Report of the Mission for Revitalization of Asian Economy: -Living in Harmony with Asia in the Twenty-first Century-

PART 2: OBSERVATIONS OF THE MISSION FOR REVITALIZATION OF ASIAN ECONOMY

I. CHALLENGES FACING ASIA

1. Signs of recovery

The Asian currency crisis began with the fall of the Thai baht in July 1997 and brought unprecedented economic upheaval to most of the countries of East Asia. However, East Asian economies appear to be over the worst of the crisis thanks to the reforms implemented by national governments and the assistance provided by the international community. Most countries have seen the currency crisis as an opportunity not only for economic reform, but also for political and social reform.

(1) As the currency and financial crisis grew longer and more serious, the growth rate for Asian economies as a whole declined sharply in 1998, but in 1999 there have been signs of recovery in the form of lower interest rates (brought on by more stable currency values) and higher industrial production. The extent of the recovery differs from country to country, however.

(2) Rising share prices have invigorated consumer spending, while recovering demand in the world semiconductor and computer markets have boosted exports, good weather has increased agricultural production, and economic stimulus packages have expanded domestic demand. The outlook is therefore much brighter for Asian economies. In September 1999, the International Monetary Fund (IMF) and Asian Development Bank (ADB) announced substantial revisions upwards in their economic growth forecasts for Asian countries (originally announced in April), leading to a growing perception that Asian economies had entered full-fledged recovery.

(3) However, much of the recovery in Asian economies is supported by government spending and is predicated on expanding world trade and the continuation of the US economic boom. Asian countries must continue to tackle reforms in their real economies, reforms in their financial systems, reforms in their economic structures (alleviation of excess corporate debt, small-business-oriented corporate reforms), and human resources development.

(4) Japan accounts for approximately two-thirds of the total GDP of Asia and therefore has a major role to play in Asian economic recovery. We will need to continue to do all in our power to bring our own economy into recovery so that we are able to meet the expectations placed on us by Asian countries.

2. Economic structural reforms

Though Asian economies are generally in recovery, they will need to resolve the structural challenges facing them or the recovery will be transient rather than long term.

(1) Economic crisis caused growth to wane in Asian countries, but that does not mean that they have lost their latent growth potential. It will be essential that countries reinforce their domestic economic bases in order to bring out this potential and again achieve strong development. Obviously, there are issues that the international community must work on too in the reform and strengthening of the international financial system, but that does not mean that Japan and other Asian countries can ignore reforms at home.

(2) In the countries we visited we heard statements recognizing the need for economic structural reforms. Defaulted debt clean-ups, financial structural reforms (banking reform and the like), and SME supports aimed at developing parts industries, supporting industries, and competitive export industries were among the topics that stood out.

(3) In general, the Asian economies we visited evinced an attitude of being willing to work for economic structural reforms, recognized the importance of reform, and displayed a strong desire to continue. Political leadership is required for reform to continue, and we would hope to see the leaders of countries continue to exert this leadership in the future.

3. Reforms to the international financial system, and regional cooperation

(1) In the current global international financial system, a sudden undermining of the confidence of the markets can spark large shifts in private-sector funds, which in turn creates panics of different sizes and durations. One of the reasons for the Asian currency crisis was the frailness of the fund-raising engaged in by countries in the region, their over-dependence on short-term, dollar funds. But the subsequent crises in Russia and Brazil demonstrated the need to look at the risks inherent in the global financial system itself.

(2) The first step is to monitor financial intermediaries, including hedge funds, for large movements of capital from the advanced countries, to engage in prudent regulation of these movements, and to suppress excessive speculation while increasing the flow of needed international capital. However, it is also important that the emerging markets that are the ultimate recipients of funds make further efforts to enhance their legal infrastructure so as to promote greater transparency in transactions, better disclosure, prudence regulation of financial institutions, and restructuring of banks and industrial companies.

(3) The Manila Framework, which was created after the currency crisis of 1997, serves as the mechanism for regional cooperation in Asia. The framework provides primarily for technical cooperation to strengthen economic surveillance in the region, reinforce financial sectors, and enhance market supervision. To deal with the crisis, the IMF was requested to establish new mechanisms for loaning short-term funds. This was done in the form of SRFs (supplementary reserve facility), which was first invoked during the South Korean crisis of December 1997. Economic surveillance in the region has been conducted five times already, and plays the role of peer pressure (prior mutual warning) for the achievement of economic structural reforms. In the future, these frameworks for regional cooperation will need to be used as the basis for creating and developing efficient markets that are consistent with the global financial system and effective financial intermediation services.

