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Committee on Economic Cooperation Policy Final Report

16 June 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 the national interest 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 the national interest 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, it is possible that our nation will be seriously affected if we ignore such issues as the environment, food, population and natural resources, 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 interest." 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 emphasizing market principles and 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. In other words, the successful post-war development was achieved through a two-track approach consisting of active government intervention in the economy in the early years and the subsequent economic development led by the private sector. Today, Japan 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 that served as a driving force of economic development, 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 economic policies that emphasize market mechanisms, by correcting existing market distortions and achieve efficient resource allocation through the implementation of privatization and liberalization. There is no disagreement between this school of thought and the Japanese experience, insofar as the emphasis on the market mechanism as a cause for economic success. However, the structural adjustment policies advocated by the World Bank have not led to economic take-off in all cases. This does not mean that development policies emphasizing market mechanisms are wrong. In this regard, there is criticism that the World Bank in applying structural adjustment policies had not taken sufficient consideration of the development stage and differences in social and political backgrounds of individual country, and also had required rapid liberalization across the board. The World Bank itself has responded to this criticism through the "East Asian Miracle," the result of a research project conducted under Japanese initiative, and other means and recognized the effectiveness of market-friendly and graduated development policies, the need to take initial conditions of individual developing countries into consideration, and otherwise reviewed its policies. In recent years, the World Bank is conducting policies that take the situations of individual countries into consideration through early policy dialogues in the initial stages on project preparation and other means.

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, Japan should, based on the understanding that market mechanisms promote economic development through efficient resource allocation, conduct economic cooperation in the direction of complementing and establishing market mechanisms. In this process, it is useful to learn from the post-war development process, look carefully at the economic cooperation Japan has extended during this period, and build on the positive elements and correct any points which were found wanting.

2. The Significance of Economic Cooperation

As stated earlier in this report, it is more important than ever to state clearly why ODA is necessary. Public surveys seem to indicate, however, 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, and the underlying vision for the global community.

(1) Our vision for the Global Community

Globalization has progressed at an ever increasing speed since the late 1980s, with rapid economic development in much of Asia, economic recovery in Latin America, and the transition to market economies in the former Soviet Union and East and Central Europe. Globalization should raise global productivity and income by promoting competition by businesses world-wide through expanded economic frontiers and increasing resource allocation efficiency through enhanced institutional uniformity. Globalization not only spreads economic liberalism based on personal liberties such as private property and freedom of contract, but also pushes the political system towards democracy, which is also founded on those principles.

Japan, like other developed countries, has progressed under a liberal economic system and democratic political system. Maintaining and enhancing this trend increases global welfare benefits also benefits developed countries, including Japan. To do so, developed countries face the challenge of establishing and bringing developing countries into an international economic system that enables free economic activities world-wide, and addressing global issues which include the negative effects of globalization, i.e. marginalization, and constraints such as global environmental concerns and energy-related issues.

(2) What Is The National Interest?

A definition of the national interest in the words of the Japanese Constitution would be "to preserve our security and existence." This, however, is no longer restricted to military security, nor to "comprehensive security," which also includes economic interests. In a globalized, increasingly interdependent world, the national interest requires "mutual development that addresses global issues under a stable, free economic system."

This view of the national interest not only includes easily visible economic benefits, but also covers the global environment, international order and other international public goods, which benefits not only ourselves, but also the global community, as well as the establishment and reinforcement of mutual trust and friendship through humanitarian aid and other means which seem at first glance to benefit solely the recipient country concerned.

(3) The Significance of ODA

"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; its 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; Japan's high external dependence in an increasingly interdependent world; achieving political stability through contributions to social and economic development and welfare in developing countries as a natural corollary of the Japanese Peace Constitution; and demonstrating the Japanese experience as the first non-

Western nation to achieve dramatic economic development. These elements are covered by the national interest that was discussed in the previous section. To consider the significance of ODA is to consider the national interest.

A look back at our post-war history shows that Japan was both recipient and provider of such economic cooperation. For example, the humanitarian considerations evident in our "responsibility to [help] less fortunate nations to overcome problems such as poverty and hunger" correspond to the grants that Japan received from 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. The "[n]atural corollary of the Japanese Peace Constitution" 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, does the recognition of interdependence that is evident in "Japan's high external dependence in an increasingly interdependent world" come in? It cannot be denied that one reason for American economic cooperation with Japan was to establish it within the West Bloc. Nevertheless, 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 our economic development through its effect on the supply of resources. The national interest 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.

