Japan's Official Development Assistance White Paper 2007
Next PageMain Text > Part I JAPAN'S OFFICIAL DEVELOPMENT ASSISTANCE IN ITS TRANSITION PERIOD > Chapter 1 The Contemporary Role of International Cooperation > Section 2. Changes in the International Economic Environment and International Cooperation
Section 2. Changes in the International Economic Environment and International Cooperation
Creating an environment where Japanese people and corporations can work and produce profits in peace throughout the world is the foundation for Japanese external economic policy. Utilizing ODA and improving the trade and investment environment in developing countries and promoting those countries' economic growth will lead to an expansion in the range of Japanese economic activities.
1. Globalization and Developing Countries
Following the end of the Cold War, former socialist countries transitioned to a market economy; now, almost all countries participate in international free trade and the investment markets. Furthermore, the unification of the global economy is moving ever faster due to the advancement of information and communications technology (the ICT revolution) and the development of global logistics networks in recent years. One trend of this globalization has been an even larger expansion in the income disparity (the difference in gross domestic product (GDP) per capita) between high-income countries and low-income countries than that of the 1980s (chart I-4 Graph (1)). While the income of high-income countries (developed countries) is increasing, the current situation in developing countries, which have low income levels, indicates sluggish income growth. There are, however, developing countries that sustain a high level of growth,1 such as China and India, which is narrowing the disparity between their income and those of developed countries (Graph (2)).
Some of those developing countries that have achieved a successful "takeoff" to the road of sustainable growth, have notably increased their trade amounts and direct inward investments. Examples of these "takeoffs," enabled by economic globalization, constitute one pattern of development. In accordance with the relocation of production bases from abroad (capital inflow), China, for example, now assembles imported intermediary goods into final products and exports them, and also contracts portions of the manufacturing process for intermediary goods. As a result, income levels have risen and China has assisted itself in developing into a powerful market.
In regard to other countries as well, countries with low income levels (GDP per capita) show signs of increases in trade amounts proportionate to high direct inward investment growth rates (Graph (3)), and income growth proportionate to extensively growing trade amounts (Graph (4)). Given these facts, it is important to implement the necessary measures so that developing countries can enjoy the benefits of globalization and realize self-reliant and continued growth. Japan utilizing ODA to cooperate in such undertakings helps to stimulate the economic growth of developing countries and broaden the area of Japanese economic activities.
2. Promoting Development Initiatives for Trade and Economic Partnership Agreement (EPA)
(1) Development Initiatives for Trade
Opportunities for economic growth in developing countries are dramatically increasing through trade and investment due to globalization. To achieve development through trade and investment, it is extremely important to promote free trade under the WTO system. The WTO Doha Round was initiated at the WTO Ministerial Conference held in Doha, Qatar in 2001. The Doha Round negotiations, officially called the "Doha Development Agenda," emphasize the development of developing countries through participation in the multilateral free trade system.
It goes without saying that successful conclusion of this round is extremely important for Japan, as Japan's economic activities are dependent upon trade. Success in the current round, which focuses on economic growth and poverty reduction through trade, will have great importance for not only developed countries but for developing countries as well.
Prior to the "WTO Hong Kong Ministerial Conference" held in December 2005, Japan announced the "Development Initiative for Trade" in order for developing countries to benefit from a free trading system. Considering the fact that developing countries now account for three quarters of the 151 WTO members (as of October 2007), Japan intends to provide, under this initiative, comprehensive support at the three stages of "Produce," "Sell," and "Buy" through a wide range of measures such as financial and technical assistance including that for infrastructure development.
Until now, Japan has steadily implemented the Development Initiative for Trade regardless of the progress of the Doha Round negotiations. Japan has actually implemented Duty-Free and Quota-Free market access by expanding it to approximately 98% of items originated from least developed countries (LDCs) from April 20072 and has assisted developing countries with the "One Village One Product" movement.3
The Japanese Government dispatched a High Level Mission on the Development Initiative for Trade to the three countries of Madagascar, Kenya, and Zambia from late June 2007 until early July. People from each country's government, including the presidents and ministers, all expressed gratitude and gave a high appraisal for Japan's existing economic cooperation and the Initiative. Through this mission it was confirmed that the Development Initiative is useful in addressing the needs of developing countries.
