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ADBI News
2011 Volume 5 Number 4

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Reforming the International Monetary System

ADBIS ANNUAL CONFERENCE OFFERS SOLUTIONS

ADBI Dean Kawai (center) joins a panel of prominent economists at the ADBI Annual Conference on Reform of the International Monetary System that was held in Tokyo on 2 December 2011.

The international monetary and financial system

has failed to maintain global economic stability. The 2008 financial crisis that erupted in the United States spread to Europe where the sovereign debt crisis is pushing the eurozone banking system toward collapse. The world needs bold solutions to kick-start growth. At the ADBI Annual Conference on Reform of the International Monetary System held in Tokyo on 2 December, scholars and officials from Asia and Europe presented innovative policies to fix a faulty monetary system. The forum also explored international capital flow management, internationalization of the yuan, and currency cooperation in Europe and Asia. The global financial crisis and the crisis in the eurozone are key drivers of the policy debate on the international monetary system, Masahiro Kawai, CEO and Dean of ADBI, said in his opening speech. Debate surrounds the search for alternative international reserve currencies to supplement the role of the US dollar as the

preeminence of the US in the global economy is being gradually eroded. Because of the dependence on the US dollar as a reserve currency, many Asian countries had to build up large foreign exchange reserves and those contributed to global current account imbalances,

In this issue
ADBI Annual Conference Capacity Building Workshop Conference on New Thinking Lessons of the European Crisis Distinguished Speaker Recent Books Selected Events Featured Working Papers Implications of the Rise of ACI 12 23 34 4 5 6 7 7 8

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said Peter Morgan, a senior consultant for research at ADBI. There is also a problem of volatile capital flows, which tend to be very pro-cyclical and they can have very disruptive effects on emerging economies; so the absence of a global financial safety net encourages the accumulation of large levels of foreign exchange reserves, which also has disruptive effects. Morgan and Mario Lamberte, director for research at ADBI, analyzed how regional and global institutions can cooperate with a focus on the G-20 and ASEAN+3 (ASEAN plus the Peoples Republic of China, Japan, and the Republic of Korea) and financial safety nets. Proposals for regional and global cooperation should allow for the likely evolution of the G-20 and the IMFs surveillance and crisis management frameworks. Yu Yongding, a prominent professor at the Chinese Academy of Social Sciences, spoke on the internationalization of the yuan. The PRCs currency internationalization plan could be seen as a policy disguised as capital account liberalization he said. Yuan internationalization could easily go astray without liberalizing interest rates and exchange rates, so the process should be gradual and long term. Capital flows to emerging economies will increase due to higher growth rates and returns on capital, but it may be disruptive because of the volatility and tendency to undermine domestic monetary policy, said Stephen Grenville, a visiting fellow at the Lowy Institute for International Policy. He argued that emerging economies, especially those with current account surpluses need mechanisms to manage capital inflows.

Dean Kawai, and Prof. Hiro Ito of Portland State University, proposed a new set of indexes of monetary policy independence, currency policy flexibility, and capital market openness, which will help locate countries policy mixes within the trilemma triangle. They advised that these measures could serve as a sign of a countrys unsustainable policy mix. The trilemma triangle, or the so-called impossible trinity, refers to the challenge of having a stable international financial system and the tradeoffs among the three goals of a fixed exchange rate, capital mobility, and national independence in monetary policy. Charles Wyplosz, a professor at the Graduate Institute in Geneva, proposed a review of the Chiang Mai Initiative Multilateralization (CMIM) because the 2008 global financial crisis exposed deficiencies. Furthermore, the G-20 should become a platform to ensure that systemically important countries adopt strategies that tackle economic and financial crises as they arise to avert threats to global stability. Chalongphob Sussangkarn, Distinguished Fellow of the Thailand Development Research Institute, discussed innovations that could boost CMIMs effectiveness in handling liquidity crunches in Asia. I

For more information on this conference please visit : www.adbi.org/event/4731.adbi.reform.international. monetary.system/. Video of the opening remarks of Masahiro Kawai, Dean and CEO of ADBI, at the ADBI Annual Conference on Reform of the International Monetary System, can be seen at : www.adbi.org/event/4731.adbi.reform.international. monetary.system/video/. www.youtube.com/watch?v=QP0zqP9UGwg&list= UULBWdbj1xsBk52uCh3TkBhg&index=1&feature=plcp.

