PEOPLEIN ECONOMICS

The Quiet Integrationist

N HIS FIRST year at the helm of a powerhouse of the global economy. “Since Jeremy Clift the Asian Development Bank (ADB), taking over, Kuroda has put the ADB at the Haruhiko Kuroda has had a roller- center of the drive to promote economic profiles Asian coaster ride, trying to help the region integration in Asia,” former ADB insider Igrapple with the risks of a bird flu pandemic Karti Sandilya told F&D. Development as it struggles to recover from the lingering In a series of speeches from Tokyo to Bank President effects of the devastating Asian tsunami and Washington over the past year, he has out- Pakistan’s deadly earthquake. “The images lined an ambitious agenda to promote a new Haruhiko Kuroda of ordinary citizens pulling friends and financial architecture for Asia. It is part of a neighbors from the rubble will be indelibly well-thought out personal vision for a more etched on our minds,” says the soft-spoken integrated Asia now that the world’s most former Japanese currency policy tsar, who populous region has recovered from the took over as ADB president in February of debilitating financial crisis of 1997–98 (see last year. Box 2). But the string of natural disasters (see A career Japanese finance ministry tech- Box 1) has not deflected Kuroda in his deter- nocrat who was an advisor to Japanese Prime mination to make the Manila-based bank a Minister Junichiro Koizumi on international catalyst for change in Asia—a region that is monetary issues, Kuroda aims to harness the modernizing rapidly and has already become ADB to foster closer Asian regional integra-

Finance & Development March 2006 3 ©International Monetary Fund. Not for Redistribution tion and an eventual single Asian currency by harmonizing would sit and discuss with the guest speaker, and, at the end rules and legislation, boosting intraregional trade and invest- of the seminar, he sort of summed up—a very short sum- ment while discouraging overlapping and competing bilat- mary. Quite interesting. It was the interaction of theory and eral trade accords, building infrastructure and expertise, and reality, of policy and the theoretical.” encouraging regional exchange rate cooperation and coordi- Kuroda’s time at Oxford taught him that economic the- nation. ory needed to be tempered with practical interpretation. “I think they taught us that, although economic theory may Soft spoken but determined provide some insight, some framework, good policies may At first glance, Kuroda is an unlikely champion to spearhead require something that goes beyond just economic theory or Asia’s transformation. A former tax expert, he is bookish analysis—some practical judgment, some good sense.” and thoughtful rather than charismatic. He talks softly and He delights in intellectual challenge and says his dream was has a dry wit. For years at the Japanese Finance Ministry, he to be a teacher—a dream briefly fulfilled when he became a lived in the shadow of his better-known predecessor, Eisuke professor at Tokyo’s Hitotsubashi University in June 2003. He Sakakibara. Indeed, when Kuroda took over from Sakakibara once wrote a paper titled, “Socrates: the Dollar Dialogue,” in as Japan’s top international financial official in 1999, the con- which he imagined how the ancient Greek philosopher would trast could not have been greater. analyze exchange rate management. For recreation, he likes Sakakibara, dubbed Mr. Yen by the media for his flam- to swim and read detective novels and, occasionally, books on boyant and outspoken comments in defense of the Japanese mathematics and physics. economy, loved the limelight and relished his ability to rattle He won his international spurs while seconded from international markets. In contrast, Kuroda is more discreet Japan’s Finance Ministry to the IMF in Washington, where and cautious. He prefers measured understatement to show- he was an assistant to the Japanese Executive Director during manship, selecting his words with academic precision. 1975–78. It was a turbulent period just after the 1973 oil crisis Born in Kyushu, in southern Japan, in October 1944, when the international financial system was being realigned he initially studied law at Tokyo University, where he was to cope with the collapse of the Bretton Woods system of selected for the civil service and later sent to Oxford to fixed exchange rates. “Really, I learned how an international study economics. “My father and mother were quite liberal. institution can be managed and can function,” he declared. Anything I decided, they accepted,” he now says. By Kuroda’s “Quite an exciting and interesting period,” he says with his own account, Oxford left a lasting impression on him. He usual understatement. studied under several prominent economists, including Nobel Prize–winner John Hicks. “[Hicks] was so famous Making a name for himself he could attract not only economics professors, but also Kuroda became Director-General of the Japanese Finance practitioners—central bank governors, bankers, industri- Ministry’s International Finance Bureau (now renamed the alists, and politicians—to his seminars. Graduate students International Bureau) in July 1997, just before the outbreak of the Asian financial crisis. He had made a name for himself in the late 1980s within Japan’s rigidly hierarchical bureau- Box 1 cracy by putting together a plan proposed by then–Finance Testing times for the ADB Minister Kiichi Miyazawa for tackling Latin America’s The ADB, which was founded in 1966 and has 64 mem- huge debt problem. During his terms as Director-General ber countries, lends about $6.0 billion a year to develop- (1997–99) and, later, Vice Minister of Finance (1999–2003), ing countries in Asia and the Pacific. It reacted quickly to Kuroda helped prepare Tokyo’s controversial plan for an the recent string of natural disasters that rocked the region, Asian monetary fund—later watered down to a $30 billion pumping in money to aid recovery. To help communities rescue package for Indonesia, Thailand, and Korea. swamped by the December 26, 2004, tsunami in which As Paul Blustein recounts in The Chastening, his detailed nearly 300,000 died, the ADB launched the largest grant reconstruction of the Asian crisis published in 2001, program in its history. To date, its total approved funding Sakakibara and Kuroda had been considering setting up an for tsunami-affected countries is $851.4 million—part of Asian monetary fund since the Mexican peso crisis of 1994–95. a global effort to rebuild areas of Indonesia, Thailand, Sri “They noticed that Asian nations probably wouldn’t qualify Lanka, the Maldives, and India. for IMF loans proportionate with the one Mexico received To help Pakistan after last October’s earthquake that because their Fund quotas had failed to keep pace with their killed more than 70,000 and left hundreds of thousands rapid economic growth,” Blustein wrote. Japan’s proposal for homeless, the ADB pledged assistance worth $1.3 billion. an Asian monetary fund was shot down by the United States It also set aside another $470 million to support national as soon as it was made in September 1997 because the U.S. action plans against avian flu. Kuroda is pressing for coor- Treasury was worried that it would undercut the IMF. “In ret- dinated measures to avert a bird flu pandemic in Asia, rospect, it was all too hasty,” Sakakibara later admitted. warning that if the virus becomes transmissible between Although the plan for an Asian monetary fund failed to humans it could cause more than 4.5 million deaths in China and Southeast Asia within a year. win acceptance, many observers see the network of foreign exchange swaps launched in May 2000 to protect Asian cur-

