1996 Diplomatic Bluebook

Sectoral Analysis of the International Situation
and Japan's Foreign Policy

The International Economy

Ensuring a Prosperous World Economy

a) Overview

As the world economy grows increasingly interdependent, international cooperation aimed at ensuring global prosperity is being pursued within a number of fora. Among these are global frameworks such as the World Trade Organization (WTO), regional frameworks such as Asia-Pacific Economic Cooperation (APEC), for which Japan served as Chair during 1995, and bilateral relationships. The prosperity of Japan's economy depends on that of the world economy Japan must play an active role in international cooperative efforts, striving not only for prosperity within its own borders, but also for the prosperity of the world economy as a whole.

i) State of the World Economy

Although the economic growth in industrialized countries slowed down slightly during 1995, their overall economic situation was good. This was especially true as far as inflation was concerned, with the annual rise in the consumer price index in industrialized countries averaging only about 2.6%, (Note 8) the lowest level since the beginning of the 1960s. Industrialized countries have thus achieved conditions favoring sustainable growth without inflation.

As an indication of the increasing globalization of the world economy, during the first half of 1995, world trade increased by 23%, almost double the rate posted in the first half of 1994. However, one outstanding problem is massive government deficits brought on by increased government expenditure to cope with economic stagnation in the early 1990s. The economic globalization has raised new issues.

European countries and other industrialized nations face a new problem, economic growth without a corresponding rise in employment - their unemployment rates hover around 10%, even though their economies are recovering. There are two main reasons for this: these countries find it difficult to adapt their industrial structures to changes in the economic environment and to create new employment opportunities, and their labor markets have proven resistant to change. To deal with these problems, industrialized countries must create and expand employment through appropriate macroeconomic policy management and structural reform. Japan, too, must push forward with more strenuous policies which emphasize, for example, domestic-demand-led economic management, drastic deregulation, and improved access to its markets.

As economies become increasingly interdependent, regulations, standards and business practices, which were formerly regarded only as a matter of domestic policy, are now often subjected to scrutiny in the international arena. This is why attention is now given to compiling new rules that will apply in the future when countries discuss post Uruguay Round "New Issues" for example, the international coordination of domestic policies, and "trade and the environment," "trade and labor standards," and "trade and competition policy" on the other.

In the monetary field, the Mexican peso crisis and the instability shown by European currencies were instrumental in deflating the U.S. dollar from the beginning of 1995 until April of the same year. As a result, exchange rates did not reflect economic fundamentals, as evidenced by the over-appreciation of the yen vis-à-vis the dollar. At the G 7 Meeting of Finance Ministers and Central Bank Governors held in April, agreement was reached on the desirability of an orderly reversal of exchange market movements. This call was reaffirmed at the Halifax G-7 Summit, and the dollar began to rally in July.

The economies of developing countries and countries in transition are taking on more weight in the global economy as a whole, so there is now a need to further integrate these economies within the international economic system. (For a more detailed discussion on this matter, refer to Chapter II, Part B, Section 2.)

ii) Establishment of the WTO, and Strengthening Free Trade and Investment Systems

The multilateral economic system should be further strengthened, in order to effectively address various issues that arise as economic activities globalize. The establishment of the World Trade Organization in January 1995 represented a historic step toward further strengthening the open multilateral trading system. Unceasing efforts are essential for the strengthening of the open multilateral trading system, and in this regard, all the Members of the WTO - not only major industrialized countries such as Japan, the United States and members of the European Union, but also developing countries - need to fully implement the WTO Agreement, which was the outcome of the Uruguay Round. They also need to make further efforts to ensure that the WTO is established as an effective organization. Of particular importance is that the dispute settlement mechanism, which has been strengthened under the WTO, should be fully utilized and respected. It is also important that negotiations be concluded by the agreed deadlines, in the on-going negotiations in the service sector (basic telecommunications and maritime transport services), and that positive steps be taken to achieve progress in the post-Uruguay Round New Issues (for further details, see subsection b below) toward the first WTO Ministerial Conference in Singapore.

Along with the developments in strengthening the global system, efforts are being made to liberalize and facilitate trade and investment through regional integration and regional cooperation such as that seen in the EU, NAFTA and APEC, as well as through bilateral trade negotiations. These efforts must be pursued with a view to complementing and strengthening the global system with the WTO at its core.

iii) Reform of International Organizations

It has become imperative that an examination be conducted not only of the multilateral free trade and investment system but also of various international organizations, in order to discover whether their functions still respond to the demands of the present age.

