Stuart Alan Becker caught up with Masahiro Kawai of the Asian Development Bank Institute

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The Asian Development Bank Institute was established in 1997 to build capacity, skills, and knowledge related to poverty reduction and other areas that support long-term growth and competitiveness in developing economies in the Asia-Pacific region.

ADBI’s work involves research, policy seminars to disseminate information on best practices and many capacity building and training initiatives.

Masahiro joined ADBI in early 2007 after working as head of ADB’s Office of Regional Economic Integration (OREI) and is an economics graduate from the University of Tokyo and holding a PhD from Stanford University.

Kawai was a Professor at the University of Tokyo’s Institute of Social Science and also worked as Chief Economist for the World Bank’s East Asia and the Pacific Region, and as Deputy Vice Minister of Finance for International Affairs of Japan’s Ministry of Finance.

What’s going to be Japan’s future relationship with China?  Are you an optimist or is the future going to be marked by tension and xenophobia and competition?  How big is Japan’s investment in China? Do you see China and Japan as competitors?

I am a very cautious optimist. 

The Japan-China relationship has a long history. Japan has imported a lot of Chinese religion and culture.  Buddhism came through China from India as well as tea, calligraphy and Chinese characters -- almost everything in fact. And so Japan has a tremendous respect for China, but what happened in the 1800s was very worrying for Japan. China was colonized by Western powers, there was the Opium War and Japan knew that it needed to do something to maintain its independence. So Japan opened its economy and learnt from the West. Technological development was the most important of Japans challenges, because of its desire to be a stronger, more competitive and high-technology country.

Japan wanted to learn from the West. 

Even though China had a tremendous civilization a thousand years ago, at that time Asia was far behind the west in technology. Japan learned a lot from China and then from the West. Unfortunately there was disagreement between Japan and China before and during WW2.  After the war, China continued to have a very closed economy but opened up gradually.

Two thousand years ago, China and India combined made up sixty per cent of the world economy. The recent rise is a re-emergence of China in a global economy and of course this is a relatively new development for China, occurring over the past two centuries or so. Everybody has to learn about the rise of China.  Japan learned a lot from China, but now, Japan and China have to work together to make sure that economic prosperity in Asia will continue so that global economic growth and human prosperity can be sustained.  There are here and there conflicts, the French and the Germans, neighbors tend to have a lot of conflicts. There are territorial issues, but we need to manage such conflicts and we are more civilized than in the past, so we don’t have to use weapons to resolve issues, we can talk.

I’m a cautious optimist because economic growth and the benefits of continuing the growth process are so huge and if you want to produce the growth and prosperity, peaceful relationships are vital and we know that. 

Some small things could derail that positive trend.

When we look at China’s 1.3 billion population and political system, we see that this giant sphere dwarfs others and therefore concepts of human value are necessarily different, from say the “West”. 

What are the concerns about China in the future and what are the positive aspects?

Obviously some positive aspects about China are that although its economic size is growing, there are vast areas where per capita income levels are still low, and education is still limited so that tells us there is still great potential. Economic growth is likely to continue even though the number of workers is going to decline, from 2015 to 2050; about 200 million workers will be gone. 

China added 300 million to its workforce from 1980 to now, so it will be a very big reversal, but nonetheless, productivity growth will be sustained with high economic growth.  That’s positive.

China has to carefully manage this and one very important aspect is governance. Increasing the number of people who feel their voice is being neglected in various types of decision making is dangerous.

Many people have lot of complaints so the justice system has to make tremendous improvements, and the government has to pay a lot more attention to the quality of life of it’s people rather than simply increasing GDP growth rate, so that means addressing the issue of inequity, unequal opportunities for people depending on where they are from, where they are born and who their parents are.

I think everybody should get better, more equal opportunities for economic and social achievements.  

Environmental degradation is a concern. People who cannot escape from pollution tend to be low income people, So the government has to address all these issues and fortunately, the Chinese leadership is fully aware of the kinds of issues I talked about.

The question is how these concerns could be translated into actual policies. Implementing policies is not a simple task.  

China is a big country with lots of provinces and autonomies, so what the leadership is thinking in Beijing may not be fully implemented in local governments.  It’s a one party system but still very decentralized. 

A big country with a one-party system is a very efficient way of pursuing economic development and growth. 

Policies so far have been largely successful in promoting economic growth, but there are many other problems and the government has to address these problems otherwise future economic growth may be much slower.

We hear the phrase “regional integration” when we talk about ASEAN, yet Indonesia is much larger than any other ASEAN member.  Also, if multinational corporations can treat ASEAN as effectively one unit, isn’t there danger of a kind of impersonal homogenization and faceless corporate influence, driven only by profits and not by any semblance of humanity?

As for homogenization, even McDonald’s adapts its hamburgers, and local adaptation is the same principle but adapted to specific local conditions. Regional integration and cooperation are very important and I strongly believe that is the case because conflict containment is our first priority. I want you to live and you want me to live, so peace and security and economic interchange can increase the value of peace and security, and this peace can continue with rising income because by exchanging, you can increase your economic well-being because if you produce everything yourself it is much more difficult.