4. Emphasis on human resources development

(1) It is essential that we bring new energy to people, goods, money, information, and technology development in order to achieve a prosperous Asia in the twenty-first century. Particularly important will be better use of the human resources that are involved in all of the other elements. The currency crisis taught the importance of emphasizing "manufacturing," and stronger efforts must be made in this regard, but "building people" is at the foundation of "building things," and so a new emphasis on human resources development will be one of the central hurdles facing Asia. Japan has excellent manufacturing technology and expertise, but this cannot be transferred merely by providing design drawings and manuals. It is only achieved by medium- and long-term "people building." Japan is a world leader in the area of manufacturing and it is only natural that we also cooperate with human resources development in the process of industrialization. It will be important for Japan to work in conjunction with ASEAN to help Indochina (Laos, Cambodia, and Myanmar) recover from economic crisis and to assist in the development of the human resources that will facilitate the integration of these countries into ASEAN.

(2) We must also deepen the human interaction and exchange between Japan and Asia in order to bring new energy to the "people" part of the equation. Exchange at the student level will be important in building good relations with Asian countries in the future. Currently, far more students in Asian countries wish to study in Europe or America than in Japan, and this is evidence of several problems: the lack of Japanese language education in Asia, the lack of internationalization in Japanese universities, and the relative lack of merits to studying in Japan. Japan itself will need to make improvements in order to provide more incentives for foreign students to study here. We must also actively work to create environments that will encourage more young Japanese people to study abroad in Asia.

(3) Japan is a resource-poor country; its greatest asset is its excellent human resources. It is important that, as Japan's society grows older, these human resources be used for the prosperity of Asia, and that further enhancements are made in human interaction and exchange, including at the student level. Japan must include cooperation and exchange in the area of human resources as one of the major focuses of its Asia policy.

5. Expectations on Japan

Though faced by its own economic difficulties, Japan provided assistance for the Asian countries when they were in economic crisis. In addition to ordinary yen loans, it established the New Miyazawa Initiative and a special yen loan program. These active efforts to deal with crisis have been a major aid to the recovery of Asian economies and have created a strong image in the minds of Asian countries of Japan as a true friend. As a "sworn friend" of Asia, Japan must actively provide Asian countries with resources in the areas of people, goods, money, and information, and must use its insights and wisdom to take the initiatives expected of it in leading Asia to common prosperity. It is essential that Japan itself be open to Asia and the world if it is to meet these expectations. Now is the time for a "third opening" of our country.

II. ISSUES FACING INDIVIDUAL COUNTRIES AND THE ROLE OF JAPAN IN THEIR SOLUTION

1. South Korea

(1) Status and challenges

South Korea is moving steadily forward with economic structural reforms as it endeavors to solidify its position in the aftermath of crisis. Reforms are still incomplete, however, and economic upturns cannot be allowed to cause them to slowdown or cease. Following are the major challenges before South Korea in reform:

(2) Role of Japan

Japan must cooperate with South Korea in the spirit of building the new partnership as advanced countries. For example, Japan and South Korea might provide joint cooperation for third countries, or they might be able to engage in mutual monitoring of economic trends and capital movements to prevent recurrences of crisis. It will also be important to study bridge facilities and other back-up systems to respond to crisis. Japan might additionally provide human resources and expertise for the clean-up of non-performing loans.

The South Korean investment climate and market access have improved for Japanese companies since the economic crisis, and progress has been made in cultural opening as well, although Japanese companies are not sufficiently aware of this. Rather than being obsessed with the images of the past, we must reevaluate the new and greatly changed Korea of today. We must also engage in further cooperation to remove the remaining impediments to investment and market access between Japan and South Korea as mandated in the "Japan-Korea Economic Agenda 21" (agreement signed by the Japanese and Korean leaders of state in March 1999). More specifically, in the immediate future work should move forward on investment agreements and mutual recognition, and we should actively pursue tighter economic relations between the two countries, including strategic tie-ups between companies from both. As an extension of these efforts over the long term, we should seek to achieve a free trade agreement (FTA).

2. Vietnam

(1) Status and challenges

In the latter half of the eighties, Vietnam embarked on reforms designed to marketize its economy and open itself to the outside. In the nineties, direct investment and aid began to flow in from other countries, enabling the economy to achieve high growth rates, averaging 8% a year. However, when the Asian currency crisis caused trade and investment to slump in the region, Vietnam's export competitiveness declined against its neighbors, and since 1998 its growth rate has been significantly blunted.

