Trends of International Economy and Scientific Technology, and Coordination for Prosperity

Section 2. Trends of International Economy and Scientific Technology, and Coordination for Prosperity

At present, the world economy is in the eighth year of its expansive phase - the longest since the end of World War II - and continues moderate growth as a whole. Inflation in industrialized countries is held to a relatively moderate level and world trade continues to expand.

The world economy owes its generally excellent health to the coordination of macroeconomic policies by industrialized countries, particularly the countries participating in the economic summit. On the other hand, trade imbalances between major economies, except some countries where a significant improvement has been made, still remain large causing pressure for protectionism to mount. Further-more, many developing countries still face economic difficulties of a serious magnitude such as accumulating debts.

Under these circumstances, the economic outlook for the 1990s indicates that the world economy is headed for consolidation as market economies are encouraged to spread by the steady progress being made toward the 1992 integration of the EC, economic reform of East European countries, economic development of the DAEs, and monetary and economic union of the two Germanys. To maximize the use of benefits from these major trends, it is essential to correct external imbalances, solve the problem of accumulated debts, and work for structural adjustments on a global scale. Moreover, it has been argued that the world will need a great increase in savings to meet huge financial requirements of East European countries' economic reform, and that worldwide inflation and recession may be triggered by the unstable situation in the Gulf area. Policy coordination among developed countries is called for from a wider point of view to cope with these problems. In addition, it is indispensable to maintain and rein-force the multilateral free trading regime to keep a healthy economic environment. For this purpose, the most important challenge for the world economy is to successfully conclude the Uruguay Round negotiations by the end of 1990.

The economy of industrialized countries is still in its expansive phase though its real-term growth rate fell from 4.4% in 1988 to 3.1% in 1989. But these countries should continue to be on guard against inflationary pressures and large-scale trade imbalances. It follows that each of the industrialized economies should properly conduct policy management on the one hand and firmly maintain the present policy coordination on the other with due consideration to possible impacts on economic conditions and correction of trade imbalances. It is also important for these countries to adopt an appropriate energy policy as the Gulf situation may, depending on how it develops, influence energy prices so as to raise the threat of inflation. Japan's current account and trade surpluses for 1989 in terms of dollars, though they are still large, decreased by 28.2% and 19% respectively from the preceding year. On the other hand, the U.S. trade deficits for 1989 fell sharply from an all-time high of $152,100 million in 1987 to $109,000 million in 1989.

The problem of external imbalances which are yet to fall to a tolerable level remains as a factor behind the growing pressure for protectionism in recent years. The problem will not only exacerbate bilateral trade and economic friction but will also imperil the multinational free trading system which is the basic principle of the GATT, and the development of the world economy itself.

To cope with these issues, policy coordination efforts among advanced economies have been reinforced through various international meetings such as the OECD Council ministerial meeting held in May, 1990 and at the Houston Summit in July.

It was reaffirmed in the "Economic Declaration" of the Houston Summit that all the summit countries would act in concert to harness inflation and correct external imbalances in order to ensure sustained growth without inflation over a long period of time. Regarding the external imbalance problem, it was emphasized that deficit-incurring countries should further reduce their budget deficits and encourage saving. Countries with surpluses, it was pointed out, should sustain noninflationary growth of domestic demand and to promote increased investment. It was also stressed that both sides needed to maintain and strengthen policy coordination and to promote adjustments in the worldwide economic structure. It was stated clearly in the declaration that the summit countries reject all forms of protectionism and work for the maintenance and strengthening of the multilateral free trading system with firm determination. To that end, a strong political will was confirmed at the summit to conclude the Uruguay Round by the end of 1990.

The Japan-U.S. Structural Impediments Initiative talks that began in September 1989 between the Japanese and U.S. governments serve to complement the efforts of policy coordination toward the correction of external imbalances. In June 1990, a final report was compiled announcing the measures to be taken voluntarily by Japan and the U.S. respectively. These measures to be taken will not only be helpful to both countries but also advantageous to other countries all over the world. In this connection, the initiative goes a long way in achieving a healthy growth of the world economy based on the free trading system while preventing the rise of protectionism.

Having grown to be a major economic power, Japan bears an important responsibility for ensuring sustainable development of the world economy. Particularly, it is the greatest policy task demanded of Japan to make effective contributions to the correction of worldwide imbalances. This is also extremely important in order for Japan to maintain harmonious economic relations with the world economy, enable its people to enjoy a better quality of life and give priority to consumer's interests. In this recognition, Japan set forth the correction of external imbalances as "a national policy target," and has been steadily implementing measures for domestic demand-led macroeconomic management, improvement of market access and deregulations.

Japan has achieved a rather high pace of economic growth through expansion of domestic demand in recent years, thus contributing to the expansion of the world economy and the correction of external imbalances. A real economic growth rate of 4.0%, the highest among all developed countries, is projected again for fiscal 1990 against the background of buoyant personal consumption and capital investment.

Among the measures to encourage imports, a tax system for promoting imports of manufactured products was created in the 1990 budget while tariffs were eliminated or reduced on as many as 1,008 items of industrial products. Furthermore, the budget was increased to improve information networks for boosting imports, whereas the Export and Import Bank of Japan and the Japan Development Bank expanded their credit line for imports of manufactured products.

As for deregulations, a Cabinet decision was made in December 1988, on the "Guideline for Promotion of Deregulation," followed by amendments of the Transportation Affairs Law and the Liquor Sales Licensing Law to reflect the decision. At the same time a measure has been taken for adequate operation of the Large-Scale Retail Store Law.