When referring to reform of the international financial system (which is oriented around the IMF) and reform of international organizations entrusted with economic development (particularly the World Bank and United Nations organizations), the 1995 Communiqué of the Halifax Summit exhibited a definite awareness of the need for reform, and indicated directions to be taken.

The Communiqué stressed the need to improve the "early warning system" of the IMF, to permit a rapid understanding of all circumstances surrounding a financial crisis of the sort experienced in Mexico, which could spark an international financial crisis, with a view to coping effectively with future financial crises. The Communiqué also cited the need to strengthen an emergency financing mechanism which the IMF could go through in the event that such a financial crisis breaks out.

Regarding development-related organizations, the Communiqué called for measures to reduce poverty and promote sustainable development. When referring to United Nations organizations, the Communiqué indicated the need to encourage further reform, with a view to reducing duplications and waste and to creating more effective, efficient organizations, and also the need to reorganize the functions of these organizations and to develop a more effective internal policy coordination role for the United Nations Economic and Social Council.

The G-7 countries and other nations are presently coordinating their efforts in response to these proposals, and the organizations concerned are conducting follow-up work.

b) Post-Uruguay Round New Issues

Conclusion of the Uruguay Round and establishment of the WTO were milestones in strengthening the world's open multilateral trading system. However, in order to secure further promotion of trade and continuous growth of the world economy, implementation of the results of the Uruguay Round alone would not be sufficient - the new issues must also be addressed.

i) Ongoing Negotiations in Trade in Services

One of the major achievements of the Uruguay Round was to establish rules for new areas, such as trade in services (e.g., financial transactions, transport and distribution), intellectual property rights (e.g., patents, trademarks and copyrights), and trade-related investment measures (e.g., local content requirements). However, agreement could not be reached on commitments to liberalization in the areas where negotiations proved difficult because of entanglement of national interests - areas such as finance, maritime transport, basic telecommunications, and the movement of natural persons. Negotiations continued in these areas even after the conclusion of the Uruguay Round.

In the area of financial services, a large majority of major participatingcountries reached an agreement in July 1995 to liberalize financial services, while maintaining the principle of most-favored-nation treatment, the most important principle of the WTO. However, it is regrettable that the United States, a major member of the WTO, has not accepted the principle of most-favored nation treatment in financial services, a most important sector in trade in services. It is necessary to request that the United States reconsider this issue.

In the negotiations in other service sectors where differences still remain regarding liberalization commitments, it is necessary to continue to work toward reaching an agreement on liberalization, while taking into account circumstances such as the different levels of liberalization and competitiveness of service industries in various countries.

ii) Structural Reforms

Although the world economy as a whole is expanding in a favorable manner, unemployment rates still remain high in industrialized countries, especially in European countries. Indeed, labor issues and unemployment have become matters of great economic and social concern in many industrialized countries. On the other hand, changes in the economic environment over the last few years - for example, globalization and technological innovation - require industrialized economies to undertake further structural reforms, which will lead to the creation of new employment opportunities in the future.

Since 1992, the Organisation for Economic Co-operation and Development(OECD) has conducted extensive research on labor issues and unemployment, and has made detailed policy proposals aimed at achieving greater flexibility in labor markets and improving worker skills. In May 1995, the Council at Ministerial Level confirmed that the OECD would monitor the implementation of country-specific policy recommendations, and complete thematic reviews in the following areas: active labor market policies; taxes, benefits and employment; the interactions between macroeconomic and structural policies; and the inter-relations among technology, productivity and job creation.

Furthermore, in June, the Halifax G-7 Summit reaffirmed the commitment of participating countries to work together in coordinating their implementation of appropriate macroeconomic policies. Also affirmed was the need to advance macroeconomic policies through appropriate structural reform in such areas as training and education, elimination of unnecessary regulations, and greater flexibility in labor markets, and through technological innovations, enhanced competition and other reforms to create secure, well-paying jobs.

