A quarterly magazine of the IMF

March 2006, Volume 43, Number 1

People in Economics

Jeremy Clift profiles Asian Development Bank President Haruhiko Kuroda

In his first year at the helm of the Asian Development Bank (ADB), Haruhiko Kuroda has had a roller-coaster ride, trying to help the region grapple with the risks of a bird flu pandemic as it struggles to recover from the lingering effects of the devastating Asian tsunami and Pakistan's deadly earthquake. "The images of ordinary citizens pulling friends and neighbors from the rubble will be indelibly etched on our minds," says the soft-spoken former Japanese currency policy tsar, who took over as ADB president in February of last year.

But the string of natural disasters (see Box 1) has not deflected Kuroda in his determination to make the Manila-based bank a catalyst for change in Asia—a region that is modernizing rapidly and has already become a powerhouse of the global economy. "Since taking over, Kuroda has put the ADB at the center of the drive to promote economic integration in Asia," former ADB insider Karti Sandilya told F&D.

In a series of speeches from Tokyo to Washington over the past year, he has outlined an ambitious agenda to promote a new financial architecture for Asia. It is part of a well-thought-out personal vision for a more integrated Asia now that the world's most populous region has recovered from the debilitating financial crisis of 1997–98 (see Box 2).

A career Japanese finance ministry technocrat who was an advisor to Japanese Prime Minister Junichiro Koizumi on international monetary issues, Kuroda aims to harness the ADB to foster closer Asian regional integration and an eventual single Asian currency by harmonizing rules and legislation, boosting intraregional trade and investment while discouraging overlapping and competing bilateral trade accords, building infrastructure and expertise, and encouraging regional exchange rate cooperation and coordination.

Soft spoken but determined

At first glance, Kuroda is an unlikely champion to spearhead Asia's transformation. A former tax expert, he is bookish and thoughtful rather than charismatic. He talks softly and has a dry wit. For years at the Japanese Finance Ministry, he lived in the shadow of his better-known predecessor, Eisuke Sakakibara. Indeed, when Kuroda took over from Sakakibara as Japan's top international financial official in 1999, the contrast could not have been greater.

Sakakibara, dubbed Mr. Yen by the media for his flamboyant and outspoken comments in defense of the Japanese economy, loved the limelight and relished his ability to rattle international markets. In contrast, Kuroda is more discreet and cautious. He prefers measured understatement to showmanship, selecting his words with academic precision.

Born in Kyushu, in southern Japan, in October 1944, he initially studied law at Tokyo University, where he was selected for the civil service and later sent to Oxford to study economics. "My father and mother were quite liberal. Anything I decided, they accepted," he now says. By Kuroda's own account, Oxford left a lasting impression on him. He studied under several prominent economists, including Nobel Prize winner John Hicks. "[Hicks] was so famous he could attract not only economics professors, but also practitioners—central bank governors, bankers, industrialists, and politicians—to his seminars. Graduate students would sit and discuss with the guest speaker, and, at the end of the seminar, he sort of summed up—a very short summary. Quite interesting. It was the interaction of theory and reality, of policy and the theoretical."

Kuroda's time at Oxford taught him that economic theory needed to be tempered with practical interpretation. "I think they taught us that, although economic theory may provide some insight, some framework, good policies may require something that goes beyond just economic theory or analysis—some practical judgment, some good sense."

He delights in intellectual challenge and says his dream was to be a teacher—a dream briefly fulfilled when he became a professor at Tokyo's Hitotsubashi University in June 2003. He once wrote a paper titled, "Socrates: the Dollar Dialogue," in which he imagined how the ancient Greek philosopher would analyze exchange rate management. For recreation, he likes to swim and read detective novels and, occasionally, books on mathematics and physics.

He won his international spurs while seconded from Japan's Finance Ministry to the IMF in Washington, where he was an assistant to the Japanese Executive Director during 1975–78. It was a turbulent period just after the 1973 oil crisis when the international financial system was being realigned to cope with the collapse of the Bretton Woods system of fixed exchange rates. "Really, I learned how an international institution can be managed and can function," he declared. "Quite an exciting and interesting period," he says with his usual understatement.