Various review meetings4 on Aid for Trade (AFT) were held in autumn 2007 by the WTO and regional development banks. In the series of reviews, it was mentioned that it is necessary to develop distribution and infrastructure in order for developing countries to enjoy the benefits of trade. Mutual acknowledgement was also given to the importance of mainstreaming trade in the development plans of developing countries. Moreover, in 2008 Japan is to host important international meetings that push development as a main theme, including TICAD IV, and the G8 Hokkaido Toyako Summit, where development may also become one of the major themes. Japan plans to proactively promote the Development Initiative in view of these meetings.
Chart I-4. World Economy and Developing Countries
(2) Promoting Economic Partnership Agreement (EPA)
Japan is taking active steps toward concluding EPAs, including with developing countries, with a view to complementing and strengthening the WTO system. In concluding EPAs with developing countries, it is important to consider improvement of the investment climate through support for strengthening domestic legal systems covering protection of intellectual property right and competition policy. It is also necessary to provide assistance in such areas as ICT, science and technology and small and medium enterprises. Human resource development and strengthening economic institution is pivotal in this regard.
In addition to dealing with matters associated with trade in goods, such as the removal of tariffs and quotas, EPAs also call for efforts to strengthen economic relations between the countries signing the agreement and include cooperation for that purpose; that is, measures to facilitate economic transactions between these countries and to harmonize economic institutions. Thus, for countries which have not established the infrastructure and legal systems at a sufficient level it is important that development aid should be used effectively to build these institutions and to further enhance the economic effects of EPAs.
For developing countries, concluding EPAs will stimulate trade and promote economic growth. EPAs bring benefits to both developed and developing countries through trade. In particular, EPAs will constitute a framework which strengthens human resource development and economic institutions in developing countries. For instance, in the Japan-Malaysia EPA which came into force in July 2006, seven areas were specified areas of cooperation - including agriculture, forestry, fisheries and plantations, education and human resources development, ICT, and small and medium enterprises − so as to develop the capabilities of trade and investment in Malaysia. Furthermore, Japan has selected projects for early implementation and is assisting efforts focused on developing human resources and legal infrastructure systems in Malaysia through foreign aid. Concrete examples include the Higher Education Loan Fund Project (HELP III). This project enables Malaysian students to receive science and engineering education through exchanges at Japanese universities and graduate schools. They also include assistance for developing human resources for the promotion of small and medium enterprises, as well as assistance for building a national quality assurance system in the lumber industry. An EPA with Thailand came into effect in November 2007, and Japan has established nine areas of cooperation including education and human resources development, agriculture, forestry, and fisheries, and enhancement of the business environment. Japan will support human resource development and institution building in these fields by utilizing development assistance and other means.
Based on the experience of economic growth in East Asia, Japan, which places emphasis on economic growth through the stimulation of trade and investment, will continue to actively assist the efforts of developing countries.
Chemical experiments conducted during local education by HELPIII (Photo:JBIC)
3. Corporate Contributions for Development and Promotion of Cooperation between Public and Private Sectors
In recent years, private corporations have made striking contributions in developing countries, where they are taking on a great role in development. Projects are being undertaken − as part of the corporate social responsibilities (CSR) of Japanese corporations − that contribute to improving the lives of residents of developing countries.
It is possible to support the sustainable growth of developing countries by uniting development assistance and private enterprise activities. The level of awareness in Japan of private enterprise activities in developing countries is still very low compared with public recognition of the activities of private enterprises and foundations5 in the United States and Europe.
Twofold cooperation between the public and private sector is needed. ODA is to be used to support development-related activities of private enterprises in order to make the most of their economic effects for development. The knowledge and technological strength of a private enterprise is to be utilized when implementing ODA projects. Cooperation between the public and private sectors has been one of the vital factors in Japanese aid producing economic growth in Asia. The industrial infrastructure development and human resources development assistance provided through foreign aid served as an accelerator for the later expansion of Japanese enterprises, and the inflow of private investments strengthened economic growth in East Asia. Given that an upsurge in ODA amounts is not anticipated despite the great recent demand for development funds, the utilization of private sector funds has become much more vital. Further strategic public-private sector cooperation6 is needed for the future, in order to properly link private business activities (direct investments) with ODA activities.
