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Securing Robust Financial Markets for Stable Growth in Emerging Asia

Wencai Zhang

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Twenty years after the Asian Financial Crisis resulted in the region’s greatest economic dislocation, two lessons from that episode continue to resonate to date. The first is that the crisis largely reflected vulnerability resulting from flows of easy money into, and eventually out of, the region, rather than being triggered by domestic financing imbalances from excessive fiscal spending. Secondly the predominantly bank-based nature of finance throughout the region exacerbated the crisis. Most importantly, financing, both in terms of mobilization and structuring, remains a critical factor in the region’s development.

Addressing the large infrastructure gap remains an important development challenge. Getting the financing right – both in terms of mobilization and structuring – is paramount to address investment. Furthermore, capital markets represent the most viable solution for infrastructure development both as an enabler of long term financing to match the prolonged gestation periods of infrastructure projects and as a source of financial stability by way of providing a better balance between bank and non-bank financing in emerging Asian economies.

Why Capital Markets?

From a supply-side perspective, capital and particularly bond market development plays to Asia’s comparative strength, namely its relatively high levels of savings. For example, the ratio of savings to gross domestic product in the two Asian giants, the People’s Republic of China and India, stands at 50% and 30%, respectively.

From the demand side, emerging Asia still faces important infrastructure bottlenecks. ADB estimates that Asia’s infrastructure requirements will sum to $26 trillion by 2030. Many of these projects will require long-term financing to meet long-term gestation costs. Combining the supply- and demand-side perspectives, it becomes apparent that bond market development represents the flip side of the coin of infrastructure financing.

How to Develop Capital Markets?

Capital market reforms should focus on three key areas. First, in targeting market facilitation, regulatory institutions need to be strengthened through better prudential standards that enhance their market development role. For example, governments should empower securities and exchange commissions to enforce prudential norms and establish effective listing requirements to strengthen corporate governance and inspire confidence in the market.

Second, on the demand side, a list of key reforms would include supporting the development of the mutual funds industry, strengthening accounting standards, and leveling the playing field in terms of taxation between bond and equity markets, and more broadly between capital markets and the banking system.

Third, government should target the supply side through the listing of quality shares by improving initial public offering procedures and making sure that state enterprises can be effectively divested in a transparent manner through stock market listing.

A Role for Public–Private Partnerships

Another way of stoking Asia’s capital markets to finance infrastructure is to more actively promote public-private partnerships (PPPs). Asia-Pacific economies look to the private sector to provide much-needed investment for infrastructure development. Not only does private investment address the infrastructure shortage, it helps to maintain sustainable public debt levels. A great deal of private infrastructure development takes place through PPP structures, so a conducive PPP framework is essential to finance long-term investment through capital markets. It would allow risk-sharing between the public sector, which has a greater risk appetite, and the private sector which has the finance and expertise. Under certain conditions, a well-designed PPP framework can increase the likelihood of projects being delivered faster and on budget.

In addition to concession agreements and structuring support, governments could invest in promoting the creation of viability gap funding—a form of subsidy that at the margin can make the difference in securing funds for a PPP project with significant social benefits. In many of the frontier markets in Asia, PPP arrangements are the only means for the private sector to invest in an economy since the associated risks are deemed to be too high in the absence of a partnership with the public sector.

How ADB is Partnering Important Financing Initiatives

ADB strongly supports capital market development and has comprehensive capital market policy reform programs under implementation in many countries including more recently in Bangladesh and Sri Lanka. These programs cover market facilitation including supporting the demutualization of the stock exchanges—or separating of ownership from trading rights—as well as demand and supply measures to strengthen sustainable and more stable broadening and deepening of these markets.

In the PPP space, ADB provided more than $17 million in technical assistance grants in India for strategic development and institutional strengthening through the creation of 21 PPP cells across central ministries and state-level departments. In Bangladesh, ADB contributed to the drafting of PPP legislation and a nationwide implementation strategy, and supported the establishment of the country’s PPP office.

These investments were supported with direct technical assistance to specialized government owned infrastructure finance companies, including India Infrastructure Finance Company Limited (IIFCL) and the Infrastructure Development Company Limited (IDCOL) in Bangladesh.

What distinguishes such finance companies from banks is that they have access to ADB long-term financing and can therefore catalyze additional resources from other commercial financiers in a consortium arrangement, resulting in a more competitive price and reflecting a blend of ADB’s long-term, semi-concessional resources with commercial resources as set by the consortium. ADB limits the financing of PPP subprojects to a certain share of the total costs—up to 20% in the case of IIFCL and up to 40% in that of IDCOL—in order to best leverage its resources.

