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

www.adbi.org
ADBI News Volume 1 Number 2 April 2007

Should PRC Keep

its Dollar Peg?

The first of ADBIs distinguished speaker

seminar series

Ronald McKinnon, William D. Eberle Professor

of International Economics at Stanford University,
addressed over 50 invited guests and ADBI staff on
1 March. He talked about why the Peoples
Republic of China (PRC) should keep its exchange Professor McKinnon urges policymakers and economists to
get rid of the notion you can manipulate exchange rates to
Many Asian countries, notably the PRC handle trade imbalances.
and Japan, suffer from conflicted virtue
appreciate the lending countrys currency. Creditor
rate pegged to the dollar, drawing on Japans countries are thus conflicted, worrying that such
experience from 1971 through the early 1990s. an appreciation will lead to deflation. In addition,
The pressure to appreciate the renminbi is McKinnon asserted, currency appreciation can lead
coming from the United States, which is to wage growth slumps and a negative risk
experiencing a large trade deficit with the PRC, premium.
much as it had with Japan 30
years ago. Politicians, and many ... exchange rate appreciation, or the threat of it, causes
economists, argue that letting the macroeconomic distress without having any predictable
renminbi appreciate against the affect on the trade surpluses of creditor economies
dollar will raise the price of the
PRCs exports and help reduce this deficit. McKinnon argued that policymakers and
McKinnon expressed concern about this approach, economists alike must get rid of the notion you
noting that as with Japans earlier experience,
exchange rate appreciation, or the threat of it,
causes macroeconomic distress without having any In this issue
predictable affect on the trade surpluses of creditor
economies. He went on to say that an appreciation Ageing Asia 2
is both misplaced and dangerous as it does not Dean Looks Ahead 3
address the root cause of the problem (i.e., US
Infrastructures Important Role 3
savings deficiency) and may hurt the PRCs
economy by triggering a deflationary spiral. Interns Insights 4
McKinnon pointed to the Japanese experience of Featured Book 5
serial appreciation, which did not obviously Facilitating Trade 5
affect its trade balance and caused Japan to go into
just such a deflationary spiral and liquidity trap. Bilateral Trade Agreements 6
Many Asian countries, notably the PRC and Meeting Water Challenges 6
Japan, suffer from conflicted virtue according to ICT Boosts Education 7
McKinnon. These countries are virtuous for
having high savings, which the US uses to fund its Advantages of Industrial Clusters 7
trade deficit. This virtue results in the buildup of Coming Events 8
dollar claims that subsequently lead to pressure to

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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

can manipulate exchange rates to handle trade
imbalances. Instead exchange rates should be
thought of as instruments of monetary control.
Floating the renminbi ... would be a big mistake
He stated that a monetary approach to exchange
rate policy, which focuses on stabilizing the
domestic price level, should be pursued. The
experience of the yuan/dollar exchange rate
between 1994 and 2005 provides anecdotal
evidence that a fixed exchange rate can lead to
stable prices at home, McKinnon said.
McKinnon stated that floating the renminbi
... would be a big mistakeleading to an upward
spiral in the PRCs exchange rate, deflation
(particularly in agricultural prices), and a zero-
interest liquidity trap in the Japanese mode.
The biggest threat currently is not the
sustainability [of the US trade deficit] in a financial
sense, but protectionism in the US, McKinnon
concluded. However, given that politicians tend to
focus on exchange rates, it is therefore important to
get ... these international imbalances smoothed
out but not with an exchange rate mechanism.
Download the presentation at www.adbi.org/event/2177.
mckinnon.distinguished.speaker/.

