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

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ADBI News 2010 Volume 4 Number 3

ADBI-BNM Conference Tackles Issues of

Macroeconomic and Financial Stability in CONFERENCE
Asian Emerging Markets
At a conference on Macroeconomic
and Financial Stability in Asian
Emerging Markets, organized by
the Asian Development Bank
Institute (ADBI) and co-sponsored
with Bank Negara Malaysia (BNM),
held in Kuala Lumpur on 4 August,
participants grappled not only with
the issues of how to strengthen
frameworks for monetary policy,
macroprudential supervision and
regulation, as well as how to
promote financial development and
inclusion in the region, but also with
the question of how Asian economies
can influence the debate on these
Conference participants grapple with issues of macroeconomic and financial
issues at the global level. The stability and financial inclusion in Asian emerging markets
conference was attended by high-
level policymakers from Asia and the United States experience in the postcrisis period. Specifically, he
(US), senior officials from international institutions favored capital controls in some specific
such as the International Monetary Fund (IMF), circumstances. By contrast, Charles Collyns,
and top academics. assistant secretary for finance at the US Treasury,
Participants generally agreed that argued that strong regulatory standards and fiscal
macroprudential supervision and regulation can policy were better suited than capital controls to
supplement the role of monetary policy in deal with surges in capital inflows.
achieving financial stability, but that they need to
be synchronized. Moreover, regulators must have
scope for independent action in cases where In this issue
information is still incomplete. Shyamala
Gopinath, deputy governor of Reserve Bank of ADBI-BNM Conference 1–2
India (RBI), provided an overview of RBI’s Trade in Central Asia 2
approach to macroprudential regulation and The Rise of Asia’s Middle Class 3
systemic risk management and reviewed lessons Skilling Up for Development 4
drawn from the Indian experience. She noted that
Post 2010 Trade Agenda 4
harmonization of monetary policy and prudential
objectives may not be possible if banking Distinguished Speaker Seminar 5
supervision is separated from central banks. New Publications 6
Volatile capital flows remain a threat to Forthcoming Publication 6
economic and financial stability in the region.
Upcoming Events 7
ADBI Dean Masahiro Kawai discussed the policy
challenges and measures needed to manage the Recent Working Papers 7
surge in capital flows that Asia is likely to Finnish Education 8