ADB supports the development of project infrastructure bonds in India. ADB has provided guarantee backstopping arrangements for two renewable energy projects on a pilot basis through its partnership with IIFCL. In this arrangement, special purpose vehicles were established and bond issuance was backed by the revenue streams generated by the project. With credit enhancement and credit protection, bond ratings were eventually raised to AA+, making it possible for domestic institutional investors with strict investment guidelines, such as pension and insurance companies, to invest in such bonds.

Banks also benefit from this arrangement as loans for infrastructure projects can be removed from their balance sheets and the proceeds used to invest in new greenfield infrastructure projects, thereby effectively recycling capital. The successful issuance of these bonds showcases how ADB can provide much-needed advisory support, lend its name and reputation, strengthen key institutions, and provide guarantee backstopping support for such structures. In India, this approach ultimately seeks to develop a project infrastructure asset class, a process that could potentially be replicated in other emerging markets.

Looking Ahead

ADB is strongly committed to continued support to financial market development. To address asset–liability mismatches from the currency side, ADB is increasingly issuing local currency “linker” bonds, which are denominated in local currency and settled in US dollars, in selected member economies. In India, so-called masala bonds have recently been issued in rupees, showcasing the appetite for this form of financing. To support mobilization of long-term financing for infrastructure development and growth, we continue to encourage policy makers to adopt long-term policies to broaden and diversify the domestic investor base by strengthening domestic non-bank financial institutions, such as life insurance companies, pension funds, and mutual funds.

Finally, given emerging Asia’s vulnerability to climate change, we are promoting green finance and green bonds for infrastructure development, with the aim of assisting members in financing their transition to low-carbon economies. A great amount of work has been undertaken through the ADB-supported ASEAN+3 Bond Market Initiative, with a focus on the development of local currency bond markets to meet long-term financing needs and the promotion of regional financial integration. Lessons from this initiative in ASEAN+3 member economies will be applied to support other ADB members. We are confident that these investments in reforms, including the development of capital markets and the fostering of PPPs, will facilitate private investment and achieve a win-win outcome for both the public and private sectors, leading to a more resilient and prosperous Asia.

First published in ADB

Mr. Wencai Zhang is the Vice-President (Operations 1) of the Asian Development Bank (ADB). Mr. Zhang is responsible for operations in the South Asia Department and the Central and West Asia Department.

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A more effective labour market approach to fighting poverty

Cynthia Samuel-Olonjuwon

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Gainful employment is still the most reliable way of escaping poverty. However, access to both jobs and decent working conditions remains a challenge. Sixty-six per cent of employed people in developing economies and 22 per cent in emerging economies are in either extreme or moderate working poverty, and the problem becomes even more striking when the dependents of these “working poor” are considered.

Thus, it is not just unemployment or inactivity that traps people in poverty, they are also held back by a lack of decent work opportunities, including underemployment or informal employment.

Appropriate labour market policies can play an important role in the fight to eradicate poverty, by increasing access to job opportunities and improving the quality of working conditions. In particular, labour market policies that combine income support for jobless people with active labour market policies (ALMPs).

The new ILO report What works: Promoting pathways to decent work  shows that combining income support with active labour market support allows countries to tackle multiple barriers to decent work. These barriers can be structural, (e.g. lack of education and skills, presence of inequalities) or temporary (e.g. climate-related shocks, economic crises). This policy combination is particularly relevant today, at a time when the world of work is being reshaped by global forces such as international trade, technological progress, demographic shifts and environmental transformations.

Policies that combine income support with ALMPs can help people to adjust to the changes these forces create in the labour market. Income support ensures that people do not fall into poverty during joblessness and that they are not forced to accept any work, irrespective of its quality. At the same time, ALMPs endow people with the skills they need to find quality employment, improving their employability over the medium- to long-term.

New evidence gathered for this report shows that this combination of income support and active support is indeed effective in improving labour market conditions: impact evaluations of selected policies indicate how people who have benefited from this type of integrated approach have higher employment chances and better working conditions.

One example of how this combined approach can produce results is the innovative unemployment benefit scheme unrolled in Mauritius, the “Workfare Programme”. This provides workers with access to income support and three different types of activation measures; training (discontinued in 2016), job placement and start-up support. The programme was also open to those unemployed people who were previously working in an informal job. By extending coverage to the most vulnerable workers, the scheme has helped reduce inequalities and unlock the informality trap.

Another success came through a public works scheme implemented in Uruguay as part of a larger conditional cash transfer programme, the National Social Emergency Plan (PANES). The programme was implemented during a deep economic recession and carefully targeted the poorest and most vulnerable.

Beneficiaries of PANES were given the opportunity to take part in public works. In exchange for full-time work for up to five months, they received a higher level of income support as well as additional job placement help. This approach reached a large share of the population at risk of extreme poverty and who lacked social protection. The report indicates that providing both measures together was critical to the project’s success.