(1) Measures for Infectious Diseases in Africa
One of the concrete examples of public-private cooperation is Sumitomo Chemical Ltd.'s Olyset®Nets which have been widely distributed in Africa through international organizations using Japanese grant aid.
At the G8 Gleneagles Summit in July 2005, then Prime Minister Junichiro Koizumi announced a decision to distribute 10 million insecticide-treated bed nets in African countries by 2007 as a countermeasure to malaria, which kills a large number of children in Africa. Japan has distributed approximately 9.5 million mosquito nets7 (valued at approximately ¥6.7 billion) to 27 African countries as of August 2007 through the United Nations Children's Fund (UNICEF) mainly using grant aid, of which approximately 6.9 million nets were Sumitomo Chemical's Olyset®Nets. Olyset technology invented by Sumitomo Chemical is unique because Olyset®Net is made from a fibre which incorporates insecticide. Its insecticidal efficacy lasts for over five years after being washed. The Net is also excellent in terms of ventilation and durability. Sumitomo Chemical commenced production of Olyset®Net in 2000, and provided technical assistance to transfer the production technology to a Tanzanian mosquito net manufacturer in 2003, establishing a system of commercial production in Africa. In 2005, the company expanded its production capacity from 7 million to 20 million nets per annum, which includes the increase of production capacity in the Tanzanian factory from 2 million to 4 million nets. The product is now being distributed to various African countries as donations to NGOs,8 and through procurement by the World Health Organization (WHO) and UNICEF. Furthermore, the factory in Tanzania received public financing from the Japan Bank for International Cooperation (JBIC)9 and constructed a new factory in 2007, increasing its annual production capacity to 8 million nets. Sumitomo Chemical's Olyset®Net is also used in grant projects of the Global Fund to Fight AIDS, Tuberculosis and Malaria, and has, on a dramatic scale, advanced preventative efforts against malaria in Africa.10
Column 2 Eradicating Malaria
Olyset® Net Developed by Takaaki Ito of Sumitomo Chemical Co., Ltd.
(2) Rare Metal Projects in Africa
It is important for Japan, a country with little natural resources, to promote public-private cooperation from the perspective of securing resources. For example, Sumitomo Corporation currently promotes an integrated production project in Madagascar, with the cooperation of Canadian and Korean enterprises, for nickel ore11 and other metals (the Ambatovy Nickel Project). The Japanese Government has contributed to establishing a pipeline to channel drinking water from the project site to the nearby urban area of Moramanga using counterpart funds for non-project grant aid.12 It is expected that this will improve access to drinking water for approximately 200,000 residents in the region. Moreover, assistance for ambulance maintenance13 is being provided and Japan Overseas Cooperation Volunteers (JOCV)14 have been dispatched to Moramanga, contributing to an increase of trust in Japan. Additionally, a portion of the national highway from Moramanga to the harbor (Tamatave) was constructed through Japanese aid.15 In this way, ODA is aiding the smooth progress of resource development projects conducted through direct investments by Japanese enterprises. It contributes to ensuring stable supplies of energy and natural resources for Japan, and also assists in improving society and the economy within developing countries through natural resource development.