4 Finance & Development March 2006 ©International Monetary Fund. Not for Redistribution rencies against speculative attacks—known as the Chiang Box 2 Mai Initiative (CMI)—as an embryonic fund. Kuroda has gone out of his way to emphasize the primacy Kuroda’s personal vision for Asia of the IMF. “The IMF remains the only global financial insti- Kuroda has laid out a six-point plan for promoting tution governing the international monetary system, and East integration: Asia’s regional financial architecture must complement its • intensify the process of building cross-border infra- role,” he wrote with University of Tokyo economist Masahiro structure and the coordination of laws, rules, and regu- Kawai in the Financial Times in 2004. “Strengthening the lations, not only within subregions but across Asia as a region’s financial architecture will also strengthen the IMF’s whole. • coordinate regional efforts to combat the spread of global role because regional financial stability contributes to communicable diseases (such as HIV/AIDS, SARS, and the stability of global finance.” But Asian leaders are edging avian flu); promote environmental sustainability; and man- toward acting on their own, announcing plans to boost the age natural disasters, such as tsunamis and earthquakes. CMI’s ability to lend without recipient countries needing to • enhance trade integration within Asia by ensuring that have an IMF program in place and building up the world’s the growing number of regional trade agreements become largest foreign exchange reserves as a bulwark against cur- building blocks rather than stumbling blocks to regional rency speculation and possible future instability related to and global trade integration. the large imbalances in the global financial system. • strengthen the Chiang Mai Initiative (CMI) by expand- Kuroda is careful not to ascribe blame, or follow U.S. crit- ing it into a more solid regional financing facility and by ics in singling out China, when discussing the issue of imbal- making the ASEAN+3 economic surveillance mechanism ances, arguing that they are a joint responsibility. “The United effective, through the establishment of a professional sec- States must cut its fiscal deficit, Europe and Japan must retariat charged with both the CMI and regional economic implement structural reforms, and Asian emerging currencies surveillance. should be made more flexible,” he says. “These joint actions • make the Asian financial system more resilient through share the responsibility for resolving global imbalances.” the sustained reform of the banking system and the devel- Some analysts believe that Asian countries are using pro- opment of local currency bond markets, thereby achieving posals for an Asian monetary fund as bargaining chips to press a better balance between banks and capital markets. for improved representation at the IMF. Developing coun- • promote a regional exchange rate arrangement that tries, including in Asia, have increased pressure on the world’s is flexible toward the rest of the world but relatively stable industrial powers to adjust the voting shares, or quotas, in the within the region, perhaps leading to a monetary union IMF to better reflect their growing economic muscle. Many, over time. including the IMF’s own management, hope that this year’s IMF–World Bank Annual Meetings in Singapore will yield later on when he called explicitly for Asia to aim for mon- concrete proposals for how the changes can be made. etary union. “Some skeptics may call this vision of a deeply Others see the drive for closer regional economic inte- integrated Asia a pipe dream,” Kuroda told the Emerging gration as part of a broader shift in political and strategic Markets Forum held at Oxford University in December 2005. balances in Asia, says Greg Sheridan, Foreign Editor of The “Some say the disparities are too wide, the political divides Australian newspaper. “There is an intense competition in too deep. But strong bridges for a united Asia, open to the the Asia-Pacific to work out what is commonly referred to as world, are already being built.” the new architecture for the region,” he argues. At the ADB’s annual meeting in Istanbul in May 2005, “Of course, this isn’t all about safeguarding financial stabil- finance ministers from the 10-member Association of ity in Asia,” says Michael Vatikiotis, a former Editor of the Far Southeast Asian Nations (ASEAN) plus Japan, Korea, and Eastern Economic Review, who is currently a research fellow at China (known as ASEAN+3) took what some analysts saw as the Institute of Southeast Asian Studies in Singapore. “Japan another tentative step toward the creation of an Asian mone- is in a hurry to cement its role as a pivot of these financial tary fund: they agreed to expand the CMI by doubling emer- mechanisms before China becomes too dominant—and gency currency swap commitments to more than $70 billion. perhaps before the yen is overshadowed by the yuan.” “Further steps could be taken to expand the CMI to a more solid regional financing facility,” says Kuroda, “and to make Well-signaled plan the ASEAN+3 economic surveillance mechanism more When Kuroda became the ADB’s eighth president, it was clear effective—for example, through the establishment of a pro- that steps toward monetary union and closer Asian regional fessional secretariat charged with both the CMI and regional integration would be at the top of his agenda. After all, he had economic surveillance.” clearly signaled his ambitious goals well in advance in a series Kuroda also argues that growing intraregional trade in Asia of academic papers and newspaper articles. Nevertheless, he is strengthening the case for a single currency. Intraregional made headlines when, shortly after taking up the reins of the trade in East Asia now accounts for 54 percent of the region’s development bank, he announced plans to set up the Office total trade, sharply up from 35 percent in 1980. He notes of Regional Economic Integration, headed by his former dep- that this is higher than the 46 percent intraregional trade in uty Kawai, to help knit the diverse region together and again the North American Free Trade Agreement (NAFTA) zone