Ageing Asia: A New Challenge for the Region

Many countries in Asia are now on the edge of
drastic population ageing. To date, policymakers
have sought to address these challenges purely
from the standpoint of domestic policy; however,
increasing regional integration implies that cross-
border movements of capital and labor are likely to
play an important role in mitigating ageings
impacts. This underscores the importance of
dealing with ageing both at the national and
regional levels.
Against this backdrop, ADBI will hold a
seminar on Ageing Asia: A New Challenge for
the Region on 7 May, in conjunction with the
Asian Development Banks 40th Annual Meeting
of the Board of Governors. A half-day workshop
on Ageing will follow at ADBI on 8 May, for the
benefit of policymakers and researchers in Tokyo.
The workshop will provide an opportunity to
i) Discuss the current status and characteristics of
ageing in Asia;
ii) Draw out its domestic and regional implications;
and
iii) Explore feasible policy responses, particularly
in the area of regional cooperation.
A distinguished panel of experts is being
assembled for the afternoon workshop (see Table),
which will end with closing remarks by Haruhiko
Kuroda, President of the ADB.
Find more information at
www.adbi.org/event/2187.ageing.asia.workshop/.

Workshop on Ageing Asia Program 8 May 2007

Session I The Impact of Ageing on Asian Development
Speaker: DAVID CANNING,* Professor of Economics and International Health,
Department of Population and International Health, Harvard University
Discussant: EIJI TAJIKA, Professor, Public Economics Program, School of International and Public Policy,
Hitotsubashi University
Session II Ageing, Saving, and Fiscal Policy
Speaker: CHARLES YUJI HORIOKA,* Professor of Economics, Institute of Social and
Economic Research, Osaka University
Discussant: NAOHIRO YASHIRO, Professor of Economics, International Christian University
Session III Cross-Border Movements of Goods and Capital Caused by National Differences
in Population Ageing
Speaker: RALPH C. BRYANT,* Senior Fellow, The Brookings Institution
Discussant: JAYANT MENON, Senior Research Fellow, Asian Development Bank Institute
Session IV Economic Challenges of Ageing in East Asia: Prospects of Regional Cooperation
Speaker: MASAHIRO KAWAI, Dean of the Asian Development Bank Institute
Discussant: YOSHIHISA UEDA, Vice President, Japan International Cooperation Agency
Notes: (*) signifies participants at both the ADB Annual Meeting seminar and ADBI workshop.

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 A s i a n D e v e l o p m e n t
Dean Looks Ahead
Singapores Business Times featured a 10 February article on ADBI Dean Masahiro Kawai. The following
are some of the Deans words from the article, Working towards Asian integration, by Anthony Rowley.
[ADBI focuses] on research and capacity-
building. For research the focus is on long-term,
structural issues, while capacity-building is
designed to strengthen capacities and skills on the
part of developing economies. There are four areas
of (interest): poverty reduction; regional
cooperation, private sector development and
governance. The issue of regional cooperation and
integration is highly relevant to all of these.
Because of my academic interest in regional
cooperation and integration, I would like to focus
particularly on this.
Actually there is an increasing demand on the
part of developing member countries for regional
Find more speeches by Masahiro Kawai at www.adbi.org/speeches/.
Infrastructures Role in Reducing Trade Costs
Improved infrastructure reduces commercial
distribution margins thereby narrowing the gap
between producer and purchaser prices. Moreover,
infrastructure can expand the scope for domestic
absorption and for supply to export markets,
leading to economies of scale. ADBI is conducting
research on the role of infrastructure in reducing
trade costs to examine how infrastructure can be
a cost-effective means of lowering trade costs
and thereby promoting growth and regional
cooperation.
In January, a two-day workshop conducted at
B a n k I n s t i t u t e
cooperation in the area of infrastructure We will
look not only at physical infrastructure but also the
software component of infrastructurethe
surrounding institutional and regulatory
environment, governance of infrastructure
corporations, the implication of infrastructure for
regional cooperation and integration, how
infrastructure can reduce the costs of doing
business and of international trade. We shall also
look at the financing of infrastructure, how Asias
massive savings can be mobilised to finance the
potential demand for infrastructure in Asia which
the ADB estimates to be US$3 trillion over the
next 10 years or US$300 billion a year.
ADBI in Tokyo was convened with a team of
researchers from PRC, India, Indonesia, the
Kyrgyz Republic, and Malaysia, and inter-
national experts in trade cost analysis. It was
agreed during the workshop that the final report of
the study will comprise an overview, a cross-
country analysis of the effects of seaport
development on reducing trade costs, and country
case studies that will show evidence of how better
infrastructure leads to lower shipping costs, faster
movement of goods or delivery of services, and
lowered variability of shipping.
The study is expected to be completed by the end of July
2007. View related information at
www.adbi.org/event/2160.reducing.trade.costs/.
The results of the study will
validate, and hopefully
accelerate, the virtuous cycle
between infrastructure and
regional cooperation, ADBI
Dean Masahiro Kawai told
the research team in his
welcome remarks.
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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