The effects of these policies on poverty eradication cannot be overestimated. By tackling unemployment, underemployment and informality, policies combining income support with ALMPs can directly affect some of the roots of poverty, while enhancing the working conditions and labour market opportunities for millions of women and men in emerging and developing countries.

ILO

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CPEC vs IMF in Pakistan

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International Monetary Fund (IMF) was created just after World War II (WWII) in 1945. The IMF is an organization of 189 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.

Pakistan has been knocking doors of IMF since 1958, and it has been 21 agreements with IMF. Generally, the IMF provides loans at very low-interest rates and provides programs of better governance and monitoring too. But for the last 6 decades, Pakistan has suffered a lot, in terms of good governance. Especially last 2 decades, corruption, nepotism, poor planning, bribery, weakening of institution, de-moralization of society, etc were witnessed. We may not blame the IMF for all such evils but must complain that the IMF failed to deliver, what was expected. Of course, it is our country, we are responsible for all evils, and wrongdoings happened to us. We have to act smartly and should have made the right decision and at right times.

IMF also dictates its terms and condition or programs like: devaluation of local currencies, which causes inflation and hike in prices, cut or draw-back of subsidies on basic utilities like fuel, gas, electricity, food, agriculture etc, which causes cost of life rather higher for local people, cut on development expenditures like education, health, infrastructure, and social development etc, which pushes the country even more backward. IMF focusses only on reducing expenditures and collection of taxes to make a country to meet the deadlines of payments. IMF does not care about the development of a country, but emphasizes tax collections and payment of installments on time, to rescue a country from being a default.

While CPEC is an initiative where projects are launched in Power Generation, Infrastructure development under the early harvest program. Pakistan was an energy trust country and facing a severe shortage of Electricity. But after completion of several power projects under CPEC, the shortfall of electricity has been reduced to a great extent. One can witness no load shedding today, while, just a few years back the load shedding was visible throughout the country for several hours a day. Several motorways and highways have been completed. Gwadar port has been operational partially. Infrastructure developments are basic of economic activities.

Projects under CPEC has generated jobs up to 80,000. CPEC was the catalyst to improve GDP by around two percent during 2015-2018. CPEC has lifted the standard and quality of life of the common man in Pakistan. CPEC was instrumental to move the economic activities and circulation of wealth in society. Under CPEC, early harvest projects, 22 projects have been completed at the cost of approximately 19 billion US dollars.

It is understood that early harvest projects were heavy investment and rather slow on returns. But, these projects have provided a strong foundation for the second phase, where Agriculture, Industrialization and Social Sector will be focused. Return on Agriculture and Industrial produce is quick and also generates more jobs. The second phase will contribute toward the social development of Pakistan as well as generate wealth for the nation.  Pakistan’s agriculture sector has huge potential as cultivatable land is huge, workforce is strong and climate is favorable.  Regarding Industrialization, Pakistan is blessed with an abundance of mines and minerals. The raw material is cheap and the labor cost is competitive. Pakistan has 70% of its population under the age of 40 years, which means an abundance of the work force. Pakistan’s domestic market is 220 million and the traditional export market is the whole of the middle-east and the Muslim world.

The major difference between the CPEC and IMF is that CPEC generates wealth, while IMF focuses on tax collection and reducing the developments and growth. China is the latest model of developments in the modern days, China is willing to replicate its experience with Pakistan for its rapid development.

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Eurasian integration: From economics to creation of a center of power

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Russia’s President Vladimir Putin had every reason to congratulate his Armenian colleague Nikol Pashinyan with the outcome of the summit of Eurasian Economic Union (EAEU) leaders that was recently held in Yerevan, where many promising decisions were made, bringing Iran, Singapore and Uzbekistan closer to this international organization.
Creation of various economic associations amid the ongoing process of globalization and toughening competition is a global trend nowadays. And still, the reasons for this process in Eurasia are as much economic, as they are existential.

The “traitorous” decision by the Western Christian powers during the Crimean War to side with the Ottoman Empire, which was widely perceived as a force hostile to the Christian world, came as a shock for Russian society, and above all, for the elite of the Russian Empire, which, throughout the 18th and 19th centuries, had been working hard to expand “the window on Europe,” opened by Peter the Great. The Europeans’ deep-seated rejection of Russia as part of the European world, often spilled out into open hostility.

The Crimean War underscored Christendom’s split along ideological and political lines, which began with the separation of the Roman Catholic and Orthodox Churches in 1054. The rapprochement between Russia and the European powers during and immediately after the Napoleonic wars proved a rather short-lived (and atypical) episode in the history of East-West relations. Before very long, however, Russian society managed to develop an “antidote” that cured the psychological trauma caused by the war: “Russia has only two allies: its army and Navy,” as Emperor Alexander III famously said. Moreover, the complex of “otherness” vis-a-vis Europe quickly turned into a matter of pride for many Russian thinkers, such as Nikolai Danilevsky (“Russia and Europe”), Leo Tolstoy (“War and Peace”), Alexander Blok (“Scythians”), to name just a few. 

