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Economic Council Report of the Globalization Committee June 1999

TABLE OF CONTENTS

Prologue

1. Globalization and the National Economy --- The Present Condition

  • 1.1. What is globalization?
  • 1.2. Globalization and changes in the domestic economy and society
  • 1.3. Globalization and changes in the world economy

2. Japan's Economic Status in the Beginning of the 21st Century --- The Direction that Japan should Take under Globalization

  • 2.1. Japan's role as a key promoter of the development and stability of the global economy
  • 2.2. Japan's role in Asia as a key member of the world economy
  • 2.3. Creating an affluent and open economy and society under globalization

3. Japan's Role as a Key Member of the Global Economy: Promoting Development and Stability

  • 3.1. Establishment of a trade and investment framework for the 21st century and the new round of the WTO
    • 3.1.1 Establishment of investment rules
    • 3.1.2. Establishment of rules for competition policies
    • 3.1.3. Establishment of rules for electronic commerce
    • 3.1.4. Protection of intellectual property and harmonization of frameworks
  • 3.2. Establishment of a new international monetary and financial framework for the 21st century
    • 3.2.1. Reform of the international monetary and financial framework
    • 3.2.2. Reform of risk management of financial institutions and institutional investors in industrialized countries
    • 3.2.3. Reform of the liberalization process in developing countries and economies in transition
  • 3.3. Response to global environmental issues
    • 3.3.1. Establishment and consolidation of an international framework for the conservation of the global environment
    • 3.3.2. Environmental measures through ODA programs
    • 3.3.3. Research and technology development on conservation of the global environment
    • 3.3.4. Establishment of an international cyclical socioeconomy: promotion of recycling activities
  • 3.4. Future international economic cooperation
    • 3.4.1. Significance and tasks of today's international economic cooperation
    • 3.4.2. Concept for effectively assigning roles
    • 3.4.3 Major plans for tie-ups
    • 3.4.4 International cooperation in the 21st centur

4. Role in Asia as a Core Member of the Global Economy

  • 4.1. Promotion of trade and investment liberalization and institutional harmonization in Asia as a complement to the WTO
  • 4.2. Creation of framework for the prevention of currency crises in Asia
    • 4.2.1 Maintenance and enhancement of the Manila Framework
    • 4.2.2. Efforts to establish an Asia Monetary Fund

5. Towards Creating an Affluent and Open Socioeconomy in Globalization

  • 5.1. Spread of information to foreign countries
    • 5.1.1. Strengthening foreign language education
    • 5.1.2. Promotion of understanding of Japan and the Japanese language
    • 5.1.3. Becoming a hub of intellectual activities in the world
  • 5.2. Policies on globalization of corporations and people
    • 5.2.1 Policies on globalization of corporations
    • 5.2.2. Policies on globalization of labor
  • 5.3. Response to a foreign labor force
    • 5.3.1. Promotion of acceptance of a foreign labor force in specialized and technical areas
    • 5.3.2. Response to changes in the socioeconomy
    • 5.3.3. Consideration of unskilled laborers and immigrants
    • 5.3.4. Cooperation with foreign governments

6. Risk Factors and Countermeasures in the Beginning of the 21st Century

  • 6.1. Food
    • 6.1.1. Characteristics of agriculture and agricultural products
    • 6.1.2. Risks in the food supply
    • 6.1.3. Directions of countermeasures to risks
  • 6.2. Energy
    • 6.2.1. Future demand, supply and price trends of world energy
    • 6.2.2. Risks in the energy supply
    • 6.2.3. Directions of countermeasures to risks
  • 6.3. Regional conflicts and large number of refugees
    • 6.3.1. Globalization and regional conflicts
    • 6.3.2. Directions of countermeasures to risks
  • 6.4. Telecommunications area
    • 6.4.1. Spread and penetration of the global network
    • 6.4.2. Directions of countermeasures to risks
  • 6.5. Countermeasure to international crimes
    • 6.5.1. Globalization of crime
    • 6.5.2. Directions of countermeasures to risks

Prologue

With the world becoming more and more globalized, the range of activities that people and corporations are involved in is expanding beyond national borders and neighboring regions to encompass the whole world. At the same time, innovations in information and communications technology have remarkably improved the capability of communication, in terms of quality, quantity and speed, all over the world. Subsequently, economic activities have become more quick and efficient, constantly giving rise to new intellectual activities.

In the business world in particular, the potential size of the market for tradable goods and services has extended all over the world, so that once a company succeeds, it has a chance to grow into an international corporate giant in a relatively short period of time. In addition, many corporations nowadays have become multinationalized and situate themselves in appropriate locations to facilitate business. Thus, there is a tremendous amount of capital flow in the global market looking for better investment opportunities.

In the meantime, together with globalization, international competition is becoming more intensive even in the fields where it used to be sheltered from international competition due to technological and institutionally restrictions. For example, as we are now in a time when corporations choose particular countries to do business in, it is impossible to be independent of the influence of global competition.

In response to increased competition resulting from globalization, governments in each country are striving to review their domestic systems so as to make them more transparent and fair for market participants both inside and outside the country, and corporations are doing their best to improve efficiency so as to survive international competition. Therefore, in a country that has succeeded in responding to globalization, improvements in economic efficiency as well as diversification in goods and services will greatly contribute to enhance the standard of living for its residents. These improvements are also expected to become the wheels of economic development, as businesses and investments from overseas countries increase.

However, all of these benefits from globalization will not always be realized in every country. Countries that fail to respond to globalization will have stagnant economic development for the following reasons: 1) internationally-competitive corporations and human resources will leave the country in search of better business opportunities; 2) foreign funds and direct investments which are necessary for development will not flow in; and 3) companies which failed to sufficiently improve their efficiency will have no choice but to withdraw from the market.

Moreover, the development of information and communications technology, which has made it possible to transfer a sizable amount of capital across borders, is one of the factors responsible for instability in the world economy. This phenomenon was witnessed during the currency crisis in Asia and then again during the financial crises in emerging market countries. Thus, the world is in need of a new institutional framework that enables the full use of new technology.

As mentioned above, going beyond geographical limitations, economies have deepened mutual interdependency and have become highly correlated on a global scale through financial and non-financial transactions. Accordingly, it is necessary to review both international systems and rules regarding trade as well as national systems and rules.

