICT for development.

What have you learned while in Japan that you would like to see applied in your country?

–Hayati A: Recycle!

–WarunaA: Orderliness is on the top among many important lessons I learned while in Japan. I observe how simple and cost-effective techniques will enhance customer care. Thus, applying some of them in my country’s public service would also make a positive change.

What’s one piece of advice you would give to organizations like ADBI and ADB to best contribute to development issues?

–Mary Ann A: Development organizations should always have a sound mechanism for monitoring effectiveness and efficiency of projects. This ensures that resources are spent on good projects.

–Hayati A: The biggest challenge of every development institute is to balance and manage the different opinions and convictions coming from different personalities and backgrounds towards achieving a common noble objective. I hope that all multilateral and international institutions would be able to see beyond individual and personal interests and focus their energy on addressing the various critical issues of the developing world.

(*) GRIPS = National Graduate Institute for Policy Studies; FASID = Foundation for Advanced Studies on International Development

Q

Q

Q

Waruna Sri Dhanapala (Office of the President, Sri Lanka)

Hayati Lim Omar (Bank Negara Malaysia, Malaysia)

Mary Ann M. Magadia (Board of Investments, Philippines)

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Facilitating Trade for Faster Growth

View agenda and related information at www.adbi.org/event/2121.customs.meeting.trade.facilitation/.

“Today, no economy can be expected to thrive in isolation from regional and global markets,” said Ms. Ursula Schaefer-Preuss, ADB Vice President in her opening remarks.

Trade plays a key role in reducing poverty through faster economic growth. At the Customs DG-Commissioner Meeting on Trade Facilitation, ADBI Dean Masahiro Kawai said, “Trade facilitation—which attempts to ensure smooth and

expeditious movements of goods traded across borders—often plays a more important role than trade liberalization in reducing costs of trade.” The January meeting was held in Tokyo in collaboration with the Ministry of Finance, Japan; the World Customs Organization; and ADB.

Twenty-nine senior officials attended the meeting from ADB’s developing member countries, focusing on policy aspects of the World Trade Organization Agreement on Trade Facilitation as well as practical ways to facilitate trade, such as use of information technology, partnerships with the private sector, and regional cooperation. In addition to active discussion on the issues, participants shared information by giving presentations on the status of trade facilitation in their countries. n

Featured Book: The Dynamics of Regional Development

Download the book for free at www.adbi.org/book/2007/01/04/2086.ngo.law/.

Overview, first chapter, and ordering information available at www.adbi.org/book/2007/02/07/2157.philippine.regional.development/.

A decade and a half since the Philippines embarked on a major program of decentralization, the authors of The Dynamics of Regional Development: The Philippines in East Asia have undertaken a detailed examination of all aspects of the nation’s regional dynamics and policies. The book was co-published by ADBI and Edward Elgar Publishing Ltd., with its Philippine version being published by Ateneo de Manila University Press.

Three core observations are that countries pursuing decentralization must:

i Establish a clear, predictable, and stable regulatory environment that governs center-region administrative and financial relations,

ii Invest in infrastructure with regional developments in mind, and

iii Resolve regional conflicts for the well-being of local and national populations.

The lessons are relevant not only for an audience interested in the Philippines, but also for readers living in and working on the many other developing countries now embarking on such decentralization programs. n

Download the book for free at www.adbi.org/book/2007/01/04/2086.ngo.law/.

NGO Law and Governance: A Resource Book Surveying issues affecting internationally operating NGOs, this useful resource provides practical tips for managing civil society operations.

Also Recommended

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Addressing Water Allocation and Water Rights

Find more information about this workshop series at www.adbi.org/event/2117.narbo.4th.workshop/.

Participants visited Saitama Prefecture’s Tone Canal Project, which is one of the representative canal systems in Japan.

Why are Bilateral Trade Agreements so Popular?

Read or download the paper for free at www.adbi.org/discussion-paper/2006/11/28/2067.bilateral.trade.agreements.wts/.

Bilateral trade agreements (BTAs) have been proliferating. Why are they so popular? What are their impacts on multilateralism and the world trading system? A recent ADBI discussion paper attempts to answer these questions by identifying the general and specific factors driving the growth in BTAs. The general factors relate to disenchantment with the WTO; domino effects with countries not wanting to be left behind; lower visibility and thus lower resistance; and pure politics. Three broad categories of specific factors are identified: economic, strategic, and event driven, and each is further divided into sub-categories to total 11 specific factors (see Figure).

ADBI Senior Research Fellow Jayant Menon examines how BTAs in general, and different types of BTAs, are affecting the world trading system. Although the sheer number of these agreements is fragmenting the system, the impact of individual BTAs often depends on their underlying motivation. This highlights the importance of delineating the specific factors in assessing the impact of BTAs. Finally, the author considers likely scenarios for the future landscape of world trade, and possible responses, in the context of different Doha outcomes. n

Increased water demand and water use conflicts are occurring in many countries in Asia, and licensing mechanisms, water allocation, and water rights have become regular challenges. Unfortunately, the extensive interest on these topics is in stark contrast with the relatively few successful experiences so far in the region.