Making a name for himself

Kuroda became Director-General of the Japanese Finance Ministry's International Finance Bureau (now renamed the 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 bureaucracy by putting together a plan proposed by then–Finance Minister Kiichi Miyazawa for tackling Latin America's huge debt problem. During his terms as Director-General (1997–99) and, later, Vice Minister of Finance (1999–2003), Kuroda helped prepare Tokyo's controversial plan for an Asian monetary fund—later watered down to a $30 billion rescue package for Indonesia, Thailand, and Korea.

As Paul Blustein recounts in The Chastening, his detailed re-construction of the Asian crisis published in 2001, Sakakibara and Kuroda had been considering setting up an Asian monetary fund since the Mexican peso crisis of 1994–95. "They noticed that Asian nations probably wouldn't qualify for IMF loans proportionate with the one Mexico received because their Fund quotas had failed to keep pace with their rapid economic growth," Blustein wrote. Japan's proposal for an Asian monetary fund was shot down by the United States as soon as it was made in September 1997 because the U.S. Treasury was worried that it would undercut the IMF. "In retrospect, it was all too hasty," Sakakibara later admitted.

Although the plan for an Asian monetary fund failed to win acceptance, many observers see the network of foreign exchange swaps launched in May 2000 to protect Asian currencies against speculative attacks—known as the Chiang Mai Initiative (CMI)—as an embryonic fund.

Kuroda has gone out of his way to emphasize the primacy of the IMF. "The IMF remains the only global financial institution governing the international monetary system, and East Asia's regional financial architecture must complement its role," he wrote with University of Tokyo economist Masahiro Kawai in the Financial Times in 2004. "Strengthening the region's financial architecture will also strengthen the IMF's global role because regional financial stability contributes to the stability of global finance." But Asian leaders are edging toward acting on their own, announcing plans to boost the CMI's ability to lend without recipient countries needing to have an IMF program in place and building up the world's largest foreign exchange reserves as a bulwark against currency speculation and possible future instability related to the large imbalances in the global financial system.

Kuroda is careful not to ascribe blame, or follow U.S. critics in singling out China, when discussing the issue of imbalances, arguing that they are a joint responsibility. "The United States must cut its fiscal deficit, Europe and Japan must implement structural reforms, and Asian emerging currencies should be made more flexible," he says. "These joint actions share the responsibility for resolving global imbalances."

Some analysts believe that Asian countries are using proposals for an Asian monetary fund as bargaining chips to press for improved representation at the IMF. Developing countries, including in Asia, have increased pressure on the world's industrial powers to adjust the voting shares, or quotas, in the IMF to better reflect their growing economic muscle. Many, including the IMF's own management, hope that this year's IMF–World Bank Annual Meetings in Singapore will yield concrete proposals for how the changes can be made.

Others see the drive for closer regional economic integration as part of a broader shift in political and strategic balances in Asia, says Greg Sheridan, Foreign Editor of The Australian newspaper. "There is an intense competition in the Asia-Pacific to work out what is commonly referred to as the new architecture for the region," he argues.

"Of course, this isn't all about safeguarding financial stability in Asia," says Michael Vatikiotis, a former Editor of the Far Eastern Economic Review, who is currently a research fellow at the Institute of Southeast Asian Studies in Singapore. "Japan is in a hurry to cement its role as a pivot of these financial mechanisms before China becomes too dominant—and perhaps before the yen is overshadowed by the yuan."