Based on a recognition of the dynamic influences of globalization, we at the Globalization Committee have discussed the ideal status for Japan in the early 21st century from the following three aspects; 1) the role that Japan should have in the world; 2) the role it should have in Asia; and 3) domestic reform; and compiled our policy recommendation in this report.

1. Globalization and the National Economy --- The Present Condition

1.1. What is globalization?

Since the 1990s, the trend towards "globalization" has become ever-present as the cost of information and communications has fallen. Simultaneously, the gaps between the national policies of various countries have narrowed. In this report, from an economic point of view, globalization refers to the search for improved global efficiency for various economic agents. What expedited this trend in the 90s was: 1) politically, the collapse of the cold war structure: 2) further liberalization of trade and investment: and 3) highly advanced information and communications technology.

In an economic sense, the collapse of the cold war structure meant the expansion of business frontiers for corporations in market economy countries. In fact, many corporations have launched into new markets and have chosen advantageous overseas locations for their business. Moreover, because almost all the former socialist nations are in transition to a market economy, the number of players under the free trade system has increased and competition in the global market has become even more intensive (mega-competition).

For institutions, the globalization of corporate activities was expedited by the liberalization of trade and investment. Subsequently, in the Uruguay Round negotiations on the General Agreement on Tariffs and Trade (GATT), tariffs were largely reduced and trade based on comparative advantage was further vitalized.

Liberalization of investment encouraged corporations to multinationalize, and the subsequent increase in direct investment not only strengthened the level of dependence among industrialized nations, but also triggered high economic growth led by foreign direct investment in relationally open developing countries such as Asian NIEs .

In addition to changes in politics and institutions, the rapid development in information and communications technology further accelerated globalization. The astonishing increase in volume and speed of communications, along with the reduction in costs encouraged trade while making it possible to trade goods and services that were previously not suitable for international trade. Moreover, the development of Internet technology is about to expand the use of electronic commerce and present significant changes to traditional systems and commercial practices.

1.2. Globalization and changes in the domestic economy and society

What influences does the globalization described above have on the Japanese economy and on Japanese society?

First of all, from the perspective of corporate activity, there is now particularly a wider selection of locations for business. Business divisions in companies have shown a strong tendency to extend their operations to suitable locations, so their network of corporate activities is being built on a global scale. In other words, even Japanese companies do not necessarily have all of their operation bases located in Japan; rather, they may build new bases or move to other ones in search of better locations for business in Asian or North American countries.

Such globalization of corporate activities is thought to help increase the number of suppliers and diversify the goods and services available to consumers, and thus improve the level of utility of households. Globalization stimulates competition, and thus, in addition to the benefit of variety, there is also the benefit of price reduction.

Globalization can rationalize the industrial structure of a country, and changes in industrial structure will naturally affect employment. The influence of globalization on the domestic factor market such as labor and corporations is not indirectly brought about in the form of an increase in the import of goods and services as it was in the past. Rather, globalization has a direct influence in the form of capital, corporate operation bases and business professionals moving across borders to maximize their benefits.

Improvements in information and communications technology and regulatory reform,--which is one of the major factors to promote globalization--also has an effect on society. For example, not only in Japan, but also all over the world, economic and social information has become diversified (spreading of local information) to meet individual needs, while, at the same time, there has been an increase in the amount of standardization (with the emergence of global media), which allows people around the world to have equal access to information beyond their particular geographic limitations.

This means that it will be easier for individuals to access a global information network, and that the structure of information distribution will change from domestic to global in nature. Moreover, thanks to an increase in the transmission speed of information, it will be possible to accumulate international information, but this will result in a disparity in the benefits gained from information between those who have access to it and those who don't.

As stated so far, with the progress of globalization in the areas of goods/services, finance and information, national borders are disappearing with regard to economic activities, and proportionately, local economies are standing out individually among neighboring countries and even around the world.

1.3. Globalization and changes in the world economy

Economic changes in individual countries can be regarded as changes in the world economy, as they mirror the latter. Firstly, one change in trade is the increase in the volume or kind of trade as a result of continued negotiations over liberalization and various trade facilitation measures. The service trade is particularly growing and its significance is likely to continue growing in the future.

In addition to a reduction in information and communications costs, further deregulation in each country and the global expansion of corporate activities can be seen to be due to the accumulation of financial assets and development of financial services. Globalization is also penetrating into the financial sector.

On one hand globalization in finance enhances both financial and non-financial firms to utilize their financial assets or capacities more efficiently. On the other hand, those firms with new financial skills and knowledge are able to trade in financial and currency markets beyond their own balance capacity.

So, the state of a macro economy such as the exchange rate becomes volatile to some extent. The Asian financial crisis in late 90s can be regarded as a typical case incurred by these new tools. The global economy faces new risks born from new technology.

Under spreading globalization ,the government's role in economic development is relatively lessening while globalization in the private sector boosts technology transfer and creates new employment opportunities. So, countries that successfully catch the wave of globalization enjoy high economic growth, while others , especially developing countries, that fail to adapt to such a new environment continue to suffer from turmoil under poverty and social uncertainties. Thus, the global economy is hovering between the merits of pursuing efficiency that exist under globalization and the demerits of globalization which may ruin social coherence. Under these circumstances, establishing both domestic and international systems and rules for making use of the merits while preventing the demerits is becoming a more important task to achieve. To this end, the role of government is becoming larger than ever.

2. Japan's Economic Status in the Beginning of the 21st Century --- The Direction that Japan should Take under Globalization

As explained so far, under these circumstances where both internal and external situations are undergoing radical changes along with globalization, it is necessary for Japan to determine the direction of its relationship with Asia and the rest of the world. Domestic reforms must also be introduced in order for Japan to continue playing an active role as a powerful economy on the world stage.

2.1. Japan's role as a key promoter of the development and stability of the global economy

Japan is expected to continue as a leading economy until around 2010, and each economic agent should take an appropriate role in designing a global framework and solving problems.

The role that Japan should take in newly establishing international frameworks and rules is becoming of greater importance than ever. Also, from a domestic point of view, it is the government's role to create an ideal environment so as to allow corporations and individuals to carry out free and creative activities.