Finance & Development March 2006 5 ©International Monetary Fund. Not for Redistribution “and is very much comparable to intraregional trade in the He sees the three pillars of Asia now as Japan, China, and European Union before the 1992 Maastricht Treaty.” India. He concedes that the rise of India and China is creat- “Given this magnitude of intraregional trade, even small ing a new dynamic in Asia and that smaller countries may intraregional exchange rate misalignments can disturb trade worry that the two giants are attracting investment at their and investment flows and could create trade frictions among expense. But he argues that, in the long run, the whole region the regional economies. This indicates the need for intrare- will benefit. “Initially, Asian countries may have feared fierce gional exchange rate stabilization in the years to come and, competition from China,” says Kuroda. “But economies can ultimately, a single currency,” he argues, although he agrees adjust, sectors can structurally change. In the long run, rapid that a single currency may be a long way off. He is press- Chinese growth will only benefit other countries.” ing forward with plans to introduce an Asian currency unit “It is natural, of course, that people are attracted to China (ACU), based on a basket of Asian currencies, akin to the and India because of their sheer size. But although China European currency unit, or ECU, that was a precursor to the and India are big and growing quite fast, other small and euro. Kawai says the ACU could become a benchmark for medium-sized countries are also doing well. In some sense Asian currencies. they are competing, but in the long run they will benefit each The ADB is also backing moves to develop local currency other through an integrated market,” Kuroda insists. bond markets in Asia. Kuroda argues that stronger regional He rejects the idea of a grand design for Asia, similar to the capital markets are needed to support huge infrastructure European model, but says that a vision for Asia is needed and development. “It is ironic that Asia’s massive needs for infra- that the region should not become inward-looking. “Our structure investment go unmet while excess savings find their objective,” Kuroda told the Asian Institute of Management way to the global capital markets,” he says. “One reason for in October 2005, “should be to create not a ‘fortress Asia,’ this is that Asian savings are not being efficiently intermedi- but a highly integrated Asia that is open to the rest of the ated by the region’s financial system.” world as well. This is ‘open regionalism.’ In short, Asia should increasingly act regionally while continuing to think Emerging giants globally.” N Kuroda denies that his focus on regional integration is crowd- ing out the ADB’s other main objective—poverty reduction. Jeremy Clift is a Senior Editor on the staff of Finance & “Poverty reduction continues to be the overarching objective Development. of the ADB; that doesn’t change at all,” asserts Kuroda, who was responsible for Japan’s official development assistance, References: including relations with the ADB, during 1994–96. But he Blustein, Paul, 2001, The Chastening (New York: Public Affairs Books). says that integration is key to spurring growth and poverty Kuroda, Haruhiko, 1989, “Socrates: the Dollar Dialogue,” The reduction. “If you look at countries in the region, many are International Economy (March/April), pp. 92–95. doing quite well, and some are not. You will find those that Kuroda, Haruhiko, and Masahiro Kawai, 2002, “Strengthening are not doing well are not well connected to growth centers Regional Financial Cooperation in East Asia,” Pacific Economic Papers in the region and not well connected to the global economy. No. 332 (Canberra, Australia: Australian National University). So regional integration is key for inclusive growth—meaning Vatikiotis, Michael, 2005, “One Asian Currency?” International Herald poverty reduction supported by growth,” he argues. Tribune, May 13.

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