You can’t be like Robinson Crusoe; unproductive and isolated; you can’t do everything by yourself, so you have to work with others, especially those who are geographically close. You can do a lot of things together, so connecting with each other thorough infrastructure, trade liberalization, investment and people movement is, I think, really the way to go.

Europeans have shown, although the Eurozone has tremendous problems right now, it has been successful in integrating and ensuring peace and coherence, and I think that’s the way to go.

I think integration should be promoted. Benefits are really better for smaller economies like Laos and Cambodia in terms of GDP because your neighbors will pull you up. By connecting yourself to Thailand and Vietnam, smaller countries tend to benefit more. 

Bigger countries can benefit, but the GDP benefit may be smaller to big countries.

Speaking of Cambodia:  what are the primary obstacles to Cambodia’s economic development?

Cambodia seems to be facing several problems:  human capital issues, education, investment in schooling, raising people skills, knowledge and capacity

Another constraint is Cambodia would need a lot more diversification in terms of production. 

The manufacturing sector is, I think, a bit concentrated in textile sector. 

A more diversified economic structure is needed. 

Cambodia is very rich in natural resources but managing natural resources, and benefiting from them is a very important challenge.  

Increasing the  Government capacity to manage the economy as a whole is also very important. Institutional upgrading is also quite important and that is related to the first question, people of all levels of skill and education will have to be improved. 

The country needs many more capable government officials to support the economic development process, and many countries are coming to Cambodia and assisting in the management of this development process, together with international stakeholders and that requires tremendous capacity on the part of the Government.  

The Government does not drive the economy. 

The private sector has to be nurtured and the Government has to provide an enabling environment, predictable and transparent policy, with solid framework supported by capable policy makers.

Finally, Cambodia is one of the smallest countries in ASEAN so that means that more integration with neighboring countries and also beyond ASEAN would be important because a small country cannot prosper without connecting itself to the rest of the world.

Cambodia started out with bad initial conditions, and still has a lot of poverty, but once these policies arepursued I think poverty can be alleviated in a few decades.

The ADB has been accused of being an instrument of Japanese policy.  Is that true?  Why or why not?

The president of ADB has always been of Japanese descent and that’s what our shareholders have chosen and not only because Japan is the largest shareholder country. Japan and the United States have equal share ownerships in ADB, because Japan has been making significant financial contributions to the Asian Development Fund (ADF), which provides soft money to poor countries.

Japan has been providing a lot of financial contributions to ADB not only for ADF but also for various trust funds and resources which can be used for technological assistance in developing companies.  

Japan has been providing a lot of public goods to be used for many countries.  Japan’s policy has been to support economic development in poor countries.

Japan’s aid strategy and contribution must have been supported by shareholders of ADB, so I don’t think its correct to say ADB is an instrument of Japan’s aid policy, Japan has been working with ADB, world bank and other multi lateral agencies like the UN, so in that sense, japan has been working with many other international organizations.

Rather than imposing from outside a way of thinking, both ADB and the Japanese Government have been working in a pragmatic way to reduce poverty, and to produce sustainable economic development. 

Many westerners may feel Japan’s aid policy has not been fantastic, but Japan has been providing a lot of aid to countries which eventually flourished, so the policies implemented seem to have been effective. Some in the US think tank rank Japans aid at the bottom of the list, while donors like the Netherlands and Sweden are at the top. But actually Japan’s aid has been very effective.

ADB itself has been effective in providing assistance to developing Asian countries, and we have much fewer staff than the World Bank in Asia, but our operations have been bigger. We are efficient and more importantly  we are trusted by the governments.  That’s what counts.

Which market is stronger and less likely to encounter problems:  Europe or North America?  Why?

Both are facing serious economic problems. 

In the short run the US economic recovery seems to be taking place, but in the US the debt problem is big. National sovereign debt is there, and how to tackle this problem continues to be an issue because the market can be always nervous about USD.

At this point the US economy seems to be doing better than Europe which is  facing tremendous problems in places like Italy, Spain and Greece who will all have to go through a significant fiscal consolidation. 

These economies are not doing very well, and I think economic growth is going to be lower and slower than in the US.

Sovereign debt problems are an issue in many south European countries and baking sector health will continue to be a concern because European banks hold a lot of sovereign bonds, which have been supported so far by the ECBs policy.  

Long term refinance operations or LTROs are low interest loans to the banking system with lots of liquidly, supporting Europeansovereign bonds, so it’s buying time for European banks to strengthen and recapitalize and governments to consolidate the budget.

What are the biggest challenges facing ASEAN?

The biggest challenge for ASEAN is to maintain its relevance and it’s so called centrality.

Asians are more optimistic, but in the west, there are many people who hold critical views because ASEAN is not a single entity like the EU, and country views tend to be divided, and with so much diversity, and both low income and high income countries.