Asian Development Bank rethinks its strategy for reducing poverty

from the International Herald Tribune

By Patrick Blum

MADRID: Against a background of record rice prices that threaten to destabilize the fast-growing economies of Asia, the Asian Development Bank is rethinking its long-term strategy for reducing poverty at a two-day meeting in Madrid this week.

Rajat Nag, managing director of the bank, says dealing with the food crisis is an urgent priority.

"In the immediate, we have to concentrate on the food side. We have to find ways to deal with this. The poor must have access to income, have the necessary purchasing power" to buy food, he said during an interview ahead of the meeting.

Unlike in parts of Africa, the food crisis in Asia is not so much about availability of supplies — there are adequate food stocks — but more about prices, he said.

As part of the immediate response, targeted income support for the poor might be needed, Nag said. "We have to be flexible. In a crisis it's important to make sure the poor are able to buy food."

In the longer term, it will also be necessary to look at under-investment in agriculture and related areas like infrastructure, rural markets and access roads. All this will require governments to spend more, which could strain public finances, he said.

The bank is ready to help. "This could affect the fiscal situation, and we will have to see what we can do to provide assistance. We have to take a long-term view, work with governments to see how we can help them on the fiscal side, to give them budget support," Nag said.

The food crisis is only one of the problems confronting the region. Despite brisk economic growth, averaging about 6 percent annually across the Asia-Pacific region in recent years, more than 600 million people still live in absolute poverty, surviving on less than $1 a day.

According to the bank's statistics, almost half of the world's poor live in South Asia alone. In China, 452 million people earn less than $2 a day, a figure that reaches 868 million in India. Child malnutrition is high and almost half of the children in Afghanistan, Bangladesh, India and Nepal are undernourished. Some 1.9 billion people in the region do not have access to basic sanitation.

Widespread poverty remains the most pressing problem in the region. Many people have had little or no access to the benefits of economic growth, or access to social services. At least 500 million, or almost one-third of the regional labor force of 1.7 billion workers, are unemployed or underemployed.

"Large numbers of people are being left behind or left out," according to a strategy report prepared by the development bank. Growing wealth, paradoxically, has exacerbated inequalities and economic disparities within and among countries.

There are fears that a global downturn could undo progress made in recent years and that many of those who have gained from rising standards of living could be at risk. Unrest and political instability could follow.

"People who have done well in recent years could suddenly find themselves slipping below the poverty line," Nag warned.

No one knows what the full impact of the U.S. and global downturn will be, but growth expectations in the United States and Europe have already been revised downward for this year.

So far Asia has appeared immune to the crisis, but even the optimists acknowledge that the region cannot escape completely untouched by global developments.

Pilar L'Hotelerie, the associate director general for international affairs at Banco de España, the Spanish central bank, said that while Asian economies would be influenced by developments in the United States and the global economy, they were in a better position now than they were during the financial crisis a decade ago.

But Asia's success could also be a source of weakness. Its share of global exports has soared to 27 percent, up from 16 percent in the 1980s, increasing the region's potential vulnerability. The Asian Development Bank estimates that by 2020 the region could account for one-third of world trade.

"Given the heavy export orientation of most economies, there will probably be spillovers through the trade channel, in other words, a reduction in the demand for exports," L'Hotelerie said. "However, given the large increase in intraregional trade in the area, increased south-south trade linkages and the robustness of domestic demand in Asian countries over the past few years, Asia may be in a relatively good position this time around."

Alicia Garcia-Herrero, chief economist for emerging markets at Banco Bilbao Vizcaya Argentaria in Hong Kong, said that while exports were vulnerable, there were signs that Asian exporters might already be shifting some of their focus from the U.S. market to other emerging markets and Europe.

"Exports are the most obvious channel in which Asia could be affected, but what we see in the export market here is relatively good and what we see in the rest of the economy is even better," Garcia-Herrero said. "There are big infrastructure plans in India, in the Philippines and other countries. They are all stepping up these investments and that will help uphold their economies."

"I don't think they will escape completely, even China will be affected, but Asian growth has been so strong in 2007 they have a lot of leeway," she added. "So what happens from now is from a huge base. It's fortunate to have a slowdown in the economy when you're at the peak of your economic cycle."

The financial turmoil has had little impact to date on emerging Asian markets, though small open economies could be more at risk.

"Asia in general with few outstanding exceptions has remained largely on the sidelines in terms of exposure to U.S. subprime risks or to complex products," L'Hotelerie, the Spanish central bank economist, said. "External positions are sound, financial vulnerabilities have been reduced, and Asia is also more closed financially than other emerging market regions. Therefore, also on this front, vulnerabilities look relatively contained."

While growth in the region may slow, it will remain at enviably high rates this year and pick up again in 2009, according to the Asian Development Outlook report published by the development bank in March.

Asia, excluding Japan, had its highest growth rate in almost two decades in 2007, with an average 8.7 percent rise in gross domestic product. For this year, the report projected growth of 7.6 percent, only slightly below the average of the past 5 years.

Still, Nag said the bank was "increasingly concerned about energy and food prices."

Garcia-Herrero said, "Asia is not used to inflation; people don't know how to hedge against it."

While core inflation for the Asian region has held relatively stable at between 2 percent and 3 percent, headline inflation, which includes food and energy prices, has more than doubled since the beginning of last year, rising to 6.6 percent in March, according to Banco Bilbao Vizcaya Argentaria.

Rising inflation expectations could be a more immediate threat to economic stability than the prospect of a moderate slowdown in growth, the development bank's outlook report warned.

"The risk of an inflation spiral in Asia is palpable and warrants close attention," it said. "Published inflation rates disguise the true extent of underlying inflation pressures due to the presence of subsidies, administrative price controls, and cuts in excise taxes."

The need to provide support for access to food, fuel and power will put pressure on government budgets already strained by a huge demand for investment in crucial areas of the economy — with most countries in the region already running budget deficits.

Taming inflation expectations and reining in fiscal deficits are challenges facing a range of countries, the outlook report said. The private sector can play a part, but financing needs are enormous. According to an internal study by the development bank, the region will need an estimated $4.7 trillion for infrastructure development alone over the next 10 years.

Nag said the bank lent a record $10 billion last year, and he said he expected it to lend a similar amount in 2008, but there is a limit to what it can do.