Asian Development Bank: A Force of Stability

Asian Development Bank president Takehiko Nakao’s goal is to make ADB a “force of stability” and Asia’s primary development partner. Can he succeed?


There may be no one who thinks more about the needs of developing Asia than Takehiko Nakao, the former Japanese Finance vice minister who now heads the Asian Development Bank. President of the multilateral lender since 2013, Nakao is known as a man who is extremely courteous and speaks English softly and fluently. He also is known as someone who moves quickly and methodically, and backs up his words with action.

The bank has been positioning itself to meet the increasing development demands of its neighbors. On February 28, ADB issued a landmark report at the Foreign Correspondents’ Club in Hong Kong, announcing that the region needs $26 trillion in infrastructure investments by 2030 — more than double the bank’s 2009 estimate. In January, Nakao and his team completed the merger of two ADB funds, Ordinary Capital Resources and the Asian Development Fund; the move will increase the bank’s lending by 50 percent, to $20 billion a year by 2020, with much of the financing geared toward infrastructure. Moreover, ADB is expanding its credit guarantee program to encourage the private sector to make infrastructure investments.

Nakao, who helped set yen exchange policy at Japan’s Ministry of Finance in the 2000s, is steering ADB to strengthen regional political stability and economic growth while at the same time gearing up for competition. The start of China’s own multilateral lending program last year — the Asian Infrastructure Investment Bank (AIIB) in Beijing and the New Development Bank in Shanghai — is the impetus pushing the 50-year-old bank to invest more money in a region that is already seeing the world’s fastest growth.

“When ADB was established, Asia was poor, food was in short supply, and it lacked resources to finance development,” Nakao said at a February 21 cocktail gathering at the bank’s Manila headquarters. The event, held to celebrate ADB’s 50th birthday, was attended by 400 dignitaries, including the president of the Philippines, Rodrigo Duterte.

“One of the priorities for ADB was to give technical assistance and loans to agriculture, and half a century later, Asia’s amazing growth and successful poverty reduction have exceeded the most optimistic forecasts,” Nakao said at the gathering, noting that Asia has evolved into a dynamic market whose gross domestic product accounts for one third of the global economy and more than half of the world’s growth.


ADB has ramped up lending under Nakao’s leadership, assisting countries that remain economically vulnerable and politically volatile. Last year the bank issued a record $31.5 billion in loans, grants, co-financing, and financial technical assistance, up 16 percent over 2015. The accelerating pace of lending, which included an unprecedented $17.5 billion in loans and grants, compares with the $267 billion in loans and grants that ADB has handed out across the region since its founding in 1966.

Nakao says he often tells his team members that his job today is far more diverse than his previous position as the Ministry of Finance’s vice minister for international affairs, and that he enjoys representing the interest of all 67 members of ADB. The bank’s membership includes 19 nations that are not in Asia, chief among them the U.S. and Canada.

Although ADB is being reinvigorated partly as a result of rising competition from China’s multilateral financing, the region’s need for investment is much larger than what the rival programs can provide.

“Competition is always good, and hopefully competition among the two new banks based in China will stimulate the Asian Development Bank to speed up its activities and particularly emphasize more privatization of infrastructure projects so the work can proceed more expeditiously,” says Mark Mobius, executive chairman of Templeton Emerging Markets Group, one of the world’s largest funds focused on emerging markets, with $21.6 billion in assets under management.

The need for infrastructure spending in developing Asia will be in the trillions of dollars over the next few decades, far exceeding what ADB, China’s new multilaterals, and the World Bank together can meet, according to Wei Shang-Jin, ADB’s chief economist from 2014 to 2016 and now a professor of finance and economics at Columbia Business School. He also points to rising demand from developing countries like Cambodia, Fiji, and China for policy advice to aid their reforms.

“Many of the development challenges are complex,” Wei says. “No development bank will have a monopoly over best ideas. So developing countries benefit from having more banks looking into their challenges and proposing possible solutions.”

Nakao is taking a collaborative approach to developing the region’s infrastructure. ADB signed agreements last year with AIIB to co-finance two projects, a 64-kilometer (40-mile) stretch of national highway in Pakistan that requires more than $230 million to develop and a $453 million natural-gas facility in Bangladesh to which ADB contributed $167 million and AIIB $60 million.