Regarding national land policy, the Basic Land Act was enacted in December 1989. Based on this law, a study has been conducted on various measures to increase supply of houses and residential land in metropolitan areas as set forth in the "Plan for Prioritized Enforcement of Land Measures in the Future," and comprehensive review of the land tax system.

All of these policy efforts resulted in a sharp increase in Japan's imports, particularly the imports of manufactured products, with the trade surplus being steadily reduced.

However, the pace of reduction of Japan's external imbalances has slowed down recently. And international criticism persists that the Japanese trade surplus is still so large that it disturbs the world economic order. Thus Japan is expected to continue its current efforts toward further reduction of external imbalances.

While such policy efforts often prove painful for some domestic industries, it should be realized that they are essential for the welfare of the population in the long run. For this reason, Japan is expected to make further efforts, with the understanding of its people, to help accomplish the sustainable growth of the world economy without inflation, correction of external imbalances, and the development of an economic structure in harmony with the international community.

After World War II, international trade expanded under the multilateral open and free trading system based on the GATT. It is the free trading system founded upon market mechanisms that has provided the driving force for dynamic growth of the postwar world economy. Thus for everlasting world prosperity it is imperative to maintain and reinforce the free trading system. In this connection, the Uruguay Round of multilateral trade negotiations (Note 1), now under way and scheduled to conclude by the end of 1990, is extremely important from the viewpoint that it will determine the framework of the multilateral trading system in the 21st century.

Japan realizes that to maintain and reinforce the free trading system, bring benefits for Japan and it should commit itself to the cause as one of the major participants in world trade. Thus a strong commitment to free trade and the prevention of protectionism form a basis of Japan's trade policy. Based on this position, Japan has been taking a stand at the Uruguay Round negotiations to fend off any moves toward protectionism, including unilateralism (Note 2), bilateralism (Note 3), closed regionalism, and inclination to managed trade, and to protect the free trading system. To lead the Uruguay Round to success, therefore, is one of the most important goals for Japan's diplomacy.

As part of such efforts, Japan held an informal ministerial meeting in November 1989 on the Uruguay Round in Tokyo by inviting ministers in charge from 26 countries and areas. This was intended to give a political thrust for the further progress of the negotiations.

The 4-year negotiations, scheduled to be concluded by the end of 1990, have entered a final phase. In July 1990, a meeting of the Trade Negotiations Committee (TNC) was held and decided on a specific schedule for subsequent negotiations.

Negotiations are underway to reach final agreement at the Brussels ministerial meeting to be held on December 3-7.

(1) Areas Aimed at Improving Market Access (Tariffs, Non-Tariff Barriers, Textiles, Tropical Products, and Natural Resource-Based Products)

In these areas, each country made requests and offers to its trading partners in 1990 for tariff reductions as well as reduction and elimination of trade barriers. On the basis of such proposals, bilateral negotiations are underway aimed at an overall tariff reduction of more than 33 % (weighted average) in each country, as well as reduction and elimination of non-tariff trade barriers to secure further trade liberalization.

Regarding textiles, tropical products, and natural resource-based products, each group carries out negotiations for tariff reduction and reduction/elimination of non-tariff barriers by taking into consideration characteristics peculiar to each product group. A major agenda for the textiles area' is the integration of the Multifiber Agreement (MFA) into the GATT (Note), and that on tropical products is the addition or revision of offers for tariff reduction made by major industrialized nations including Japan.

(2) Establishing, Maintaining and Reinforcing Multilateral Rules (Agriculture, the international codes adopted in the Tokyo Round, Subsidies, Safeguards, GATT Provisions)

In the area of agriculture, under the long-range objective of making progressive reductions in agricultural support and protection, negotiations have been made on reduction or elimination of import quantities and subsidies as well as export subsidies. Regarding border measures, negotiations are now in progress on the advisability of introducing tariffs in place of non-tariff barriers, handling of general protection indicators for reduction of agricultural support and protection (AMS), and reduction or elimination of export subsidies, etc. As the world's largest food importing country, Japan stressed that due consideration should be given to non-trade matters including the concept of food security. In particular, Japan. insisted that border measures required to maintain a specific level of domestic production should be permitted for basic foods. But agricultural exporting countries are wary of introducing such exceptional measures.

Regarding the strengthening of multilateral rules, i.e., regulations and arbitrary procedures, Japan considers it very important to establish the "rule of law" in international trade based on the GATT, and has played a positive role in negotiating the strengthening of antidumping regulations, the establishment of country-of-origin rules to determine the origin of products, and the reinforcing of arbitrary functions.

As for subsidies, negotiations are centered on the reinforcing of regulations in light of trade distortion effects of subsidies, and as to safeguards (Note), on ways of dealing with the widely practiced "gray-area measures" which are taken outside the framework of the GATT.

(3) New Areas (Services, Trade-Related Aspect of Intellectual Property Rights, and Trade-Related Investment Measures)

In the area of services, intensive negotiations have been made on the development of a multilateral framework which contains the principles, regulations, and procedures to be generally applied. At the same time, each sector is examined to consider possible problems if the rule is applied.

Regarding intellectual property, negotiations are under way to establish new rules containing protection standards and their enforcement. Similarly, new rules for trade-related investment measures are being developed to avoid trade restrictive and distorting effects.