Moreover, economic cooperation in the Middle East, where we rely on for much of our natural resource needs not only directly benefits Japan, but also contributes to economic and military security in the global community as a whole through economic stability and development in the developing world. In other words, the significance of economic cooperation is a mixture of humanitarian concerns, international contributions, and the national interest.

Internationally, humanitarian concerns tend to be emphasized. Here in Japan, the tendency has been to emphasize this and international contributions. Nevertheless, a look at our past history of economic development and cooperation shows that the national interest is also significant; without the national interest, there is no assurance that that nation's economic cooperation can be sustained. Efficient and effective economic cooperation also requires a stronger awareness of the relationship between costs and benefits, and an emphasis on such befits, economic in particular. In this report therefore, economic cooperation will be examined taking into economic benefits as much as possible.

From this point of view, international contributions and the like correspond to "international public goods" in the economics discipline. Since no one can be barred from enjoying the benefits of public goods even if that person does not bear the costs, it will be in the interests of that person to become a free rider. This means that if there are no hegemonies or other countries willing to provide international public goods and all countries try to be free riders, international public goods will not be provided; the global environment will deteriorate, international order will be disrupted, and the benefits of all countries including Japan will be severely constrained. The costs would dwarf the benefits if we were to bear the costs alone. But they would be relatively small if the developed countries were to share them. Providing economic cooperation is not enough; we must also coordinate the efforts developed countries. Indeed, countries that played this role in dealing with international conflicts and the problems of developing countries in general have been praised for their actions and gained the trust of the global community, while those that have not done so have been subjected to severe criticism. This is the reality that must be faced.

There is a tendency to think of the national interest as political and diplomatic or short-term economic benefits. However, the national interest 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 the national interest 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 of the social security or welfare type 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 to assume ownership 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 capabilities 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) Fiscal Reform and 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. The secretariat of this committee also conducted its own estimate of global financial demand, by calculating current account balances using econometrically derived export-import functions and income account functions internalizing interest payments on external debts . According to this study, the average current accounts/GDP ratio for East Asia and Oceania between 1996 and 2005 based on the national growth rate forecasts by the World Bank is estimated at -1.7%, somewhat larger than the -1.5% World Bank estimate . As for the Sub-Sahara region, the secretariat's estimate demonstrates an expansion of the current accounts/GDP ratio, whereas the World Bank estimate figure remains stable or shows a slight improvement. The developing countries aggregate current accounts/GDP ratio is -1.3%, roughly equal to the -1.4% World Bank estimate. Showing continued strong demand in the developing countries . However, if growth in the developed countries is lower than the World Bank assumptions, developing countries' exports to the developed countries will fall, increasing the current accounts/GDP deficit figure, worsening the financial position of the developing countries.

The secretariat also conducted an estimate of infrastructure demand covering water sewage, roads, airports, telecommunications and electricity in the developing countries . In the study, the relationship between per capita income and infrastructure levels were derived through cross-sectoral analysis based on country data, incorporating Japanese experience for sewage and roads. This was used to estimate in accordance with growing income future levels of infrastructure and the necessary financing. According to the survey, aggregate infrastructure demand between 1995 and 2015 in East Asian developing countries reaches 1.5 trillion dollars, with roads accounting for about 70%, followed by electricity and telecommunications. The aggregate figure for all developing countries is 6.3 trillion dollars, led by East Asia, with Sub-Sahara Africa and Latin America following. Comparing these results with the World Bank estimate, the secretariat figures are lower (about a quarter lower than the World Bank for the developing countries aggregate), due to differences in scope and methods . Nevertheless, both estimates show that future economic development will lead to huge infrastructure demand in the developing countries.

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 falling into line with the "aid fatigue" that is affecting many developed countries without giving due consideration to the national interest. 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 public funds should be used for high- return investments now in order to prepare for the future. The impact of long-term public finance deficits on the overall Japanese economy must also be taken into consideration. In view of these domestic considerations, it is of the utmost urgency to explain convincingly the importance of ODA to the Japanese public.

