Section 4.  Economic Cooperation: From Recipient to Major Donor


Japan concluded its first postwar reparation convention with Burma in 1954 and began accepting technical trainees and dispatching experts under the Colombo Plan that same year. At the time, Japan was more a recipient country than a donor country, as seen in Japan's borrowings from the World Bank (borrowing that started in 1953 and continued through the mid-1960s for such projects as Aichi Reservoir, Number Four Kurobe Hydroelectric Power Station, and Shinkansen between Tokyo and Osaka).

Even in 1960, several years after Japan had initiated governmental economic cooperation,* ODA disbursements were a little over $100 million, only half the West German level and less than 4% the leading (United States) level. Since then, Japan has gradually expanded its ODA until now, thirty years after the first aid extension, Japan ranks second only to the United States as a major donor nation. This growth reflects the fact that economic cooperation has been an important part of Japanese foreign policy. It is the result of the tremendous efforts that Japan has been making to expand its economic cooperation so as to fulfill the international responsibilities which go with its enhanced international standing. These Japanese efforts are highly appreciated by the international community.


ODA Disbursements


1.  Philosophy Underlying Japanese Economic Cooperation

Although Japanese economic cooperation started with the emphasis on export promotion, it has since been transformed as the realization has taken hold that Japan should contribute to the development of the developing countries commensurate with its economic might. Additionally, given Japan's strong dependence on the developing countries for energy, food, and other resources as demonstrated by the oil crises, there are also those who see economic cooperation as a means of preserving and strengthening the good relations with the developing countries and hence securing stable supplies of these important resources. Others see this economic cooperation as humanitarian assistance, and still others emphasize the interdependent relationship between North and South as epitomized in the sentence that "There can be no prosperity for the North without prosperity for the South."

Now halfway through the decade of the 1980s, Japan conducts its economic cooperation under the ideals of humanitarian considerations and the interdependence underlying North-South relations, and intends its cooperation to contribute to the developing countries' economic and social development and improved well-being for their people. Economic cooperation is an important international responsibility for Japan as a nation committed to world peace, as the second-largest economy in the free world, and as one of the countries most dependent on the international economy. At the same time, support to strengthen the political, economic, and social resilience of the developing countries is in Japan's comprehensive security interests in that it contributes to the peace and stability of the recipient countries, regions, and ultimately the world.


2.  Schemes of Japanese Economic Cooperation


A.  Reparations and Quasi-reparations 

Starting with the first reparation convention signed with Burma in 1954, Japan concluded conventions providing for reparation to the three countries of Indonesia, the Philippines, and Vietnam and agreements providing for quasi-reparations to the eight countries and regions of Laos, Cambodia, Thailand, Burma, the Republic of Korea, Malaysia, Singapore, and Micronesia. Part of the process of postwar management, these reparations and quasi-reparations contributed to the recipient countries' economic and social development and were the start of Japanese official financial assistance.


B.  Technical Cooperation 

In 1954, the same year that the reparation convention with Burma was concluded, Japan joined the Colombo Plan (initiated in 1950 to provide assistance to the countries of the Asia-Pacific region) and began to accept trainees and dispatch experts for overseas work. This marked the start of Japan's official technical cooperation. In the mid-1960s, this effort was powerfully buttressed with the creation of the Overseas Technical Training Center program to facilitate technical cooperation, the start of equipment provision programs, and the creation of the Japan Overseas Cooperation Volunteers. At present, technical cooperation plays a crucial role in the very important field of human resources development.

Although Japan's technical cooperation was initially conducted by the Society for Economic Cooperation in Asia, the Overseas Technical Cooperation Agency was established in 1962 to coordinate all governmental technical cooperation. This Agency was then superseded in 1974 with the creation of the Japan International Cooperation Agency (JICA) also incorporating the operations of the Japan Emigration Service established in 1963.


C.  Direct Government Loans

The first agreement providing for a direct Japanese government loan (yen loans) was signed in February 1958 with India. Unlike the reparation payments, which are an obligatory part of postwar management, yen loans are economic cooperation extended for policy reasons on far easier terms than commercial lending, and the start of Japanese government yen loans was thus a most important development in the history of Japan's financial assistance. At the beginning, yen loans were so-called project loans, but commodity loans, refinancing, and rescheduling for debt relief were introduced in the mid-1960s.

Although yen loans were first handled by the Export-Import Bank of Japan, the Bank has shared operational responsibility with the Overseas Economic Cooperation Fund since the Fund's establishment in 1961. In 1975, an effort to clearly differentiate between the Bank and the Fund resulted in the Fund, in principle, handling all new yen loans.


