Comment on “Changes in Development Finance in Asia: Trends, Challenges, and Policy Implications”


Peter J. Morgan, Asian Development Bank Institute, Kasumigaseki Bldg., 8F, 3-2-5 Kasumigaseki, Chiyoda-ku, Tokyo, Japan 100-6008. Email:

This paper (Nishizawa, 2011) discusses the trends of development finance in Asia, with a focus on external sources of financing, but touching on interconnections with domestic financing as well. Nishizawa defines “investment in developing countries with a public goods nature” as investment for development purposes. He addresses three main issues. First, how has development finance in Asia changed its sources and nature during the past decade and why has that happened. Second, what issues are on the common agenda for development finance in Asia going forward. Third, what are the respective roles of the public and private sectors for enhancing the effectiveness of development finance in Asia.

The discussion focuses on four main areas: official development assistance (ODA), public–private partnerships (PPPs), green finance, and foreign direct investment (FDI).

Nishizawa notes that, following the Asian financial crisis of 1997–1998, the savings–investment relationship in a number of Asian countries shifted from surplus investment to surplus savings. He argues that this shift to net investment in foreign assets is a sign that “domestic savings have not been fully and effectively utilized as sources of development finance . . . within the boundaries of the developing world” (Nishizawa, 2011, p. 163). However, I would argue that, following the Asian financial crisis, many Asian economies deliberately built up foreign exchange reserves, both as a means of self-insurance against “sudden stops” resulting from capital outflows and as a by-product of foreign exchange market intervention to slow the appreciation of their currencies. Also, a recent Asian Development Bank (ADB) study did not find evidence of underinvestment in Asian economies (ADB 2009).

Regarding external financing, FDI continues to be the workhorse of such flows, both in terms of magnitude and stability. ODA has declined, but “nontraditional” inflows have also been picking up. The author notes several developments in FDI flows – the increasing share in services, the development of south–south flows, and the importance of remittance flows.1

Nishizawa discusses issues related to the level and efficiency of ODA, both of which are widely regarded as inadequate, and gives a good description of recent organizational developments and debates on these issues, although he does not offer many conclusions. Parallel to developments in FDI, Nishizawa notes the development of South–South Cooperation, especially by China and India.

Nishizawa notes a pickup in the role of PPPs to finance infrastructure investment. He provides a good summary of data on such partnerships and a useful and detailed description of the issues involved, particularly the difficulties of reconciling the different interests of the public and private partners, including the role of political pressures.

Regarding green finance, Nishizawa gives a good description of recent developments of international efforts to limit greenhouse gas emissions, focusing on the Clean Development Mechanism (CDM). There have been positive developments, but various problems as well, including validating the additionality of projects, slow and nontransparent board decisions, and inadequate scope of allowable projects.

Nishizawa covers a number of issues regarding FDI. He argues that, to the extent that FDI incorporates technology transfers to host countries, it should be counted as part of development finance. Regarding the effectiveness of FDI in terms of technology spillovers, he cites research that finds that FDI does raise the technology level of the target factory or company, but that evidence of spillovers to other companies is less obvious, and there may be negative competition effects.

This paper has assembled a lot of useful data and discussion on overall capital flows, PPP-related infrastructure projects, and green finance. However, its policy recommendations need to be developed in greater detail. Regarding FDI, there are still significant barriers to foreign entry in service sectors, including finance, retail, education, and communications. Easing these by regional free trade agreements could lead to significant increases in FDI. Securities markets, especially bond markets, remain problematic for foreign investors due to lack of harmonization of regulations and taxes, inadequate infrastructure, etc. Regarding infrastructure investment, another approach besides PPPs would be to develop an Asian Infrastructure Investment Fund to help recycle savings within the region. Regarding climate change, perhaps other mechanisms besides the CDM should be explored as well.


  • 1

    ADB (2011) provides a lot of useful information on this subject.