Boosting Investment in the Asia-Pacific Region

Robust foreign and domestic investments are essential economic growth drivers. Attracting investment to a country requires an enabling climate in which firms of all sizes are free to invest and do business. But too often government red tape strangles investment, discriminates against smaller firms, and hurts competition. To help governments lift hurdles and unlock investment potential, the ADBI held a Capacity Building Workshop to Enhance Domestic and Foreign Investment Flows in the Asia Pacific Region in Melbourne, Australia, on 1218 October
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2011. The event was sponsored by ADBI, AusAID, and the Organisation of Economic Co-operation and Development (OECD). For seven days, officials from Bangladesh, Cambodia, Chile, Fiji Islands, Sri Lanka, and Viet Nam, among others, were given the training and policy tools that will help their home country foster a sound investment environment. The wide-ranging workshops were conducted by former officials from OECD, Australia Treasury, and the World Bank. One training simulation required participants to analyze and

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evaluate from a public policy perspective a government proposal to open its banking industry to foreign competition. Another simulation had participants assess a government bid to privatize the electricity sector. Attendees learned the following steps to a good investment climate: Open trade and effective competition policy; neutral treatment of investors; easing of regulatory barriers; transparency; policy monitoring and evaluation; international co-operation; and high social returns. I

Attendees at the Capacity Building Workshop to Enhance Domestic and Foreign Investment Flows in the Asia Pacific Region, which was held in Melbourne, Australia, learned how to attract foreign investment to their country.

Find more details about these events at: www.adbi.org/event/4700.cbt.workshop.investment.asia. pacific/.

Asia Must Prepare for a Graying Population

CONFERENCE

Asia is growing old fast due to falling fertility rates augment Asian pension systems that are failing to and rising life expectancies. An expanding army of provide an adequate retirement income. Pension elderly poses a dilemma for a region that does not systems can deliver poverty relief for Asias have mature, well-functioning pension systems. elderly, but the challenge is to achieve that without The sheer speed and scale of the demographic shift jeopardizing growth. One reform that countries can and the serious shortcomings of Asian pension do is to raise the retirement age, which has become systems mean that delaying reform is not an necessary in light of increasing longevity. option. The potential benefits for societies and To find solutions to this problem, pension businesses from an aging Asia were covered in a experts from around the world took part in the second conference titled Economic Opportunities Conference on New Thinking on Social Security in Asia at ADBIs office in Tokyo on 17 November 2011. Attendees presented a range of new ideas to meet the biggest challenge looming on the regions horizon, that of coping with aging populations. The conference highlighted emerging themes in pension reform and their implications for Asia. Attendees discussed innovations in more advanced economies to draw lessons for developing countries in the region, said Gloria Pasadilla, a research fellow at ADBI who organized the event. The weakening of family-based, National University of Singapore professors Azad Bali (left) and Mukul Asher (center), and Yuqing Xing (right), ADBI director of the Capacity Building & Training old-age support mechanisms are Department, address the Conference on New Thinking on Social Security in Asia compounding the urgency to on 17 November 2011.
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from the Ageing Society: Policies and Challenges, which was held at ADBI on 18 November 2011. The Bank of Italys representative office in Tokyo co-organized the event. The elderly should not be considered a burden on society; rather, they should be regarded as a rich depository of talent and knowledge that can be tapped with the help of modern technology to become a strong pillar of a growing economy, said Dean Kawai, in his opening remarks at the conference. They have particular needs that businesses can harness: from healthy diets to specially designed cars and other equipment for greater physical mobility; from home health care services to elderly care facilities; and from transportation services to travel and tourism packages. The silver market remains untapped, so it is still a very young market. I
Find more details about these events at: www.adbi.org/event/4344.conference.social.security.asia/; www.adbi.org/event/4730.economic.opportunities.ageing. society/.

Asian societies must establish adequate safety nets for its growing multitude of seniors.

What Can Asia Learn From the European Debt Crisis?