In the future, the presence of corporations in world economic activities will grow even further. Japanese corporations will not merely be limited to business activities involving the provision of goods and services to people around the world, but will also contribute to the development of the world economy through job creation and the spread of technology.

In consideration of Japan's important role in economic activities, Japan should also make efforts to spread more information from both cultural and social aspects around the world. This can be realized not only by increasing activities at the government level, but also by efforts of individuals and non-profit organizations aimed at developing and stabilizing the world.

2.2. Japan's role in Asia as a key member of the world economy

Looking at the Asian economy, until around 2010, the Japanese economy will remain equivalent to the total size of the GDP of NIES, ASEAN, China and India. In addition, considering the fact that Japan has formed close mutual relationships for trade and investment with many Asian countries, Japan has its own role in Asia.

While the leading economies such as the EU (European Union) and NAFTA (North American Free Trade Agreement) are expected to promote the liberalization and institutional harmonization within the regions by consolidating their economies, Japan should take the initiative to maintain and enhance the momentum for economic liberalization in Asia and work to reduce the disparities in the systems among Asian countries.

Indeed,the Asian crisis is tormenting the smaller players in each country, and Japan should not only continue contingency aid but also, from a long-term aspect, perform a leading role in planning and implementing measures to stimulate the regional economy, with the aim of promoting economic growth and social stability in Asia.

2.3. Creating an affluent and open economy and society under globalization

In order for Japan to continue as an economic leader in the world in the beginning of the 21st century, there are some prerequisites that must be met. Primarily, it is necessary to reform the Japanese economic system and its rules in response to globalization, so as to improve economic efficiency and enhance the attractiveness of Japan as a base for corporate and individual activities. In addition, not only government, but also companies and citizens must actively partake in international organizations and networks of information, technology and ways of thinking.

Moreover, firms and people should carry out more creative activities, and thus, an internationally competitive intellectual consortium must be established. It should be created in an open economy and society that accepts different cultures and diversity.

3. Japan's Role as a Key Member of the Global Economy: Promoting Development and Stability

3.1. Establishment of a trade and investment framework for the 21st century and the new round of the WTO

To encourage the stable development of the global market, Japan should prevent protectionism and make efforts to sustain liberalization of trade and investment.

To this end, in addition to the promotion of free trade, Japan needs to show its leadership in negotiations for setting an international framework for investment rules and competition and create a global business environment. It is also important to ensure that international trade and investment activities be conducted in accordance with the principles agreed upon by many countries.

Japan should give particular support to developing countries such as Asian countries in order to create an investment environment. This can be achieved by concluding investment agreements and setting up rules for competition, so as to stimulate economies.

Specifically speaking, Japan should propose the following at the next round of WTO negotiations, and by positioning these proposals as mid-term goals, make efforts to set a framework for international economic transactions in the coming era.

3.1.1 Establishment of investment rules

Setting up multilateral rules for appropriate protection and liberalization of investment can lead to the creation of an environment for investment over the middle and long run, and contribute to economic development. If comprehensive rules, including the protection and liberalization of investment and mechanisms for arbitration were established, the level of freedom and predictability in corporate activities would be raised. This is very important for the creation of an international business environment.

However, such investment rules should not equally restrict the implementation of development measures in each individual country. Rather, flexible and appropriate consideration should be given under the rules in view of the level of economic development of developing countries.

3.1.2. Establishment of rules for competition policies

Ensuring free and fair competition in the market can improve economic welfare. Japan should strive to create an international framework for competition under the WTO negotiations. Also, further discussions should be held on major issues, such as transparent and indiscriminate policies for competition (the WTO's basic principle); the establishment of legislation on competition in developing countries; and the promotion of international cooperation in competition policies. Moreover, in view of competition policies, it is also important to review trade remedies which may actually distort competition.

3.1.3. Establishment of rules for electronic commerce

Electronic commerce can, through the accurate exchange of information over low-cost networks, facilitate transactions of goods and services in remote places beyond national boundaries. Towards the 21st century, this type of commerce will increase very rapidly.

Thus, further discussions must be held during the WTO negotiations as to whether the existing rules should be applied to electronic commerce, how these rules should be applied, and what steps should be taken to protect privacy and intellectual property. Japan needs to actively participate in these discussions so that the necessary domestic environment can be created for electronic commerce.

3.1.4. Protection of intellectual property and harmonization of frameworks

The protection of intellectual property is an inevitable prerequisite for free trade as well as sound economic development, and with appropriate protection, it is extremely important to create an environment for trade and investment that is highly predictable.

To this regard, considering the related institutions of intellectual property as a key to the harmonization of the existing frameworks in response to the globalization of corporate activities, Japan intends to: 1) strengthen enforcement in developing countries; 2) introduce the American first-to-invent system as well as a system for expeditious disclosure; and eventually, 3) establish an international framework for obtaining rights (global patent system).

The liberalization of trade and investment will contribute significantly to economic development. However, without any principles, it may have a negative influence on the environment,and thus, policies for promoting trade and investment and environmental policies must support each other.

3.2. Establishment of a new international monetary and financial framework for the 21st century

Thanks to technological innovation in the information and communications field as well as deregulation, globalization in finance is expected to improve the efficiency of allocating funds on a global scale and stimulate investment. On the other hand, as actually seen in the recent Asian currency crisis, globalization also causes sudden inflows or outflows of enormous sums of capital. This seriously affected Asian countries. In addition, because of Asia's fragile financial system, such capital flow triggered the crisis and even shook the global economy.

The recent instability in the international monetary and financial framework has brought about questions on: 1) sustaining orders under the existing international monetary and financial architecture: 2) the risk management ability of institutional investors in industrialized countries, and 3) the liberalization process in developing countries and economies in transition. Together with other countries, Japan intends to carry out appropriate measures to establish and maintain a stable international monetary and financial framework in the 21st century.

3.2.1. Reform of the international monetary and financial framework

In order to realize prosperity in the global economy in the 21st century, a stable international financial framework which can prevent and solve the international currency crisis is inevitable, and to this end, it is necessary to create a framework in which international risk management systems centered around the IMF can effectively perform. Also, it is thought effective to design a risk management mechanism in each region as a complement of the IMF.