D.  Grant Aid

The reparations and quasi-reparations, the mainstay of Japanese capital cooperation until the mid-1960s, peaked in 1967 and began to be phased out by 1977. Offsetting this decline, bilateral general grant aid was initiated in 1969 to provide funding for social infrastructure projects, chiefly in the poorer developing countries, which do not lend themselves to loan financing. General grant aid has expanded steadily in the years since then until it now accounts for over half of Japanese grant aid, and it now plays a major role in that "Basic Human Needs" aid, which is a central focus of Japan's economic cooperation.

Food aid was begun in 1968, the year before general grant aid was initiated, and it was joined by Grant Aid for Fisheries in 1974, Grant Aid for Cultural Activities in 1975, and Aid for Increased Food Production in 1977.


E.  Multilateral Aid

Along with consolidating the system of bilateral assistance, Japan expanded its participation in international organizations for economic cooperation. One of the founding donor-country members of the International Development Association established in 1960 and also a founding member of the Development Assistance Committee (DAC) established within the OECD in 1961 to facilitate consultations among the major donor countries, Japan has also joined the Asian Development Bank (founded in 1966), the African Development Fund (1973), the Inter-American Development Bank (1976), and other regional development banks and strengthened its cooperation with United Nations agencies.


Japanese ODA by Type of Cooperation


3.  Japanese ODA Performance


A.  Quantitative Expansion

As noted above, Japanese ODA was only about $100 million in the early 1960s shortly after its start. Yet by 1984 it had grown to $4.32 billion to make Japan the second-largest donor country among the seventeen DAC members (after the United States with disbursement of $8.7 billion). Although the other donor countries have also worked hard to expanded their ODA over this period (the ODA in 1984 is three times as large as that in 1960 for the United States, four times and a half for France, twelve times for West Germany and three times and a half for Great Britain), the increase of Japanese ODA is by far larger with the amount in 1984 forty-one times as large as that in 1960. Even if these figures are calculated in each country's currency to eliminated the effect of the exchange rates' fluctuation, Japan's increase rate (27-fold) still exceeds those of the other (3-fold for the United States, 8-fold for France and West Germany and 7.5-fold for Great Britain.

Much of the credit for this quantitative expansion in Japanese ODA must go to the two Medium-Term Targets on ODA. At the 1978 Bonn Summit, Japan announced that it would double its ODA in three years, and Japanese ODA subsequently grew from $1.42 billion in 1978 to $3.30 billion in 1981, well over the target. In 1981, a New Medium-Term Target for ODA was announced of doubling the ODA volume for the years 1981-85 over the disfused ODA of $10.68 billion for the years 1976-80. Although the yen's exchange weakness and delays in negotiations on capital increases for international organizations held the annual increases to 4.0% in 1981 and 4.7% in 1982, growth has subsequently picked up to show a 24.4% increase in 1983 and a 14.8% increase in 1984. With the present Target ending in 1985, Japan will continue its efforts to steadily expand its ODA, setting a new Medium-Term Target for 1986 and beyond and continue to work to expand its ODA in keeping with international expectations. In so doing, Japan will make every effort to improve the quality of its ODA.

Volume of ODA is often compared in terms of ODA/GNP ratio. Although Japan has improved its performance from 0.32% of GNP in 1983 to 0.35% in 1984, it still ranks eleventh among the seventeen DAC member countries, and this is another reason for Japan to work to further expand its ODA.


B.  Qualitative Improvement

The most common measures of the quality of ODA are the share of grants (bilateral grant aid, technical cooperation, and contributions to international organizations) in total ODA and the grant element.* Japan is well behind most of the other other DAC countries in both respects. As a result of yen loans becoming the mainstay of Japanese ODA since the mid-1960s, the share of grants has hovered around 40-50% (43.6% in 1981, 39.6% in 1982, 55.2% in 1983, and 46.2% in 1984) which compares unfavorably with the DAC averages (75.2% in 1981, 76.1% in 1982, and 79.7% in 1983).

In 1972, the DAC recommended that the grant element for total ODA be raised to 84% of total ODA, and in 1978 this target was revised to 86%. Although Japan is working hard to increase its grant element in line with these recommendations, it still falls short of either the target figure or the DAC average of 91.2% in 1983, the Japanese figures being 61.0% in 1972, 74.9% in 1976, 74.2% in 1980, and 74.2% in 1984.