While the birth of the euro in 1999 created great interest in regional monetary integration in East Asia, the crisis has had the opposite effect, even raising expectations of a eurozone breakup. Dr. Ulrich Volz, a senior researcher at the German Ulrich Volz, a Development Institute, spoke senior researcher at the seminar Lessons of the at the German European Crisis for Regional Development Institute, outlined Monetary and Financial six lessons for Asia Integration in East Asia at on the eurozone ADBI Tokyo on 8 November crisis at an ADBI conference on 8 2011 on the crisis and lessons November 2011. Asia can learn so the region can better pursue economic integration. International economic and financial integration offers great benefits, but it also carries risk. The global financial crisis shows how turmoil in one country can spill over into a worldwide economic meltdown. So it is crucial to take steps in advance to avert such a predicament. What caused the crisis? The main culprits, said Volz, include imbalances in the eurozone, a banking crisis that fuelled sovereign debt crisis and
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vice versa, government bailouts of banks during the global financial crisis that have swelled public debt, worsening fiscal positions as economies contracted and governments responded with anticyclical policies, and the failure to swiftly recapitalize banks. The debt to GDP ratio of the eurozone surged from 66.3% to 85.4% from 2007 to 2010. Sovereign risk has increased and worsened bank assets, and further bank and state bailouts have exacerbated the crisis. Compounding all this is the publics lack of trust in their leaders to tackle the crisis. Volz says the crisis offers six fundamental lessons for East Asia: Dont rush monetary integration; rethink costs and benefits of international financial integration; create crisis prevention and resolution mechanisms; strengthen monitoring of regional financial markets; recapitalize banks quickly in a crisis; and boost regional monetary and financial cooperation. I
For more information on this seminar, please visit: www.adbi.org/files/2011.11.08.cpp.volz.european.crisis. monetary.integration.east.asia.pdf.

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Will the Euro Survive? Three Top Economists Offer Their Outlook
At the distinguished speaker seminar Europe Sovereign Debt Crisis. Lessons and Application to Asian Countries held at ADBI on 1 December 2011, three eminent European economists presented their prognosis on the future of the eurozone and currency. It is not clear the euro will survive, said Stefan Collignon, a professor of political economy at SantAnna School of Advanced Studies, Pisa. If the euro does not survive then the European Union will not survive, and if the EU does not survive then he is not sure how much longer there will be peace in Europe. Either Europe will move forward and deepen its political integrationincluding having Eurobonds but also setting up more stringent fiscal policy coordination mechanisms or it will disappear as a global player and sink into irrelevance. Whether it does that or not is a matter of political will, he said. Charles Wyplosz, a professor of international economics at the Graduate Institute in Geneva, said the May 2010 bailout of Greece was the Mother of all Mistakes. Europe is in a free fall and to stop it several countries will need to restructure their public debts, which will cause the biggest banks in Europe to go bust because they are exposed to public debts so they will

DISTINGUISHED SPEAKER

have to be recapitalized. And a floor needs to be put under the value of public debts, but that is not happening and that is where the battle is happening now. Eric Girardin, a professor of economics at the Universit de la Mditerrane Aix-Marseille in France, said the eurozone has brought great economic benefits. Europe would not gain anything from retreating on the euro and going back to what it had before. Europe is going to go forward, it will be painful, but it will go forward one way or another. But what should be done in the long run? Should Europe strengthen stability and growth, by setting up more stringent fiscal deficit and debt ceilings, which is being discussed? Yes, possibly, but if Europe does that alone it will be a killer in the long run, he said. I
See more details at: www.adbi.org/event/4799.collignon.girardin.wyplosz.dss/.

Economists Eric Girardin (far left), Charles Wyplosz, and Stefan Collignon, and ADBI Dean Kawai, present their solutions to the eurozone crisis at a Distinguished Speaker Seminar that was held in Tokyo on 1 December 2011.

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For a daily wrap up of development news and events in Asia, subscribe free to ADBIs e-newsline. Concise summaries of news, opinions, and editorials from an Asian perspective are delivered daily to your inbox. To learn more about e-newsline and to subscribe, visit: www.adbi.org/e-newsline/. 5

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Recent Books
Asian Perspectives on Financial Sector Reforms and Regulation
Asian Perspectives on Financial Sector Reforms and Regulation analyzes the major domestic macroeconomic and financial policy issues that could limit the growth of Asian emerging markets, such as rising inflation and surging capital inflows, with the accompanying risks of asset and credit market bubbles and of rapid currency appreciation. Emerging economies have performed well during the global recession, weathering the storm better than advanced economies. But there were sharp differences among individual economies and across regions. The emerging economies of Asia had the most favorable outcomes, surviving the ravages of the global financial crisis with relatively modest declines in growth rates in most cases. The Peoples Republic of China and India maintained strong growth during the crisis and have played an important role in facilitating the global recovery. The book examines strategies to promote financial stability, including reforms for financial market development and macroprudential supervision and regulation. I