Departing Interns Reflect on Time Spent in Tokyo

In February, ADBI said farewell to three interns from ADB developing member countries. As students
in the FASID-GRIPS* Joint Masters Degree Program in International Development Studies, they
completed internships at ADBI as part of their course of study.

Mary Ann M. Magadia Waruna Sri Dhanapala Hayati Lim Omar

(Board of Investments, Philippines) (Office of the President, Sri Lanka) (Bank Negara Malaysia, Malaysia)

Q Describe the accomplishment you are most
proud of from your time at ADBI.
Mary Ann
A: I am most proud of the assistance I provided
for the 9th ADBI Annual Conference on
Infrastructure for Regional Cooperation. It is a
very important event for the ADBI and thus I
am honored to have contributed to its success.
Waruna
A: My exposure to ADBIs capacity building
and training activities enabled me to acquire
more knowledge on international development
and to understand effective utilization of ICT
for development.
Q What have you learned while in Japan that
you would like to see applied in your
country?
Hayati
A: Recycle!
Waruna
A: Orderliness is on the top among many
important lessons I learned while in Japan. I
observe how simple and cost-effective
techniques will enhance customer care. Thus,
applying some of them in my countrys public
service would also make a positive change.
Q Whats one piece of advice you would give
to organizations like ADBI and ADB to best
contribute to development issues?
Mary Ann
A: Development organizations should always
have a sound mechanism for monitoring
effectiveness and efficiency of projects. This
ensures that resources are spent on good
projects.
Hayati
A: The biggest challenge of every development
institute is to balance and manage the different
opinions and convictions coming from
different personalities and backgrounds
towards achieving a common noble objective.
I hope that all multilateral and international
institutions would be able to see beyond
individual and personal interests and focus
their energy on addressing the various critical
issues of the developing world.
(*) GRIPS = National Graduate Institute for Policy
Studies; FASID = Foundation for Advanced Studies on
International Development

