Volume 22 Issue 5, May 2018


Pakistan is not only a founding member of the Asian Development Bank (ADB), but is one of the largest recipients of funds from the institution. As discussed later, the institution's importance for Pakistan is likely to increase significantly. The Bank was modeled after the World Bank Group (WBG) and was established on December 19, 1966. Headquartered in Manila, the Philippines, such nations as Japan and the United States are the institution's largest shareholders, each with 15.61 percent share in the capital. China holds 6.44 percent, India 6.35 percent and Australia 5.79 percent.

The ADB has committed $29.57 billion to the country for 734 operations. This works out at about $600 million a year. But the annual lending programme is now much larger than the average as is the typical size of the project. The average project size is $40 million but in recent years, the institution has financed much larger projects.

The sector of energy has been the largest recipient of ADB's support, accounting for almost 28 percent of the total. Projects in this sector comprise over half of the institution's portfolio for Pakistan which includes $900 million for the Jamshoro Power Generation Project. The institution is also helping finance hydropower plants, energy-efficiency programmes and innovative clean energy initiatives. In 2016, ADB provided a loan of $325 million to enhance Pakistan's energy security. Under this initiative, the aim is to build 1,000 micro-hydro plants and roof-top solar plants for schools and clinics so that the operations of these vital institutions are not interrupted because of power outages. Some 4 million people will benefit from this programme, including 1.2 million girls attending schools in Khyber Pakhtunkhwa and Punjab provinces.

To help the country to deal efficiently with its rapidly growing energy needs, it is providing assistance for energy planning, capacity development and regional trading initiatives for power and gas. It has teamed up with the United Kingdom's Department for International Development (DFID) to help Pakistan develop the institutional capacity to take full advantage of the multi-billion dollar China-Pakistan Economic Corridor (CPEC).

Transport, with 16 percent of the share, is the second largest sector for the ADB in Pakistan followed by what the institution describes as the "public sector management" cluster. In 2016, the institution's board approved the total lending package for the period 2017-19 costing $5.96 billion. In this period the institution is placing emphasis on inter-country connectivity via a north-south road network. This will provide enormous benefits if Islamabad and Beijing reach an understanding with Kabul to extend the CPEC to Afghanistan. That way Pakistan will get connected to the land-locked countries of Central Asia and become a major hub for international commerce.

A large ADB programme coupled with those being financed by the World Bank Group and the Asian Infrastructure Investment Bank will help Pakistan to overcome the problem resulting from the threatened withdrawal of the United States support from the country. To see how Pakistan could use the cluster of international institutions to deal with the American threat, it would be useful to reflect on the development of the multi-faceted international framework for cooperation among nations.

After defeating Germany and Italy in the Second World War, the victors agreed that they should not repeat the mistakes they had made after the First World War (1914-18). Then defeating Germany on the battlefield was not considered to be enough. It had to be punished in other ways for the destruction it had wrought by pursuing its imperial ambitions. The victors imposed economic sanctions on Germany by way of heavy reparations it was to make to the countries it had invaded and destroyed. The imposed financial burden was too heavy for the Germans to bear. Resentment built up that led to the rise of extreme nationalism. This was exploited by the Nazis and their leader, Adolf Hitler. Germany's aggressive behaviour plunged the world into another war that turned out to be far more destructive than the one in the early part of the century.
After the same set of victors had defeated the same set of enemies on the battlefield, it was agreed that the vanquished should be reabsorbed into the world's political and economic system. This should not be done by making a one-time effort.
Instead, an institutional structure should be built to achieve at least four objectives. There should be a mechanism for countries to resolve their differences through negotiations rather than by waging war. The battle-filed should be the last option exercised after careful thought against the erring party. Second, the defeated nation should be helped to rebuild its economy. Third, the countries under financial stress should be helped collectively by other nations but on the condition that the affected country would not repeat the same policies that created the problem in the first place. The help to be provided should be on non-onerous terms. Fourth, commerce among nations should be conducted on the basis of rules all countries would follow without discrimination. These four objectives would be the responsibility of specially devised institutions in which all nations would have the right to participate.

To construct such a multinational system, the victors met in a small resort in New Hampshire in the United States. The choice of an American site for deliberations was a clear signal that the United States had emerged as the most powerful nation on Earth. The Bretton Woods Conference formally known as the United Nations Monetary and Financial Conference brought 730 delegates from 44 nations together to discuss the formation of a new economic and financial order. The conference was in session for three weeks from July 1 to 22, 1944 and resulted in the creation of the International Bank for the Reconstruction and Development (IBRD) and the International Monetary Fund (IMF). These two institutions were to satisfy the second and third objectives mentioned in the afore-stated. The first objective was met a year and a half later when on October 24, 1945, 51 countries signed the charter to establish the United Nations system. It took fifty years for the fourth objective to be met. On January 1, 1995 after the conclusion of the Uruguay Round of Trade Negotiations at Marrakesh, Morocco, 123 nations agreed to establish the World Trade Organization (WTO).

These four parts of the system evolved over time as the demands of the global economy and politics changed in several significant ways. The IBRD was initially focused on helping both the vanquished and victor nations emerging from the Second World War to recover from the conflict's ravages. It used the capital committed by member nations to borrow from the financial markets. Only a small amount of the pledged capital was actually provided; the rest was "callable." It was to be used only if those who were the Bank's borrowers did not service their loans. With this assurance, the institution was able to float its bonds at very favourable rates -- rates equal to those paid by the United States Treasury. But poor IBRD members could not afford to borrow even on these terms. When the capital needs of the newly independent nations of South Asia increased, the rich members of the IBRD agreed to a mechanism that could provide credit to the poor nations on very concessional terms. The International Development Association (IDA) was established in 1961 with funding provided as grants by the rich nations. Five years earlier the International Finance Corporation (IFC) was created as the private sector arm of the IBRD. Together this cluster of institutions came to be called the World Bank Group (WBG).

The next major innovation came in the 1960s with the creation of a string of regional banks that could concentrate on the development needs of different parts of the globe. Regional banks were established to serve the needs of Asia, Latin America, Africa, the Muslim world and the eastern part of Europe. Much later the Chinese decided to add one more institution to this cluster, the Asian Infrastructure Investment Bank (AIIB).

The challenge posed by Washington can be met by Islamabad by developing a well thought-out plan to access the funds it will require to meet its development needs. Institutions such as the ADB and WBG should be accessed as part of an effort that exploits their separate expertise. In order to plan this effort it might be useful to consult with Beijing and incorporate the CPEC in the overall programme.

Shahid Javed Burki is a professional economist who has served as a Vice President of the World Bank and as caretaker Finance Minister of Pakistan.
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