International fora such as these have clearly indicated the resolve of industrialized countries to proceed with structural reform. Although such reforms may cause some difficulties in the process of adaptation, they can create more efficient and flexible economies on the whole. Therefore, they should be pursued while ensuring that they will not lead to a call for new regulations which are based only on a short-term perspective.

iii) New Issues

In the undertakings toward further development of the world economy, it has become necessary to study ways to ensure the compatibility between economic globalization and individual domestic policies, and to develop a new framework that further promotes the multilateral economic system. Concrete examples include examinations of the relations between trade policy, on the one hand, and environment policy, competition policy and labor standards, on the other. These issues have been extensively discussed over the last few years in such international fora as the OECD, and, on relations between trade and the environment in particular, discussions are also underway within the WTO.

It is also noteworthy that the OECD launched a negotiation on the Multilateral Agreement on Investment (MAI) in September 1995, in order to formulate comprehensive, international rules for the first time in history, taking into consideration the increasingly pivotal role of foreign direct investment in the growth of the world economy and the expansion of trade. The MAI negotiation should be further promoted toward the 1997 OECD Council at Ministerial Level. At the same time, it is essential that discussions be held in various international fora, with a view to ensuring the participation of developing countries in the multilateral framework.

These issues will continue to be addressed internationally in the OECD, the WTO, the G-7 Summit, APEC as well as other fora. In order to help maintain and further strengthen the open multilateral trading system, Japan must participate positively in these discussions, ensuring carefully that these discussions do not lead to the introduction of protectionist measures, while also trying to secure the interests and involvement of developing countries.

c) Multilateral Cooperation and Regional Integration

The year 1995 witnessed continued developments toward regional integration and regional cooperation. The movement toward regional integration was broadened and deepened on a number of fronts: Sweden, Finland and Austria joined the European Union (EU) at the beginning of the year; the Common Market of the South (Mercosur) was launched as a customs union; within the ASEAN Free Trade Area (AFTA), agreement was reached on reducing intra-regional tariffs to a maximum of 5% on as many items as possible by 2000, thereby moving forward the deadline of 2003, and a framework agreement on services and intellectual property rights was signed; the EU stepped toward economic and monetary union and the Schengen Agreement came into effect, providing a vision for the liberalization of the movement of persons. (The WTO Secretariat received notifications of 109 regional trade agreements by the end of 1994.) Also of note are discussions on the possibility of new initiatives on cooperative arrangements between regional integrations, such as the one envisioned by the Trans-Atlantic Free Trade Area (TAFTA), between the EU and the North American Free Trade Agreement (NAFTA).

Such regional integration can contribute to the development of the world economy by reinvigorating regional economies through economy of scale, enhancing competitiveness in local industries, and promoting structural adjustments. Also, in areas where multilateral rules are not fully developed on international trade, it may be beneficial for countries with common interests to cooperate regionally. On the other hand, regional integration can become discriminatory toward areas outside the region and distort trade. In particular, under the conditions of a stagnant world economy, regional integrations could lead to trade blocs, inviting the risk of jeopardizing the open multilateral trading system. Therefore Japan, whose economic development has been underpinned by the open multilateral trading system, must ensure not only that regional integrations are consistent with the WTO Agreement, but also that they complement and strengthen the open multilateral trading system.

From this point of view, clearly-defined standards regarding regional integrations should be drawn up at multilateral fora such as the WTO and the OECD, in order to ensure their compatibility with the open multilateral trading system which is based on the WTO Agreement, and these standards should be applied in monitoring and analyzing regional integration movements. There have been calls in the WTO General Council for the establishment of a single committee on regional trade agreements to ameliorate the situation in which more than 20 working groups on regional trade agreements are operating in parallel, as well as to conduct comprehensive examinations on broad issues such as the implications of regional trade agreements for the open multilateral trading system.

At the OECD as well, the Trade Committee has been discussing interrelations between regional integration movements and the open multilateral trading system, and a report entitled Regional Integration and the Multilateral Trading System was issued in May 1995. Moreover, the 1995 Communiqué of the OECD Council at Ministerial Level provided that the OECD is invited to "pursue its monitoring of the progress of regional integration, to help ensure that regional trade initiatives are consistent with the newly-strengthened multilateral trading system."

