Committee on Economic Cooperation Policy Interim Report
7 February 1997
Economic Planning Agency
Government of Japan
I. Foreword: Economic Cooperation after the Cold War
The end of the Cold War has triggered major structural changes throughout the world.
Economic cooperation is no exception. For example, it is widely recognized that the
so-called aid fatigue is causing the United States and other developed countries to
sharply cut back their official development (ODA) budgets.
Needless to say, meeting the challenges posed by poverty and the North-South dichotomy
to create a sound and rational world order was an important motivation of American
economic assistance during the Cold War was motivated by . But an even larger
motivation was the strategic need to keep developing countries beyond the realm of
the communist bloc. When this strategic objective disappeared with the end of the
Cold War, the first motive was swallowed up, and the United States cut back its
external aid and shifted its position to where it would not provide economic assistance
unless US interests are clearly served.
Moreover, during the Cold War, there were cases where the United States and other
developed countries in the Western Bloc would support and provide assistance to
corrupt dictatorships as long as they were anti-communist. In other words, despite
deviations from liberty, democracy, and market economy principles, assistance was
continued from a strategic point of view. The end of the Cold War liberated the
developed countries in the Western Bloc from this unwanted situation. This, indeed,
was the greatest repercussion of the end of the Cold War. The values and institutional
framework of the West, namely liberty, democracy and the market economy, spread and
deepened across the globe, and has come to be considered the universal values common
to all of humankind in the post-Cold War era. Assistance policy also reflected this
viewpoint, and the World Bank became an even more emphatic advocate of structural
adjustment based on market economy principles as the condition for assistance.
Another example is the United States attempt under the Clinton Administration to link
human rights issues and economic policy in its relations with China. Japan, in the
Official Development Assistance Charter adopted in 1992 also states that military
issues, basic human rights and freedoms, democratization, and introduction of market
economics will be taken into consideration in providing ODA.
The linkage of human rights and democracy, politically delicate issues in developing
countries, with ODA is an important issue. But this report does not attempt to shed
light on the political conditionalities in ODA. Instead, our aim is to seek
economically sustainable ODA based on economic rationale in the post-Cold War era.
What makes "economically sustainable ODA" so important today? It is because both
national interests and global objectives are reinforcing the need to sustain and
strengthen Japanese ODA, yet economic and fiscal circumstances are now making it
difficult to expand ODA in both the short and long run. To achieve "economically
sustainable ODA," we should not pursue national interests from a short-sighted view
point. We must, however, verify the existence of a definite merit for Japan in a
broad sense within an increasingly interdependent world, and state clearly the reasons
for providing ODA.
In order to explain why Japan provides ODA, it is useful to take a look at the history
of Japanese ODA, and identify current directions and issues.
Japanese economic cooperation began with wartime reparations to Asian countries, and
evolved over the decades towards "universality." ODA in the 1960s played a role in
Japanese economic recovery and growth. In the 70s, following the experience of the
oil crisis, there was an increased emphasis on achieving the stable supply of resources,
and the concept of "comprehensive security," which went beyond "national defense,"
was embraced. Other turns of events also drove home the need to obtain the friendship
and trust of the people of its Asian neighbors, and created awareness of the fact
that Japanese interests were not the sole objective of ODA. The Fukuda Doctrine in
1997, which sought a "heart-to-heart" relationship with the Asian countries, was a
culmination of such efforts.
Japanese ODA increased rapidly during the late 70s and throughout the 80s. This
expansion was fueled by two factors. One was on the domestic side, where ODA was
the only means for international contribution for post-war Japan that could claim
a national consensus, because of the aversion in public opinion and opposition parties
towards increasing armaments. The other reason was international. After the
Japanese economy overcame the oil crisis and its aftermath, Japan became a highly
competitive economic power that piled up trade surpluses. There was a belated
recognition of ODA as one of the few tools available to recycle this surplus. In
other words, ODA was allowed to grow as a policy tool with domestic and international
legitimacy.
This environment is now about to disappear. The early 90s saw recession, and the
deterioration of the Japanese economy and public finances due to the loss of
competitivity and other factors, while demographic forecasts showed an aging society
and a declining population. This turn of events has fed growing sentiments that Japan
can no longer afford its foreign aid, and the feeling is increasing that ODA cannot
escape the tightening of the national budget.
It is clear, however, that Japan cannot continue to exist without a recognition of
"global," in addition to "comprehensive," security. Military and economic security
will become meaningless if the global environment is lost. In other words, if we
ignore such issues as the environment, poverty, famine, food, population and natural
resources, the national interest will be swept away by global catastrophe, such is
the extent to which global interdependence and unity has progressed. Extreme misery,
such as famine and refugees, in the developing countries destroys the legitimacy of
the global society and its leaders, the developed countries. It is the help extended
to the developing countries to stand on its own economically and grow that ensures
Japan's "open national interests." ODA is essential an a means to achieving this end,
and deserves particular emphasis from a national strategy perspective in Japan as
a non-military, civilian superstate.
It is from this point of view, in a global society where the market economy is more
emphasized than ever, and in light of fiscal and economic issues that Japan faces
that ways must be found to make Japanese economic cooperation economically sustainable.
This report seeks to find the answer.
It is taken note here that comprehensive security and other issues that cannot be
assigned economic values in a conventional sense were not discussed sufficiently
before this report was drafted. This requires future deliberation.
II. Fundamental Aspects of Japanese Economic Cooperation
1. Past Experience and the Future of Japanese Economic Cooperation
In considering the future of Japanese economic cooperation, it is useful to learn
from the post-war Japanese experience in economic development and economic
cooperation. Japan received much assistance from the World Bank, the United States
and other sources for reconstruction in the aftermath of World War II. Leveraged
by this assistance, post-war reconstruction was achieved in the beginning through
active government participation. Later, benefiting from the free trade system as
a member of the Free World under the US security umbrella, Japan experienced high
economic growth through self-help efforts led by the private sector, became a leading
welfare state while overcoming pollution and other obstacles, and, in 1990, paid the
last installment on World Bank loans. Today, it is the largest creditor, as well
as donor, country, and has been achieving economic expansion together with the East
Asian countries whose growth in turn was partly fueled by Japanese ODA .
This Japanese development process shares many similarities with those of the East
Asian countries, who have achieved rapid economic development since the late 80s.
In addition to sound economic policies supported by competent bureaucracies, high
savings investment rates, well-educated populations, and other domestic factors, they
used Japanese ODA and other sources of financing to create infrastructure and other
elements, and implemented a gradually progressing free trade and investment policy.
This has enabled them to achieve economic development based on market mechanisms.
In the meantime, the World Bank, which has played a leading role in shaping development
policy, has supported structural adjustment policies, based on the view that
self-sustaining economic development is promoted by market-friendly economic
policies, which correct existing market distortions and achieve efficient resource
allocation by implementing privatization and liberalization. There is no
disagreement between this school of thought and this report, insofar as the emphasis
on the market mechanism as a cause for economic success. However, the structural
adjustment policies as advocated by the World Bank does not take the situation of
the individual country into sufficient consideration, and also requires rapid
liberalization. These are factors which have kept this approach from always being
successful in terms of structural adjustment or economic takeoff. The approach is
in contrast to the Japanese post-war success in economic development through a
two-track approach, i.e. active interventionist policies in the initial years, and
the subsequent private sector-led economic development.
The world today faces the end of the Cold War, globalization, the global environment,
rapid population growth, AIDS and other new challenges. The economic environment
itself is different from that surrounding Japan during its post-war development years.
The Japanese situation at the end of that war and the initial conditions of individual
developing countries also differ. Nevertheless, in conducting economic cooperation,
it is useful in Japan to learn from the post-war development process, look carefully
at the economic cooperation it extended during this period, and build on the positive
elements and correct any points which were found wanting.