With regard to strengthening of the IMF, it needs to be reformed to ensure a smooth and swift supply of liquidity in times of crises. As "Lender of Last Resort," the IMF should have diversified financial sources and a flexible loan system that allows swift financing in emergencies.

Moreover, in order to further improve the effect of the IMF's economic adjustment programs, which are imposed on the countries in crisis to receive financing, it is necessary to ensure propriety and transparency in these programs and also to establish procedures to appropriately handle crises.

In the meantime, with respect to the international economic stabilization system, it has been pointed out that the IMF's assistance causes moral hazards to investors. To avoid this, it is important to require further commitment of the private sector for affected countries receiving loans, i.e. it should be necessary to maintain the balance of credit of private creditors.

3.2.2. Reform of risk management of financial institutions and institutional investors in industrialized countries

In consideration of the fact that the Asian currency crisis was provoked by the flow of short-term capital, regulations on capital flow will be of concern in the globalized international financial markets.

It is thought that an inflow of long-term capital may not cause problems, while the flow of unstable short-term capital should be regulated. Specifically speaking, regulations with taxes or quantitative restrictions are supposed to be options. (For example, Chile restricted the inflow of short-term capital by requiring a deposit equivalent to a certain percentage of the capital to the central bank.)

Although restrictions on capital flow involve difficulties for long-term implementation and costs, it is essential to have measures to establish a sound financial system through prudential regulations on the domestic financial sector, which is to receive the capital, as well as to enhance monitoring on capital inflow.

Primarily, it is necessary to grasp the flow of capital in the liberalized international financial market, and thereby, it is desirable to reform prudential regulations which secure the sound management of the financial sector.

For the risks arising from financial institutions' transactions with hedge funds, by taking into account the ripple effects of such risks on the financial system, it is necessary to fully recognize the risks and establish a proper risk management system.

Specifically, various risk management methods should be established. For example, financial supervisory authorities should carry out regular monitoring on each financial institution's investments and loans in hedge funds. In addition, for the purpose of grasping the flow of capital to enhance the level of transparency, each economic agent should be responsible for its own accountability, and consideration should also be given to information disclosure regarding hedge funds.

Japan strives to continue making contributions towards the formation of an international consensus and to ensure its validity.

3.2.3. Reform of the liberalization process in developing countries and economies in transition

The liberalization of trade in goods may improve productivity in the economy despite the possibility of causing unemployment due to changes in industrial structure. At the same time, liberalization of capital flow should be promoted from a long-term viewpoint in light of the effects of technology transfer through direct investment and re-allocation of resources. However, considering the influence of short-term capital flow, it is necessary to take the level of economic development into account when carrying out liberalization.

For developing countries and economies in transition, where the market economy framework has yet to be established, we should promote step-by-step liberalization (deregulation). Developing countries should first liberalize trade in goods, then long-term capital flows, including direct investment, and then short-term capital flows.

As a prerequisite for the third step of liberalizing short-term capital flows, it is necessary to ensure the maintenance and sound management of the financial system, the establishment of a system of risk management at each financial institution, and also information disclosure by borrowing companies in developing countries and economies in transition to the capital lenders (i.e., domestic and overseas banks). Therefore, liberalization without these conditions might end up with undesirable results.

Based on the recognition mentioned thus far, it is necessary to maximize the merits from globalization while preventing its demerits. In addition to assistance through international organizations, Japan intends to provide support on making institutional and legal frameworks for developing countries and economies in transition.

3.3. Response to global environmental issues

Global environmental problems (i.e., global warming) cannot be solved single-handedly by one country. Rather, such problems require an international consensus with the involvement of every nation. Since the Earth Summit in 1992 in which the concept of "sustainable development" was internationally recognized, efforts for addressing global environment problems have been promoted. However, these problems have become more pressing, and thus, efforts to date are not sufficient. Under these circumstances, the fact that a target reduction amount for greenhouse gases was specified and adopted at the COP3 (the 3rd Session of the Conference of the Parties to the U.N. Framework Convention on Climate Change) in Kyoto in December 1997(the Kyoto Protocol) can be considered as significant progress. In the future, preventive measures must be promoted based on a recognition of uncertainty of the risks, the scale of risks and the non-reversible and concurrent nature of impact on the world with respect to global environmental issues.

The ever-growing burden on the environment due to the increasing population, urbanization and economic development centered around developing countries is expected to continue in the future, and thus, global environmental problems will remain a critical issue for the international society to address. Japan needs to exercise its leadership towards sustainable development. For this purpose, Japan intends to take the following specific measures:

3.3.1. Establishment and consolidation of an international framework for the conservation of the global environment

Japan plans to participate in international negotiations on the conservation of the global environment and to strive to set an international framework. Particularly, regarding the issue of global warming, in order to implement the Kyoto Protocol, international efforts shall continue to be made to establish international rules, including those for emissions trading. Japan should actively partake in such works.

3.3.2. Environmental measures through ODA programs

Japan will implement official development assistance (ODA) programs in environmental areas for developing countries. This in particular will include: technology transfer and the fostering of human resources in environmental fields in accordance with the actual state of each developing nation; the development of a particular country's capability to solve environmental problems with the introduction of Japan's experience with environmental pollution; and education on the environment. For these purposes, necessary preparations should also be made domestically; for example, the education and support of environmental experts.

In addition to the above, it is also important to promote environmental conservation with energy-saving and other measures to reduce poverty while ensuring social and economic development.

For the future, each country should seek the ideal status of a sustainable socioeconomy, and Japan should assist developing countries in taking self-supporting actions through ODA programs.

Appropriate and effective consideration of the environment should be made when implementing projects abroad, including ODA programs.

3.3.3. Research and technology development on conservation of the global environment

Research, observation and surveillance of the global environment should be promoted. R& D on innovative technology in the fields of the environment and energy should also be carried out with the object of contributing to the conservation of the global environment, and this technology should be widely shared. Moreover, research networks on the global environment and the fostering of researchers in the fields related to the global environment are needed.

3.3.4. Establishment of an international cyclical socioeconomy: promotion of recycling activities

In view of Japan's goal of establishing a cyclical socioeconomy and in order to ensure measures for creating harmony with the environment, it is also important to encourage other countries to adopt similar systems. Because of trade and investment, the cycle of resources isn't limited to a single country and therefore Japan should appeal to the world to tackle this issue.