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 directions of our ODA. Policy guidelines that state clearly the national policy for ODA should be brought forth the Japanese public, based on such debate.

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 serious 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, taking into consideration division of labor between developed countries. Efficient and effective economic cooperation means that 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 should receive attention. Looking further, countries bordering on the Indian Ocean should also receive attention if they forge close economic ties with Japan. 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.

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 industrial sectors 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. This may involve countries at different levels of development. Where this is so, there will be cases where it will be necessary to develop ecoonomic cooperation packages that will enable the appropriate development of infrastructure for the region as a whole. Addressing such issues is one reason why 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 it is necessary to emphasize economic cooperation with East Asian countries and countries that have the potential of following the development of the former.

On the other hand, as a country heavily reliant on the free economy regime, the international stability and development of this system is important to Japan. Humanitarian aid as well as the need to contribute to the preservation of the global environment and other global issues is also a serious concern. The most efficient and effective mechanism for achieving these objectives must be studied. This requires the consideration of the optimum relationship between bilateral and multilateral assistance.

The international institutions responsible for multilateral assistance not only perform such functions as maintaining international financial order, but also contribute to efficiency and effectiveness in providing assistance because of their expertise and their ability to provide politically neutral policy advice. Utilizing these strong points is also useful in achieving our ODA objectives.

It is also very important to reflect Japanese views on policy issues and administration in international institutions. There is criticism that Japanese thinking on economic cooperation has little influence on policy making in the World Bank, IMF and other international institutions. The relative lack of Japanese contributions in terms of human resources and insufficient information on Japanese involvement in decision making processes is partly to blame for this. In recent years, Japan has requested the World Bank to learn from the development process of East Asian countries and use the results in its activities. Japan has also requested the study of substantive measures to contribute to the introduction of private financing to infrastructure development in newly emerging economies. Such efforts to take the initiative should be encouraged. Contributions in the form of human resources is also important. From this point of view, it is necessary for the government to make further efforts to encourage the deployment of high-level officials. More disclosure of information on the role of the Japanese government in the decision making process of international institutions is also desirable.

(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. Interest rates are also determined in principle by the income levels of the countries concerned. 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. Economic development requires substantial funds. Least developed countries, however, face serious financing constraints. They generally lack domestic savings, and cannot expect too much in the form of grants. This means that there is a high possibility that they will never take off economically if they are unable to secure loans. In fact, least developed countries do borrow form the World Bank and other international development banks to achieve economic development, while at the same time receiving grants bilaterally. Moreover, basic human needs 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, as discussed above, there is the possibility that projects might be implemented without sufficient consideration of their significance because of the relatively low costs to the recipient country. This means that it is necessary to fully examine the necessity of a given project subject to a grant, and make further efforts to reduce costs in implementing it.

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 due to preference for grants should be taken into consideration. Following this line of thinking, assistance need not be limited to the current forms of loans and grants. Other, intermediate forms of financial cooperation are conceivable. Some examples that should be examined, with the assumption that they will not increase public financing requirements 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. Also, flexibility between loans and grants could be problematic where the criteria is unclear. Nevertheless, 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. 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. 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. As a related issue, although grant element is one internationally recognized yardstick to determine concessionality, there is no convincing reason why a ten percent discount rate should be used. Consideration should be given to the possibility of determining concessionality based on market interest rates. It is important to have these issues discussed in the Development Assistance Committee of the OECD and other international forums. Evaluating the quality of ODA requires a comprehensive judgment including the effects of economic cooperation, and a narrow focus on a given individual index 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 or changing repayment conditions to cover the appreciated amount or other means for an economic cooperation standpoint is conceivable. 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 futures market is not very large yet, the yen 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 for developing countries. 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.

(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. Addressing this aspect also serves our national interest.

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.

1 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 regulations, and training specialists, in addition to "intellectual" cooperation aimed at transferring the knowledge gained from the experience of the developed countries. 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.

2 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.

As on environmental issues, Japan has gained exceptional know-how in the agricultural sector that can be very useful in making contributions. There is a need for measures for economic cooperation in this area also.

