Statement at the Annual Meeting of 50th IDB / 24th IIC (Medellin, Columbia / Mar. 30, 2009)

I. Introduction

Mr. Chairman, Mr. President, fellow Governors, ladies and gentlemen.

I am honored to have this opportunity to address the 50th annual meeting of the Inter-American Development Bank (IDB) and the 24th annual meeting of the Inter-American Investment Corporation (IIC) as a representative of the Japanese Government, and offer my congratulations for the IDB’s 50th anniversary of its founding.

I would like to begin by expressing my heartfelt gratitude for the warm welcome extended by the government of the host country, Columbia, and by the people of Medellin.

Japan joined the IDB 33 years ago, and Korea joined in 2005. This time, as a fellow Asian country, Japan heartily welcomes the People’s Republic of China as a new member to the IDB.

II. Stabilizing the global economy and Japan’s contribution to date

The global financial market turmoil has spilled over into the real economy, lowering the prospects for economic growth in developing as well as developed countries, and further deepening global economic downturn. Against this backdrop, all countries, including the developed and the developing, should unite in coping with this difficult challenge, and collaborate in utilizing all possible policy measures, not just traditional ones. From that perspective, Japan has been implementing a package of economic policy measures totaling 75 trillion Yen (approx. $770 billion), including about 12 trillion yen (approx. $120 billion) of fiscal stimulus measures, since the second half of last year.

At the same time, there is an urgent need to provide sufficient liquidity to developing and emerging countries severely affected by the global credit crunch. The International Monetary Fund (IMF) and the Multilateral Development Banks (MDBs) should fully utilize their resources in responding to the crisis. Japan has singed a lending agreement of up to $100 billion with IMF to augment its capital base, and has also been assisting developing countries in the recapitalization of banks, trade finance and environment-related investments through the Japan Bank for International Cooperation (JBIC).

III. Challenges Facing the IDB

(1) Overview of the Latin American and Caribbean region

Latin American and Caribbean (LAC) region has also been hit hard by the recent global economic turmoil. Up until the beginning of the economic crisis, the region had shown remarkable progress including growth in private sector and improvement in access to capital markets, supported by strong world economy and soaring commodity prices, resulting in a historically high economic growth rate of 5.3% per annum on average for the five years through the first half of last year.

However, the perspective has dramatically changed since the global financial crisis erupted last fall. The region cannot escape from a significant economic slowdown, due to globally declining demand, plunge in commodity prices which had been driving the LAC economy, and the sharp reduction in private external financing flows. According to a recent survey, foreign bank lending and economic growth in the region are both projected to go negative this year. There are concerns that an additional 2.8 million people in the region may fall into poverty as a fallout of the financial crisis, threatening the prospect for achieving the Millennium Development Goals (MDGs) by 2015.

(2) Current highest-priority issues: responding to the financial crisis

Responding to the contraction of the private sector capital flows

We are currently facing an emergency situation never experienced by the modern society ? the worldwide contraction of finance and real economy. To preserve past achievements of economic growth that the LAC region has built up to date, the IDB needs to respond aggressively and promptly to the funding needs of countries in the region, until normal flow of private capital has been restored. In this respect, Japan highly commends the IDB for having introduced, ahead of other MDBs, the $6 billion Liquidity Program for Growth Sustainability last November to provide liquidity assistance to SMEs and exporters in the region, and having promptly expanded its trade finance facilities. We expect that the IDB will continue to play an active role in mitigating the adverse effects of the contraction in the private capital flow by supporting crisis response efforts by the governments through increased lending, as well as in supporting private-sector activities that are the driving force of economic growth.

Assisting the poor

The poor who are socially vulnerable will be hit hardest by the current financial and economic crisis. We hope that the IDB will strengthen its efforts in supporting such projects that will directly benefit the poor, protecting them from further hardships. Specifically, the IDB should support the efforts of the developing countries to maintain the level of regular employment through vocational training, and to introduce or expand their pension, medical insurance and other safety nets, by providing both financial as well as technical support. Considering that an increase in the number of the poor will, through lower school attendance rates and childhood malnutrition, negatively affect the economic productivity over the long term, providing conditional cash transfers (CCTs) to households fallen into poverty as a result of the deteriorating economy could be effective.

To meet these urgent challenges, we expect the IDB to utilize all possible means, including ordinary assistance through lending and providing know-how, Opportunities for the Majority (OMJ), Multilateral Investment Funds (MIF), and donor trust funds by Japan and other countries.

Japan’s response to the crisis

Considering the urgency of the situation, Japan will reinforce and reorganize the Japan Poverty Reduction Program (JPO) to establish a new Crisis Response Facility to support efforts by LAC countries in responding to the economic crisis. Japan commits to making available $30 million over the next 3 years through this newly-established facility to provide technical cooperation for implementation of various crisis response projects of urgency, and to implement grant projects that would directly assist the poor.