The successful 1995 Osaka APEC Economic Leaders Meeting, hosted and chaired by Japan, was an important event in the field of the regional cooperation. The Osaka Action Agenda specifies that results achieved through APEC liberalization measures are to be broadly shared on an equal basis with countries outside the region. Also, "Initial Actions" by each member economy included voluntary acceleration of the implementation of the Uruguay Round Agreement as well as deregulation measures. These achievements indicate that APEC is opposed to any movement towards protectionism or the creation of inward-looking economic blocks, and that APEC will contribute to the maintenance and strengthening of the open multilateral trading system. Japan believes it is most appropriate that APEC, through its "open regional cooperation," will thus actively promote a new approach for further liberalization of trade at the multilateral level. (For further information on the Osaka APEC Economic Leaders Meeting, refer to Chapter I, Part B, Section 1.)

d) Natural Resources and Energy

It is generally predicted that strong economic growth in many developing countries will cause world energy demand to continue to rise rapidly by more than 40% by 2010. It is also a matter of growing concern that this increased use of energy will exacerbate global warming and other environmental problems. Japan, as a nation depending almost entirely on imports for the large amounts of energy resources it consumes, must actively promote international cooperative efforts which address these problems, sharing the energy-conservation technology and expertise it developed partly as a countermeasure to past oil crises.

At the International Energy Agency (IEA) Governing Board Meeting at Ministerial Level, held in Paris in May 1995, Japan stressed the importance of cooperating with developing countries whose energy demands are growing rapidly. At the Osaka APEC Economic Leaders Meeting, held the following November, the leaders decided to strengthen cooperation in the energy sector by establishing the Asia-Pacific Energy Research Center, as proposed by Japan.

Another matter of growing international concern is food supply and demand - stress is placed on global resources and the environment as more crops are grown to cope with increased food consumption, particularly in developing countries, as their populations increase rapidly and their economies expand. The Fiftieth Anniversary Declaration on Food and Agriculture (the Quebec Declaration), adopted in October 1995 in Quebec, Canada on the occasion of the 50th anniversary of the founding of the FAO, reaffirmed the importance of freeing humankind from hunger. At the 28th FAO Conference, held the following October, it was agreed that the World Food Summit would be held in Rome in November 1996.

In the field of fisheries, as the world population increases, discussions are being held with a view to sustainable utilization of living marine resources while conserving the environment. In August 1995, the U.N. Agreement to conserve and manage straddling fish stocks and highly migratory fish stocks was formulated to establish a legal framework on high seas fisheries. In October, the FAO Conference adopted the Code of Conduct for Responsible Fisheries to ensure disciplined fishing activities through international cooperation. On top of these, bearing in mind the FAO World Food Summit which is to be held in November 1996, the Kyoto International Conference on the Sustainable Contribution of Fisheries to Food Security, hosted by Japan in December, adopted the Kyoto Declaration that stressed the importance of the fisheries' role in food security.

e) Japan's Policy Initiatives

Because of its strong economic presence in the world, Japan is expected to encourage the sound development of the global economy. To pursue this task, Japan must properly manage its own economic affairs and introduce bold deregulatory measures as an important step toward economic structural reform. On the international stage, Japan must ensure that its socioeconomic systems are in harmony with those of the world at large - it must continue to reduce the current account surplus, mainly through steady, domestic-demand-led growth and increased market access.

While suffering the after-effects of the collapse of a speculative bubble, Japan's economy was further hit by the Great Hanshin-Awaji earthquake at the beginning of 1995 and by the appreciation of the yen. This serious situation was exacerbated by non-performing loans of financial institutions. Since these dilemmas continued to stifle the economy, the Japanese Government initiated a series of policy measures aimed at strong economic recovery and structural reform, with a view to achieving prosperity over the medium and long term. The following is a description of some of these policy measures.

First of all, in March 1995, the Government adopted its Deregulation Action Program, which calls for the stimulation of domestic demand and imports as a means to improve the quality of life of the Japanese people. The Program initially envisaged deregulation of 1,091 items in 11 sectors over five years. Program revisions, to be undertaken each fiscal year, take into account the views and requests of people in Japan and abroad, and are guided by the findings of the Administrative Reform Committee. Every effort is taken to ensure that this revision process remains transparent; for example, the results of interim reviews are to be made public.