3 Basic Human Needs and Poverty

Failure in economic development is a major cause of poverty and poverty-related problems. Assistance aimed directly 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.

4 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).

5 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. 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.

1 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 on one hand, and on the other international proposals such as reciprocal untying, which seeks to unty all aid including grants. As there is renewed discussion on this issue, it 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. Expanding SAPI and SAPROF implemented by the Overseas Economic Cooperation Fund, the concessional lending arm of Japanese ODA, is another. 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.

It is also important to work together with recipient governments in public relation activities in order to raise public awareness of the benefits that Japanese cooperation has provided.

2 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, and the participation of the Japanese public economic cooperation based on that understanding, are 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.

III. 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, but deserves particular attention because of the difficulties surrounding ODA.

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 the national interest. 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. There are desirable aspects to bringing our relationship with recipient countries where Japan is providing economic cooperation on a continuous basis into this process, since it facilitates mutual understanding on the procedural aspects and efficient use of concessional lending funds through careful and deliberate preparations. Going one step further, for countries sharing this process that can develop mid-term development plans, deciding annual funding after annual consultations based on mid-term considerations on sectors and projects 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 runs the risk of creating a reliance on aid, as well as facing problems such as the relative lack of visible Japanese "presence" and oversight difficulties. On the other hand, it has advantages such as effectiveness in supporting economic reform because of the greater discretion it gives to the recipient country, and the potential for addressing meeting short-term, emergency needs. 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, while utilizing intellectual assistance and otherwise enhancing management of the non-project assistance provided.

The second issue is the need to realize the completion of the project as a whole. The completion of a major project requires the participation of many parties from various countries. Moreover, there are projects whose ultimate objective of economic development cannot be achieved by the completion of individual projects, but require the completion of a range of projects for this . In this case, if all the construction work has not been completed on schedule at a satisfactory level and the components been made ready to run, the individual components and their financing have not been utilized effectively. To avoid such a situation, either a single party should be contracted to undertake the entire project from design to completion, or place the obligation on the contractor to get the project up and running based on technically uniform specifications for the project as a whole. This means that there is a need to give guidance to the developing country parties on know-how for developing specifications that cover the running of the project as a whole, as well as cost considerations. It may also be effective to provide interest rate incentives on concessional loans for completion within schedule, or, conversely, disincentives when completion is delayed.

The third 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. To take an agricultural project for example, in the beginning, there could be a pilot project using [syokuryouzousanennjo], which comes in the form of a grant. This could be expanded by using a concessional loan. 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 fourth 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.

Fifth 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 to this end. Existing country-by-country, sectoral and other forms of assessment should be further elaborated. 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 strengthen the evaluation mechanism and 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 concessional loans to peripheral projects undertaken by the developing country itself where 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 a private enterprise will be undertaking the project, there must be some way to confirmed that public interests will be secured. Another problem is that 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. Moreover, 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.

There are ways other than concessional loans to reduce risks for the private businesses that are possible. Concrete examples are the Private Sector Investment Finance facility of the OECF, loans from the Export-Import Bank of Japan, 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 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 possibility that through these NGO activities, government agencies can be approached to make economic cooperation more efficient and effective. Third 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.

One issue in working with NGOs is how to bridge 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 can be beneficial where it leads to deep knowledge and interest in specific areas. But this is also 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 government must make a comprehensive decision for the implementation of specific projects with the cooperation of NGOs, based on a mutual understanding of this point between the Japanese and recipient governments and NGOs. 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. Cooperation and Support from the Japanese Public and Disclosure

As we stated in the beginning, in the survey on Japanese policy on economic cooperation policy, the view that economic cooperation should be actively pursued is much more prevalent than the view that it should be curtailed, showing that economic cooperation 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." The same survey also 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. This could be a manifestation of dissatisfaction from the perception that there is a large amount of funds going to economic cooperation, despite the fact that the Japanese ratio of ODA to GDP is as low as fifteenth among developed donor countries, while Japanese citizens are facing an aged society, yet are not fully enjoying a satisfactory standard of living. Since the interests served by economic cooperation, unlike public works, are not readily visible, the government may have been responsible for not working enough make the Japanese public more aware of the significance of economic cooperation. The government and the media may not provided the information for a full understanding of development issues.