(2) Role of Japan

Japan already provides support for structural reforms in Vietnam. Examples include the Comprehensive Policy Study on Marketization (the Ishikawa Project) and assistance for the formulation of programs to foster the private sector conditional upon economic reform assistance loans granted under extensions to the New Miyazawa Initiative. Japan should continue and expand these policy dialogues, and should provide the government and state enterprises of Vietnam with the human resources required to ensure that reform plans are appropriately reflected in actual policies. This would include sending in Japanese experts on law, taxation, fiscal policy, trade, and industry, and also high-level policy advisors capable of adjusting and coordinating policies. As a member of ASEAN, Vietnam will need to enhance its backward economic and social base in order to achieve economic development on par with its neighbors. In addition to ordinary yen loans, Japan needs to provide special yen loans as it continues to aid Vietnam in these infrastructure improvements.

3. Thailand

(1) Status and challenges

With the fall of the baht in July 1997, Thailand was the country in which the Asian currency crisis started, and in 1998 it recorded its worst negative growth in history. However, in 1999 calm began to be restored in the Thai economy, and recovery is now under way.

There are urgent issues that Thailand must address in order to overcome the currency crisis and consolidate stable, sustainable growth. These issues can summarized in the three points below.

(2) Role of Japan

4. Malaysia

(1) Status and challenges

Malaysia's response was unique among the countries hit by currency crisis; it refused all assistance from the IMF, and instead imposed restrictions on capital transactions and fixed foreign exchange rates to insulate its economy from foreign speculation. It also moved dynamically to stimulate its economy with easier money and higher fiscal outlays, injected capital into its banks, purchased defaulted credits, reorganized its financial systems, and moved actively to restore its financial system to a sound footing. The Malaysian economy is now in recovery, and the country deserves high praise for its efforts, under the leadership of Prime Minister Mahathir, to solve its problems on its own.

(2) Role of Japan

The Malaysian economic recovery has finally gotten under way, and financial cooperation from Japan will continue to be extremely important to its success. Malaysia has particularly large expectations for Japan in the areas of human resources development and transfers of technology and expertise. Japan should use yen loans and other mechanisms to provide active support. It is also desirable that Japan share its experiences with Malaysia and act as a good advisor for the country's efforts to train the human resources required to advance its industry, develop its supporting industries, and reform its financial sector. This is a country that is quite willing to listen to complaints from foreign companies, particularly Japanese companies. If there are problems, they should be pointed out and discussed frankly.

5. Indonesia

(1) Status and challenges

The process of political stabilization is moving steadily forward in Indonesia. General elections were held without incident, and President Wahid was chosen at the end of October, 1999 according to democratic processes. Obviously, stable political environments and fair, transparent political systems are essential to energetic economies, and it is expected that Indonesia will continue to move forward with reforms in its political and economic spheres. Improvements in transparency and accountability are of particular importance.

The Wahid Government faces many challenges in the macroeconomic environment. While political processes have made progress, the situation remains unstable. Among the issues to be addressed are programs for the socially vulnerable, expansions to the scope of economic legislation, rebuilding of the banking sector, and alleviation of the debt problems at private companies.

(2) Role of Japan

6. Philippines

(1) Status and challenges

The Asian currency crisis did not hit the Philippines as hard as it did its neighbors, but it did have measurably negative impacts on the growth rate and poverty conditions. Economic growth has worsened (from a real GDP growth rate of 5.2% in 1997 to -0.5% in 1998), inflation has risen (from 5.0% in 1997 to 9.6% in 1998), fiscal spending has worsened (from 0.1% of GDP in 1997 to -1.9% in 1998), and the poverty rate is high (32.1% in 1997). It is urgent that the Philippines quickly overcome the economic problems raised by the crisis, so that the country is able to achieve sustainable economic growth. It will also need to alleviate poverty by securing efficient administration of the economy, timely implementation of important policies, and improvements in national social welfare.

(2) Role of Japan

There are great expectations on Japan and there is much that it can contribute to securing economic growth and public welfare in the Philippines.

Reference: Singapore

During its visits to the six countries discussed above, the Mission also visited Singapore and held discussions there. Singapore was not directly hit by the currency crisis, but it has nonetheless felt the impact of slumping regional economies. Its growth rate slowed in 1998, although it is once again turning in high growth now. In moving forward with regional cooperation, it will be important for Japan to maintain close, cooperative ties with the rapidly developing financial and information center of Singapore.