2. The Significance of Economic Cooperation
Public surveys seem to indicate that, although there is a certain level of public
acceptance of economic cooperation, it is difficult to say that there is sufficient
concrete support. The reason for this could be the lack of a persuasive explanation
to the Japanese public about the significance of economic cooperation. It is
important therefore to begin the consideration of the future of economic cooperation
by clarifying the significance of economic cooperation.
Japan's ODA 1989, a Ministry of Foreign Affairs publication, gives five reasons for
ODA: ‡@its responsibility as an economic superpower to share the burden of helping
less fortunate nations to overcome problems such as poverty and hunger; ‡Aits
responsibility as the world's leading creditor nation and the nation with the largest
surplus to play a significant role in the global economy, including the development
of developing countries; ‡BJapan's high external dependence in an increasingly
interdependent world; ‡Cachieving political stability through contributions to
social and economic development and welfare in developing countries as a natural
corollary of the Japanese Peace Constitution; ‡Ddemonstrating the Japanese
experience as the first non-Western nation to achieve dramatic economic development.
They can be reordered under three categories: humanitarian considerations, which
focus solely on the benefits to the recipient country, international contributions,
whose benefits accrue to the international community, and the direct benefits to
Japan .
Humanitarian considerations correspond to the grants that Japan received form the
United States and other sources in the years immediately following the war, and can
be considered to be the emergency aid that is extended before economic recovery and
self-replicating development are achieved. International contribution mirrors the
existence of economic cooperation from the United States to the other members of the
free world and its benefits through the resultant peace and security. This aspect
of the purpose of ODA still remains, albeit diluted somewhat by the end of the Cold
War.
Where, then, do national interests come in? It cannot be denied that one reason for
American economic cooperation with Japan was to establish it within the West Bloc.
Japan used this as leverage to achieve economic development, and realized mutual
economic expansion with the developed countries of the West through trade and
investment. Currently, East Asian countries are achieving economic development with
Japanese economic cooperation as one factor. This is producing economic expansion
in the Asia –Pacific region, which is also benefiting Japan economically. One effect
of this process was the fact that it enabled Japan to obtain a stable supply of raw
material and other industrial inputs. In other words, economic cooperation has also
contributed to its economic development through its effect on the supply of resources.
This is another aspect of national interests. Moreover, as we can see in the Middle
East, for example, economic stability and development has contributed to economic
and military security in the global community, of which Japan is also a member, and
will continue to do so. Economic cooperation with these countries also will be in
the national interest.
National interests can be identified not only on the national level, but also through
the benefits to the individual citizen or business. With the progress of
globalization, many Japanese businesses are locating abroad and, with this, many
Japanese citizens are living overseas. The number of Japanese tourists overseas has
also increased. Maintaining the ability to speak out on behalf of those businesses
in their overseas activities, and ensuring the safety of Japanese citizens overseas,
are also aspects of the national interest. Economic cooperation could be one element
in the bargaining power to secure their rights and safety.
Where economic cooperation is actually being implemented, the motive is a mixture
of humanitarianism, international contribution and national interests.
Internationally, the first two elements tend to be emphasized. Nevertheless,
national interests are just as significant; without national interests, there is no
assurance that that nation's economic cooperation can be sustained. There is a
tendency to think of national interests as political and diplomatic or short-term
economic benefits. However, national interests within the context of economic
cooperation are the long-term benefits resulting from the dynamic and long-term
economic development of the developing countries. Economic cooperation that
contributes to national interests in the sense that has been identified here should
be conducted with the recognition that it is a form of investment with long-term
returns.
A few words with respect to one purpose of economic cooperation that was raised in
Japan's ODA 1989: recycling the trade, or, more accurately, current accounts, surplus.
It is expected that Japan's current accounts surplus will decrease in the future, due
to an aging population among other factors. However, there is no way to determine
conclusively whether or not reducing the current accounts surplus is desirable to
the national economy. Moreover, even if the surplus is recycled, in the case of loans,
they will returned, with interest. It is not a foregone conclusion, therefore, that
economic cooperation should be increased when the current accounts surplus increases,
and decreased when the surplus decreases. Economic cooperation should be decided
from a different point of view. Indeed, many developed countries have continued their
economic cooperation with developing countries even when they carry current accounts
deficits.
3. The Role of ODA in Economic Development
Economic cooperation can also be divided into cooperation aimed at maintaining a
minimum standard of living and cooperation aimed at economic development. However,
maintaining a minimum standard of living in a developing country can ultimately be
achieved only by economic development based on the self-help efforts of that country.
Economic development therefore should be the mainstay of economic cooperation.
Ideally, the role of humanitarian aid aimed at maintaining a minimum standard of living
should diminish as the economies of the developing countries advance.
Let us turn to economic cooperation aimed at economic development. There is no
denying that post-war Japanese development and the more recent experience of other
countries in East Asia were driven mainly by the private sector. In this process,
ODA acted as a catalyst in the initial stages of development, and the provider of
infrastructure and other element of the environment essential to the steady
functioning of the private sector. In other words, the important function of ODA
is to provide resources as appropriate where there is market failure, i.e. private
resources do not flow. The developing countries can then link domestic resources
to the ODA. This enables them to use resources efficiently, and achieve economic
development.
In some countries in East Asia experiencing rapid economic development, the linkage
between infrastructure and other uses of ODA and trade and investment liberalization
has led to a self-sustaining development process through the inflow of foreign private
capital and its developing ties with domestic capital. In such cases, it can be
concluded that the development of market mechanisms is gradually enabling the private
sector to raise domestic and foreign financing on its own. This means that the role
of ODA as a catalyst at the initial stages of development will diminish. There is
also the possibility that demand for ODA may increase as economic development
increases demand for infrastructure. However, since there is a limit to ODA supply,
it should be used efficiently. Therefore, as the economy develops, it is desirable
in the public sector also to become able to raise non-ODA financing through improved
tax regimes, bond markets and other means. At this stage, ODA will shift from
financing to technical cooperation for tax regimes, developing securities markets,
and other means to further promote trade and investment liberalization.
4. Future Direction of Japanese ODA
(1) Basic Direction
Nevertheless, there are many developing countries where, unlike many East Asian
countries, the market mechanism does not yet function sufficiently. If there is
demand for development financing in these countries which will enable them to achieve
economic development by obtaining these funds, and benefits thereof will accrue to
Japan in the long-run, then we should supply ODA. In so doing, to use the finite
rescues for ODA effectively, a precondition of economic cooperation should be the
earnestness of the recipient country for its own economic and social development and
improved standard of living. Moreover, the ultimate objective of economic
cooperation is to raise developing countries from the ranks of recipient countries
and integrate them as fully equal partners of the global economy. In fact, many
countries which have achieved development are those that have succeeded in
market-oriented reforms. Therefore, economic cooperation should steer countries
towards the development of economies based on the market mechanism.
Moreover, the capability of donor countries are diverse, and the needs of recipient
countries also vary. Therefore, economic cooperation should be internationally
coordinated in order to capitalize on the strengths of each donor country. Japan
should also play to its strengths in the substance and geographical distribution of
its economic cooperation. Moreover, to conduct economic cooperation efficiently,
it is necessary to reveal the conditions for development in developing countries and
promote economic development that utilizes those conditions. To this end, our
economic cooperation should be conducted on the basis of extensive social and economic
surveys and meaningful policy dialogues with the developing countries.
(2) The Quantity of Japanese ODA
According to a World Bank forecast , the aggregate current account of the Asia-Pacific
region between 1996-2005 shows an average annual deficit of 1.5% of GDP. Another
World Bank forecast envisions a 1.5 trillion US dollar demand for infrastructure
between 1996-2004 in East Asia and the Pacific. The two forecasts highlight a huge
demand for financing in the Asia-Pacific region. Given the additional demand from
the emerging economies in Latin America and East and Central Europe, and the need
for financing for purposes other than development, it is evident that global demand
for financing remains enormous. The significance of economic cooperation, as
mentioned before, also includes other purposes, including international contribution.