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 based on an accurate understanding, in order to continue meaningful economic cooperation. For this purpose, it is important for the government to promote public education that provides a comprehensive coverage of developed and developing countries and global issues, seek public understanding and support through active public disclosure, and obtain cooperation and participation from outside government agencies.

Nevertheless, this has not been sufficiently achieved. To give an example in public disclosure, in financial cooperation, 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. It should be possible in this case, for example, to publicly disclose at the point of agreement the reasons why a project was chosen from the list of requests from the recipient country concerned.

V. Conclusion

This objective of this report is to seek the answer to economically rational and sustainable economic cooperation. This process must begin with the answer to the question why ODA is necessary. Economic cooperation seeks to fulfill the national interest. The benefits accruing to Japan through the economic development of recipient countries is a major part of this national interest. Although this is not a point that has been given much emphasis in the past, we believed that focusing on this would lead to the realization of efficient and effective economic cooperation. In other words, economic cooperation is just as much a part of international economic policy as it is a part of diplomacy. This is the basis on which this report made recommendations such as the emphasis for ODA on the Asia-Oceania countries that will provide the greatest benefits to Japan, actual measures to use constrained ODA resources more efficiently and effectively.

This report also assumes that economic globalization promotes economic freedom and democracy worldwide. The Japanese constitution makes it clear that Japan is founded the principles of the sovereignty of the people and democracy; we the Japanese people must strive continuously to this end.

The constitution ensures as important prerequisites of democracy freedom of expression and the right to know. Public disclosure of information is essential to this. One aspect of disclosure is securing the understanding and support of the people by demonstrating the costs and benefits of public policy. But it is also essential to realizing democracy, which is our vision for the global community that we se to achieve.

Since economic cooperation is external economic policy, there should be more room for public disclosure than in diplomatic policy in the narrow sense. For example, it should be disclosed beforehand to the public how much economic cooperation should be extended to what countries in order to maximize the benefits to the national interest, and the decisions made through public debate. The government should, while balancing this with diplomatic concerns, make such improvements.

Finally, it is not enough merely to provide public disclosure and other tools that reinforce democracy. Just as important is an attitude on the part of the administrative institutions that intend to follow them. It is almost inconceivable that a post facto examination of any government policy will show it to be an unqualified success. This is a point that both the people and the government must understand. It is on the basis of this understanding that the objective control of the administrators must be strengthened, whereby the costs and benefits of a policy proposal is shown to the public and the decision made by the public and the parliament. This is the issue at the heart of administrative and fiscal reform, the foremost public issue today, and, in economic cooperation, should be the first step in obtaining the understanding and cooperation of the people.

Global Economic Prospects and the Developing Countries (1996)

Infrastructure Development in East Asia and the Pacific (1995)

For more details, see EPA commissioned study "Survey Report on Estimate of Global Financial Demand" (FY1996 Zaidan Houjin Kokumin KeizaiKyoukai).

Unlike the World Bank estimate, the secretariat's estimate does not include the Republic of Korea and Vietnam. Including the figures for these countries in the estimate should increase the figure somewhat. All countries minus high income countries.

For more details, see EPA study "Survey of Infrastructure Demand in Developing Countries" (FY1996 nihon sougou kenkyuusyo).

Ex. Infrastructure is lower than in the World Bank estimate. Ex. The ratio of infrastructure investment to GDP levels is a constant. wind and solar power,urban 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.

Special Assistance for Project Implementation.

Special Assistance for Project Formation.

One hypothetical case would be financing a regional agricultural improvement project, rather than individual irrigation projects, allowing a measure of discretion within that amount.

For example, the completion of a power generation plant requires boilers, turbines and other equipment, which may have different contractors. The completion of a project to supply electricity requires dams, power generation plants, transmission lines and other facilities

Covering initial large-scale investments, providing subsidies and guarantees in the case of management failure are examples.

In this case, subsequent progress in privatization could expand the privatized portion of the project concerned. This means that privatization plans should be taken into consideration, and that public disclosure of such plans is important.

For more details, see EPA commissioned study "Survey Report on Estimate of Global Financial Demand" (FY1996 Zaidan Houjin Kokumin KeizaiKyoukai).

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