Recent Global Media Coverage

ADBI has been in the news the past several months as a number of media outlets have interviewed professional staff or published their articles on the economic outlook for Asia and the world. ZDF German TV Yuqing Xing, ADBI director of Capacity Building and Training, was interviewed by ZDF about his paper How the iPhone Widens the United States Trade Deficit with the Peoples Republic of China.
www.zdf.de/ZDFmediathek/beitrag/video/1459246/ Apple-will-Aktionaere-gluecklich-machen#/beitrag/video/ 1459246/Apple-will-Aktionaere-gluecklich-machen www.thejakartapost.com/news/2011/12/13/hello-asean3good-bye-europe.html

The Nation As the sun sinks on Europe, the future is bright for Asean
www.nationmultimedia.com/opinion/As-the-sun-sinkson-Europe-the-future-is-bright-fo-30171793.html

The Australian Broadcasting Corporation interviewed John West, ADBI senior consultant.
www.abc.net.au/lateline/business/items/201111/ s3360806.htm?site=gippsland

ChinaDaily.com.cn Yuqing Xing was quoted in the article Trade pact complicates prospects for Asia
www.chinadaily.com.cn/cndy/2011-11/11/ content_14075918.htm

The Korea Herald published John Wests article Korea and Japana tale of two countries
www.koreaherald.com/national/Detail.jsp?newsMLId= 20120119001085

The Jakarta Post Giovanni Capannelli, ADBI principal economist and senior research fellow, was quoted in the article Scholars call for ASEAN to be strengthened to meet agenda
www.thejakartapost.com/news/2011/11/02/scholarscall-asean-be-strengthened-meet-agenda.html

The Japan Times The ADBI book, The Asian Tsunami: Aid and Reconstruction After a Disaster, was highlighted in the 29 January 2012 issue of The Japan Times.
www.japantimes.co.jp/text/fl20120129x1.html

Dean Kawai was featured in the following publications: The Business Times 17 January 2012 Sino-Japan Currency Pact and Beyond The Business Times 31 December 2011 Champion of Asian Integration Japan Spotlight magazine Outlook of Global Governance & Currency Management
www.jef.or.jp/journal/jef_contents_free.asp?c=3989

ADBI research associate Fithra Faisal Hastiadis article on the Distinguished Speaker Seminar on Europes debt crisis was published by two newspapers: The Jakarta Post Hello ASEAN+3, good-bye Europe

ADBI is now on Twitter, where new research, events, and speeches are announced. Visit our page at www.twitter.com/ADBInstitute.

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Selected Upcoming Events

14 March

ADBI/PRI Conference: Achieving Financial StabilityLessons from the Eurozone Crisis for Macroeconomic and Financial Stability (Tokyo, Japan) The conference will gather well-known scholars and experts on macroeconomic and macroprudential stability and actively promote a discussion on relevant issues which are expected to contribute to the theoretical and empirical literature and regional policy dialogue. The key issue to be analyzed in the conference is what reforms and innovations are needed to contribute to both financial and fiscal stability to obtain sustainable economic growth for emerging economies. IADB/ADB/OREI Conference: Joint Report on LAC-Asia Opportunities and Challenges of a long term Relationship (Montevideo, Uruguay) This conference will focus on further strengthening the institutional collaboration between the ADB and IADB in key development areas in Latin America and Asia and the opportunities for enhancing and supporting the patterns of south-south cooperation. The Conferences participants will jointly analyze the emerging strengthening of economic relationship between Latin America and Asia and review the recent trends in trade, investments and cooperation between the two regions. The aim is to lay down the main elements of a policy agenda that could contribute to maximize the gains from the bilateral relationship. ADBI/RSIS Conference: The Evolving Global Economic Architecture: From a Centralized to a Decentralized System (Singapore) The conference will bring together experts on the international monetary system to contribute to regional policy dialogue on reforms and innovations needed to reform the global economic architecture to promote financial stability and sustainable economic growth for emerging economies. The specific objectives are to (i) review key issues in reforming the global architecture including the roles of the oversight bodies such as the G 20 (ii) identify evolving trends in the global architecture including developments at the regional and the national levels and (iii) develop ideas and principles to ensure that national and regional efforts complement global institutions and not try to supplant them.

19 March

2627 March

Featured Working Papers

The Five-Phases of Economic Development and Institutional Evolution in China and Japan
Author: Masahiko Aoki
The author takes a historical approach to the development issues facing the Peoples Republic of China (PRC), Japan, and the Republic of Korea, exploring the agrarian origins of institutions in Qing China, Tokugawa Japan and Chosn Korea and their path-dependent transformations over those phases.
Read Working Paper 340 at www.adbi.org/working-paper/2011/12/ 30/4836.five.phases.economic.dev.evolution.prc.japan/.