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 A s i a n D e v e l o p m e n t
Dato’ Muhammad Ibrahim, deputy governor of
BNM, in his keynote address said that Asia had
benefited greatly from its integration into the
global economy, but that this also raised two key
challenges. The first is to balance domestic and
external considerations in determining monetary
policy actions. The second is to continue
developing financial markets despite the global
financial turmoil, while maintaining their strength
and soundness. He called for greater trade and
financial integration among Asian countries and
greater regional cooperation to improve stability
and harness the growth potential of the region.
Regarding the goals of financial development
and inclusion, IMF’s Mangal Goswami presented a
paper outlining the priorities for developing bond
markets in the region. Naoyuki Yoshino of Keio
University advocated the construction of a small-
and medium-sized enterprises database in order to
synthesize information and allow banks to
undertake better risk assessment. Sukudhew Singh,
assistant governor of BNM, discussed the
Toward Smoother, Cheaper Trade in Central Asia
Trade drives economic growth across Asia. In the
landlocked Central Asia region, eight countries are
working together under the Central Asia Regional
Economic Cooperation (CAREC) Program to
improve the trade environment with a focus on six
transport and trade corridors linking the countries
to each other, and the CAREC region to major
markets across Eurasia.
Modern customs and logistics arrangements will
be critical to cut trade costs and time, and to ensure
the Program’s large investments in transport
infrastructure bring the greatest benefit to the region.
The CAREC Customs Cooperation Committee
(CCC), which is supported by the Asian
Development Bank (ADB), held its 9th annual
CAREC customs officials inspect the container management
system at Yokohama Port
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B a n k I n s t i t u t e
imperatives of broadening financial inclusion and
the experience of Malaysia in this regard. He
argued that the poor need a variety of financial
services, but that there is a lack of delivery
channels for such services. ■
Dean Kawai sets out Asia’s policy challenges
Read more details of the event at www.adbi.org/event/
3836.climate.change.adaptation.natural.resource.mngt/
?sectionID=35.
SEMINAR
meeting at ADBI in September. The meeting
reviewed each country’s progress in the
simplification and harmonization of customs
procedures and documentation, including
single-window development; information and
communication technology for customs
modernization and data exchange; risk
management and post-entry audit; joint customs
control; and regional transit development.
As the Program considers options for a regional
customs modernization project, the CCC studied
the Time Release Study (TRS) methodology
developed by the World Customs Organization and
its use in Japan. The TRS is a tool to measure the
efficiency of customs procedures and identify
bottlenecks. Japan Customs has implemented nine
TRSs since 1991. The findings have helped it fine-
tune customs processes and shape new initiatives
such as its Authorized Economic Operators
program. The results have been impressive—a two-
thirds reduction in the mean time required for the
clearance of imported goods transported either by
sea or by air. Achieving similar progress in CAREC
economies will require strong political support for
modernization efforts and effective coordination
among trade-related ministries and agencies. ■
For more information on the CCC and the CAREC Program visit
www.carecinstitute.org.
 A s i a n D e v e l o p m e n t
ADB Key Indicators for Asia and the Pacific
2010: The Rise of Asia’s Middle Class
Strong economic growth in Asia over the past two
decades has been accompanied by the emergence
of a sizeable middle class and significant
reductions in poverty. As a result, developing Asia
has become one of the foremost global consumers,
with expenditure second only to the Organisation
for Economic Co-operation and Development
(OECD) countries.
ADB’s study The Rise of Asia’s Middle Class
was presented at ADBI on 31 August. It was the
main theme of ADB’s flagship annual statistical
data book, Key Indicators for Asia and the
Pacific 2010. It contends that the growth of Asia’s
middle class may hold the key to greater and more
efficient poverty reduction across the region, but it
will also place extraordinary demands on the
environment and governments will be confronted
with the challenge of adequately responding to the
demands of this emerging middle class. Carefully
constructed policies to bolster Asia’s emerging
middle class and fulfill its needs will be
indispensable.
Masahiro Kawai, Dean and CEO of ADBI,
stressed the importance of Asia’s new middle class
in terms of providing the potential domestic
demand to support global sustainable growth: as
Asia’s middle class continues to grow it will be an
increasingly important force for driving global
economic growth and development.
Douglas Brooks, assistant chief economist at
ADB, observed that developing Asia’s middle class
has rapidly increased in terms of size and
purchasing power, as strong economic growth in
the past two decades has helped to reduce poverty
significantly and lift previously poor households
into the middle class. He argued that Asia’s
emerging consumers are likely to assume the
traditional role of the US and European middle
Panelists discuss Asia’s growing middle class
B a n k I n s t i t u t e
DISSEMINATION EVENT
classes as global consumers, and will play a key
role in rebalancing the world’s economy. Mr.
Brooks also emphasized the role of governments in
initiating proper policies to cultivate the quality
and size of the middle class. Governments should
promote higher quality jobs, education, social
safety nets, conservation, public health, and
infrastructure development to support the growth
of middle income classes.
In conclusion, Dean Kawai observed that the
demand of Asia’s growing middle class would
evolve from durable products, to higher quality
medical and educational services, to better
infrastructure, and to better social protection. As
needs are increasingly fulfilled, the new middle
class may demand higher levels of policy
participation, which in turn should lead to better
governance, Dean Kawai predicted.
Assessing regional development, Kaushal
Joshi, statistician at ADB, presented key economic
indicators on regional growth and revealed
progress made in terms of meeting the Millennium
Development Goals (MDGs). Despite a slowdown
in Asian growth in 2009 as a result of the global
financial crisis, its impact was less severe than had
been anticipated at the beginning of 2008. Instead
of relying on export oriented strategies, Asian
governments increased their government spending
to cushion the impact of the crisis. Progress
towards meeting the MDGs was mixed. In terms of
poverty reduction, universal primary education,
gender equality, combat of disease, and
environment sustainability, acceptable levels of
improvement could be seen, but achievements in