In fact, for Japan, economic cooperation is the foremost means for international
contribution. Therefore, the implementation of our economic cooperation should be
visible and quantitatively appreciable by the international community. Taking these
factors into consideration, we should avoid simply falling into line with the "aid
fatigue" that is affecting many developed countries.
On the other hand, when we turn to the mid- to long-term prospects for our own economy,
the rapidly aging demographics will raise social welfare and other costs, and fiscal
limitations will tighten. This means that we should be making high-return
investments now in order to prepare for the future. In view of these domestic
considerations, unless ODA, including its significance, is convincingly explained
to our citizens, it will not be possible to receive support to continue increasing
the amount of ODA as before.
In considering the significance of ODA, the quantity of ODA to be provided should
be decided by comparing the benefits accruing to our national interest by meeting
the financial needs of developing countries, and the benefits from using the funds
for our own domestic infrastructure and other purposes. It is misleading to talk
about quantity without such considerations.
Public finance, together with the role of government, is at a turning point in Japan.
The time has come to provide our citizens with accurate information on the significance
and realities of ODA, and conduct a debate on the quantity and other directions of
our ODA. Any "mid-term objective" for ODA should be brought forth to express these
points clearly to our citizens.
On a related issue, international assessment of the quantity of donor countries' ODA
has often been conducted on the basis of net disbursement. This is an index that
focuses on the income transfer from developed to developing countries, and
consequently could be viewed as an overemphasis on financing current accounts. If
we take the view that public funds should be allocated properly to where they are
needed and returned from where they are no longer needed, then, indices which can
determine whether supply has been allocated properly according to demand, such as
the geographical distribution or, in the case of an individual recipient country,
the distribution by income levels of gross disbursements or pledges would be effective.
Such indices should be given due attention, in addition to net disbursement.
(3) Geographical Distribution
As we have already stated, it is true that there are difficulties in the current
situation to allocate as much funds to ODA as before. Given this situation, in order
to conduct our economic cooperation policy effectively, it is necessary to
consider the geographical distribution of our ODA. The allocation of ODA, and loans
in particular, should place an emphasis on countries with greater potential benefits
accruing to Japan from their economic development. From this point of view, it is
desirable to place emphasis on the developing East Asian countries and countries with
the potential to follow their development. In addition to the East Asian countries,
which already receive much of our ODA, relatively underdeveloped Asian countries and
countries reaching out to Asia to form a Pan-Pacific economic region, and, looking
further, countries bordering on the Indian Ocean, including the South African
countries, which have strong historical ties to South Asia, should receive attention.
There is another point to be taken into consideration for loans in particular; because
of their focus on development, it is important to extend them to countries that
demonstrate an eagerness for development and a high capacity for utilizing the funds.
There is another issue concerning geographical distribution. Currently, developed
countries follow the DAC list as a uniform standard to determine ODA recipient
countries. Since the relative importance of recipient countries should differ among
donor countries, each country makes its own decisions in extending economic
cooperation, and could decide to do so over and above the DAC list . A case in point
is the growing need for economic cooperation on the regional level, on which we will
have further words later. Where the region includes high-income countries, and
economic cooperation is not extended to the portions of infrastructure in those
countries, or is provided but on less favorable terms, there is a possibility that
this could cause problems, because of the lack of balance within that region. In
such a case, the preceding considerations would be necessary.
Concerning geographical distribution, a regional perspective, in addition to the
country perspective, is growing in importance. This is because development in recent
years is in part being driven by regional frameworks such as ASEAN, APEC, EU and other
regional institutions and cooperation mechanisms, and de facto transboundary division
of labor and interdependent relationships such as the Bahts economic sphere, the
Yellow Sea economic sphere and the Golden Growth Triangle. There should be such cases
where it is more effective to consider development on the regional economy level,
in contrast to the country level, by taking advantage of individual strengths and
encouraging industries with comparative advantage through economic cooperation. In
addition, there are bottlenecks for development in transport and other areas that
must be dealt with on the transboundary level. There are regions for which Japan
should form regional assistance policy guidelines.
(4) Emphasis on Bilateral Assistance, Contribution to International Organizations
If, as we mentioned on geographical distribution, the allocation of ODA should place
an emphasis on countries with greater potential benefits accruing to Japan from their
economic development, it follows naturally that Japan should be able to decide where
its ODA should be distributed. This means that in principle bilateral economic
cooperation should be emphasized.
Nevertheless, Japan should also make international contributions appropriate to our
international status for humanitarian and other objectives by contributions to
international organizations and other means.
If there is a problem concerning contributions to international organizations, it
is that, for example, Japan currently subscribes to 2.3 billion US dollars of the
World Bank capital and 8.3 billion SDR in contributions to the IMF, second only to
the US, yet it seems that Japanese views on economic cooperation do not seem to be
reflected very much in deciding policy in the international organizations. The
current economic plan states that Japan should "exert worldwide leadership" on
economic cooperation, yet currently there does not seem to be sufficient involvement
in decision-making in international organizations. This situation should be
remedied. The relative scarcity of high-level Japanese employees in international
organizations appears to be one cause of insufficient involvement in policy decisions.
Japanese college and language education is also a problem here.
A further problem is that it is not very clear how Japan is involved in decision making
in the World Bank, IMF and other international organizations, and not much material
for debate is being provided to the Japanese public. There is a need for disclosure
of information by the government.
(5) The Forms of Japanese ODA
Japanese ODA has been provided in large part through loans, partly because of its
focus on infrastructure investment and partly because of its emphasis on self-help
efforts. Recently, two issues have been raised concerning this point. One is
whether grants should be increased to improve the quality of ODA, and the other is
the increase in the burden on the developing countries due to rising yen exchange
rates in the case of loans.
a) Grants
Broadly speaking, assistance for least developed countries, which are fiscally weak,
and for basic human needs and other low-return objectives are generally provided
through grants, and developing countries beyond a certain level of development are
generally extended economic cooperation through loans for production-related
infrastructure. However, if a developing country needs financing to raise its
citizens' income or their standard of living, that country needs those funds as a whole,
regardless of whether they take the form of grants or loans. It will not forgo such
efforts just because it does not happen to receive all the funds in the form of grants.
In other words, if that country has multiple investment projects that it requires,
then investments will be made in the order of the relative levels of return, i.e.
rising incomes or standard of living. If there are no constraints on the supply of
funds, then, from a rational point of view, projects funded by grants will be
implemented first, since they entail no costs, followed by projects funded by loans,
until returns are equal to costs, so there is no reason to believe that projects based
on loans would not be implemented. Also, basic human needs, for example, will
ultimately be satisfied by raising the income of the country as a whole through
economic development. There is no need, therefore, to equate the least developed
countries or basic human needs with grants. Moreover, infrastructure such as water
supply address both basic human needs and industrial infrastructure demand, so it
may be difficult to draw a clear line between basic human needs and other objectives.
Based on these considerations, it appears that there are cases where loans could be
provided that were traditionally considered to be appropriate for grants. In
particular, since it is difficult to provide grants for large-scale projects, the
long-term, large-scale, low- interest nature of development loans could be at least
as significant as grants in developing social infrastructure, for example, that
involve relatively large-scale projects. Also, if the lack of visible development
despite grants to least developed countries and fiscal problems of their own are
reasons for aid fatigue in the developed countries, loans, which encourage self-
help efforts by the recipient countries and which flow back to the donor countries
in the long run might stem the tide of aid fatigue. Moreover, grants could have
efficiency -related problems, since there is the possibility that relatively
unproductive projects might be implemented because of the relatively low costs to
the recipient country. These are also reasons to provide loans to least developed
countries.