As the final workshop in a series organized to address this problem, the NARBO Fourth Thematic Workshop on Water Allocation and Water Rights was held in Saitama, Japan, in January in collaboration with the Asian Development Bank and the Japan Water Agency, as one of the leading activities of the Network of Asian River Basin Organizations (NARBO). Thirteen government officials and practitioners from seven Asian countries (Indonesia, Japan, Lao PDR, Philippines, Sri Lanka, Thailand, and Viet Nam) in charge of water resources management

attended the workshop to discuss how to improve water allocation issues and water rights systems. During the workshop, participants presented and deliberated on action programs for achieving these improvements in their own country. n

Factors Driving Growth of Bilateral Trade Agreements

SectorExcluding

SectorExpanding

MarketRestoring

MarketCreating

LobbyDriven

TerrorDriven

PTAFacilitation

PTAIntegration

WTOAccession

Political Integration

Political Disintegration

Notes: PTA = preferential trade agreement; WTO = World Trade Organization

Sector Driven Market Access PTA Political

Economic Strategic Event Driven

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Sharing the Advantages of SME Promotion through Industrial Cluster Approach

This was the second seminar which ADBI organized on this topic. Find more information about these events at www.adbi.org/event/2105.clusterbased.development.local.government/.

Promotion of small and medium-sized enterprises (SMEs) is a key to achieve economic growth, employment generation, and eventual poverty reduction. Industrial clusters offer various advantages to SMEs located within them (see box on right). A favorable national policy framework and local business environment, however, are needed for these clusters to flourish. In addition, enhanced roles of the public sector under market-oriented economy and globalization mean new challenges for the government officials in former centrally planned economies.

To expose key policymakers to successful cluster development cases in the Asia-Pacific region, and to disseminate knowledge about their patterns as well as favorable public policy intervention measures, ADBI organized the Industrial Development Planning: Cluster-Based Development Approach Policy Seminar. The five-day seminar, held in March, drew 18 participants from 9 ADB developing member countries and one self-financing participant from

the Republic of Korea. ADBI organized the seminar in collaboration with the Foundation for Advanced Studies on International Development, ADB, Japan International Cooperation Agency, United Nations Industrial Development Organization, and Organisation for Economic Co-operation and Development. n

Some Advantages of Industrial Clusters

l Spillover of technological and other information

l Accumulation of skilled and various labor

l Reduced transaction costs

l Promotion of long-term contracts and commitments

l Specialization and division of labor

l Provision of business service and infrastructure

l Increased opportunities for innovation

ICT Boost for Education in Nepal

View more information about this course at www.adbi.org/event/2104.pilot.computer.courseware/.

To produce well trained teachers capable of developing quality educational materials, 35 teachers and government officials of Nepal were trained at the workshop. During the course each participant developed a computer courseware.

In developing countries like Nepal, the education and training infrastructure has not been able to fully equip the workforce with the skills and knowledge demanded by both domestic and international industries. The severe skill gaps show a lack of both proper instructional materials and prepared teachers. Use of multimedia technology in education makes it possible to illustrate and to grasp complex industrial processes and difficult scientific concepts. With such materials, “we can expand educational opportunities which eventually will ensure sustainable development and prosperity,” says Jeoung-Keun Lee, course director.

With the objective of promoting the use of information and communication technology (ICT) in the education sector of Nepal, ADBI organized a 12-day residential workshop called the Pilot Course on Computer Courseware Development in Lalitpur in February. The workshop was supported by the Nepal Resident Mission of the Asian Development Bank and National Information Technology Center (NITC).

“It’s never too late to begin,” remarked Subash Kumar Bhatt, a computer teacher and head of department at Shuvatara International School in Lamatar, Lalitpur. “With these kinds of capacity building programs, we can equip teachers with skills which in turn will bring significant positive changes in the country’s education sector.” n

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ADBI Online

Publisher: Mamoru Umemoto

ADBI News reports on the activities of the Asian Development Bank Institute, which publishes the newsletter quarterly. The views expressed in this newsletter do not necessarily reflect the views or policies of the Asian Development Bank Institute or the Asian Development Bank. Materials may be reprinted with credit given to ADBI News. To send comments or to request a free subscription, e-mail adbinews@adbi.org; fax a message to +81-3-3593-5571; or write to ADBI News, Kasumigaseki Building 8F, 3-2-5, Kasumigaseki, Chiyoda-ku, Tokyo100-6008, Japan. For the web version, go to www.adbi.org/newsletter/.

To read ADBI News online, go to www.adbi.org/newsletter/For information, send an e-mail to info@adbi.org or go to www.adbi.orgFor publications, go to www.adbi.org/publications/To read daily development-related news and analysis, go to www.adbi.org/enewsline.cover. Sign up to receive E-Newsline daily.Register for free e-mail alerts when new material is posted on our website.http://www.adbi.org/email.notification/register.php

CALENDARwww.adbi.org/calendarofevents/

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ADBI News

3–4 May

7 May

8 May

10 May

5–8 June

12 June

25–26 June

2–5 July

9–13 July

East Asia Conference on Competition Policy and Development (Hanoi, Viet Nam)

Seminar on Ageing in East Asia (Kyoto, Japan)

Workshop on Ageing in East Asia (Tokyo)

Japan Microfinance Symposium (Tokyo)

Workshop on Asian Think Tanks: Strengthening Knowledge Management and Knowledge Sharing (Tokyo)

Ten Years After the Crisis: Evolving East Asian Financial System and Challenges Ahead (Tokyo)

Infrastructure’s Role in Reducing Trade Costs: Finalization Conference (Tokyo)*

Private Sector Participation in Physical Infrastructure (Tokyo)

Local Government Strategic Planning to Improve the Urban Environment: Linking Local Actions to the Global Agenda (Tokyo)*

(*) Event is pending confirmation.Dates for all events are subject to change. New events are added to the calendar as they are confirmed. Please consult the website for the latest information.