As regulations governing the multilateral trading system become complicated with the establishment of international codes in the Tokyo Round, international codes and rules for new areas including services to be developed during the Uruguay Round negotiations, the strengthening of the GATT organizational base and the establishment of World Trade Organization (WTO) have been proposed to handle these codes and rules in an integrated manner and to effectively deal with issues related to international trade.

The proposal has received much attention from the participating countries, although it is commonly recognized that substantial results must be achieved at the Uruguay Round negotiations.

The GATT Panel established in May 1989 under an appeal by Japan on alleged arbitrary operation of the EC's dumping regulations on parts, adopted a report in March 1990, entirely accepting Japan's appeal. As more and more disputes are expected to be referred to the GATT in the future, Japan needs to consider more effective use of an instrument of multilateral settlement under the GATT and other venues, in addition to the conventional bilateral settlement

Economic growth rates of developing countries, which remained around 4% in recent years, dropped to 3% in 1989, down more than 1 percentage point from 1988 (IMF data). This reflects the fact that many developing countries have taken tight-money measures. It is also attributable to an unfavorable international economic environment caused by a worldwide economic slowdown (4.1% in 1988, and 3% in 1989), rising interest rates, and sluggish markets for non-petroleum primary commodities.

At the same time the economies of developing countries are being diversified further. In addition to the newly industrializing economies (NIEs) in Asia including the ROK, Taiwan, and Hong Kong, some ASEAN countries such as Thailand and Malaysia continued rapid economic growth thanks to brisk exports of finished products. In contrast, the poorest countries, such as those in Africa, which have a weak economic base, and the severely indebted middle-income countries including those in Central and South America, are still facing difficulties. Therefore, it is increasingly important for the developed countries, including. Japan, to provide well-coordinated assistance according to the respective conditions of each developing country.

Japan's imports from developing countries which have been growing since 1987, totaled $78.7 billion in 1988 (a 17% increase over the preceding year) and $87.9 billion in 1989 (a 11.7% increase). At the same time, Japan's imports of finished products from developing countries have steadily increased, contributing effectively to the development of the world economy.

The outstanding external debts of developing countries is estimated to have reached $1,290 billion at the end of 1989 (World Bank data), still posing a serious problem to the sound development of the world economy and the international financial system. The outstanding debts grew dramatically in the mid-1980s (at an annual rate on 10% to 20%) but has leveled off since 1987. However, the indebted countries' repayment capacity has not recovered. Furthermore due to decreasing amounts of new loans by private banks (Note), the "capital flowback" phenomenon in which the amount of money that flows out of developing countries to repay their debts exceeds the amount of money that flows into them as new loans has continued since 1984.

In order to reach for a solution of the accumulated external debt problem, the developed countries, debtor countries, and international organizations have been making concerted efforts.

For middle-income countries, the "Strengthened Debt Strategy," based on the proposal of U.S. Treasury Secretary Brady in March 1989 forms a major framework for international efforts. The strategy emphasizes the promotion of debt and debt service reduction, in addition to new loans by private banks and the reinforcement of the roles of the IMF and the International Bank for Reconstruction and Development (IBRD: the World Bank). The strategy has been repeatedly endorsed by the international community at various occasions such as the Houston Summit and has been already applied to various countries including Mexico and the Philippines.

For the poorest countries, a concrete framework for debt relief including partial write-off, based on the agreement at the Toronto Summit in June 1988 (the so-called "Toronto Scheme") has been established and is being implemented. (It has already been applied to 24 countries, as of July 1990)

The basic solution to the accumulated external debt problem requires building up "physical strength" in the debtor countries. To this end, in addition to monetary measures, it is important that both developed and debtor countries work together to create a favorable environment for the economic growth of the developing countries. For this purpose, developed countries, while bolstering assistance to the "Strengthened Debt Strategy," must implement comprehensive programs covering a wide range of policy areas, such as sustained growth without inflation and improvement of market access. At the same time, it is important that developing countries continue their self-help efforts, i.e., they must carry out structural adjustments, improve investment climates, and make efforts to recapture the capital that has flown from their country so as to increase their capital inflow.

On the basis of the above-mentioned principles, Japan, while encouraging self-help efforts by debtor countries, has been making positive contributions to the solution of the accumulated debt problem through various measures in cooperation with other developed countries, the IMF the World Bank and other parties concerned.

As for official development assistance (ODA), quantitative expansion and quality improvement are being carried out under the 4th medium-term target. Furthermore, Japan announced in July 1989 the expansion of its financial recycling scheme, from the "more than $30 billion over three years" between 1987 and 1990 to "more than $65 billion over a five-year period" up to 1992, in order to further encourage the flow of completely untied funds to developing countries including the debtor countries. As of July 1990, Japan has committed more than 60% of the pledged amount. Japan also intends to provide more than $10 billion of the $65 billion to countries to which the Strengthened Debt Strategy would be applied, and it has already decided to extend loans to Mexico and the Philippines. In addition, taxation measures are being implemented in order to facilitate the Japanese commercial banks to respond to the New Strategy.

Regarding debt relief to the poorest countries, in addition to the application of the measures based on the Toronto Scheme, Japan has been providing debt relief grant aid.

These contributions have been highly appreciated by both developed and developing countries, and international organizations including the IMF and the World Bank.

While the diversification of the developing countries is taking place in the world economy, Asian countries are moving toward economic development through encouraging overseas direct investment and promotion of export industries. In particular, the Asian economies which have recorded robust growth throughout the 1980s, fueled by steadily growing exports and other favorable factors, have become indisputable partners in the management of the world economy. Recently, the Asian NIEs (Note), Thailand, and Malaysia are collectively referred to as dynamic asian economies (DAEs) and are expected to play an increasingly important role in the world economy.