On the other hand, it is logically possible to provide grants for production-related
infrastructure and other relatively large-scale projects. However, since
production-related infrastructure would generally be large-scale projects, issues
such as the size of the burden on the donor country and the potential for adverse
effects on self-help efforts should be taken into consideration. Following this line
of thinking, intermediate forms of financial cooperation are conceivable. Some
possible examples are: combining loans and grants to provide effectively low-rate
financing; interest-free loans; conditional grants or loans, that reduce the
repayment to be made by recipient countries in proportion to the extent to which
pre-set policy objectives are met.
On the other hand, it cannot be denied that grants do have their own justification,
since it is true that the burden on the recipient countries must be taken into
consideration on its own, and the economic cooperation does have a humanitarian aspect.
The conclusion is that there is no inherent reason to suppose that there are countries
or types of projects which should be limited to either grants or loans. Instead,
flexible, case-by-case determinations should be made, taking into consideration the
social and economic situation of the individual country and the nature of the project
in question. The choice should be made through coordination between the
organizations involved on the basis of regular consultations and joint on-site
surveys.
A related issue is the widespread international use of grant share or grant element
as indices of the quality of ODA. However, it is not feasible to determine once and
for all which is more desirable in terms of quality, grants or loans. Grant element
also has theoretical difficulties in the determination of the interest rate used to
calculate it. Therefore, it is not very meaningful to discuss and evaluate the
quality of ODA on the basis of determine grant ratio or grant element alone. Grant
share, moreover, shows a countercorrelative relationship with the untied ratio,
another index used to evaluate quality (Figure 9). Given Japan's policy to promote
self-supporting development through economic cooperation, not only concessionality,
but the positive effect on self-help efforts that loans have should also be taken
into consideration from a qualitative point of view. Evaluating the quality of ODA
requires a comprehensive judgment including the effects of economic cooperation, and
a focus on individual indices should be avoided.
b) Currency Risks
An issue related to the burden of loans on the recipient countries is the increase
in the burden on recipient countries due to continuous appreciation of the yen. Here,
distinction must be made between the increase in repayments of past yen loans due
to the drastic appreciation since 1985, and the possibility of yen appreciation with
regard to future loans.
Since the first issue concerns the fulfillment of contractual obligations, it may
seem unnecessary to give it further consideration, but there is a move among past
borrowers of yen loans to seek action on this matter. If the situation does make
it difficult to take out new yen loans for the development of new infrastructure or
other purposes, leading to adverse effects on the economic development itself in the
developing countries, then re-lending, changing repayment conditions, new financing
to cover the appreciated amount or other means for an economic cooperation standpoint
is conceivable, and there is precedent for this. Such measures, however, are the
same as providing grants to heavily indebted countries. Strictly speaking, this is
a different matter than the issue of currency risks itself. Unless the economic
situation of the developing country that has borrowed the funds is comparable to a
heavily indebted country, or where the change in circumstances is such that clausula
rebus sic stantibus applies, the loans should be repaid according to the original
terms, and additional measures should be avoided as much as possible.
As for the second issue, theoretically, it is possible to determine the future exchange
rate through middle-term forward contracts or eliminate the uncertainty itself
through currency swaps. However, the middle- to long-term currency market is not
very large, the yen rate does not always appreciate, and market forces could cause
currency swaps to make the loans costlier to the developing countries. These measures,
therefore, are difficult to use. This makes it necessary to consider who should bear
the risks of a future yen appreciation, and what are the ways to minimize the currency
risks.
From an economic cooperation point of view, it is conceivable for Japan to bear the
risk. There are no legal obstacles to providing dollar-denominated loans with funds
raised for example through dollar-denominated bonds. Sharing the currency risks
between the recipient country and Japan by adding part of the yen-dollar interest
rate differential in providing such dollar-denominated loans is also conceivable.
Creating such a wider variety of options, allowing the developing countries to choose
from them, or to reduce risks by combining them are matters that should be given
consideration. In doing so, the extent to which Japan should bear the risk should
be considered together with the effect on the use of the yen as a key currency.
Developing countries, the borrowers, have few means to mitigate the risks from the
appreciation of the yen. From an economic cooperation point of view, if the overall
risks could be lowered by assuming some of the risks, and if this helps ODA disbursement
and promotes economic development in the developing countries, it is sensible for
Japan to prepare a varied menu including dollar-denominated loans to reduce the risks.
(6) Contribution on Issues beyond the Scope of Economic Development
So far in this report, "development" has been used in the sense of kaihatsu. The
thinking behind this is that as economic development progresses, social problems will
also be resolved. However, there is a perception that the meaning of development
is undergoing a worldwide change. "Development" also means hatten, and it is said
that in the English language "development" is more important in its social, than its
economic, sense. In other words, the "development" issue humankind faces includes
the social.
Non-economic issues relevant to economic cooperation include the global environment,
energy, food and other global issues, basic human needs issues rooted in poverty,
income distribution and gender. The transition to market economies in the former
planned economies is also an economic cooperation issue, albeit one that involves
non-developing countries.
Some schools of thought in developed countries feel that these issues should have
priority over economic development in the developing countries. However, economic
cooperation should not be conducted on the basis of the interests and values of the
developed countries alone, and it should not be used to force their policies on the
developing countries. Therefore, it is more desirable, as well as effective, to
conduct economic cooperation that helps a developing country to recognize the
importance of the issue at hand and provides appropriate incentives to its resolution.
However, these issues are not necessarily resolvable simply by providing economic
incentives and relying on market mechanisms. Indeed, the market mechanism, with
efficiency as the key concept, cannot cope with income distribution and gender issues.
Moreover, even issues seemingly beyond the scope of economic development are in fact
closely intertwined with economic development. It is important, therefore, to deal
with them in connection with the latter, as we see in subsequent sections of this
report.
The areas of knowledge and experience useful to resolving these issues apparently
vary widely from country to country among the developed countries. This means that
sharing roles is even more important than in economic development areas. There should
also be an emphasis on working through South-South cooperation, which also has the
benefit of raising awareness of the issues among the developing countries.
‡@ The Environment
Concerning environmental issues related to economic development, in the Japanese
experience, pollution had already become a problem by the early 60s, before the
high-growth era, yet truly effective measures had to wait the beginning of the 70s.
This delay seems to have increased the subsequent economic burden. It is said that
much of the capital investment by businesses in the 70s was devoted to environmental
objectives. In simple terms, this suggests that motivation for environmental
protection grows only when the standard of living rose and environmental problems
became evident, and that even when the need for environmental protection grows,
expenditures for such purposes could retard economic growth, where there is a limit
on development resources.
Based on this domestic experience, cooperation on environmental protection in the
initial stages should emphasize raising awareness of the problems through technical
cooperation for monitoring and developing environmental indices, and training
specialists. Efforts should be made to enhance motivation and meet both development
goals and environmental objectives in development projects by increasing the portion
of financing for environmental financing at the currently more favorable rates,
providing interest-free loans or grant-loans mixtures. Since much of the
environmental deterioration is due to the growth in energy consumption as the result
of economic development, there should be an emphasis on cooperation on new energy
sources and energy conservation projects.
Concerning global environment issues and transboundary issues such as waste transport
bearing some of the costs within the developing countries from an economic cooperation
point of view, while maintaining the polluter pays principle, should be given
consideration.
‡A Food
Forecasts vary on the probability of a disastrous food situation, but there is no
denying that the productivity of agricultural land holds the key to the situation,
since expansion of agricultural land cannot be expected because of environmental
considerations and soil erosion.
Behind the rise in the national income of developing countries through
industrialization is the economic stagnation of developing countries reliant on
primary products, which have suffered a long-term decline in relative prices. Even
though the situation may not become disastrous, if there is a serious possibility
that food supply will tighten substantially, it is possible that developing food
producer developing countries could achieve economic development through
agricultural production, if deregulation progresses, markets are opened, and prices
become elastic.