The qualitative improvement of ODA is a major task for Japan, and Japan has committed itself to endeavor, to the great extent possible, to effect qualitative improvements under the new Medium-Term Target for 1986 and beyond.

Untying** is another indicator of the quality of ODA. Japan adopted the policy of expanding untied loans in 1972. Since 1974, when the "Memorandum of Understanding on Untying of Bilateral Development Loans in Favor of Procurement in Developing Countries" was concluded within the DAC, Japanese government loans have been been LDC-untied in principle. A further step was taken when Japan enunciated its basic policy of general untying of loans pledged since April in line with the joint statement issued after the Japan-United States trade negotiations in January 1978. Although generally untied aid has risen to 50-60% of total loans recently, Japan intends to continue to mal<e every effort for further untying with due consideration of the international economic conditions and other factors.


C.  Geographic Distribution

As indicated by the fact that Japanese governmental economic cooperation started with reparations to the Asian countries, Asia has been the major recipient of Japan's bilateral ODA since the very beginning, and especially until the early 1970s, it received 90 to nearly 100% of Japanese bilateral ODA. This situation was a reflection of Japan's own position as an Asian country and the close relations which Japan has had with the rest of Asia historically, politically, economically, and culturally. As Japan has developed stronger relations with countries in other regions and has expanded its total ODA, these other regions have come to account for an increasingly important share of Japanese ODA. In recent years, Asia has accounted for approximately 70% of Japanese bilateral ODA (the ASEAN countries alone accounting for about one-third) with the remainder distributed approximately equally among the three regions of the Near and Middle East, Africa, and Latin America. In line with the economic cooperation principles described above, Japanese bilateral aid disbursements are currently decided based upon the two criteria: the degree of interdependence (the recipient country's overall importance to Japan), and humanitarian considerations (the recipient country's need or the degree of poverty), and other factors.

In the May 1981 joint communique with the United States, Japan announced its intention to step up assistance to those areas which are important to the maintenance of world peace and stability. It is based upon the consideration that economic disorder in the developing countries breeds political and social unrest and may even lead to international conflict or tension, such that supporting the developing countries' economic and social development and improvement of the popular well-being through economic cooperation is conducive not only to political and social stability in the recipient country but to the easing of tensions in the broader international community. Which specific countries fall under this category is a decision made independently by Japan taking the prevailing international situation into consideration.


Japanese Bilateral ODA by Regional Distribution


D.  Sectoral Distribution

Economic infrastructure has been a priority area in Japan's economic cooperation, especially yen loans, but the recent increase in grant aid and technical cooperation has meant greater emphasis on basic human needs and human resources development. Cooperation in basic human needs, which began to be stressed internationally in the 1970s, includes such areas as agriculture, health and medical care, water resources, and other areas directly related to the well-being of the people in the developing countries. Human resources development, initiated because the lack of qualified people is a major impediment to the development process, is perhaps best represented by the ASEAN Human Resources Development Project (proposed by Prime Minister Suzuki during his 1981 visit to the ASEAN countries) to establish Human Resources Development Centers in each of the ASEAN countries and a corresponding International Center in Okinawa.


4.  Aid Effectiveness

Given the harsh financial constraints in recent years, special consideration has been given to economic cooperation, and it is imperative that these programs be effectively conducted and achieve their objectives if they are to continue to receive the broad support and understanding of the Japanese people. Accordingly, Japan has been (i) consulting with the recipient countries to accurately gauge their development needs, (ii) doing preliminary studies to identify appropriate projects, (iii) promoting policy dialogue with the other donor countries, and (iv) conducting aid evaluations to ensure and enhance aid effectiveness.


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* The OECD's Development Assistance Committee (DAC) defines economic cooperation as the flow of financial resources to the developing countries, and this is classified into (i) Official Development Assistance (ODA) provided by the government of the donor country on concessional terms with the primary objective of promoting the economic development and welfare of the developing countries, (ii) Other Official Flows, which includes, for example, assistance with official funds for export credits and direct investment in the developing countries, and (iii) Private Funds; with governmental economic cooperation usually means ODA.


* The grant element is a measure of how concessional (i.e., soft) the ODA is, and the grant element for total ODA is derived from the weighted averages of all aid disbursements. The lower the interest rate and the longer the grace and repayment periods, the higher the grant element.


** Generally, aid is called untied when the procurement of goods and services with the aid is not limited to the donor country. General untying refers to opening the procurement to all countries, developing and industrialized, whereas LDC-untying was introduced as a transitional measure to allow procurement in the donor country or the developing countries.