In 1987 and onward, with the move to correct worldwide external imbalances, the U.S. and Europe began to take a critical view of the trade surpluses accumulated by the Asian NIEs. In the meantime, Japan has insisted that the developed countries should initiate dialogue with the Asian NIEs, instead of taking a unilateral approach toward them. Japan has appealed to the developed countries that, while it is important for the Asian NIEs to play an appropriate role in the world economy, a role commensurate with their growing economic strength, their dynamism which helped revitalize the world economy should be appreciated, and more than anything else, it is important for the Asian NIEs to participate in the management of the world economy.

These efforts led to the beginning of a dialogue at an informal seminar held in January 1989 which gathered the OECD nations and Asian NIEs. Later, the dialogue was expanded to include the DAEs and four workshops covering a wide range of areas, including trade, finance and macroeconomics, were held between February and April of 1990. The workshops which were attended also by representatives of the industrial and academic sectors of the OECD countries and DAEs have produced successful results building better mutual understanding of the economic situation in the DAEs and desirable economic policies. The deepening of the dialogue with the DAEs are expected to take place in the near future using the workshop formula. Japan is ready to make positive contributions, at various occasions including the workshops, to the promotion of mutual understanding of the OECD nations and DAEs and further involvement of the DAEs in the management of the world economy

Japan's official development assistance (ODA) totaled $8.965 billion in 1989 (net disbursement basis). The amount, which was slightly below the actual 1988 figure on a dollar basis, put Japan the world's No.1 donor nation surpassing the United States for the first time. While many developed nations have failed to register increases of their assistance as a result of "weariness of providing aid," steady growth of Japan's aid is highly appreciated not only by the developing countries but by developed countries as well.

Today, out of the 168 countries recognized by Japan in the world, about 130 countries are classified as developing countries. They are still suffering from various economic problems. While some countries and areas, Asian NIEs in particular, are achieving notable economic growth, in many other countries including Sub-Saharan Africa, he economic hardship due to sluggish economic growth, accumulated external debt, increase of poor people, is growing serious. As a result, the flow of private funds to developing countries has slowed down, and a net payment from developing countries to developed countries, so called "capital flowback," is occurring in recent years. Thus, ODA is expected to play an increasingly important role in coping with such a situation.

As has been laid down in "International Cooperation Initiative," Japan regards expansion and improvement of ODA to developing countries as one of the most important contributions to the international community. Japan's ODA is provided on the basis of internationally established philosophies; humanitarian considerations and recognition of interdependence. It aims at raising living standards of people in developing countries through economic and social development, thereby helping the stability of the countries and establishing close ties with them. For Japan, which is seeking for ways of contributing to the international community by means other than military forces, ODA serves as an important means to promote peace and stability in the international community.

In July 1990, Japan completed the repayment of loans amounting to approximately $860 million, which it borrowed from the World Bank between 1953 and 1966. Japan used these loans to build economic and social infrastructures providing the foundation for high economic growth; in that process, Japan studied effective allocation of the loans and used them for a number of projects, including the Aichi Waterway for irrigation purposes, and Shinkansen superexpress railway. The experiences Japan gained as a recipient country are being reflected in Japan's aid policy in many way. One of them is Japan's emphasis on self-help efforts of developing countries; aid is provided to developing countries which are making serious efforts to build up their economies, with due consideration to their own priorities. Such approaches as "looking entirely after" developing countries or "imposing" something' on them are not adopted.

For this reason, Japan maintains a policy of providing ODA only upon request from a developing country. However, this does not mean that Japan reacts passively to the requests of a country. Through policy dialogue with developing countries, Japan communicates its basic philosophy of aid to them and makes its best effort to implement the aid with maximum effectiveness and benefit. Japan, as the only non-Western developed country having had a period of developing after World War II, has built a rich stock of experiences during its own economic development process and can make them available for developing countries through aid, with respecting recipient's own values and needs. Indeed, this is Japan's unique contribution to the international community as well as its major responsibility.

Since 1978, Japan has set several medium-term targets to ensure coordinated expansion of ODA. The fourth medium-term target established in June 1988 based on "International Cooperation Initiative" envisages increasing Japan's ODA share in proportion to its economic strength. Specifically, it aims to increase the total amount of ODA more than twice from $25 billion in the preceding five years to over $50 billion in the current five-year period, (1988-92), and steadily improve the ODA/GNP ratio. At the same time, the target identifies major items for qualitative improvement of assistance in detail, thus setting forth a direction of future policy formulation and implementation. (See the attached table)

The Fourth Medium-Term Target (Points)

1. With a view to increasing Japan's ODA share commensurate with the country's economic strength, efforts are being made to increase the total amount of ODA more than twice from $25 billion in the preceding five years (1983-87) to over $50 billion in the current five-year period (1988-92), and to ensure stable growth of the ODA/GNP ratio.

2. Efforts are made to increase grant aid to and expand debt relief measures for the Least Less Developed Countries (LLDCs)

3. Efforts are made to expand technical cooperation, to strengthen ties with nongovernmental organizations (NGOs), and to promote international cultural exchange.

4. Efforts are made to increase personnel contribution to international organizations, and to promote technology transfer to developing countries through international organizations.

5. Efforts are made to promote qualitative improvement of yen-denominated loans and general use of untied loans.

6. Efforts are made to increase aid staff, to improve the implementation system, and to promote coordination with private sector activities.