In April, to deal with sharp exchange rate fluctuations that began in the first quarter of 1995, the Government drew up its Economic Measures to Cope with the Yen Appreciation. These Measures included: stimulating domestic demand in order to achieve growth in the Japanese economy over the medium to long term; shortening the term of the Deregulation Action Program from five years to three; encouraging imports; and promoting economic structural reforms. The Government subsequently announced a number of programs intended to counteract the overvaluation of the yen. These included Measures for Implementing and Supplementing the "Economic Measures to Cope with the Yen Appreciation" (in June) and Measures to Promote Overseas Investments and Loans Aiming for Correction of the Yen Appreciation (in August).

In September, when exchange rates and the stock market were showing some favorable signs, the Government decided to implement its Economic Measures, a package of projects valued at a total of 14.2 trillion yen. These projects contribute to the advancing of economic structural reform, as well as the stimulation of domestic demand on a scale never seen before.

The following November, the Government announced its Social and Economic Plan for Structural Reforms Towards a Vital Economy and Secure Life, a new plan to replace its Five-Year Economic Plan - Sharing a Better Quality of Life around the Globe, which it had adopted in 1992. Envisaging medium- to long-term growth in the Japanese economy, this new economic plan lays the groundwork for structural reform policies oriented towards achieving three goals: reinforcement of Japan's free and vigorous business community; development of an affluent and secure economy; and participation in the global community. The Plan also calls for "an action plan to rectify high cost structures and promote dynamism."

Scale of Assessments for the United Nations Regular Budget

Support for Developing Countries and Countries in Transition

a) Development Issues

i) Recent Trends

During the Cold War, relationships between developed and developing countries tended to be colored by ideological confrontation between Eastern and Western blocs. The end of the Cold War has ushered in a favorable climate that can foster realistic dialogue and partnership.

Some developing countries, particularly those in East Asia and Latin America, are now experiencing rapid economic growth, (Note 9) and thus exert a healthy influence on the global economy. On the other hand, many other developing countries, especially those in Africa, still struggle with poverty and underdevelopment. Even the economies of developing countries which have made considerable advances show inherent signs of weakness: starting at the end of 1994, the Mexican peso crisis revealed that even the developing countries which have enjoyed comparatively smooth economic development have weak foundations. The crisis also showed that these weak foundations can have a grave impact on the entire world economy.

Thus, in order to ensure the stable development of the world economy, it is essential to foster the economic development of developing countries and incorporate them into the framework of the global economy, while giving due consideration to the respective social and economic conditions of those countries. There is a deepening recognition that liberalization of trade and economic openness have been key forces behind the progress seen in the developing countries of East Asia. The experiences of East Asian economies can be shared by other regions.

The poverty and underdevelopment of many developing countries could trigger social unrest and conflict, menacing the very peace and security of the international community. This is yet another reason why it is urgent that we work for development.

ii) New Development Strategies

The situation described above shows the need for new development strategies, an issue that Japan has actively addressed. During deliberations at the 50th U.N. General Assembly, Minister for Foreign Affairs Yohei Kono stressed the need to adopt a new development strategy which is outlined below.

  • Official Development Assistance (ODA) will continue to play an important role, and Japan will continue its efforts to expand its ODA.
  • A "comprehensive approach" is needed to integrate developing economies into the global economy. Such an approach would include not only ODA, but also a variety of policy measures in areas such as trade, investment, macroeconomic policies, technology transfers, and the building of social infrastructure.
  • It is also important to take a "individual approach" which selects the best policy mix from among the policy measures in the areas listed above, in line with each respective country's stage of development.
  • Such development strategies should be carried out in accordance with the following concrete guidelines: 1) international fora such as the United Nations should study and establish realistic development targets which clearly indicate the anticipated results of development, and developing and donor countries should work together to achieve these targets; 2) "participatory" development which involves, in addition to central governments, new actors in development, such as NGOs and local governments, should be encouraged; and 3) "South-South cooperation" should be further promoted.

iii) Incorporating Developing Countries into Regional and Global Frameworks

In implementing the above-mentioned new development strategies, it is important that developing countries be incorporated into international (global and regional) frameworks, as outlined below.

  • Integration of developing countries within global frameworks

    At the United Nations, in response to the report entitled Agenda for Development, submitted by Secretary-General Boutros Boutros-Ghali, a working group established under the U.N. General Assembly is exploring new development strategies, and studying reform measures needed to align U.N. organizations more closely with these strategies. Discussions are also ongoing on reform of the International Monetary Fund, the World Bank and other international financial institutions. Developing countries should be called upon to play a constructive role in these discussions.