Well-signaled plan

When Kuroda became the ADB's eighth president, it was clear that steps toward monetary union and closer Asian regional integration would be at the top of his agenda. After all, he had clearly signaled his ambitious goals well in advance in a series of academic papers and newspaper articles. Nevertheless, he made headlines when, shortly after taking up the reins of the development bank, he announced plans to set up the Office of Regional Economic Integration, headed by his former deputy Kawai, to help knit the diverse region together and again later on when he called explicitly for Asia to aim for monetary union. "Some skeptics may call this vision of a deeply integrated Asia a pipe dream," Kuroda told the Emerging Markets Forum held at Oxford University in December 2005. "Some say the disparities are too wide, the political divides too deep. But strong bridges for a united Asia, open to the world, are already being built."

At the ADB's annual meeting in Istanbul in May 2005, finance ministers from the 10-member Association of Southeast Asian Nations (ASEAN) plus Japan, Korea, and China (known as ASEAN+3) took what some analysts saw as another tentative step toward the creation of an Asian monetary fund: they agreed to expand the CMI by doubling emergency currency swap commitments to more than $70 billion. "Further steps could be taken to expand the CMI to a more solid regional financing facility," says Kuroda, "and to make the ASEAN+3 economic surveillance mechanism more effective—for example, through the establishment of a professional secretariat charged with both the CMI and regional economic surveillance."

Kuroda also argues that growing intraregional trade in Asia is strengthening the case for a single currency. Intraregional trade in East Asia now accounts for 54 percent of the region's total trade, sharply up from 35 percent in 1980. He notes that this is higher than the 46 percent intraregional trade in the North American Free Trade Agreement (NAFTA) zone "and is very much comparable to intraregional trade in the European Union before the 1992 Maastricht Treaty."

"Given this magnitude of intraregional trade, even small intraregional exchange rate misalignments can disturb trade and investment flows and could create trade frictions among the regional economies. This indicates the need for intraregional exchange rate stabilization in the years to come and, ultimately, a single currency," he argues, although he agrees that a single currency may be a long way off. He is pressing forward with plans to introduce an Asian currency unit (ACU), based on a basket of Asian currencies, akin to the European currency unit, or ECU, that was a precursor to the euro. Kawai says the ACU could become a benchmark for Asian currencies.

The ADB is also backing moves to develop local currency bond markets in Asia. Kuroda argues that stronger regional capital markets are needed to support huge infrastructure development. "It is ironic that Asia's massive needs for infrastructure investment go unmet while excess savings find their way to the global capital markets," he says. "One reason for this is that Asian savings are not being efficiently intermediated by the region's financial system."

Emerging giants

Kuroda denies that his focus on regional integration is crowding out the ADB's other main objective—poverty reduction. "Poverty reduction continues to be the overarching objective of the ADB; that doesn't change at all," asserts Kuroda, who was responsible for Japan's official development assistance, including relations with the ADB, during 1994–96. But he says that integration is key to spurring growth and poverty reduction. "If you look at countries in the region, many are doing quite well, and some are not. You will find those that are not doing well are not well connected to growth centers in the region and not well connected to the global economy. So regional integration is key for inclusive growth—meaning poverty reduction supported by growth," he argues.

He sees the three pillars of Asia now as Japan, China, and India. He concedes that the rise of India and China is creating a new dynamic in Asia and that smaller countries may worry that the two giants are attracting investment at their expense. But he argues that, in the long run, the whole region will benefit. "Initially, Asian countries may have feared fierce competition from China," says Kuroda. "But economies can adjust, sectors can structurally change. In the long run, rapid Chinese growth will only benefit other countries."

"It is natural, of course, that people are attracted to China and India because of their sheer size. But although China and India are big and growing quite fast, other small and medium-sized countries are also doing well. In some sense they are competing, but in the long run they will benefit each other through an integrated market," Kuroda insists.

He rejects the idea of a grand design for Asia, similar to the European model, but says that a vision for Asia is needed and that the region should not become inward-looking. "Our objective," Kuroda told the Asian Institute of Management in October 2005, "should be to create not a 'fortress Asia,' but a highly integrated Asia that is open to the rest of the world as well. This is 'open regionalism.' In short, Asia should increasingly act regionally while continuing to think globally."