terms of child mortality reduction, maternal health
improvement, and global partnership development
remained unsatisfactory. ■
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 A s i a n D e v e l o p m e n t
Skilling Up for Development
In the wake of the global financial crisis,
developing Asian economies need to “rebalance”
their growth towards greater reliance on domestic
and regional demand. US and European Union
(EU) markets could be weak for some years.
However, for such rebalancing to take place
effectively, skills development policies will need to
be adapted to complement this new pattern of
demand. These issues were at the top of the agenda
Participants debate skills development
A Post 2010 Trade Agenda for the Asia-Pacific
“America and Europe cannot be the strong engines
for global trade and investment for some time to
come, and the need for new sources of growth
from domestic and regional markets has made
regional economic integration more appealing than
ever”, Masahiro Kawai, Dean and CEO of ADBI,
said at a two-day conference entitled A Post 2010
Trade Agenda for the Asia-Pacific held at ADBI
on 6-7 July 2010.
The year 2010 is viewed as a watershed year
for trade policy in the Asia-Pacific region. It is the
year when industrialized Asia-Pacific Economic
Cooperation (APEC) economies will be assessed
on their progress in meeting the Bogor Goals of
APEC. More importantly, 2010 marks a “new
beginning” as the global economy crawls out of the
global financial crisis. The postcrisis scenario
implies a changed environment for trade policy.
To discuss the next steps for APEC’s trade and
investment agenda, the Pacific Economic
Cooperation Council (PECC), ADBI, and Inter-
American Development Bank (IDB) jointly
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B a n k I n s t i t u t e
CONFERENCE
of a recent OECD/ADBI conference on Skills
Development in the Post-Crisis Era.
Policymakers from developing Asia agreed that
some of the major challenges in adapting skills
policies are to ensure that they are aligned with
long-term economic strategies, are based on
accurate and reliable forecasts of various skills
needed, and are well coordinated (both horizontally
and vertically) within government. Other critical
elements are building the capacity of trainers and
developing effective partnerships with local
stakeholders, especially from the business sector.
Participants agreed that this Conference made
an important step towards a more coherent and
coordinated approach to policymaking as it brought
together policy makers from both education and
employment ministries. They also proposed to
organize a follow-up conference next year to take
stock of progress and lessons learned rebalancing
skills development policies. ■
Read more details of the event at www.adbi.org/event/
3723.adbi.oecd.post.crisis.context/?sectionID=35.
CONFERENCE
organized the conference where policy makers and
leading trade scholars from APEC economies
grappled with various issues of multilateral trade
and regional economic integration. Some points of
consensus emerged on the continuous importance
of the World Trade Organization (WTO)-Doha
Development Agenda (DDA) and the building of
an Association of Southeast Asian Nations
(ASEAN) Economic Community. However, the
political economy of regional integration remains
fraught with difficulties. ■
Sherry Stephenson of the Organization of American States
discusses labor mobility in preferential trade agreements
Read more details of the event at www.adbi.org/event/
3886.post.2010.trade.agenda.asia.pacific/.
 A s i a n D e v e l o p m e n t
Sustaining Growth and
the Environment: What Asian
Governments Can and Should Do
Asian economies continue to grow and projections
for economic growth in the short- to medium-term
are rosy. However, this growth is also having
negative local, regional, and global environmental
impacts. Euston Quah, head of the economics
department and acting chair of the School of
Humanities and Social Sciences at Nanyang
Technological University, Singapore, delivered a
lecture entitled “Sustaining Growth and the
Environment: What Asian Governments Can and
Should Do” at an ADBI Distinguished Speaker
Seminar in Tokyo on 2 September 2010.
Professor Quah argued that the key challenge
facing Asian governments is to pursue the twin
goals of continued economic growth and affluence,
on the one hand, and environmental conservation,
on the other. The success of achieving this will
hinge on whether Asia will be able to develop
sustainably. For this, he believes, more pragmatism
is needed at all policy levels. At the local level,
individual governments should adopt sound,
pragmatic environmental policies, whereas at the
regional and global levels, they should adopt a
“bottom-up” approach, rather than the “top-down”
approach of imposing a global benchmark on
countries. Policies adopted within a country tend to
be more useful than international treaties.
He believes Asian governments are faced with
five key challenges in resolving the environment
issue: the so-called not-in-my-back-yard challenge,
that can lead to the failure of a planned project due
to insufficient support by the people immediately
affected; the challenge of pricing non-market
goods; the challenge of solid waste disposal arising
from the fact that countries are becoming
increasingly affluent resulting in higher
consumption and an increase in waste generated;
the challenge of trans-boundary pollution; and the
challenges posed by climate change.
In Professor Quah’s view, environmental
problems are economic problems and he made the
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B a n k I n s t i t u t e
DISTINGUISHED SPEAKER
case that economic instruments can and should be
used to solve these problems. To achieve
sustainable development, therefore, it is important
to assess how to deal with environmental
spillovers from economic development. He
suggested a number of policies crucial, in his view,
for sound local environmental management. Each
is based on basic economic principles, namely:
getting prices right (in that the price observed in
the marketplace should reflect the true social
opportunity cost of using the resources); greater
employment of appropriate and inclusive cost-
benefit analysis; accounting for externalities and
non-market goods; adopting so-called damage
schedules; expanding market solutions (e.g.,
emission taxes, cap-and-trade systems, deposit
refund systems), which are instrumental for
creating incentives and disincentives; establishing
baselines and green accounting for environmental
variables and pollutants; pursuing green
technology; and working with stakeholders.
Although these policies seem easy to implement,
governments have been displaying many
shortcomings in trying to do so. ■
Professor Quah makes the case that
environmental problems are economic problems
Read a more detailed summary of this event at www.adbi.org/
event/4049.quah.distinguished.speaker/.
See the video of this seminar at www.adbi.org/event/
4049.quah.distinguished.speaker/video/.
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 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