3.4. Future international economic cooperation

3.4.1. Significance and tasks of today's international economic cooperation

Based on the Official Development Assistance (ODA) guidelines, Japan has implemented ODA programs with a view toward economic development of developing countries occurring in a self-supporting manner and with the humanitarian perspective of saving people from suffering from hunger and poverty, as well as and responding to global issues including environmental problems. ODA programs have also been implemented with the goal of contributing to the sound development and stability of the international economy and society through the development of developing countries. The importance of these philosophies and principles will remain the same in the future, but in consideration of the actual changes in international politics and the world economy surrounding the Japanese economy, as well as globalization's great influences on the world economy itself, Japan should continue its international economic cooperation in the 21st century.

Because the number of assistance programs is reducing worldwide, expectations for Japan's development programs are high despite the severe economic and fiscal situation in Japan. Under administrative and fiscal reforms, Japan has been required to improve the quality of ODA programs. Clear effects of ODA programs and the provision of information on ODA programs are increasingly expected. In addition, further understanding of public opinion should be obtained so that ODA programs have great impact on the development of the international economy and society. It is necessary that ODA program will eventually ensure Japan's safety and prosperity and contribute to an increase in the national benefit in a broad sense, including peacekeeping measures. Moreover, in order to increase the transparency and efficiency of ODA programs, while fully considering the benefit to developing countries and endeavoring to ensure the trust and appreciation from these countries, Japan should strive to make a larger contribution to the international society by designing a different approach for each developing country based on its particular global strategy. Moreover, Japan should also systematically tie up with other official and private flows and allot suitable roles to work towards achievement according to individual philosophy and goals.

For international economic cooperation, in addition to government and assistance organizations, various entities (actors) such as private firms, NGOs, local governments and international financial development agencies should carry out activities in accord with their own purpose. By making the best use of their advantageous points and working with them to assign roles and tie-ups, it is important to make efforts to systematically consolidate their human resources, funds and technology, and to promote cooperation from the standpoint of developing countries. Moreover, along with efforts for promoting activities in the private sector, it is desirable to ensure mutual cooperation without overlapping resources.

3.4.2. Concept for effectively assigning roles

For the assignment of suitable roles and tie-ups between public and private sectors in international economic cooperation, it is necessary to clearly distinguish the roles of the market and the government, and put an emphasis on the areas where resources are not properly allocated due to dependence on the market mechanism alone. There have been many cases in which economic activities in the private sector such as direct investment are waning because companies feel nervous about risks stemming from the insufficient infrastructure of developing countries such as legal systems and financial sectors as well as growing instability due to the rise in short-term capital flows. Thus, it is another important task to decide how much risk the public sector should accept while ensuring initiative in the private sector.

3.4.3 Major plans for tie-ups

Primarily, it is necessary to strengthen cooperation to assist developing countries in carrying out reforms. With an aim toward promoting sustainable development in developing countries, institutional reforms such as financial reforms and reforms in tax and trade systems are inevitable so as to ensure that market mechanisms function effectively. Based on Japan's experience in economic development, it is required to conduct overall cooperative activities for international economies . Moreover, through the promotion of "good governance," it is important to ensure that the small players and people suffering from poverty share the benefit of economic development in developing countries.

Secondly, cooperation for addressing global issues including environmental, population, food and medical problems should be strengthened. In order to realize sustainable development of the socioeconomy, not only material affluence or improved efficiency, but efforts to solve such global problems are also needed. However, in many cases, the market economy alone cannot solve these problems, and thus, the public sector, international organizations and NGOs should take on suitable roles and cooperate with each other.

Thirdly, cooperation with other official flows should be strengthened at assistance agencies. The Japan Bank for International Cooperation (JBIC), to be inaugurated in October 1999, is a result of the merger of Overseas Economic Cooperation Funds and the Export-Import Bank of Japan and by incorporating the information and know-how of both organizations, it will effectively provide financing in accordance with the socioeconomic state of the country to be financed and the characteristics of its projects. At this institute, it will be necessary to make further mobile and efficient contributions to the international society.

Fourth, assistance with the participation of private organizations and local individuals should be promoted. For example, the activities of NGO groups can be helpful in giving community-oriented assistance and technical advice. Also, cooperation among the government, assistance organizations and NGOs is important to ensure transparency in the implementation process of development projects.

Fifth, cooperation with international financial development organizations should be made. By putting an emphasis on the sustainable development of developing countries, Japan should strengthen cooperation with international financial development organizations, so that they can play a proper role under a new global financial system. Recently, relief of liabilities has been adopted for the aid of heavily-indebted countries, and this, together with sufficient consideration for the independence and development of indebted countries, should be promoted.

Sixth, cooperation with these organizations implementing assistance programs in developing countries should be reinforced. In order to promote international cooperation that will stay in tune with the actual state of developing nations, it is essential to contact the Japanese embassies abroad as well as assistance-providing organizations to promote political dialogue and the sharing of information and know-how, so that the international monetary organizations who receive assistance for developing countries and who implement entities of assistance such as private organizations can take on appropriate roles and cooperate with each other.

Seventh, the needs of developing countries should be understood in a timely manner. In addition to the promotion of research and analysis, it is necessary to build a network of information owned by the organizations concerned so as to quickly understand the actual state and needs of developing countries.

3.4.4 International cooperation in the 21st century

Taking the above-mentioned matters into account, Japan should further study the mid- and long-term trends of the economies of developing countries. And in consideration of the roles and cooperation of various entities engaged in international economic cooperation, Japan will make clear the prospect of international cooperation in the 21st century.

4. Role in Asia as a Core Member of the Global Economy

4.1. Promotion of trade and investment liberalization and institutional harmonization in Asia as a complement to the WTO

It goes without saying that activities based on the international rules established at the WTO meetings are required for the global expansion and stable development of trade and investment. However, huge costs as well as a considerable length of time will be required to coordinate different countries in the world, including developing countries, which have various interests and levels of economic development.

In such situations, regional alliances and unions such as NAFTA and EU are being formed and established throughout the world. Creating a framework for trade and investment in a region where the interests of each country are closely related may help lead to the establishment of a multilateral trade system. Therefore, as an economic strategy for the 21st century, Japan should be aware of the significance of regional alliances and unions, and place a high priority on such strategies as an effective tool for foreign policy.