III. ASSESSMENT OF JAPANESE AID PROGRAMS

1. Evaluations by recipient countries

We asked the governments and private sectors of the countries we visited to evaluate Japanese aid and describe their expectations for it. For example, South Korea, the first country we visited, expressed its thanks for Japan's response to the currency crisis. Thailand said that "friends in need are friends indeed" and that "Japanese aid has created jobs in rural areas and encouraged consumer spending." Vietnam praised the Ishikawa Project as "the most suited to conditions in Vietnam of any of the expert recommendations we have received on economic policy from any country or international institution." Thailand also held the Mizutani Project in high regard for the assistance it provided in economic policy.

2. Future issues

(1) Continued provisions of needed aid

The economic outlook is brighter in most countries, but in addition to ordinary yen loans provided by JBIC, further financial cooperation from Japan under the New Miyazawa Initiative, special yen loans, and other mechanisms will be vital to continued recovery. We must continue to provide a steady stream of this aid. Human resources development is the area to be given top priority because it will vouchsafe the region's economic revitalization over the medium and long terms. All countries have high needs in this regard, and there is enormous room for further Japanese contributions. It would be conceivable to use student loans and government assistance to aid in the development of middle managers for private companies. Specific areas to do this in will need to be identified in coordination with national governments, experts will need to be recruited, and systems will need to be set up for their dispatch (decisions made on cost allocations between the government and private sectors). We should also study more active use of "silver" personnel. Recent advances in telecommunications technology have made remote education more feasible, and this is an area that also deserves study.

(2) Improved transparency: Monitoring the use of funds

It is extremely important that the use of government cooperation funds be transparent. Funds must be used appropriately if the people of the recipient countries and the people of Japan are to be truly grateful for and favorably inclined towards cooperation. Japan needs to establish, in coordination with international institutions and other donors, a system capable of detailed monitoring, when needed, of counterpart funds that come with the financial assistance administered by JBIC under the New Miyazawa Initiative. Monitoring of yen loans to Indonesia is accomplished with the assistance of NGOs. The government should make greater efforts to monitor and follow up on aid in the future.

(3) Appropriate, timely aid, outlook for the future

Japan's response to the Asian currency crisis consisted primarily of "quick-disbursing" program-style aid such as the New Miyazawa Initiative to provide East Asian economies relief for damaged economies. This program-style aid was extremely effective as a response to the currency crisis, something that has been touched on repeatedly in this report. Meanwhile, in addition to project-style aid, it goes without saying that it will be more important than ever that the governments and peoples of recipient countries develop grand designs for economic reconstruction and development during this recovery period. The government of Japan and aid administration agencies must make more of an effort to identify the needs of the recipient country and engage in active policy dialogs so that aid is more effective. There are great expectations on Japan to continue to contribute to the stable growth and development of Asian economies.

(4) Better publicity

Unless Japan accurately communicates the purposes and nature of its aid to the people of recipient countries, that aid will be neither understood nor appreciated, and doubts will eventually arise domestically over the justification of Asian aid at all. In light of the fact that new generations of political leaders and new governments are coming to power in many Asian countries, it is extremely desirable for Japan to better publicize its aid policies and its basic attitudes towards aid.

Local embassies and Japanese companies must make greater efforts to communicate with the local mass media, opinion leaders, and business communities, including greater efforts to ensure that funds are used transparently. These must be active rather than passive efforts, with information issued both in English and in the local vernacular.

CONCLUSION

After the announcement made by Prime Minister Obuchi on June 3, 1999, the Mission for Revitalization of Asian Economy began to study the issues to be addressed in Asian prosperity in the twenty-first century and the role that Japan should play in this. This report embodies our findings, and we have placed particular emphasis on recommendations for Japanese efforts in the areas of people, goods, money, and information. Most of these recommendations involve issues that have already been discussed by others elsewhere, but for which little progress has been made for a variety of reasons. The recommendations in this report acknowledge the background and status of these issues, but seek to encourage some progress on them, no matter how meagre.

One the one hand, we have discussed how to deal with "money," the vast influence of which was made abundantly clear by the currency crisis. On the other hand, we have discussed the need to emphasize the production of "goods," which continues to account for a large portion of the economy, and the need for better efforts in the area of "information" in light of the growing role of computers in defining the twenty-first century. Ultimately, however, the key element for the future of Asia in all of these areas-money, goods, and information-will be people. In recognition of this, the Report has made "people" the major focus of its recommendations.

We would also like to underscore that these recommendations have been formulated with a strong awareness of how essential it is for Japanese society to be open to Asia and the rest of the world as it seeks to address these issues.

We hope that the issues and perceptions raised in this Report are widely shared by the government and people of Japan. We look forward to a prosperous twenty-first century for Asia and a "third opening" for Japan, and we hope that we have in some way aided Japan in living in harmony with the rest of Asia.

---

Back to Index