New Publications

Effects of Social Policy on Domestic Demand

Edited by Masahiro Kawai and Gloria Pasadilla
This book is based on ADBI’s 12th Annual developed and emerging
Conference, which had the objective of economies? How do
formulating appropriate long-term responses to the factors like demographic
global financial crisis, focusing on social policies developments and income
and their impact on domestic demand. The distribution between labor
conference examined the extent to which improved and capital affect savings
social protection policies can help reduce and demand? What is the
household savings in Asian countries with very impact of increased social
high savings rates and induce a long-term increase protection spending on
in consumption spending. The conference tackled household savings and consumption in Asian
the following questions: What are the theoretical countries? ■
and empirical relationships between social Read or order “Effects of Social Policy on Domestic Demand” at
protection, household savings, and income? What www.adbi.org/book/2010/11/04/4158.effects.social.policy.
is the experience of social protection policies in domestic.demand/.

Promoting Financial Inclusion through Innovative Policies

Edited by John Conroy, Julius Parrenas and Worapot Manupipatpong
This book covers six key areas for financial
inclusion, namely: agent banking, mobile phone
banking, diversifying providers, reforming public
banks, financial identity regulation, and consumer
Read or order “Promoting Financial Inclusion through Innovative
protection. It highlights best practices for Policies” at www.adbi.org/book/2010/10/14/4089.financial.
introducing innovative policies in these areas. ■ inclusion.innovative.policies/.

Forthcoming Publication

Asia’s Free Trade Agreements: How is Business Responding?

