Of course, some might wonder how significant this new approach is in terms of its actual effect on the ADB’s operations and overall development strategy. In fact, the RCI is a very significant departure from the ADB’s prior practice. In the 2012 Strategy paper, the ADB declared its intention to have 30 per cent of its operations as ‘regional’ in the near future.

Since the ADB loaned roughly $4.5 billion to East Asia in 2008, nearly twice that of the World Bank, we should be expecting at least $1 billion in regional projects annually. This is a considerable investment in both relative and absolute terms for East Asia, and it is important that the regional strategy deliver at least as much as a national-level strategy.

The RCI is itself a new idea. The World Bank, the basic reference point for economic development thinking and practice, has favoured a so-called country-level approach; under which each country has its own development strategy and applies for/receives loans independently of its neighbours.

There are benefits to prescribing individual remedies to individual aid clients, and while a great deal of work (especially poverty reduction) can be achieved with such a close-country focus, there are costs. The most obvious cost is that cross-border infrastructure and technical assistance might be missed.

While the World Bank continues to be the leading development bank at the individual country level, the ADB has an opportunity, indeed a responsibility, to find worthwhile projects hidden in the spaces between member countries.

A regional strategy is by its nature more complicated and difficult to manage. A country focus would limit the number of actors at the table to two (ADB and client), a regional strategy necessarily involves bringing more actors to the table. This is a case of ‘two is company, three is a crowd’, as the addition of even one extra country at the table significantly complicated negotiations.

A road construction project is a good example. A country-level project is relatively simple to carry out – however, if the road were to link two countries, such as the southern economic corridor from Thailand to Cambodia, then both Thailand and Cambodia must agree, Thailand and the ADB must agree and Cambodia and the ADB must agree. If the project involves another country, then the total number of agreements required is six. Thus, each additional country involved exponentially increases the complexity, costs and risks of negotiations – a ‘coordination problem’ in the literature.

Moreover, since each country will benefit to differing degrees, each country wishes only to pay its ‘fair’ share. Or put another way, no country wishes to subsidize others’ costs. In addition to whatever local political problems of distrust that might exist, this fear of a ‘free rider’ (while strictly rational) will likely prevent real cooperation.

So how has the ADB sought to resolve these two issues: coordination problems arising from negotiating with multiple actors at once, and the free rider problem implicit in the new RCI strategy?

With regard to the issue of coordination, the ADB has sought to resolve the issue by, in most cases, simply taking the initiative itself.

The ADB also considers proposals from regional and sub-regional bodies, such as the Pacific Islands Forum (PIF) , Economic Research Innovation Asia (ERIA) or Central Asian Regional Economic Cooperation (CAREC) but even here is it likely that these bodies would refer to documents which the ADB had prepared in their planning.

While smoothing over the coordination problem, this new function of the ADB invites its own set of risks for the region’s development. By both recommending projects and offering to fund them, the ADB creates a situation in which aid clients might find it difficult to refuse.

This is because the money offered is ostensibly ‘free.’ The funding for regional projects is sourced not from the countries’ national quota but from a regional ‘allowance’. This is due to an institutional innovation, which created within each regional department of the ADB a regional cooperation envelope independent of the national allotments. It might be difficult for national governments to judge these proposals honestly. If they believed that a project might not produce any real gain, explaining a refusal is an unwanted domestic political risk, regardless of regime type. Moral hazard of a sort also arises because, if any one country turns down a project, it means that its neighbours must also go without.

Thus the balance of power in the relationship lies with the ADB, as the incentives are structured such that agreeing to any project, no matter its actual utility, is seemingly less costly (economically and politically) than refusal – particularly when compared with the balance of power in negotiations and the incentives structure in the country-level approach.

Under the rubric of the RCI, countries are more likely to accept any regional proposals. The ADB must be more careful that what it offers is based on sound judgment of the utility of each regional project. One idea might be to have the World Bank invited in review such cross-border projects and to peer review these projects’ effectiveness, paying close attention to the goal of poverty reduction.

The ADB has taken steps to resolve the ‘free rider’ problem. In cases where client countries are unable to reach a consensus on burden sharing, the ADB has sought to ‘pay the difference’ from its own pockets. Of course, the ADB is unable to simply provide compensatory payments to the ‘losers’ of any project, and so the ADB has sought to lengthen the shadow of the future by ‘bundling’ each individual regional project in with other such projects. This bundling allows the ADB to spread out the ‘losses’ over time. But this is hardly optimal and is likely to create its own set of problems.

Because the ADB is not equipped to function like the European Commission’s Structural Funds mechanism, the ADB is having difficulty with evening out the costs and benefits of regionalism. This may change in future: having the ADB adopt such a role is indeed a logical extension of the RCI, but for the time being the ADB risks institutional overreach in its attempts to help the poor of Asia to help themselves.

The second way the ADB has sought to ameliorate the free rider problem is rather to get someone else to ‘pay the difference.’ Here, however, there are only two candidates: Japan and China. These two regional powers have both the necessary deep pockets and political interests in the region to allow taking on such a role, but of course there are obvious risks.

The most obvious of these risks is that great powers will engage in strategic competition in Southeast Asia. This is precisely what has happened with North-South corridor and the East-West corridor. The North-South corridor (funded by China) links Yunnan Province to the Mekong, while the East-West corridor (funded by Japan) opens better access to the same markets for Japanese goods arriving by sea (likely at the port of Da Nang in Vietnam).

China has become skilled in tapping the regional allowances outlined earlier, usually in combination with its own PRC Special Fund, to direct the ADB towards financing regional projects that benefits China. One example involves a project aimed at ‘facilitating sustainable, environmental-friendly regional power trading in the greater Mekong subregion’, co-financed by the ADB and the PRC Special Fund. The purpose of this project for ‘developing the hydropower plants for exporting power to Yunnan province or other potential hydropower sources for inclusion in the power trade’ to the tune of $2 million.

The ADB is risking its reputation by letting the big powers direct the RCI. If the RCI is to be ‘done right’, and to gain the approval that will see it live past the end of Kuroda’s term in 2011, the ADB will need to maintain, and be seen to be maintaining, ethical standards. As always, it is a question of money. If the ADB is to carry out its regional agenda, then it needs to be given the resources to do so.