Although Japan's ODA has grown to be the world's largest in quantity terms, its quality - measured by softness of terms and grant ratio - is still at a low level compared with that of other developed countries. Grant aid is generally regarded as a standard form of assistance in the U.S. and Europe. However, loan aid shares a large percentage of Japan's aid, nearly 40% of the total ODA, placing Japan one of the lowest of DAC (Note) member countries in terms of the grant ratio and grant elements (an index of financial terms of capital assistance).

Japan has been taking measures to improve the quality of its ODA, including the increase and emphasis on grant aid and technical cooperation as well as softening of terms for yen loans.

NGOs can extend cooperation activities for development projects directly at the grass-roots level and respond to emergency needs in a flexible and swift manner. Their assistance is also important in that it is carried out carefully and with great attention to detail. It is highly desirable, therefore, to link private-sector efforts organically to the government ODA in providing comprehensive economic cooperation jointly by the government and private sources, from the standpoint of promoting development cooperation with the participation of the people. In this regard, the government bas been actively involved in reinforcing communications with NGOs and providing support for their activities, with due respect to their initiative.

In fiscal 1989, the government stepped up such support measures by introducing a program to subsidize development cooperation projects carried out by NGOs, and a small-scale grant aid program for local governments and medical and research institutions in developing countries, as well as support for NGOs in Japan and other countries.

In allocating its ODA, Japan used to give priority to Asia because of the region's close relationship with Japan. Last year more than 60% of Japan's bilateral ODA was allocated to Asian countries. Recently, however, with growing expectations for Japan from the international community and the increase in the amount of assistance, Japan has been expanding its aid to Africa, Central and South America, the Middle East, and the Pacific. As a result, the number of countries which have received Japan's ODA has reached nearly 140.

In particular, East European countries have gone through drastic political and economic reforms since 1989 with many of them making firm steps toward democratization and economic liberalization. Japan has assumed a vital role in the establishment of the European Bank for Reconstruction and Development (EBRD) under close collaboration with other industrialized democracies, while providing financial and technical cooperation for East European countries. Also, it has stepped up assistance to Central and South American countries which are being democratized following the settlement of civil wars.

In the meantime, some developing countries are concerned about possible reduction of assistance to developing countries in the wake of the growing flow of assistance to East European countries. Japan, which intends to expand ODA under the fourth medium-term target, will ensure that overall assistance to the Third World will not decrease in spite of increased aid for East Europe.

In fiscal 1990, which fell on the third year of the fourth medium-term target, \817.5 billion was allocated to ODA in the general account budget, an increase of \61.8 billion (an 8.2% increase) over the previous fiscal year, to secure the implementation of measures set forth in the target. The total amount of ODA budget - which consists of ODA budget in the general account, loans from the Government Investment and Loans Program, and Government bonds for contributions to international organizations, etc. - grew by \79.6 billion (a 5.8% increase) from the previous year to reach \1,449.4 billion.

In implementing development assistance, care should be taken to prevent each development project from causing an adverse effect on its surrounding environment. Japan actively involves itself in environmental protection through environmental impact assessment prior to the start of each development assistance project.

Furthermore, Japan is stepping up its environmental considerations in accordance with recommendations made in reports by the Environmental Assistance Study Group of Japan International Cooperation Agency (JICA), etc. In case an assistance project might damage the environment, environmental experts participate in a preliminary study mission. A guideline for environmental consideration is being developed for each sector of assistance. For planning and implementation of ODA loans, a guideline for environmental consideration prepared by the Overseas Economic Cooperation Fund (OECF) in November 1989 is being applied.

Developing countries have diverse development needs. With the geographical spread of development assistance, new sectors have come into the scope of Japan's ODA. In addition to global problems such as environment and drugs, the role of women in development, the support for democratization, and many other aspects need to be considered as sectors requiring development assistance. In other words, assistance should be implemented on behalf of the peoples of developing countries from the broadest viewpoint possible. To this end, continuing review and creative innovation should be introduced to Japan's ODA programs.

To meet future requirements in quantity and quality, e.g., provision of ODA in wider geographical areas as well as diverse sectors, improvement of evaluation and coordination with other developing countries and international organizations as set forth in the fourth medium-term target, it is quite important to strengthen the aid administration which functions as an essential vehicle of ODA.

Although the Government has been trying to increase the number of staff in charge, it is not that the Government has enough personnel to carry out its ODA. This is because Japan has become a major donor within a relatively short span of time in response to growing requests from the international community. While Japan has become the world's largest ODA donor in volume, however, it is still lagging behind other developed countries in terms of manpower at aid administrative agencies such as JICA and OECF, and the Minister of Foreign Affairs and other ministries involved in development assistance. In particular, there is a serious shortage of field staff who work in developing countries. To tailor development assistance to local conditions and needs in recipient countries, the reinforcement of the administrative staff should receive the highest priority; it is urgent to increase the manpower engaged in development cooperation and to develop staff and experts with internationally acceptable abilities and competency.

To further improve and reinforce Japan's ODA, it is also important to promote public concern on the situation of developing countries, so as to gain popular support for development assistance, and to create a social environment to enable private citizens to participate directly in development assistance activities. To achieve these objectives, greater efforts should be made on public relations and education related to development.

Technical cooperation has dual purposes; one is to train leaders in developing countries, and the other is to promote mutual understanding and friendship between the peoples of Japan and developing countries through person-to-person contact. For these reasons, Japan is expected to expand its technical cooperation making use of its wealth of technological resources.