In order to achieve both economic development in the developing countries through
agricultural production and reinforcement of food supplies efficiently, it is
important to raise agricultural productivity by actively extending economic and
technical cooperation to countries that are competitive in agriculture and have the
potential to increase agricultural exports in the future.
‡B Basic Human Needs and Poverty
Failure in economic development is a major cause of poverty and poverty-related
problems. Grants aimed at these targets treat the symptoms, and cannot be considered
to be the fundamental solution. Therefore, poverty and basic human needs issues
arising therefrom must be faced with the basic understanding that they should be
resolved through economic development, and an approach that is compatible with
development is desirable. For example, on health issues, water supply and sewage
projects that contribute to the development of water supplies are important.
Another cause of poverty is the rapid population increase in developing countries.
An increasing population is in one sense reproducing poverty. Here, there is an
urgency that cannot wait for development to occur first. Assistance to solve the
population problem can in of itself have a major positive effect on poverty.
The new DAC/OECD policy statement is one that has great bearing on basic human needs
issues. The strategy emphasizes the need to achieve its goals through international
cooperation including international organizations under the responsibility of the
developing countries themselves. This is in agreement with the Japanese thanking
on economic cooperation. Japan should cooperate with international organizations and
other donor countries, and concentrate its own efforts on areas where it has expertise.
‡C Income Distribution and Gender-Related Issues
Historically, the initial stages of development have seen income distribution and
gender-related issues, such as the income gaps between urban areas and agricultural
communities or capitalists and workers, and differences in income and social status
between men and women arising from educational opportunities and other factors.
These issues are not conducive to resolution by the market mechanism, which is based
on efficiency, and, if the significance of economic cooperation is seen as the catalyst
at the initial stages of development and the provider of the environment for the
private sector in development, is not answered directly by economic cooperation.
However, history also shows that these disparities have diminished with rising incomes
as the result of economic development. Japan should be careful in addressing income
distribution and gender-related issues, since they involve the values, views on social
equality, religion and other complicated aspects unique to individual countries. It
is desirable for Japan in economic cooperation aimed at raising the overall income
level in a developing country for example to enfranchise workers and women in
development policy through improved education and other means (c.f. Women in
Development: WID).
‡D Transition of the Former Planned Economies to Market Economies
Many of the former planned economies lie in East and Central Europe, with few economic
or geographic ties with Japan. Moreover, they include countries that are unlike
developing countries, with relatively high incomes, developed infrastructure, a
generally well-educated population, and administrative capacity, albeit undergoing
some confusion.
In these countries, it is necessary to put an end to the temporary economic, political
and administrative confusion, in order to put the economy onto a self-sustaining path
of economic recovery, In countries that have seen the de facto progress of the market
economy and a lag in the administrative response to the market economy system, there
is confusion in the economic transactions arrangement. Here, there is an urgent need
for practical assistance to introduce market mechanisms through such means as
recovering public order, enacting property and economic laws, developing statistics
for grasping the economic realities as the premise of macroeconomic policy. To
directly affect the economy, there is a need for concentrated, short-term financing
for structural adjustment, and economic cooperation for recovering a functional
infrastructure.
Among the former planned economies, Central Asian countries face development issues.
This complicates economic cooperation, since economic cooperation for development
must also take the transition to market economies into consideration. Since economic,
political and administrative stability are the prerequisite of economic development,
this stability should be the first objective.
(7) The "Presence" of Japan's Economic Cooperation
The complaint is heard in some domestic quarters about Japan's economic cooperation
that it lacks a "Japanese face." This criticism has two aspects. One is that there
is a lack of a policy behind Japan's economic cooperation. The other is that, despite
large amount of Japanese economic cooperation, there is insufficient recognition by
the public in developing countries that the cooperation is being extended by Japan.
According to a survey in recipient countries, there is a widespread opinion that the
objective of Japan's economic cooperation is to promote Japanese exports (figure 10).
Actually, most of Japan's ODA loans are globally untied , and the participation of
Japanese businesses in the recipient countries is decreasing. Dissatisfaction
within industrial circles seems to be particularly strong because of this. Unless
this dissatisfaction and criticism among the Japanese public and industry is answered,
there will be a lack of support for economic cooperation, and the basic foundations
of economic cooperation that have been expounded on in this report will be ignored.
Therefore, the issue of "presence," although somewhat distinct from the economic
rationale of economic cooperation, will be discussed here.
‡@ Presence Abroad
One view is that yen loans should be tied, in order to secure recognition abroad.
However, tied aid is internationally prohibited unless it satisfies a certain level
of concessionality. This is intended to eliminate trade-distortional export
subsidies. This means that, since the objective of Japanese economic cooperation
is the mutual development of Japan and developing countries through development in
the developing countries, increasing the misunderstanding or inviting international
criticism that Japan's economic cooperation is for export promotion by tying yen loans
to purchases from Japan is undesirable to Japan. On the other hand, from the viewpoint
of this report, which seeks economically sensible economic cooperation, the
participation of the firm that conducted technical cooperation throughout the project
could make sense by facilitating flexible responses to changing circumstances. There
is nothing in economic theory to suggest that tied aid is justified if concessionality
is high, or that aid should be untied if concessionality is low. Taking measures
counter to untying economic cooperation for the sake of achieving Japanese presence
should be avoided. Nevertheless, there are intermediate measures such as LDC untied
aid, and there are proposals elsewhere such as reciprocal untying. This issue should
be debated in the OECD/DAC and other international forums, taking into account such
matters as the significance of loans and grants, efficiency of economic cooperation,
and trade-distortional effects of tied aid.
In any case, if there is a total lack of understanding that the economic cooperation
is from Japan, there is also a problem here in creating good relationships with the
recipient countries. On this matter, a distinction should be made between the
government of the developing country and its citizens. The governments by and large
understand that economic cooperation is coming from Japan. Here, it seems more
important to secure the understanding that it is not being used to promote Japanese
exports. It is therefore important to have them understand our economic cooperation
policy. To this end, it is useful to assume leadership in economic cooperation policy
by such means as hosting donor country meetings.
The best way to obtain the understanding of the citizens of the developing countries
is to demonstrate Japanese involvement through Japanese consultants, contractors,
JICA experts and other participants in all project phases. However, participation
in all phases may not be possible if the projects are untied. In this case, it will
be difficult for those people to recognize that cooperation is coming from Japan.
Since the person-to-person interaction is the most important element in securing this
understanding, it is important to deepen this interaction through such means as
strengthening technical cooperation using consultancy services, or conducting
surveys for evaluation before and after project implementation in ways directly
visible to the members of the communities concerned. The most important thing in
this respect is to develop and secure the human resources to work abroad. Since there
should be many cases where the technologies that have been used over the process of
the changes in the Japanese industrial structure are readily adaptable to developing
countries, it could be useful to utilize Japanese human resources by strengthening
the Senior Overseas Volunteers System and linking the in-job participation system
and employment policy measures in cooperation with the business community. Technical
cooperation using consultancy services requires particular attention because of the
favorable effect on efficiency, since it leads to appropriate design and engineering
and other subsequent activities. One possibility here is to provide consultancy
services in the form of grants. Evaluation activities also deserves attention, not
only from a project management viewpoint, but also for its interpersonal aspects.
Here, NGOs, which can go more deeply into communities and work more closely with their
members than government institutions, could be one facet of Japanese "presence."
Government institutions should take this aspect of NGOs into consideration in
evaluating the role of NGOs.
On the issue of interpersonal relationships, sending Japanese experts to developing
countries and accepting students and other potential leaders of the future in
developing countries at Japanese universities and graduate schools is important.