Impact of US Quantitative Easing Policy on Emerging Asia

Author: Peter J. Morgan
This paper investigates possible impacts of United States Federal Reserve Bank quantitative easing policy on Asian economies and financial markets, in particular the weakening of the US dollar and stimulating capital outflows to emerging economies that might increase inflationary pressures.
Read Working Paper 321 at www.adbi.org/working-paper/2011/11/ 18/4796.impact.us.quantitative.easing.policy.emerging.asia/.

Leveraging Environment and Climate Change Initiatives for Corporate Excellence

Authors: Venkatachalam Anbumozhi, Mari Kimura, and Kumiko Isono
This paper reviews selected initiatives taken by Asian countries to comply with emerging global sustainability standards, reporting, and management systems, and tracks the response of Asian businesses to global environmental concerns, examines market based innovations including new regulations that augmented corporate excellence, and identifies future directions for business that lead low carbon society.
Read Working Paper 335 at www.adbi.org/working-paper/ 2011/12/22/4834.climate.change.initiatives.corp.excellence/.

Coordination Under Uncertain Conditions: An Analysis of the Fukushima Catastrophe

Authors: Masahiko Aoki and Geoffrey Rothwell
This paper analyzes the impacts of the 11 March 2011 earthquake and tsunami at the Fukushima nuclear power plant in Japan, which were amplified by a failure of coordination across the plant, corporate, industrial, and regulatory levels, resulting in a nuclear catastrophe, comparable in cost to Chernobyl.
Read Working Paper 316 at www.adbi.org/working-paper/ 2011/10/28/4771.analysis.fukushima.catastrophe/.

Understanding the Pattern of Growth and Equity in the Peoples Republic of China
Author: Minquan Liu
The author analyzes the current pattern of economic growth and equity in the Peoples Republic of China (PRC), tracing its origins to a time before the economic reforms and opening-up that occurred before 1978, in the first 30 years of the PRC.
Read Working Paper 331 at www.adbi.org/working-paper/ 2011/12/08/4827.understanding.pattern.growth.equity.prc/.

The Impossible Trinity and Capital Flows in East Asia

Author: Stephen Grenville
The author demonstrates that the Impossible Trinity argument has been an unhelpful element in developing suitable policies for addressing the problems large volatile capital flows are causing emerging countries.
Read Working Paper 319 at www.adbi.org/working-paper/ 2011/11/07/4776.impossible.trinity.capital.flows.east.asia/.

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Impact of ACIs Rise on Japan and the World

Emerging Asias economic success has been coupled with remarkable achievements in reducing poverty and raising the living standards of the people of the region. This dynamic performance has been led by the major emerging economies of ASEAN, Peoples Republic of China, and India (ACI). They are the worlds manufacturing hub, a major global production and trade center, the focus of the outsourcing industry, and a major financier. How the ascent of ACI will affect the global economy was the subject of the conference Implications of the Rise of Note: PRC = Peoples Republic of China Source: UnctadStat. Cited in Chalongphob Sussangkarns paper Japan and ACI. Paper ASEAN, Peoples Republic of delivered at the conference Japan and the Rise of ASEAN, the Peoples Republic of China and India for the China, and India. 30 November 2011. Tokyo. World Economy, which was held in Washington, DC, on 2526 October 2011. and the Rise of ASEAN, Peoples Republic of Policymakers and international experts China, and India, which was held in Tokyo on 30 gathered at the ADBI/Peterson Institute for November 2011. International Economics PIIE joint conference to The rise of ACI will have profound examine the potential rivalry among the ACI and implications for Japan and other Asian economies, between the ACI and other economies, particularly offering both opportunities and challenges for the those in the West, such as the United States, as region. A rising ACI may lead to unhealthy rivalry well as their mutual collaboration, in key areas of if proper measures for effective cooperation, interdependence. Fred Bergsten, director of PIIE, integration, and partnership are not adopted. I was an active participant in the two-day conference For more information about these events please see: and chaired the session The Rest of the World www.adbi.org/event/4737.implications.asean.prc.india.world. Responds. economy/ This conference was followed by the joint www.adbi.org/event/4791.adbi.adb.asahi.shimbun.joint. symposium/. ADBI/ADB/Asahi Shimbun symposium Japan

Publisher: Takashi Kihara

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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 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, Tokyo 100-6008, Japan. For the web version, go to www.adbi.org/newsletter/.