Edited by Masahiro Kawai and Ganeshan Wignaraja

The spread of Asia’s free trade agreements (FTAs) FTA preferences, reducing
has sparked an important debate on the impact of costs of FTAs and creating
such agreements on business activity. This a region-wide FTA.
pioneering study uses new evidence from surveys This well-researched
of East Asian exporters—including Japan, the and documented book will
People’s Republic of China, the Republic of Korea appeal to undergraduate
and three ASEAN economies, namely of the and postgraduate students
Philippines, Singapore and Thailand—to shed light in international business,
on the FTA debate. international economics,
Critics are concerned that FTAs erode the economic development, public administration and
multilateral trading process and foster an alarming public policy. Academics, researchers and
“noodle bowl” of overlapping regulations and rules members of think-tanks around the world will also
of origin requirements—which may be costly to benefit from this book as will trade negotiators and
business. Asia’s Free Trade Agreements makes key trade policy officials from developed and
recommendations for improving business use of developing countries. ■

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 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

Selected Upcoming Events

Innovation for Balanced and Sustainable Growth (Tokyo)

This round table will deal with innovation today, innovation for balanced and sustainable growth, making
24-26 innovation work for development, seizing the benefits of the global value chain at the local level, green growth,
November innovation and technological transfer, and international cooperation for innovation.
www.adbi.org/event/3919.adbi.oecd.roundtable.sustainable.growth/
The Environments of the Poor: Responding to Climate Change and the Green Economy — Making
Sustainable Development More Inclusive (Delhi)
24-26
This conference will review the linkages between the environment and poverty reduction from a spatial, climate
November
change, and green economy perspective.
www.adbi.org/event/4083.environment.poor.climate.change.green.economy/

3 The Political Economy of Asian Regionalism (Tokyo)

December The ADBI annual conference 2010 will explore what reforms and innovations are needed to the current
institutional architecture in the region to promote further economic integration.
Postcrisis Employment and Social Policies in Developing Asia (Tokyo)
This conference will deal with jobs and the recovery, youth employment, role of active labor market policies,
15-17
promoting employment recovery while meeting fiscal goals, rebalancing Asia's economy and jobs, and social
December cohesion and employment.
www.adbi.org/event/3640.regulatory.reforms.liberalization.services/

Recent Working Papers

Asia’s Role in the Global Financial Architecture
Authors: Masahiro Kawai, Peter Petri
This paper suggests that federalism be introduced on a global
scale by creating hierarchies of global and regional organizations
with overlapping ownership structures in various functional
areas. Asia could contribute to this transformation by building
effective institutions to promote macroeconomic and financial
stability and deepen regional trade and investment integration.
Read Working Paper 235 at www.adbi.org/working-paper/
2010/08/04/4025.asia.role.global.financial.architecture/.
Asset Market Structures and Monetary Policy in a
Small Open Economy
Author: Yongseung Jung
This paper sets up a canonical new Keynesian small open
economy model with nominal price rigidities to explore the
impact of habit persistence and exchange rate pass-through on
the welfare ranking of alternative monetary policy rules.
Read Working Paper 251 at www.adbi.org/working-paper/
2010/10/27/4118.asset.market.structures.monetary.policy/.

ASEAN Services Sector and the Growth
Rebalancing Model
Authors: Rafaelita Aldaba, Gloria Pasadilla
This paper argues that ASEAN governments should pursue
policies that support new growth areas of services investment
(environmental protection, low carbon growth, and green
strategies) by encouraging research and development,
strengthening mechanisms for the transfer of green technology,
and promoting greater private sector participation.
Read Working Paper 246 at www.adbi.org/working-paper/
2010/09/07/4059.asean.services.sector.growth.rebalancing/.
Measuring the Environmental Impacts of Changing
Trade Patterns on the Poor
Authors: Kaliappa Kalirajan, Venkatachalam Anbumozhi,
Kanhaiya Singh
This paper attempts to measure the environmental impact of
changing trade patterns on the poor and argues that poverty
reduction can be achieved without causing damage to the
natural environment through energy-efficient production
methods and service-led growth.
Read Working Paper 222 at www.adbi.org/working-paper/
2010/08/10/4030.environmental.impacts.trade.patterns.poor/.