Specifically, Japan should maintain and add momentum to the liberalization of trade and investment in Asia, with continuous support for crisis-recovery as well as for restoring long-term, sustainable growth. Moreover, in order to accelerate the economic development delivered by direct investment in Asia, it is important to actively support and contribute to institutional harmonization such as competition policies at forums like the APEC meetings, etc.

Furthermore, from a long-term perspective, Japan's purpose should not only be to liberalize trade within Asian countries, but also to develop a common market where institutions are harmonized. As an initial step, Japan should coordinate an economic environment with Korea, a neighboring and relatively homogeneous country.

4.2. Creation of framework for the prevention of currency crises in Asia

Several factors contributed to the recent Asian currency crisis including: overvaluation of currency because of de facto dollar exchange rate systems; enormous current account deficits and a rapid short-term capital inflow; and vulnerability in financial systems. Sudden outflows of sizable amounts of private capital in a short period of time in particular was a direct trigger of the crisis.

In Japan, "A New Initiative to Overcome the Asian Currency Crisis" was announced last autumn (the so-called "New Miyazawa Initiative" after Finance Minister Miyazawa), and various measures have been carried out since. Not only direct official financial assistance, such as the Export-Import Bank of Japan loan, but also the guarantee system by the Asian Currency Crisis Support Facility inaugurated within the Asian Development Bank (ADB), has been facilitated so as to ensure smooth financing of each Asian country at the international capital market. For the future as well, in cooperation with international organizations such as ADB and Asian countries, efforts should continue to be made to establish a system for the prevention of crises, including the maintenance and enhancement of the Manila Framework.

To be specific, surveillance within the region should be regularly conducted and careful opinion exchanges should be made on macro-economic, structural and exchange policies. These activities as well as the establishment of a framework to support global risk management of the IMF through the monitoring of international capital flow are necessary to prevent another currency crisis in Asia.

Moreover, among Asian countries, in order to stabilize their own currencies and even their economies, there has been growing concern that the yen should be the major currency for holding foreign assets, for the currency basket system, and for the settlement of trade and capital transactions. This situation makes it necessary to increase the convenience of the yen or, in other words there should be "internationalization of the yen".

4.2.1 Maintenance and enhancement of the Manila Framework

The so-called Manila Framework was agreed to in November 1997 as "a framework for strengthening Asian regional cooperation for financial and currency stabilization." The following four tasks constitute the pillars of the agreement: implementation of surveillance within the Asian region to backup the IMF's global surveillance; technical cooperation to reinforce the financial sector of each country; strengthening the IMF's capability to respond to a financial crisis; and arrangement of cooperation for the stabilization of Asian currencies.

In the future, in addition to improvements in regional surveillance, it will be necessary to maintain and enhance the Manila Framework, including the establishment of flexible support system.

4.2.2. Efforts to establish an Asia Monetary Fund

The crisis in Asia has made it clear that it is necessary to develop countermeasures for the transfer of short-term or speculative capital as well as to strengthen the framework for ensuring flow of funds within the region in order to support the IMF's function of risk management. To this end, it is thought effective to design a regional risk management mechanism (the so-called Asia Monetary Fund), and in establishing such a mechanism, it is desirable for Japan to be actively involved in the proposals given that Japan is a nation which has a close economic relationship with Asia .

With regard to the regional risk management system, it is important to take on an appropriate role with the IMF and create an environment in which the above-mentioned mechanism can operate effectively.

5. Towards Creating an Affluent and Open Socioeconomy in Globalization

As stated thus far, in order that Japan remain a world economic leader in the beginning of the 21st century, Japan must be tolerant to different cultures and diversity. It is also necessary to create an environment for competition in the intellectual arena, so that Japan's distinctive culture along with her beauty and good points will be conserved and developed.

Moreover, to be able to fill an appropriate role as an economic leader in a timely manner, the government as well as each economic agent must be fully aware of changes in the global situation and actively respond to them. In consideration of this, it is desirable to encourage more foreigners and foreign companies to develop a close relationship with the Japanese people and businesses in Japan.

In the midst of on-going globalization, it is impossible for one country to enjoy prosperity without opening its market. In other words, under globalization, prosperity can only be sustained by conducting reforms and policies in the following four areas of goods/services, finance, corporations and labor. In the preceding sections, globalization in goods/services and finance areas were explained, so in the following part, consideration will be given to the dissemination of information to foreign countries and globalization for businesses and people.

5.1. Spread of information to foreign countries

5.1.1. Strengthening foreign language education

In view of the fact that English is widely used as an international communication tool, it is necessary for Japanese people to develop communication skills in English.

The significance of language education as a tool for international communication has long been known, and indeed promotional measures have been conducted. Considering that development of individual ability will be beneficial to society, it is worthwhile for the authorities to support further measures for language education.

5.1.2. Promotion of understanding of Japan and the Japanese language

With regard to the international use of Japanese, it is desirable to consider the relationship between the goals of promoting its international use (e.g. to increase the number of people learning Japanese in overseas countries, or to increase the use of Japanese at international organizations or conferences, etc.) and the costs (e.g. financial costs and utilization of human resources, etc.).

Particularly, in the current situation where Japanese corporations are expanding all over the world and a global network of NGOs is being built, it is expected that as more foreigners acquire Japanese as a communication tool, more opportunities for employment will be created in their countries and a deeper mutual understanding will be obtained.

5.1.3. Becoming a hub of intellectual activities in the world

In addition to the choice of language as a communication tool, it is also important to improve the contents of information spread to the world. In light of Japan's goal of becoming a center of intellectual activities, it is not only required to spread domestic information on topics such as Japanese culture, government policies or domestic news, but also to encourage other countries to access Japan when they need data, information and opinions regarding global issues.

In order for Japan to become such a hub of intellectual activities, although it basically depends on the capabilities of private individuals and organizations, the government should carry out measures to cultivate a society which supports and encourages the free activities of private individuals and organizations. For example, measures should be taken to: promote the preservation, accumulation and spread of information on cultural and academic matters, which is not supported under market mechanisms in spite of its social significance; development of an infrastructure to expand telecommunications networks and to reduce the cost of their use; improvement of education on the use and development of telecommunications technology; increase opportunities to study at institutions of advanced education abroad; and increase incentive measures to support non-profit activities at research institutes.