Ambatovy Nickel Project: rendering of completed refining plant (Photo: Sumitomo Corporation)
(3) Reconstructing the Basic Industries in Africa
There are countless examples of public-private collaborations that utilize other official flows (OOF) than ODA. One example is how Mitsubishi Corporation greatly contributed to an aluminum smelting project in Mozambique, which was the key to reconstructing the nation in the aftermath of the civil war. Mitsubishi Corporation established an aluminum company, Mozal SARL, in 1998 through joint funding by the Mozambique Government, resources company BHP Billiton, and the Industrial Development Corporation (IDC) of South Africa, and commenced operation of the aluminum plant in 2000 (Mozal 1; production capacity of 280,000 tons/year). Construction of Mozal 2 began in 2001, the following year, after receiving financing through public funds from JBIC.16 By 2003 the combined production capacity of Mozal 1 and Mozal 2 reached 560,000 tons per year. The aluminum smelting at Mozal has grown to become a basic industry in Mozambique, accounting for 60% of all exported goods. Moreover, in addition to the approximately 1,000 employees at Mozal, when including subcontractors and staff directly related to port cargo handling, over 10,000 jobs have been created. Mozal is also praised as a place of superb human resource development for its workers as through educational training was provided to employees on quality control, safety, and sanitary management. Mozal also established a fund,17 in 2001 for social contributions to the surrounding regions by providing aid of US$5 million over the year (FY2006). This aid is used for educational assistance through the construction of schools and distribution of textbooks; an increase of public health via development of water utilities and construction of hospitals; health education including teaching about HIV; and fostering job creation through support for small-scale businesses. Mitsubishi Corporation has in this way contributed to the development of basic industries in Mozambique, and thoroughly assists in the social development of surrounding regions as part of CSR activities through the Mozal fund.
4. Securing Natural Resources and Energy and International Cooperation
Our daily life and economic activities are dependent upon energy. Japan's energy self-sufficiency ratio is a mere 4%, mainly from hydraulic power, and does not exceed 18% even if nuclear power is included. The rest of Japan's energy needs are dependent on imports from abroad. Japan is planning to diversify its energy source mix; however, dependence on oil is approximately 50%18 and 90% of oil imports are from the Middle East.19 Recently the economic growth of emerging economies impacts the world's energy market. The energy demands of China and India are rapidly increasing because of their fast-paced growth and their industrystructures with relatively low efficiency of energy use. The total oil demand of China and India in 2030 is anticipated to amount to the total crude oil production of Saudi Arabia and Iran20 for the same year.21 Given this scenario, it is necessary for Japan to make efforts to ensure a stable supply of natural resources and energy with long term perspective. It is important that Japan utilize ODA, in addition to international financing operations from JBIC and trade insurance22 from Nippon Export and Investment Insurance (NEXI) to promote a wide range of policies with regard to countries that possess natural resources − including increasing political stability, improving market transparency, nurturing the investment climate, and securing transportation routes for natural resources in developing countries − while also enhancing stable and longlasting bilateral relationships with them.
Japan depends on imports for not only such energy resources as oil, coal, natural gas, and uranium, but also nonferrous metals including rare metals.23 These materials are used for manufacturing automobile and products (sector which bolsters Japan's international competitiveness through their added value and high performance), and are a vital resource to people's daily life. Japan is dependent on the imports of nonferrous metals for the majority of these goods. Most rare metals exist often unevenly in a small number of countries (China, Russia, South Africa, Chile, etc.), and it is difficult to ensure stable provision of rare metals because of supply reductions by unexpected reasons (accidents, natural disasters, strikes at mines, etc.) and because of price increases caused by speculation. Since China's economic growth has often driven the country, a producer of rare metals, to resort to preferential allocation of rare metals to meet its domestic demand and restrictive export measures, international supply and demand has, in recent years, often been tight.
The international environment for rare metals is growing in severity. Additionally, especially in Africa, China is intensifying its diplomatic efforts for securing natural resources. Against this backdrop, it is tremendously important for Japan to secure stable supply of these resources over the long term through direct investments by Japanese enterprises for gaining access to vital resources such as rare metals. It is considered that supporting these corporate activities through the utilization of official aid will become more and more important in the future. Specifically, possibilities include the development of an environment where Japanese enterprises can conduct activities smoothly in developing countries through assisting infrastructure building such as harbors and roads, and social development of local residents of surrounding mines. A specific example of this type of assistance has been described previously24. It is also important that development assistance be used to assist the strengthening of the capacity (including strengthening geological survey capability) of the relevant authorities for natural resources and energy in developing countries, in order to promote investment in the mining industries of countries that may prove to have resources.