Technical cooperation on a government-to-government basis is extended mainly through JICA, in a variety of forms ranging from Acceptance of Trainees, Dispatch of Experts, Equipment Grants, Development Study (Note 1), Project-Type Technical Cooperation (Note 2) Development Cooperation (Note 3), the Dispatch of Japan Overseas Cooperation Volunteers, Youth Invitation Program (Friendship Plan for the 21st Century), and the Dispatch of Japan Disaster Relief Team.

Compared on a DAC basis, Japan's technical cooperation in 1988 totaled $1,093 million (\ 139,900 million, not including administrative expenses) which put Japan fourth among 18 DAC countries, next to France, the United States and the Federal Republic of Germany. In terms of technical cooperation's share of ODA, however, Japan ranked 14th at 12%, nearly half the DAC average of 21.3%. Therefore, it is important for Japan to further expand its technical cooperation, which also leads to qualitative improvement of ODA. In this connection, the reinforcement of the administrative staff and the development of staff and experts in development assistance are required to effectively support quantitative expansion of technical cooperation.

Grant aid is the assistance to provide funds to a developing country - recipient country - without repayment obligation and can meet a variety of development needs, including basic needs and human resources development. Japan's grant aid is extended to provide funds for a developing country to procure equipment, materials, facilities and/or services required for implementation of a necessary social/economic development project, in various forms ranging from general grant aid, grant aid for fisheries, disaster relief, grant aid for cultural activities, food aid (Note 1), and grant aid for increased food production (Note 2).

The fiscal 1989 budget for grant aid amounted to \203 billion (on a supplementary budget basis).

(i) Implementation of untied grant assistance for economic structural adjustment support

Japan extended approximately $500 million in untied grants to support efforts for economic structural adjustment (non-project grant assistance) of the African countries in a three-year period between fiscal 1987 and 1989. Starting in 1990, Japan decided to extend $600 million non-project grant assistance over three years also mainly to African countries, and appropriated \2.6 billion as the first year portion in the 1990 budget.

A small-scale grant assistance scheme was introduced in fiscal 1989 to quickly and effectively respond to financial requirements for relatively small projects in developing countries. In fiscal 1989, approximately \294 million small-scale grant assistance was extended to 95 projects in 32 countries, and it was highly valued as the grass-roots level assistance addressing local needs.

To ensure more effective execution of grant aid, various measures are being taken; including (1) expansion of advance study; (2) reinforcement of coordination between grant aid and technical cooperation; (3) strengthening of cooperation with other donor countries and organizations, as well as NGOs; and (4) expansion of follow-up assistance (consisting of "follow-up cooperation" to supply spare parts, etc. for facilities or equipment furnished under a grant aid project, and "rehabilitation assistance" for improvement, reinforcement and expansion of existing projects).

ODA loans are designed to provide long-term and low-interest funds for development; in fiscal 1989, the average interest rate was 2.7% p.a., with repayment periods of 25-30 years and grace periods of 7-10 years. While meeting demand for a large amount of development funds, ODA loans create repayment obligations for developing countries, albeit favorable conditions compared to commercial loans. For this reason, ODA loans are mainly extended to projects related to infrastructure which have relatively high economic feasibility and can directly contribute to economic and social development of developing countries. For this reason, ODA loans have been playing an important role in economic development of ASEAN and other countries which have relatively large demand for development funds. In addition, Japan boosts non-project loans to countries who face balance of payments difficulties in recent years.

ODA loans extended in fiscal 1989 (on an Exchange of Notes basis, including rescheduling) amounted to \1.011 billion, exceeding the \1 trillion level in the two consecutive years following 1988. Compared to fiscal 1988, the amount was down 9.4% to reflect rather exceptional increase in the preceding year. Rescheduled debts of ODA loans at the Paris Club totaled \27,800 million.

To meet the demands of developing countries and promote an efficient use of development funds, Japan has been making efforts to promote untied ODA loans. Generally untied loans accounted for 80.5% in fiscal 1989 on an Exchange of Notes basis. At the same time, the procurement from Japanese companies has been declining each year, down to a 40% share in fiscal 1989, while the procurement from other developed countries (OECD member countries other than Japan) and developing countries accounted for 20% and 40% respectively.

In September 1989, the Administration Inspection Bureau issued recommendations on ODA loans calling for the streamlining of implementation procedures, the monitoring of the effect of completed projects, and the securing of coordination between ODA loans and technical cooperation. Improvement measures are being taken in line with these recommendations.

Japan has contributed to the development of developing countries not only by providing bilateral assistance but also through cooperation with the activities of international financial institutions and international organizations including the United Nations.

To compare the advantages of bilateral ODA with multilateral ODA, the former can operate effectively and flexibly along the lines set by Japan's foreign policy and work to improve relations with recipient countries. On the other hand, the latter can make use of the expertise of the various international organizations, secure the political neutrality of aid, and can be provided to the developing countries where Japan's aid implementing force is not enough. Japan will continue to expand multilateral aid while maintaining an appropriate balance between bilateral and multilateral aid.

Japan's multilateral ODA in 1989 amounted to $2,186 million, a 19.4% decrease over the preceding year. The share of multilateral ODA in Japan's total ODA was 24.4%, compared to 29.7% in 1988.

Japan has been actively cooperating with major international financial institutions; Japan's shares of capital subscription in the International Bank for Reconstruction and Development (World Bank or IBRD) and the International Development Association (IDA) are 9.03% and 9.63% respectively, the second largest. Japan, along with the United States, has the largest capital subscription share in the Asian Development Bank (ADB) and also ranks first in capital subscription to the African Development Fund. Japan's capital contribution is extended also to the International Fund for Agricultural Development (IFAD).