I am pleased to note here that the JBIC and the IDB will sign a Memorandum of Understanding (MOU) to further strengthen the cooperation between these two institutions, by establishing a co-financing framework for financial crisis response. Japan International Cooperation Agency (JICA) will also sign a MOU with the IDB to strengthen cooperation in lending and technical assistance.

Reviewing the capital position of the IDB

The MDBs must have sufficient capital to be able to temporarily increase its lending volume to meet the urgent financing needs. Fortunately, the current capital base of the IDB is adequate in this respect. I would therefore expect the IDB to fully utilize its existing resources and focus on crisis response for the time being.

However, as the current crisis is protracted and a series of sizable lending is provided to weather the crisis, we may need to envisage a situation where the IDB becomes short of capital to maintain its lending operations under normal condition after the crisis. When initiating the review of capital adequacy from the medium- to long-term perspective, it would be critical for the IDB to set out a vision for the future growth of the LAC region, and to develop a long-term strategy encompassing IDB’s objectives in materializing such a vision, a grand design of the development of the region, and identification of IDB’s core area of business.

(3) Medium- to long-term challenges for the IDB

Poverty issues and reducing disparities

In developing a long-term strategy, the first priority challenge would be deep-rooted poverty issues and underlying need for reducing inequality. Disparities in the LAC region are among the worst in the world, with the wealthiest 10% of the population possessing 40% of the total assets whereas the poorest 10% holding merely 1%. Accordingly, reducing inequality is the biggest challenge for the region. Inequality is stark in the area of access to public services such as water supply, sewerage and educational opportunities, and they solidify such disparities through impeding healthy growth of children. We expect the IDB to take effective measures in these areas. In addition, we expect the IDB to cooperate with other donors in realizing more equitable burden sharing and income redistribution through proper tax system and social security policies. In the LAC region, universal subsidies are often provided to lower the cost of public services. Replacing such broad subsidies with ones targeted to the poor will have the dual benefits of enhancing fiscal response capabilities and of further reducing inequality, and thus will be the most suitable measure to cope with the current situation. We expect that the IDB encourage the regional countries to implement such policy measures through policy dialogues, and strongly support their efforts by providing necessary financing and know-how.

Climate Change and others

We also expect that the IDB, as a regional development bank, will be active in addressing climate change and other issues regarding global and regional public goods.

At their G8 Hokkaido Toyako Summit meeting held in Japan last July, leaders agreed that the goal of at least halving global greenhouse gas emissions by 2050 is to be shared with all participating countries in the UN negotiation process. The IDB has been working on the issue of climate change through its Sustainable Energy and Climate Change Initiative (SECCI), and Japan expects the IDB to continue to play a leading role in the LAC region. In doing so, we expect that the IDB will actively collaborate with the Climate Investment Funds (CIF) at the World Bank and Japan’s Climate Change Program Loan (Yen loan). The IDB should also focus on disaster prevention, an area closely related to climate change. Japan has formally agreed with the IDB to contribute $5 million to the SECCI, for which a signing ceremony will be held this afternoon. Japan will continue to support the IDB’s efforts in climate change issues.

Strategy for the Middle Income Countries (MICs)

The primary recipient countries of the IDB are middle income countries (MICs) with access to capital markets, many of which are expected to raise the capital necessary for financing their development from the markets once the capital flows have returned to normal. Therefore, the role of the IDB as a provider of financing would inevitably diminish over time. Nevertheless, the IDB has obtained a wealth of knowledge through its continued involvement as a leader in regional development. The future role of the IDB would shift towards providing knowledge based services including giving advice on tested best practices in the region. Developing strategies for assisting MICs and setting policies for their graduation are going to be among the key challenges facing IDB.

Operational Management

To ensure stable operation of IDB, it is important to enhance its financial soundness, enabling it to maintain confidence of the donor countries and the market. In this respect, the IDB needs to take it seriously that its financial position has shown a net loss due to investment losses, and should promptly put in place measures to prevent a recurrence of such problems.

IV. Conclusion

Japan and the LAC region are bonded with personal and economic ties developed through a long history of mutual exchanges. The two regions have overcome several socially and economically difficult times and strengthened our mutual relationships. I hope that we can strengthen our cooperation and work together to overcome the current crisis, not by blindly moving into protectionism, but by strengthening our mutual exchange.

To this end, we expect the IDB’s Office in Asia to play a key role as a hub of human, economic, knowledge, and all other exchanges between the two regions.

Thank you for your kind attention.