ADB, which always has been led by a Japanese president, has come a long way in being recognized as a serious lender. As recently as the early 1990s, many Asian business leaders and executives rarely mentioned the bank in any of their conversations. When they did, two phrases often came up: “Taj Mahal” and “white elephant.” For much of the 1970s and 1980s, ADB was known for its extravagance and largesse, recall several of its former consultants.

One retired senior banker, who asked not to be identified, says the bank was famous for being a place where investment bankers or lawyers could retire — where they “don’t need to work very hard and still get a huge pay package, including a car; a driver; a young, attractive secretary; and a villa in the center of town with a large swimming pool.”

That image, however, has changed dramatically in the past two decades, since the 1997 Asian financial crisis and particularly under the leadership of ADB’s three last presidents: Tadao Chino, who served from 1999 to 2005; Haruhiko Kuroda, who served from 2005 to 2013, before becoming governor of the Bank of Japan; and current leader Nakao, who was named to the post in 2013.

Under Chino, ADB became a significant advocate of Asia in global multilateral circles, much to the chagrin of officials in Washington, especially those at the World Bank and the International Monetary Fund, which took hard-line approaches to the region during the Asian financial crisis. They pushed for nations hit by the crisis to immediately implement monetary austerity; the ADB initially supported this, but only half-heartedly, and later it resisted the harsh measures.

“We’re a key partner in Asia’s development,” says Stephen Groff, an American and ADB’s vice president in charge of operations. “We certainly wouldn’t go as far as to claim credit solely, but we have been a key partner with many of the nations in the region in helping them to achieve their development objectives.” He recalls that ADB’s first president, Takeshi Watanabe, described the bank as the “family doctor” of the region — a role suggesting intimacy and trust. Groff says ADB’s local presence gave it the “perspective and closeness” needed to become a key partner for many nations in those decades.

The bank’s previous president, Kuroda, helped ADB recognize the rising importance of China and other emerging markets by promoting their nationals into the organization’s senior ranks. Now, under Nakao’s leadership, ADB is cementing its transformation into a strong regional partner by launching what will be the most aggressive infrastructure finance program in the five decades it has existed.

ADB’s success in promoting development and rapid growth in Asia is primarily because of employees who resisted efforts by officials in Washington to impose the policies of the so-called Washington Consensus, notes Laurence Brahm, a Beijing-based American lawyer and a former ADB consultant. Such policies, crafted by bureaucrats in the U.S. capital, often took a cookie-cutter approach to economic development in Asia. Today the U.S. owns a 15.5 percent equity stake in ADB, just behind Japan’s 15.6 percent, and it has the right to post an American to one of the bank’s vice president positions.

“The actual implementation of projects under ADB very much depends on the views of the officers overseeing the project,” says Brahm, who as a consultant was seconded by ADB in the early 1990s to become an adviser to the central banks of Vietnam and Laos, and to what then was known as China’s State Planning Commission. While in Vietnam and Laos, Brahm helped central bankers adopt market reforms, including the establishment of stock exchanges. In China he assisted officials in creating a strategy to restructure the nation’s state-owned enterprises, including converting policy banks into commercial lenders, which later went public and helped propel the country’s capital markets.

“Ideologically, ADB was advancing Washington Consensus views during the 1990s,” Brahm says. “However, many officers implementing projects had their own independent views and cared more about the national interest, and were sensitive to these needs.”

ADB’s success is tied in part to its strategy of welcoming China in 1986, according to Groff. By including China as a member and making it a 6.5 percent shareholder in the bank, ADB became an economic adviser and financial lender to the world’s most populous nation. “The rise of the People’s Republic of China and its becoming a member of ADB in 1986 have been significant for the bank,” Groff says. “Until that time, China had been outside, and by becoming a member it made the institution really a bank for half of the world.”

Each ADB member controls and is responsible for its own development, Groff says, adding, “What we provide is a platform in which they can learn from the success and failures of others, and push for development strategies that suit their needs.”