5.2. Policies on globalization of corporations and people

5.2.1 Policies on globalization of corporations

Creating a competitive business environment with no barriers to market entry is a prerequisite for making continuous innovations and incentives for improvement of efficiency through the stimulation of the economy. In other words, establishing fair and transparent market mechanisms helps to prepare the conditions for attracting corporations with diversified backgrounds, particularly foreign companies, to the Japanese market. In addition, diversification of corporations will lead to diversification in labor and create a foundation for an open society.

Moreover, in order to actively respond to globalization, Japan must vigorously participate in the establishment of international rules and standards. As for specific measures for structural reforms, based on our recognition of problems identified by the Committee of Globalization and the Committee of Promotion of Structural Reforms we have compiled a report.

5.2.2. Policies on globalization of labor

Global business activities naturally lead to globalization of people at the same time. For example, in order to adjust and overcome differences in business frameworks and practices among several countries, the range of activities of experts in accounting and law must extend beyond the borders. Therefore, it is necessary to make the living environment in Japan more attractive to foreigners.

Also, globalization of corporations will accelerate communication among people as employees are dispatched from their native land to other locations. In order to attract more foreign companies to the Japanese market, Japan should prepare the necessary conditions for companies to recruit appropriate personnel in the Japanese labor market while also creating an environment where Japanese employees can smoothly move to a different company.

PjOn external labor market

In order to ensure that the market can smoothly initiate business, it is important to create an environment in which not only new graduates but also those who are already employed can take positions at domestic and foreign companies. To this end, regulations on Worker Dispatching Undertakings and the Fee-charging Employment Placement Project should be reformed to smooth labor mobility, and also, further consideration should be given to ensuring the portability of retirement annuities, such as by introducing the defined contribution pension scheme.

QjOn living environment for foreigners

When companies launch into an overseas market, the living environment for foreigners is an important issue. Particularly, education for foreign children is of great importance. Considering the fact that institutions known as international schools play a significant role in education for these children, it is expected that the number of foreign children who will want to study at these schools will increase, and thus, corresponding measures will be needed. Specifically, to support the establishment and management of such schools, the following measures should be taken: to facilitate the transfer of closed-down schools and other public assets for the use of international schools and to study measures to facilitate private sector financial support for international schools.

5.3. Response to foreign a labor force

Along with the progress of globalization, a new era of diverse-knowledge is drawing near. Japan should make active use of people with various and distinctive abilities and expand its economic activities based on creativity, so as to continue enjoying prosperity. In this regard, it is desirable that people and corporations from overseas with different cultural backgrounds cooperate with their counterparts in Japan, as well as stimulate improvements in each other through competition.

5.3.1. Promotion of acceptance of a foreign labor force in specialized and technical areas

Admitting foreign human resources in specialized and technical areas, and people with knowledge and good understanding of fields which originated in foreign cultures is likely to help stimulate the Japanese socioeconomy. Moreover, the Japanese socioeconomy can be diversified by increasing openness to overseas cultures, and making use of the ability of foreigners from different backgrounds in an environment where they can safely stay and work in Japan.

From this viewpoint, Japan should promote the acceptance of foreign workers in specialized and technical areas. To achieve this, it is necessary to create an attractive working and living environment for both foreign and Japanese workers, by proceeding with structural reforms in Japan, as mentioned earlier. In addition, it is also necessary to increase the number of foreign students accepted to study in Japan with measures to support them, including improvement of accommodation facilities, and to assist them in finding employment after graduation.

5.3.2. Response to changes in the socioeconomy

With regard to the limits of acceptance of foreign workers, who are subject to the regulations on their visas and visa inspection, it is necessary to continue reviewing this system in light of changes in the Japanese socioeconomy. However, it should be noted that Japan is surrounded by many developing countries with large populations and there is a massive influx of these foreign workers to Japan. Thus, in consideration of their influence on Japanese industries and lifestyle of her citizens, it is necessary to seek an appropriate acceptance framework which allows precise and flexible control on the number of foreigners to be admitted in response to the varying conditions of the Japanese labor market, such as for example, a worsening of the unemployment rate.

For technical training programs, from the aspect of technology transfer to developing nations, more appropriate and smooth implementation of training programs is required, including a review of the type of industries in programs based on the need of those countries.

5.3.3. Consideration of unskilled laborers and immigrants

The admittance of unskilled laborers and immigrants is expected to have a large effect on the Japanese socioeconomy and the lives of Japanese people, as well as on the countries left by such immigrants and the immigrants themselves. For this reason, it is crucial to give careful consideration to this issue, starting with a consensus of Japanese citizens. From a long-term point of view, these issues should be discussed from a variety of perspectives. In addition, deliberations must proceed with sufficient information disclosure, by ensuring transparency of the policy-making process.

5.3.4. Cooperation with foreign governments

In order to realize an orderly migration of labor, it is necessary to make efforts to exchange information with foreign governments on migration of labor as well as their policies on foreigners.

Also, it is necessary to cooperate with foreign governments to promote effective countermeasures against illegal employment.

6. Risk Factors and Countermeasures in the Beginning of the 21st Century

Looking only at the postwar period in the world, so many world-shaking events have occurred such as conflicts and disasters, and Japan has also been largely affected by many of these. Naturally, for the beginning of the 21st century, there are expected to be many risk factors in the course of the realization of a desirable socioeconomy in Japan, as well as the development and stability of the global economy. In order to manage these risks, a comprehensive risk management framework should be established, in which the following items should be taken into account: the probability of each risk; preventive measures; and the necessary costs for reducing the effect in the event that problems actually do occur.

Usually, countermeasures to risks are implemented within a multilateral framework (e.g. international organizations), through regional or bilateral alliances, or by a country itself. It is important to utilize an appropriate combination of these approaches to manage risks.

The following risk factors should particularly be taken into account. International monetary and financial issues, as well as global environmental problems, which are the most crucial considerations, have already been mentioned in the previous section as issues related to the design of frameworks for the 21st century.