Japan has been actively working not only with the United Nations Development Program (UNDP) which constitutes the core of technical cooperation in the United Nations system, but also the World Food Program (WFP), the United Nations International Children's Emergency Fund (UNICEF), and the United Nations Fund for Population Activities (UNFPA), the United Nations Industrial Development Organization (UNIDO), the Food and Agricultural Organization for the United Nations (FAO), and the United Nations Relief and Works Agency for Palestine Refugees (UNRWA), and other United Nations aid organization in their assistance activities. The contributions to these U.N. aid organizations amounted to approximately $500 million in 1989, up 33% from the preceding year.

In addition, Japan has extended a wide range of cooperation to a number of international aid organizations to meet specific needs of recipient countries.

1. Development of Industrial and Scientific Technology and International Cooperation

Today, Japan is one of the leading countries in the area of science and technology. With expectations and requests for cooperation rapidly growing from other countries, Japan faces an important diplomatic task of how to respond to them. At the same time, to cope with global-scale problems is becoming an increasingly important international issue. As a responsible constituent of the Earth community, Japan is expected to work together for solution of the problems by using its scientific and technological resources.

In this connection, Japan is required to further expand and reinforce basic research activities the outcome of which should be treated as common property of the international community, to receive more foreign researchers to research institutes in Japan, and to promote joint research projects. As part of these efforts, Japan has steadily expanded three plans it initiated in 1988 to invite foreign researchers, which has been highly rated by various countries. Furthermore, it is anticipated that scientific and technological development will increase the importance of research areas requiring a large amount of capital investment. Clearly, international cooperation will be required in these areas to share expenses and develop a coordinated research system, and the fruit researches should be utilized for the benefit of the international community. Again, Japan is required to make positive contributions in these areas.

At present, 80 percent of Japan's research and development expenditure is accounted for by the private sector, compared with 50percent for the United States and 40 percent for France. As a result, the expectations of other countries placed on Japan are directed rather to private research institutes. It is now a matter of great importance to increase the research budget of government institutes, in particular, in basic research.

As science and technology are closely related to social and economic development of a country, each country is required to take into account international relations in promoting its science and technology development policy, and to conduct active diplomacy on the basis of comprehensive and accurate evaluation of the effects that may be produced by science and technology. In this context, constructive competition is as important as cooperation for the development of science and technology. However, excessive competition should be avoided since it may lead to restrictions on the transfer of high technology and reinforcement of the protection of intellectual property rights beyond a reasonable level, and finally to the onset of techno-nationalism.

Based on the above recognition, Japan pursues international cooperation in science and technology as follows.

In 1990, cooperation in science and technology between Japan and the United States made steady progress. In February, the Japan-U.S. Agreement on Cooperation in Energy was extended for another five years with some amendments. In May, the Second Joint High Level Committee (ministererial level) under the the Japan-U.S. Agreement on Cooperation in Science and Technology (signed in June 1988) was held and agreed on new joint projects centered on earth science and the global environment. Also in May, Deputy Secretary Moore of the U.S. Department of Energy visited Japan and formally requested cooperation from Japan in the Superconducting Super Collider (SSC) construction project.

The HFSP is a project designed to bring to light functions of living organisms (e.g., brain learning, memory) and was proposed by Japan at the Venice Summit in 1987. In October 1989, the International HFSP Organization was established in Strasbourg, France, and in March 1990, researchers who would receive grants or fellowships for the first fiscal year were selected.

Since April 1988, Japan has been involved in conceptual design activities of ITER, jointly with the United States, the EC, and the Soviet Union. The conceptual design is scheduled to be completed at the end of 1990, and the participating countries are discussing moving into engineering design activities from the beginning of 1991.

The OECD has been implementing the Technology Economy Program (TEP) with recognition that a comprehensive approach is needed to analyze complex and diverse effects of science and technology on the economy and society more accurately. Japan recognizes the importance of the program and co-sponsored with the OECD a symposium with the theme Toward Techno Globalism in March 1990 in Tokyo.

Since May 1985, Japan has been taking part in the preliminary designing of a manned space station jointly, with the United States, the European Space Agency (ESA) member countries, and Canada. In September 1988, the participating countries signed an intergovernmental agreement on cooperation in the space station to establish a framework of cooperation in detailed design, development, operation, and utilization, which Japan accepted in September 1989.

Regarding relations with European countries, the 15th Japan-ESA officials meeting was held in Italy in June 1990.

The 44th U.N. General Assembly of 1989 approved the report for the 32nd term (held in June 1990) of the United Nations Committee on Peaceful Use of Outer Space, and adopted a resolution entitled "International Cooperation Concerning Peaceful Use of Outer Space."

In October 1989, the 15th Antarctic Treaty Consultative Parties Meeting was held in Paris to have intensive discussion on environmental protection in the Antarctic. It agreed to hold a meeting in Chile to negotiate on the Protocol of the Convention on the Regulation of Antarctic Mineral Resource Activities concerning liabilities and on comprehensive measures to protect the Antarctic environment.

Today, Japan is the 4th largest country in terms of nuclear power generation (in terms of total generating capacity) (Note 1), after the United States, France, and the Soviet Union. Thus nuclear power serves as the key energy source for Japan. Yet, the Japanese nuclear energy industry depends heavily on foreign sources (Note 2) for nuclear fuel supply and related services. Therefore, it is of vital' importance for Japan - a country with little energy resources - to establish an independent nuclear fuel cycle to raise self-sufficiency in nuclear fuel, thereby to reduce energy dependency on foreign sources and to secure a steady supply of energy.