Here, as in the case of Japanese staff in international organizations, there is a
need to resolve problems in higher education and language education, as well as improve
the conditions for dispatching experts.
‡A Domestic Presence
On the domestic front, it is questionable whether the Japanese public has a good
understanding of Japanese economic cooperation. Indeed, even if the necessary
efforts are made abroad, unless there is an accurate understanding of the actual
situation of Japanese economic cooperation, public dissatisfaction will not disappear.
Here, both the cooperation agencies and the public should understand that the
misconception that economic cooperation with presence equals instantly effective
cooperation could force out cooperation that is effective over the long-run. To
obtain the understanding of the Japanese public on this and other matters, disclosure
of information and educational efforts aimed at improving understanding of economic
cooperation is important. Also, in order to receive a fair evaluation of the results
of Japanese economic cooperation, the views of foreign countries and international
organizations should also be made known to the Japanese public. It is also necessary
for the government to seek out those views on Japanese economic cooperation.
Towards Effective and Efficient Economic Cooperation
An effective and efficient economic cooperation policy requires efforts to disburse
ODA effectively and efficiently. It is also important to consider the relationships
with the businesses, local governments and NGOs, who are the other agents of economic
cooperation, as well as the relationship with third countries.
1. Effective and Efficient ODA
The transition from quantity to quality is a phrase that often crops up recently
concerning the quality of ODA. Here, "quality" can mean concessionality and the like,
but also often refers to effective and efficient aid, i.e. using a given amount of
funds more effectively. The quality of ODA in this sense should always be maintained
at a high level, and is not a subject that deserves attention just because there is
an increased likelihood that the amount of ODA available will be limited. The two
issues, quality and quantity, must be kept separate.
There are two aspects in evaluating the quality of economic cooperation: how effective
the economic cooperation Japan provided in the recipient country was, and what kind
of effect the resultant economic development and other effects had on Japan. Since
the main focus of this report is on the economic rationale of economic cooperation,
the "effect" should be evaluated by the returns to Japan from the economic cooperation
extended. However, the effect on Japan of the effect in a recipient country involves
many aspects of the relationship between the two. This greatly complicates the issue,
as we have seen in the consideration of national interests. Therefore, the following
discussion will proceed under the assumption that economic cooperation that is most
effective for the recipient country is the most efficient from the Japanese viewpoint.
In order to conduct economic cooperation effectively and efficiently, it is necessary
in the first place to do so appropriately, based on a development plan that accurately
reflects the development needs of the developing country in question. Since
financial cooperation is currently based on the requests of the developing countries
for specific projects, the projects are presumed to be in line with appropriate
development plans. Therefore, some feel that it is doubtful that there is sufficient
examination whether a request is truly in line with the development plan, or whether
the development plan itself is appropriate, i.e. whether the bottlenecks of
development are in that developing country. They feel that the economic cooperation
does not focus on eliminating the bottlenecks, and is spread out too widely. In order
to ensure that economic cooperation is conducted appropriately in line with proper
development plans that serve as the guidelines for eliminating economic and social
problems, there is a need for Japan to be involved from the initial stages of the
planning process through the dispatch of experts through JICA (Japan International
Cooperation Agency) and other means. However, excessive involvement could invite
charges of interfering in domestic affairs. Even where this is not the case, there
are problems such as the limitations this could impose on the policy choices for the
governments of recipient countries. Therefore, Japanese involvement in the
development planning process could preferably take the form of joint planning based
on a mutual understanding forged through the demonstration of the development needs
of the recipient country and Japan's cooperation policy through policy dialogues and
the country-by-country aid policy guideline development process, or the provision
of alternative menus, leaving the ultimate choice to the democratic process in the
developing country itself.
Appropriate economic cooperation in line with an appropriate development plan
requires the assurance of ODA disbursement matching the development plan. Ideally,
the donor country side should have a financing plan that is in line with the development
plan. In the case of yen loans, there are a number of countries that receive funds
on the basis of annual consultations. Increasing the number of countries under the
"round" method, which is currently employed vis-vis China, where the overall
midterm amount of financing is determined beforehand, and the actual amount to be
disbursed is determined annually, should be considered. Provision of financing on
the basis not of individual projects, but for a broader range of projects under the
development plan should also be utilized .
In more general terms, appropriate economic cooperation in line with an appropriate
development plan means economic cooperation that meets the middle- and long-term
financing needs of the recipient country. In this respect, there is the issue of
the desirability of future expansion of program assistance and non-project assistance
in general. Program and non-project assistance in general has problems such as the
relative lack of visible Japanese "presence" and oversight difficulties. On the other
hand, it has advantages such as greater discretion it gives to the recipient country
and the relative ease in attaching conditions to support macroeconomic stability and
liberalization. Project assistance that contributes to long-term development should
continue to figure importantly in Japan's economic cooperation, but program assistance
and non-project assistance in general also complements project assistance by
supporting the recipient country's policies and contributing to economic development.
The two elements should be used as appropriate, based on the assistance needs and
other relevant aspects of the recipient country.
The next issue is the coordination of grants, technical cooperation, intellectual
cooperation and concessional lending. As we have already seen, there is no a priori
way to identify projects or countries with loans or grants. However, based on the
experience in Japan and East Asia, economic cooperation that encourages the self-help
efforts of the developing countries is the most effective in the long-run. In this
regard, loans generally enhances cost-consciousness, and thus increases efficiency,
while in the case of grants, without precise conditionalities, there is the risk of
the acceptance of assistance beyond the capacity of the recipient country, which could
lead to a waste of ODA funds. However, in the case of a country with a low capability
for self-help or a country with insufficient capacity for its debt burden, grants,
technical cooperation and intellectual cooperation should be extended, and, at the
same time, its capacity for loans as well the basis of a viable economy should be
enhanced. When the country's development is on track, loans oriented to self-
sustaining development through the promotion of self-help efforts will become
desirable, and there could be a shift from grants to loans. This is coordination
in a temporal sense.
Once the goods and services provided through grants or loans are in the hands of the
recipient country, they are under its control, and their maintenance and management
should in principle be the responsibility of the recipient country. However, since
the objective of economic cooperation is the long-term economic development and better
standards of living in the recipient country, Japan should also be concerned with
the maintenance and management of the goods and services provided. Therefore, where
the maintenance and management is inappropriate, while not relieving the
responsibility of the recipient country, follow-up assistance should be provided
where appropriate in the form of technical cooperation, intellectual assistance and
supplementary financing. This is coordination between various forms of cooperation
within a project.
The third issue is concerned with the implementation stage of a project. Here, it
is important to check and see whether the project is proceeding properly, particularly
whether changes in circumstances after the planning stage have been dealt with
properly. There should be a readiness to make changes in the plan and effect new
financing measures to meet any difficulties the project may face. For this purpose,
there should be a well-developed follow-up system in place that includes the dispatch
of experts to projects that have received Japanese ODA. Moreover, in order to
disburse ODA quickly and flexibly where changes in plans necessitate financial
measures, there is a need for Japan to prepare an ODA implementation menu that can
meet such changes. This could include additional funds in the form of grants to
loan-financed projects, and/or accelerated disbursement for an additional interest
charge for urgently needed additional funds to meet such changes.
Fourth is the improvement of prior and post facto evaluation, and the feedback of
their results. In the past, there has been an emphasis on the evaluation of individual
projects. The evaluation reports issued by the Ministry of Foreign Affairs, OECF
(Overseas Economic Cooperation Fund) and JICA basically focus on individual projects.