6.1. Food

6.1.1. Characteristics of agriculture and agricultural products

Agriculture is largely subject to environmental factors so that production volume is likely to fluctuate. In addition, another characteristic of agriculture is that the portion of production for trade is low, and on a global scale, most exported crops are supplied by only a few specific countries.

6.1.2. Risks in the food supply

Because of distinctive characteristics of agriculture and the trade of agricultural products, there is an inherent risk of instability in the global food supply. In addition, the level of instability might be aggravated in a short period, and even cause shortages over mid- or long-term period due to the following reasons:

A drastic increase in food demand as a result of increases in population and increasing consumption of livestock leading to increasing demand for feed crops, particularly in developing countries;

Fluctuations in food supply because of an unusual weather pattern or limitations caused by global environmental problems, including desertification.

6.1.3. Directions of countermeasures to risks

As stated above, global food demand is likely to become sharply higher over the mid- and long-range, and Japan's self-sufficiency is continuing to decrease. Food is the most fundamental resources for human life, and thus, it is a fundamental responsibility for the government to ensure a stable food supply during peacetime as well as security in unexpected situations.

Therefore, in order to ensure a stable food supply, basically, Japan should increase domestic agricultural production, and at the same time, combine import and storage of foods in an appropriate manner. In addition to have a risk management system in production and distribution areas for unusual situations, it is also necessary to be prepared to implement emergency increases of production of rice and wheat, production of high-efficiency crops, monitoring of food prices, and insurance of food distribution.

Moreover, with the promotion of R& D and international cooperation on food and agriculture, it is also important to reduce the possibility of a global food crisis. Japan must secure a stable food supply by implementing the above-mentioned measures.

6.2. Energy

6.2.1. Future demand, supply and price trends of world energy

Global energy demand is likely to increase in the future mainly as a result of the growing Asian region. Also, it is expected that supply can be ensured until around 2020 and prices will vary quite moderately without a sharp rise or decline. However, there are uncertainties and risks, and possibilities of tightness in demand and supply and price escalation cannot be entirely ruled out.

6.2.2. Risks in the energy supply

Oil is expected to remain the major source of primary energy throughout the world. Therefore, regions where large increases in demand are predicted will largely be dependent on oil from the Middle East. However, the Middle East region contains various political and economic uncertainties, and in addition, the Asian region itself contains a strong potential for instability, so the possibility of suspension of supply cannot be denied. As a consequence, because of Asia's insufficient risk management, each economy in Asia may also be affected.

6.2.3. Directions of countermeasures to risks

Concerning the energy problem, in addition to the diversification of energy sources and risk reduction by strengthening relationships with oil producing countries, particularly those in the Middle East, Japan should strive to reduce potential risks by promoting energy-saving efforts, by introducing alternative energy sources, by carrying out R& D of alternative energy, by use of atomic power generation, and by taking safety measures based on the recognition that there are no national boundaries regarding the security of atomic energy. Toward this end as well, Japan should stockpile oil supplies.

6.3. Regional conflicts and large number of refugees

6.3.1. Globalization and regional conflicts

Since the end of the cold war, the probability of war on a global scale has been reduced. However, in developing countries and regions, there is an increase in country risks arising from the process of transition and democracy, and there is risk of regional conflict due to various factors including politics, territory, race and religion. In addition, subsequent political instability and suspension or stagnation of economic activities increases the risks of massive numbers of refugees.

Moreover, Japan might be influenced by regional conflicts if they occur in countries that are major trading partners.

6.3.2. Directions of countermeasures to risks

In order to prevent conflicts in Japan's neighboring regions, initially, it is necessary to take preventive measures against regional conflicts by political means. Japan should respond to these conflicts as much as possible based on the tenets of the Constitution. If a war actually occurs, it is necessary to smoothly carry out contingency humanitarian aid, recuperation support and effective development assistance in accordance with the level of damage. This should be conducted in cooperation with foreign governments, international organizations and NGOs. Moreover, it may also be necessary to establish fundamental policies on the acceptance of refugees in cases of a crisis in a neighboring country and to maintain and secure necessary facilities.

6.4. Telecommunications area

6.4.1. Spread and penetration of the global network

Following the advanced use of information and communications networks in social and economic activities, the activities of individuals as well as corporations are expanding all over the world beyond geographical limitations. At the same time, along with the astonishing increase in the volume and speed of information transmission, the quality as well as quantity of intellectual activities have been improving remarkably. On the other hand, new social problems are arising, for example, on information and communications networks, people may gain illegal access to reproduce, distribute, or change another person's records. Also, because of a high level of anonymity over a network, high-tech-crimes such as cyber terrorism may occur.

Moreover, if the necessary legislation for electronic commerce on the network is not sufficiently established, business transactions might become chaotic.

6.4.2. Directions of countermeasures to risks

For the establishment of telecommunications networks, in order to realize safe and reliable information and communications services for users, it is necessary that telecommunications businesses promote measures to ensure safety and reliability, develop inspection techniques for the purposes of verifying personal identification and the checking of the content of information, and improve techniques to prevent illegal access.

To prevent high-tech crimes, in particular, not only are specific preventive measures required, but also both domestic and international cooperation is necessary for close and swift investigation.

Also, with regard to losses incurred as a result of mis-transmitted data in electronic commerce, it is necessary to design legislation to determine the portion of such losses that is the responsibility of traders and telecommunications businesses.

6.5. Countermeasure to international crimes

6.5.1. Globalization of crime

Since the 90s, crime has become increasingly more global in scope. International crimes, -- assistance for stowaways, smuggling of women or children, illegal trade of drugs, arms, weapons and nuclear material, organized theft and sale of stolen goods to overseas countries by foreigners staying in Japan, transfer of profits from crimes to foreign locations via money laundering, international high-tech crimes over the Internet, alliances between gangs and international crime groups or alliances between various international groups-- are becoming serious world-wide issues.

6.5.2. Directions of countermeasures to risks

In order to establish a sound and transparent economic system, it is necessary to create a new international framework in the criminal code or assistance in investigations in order to prevent loopholes for criminals and the profits from their crimes. Japan should actively participate in international cooperation on this matter.

Cabinet Office, Government of Japan1-6-1 Nagata-cho, Chiyoda-ku, Tokyo 100-8914, Japan.
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