Considering that nuclear materials used as nuclear fuel can be converted to produce nuclear weapons, and that a nuclear accident can cause serious damage beyond national borders, as was evidenced in the Chernobyl accident, nuclear energy requires careful consideration to prevent proliferation and ensure safety unlike any other energy sources. To this end, various international rules for use and management of nuclear materials have been established, and nuclear energy related operations in Japan are carried out in accordance with such rules and regulations.

Clearly, nuclear proliferation is a major threat to peace and stability of the world, and various restrictions to ensure nuclear non-proliferation on a global basis have been established, including the stature of the International Atomic Energy Agency (entered into force in 1957) and the Treaty on Non-Proliferation of Nuclear Weapons (NPT) (1970).

Japan has been actively involved in the framework of the international regulation, and in 1990, it amended the Agreement for Cooperation in the Peaceful Use of Nuclear Energy with France (entered into force in 1972) to reflect the move toward the stricter regulations.

Since the end of 1989, North Korea has become a focus of attention regarding nuclear non-proliferation (Note).

As a signatory of the NPT, North Korea is obligated to conclude a full-scope safeguard agreement with the IAEA within 18 months of signing the NPT but is yet to sign the agreement. (North Korea signed the NPT treaty in 1985) Japan has urged North Korea to conclude the agreement on various occasions including the IAEA board meetings.

As part of international cooperation for ensuring nuclear safety, various kinds of operations have been undertaken by the IAEA and the Nuclear Energy Agency of the Organization for Economic Cooperation and Development (OECD/NEA), and Japan has been playing an active role in them. At the same time, Japan considers cooperation with neighboring countries to be extremely important. Accordingly, Japan and the ROK signed the Japan-ROK Agreement on Cooperation for Peaceful Use of Nuclear Energy in May 1990, and the two countries are expected to further advance cooperation in this area, in particular that in nuclear safety.

Traditionally, Japan has been actively cooperating with developing countries in the field of the peaceful use of nuclear energy in order to contribute to their economic growth by applying its high-level nuclear technology, while satisfying non-proliferation and safety requirements. In the area of multilateral cooperation, Japan has made the 3rd largest capital contribution to the IAEA's Technical Assistance and Cooperation Fund, next to the United States and the Soviet Union, and has been extending technical and financial cooperation for projects implemented under the IAEA's Regional Cooperative Agreement for Research, Development and Training Related to Nuclear Science and Technology (RCA). As bilateral cooperation, Japan has been providing technical cooperation on a government-to-government basis through JICA, including the acceptance of trainees, and the dispatching of experts.

Note 1: The multilateral trade negotiations launched by the Punta del Este Ministerial Declaration of September 1986 aimed at maintaining and reinforcing the multilateral free trading system as the basis of continued expansion of the world economy and trade. A total of 106 nations participate in the negotiations on 15 areas which include not only trade but also "new areas," e.g., services, intellectual property rights, and trade-related investment measures.

Note 2: To settle a trade issue by taking unilateral action, such as sanctions,' against a trade partner, without taking procedures set forth in the GATT. One example is the U.S. action based on Section 301 of the Omnibus Trade Act.

Note 3: To settle a trade issue within a bilateral framework, as opposed to multilateralism aiming at trade liberalization within a multilateral framework.

Note : The textile trade is subject to more relaxed regulations under the MFA, which is an exceptional measure of the GATT.

Note : Tariff increase, restriction on import quantity. And other measures allowed a temporary basis to cope with an exceptional situation.

Note : long-term loans extended in 1988 amounted to around $34 billion, or approximately 60% of the amount in the early 1980s.

Note : NIEs stand for newly industrializing economies. Republic of Korea, Taiwan, Hong Kong and Singapore are referred to as Asian NIEs.

Note : Development Assistance Committee of the Organization of Economic Cooperation and Development (OECD) consisting of 18 major aid nations and the EC. The DAC discusses aid policies and quantitative projections on aid, and collects and analyzes data related to the amounts and quality of aid.

Note 1: A project to send a mission to study a public development project in a developing country, to formulate a plan to help the progress of the development project, and to prepare a report.

Note 2: Comprehensive technical cooperation which combines the Dispatch of Experts, Acceptance of Trainees, and Equipment Grants in an efficient and effective manner.

Note 3: Cooperation in socioeconomic development of a developing country by combining the funding under favorable conditions and the provision of technology (Dispatch of Experts, Acceptance of Trainees, and Development Study).

Note 1: Financial aid to food-short developing countries to help them pay for the purchase of grains (rice, wheat, maize, etc.) and transportation services thereof.

Note 2: Financial aid to finance the purchase of fertilizers, pesticides, farm implements, etc. needed for increasing food crops.

Note 1: Nuclear energy accounted for approximately 25.8% of the total power generation in Japan (1989).

Note 2: Japan imports nearly 100% of the uranium ore it needs, and 95% of the uranium enrichment service is carried out overseas, and so is around 95% of recycling of spent fuel from Japanese nuclear power plants.

Note : North Korea has an experimental nuclear reactor introduced from the Soviet Union, to which IAEA's individual safeguard measure is applied. However, North Korea is reportedly operating another nuclear reactor with generating capacity of 30Mw and is constructing a recycling plant.