However, evaluation that focuses on the project level, and on efficiency in particular,
tends to de-emphasize environmental and other undesirable side effects. Economic
cooperation seeks to enhance the overall economic and social welfare of the people
as a whole. If so, evaluation of the overall effects, direct and indirect, of the
region as a whole, including the negative aspects, is important. Impact assessments
should strengthened with this in mind. Moreover, the success of a project depends
not only on the portion financed by Japanese ODA, but also on the part financed by
the recipient country itself. Even if the ODA part is completed, the project is not
a success unless the rest is finished. The success of a development plan, in turn,
cannot be determined on the basis of the success of individual projects. Successful
projects and plans require the strengthening of feasibility studies at the development
planning stage.
The lessons learned from such evaluation should be utilized in economic
cooperation in Japan and world-wide. This is necessary to improving the efficiency
and effectiveness of economic cooperation, and the prerequisite to Japanese
leadership in economic cooperation. To do so, it is necessary to increase the number
of personnel working on evaluation and to improve evaluation methods. The ratio of
OECF employees to the amount of loans outstanding is only about one-tenth of the same
figure for the World Bank. Since budgetary constraints alone make it difficult to
bridge this gap in the short term, one option is, as is the case with the World Bank,
to actively use NGOs in the evaluation process. However, there are other
considerations in utilizing NGOs, as we shall see later.
2. Coordination with the Private Sector
The move to use the private sector to develop infrastructure and other elements of
development is gathering further momentum in the developing countries, led by East
Asia nations. There are many desirable aspects to this trend such as the elimination
of inefficiency in state enterprises and the progress in bringing in foreign
investment through the privatization process. As for the role of the private sector
in economic development, since after the initial stages of economic development the
activities of the private sector should play the main role, the move towards the
provision of infrastructure led by the private sector is inevitable.
However, there are some significant problems with recent trends in infrastructure
development by the private sector. The first concerns the fact that the current drive
to introduce infrastructure development through the private sector arises from
concern over the expansion of public debts for economic development. There should
be no reason for concern over debts whether they be public or private, if the funds
are being invested efficiently. However, if a particular segment of infrastructure
is left to the private sector, it could become impossible to control the speed of
development under a comprehensive development plan. This raises the possibility that
not enough infrastructure will be provided to match the development speed of the
developing country or, to the contrary, too much infrastructure in too short a time
for the available demand will be provided, reducing the return on investment. The
latter case could lead to external debts excessive in comparison to the investment,
if the government of that developing country has ensured returns on the investment.
This potential external debt has not surfaced, given the low interest rates prevailing,
but there is a potential for major risks if interest rates rise.
Second is the distinction between private sector activities and providing
infrastructure through the private sector. The appropriateness of providing
infrastructure through the private sector should take the public nature of
infrastructure into consideration.
The growing move in East Asia towards providing infrastructure through the private
sector is concentrated in large-scale road building and management, water supply and
electricity. Even in the developed countries, these are areas where in many cases
the government or public entities provide the services, or the private sector does
so as licensed monopolies. This is because government intervention is considered
necessary due to market failure in these large-scale infrastructure activities. The
private sector infrastructure proceeding in East Asia presumes future growth in that
region, with investments being made to meet increased future demand, but in some cases
are not seeing the expected demand materializing because of the high prices being
set. Since BOT projects in particular will ultimately be transferred to the
developing country's government, there should exist an incentive for the private
business to recover costs as soon as possible. This raises the possibility that
prices will be set at high levels, leading to potential cases where market failures
occur.
In such a case, the private business will face bankruptcy or some other negative
consequence. However, if that infrastructure is deemed necessary to the economic
development of the developing country, the government will have no choice but to
intervene to continue it. In other words, private sector infrastructure is either
an ordinary private business or a public utility in a broad sense. This means that
for a particular area of private sector infrastructure to function properly, it is
necessary to either consider it as a totally private business, ignoring business
failures, eliminating government intervention, and leaving the matter to the
mechanism, or have the government cover market failures as a matter of public
interest .
In the latter case, the developing country's government and the private business must
decide how to share the costs and risks. The dilemma here is that both sides are
reluctant to take them on. The government in particular faces a moral hazard carrying
a serious possibility of increasing the political risks, with the corresponding rise
in the risks that the private business must bear. Given such a situation, private
businesses will not undertake the infrastructure projects, and the infrastructure
necessary to development will not be provided.
To ameliorate this situation, it will be justified to provide Japanese ODA to reduce
private sector risk, since the private sector infrastructure, albeit a private sector
undertaking, promotes development.
Some ways to do this are to provide yen loans to peripheral projects undertaken by
the developing country itself because they are beneficial to the private sector
infrastructure or are a discrete portion of the infrastructure that carry high public
benefits but has low financial returns. If the developing country's government or
public agency is directly involved in the private sector infrastructure project, for
example through equity holdings, the infrastructure itself could be the subject of
a loan. For projects with high public benefits but is not economically viable with
private funds alone, it is conceivable to provide loans to the private business
directly or through a two-step loan. In this case, however, since there is no
government-to-government agreement that serves as a powerful guarantee for the
fulfillment of the obligations of the private business concerned, cream-skimming
could occur. This is one problem in dealing with it in the context of economic
cooperation. Moreover, since this provides financing to a private business on
favorable terms, at least indirectly, transparency must be secured to avoid improper
dealing. This calls for the development of international rules for BOT and similar
activities.
There are ways other than loans to reduce risks for the private businesses that are
possible. Concrete examples are the Private Sector Investment Finance facility of
the OECF, and the International Trade Insurance system, consisting of the Overseas
Investment Insurance and Overseas Untied Loans Insurance facilities. The
International Trade Insurance system does not necessarily seem to have kept pace with
the latest BOT and related developments. For example, the insurance period of the
International Trade Insurance is 10 to 15 years, which does not always match the 10
to 30 year project lifespan of BOT projects. In cases where projects are conducted
with the involvement of the Japanese government as related above, the amount of
insurance required would decrease. The assurance derived from such involvement could
also provide room to reduce premiums. Moreover, the investment insurance schemes
of the developing country's government and of the countries of origin of the other
businesses participating in a consortium should be coordinated, and reinsurance
schemes developed. Traditional forms of technical and intellectual economic
cooperation to prepare an appropriate environment for private business activities
is also necessary.
To reduce political risks, the major obstacle in developing countries, it is necessary
to enter into government-to-government investment protection agreements with the
developing countries concerned, and secure the commitment of their governments to
maintaining a stable environment for investment. There is an urgent need for the
Japanese government to enter into such agreements where Japanese businesses
participate in private sector infrastructure projects. It is also necessary to
promote the development of an multilateral agreement on investment being discussed
in the OECD, UNCTAD, WTO and other quarters.
3. Coordination with Third Countries
Efficiency in economic cooperation is also a global issue. There still remains a
huge demand for infrastructure in the developing countries, and economic cooperation
is also sought after to solve non-economic issues. The providers of economic
cooperation are also proliferating, with many bilateral providers, international
organizations, and private entities. Given this situation, implementing projects
with no regard of each other creates great potential for inefficient economic
cooperation. Therefore, it is necessary for each donor country and institution in
conducting economic cooperation to coordinate its efforts with the others, while
acting within its own competence and resources. Ideally, the developing country
concerned should take the initiative in coordinating these efforts, based on its
development plan.
While aid fatigue is surfacing in the developed countries, there is a new trend among
countries leaving the ranks of developing countries as well as other rapidly growing
developing countries to become providers of economic cooperation. This parallels
the Japanese experience of transformation from a recipient country to a donor country.
Japan should actively support this trend if it enables the delivery of similar results
at lower cost.
There are significant expectations for financing, in light of the aid fatigue in the
developed countries, and there are countries willing to undertake such roles. But
for the time being, the main contribution from these quarters is expected to be
cooperation drawing on the advantages derived from their recent experience in breaking
out. For example, in technical cooperation, there are cases where the technology
being transferred from developed countries is too advanced to be fully utilized in
a given developing country. Such cases have been criticized as a waste of ODA funds.