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 A s i a n D e v e l o p m e n t
Featured Book: The Dynamics of Regional Development
A decade and a half since the Philippines
embarked on a major program of decentralization,
the authors of The Dynamics of Regional
Development: The Philippines in East Asia have
undertaken a detailed examination of all aspects
of the nations regional dynamics and policies.
The book was co-published by ADBI and Edward
Elgar Publishing Ltd., with its Philippine version
being published by Ateneo de Manila University
Press.
Three core observations are that countries
pursuing decentralization must:
i Establish a clear, predictable, and stable
regulatory environment that governs center-
region administrative and financial relations,
ii Invest in infrastructure with regional
developments in mind, and
iii Resolve regional conflicts for the well-being
of local and national populations.
The lessons are relevant not only for an
audience interested in the Philippines, but also for
readers living in and working on the many other
developing countries now embarking on such
decentralization programs.
Facilitating Trade for Faster Growth
Trade plays a key role in reducing poverty through
faster economic growth. At the Customs DG-
Commissioner Meeting on Trade Facilitation,
ADBI Dean Masahiro Kawai said, Trade
facilitationwhich attempts to ensure smooth and
Today, no economy can be expected to thrive in isolation
from regional and global markets, said Ms. Ursula Schaefer-
Preuss, ADB Vice President in her opening remarks.
B a n k I n s t i t u t e
Overview, first chapter, and ordering information available at
www.adbi.org/book/2007/02/07/2157.philippine.
regional.development/.
Also Recommended
NGO Law and Governance: A Resource Book
Surveying issues affecting internationally operating
NGOs, this useful resource provides practical tips for
managing civil society operations.
Download the book for free at
www.adbi.org/book/2007/01/04/2086.ngo.law/.
expeditious movements of goods traded across
bordersoften plays a more important role than
trade liberalization in reducing costs of trade. The
January meeting was held in Tokyo in
collaboration with the Ministry of Finance, Japan;
the World Customs Organization; and ADB.
Twenty-nine senior officials attended the
meeting from ADBs developing member
countries, focusing on policy aspects of the World
Trade Organization Agreement on Trade
Facilitation as well as practical ways to facilitate
trade, such as use of information technology,
partnerships with the private sector, and regional
cooperation. In addition to active discussion on the
issues, participants shared information by giving
presentations on the status of trade facilitation in
their countries.
View agenda and related information at
www.adbi.org/event/2121.customs.meeting.trade.facilitation/.
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 A s i a n D e v e l o p m e n t
Why are Bilateral Trade Agreements so Popular?
Bilateral trade agreements (BTAs) have been
proliferating. Why are they so popular? What are
their impacts on multilateralism and the world
trading system? A recent ADBI discussion paper
attempts to answer these questions by identifying
the general and specific factors driving the
growth in BTAs. The general factors relate to
disenchantment with the WTO; domino effects
with countries not wanting to be left behind; lower
visibility and thus lower resistance; and pure
politics. Three broad categories of specific factors
are identified: economic, strategic, and event driven,
and each is further divided into sub-categories to
total 11 specific factors (see Figure).
Factors Driving Growth of Bilateral Trade Agreements
Economic
Sector Driven Market Access
Sector Sector Market Market
Excluding Expanding Restoring Creating
Notes: PTA = preferential trade agreement; WTO = World Trade Organization
Addressing Water Allocation and Water Rights
Increased water demand and water use conflicts are
occurring in many countries in Asia, and licensing
mechanisms, water allocation, and water rights
have become regular challenges. Unfortunately, the
extensive interest on these topics is in stark
contrast with the relatively few successful
experiences so far in the region.
As the final workshop in a series organized to
address this problem, the NARBO Fourth
Thematic Workshop on Water Allocation and
Water Rights was held in Saitama, Japan, in
January in collaboration with the Asian
Development Bank and the Japan Water Agency, as
one of the leading activities of the Network of
Asian River Basin Organizations (NARBO).
Thirteen government officials and practitioners
from seven Asian countries (Indonesia, Japan, Lao
PDR, Philippines, Sri Lanka, Thailand, and
Viet Nam) in charge of water resources management
Find more information about this workshop series at www.adbi.org/event/2117.narbo.4th.workshop/.
6
B a n k I n s t i t u t e
ADBI Senior Research Fellow Jayant Menon
examines how BTAs in general, and different types
of BTAs, are affecting the world trading system.
Although the sheer number of these agreements is
fragmenting the system, the impact of individual
BTAs often depends on their underlying
motivation. This highlights the importance of
delineating the specific factors in assessing the
impact of BTAs. Finally, the author considers
likely scenarios for the future landscape of world
trade, and possible responses, in the context of