While Danilevsky presented Russia as the leader of the still emerging Slavic “cultural-historical type,” the classical “Eurasians” with their idea of “Russia-Eurasia” believed that the cultural code of the Russian people is closer to the Turkic than to the West-Slavic one. What the “Eurasians” failed to delve into, however, was religious difference between the Russian and Turkic peoples, most of the latter being Muslims.

The ambitious experiment of building communism on a planetary scale further alienated Russia from the West, but brought it closer to the countries of the “third world,” primarily those in Asia. During the 1990s, Russia once again reached out to the West, only to be cold-shouldered by it.

This is exactly the response the West gave Turkey at the turn of this century and, just like the Russians before them, the Turks transformed their own complex of rejection from the West into a matter of pride. Today, according to various polls, up to 94.5 percent of Turks view the United States a hostile country. Anti-Americanism (coupled with anti-Western sentiment) is similarly on the rise in much of the Eurasian continent – from China all the way to the Middle East.

Meanwhile, the “Eurasians” theorized about a fundamental idea the entire future of “Russia-Eurasia” was to be built on. Today, most of the Eurasian countries’ foreign policy paradigm is overshadowed by their postcolonial syndrome and their desire for a more equitable world economic order.

“The recurrence of arrogant neo-colonial approaches, where some countries have the right to impose their will on others, is rejected by an absolute majority of members of the world community,” who seek “a more meaningful role in taking key decisions,” Russian Foreign Minister Sergei Lavrov wrote in an article titled “The world at a crossroads, and the system of international relations of the future.”

This goal can only be achieved by joint efforts and closer integration in the Eurasian space, where complex supranational integration formats, such as ASEAN, SCO, the Customs Union and the Common economic space (Russia, Belarus, Armenia, Kyrgyzstan and Kazakhstan) are already being established. Despite the complexity of the search for a mutually acceptable combination of the interests of very dissimilar countries (unlike in the case of the European Union), which have different civilizational affiliations and some even have running conflicts, this process is still moving ahead.

And yet, despite all their specific features, these countries still have very much in common: as a rule, a powerful state (“public”) economic sector, a long tradition of statehood (unlike Europe, not necessarily national) and, as a consequence, a traditional view of state power as something bordering on sacrosanct. And also an inherent rejection of the Western worldview with its mass culture, “rational,” almost materialistic, religion, and the substitution of morality by the criminal code, as the harshest critics of the West claim. Comparing Russia and Europe, the Russian historian Mstislav Shakhmatov stated: “The state of truth and the state of law are two different worldviews: the former is characterized by religious pathos and the latter – by material aspirations (…). Almost a century later, this maxim still rings true with many Eurasian societies.

Integration in our pragmatic century should start with a search for shared economic interests (by the way, the European Union grew out of the European coal and steel association). Speaking at the 2016 international economic forum in St. Petersburg, President Vladimir Putin pitched the idea of creating a large Eurasian partnership which, besides the CIS countries, would also bring on board China, India, Pakistan, Iran, and other countries.

Russia, which is a melting pot of a plethora of ethnic groups and cultures, has every reason to claim the role of a “natural” driving force behind the process of Eurasian integration. According to Turkish political analyst Ferhan Bayir, today “even the ruling Justice and Development Party in Turkey, which is rooted in political Islam, is edging closer to Russia as it increasingly opposes the United States… Even more so Iran, which is not just getting closer to Russia, but is actually working together with it in many parts of the region.”

Europe became a self-sufficient (though flagging) power center even before it united politically, and Eurasia may well become another such center. Since political unity, including in future, is unlikely, the participants of this integration process could still learn how best to respond together to external challenges, just like Russia, Turkey and Iran managed to collaborate in the Syrian conflict. 

It would certainly be great if all countries of the continent (like just anyone else too) could learn to be friends and work together, but awareness of common interests (and, in the era of globalization, of destinies too), can hardly extend to all of Eurasia. Therefore, when we talk about the hypothetical Eurasian community as a center of power, we would have to exclude China, which itself is a power center and the core of a separate civilization. As for India, it will hardly show much interest in close integration as Hindustani civilization is a vivid example of an introverted and self-contained one.

Putting aside the term “center of power,” creating a community of countries with shared economic interests in Eurasia is quite possible. This project will not be hampered by any political incumbrancers, if only its participants agree to find compromises as they go. It won’t be easy, but, as they say, a journey of a thousand miles begins with a single step…

From our partner International Affairs

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