Here, it is more efficient to provide the funds to transfer the technology from recent
"graduates." From this point of view, support for South-South cooperation, and
reinforcement of "triangular" cooperation are important in the relationship with the
new donor countries. Support for South-South cooperation and reinforcement of
"triangular" cooperation are part of Japanese, albeit indirect, economic
cooperation. Therefore, the decision of the countries to which the economic
cooperation is to be provided should made with the same criteria as conventional
economic cooperation being applied, taking into account the relationship between the
immediate provider and the recipient country.
4. The Role of Local Governments
The bulk of international activities of local governments consist of opening the minds
of their citizens to the world abroad through cultural and human exchanges between
sister/friendship municipality relationships, or revitalizing local regions by
upgrading to international airports and inviting foreign businesses. Their role in
economic cooperation has been a subsidiary one in their relationship with the national
agencies, mainly providing expects to be dispatched abroad and accepting trainees.
One reason for this has been the diplomacy aspect of economic cooperation, which is
part of the relationship between sovereign entities, raising questions related to
the integral nature of diplomacy, as well as the raison d'être of local governments.
However, local governments have a positive role to play, both in increasing the
financial and human resources for economic cooperation and in advancing public
understanding of economic cooperation. To this end, the central government should
consider providing incentives to local governments.
One potential area for this is the simultaneous achievement of revitalization of the
local economy and economic development in developing countries through regional
economic spheres, with the understanding that the activities are in line with the
economic cooperation policies of Japan and the other country or countries concerned.
Another possibility is creating a system whereby local governments aiming at
revitalizing their economies can use various means of existing ODA or extend its own
ODA to the local governments in developing countries. Promoting two-way direct
investments is another.
Concerning the subsidiary role in the actual implementation stage of economic
cooperation activities, the costs of accepting trainees and other activities are
already being subsidized, where deemed appropriate. It is hoped that the activities
eligible for such subsidies, as well as their amount, should be increased. Moreover,
since the requests for economic cooperation pass through the central governments on
both sides, it is likely that the needs of the developing countries are not always
being accurately transmitted to the local governments that are the immediate providers.
There is a need for something to eliminate this mismatch. In technical cooperation,
JICA could be the place to set up such a function.
Areas where Japan's local governments can be expected to play significant roles in
economic cooperation include the transfer of know-how in managing water supply and
conducting public-private sector joint ventures, where local governments have played
the leading role, and know-how in pollution control. Transfer of hands-on experience
in local revitalization and other aspects of local administration is another
possibility, since regional development is a major issue for developing countries.
Moreover, if local self-rule is the classroom for democracy, then intellectual
cooperation focusing on government structure and management that fosters democracy
in the developing countries should also be considered.
5. The Relationship with Non-Governmental Organizations
Non-government organizations (NGOs), like local governments, have not played a major
role in Japan's economic cooperation policy, but, again as in the case of local
governments, there is now a need for active cooperation with NGOs.
There are a couple of reasons for economic cooperation policy why government and NGOs
should cooperate. First, the World Bank and other institutions are actively working
with NGOs in examining projects and other aspects of their activities, yet, as we
have seen already, the number of people working in economic cooperation is quite low
compared to those in international organizations. Examining projects before and
after their implementation with the cooperation of NGOs is important for transparency
and efficiency purposes, because of third-party participation and the wider coverage
this provides. The grass roots nature of NGO activities means that it will be easier
to identify projects that yield large benefits to local people with relatively small
funds. Second is the potential for economic cooperation with a "face." NGOs act
locally, in developing countries, as elsewhere. Successful Japanese NGOs there can
show that "face" on the people level.
The problem in working with NGOs is the difference in the views on economic cooperation
arising from the gap between the macro, national perspective of economic cooperation
extended by the government and the micro, local nature of the activities of the NGOs.
The issue here is how to reflect those NGO activities within the macro perspective
of economic cooperation extended by the national government, and combine them. There
are, presumably, NGOs that are concerned with specific interests. This is a limiting
aspect of NGOs, since economic cooperation does not limit itself to a single interest,
but is provided within the context of the overall benefits of a higher social and
economic level for the citizens of a given developing country. In conducting economic
cooperation, the Japanese and recipient governments and NGOs should all understand
this point, and make the necessary decisions from a comprehensive point of view. This
is one more reason for the importance on the part of the Japanese and recipient
governments of developing an understanding with NGOs through information disclosure
and dialogue.
In cooperating with NGOs, it is important not to impair their independence, since
this is the very foundation of their activities. Economic and other incentives from
the government should not become the cause of constraints on the activities of the
NGOs. The government should utilize the results of NGO activities and prepare a
favorable environment for their independent and effective activities, as well as
encourage the development of NGOs and their personnel that can work abroad.
IV. Conclusion: Cooperation and Support from the Japanese Public
As we stated earlier, the Japanese policy on economic cooperation policy does
generally receive the support of the Japanese public. But the same survey shows an
increase, albeit slight, of the view that "Japanese economic cooperation could be
decreased from current levels." This could be a manifestation of dissatisfaction
about the large amount of economic cooperation despite the sense that Japanese
citizens are facing an aged society, yet are not fully enjoying a satisfactory standard
of living. The same survey shows that although there is an increasing interest in
volunteer activities, the number of people interested in international exchanges and
cooperation is low, another sign that public interest in economic cooperation is low.
As this report has shown, the importance to Japan of economic cooperation will not
diminish. Therefore, there is a need for further public support and participation,
in order to continue meaningful economic cooperation. For this purpose, it is
important for the government to seek public understanding and support through active
public disclosure, and cooperation and participation outside government agencies.
Economic cooperation is part of public policy; it should be conducted with public
support. Nevertheless, this has not been sufficiently achieved, since the benefits
of economic cooperation are not easily visible. Take financial cooperation as an
example. After the broad outline is given as the budgetary outlay, it is not made
public which countries are making what kind of requests, and what are the standards
by which they are judged. It is only at the point where the cabinet makes the decision
to provide funds that the public is made aware. As information about the projects
to which the funds have been made available, the only disclosure is the publication
of the evaluation results after the project is completed. Disclosure of information
in a democracy requires the provision of information for debate in deciding policy.
Since economic cooperation is ultimately tied to national interests, it follows that
there should be such a debate on such matters as the countries and reasons for
cooperation based on prior information. Economic cooperation is public policy; it
is not confined to diplomacy in a narrow sense. Economic cooperation policy that
emphasizes national interests is to a large extent external economic policy, which
means that diplomatic confidentiality could justifiably be less of a concern than
diplomacy in a narrow sense. Improvements in this area, while giving due
consideration to diplomatic concerns, is the first step to economic cooperation with
public participation.
Theoretically, something whose benefits appears at first glance does
not appear at all to accrue to Japan can nevertheless benefit Japan
in the long-run in ways such as insurance for security purposes. However,
since this report examines economic cooperation for its economic
rationale, national interest is defined as the economic befits accruing
to Japan.
Global Economic Prospects and the Developing Countries (1996)
Infrastructure Development in East Asia and the Pacific (1995)
Development Assistance Committee, Organization for Economic
Cooperation and Development (OECD)
In this case, it would not be recognized as ODA.
SDR: Special Drawing Rights. 1 SDRà1.5 US dollars.
Social and Economic Plan for Structural Reforms - Toward a Vital
Economy and Secure Life
wind and solar powerCurban public transport, etc.
Shaping the 21st Century: The Contribution of Development Cooperation
(May 1996)
The borrower can use the funds to purchase from any country.
Five years in this case.
One hypothetical case would be financing a regional agricultural
improvement project, rather than individual irrigation projects,
allowing a measure of discretion within that amount.
Covering initial large-scale investments, providing subsidies and
guarantees in the case of management failure are examples.
If you have any comments on this report, please send e-mail to
oda.b@epa.go.jp