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Japan and Asia: developing ties
by Aelim Chi and Maiko Miyake
Despite its present economic turmoils, Japan is still comfortably the world’s second largest economy after the United States. A perhaps lesser-known fact is that it is also the world’s leading bilateral aid donor. Japan’s total net Official Development Assistance (ODA), which comprises grants and low interest loans for development, to developing countries reached US$9.36 billion in 1997. This was more than the United States, which spent US$6.9 billion in the same year. The grant element, which is equal to or near 100% in most countries, was about 40% of total ODA for 1996-97—Japan has lowest grant share among ODA donors.
Most of that ODA is targeted in its own regional sphere of south, central and east Asia. In fact, since the beginning of the Japanese aid programme, the share of its bilateral ODA to Asia has not changed much, standing at 69% of the ODA total in 1997, down just 4 percentage points on the position in 1976-77. The rest is shared by Africa (13%), America (11%), Middle East (5%), Oceania (2%) and Europe (1%). Moreover, according to OECD data, the top ten recipients of Japanese ODA were Asian countries, and the top five of those received over 40% of Japan’s total bilateral ODA outlay (see table). So while Japanese official bilateral aid is directed mainly at Asia, there are marked concentrations of aid within the region too.
The main reasons for this concentration of Japanese aid in Asia are clearly both historical and geographical, as well as economic. Aid, in the form of grants and low-interest loans, is mainly aimed at promoting the economic “take-off” in recipient countries and to promote economic stability in developing regions. While Japan has invested quite a bit in hospitals, sewage facilities and rural water supplies, its overall investment in basic human needs, such as rudimentary education and health, has been poor. Most of the aid has been aimed at building the economic infrastructure of the region and improving industrial production and services. Moreover, reflecting the importance of economic interests in its aid policy, a large portion of Japan’s ODA has been consistently directed towards lower-middle income countries, which is followed by low income and then least developed countries. But Japan is not just an important aid donor. It is also an important generator of foreign direct investment (FDI), reaching US$13 billion in 1997. This accounted for a half of the nation’s total outward investment. Private sector investment has been strong in the Asian tigers of Singapore, Hong Kong, China, Korea and Chinese Taipei, and has spread throughout the ASEAN area, which is the loose trading block linking Asia and Oceania. More recently, China has been a favourite destination of Japanese FDI.
The Asian continent has traditionally been attractive to investors for its cheaper production sites, but its attractiveness as a market has been increasing too. Japan is now the largest single investor in terms of stock in Thailand, Indonesia and Malaysia, and the second largest in the Philippines after the United States. And while Japan has helped to expand Asia’s productive capacity in the last few decades, it has also played a key role in boosting the inflow of technology, know-how and human resource development in the region.
The economic and financial crisis in much of South-East Asia has not jolted Japan’s commitment either. In fact, since the financial crisis started in Thailand in mid-1997, the value of Japan’s rescue packages to the region came to US$80 billion, of which about US$10 billion was in the form of ODA, which is still being disbursed. The packages were aimed at economic recovery, structural reform and social assistance. Japanese investment, particularly in the manufacturing sector in these countries, grew in yen terms in 1997, but it fell in dollar terms. One important reason for this is that as the re-invested earnings declined, parent firms in Japan have had to boost remittances to buoy their investment operations abroad. However, another reason is that firms have turned the recent financial crisis to their advantage by developing their Asian export platforms on the back of steep currency devaluations. This was particularly true of Japanese consumer electronics companies in Malaysia, Thailand and Indonesia, whose cost competitiveness vis-à-vis China increased.
It is worth noting the strong support of the Japanese government for continuing FDI. In fact, the economic rescue package for Asia included the injection of funds into the Export-Import Bank of Japan to help finance it. The funds have provided some relief for firms, given the climate of tighter bank lending conditions in Japan. So, what of the future? One trend to note is that Japan’s FDI flow to South-East Asia has increased dramatically, widening the gap between ODA and FDI. However, both flows have fallen in recent years, reflecting fiscal and economic pressures in Japan (see graph). The squeeze is likely to continue. Aid, in particular, is likely to decline when the special assistance provided through the rescue packages comes to an end.
This raises two important issues for both recipient countries and Japan. One is how to manage the FDI and aid flows more efficiently. The OECD has already noted that the four Asian countries—Malaysia, the Philippines, Thailand and Indonesia—which were hit hardest in the crisis, would have benefited more from FDI had they had a more balanced policy towards foreign investment, in particular in the areas of improving linkages with local industry and developing the region’s human capital. The second point concerns mainly Japan, namely that it might channel more of its ODA into promoting the basic needs of social development and poverty reduction and allow more of the economic, financial and infrastructural requirements to be satisfied through the market. Some of this can be achieved by shifting more aid to social sectors and by focusing more on the most needy recipient countries. The change would boost the effectiveness of Japan’s ODA and FDI commitment in Asia. It would also reduce the risk of future turbulence in the region as a whole, benefiting not only Japan, but the world economy as well.
Bibliography
Recovery in South-East Asia: Enhancing the Role of Foreign Firms, OECD, 1999.