    With developing countries now enjoying a growing share of the world's trade and investment, it is essential that they are called upon to respect existing international rules on trade and investment and to participate constructively in formulating new rules. It is thus important that China and other countries and economies which are not yet members of the World Trade Organization become Members of the WTO, accepting its disciplines.

    On another front, the OECD has been conducting political dialogues with Dynamic Non-Member Economies (DNMEs) in Asia and Latin America, encouraging them to fully acquaint themselves with international rules on trade and investment, while making efforts to ensure that post-Uruguay Round issues reflect the views of developing countries. These efforts should be continued. It is also important to call on developing countries to accede to a Multilateral Agreement on Investment, which is being drafted by OECD members.

    As China's economy continues to grow rapidly, so does its influence on the global economy, and it is indispensable to integrate China therein. The OECD is conducting dialogue and cooperation with China, as seen in the holding of the Informal Workshop on Trade and Investment Links between OECD Counties and China, and the visit to China of the high-level mission of the OECD Secretariat. Negotiations are now proceeding on the conditions of China's participation in the WTO. In view of the importance of China's economy to the world economy, it is hoped that China realize an early accession to the Organization.

  • Integration within regional frameworks

    Regional integration and cooperation among countries including developing countries have been seen in many parts of the world - such as APEC, free-trade arrangements which the EU has concluded with Central and Eastern European countries and with Mediterranean countries, and movements to expand NAFTA and promote economic integration within the Americas. However, regional cooperation which includes the participation of developing countries should only complement the open multilateral trading system, and be consistent with WTO Agreements.

    In this connection, the significance that APEC remains a forum for open regional cooperation should be recognized. At the APEC Economic Leaders Meeting in Osaka, "Partners for Progress (PFP)" was proposed by Japan and adopted. PFP encourages members at different stages of economic development to join together as partners working for economic and technological cooperation, and this scheme can serve as a model of cooperation between developed and developing countries within a regional framework.

iv) Overcoming Economic Vulnerability

Another important issue in the area of development is the need for developing countries to overcome their economic vulnerability. Many developing countries still depend heavily on the export of primary commodities, whose prices tend to stagger due to inherent oversupply in the market. These countries also suffer serious accumulated debt. Over the short term, the international community should join forces to stabilize commodity markets in compliance with market principles, and provide debt relief. However, to root out the problem in the long term, developing countries should make their own efforts to reconstruct their economies through structural reforms and adjustments.

b) Countries in Transition

In the face of various difficulties, countries in transition are continuing their efforts toward democracy, the market economy and integration into the world economy. Having recorded economic growth as a whole for the first time since the beginning of the 1990s, the economies of these countries are getting on the road to recovery.

These efforts are being continued not only in the countries of Central and Eastern Europe and the former Soviet Union, but also in other regions (Asia, Africa, and Central and South America). In some countries, particularly in countries of Central and Eastern Europe, these efforts are beginning to bear fruit, but many other countries are still in the midst of difficulties. To take Russia for example, where some positive signs are observed, such as the gradual deceleration of inflation and the slowdown in the fall of industrial production, the country is still afflicted with the deterioration of living standards for low-wage earners, delays in structural reform and many other problems. With regard to the other countries of the former Soviet Union, although inflation is dying down and the total drop of national income is less severe than in 1994, economic growth remains in the negative in Belarus, Ukraine and many other countries.

The success of reforms in countries undergoing the transition to democracy and a market economy is not only indispensable for the stability and development of these countries, but is also of great importance in building a framework for global peace and prosperity.

Most essential to the solution of these difficulties are, of course, the self-help efforts of the countries in transition themselves. At the same time, the international community should work together to lend help and support to such reform efforts, in order to alleviate their difficulties, since, all too often, the continuation of the reform process in these countries is hobbled by political and economic disorder, social problems rarely encountered before, and a drop in public support of reform caused by a temporary decline in living standards.