different Doha outcomes.
Read or download the paper for free at www.adbi.org/
discussion-paper/2006/11/28/2067.bilateral.trade.
agreements.wts/.
Strategic Event Driven
PTA Political
Lobby Terror PTA PTA WTO Political Political
Driven Driven Facilitation Integration Accession Integration Disintegration
attended the workshop to discuss how to improve
water allocation issues and water rights systems.
During the workshop, participants presented and
deliberated on action programs for achieving these
improvements in their own country.
Participants visited Saitama Prefectures Tone Canal Project,
which is one of the representative canal systems in Japan.
 A s i a n D e v e l o p m e n t
ICT Boost for Education
in Nepal
In developing countries like Nepal, the education
and training infrastructure has not been able to
fully equip the workforce with the skills and
knowledge demanded by both domestic and
international industries. The severe skill gaps show
a lack of both proper instructional materials and
prepared teachers. Use of multimedia technology
in education makes it possible to illustrate and to
grasp complex industrial processes and difficult
scientific concepts. With such materials, we can
expand educational opportunities which eventually
will ensure sustainable development and
prosperity, says Jeoung-Keun Lee, course
director.
With the objective of promoting the use of
information and communication technology (ICT)
in the education sector of Nepal, ADBI organized a
12-day residential workshop called the Pilot
Course on Computer Courseware Development
in Lalitpur in February. The workshop was
supported by the Nepal Resident Mission of the
Asian Development Bank and National
Information Technology Center (NITC).
Sharing the Advantages of SME Promotion
through Industrial Cluster Approach
Promotion of small and medium-sized enterprises
(SMEs) is a key to achieve economic growth,
employment generation, and eventual poverty
reduction. Industrial clusters offer various
advantages to SMEs located within them (see box
on right). A favorable national policy framework
and local business environment, however, are
needed for these clusters to flourish. In addition,
enhanced roles of the public sector under market-
oriented economy and globalization mean new
challenges for the government officials in former
centrally planned economies.
To expose key policymakers to successful
cluster development cases in the Asia-Pacific
region, and to disseminate knowledge about their
patterns as well as favorable public policy
intervention measures, ADBI organized the
Industrial Development Planning: Cluster-
Based Development Approach Policy Seminar.
The five-day seminar, held in March, drew 18
participants from 9 ADB developing member
countries and one self-financing participant from
B a n k I n s t i t u t e
To produce well trained teachers capable of developing
quality educational materials, 35 teachers and government
officials of Nepal were trained at the workshop. During the
course each participant developed a computer courseware.
Its never too late to begin, remarked Subash
Kumar Bhatt, a computer teacher and head of
department at Shuvatara International School in
Lamatar, Lalitpur. With these kinds of capacity
building programs, we can equip teachers with
skills which in turn will bring significant positive
changes in the countrys education sector.
View more information about this course at
www.adbi.org/event/2104.pilot.computer.courseware/.
the Republic of Korea. ADBI organized the
seminar in collaboration with the Foundation for
Advanced Studies on International Development,
ADB, Japan International Cooperation Agency,
United Nations Industrial Development
Organization, and Organisation for Economic
Co-operation and Development.
Some Advantages of Industrial Clusters
Spillover of technological and other information
Accumulation of skilled and various labor
Reduced transaction costs
Promotion of long-term contracts and commitments
Specialization and division of labor
Provision of business service and infrastructure
Increased opportunities for innovation
This was the second seminar which ADBI organized on this
topic. Find more information about these events at
www.adbi.org/event/2105.clusterbased.development.
local.government/.
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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

CALENDAR
www.adbi.org/calendarofevents/

34 May East Asia Conference on Competition Policy and Development

(Hanoi, Viet Nam)
7 May Seminar on Ageing in East Asia (Kyoto, Japan)
8 May Workshop on Ageing in East Asia (Tokyo)
10 May Japan Microfinance Symposium (Tokyo)
58 June Workshop on Asian Think Tanks: Strengthening Knowledge Management
and Knowledge Sharing (Tokyo)
12 June Ten Years After the Crisis: Evolving East Asian Financial System and
Challenges Ahead (Tokyo)
2526 June Infrastructures Role in Reducing Trade Costs: Finalization Conference
(Tokyo)*
25 July Private Sector Participation in Physical Infrastructure (Tokyo)
913 July Local Government Strategic Planning to Improve the Urban Environment:
Linking Local Actions to the Global Agenda (Tokyo)*
(*) Event is pending confirmation.
Dates for all events are subject to change. New events are added to the calendar as they are confirmed.
Please consult the website for the latest information.

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