Estimating Demand for Infrastructure in Energy,
Transport, Telecommunications, Water, and Sanitation
in Asia and the Pacific: 2010-2020
Author: Biswa Nath Bhattacharyay
This paper estimates the need for infrastructure investment,
including energy, transport, telecommunications, water, and
sanitation during 2010-2020, in order to meet growing demand for
services and facilitate further rapid growth in the region. By using
“top-down” and “bottom-up” approaches, this paper provides a
comprehensive estimate of Asia’s need for infrastructure services.
Read Working Paper 248 at www.adbi.org/working-paper/
2010/09/09/4062.infrastructure.demand.asia.pacific/.
Investigating the Effect of Exchange Rate Changes on
Trans-Pacific Rebalancing
Authors: Willem Thorbecke, Ginalyn Komoto
This paper investigates the role exchange rate changes can
play in rebalancing transpacific trade. It presents evidence
from a gravity model indicating that the exports from the
People’s Republic of China (PRC) to the United States (US)
are a key outlier in the global economy and that imbalances
between the PRC and the US have remained large during the
financial crisis that began in September 2008.
Read Working Paper 247 at www.adbi.org/working-paper/
2010/09/08/4060.effect.rate.changes.transpacific.rebalancing/.

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 A s i a n D e v e l o p m e n t
“Finnish-ing” Top in Education
High-school students in Finland have the OECD’s
shortest school hours and rarely have more than
half an hour of homework a night. They have no
classes for the gifted. They have no school
uniforms, honor societies or valedictorians. They
do not even have sport teams, marching bands or
proms.
And yet, Finnish teenagers score highest overall
in the OECD’s Program for International Student
Assessment which measures reading, scientific and
mathematical literacy. Moreover, the gap between
Finland’s best and worst schools is the smallest of
any country.
What are the secrets behind its success?
Finland’s Ambassador to Japan, Jari Gustafsson,
shared some of the evidence in a keynote address
to a recent ADBI/OECD conference on skills
development.
In Finland, there is a broad political consensus
that since the country does not have oil and other
riches, or a big domestic market, it should invest
in education. Knowledge is power. Finnish
Finland’s Ambassador Jari Gustafsson with ADBI’s Takashi Kihara.
ADBI News
Publisher: Takashi Kihara
ADBI News reports quarterly on the activities of the Asian
Development Bank Institute. 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
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Chiyoda-ku, Tokyo 100-6008, Japan. For the web version,
go to www.adbi.org/newsletter/.
B a n k I n s t i t u t e
education is comprehensive and non-selective. It is
based on the principle of equal opportunity,
irrespective of the place of residence and the
economic situation of the parents. And above all,
education is “free”, with all expenses covered by
government.
Teaching is a well paid vocation in Finland. All
teachers hold university Masters degrees. They
have personal life-long learning programs.
Teachers tend to stay with the same kids for years,
rather than moving on to another school. Most
importantly, teachers are highly respected members
of society.
Students are encouraged to be self-reliant and
independent. Parents do not fuss over
accompanying their children to and from school,
and arranging every play-date and outing. Young
Finns do much on their own. More responsibility
means less need for standards and rules.
Schools have a free hand in choosing the
curriculum, and teachers have freedom to choose
textbooks and create lessons to fit their students.
And when it comes to marshalling
scarce resources, Finland
concentrates on weaker students
rather than pushing gifted students
ahead of everyone else. Bright
students can help average ones
without harming their own progress.
Thus, remedial teaching is taking
place during school hours, not
outside the classroom.
In short, the Finnish education
success story is based on a strong
partnership between well qualified
teachers and responsible children. ■
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