At the Halifax G-7 Summit, the G-7 countries reaffirmed their support for reform efforts in Russia, Ukraine and other countries in transition. In cooperation with the other G-7 countries and the other members of the international community, Japan is giving assistance to the political and economic reforms in these countries. Japan also provides assistance for economic reforms and democratization in Central and Eastern Europe, Cambodia, Viet Nam, Laos and other countries through bilateral arrangements for economic cooperation.

c) Japan's Official Development Assistance (ODA)

i) Japan's ODA in 1994

As the need for development assistance in various parts of the world has grown and become more diverse, Japan continued expanding its assistance.(Note 10) During 1994, Japan's ODA amounted to US$13.24 billion (excluding aid to Eastern Europe). This sum represents 22.9% of the total provided by the 21 member countries of the OECD Development Assistance Committee (DAC), and Japan has been the top donor for four consecutive years. Both grant share and grant element, which are used as indicators of the quality of aid, (Note 11) are still lower than the DAC average. Nevertheless, the absolute amount of Japan's grants (Note 12) is even larger than the total ODA provided by France, the world's third-largest donor country in 1994.

The share of Japan's ODA to the Asian region has remained more than its ODA to other parts of the world.(Note 13) Still, Japanese assistance plays an important role in the economic and social development of almost every one of the world's developing countries, with the number of countries and regions receiving Japan's ODA having risen to 158. (Note 14)

ii) ODA - The International Situation

The budgetary situation for ODA continued to be austere elsewhere in the world, and most of the other donor countries reduced the amount of their assistance in 1994. As a result, the total ODA from all DAC countries showed a minimal increase of 2.4% (Note 15) in 1994, up from the previous year which had suffered a sharp drop in the amount of ODA.

And yet, the need for ODA has been rising more than ever - in addition to the fact that many developing countries are still suffering from severe poverty and that the number of recipient countries has been rising after the collapse of the Cold War structure, new problems have also arisen, such as the refugee problem caused by major regional conflicts in Rwanda and the former Yugoslavia and the recognized need to progress from emergency humanitarian assistance to support for reconstruction and development in Mozambique and Angola. On top of this, a greater variety of assistance is now called for, to address global issues, to support Women in Development (WID), to encourage democratization and market economy reforms in developing countries and countries in transition, and much more. The very definition of development now includes not only "economic development" (often the subject of conferences sponsored by the U.N. (Note 16) but also sustainable development, which makes much of environmental conservation and "people-centered development" that focuses on human and social advancement.

As there is growing interdependence in the international community, Japan's use of ODA to help fight the problems and to support the economic and social development of developing countries will contribute to the peace and prosperity of the international community, thereby serving Japan's national interests as well. ODA also plays an important role in fostering friendly relations with developing countries and improving the climate for diplomatic activities. ODA has thus become Japan's most important form of international contribution and plays a significant role in its diplomacy.

It has been from this perspective that Japan, in spite of its own extremely difficult fiscal situation in recent years, has actively played a leading role, expanding its assistance in line with its fifth medium-term target and contributing significantly to new areas of ODA as well.

iii) Recent Trends

Japan's assistance is provided in a balanced manner, implementing various forms of assistance that are tailored to the wide-ranging needs of each developing country at its unique stage of development. Japan assists many different types of projects - for example, projects to develop infrastructure, to ensure Basic Human Needs (BHN), and to reform economic structures.

In order to support the economic development of developing countries, it is not enough to simply provide assistance - more important is a comprehensive approach in which ODA is coordinated with trade and direct investment. This is why Japan is exploring ways to further assist the construction of infrastructure that will facilitate trade and private investment, and to complement support for areas in which there is little flow of private capital.

Japan's ODA stresses not only physical aspects which are necessary for improving socioeconomic infrastructures, but also the human element, such as training programs, creating socioeconomic systems, assistance projects sponsored by local governments and NGOs, and grassroots activities, well represented by the Japan Overseas Cooperation Volunteers program.

Since the Great Hanshin-Awaji Earthquake in early 1995, Japanese people have had a growing desire to take part in volunteer activities for social welfare and international cooperation both in Japan and abroad. It is the Government's policy to further promote popular-participation-type ODA.

Japan's assistance is provided in accordance with principles set out in Japan's Official Development Assistance Charter. In addition, Japan's ODA must have broad public support. To ensure that the Japanese people have easy access to information on Japan's ODA programs, the Government conducts public relations activities and publishes reports entitled Annual Report on Japan's ODA and Japan's White Paper on ODA.

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