With Nakao at the helm, the bank has been systematically devolving power, delegating more independent decision making to the heads of its missions and lower-level officials in the field. “We are fine-tuning the bank,” Nakao said to Institutional Investor in 2015, when he began an initiative to give more power to the heads of each of the bank’s 48 missions across Asia. He also led the bank’s plan to boost lending by merging its Asian Development Fund, ADB’s below-market-rate lending window for poor countries, with Ordinary Capital Resources, its lending window for middle-income countries. The deal nearly tripled the bank’s equity base, to $53 billion.

“We are trying to increase our lending capacity dramatically, and we are also trying to reform ourselves a lot,” Nakao told II in 2015. “Instead of preaching to countries to reform, we should also reform ourselves. It is the responsibility of the management, especially the chief executive, to promote continuous reform and innovation.”

The larger equity base means ADB has a greater capacity to leverage its balance sheet and provide more loans to governments, helping them fund a wide range of projects, from schools and hospitals to highways and subway systems.

Under Nakao, ADB has shifted a lot of attention not only to infrastructure but also to the least developed parts of the region, particularly Central Asia. Last year the bank provided $100 million for the electrification of a 140-kilometer railway track between the cities of Samarkand and Karshi in the south of Uzbekistan. ADB also approved a $198 million loan to help upgrade and widen 77 kilometers of the Karshi-Shakhrisabz-Kitab highway in Kashkadarya province, in southeast Uzbekistan, to improve tourism and mobility, as well as domestic and international trade. And in Kyrgyzstan, ADB last year provided a $95.1 million loan to rehabilitate a section of the North-South Alternate Road Corridor.

The lender also has been forging ties with its members and potential financial partners through its global meetings. ADB held its 2014 general meeting in Astana, Kazakhstan, and its 2015 general meeting in Baku, Azerbaijan. Last year its annual summit was in Frankfurt, and in May it will be in Yokohama, Japan.

“We should continue to promote inclusive growth in the Asia and Pacific region,” Nakao has said he tells his team members. “To do that, we should continue to promote economic development, and for that we need investments in infrastructure, education, and health. We also need good macroeconomic and structural policies.”

Nakao earned a bachelor’s degree in economics from the University of Tokyo before joining the Ministry of Finance in 1978. During his 35 years at the ministry, he earned an MBA from the University of California, Berkeley, and published a book in 2008 titled America’s Economic Policy: Can It Sustain Its Strength?

His move to reform and strengthen ADB is one of many bold moves Nakao has made over the course of his career. As the MoF’s vice minister for international affairs — the most senior civil-service appointment within the ministry — Nakao won the respect of his peers for his steady-handed approach to overseeing the Japanese government’s largest-ever currency market intervention, after the yen’s sharp appreciation in 2011.

The yen and the Swiss franc soared to record levels that year as investors sought haven from Europe’s sovereign debt crisis. Nakao responded by buying dollars and helping Japan sell tens of billions of yen to drive down the currency’s price. The yen strengthened to a 2011 peak of 75.32 per U.S. dollar on October 31. As the Japanese government intervened to stem the yen’s rise against the dollar, Nakao worked first with Finance minister Yoshihiko Noda and then with Jun Azumi, who replaced Noda when he became prime minister in September 2011.

Since then the yen has weakened significantly, trading at 113 per dollar on March 17, a level that’s agreeable today for a nation relying on exports to power growth.

“When I was vice minister, I was guided by the minister,” Nakao says he tells his team members. “I was guided by Japanese national interest. But today I am the head of an institution that represents many nations. I must closely consider the different interests and perspectives of countries, and coordinate those interests. So my job is very different.”

Nakao, who was endorsed for a second term last August, notes that his goal is to make ADB a “force of stability” and Asia’s primary development partner for the long term.

He sees the region’s political stability as a basis for its economic development, confirming what he told II in 2015: “It is crucial for the quality of life of the people.” Nakao knows well that the region’s development is a massive work in progress and that he’s in a position to influence peaceful relations and a stronger economy in areas of the world, such as Central Asia, that are still struggling with basic infrastructure needs. “As an important partner in Asia, ADB wants to help promote the idea of regional cooperation, friendship, and stability,” he told II two years ago. Today his actions show that belief is as strong as ever.

See sidebar stories: ADB Seeks Private Sector Help for Infrastructure Projects; China’s Consumers Power Ahead; and Asia’s Ballooning Bond Market.