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

B. Securing global economic prosperity and development issues for developing countries

1. Ensuring a prosperous world economy-Japan's policy efforts

a) Overview (responding to globalization)

i) The progress of globalization

One major thread characterizing the post-Cold War international community is globalization, or the trend toward seeking economic efficiency on a global scale through the free movement beyond national borders of goods, money, information and people. This trend is profoundly deepening world markets and leading the world toward the formation of a borderless single market. Such a transformation of the world market is a major opportunity in terms of the prosperity of the world economy; it also highlights how closely interlinked the world has become.

The progress of globalization became quite clear by the currency and financial instability experienced in Asia since mid-1997, starting in Thailand. The turmoil on Asian currency and stock markets rocked the economies of Indonesia, Hong Kong and the Republic of Korea, causing uncertainty across the global economy, including Japan. The international community, working together, extended assistance to Thailand and Indonesia and based on the Manila Framework, a new IMF-led framework adopted in November, decided to extend assistance to the Republic of Korea in December. In those cases, recognizing its responsibility to the world economy, Japan worked together with the countries concerned and international organizations, and announced the largest financial assistance packages on a bilateral basis. Japan has also announced assistance measures for Indonesia's industries-the provision of yen loans to support economic restructuring.

The Asian economy was also a major topic of discussion at the APEC Informal Economic Leaders' Meeting in Vancouver. Leaders affirmed that economic fundamentals for the long-term growth and prospects of the region were quite sound, and shared the view that prudent and transparent policies, particularly sound macroeconomic policies and structural reform, were the keys to restoring financial stability and realizing growth potential.

ii) Japan's response-policy efforts for the 21st century

It is axiomatic that the advance of globalization will, fundamentally, greatly benefit not only the Japanese economy but also the global economy. For example, world trade continues to skyrocket. According to IMF statistics and estimates, the real growth rate for the world in 1996 was 4.0 percent higher than the previous year, rising to 4.1 percent in 1997; the estimated figure for 1998 is 3.5 percent. The expectation is therefore for a continuation of sustained and stable growth. Similarly, the figures for volume of world trade (including commercial services) indicate a 6.2 percent increase over the previous year in 1996, 8.6 percent in 1997 and 6.2 percent in 1998, with still further expansion being forecast.

Japan, too, must sustain policy efforts which look forward to the 21st century in order to respond positively to the tide of globalization, continuing to seek greater harmonization between the Japanese economy and the global economy. The three main points to be borne in mind in this regard are: (1) promotion of structural reform of the Japanese economy in response to globalization; (2) maintenance and promotion of the multilateral trading system, which allows maximum benefit to be derived from globalization; and (3) responses to the new challenges posed by globalization.

b) The World Trade Organization (WTO) and maintaining and strengthening the multilateral trading system

i) Development of the WTO system

The WTO has generally functioned well in its first three years in strengthening the multilateral trading system. First, liberalization moved forward in trade in services. Under the WTO Agreement, trade in services was already subject to multilateral disciplines along with trade in goods. However, further negotiation was still needed on areas for which agreement was not reached during the Uruguay Round. In 1997, the negotiations on basic telecommunications and financial services were successfully concluded. This demonstrates substantial and significant progress in liberalizing trade in services. Second, dispute settlement mechanisms, which were improved and strengthened with the establishment of the WTO, functioned effectively. Third, progress was also made in negotiations on the accession to the WTO of China, Russia and other applicants. Moreover, as a result of the First WTO Ministerial Conference held in Singapore in December 1996, consensus was reached on the Information Technology Agreement (ITA).

ii) Further liberalization of trade in services

Negotiations on basic telecommunications reached consensus on 15 February 1997, with liberalization commitments from a total of 69 members being submitted, although the original deadline, the end of April 1996, was extended to 15 February 1997 after negotiations foundered. The main points in these negotiations were: securing meaningful liberalization commitments from the major negotiating members; improvement of market access (especially relaxation of foreign ownership restrictions); liberalization of international telecommunications and satellite communications; and creation of a framework to ensure that domestic regulations do not substantially obstruct market entry. Japan contributed to the success of the negotiations by presenting forward-looking liberalization commitments, including the elimination of foreign ownership restrictions, and actively working to build a regulatory framework.

In the financial services area, in July 1995 an interim agreement up to the end of December 1997 had been reached among 44 countries (excluding the United States), based essentially on the most-favored-nation principle. Negotiations resumed in April 1997, however, and a permanent agreement was reached on a most-favored-nation basis by 13 December among 71 members, this time including the United States. There had been some concern over the developing countries of Asia and Latin America not submitting their offers. However, they eventually responded to the encouragement from Japan and the United States, and presented their liberalization commitments entailing substantial improvement in some areas, basically reflecting current levels of liberalization. Japan was instrumental in the success of the negotiations, putting forward liberalization commitments which reflected the results of amendments to the Foreign Exchange Control Law, and often relevant legislation grounded in progress with financial system reforms. Japan also made additional commitments in regard to the results of consultations between Japan and the United States on insurance in 1996 and on financial services in 1995.

On professional services, a working party is currently drawing up multilateral rules to ensure that domestic regulations on accountancy services are based on objective and transparent criteria and do not become unnecessarily trade-restrictive.

iii) Dispute settlement system

The dispute settlement system under the WTO is far more effective than under the GATT, since the former's procedures are more expeditious and automatic than the latter's. The number of cases referred to dispute settlement mechanisms is greater than in the GATT days: whereas under the GATT, the annual average was 6.6 cases, in the period since the WTO was established in January 1995 up until the end of 1997, 109 requests were made for consultations. Of these, the Appellate Body issued reports in seven cases, with another three currently under appeal, and 15 cases being deliberated by panels. These figures indicate how effectively the dispute settlement system is functioning.

Japan has been party to 12 cases. As of the end of 1997, the Appellate Body has adopted a report in one, with three cases under panel deliberation and five cases either resolved or substantially resolved bilaterally. The four cases in which panels have been established currently stand as follows:

The WTO dispute settlement system has played an important role in ensuring a positive solution to disputes according to the WTO Agreement and in providing security and predictability to the multilateral trading system. It will be imperative that members continue to observe rules and procedures of the dispute settlement system and work to further improve both its effectiveness and credibility.

iv) Negotiations on accession

As of December 1997, working groups had been established with regard to negotiations on accession to the WTO for 29 countries and regions, including China, Chinese Taipei, Viet Nam, Saudi Arabia, Russia and Ukraine. In 1997, both the Summit Communique and the declaration issued by the APEC Economic Leaders' Meeting advocated encouraging the acceleration of negotiations on protocols for accession to the WTO Agreement and market access negotiations in order to enhance the universality of the WTO. To further strengthen the WTO-based multilateral trading system, it is vital to achieve the participation of as many countries and regions as possible, including transition economies, and Japan is supporting the early WTO accession of these applicants, providing the necessary cooperation to this end. In terms of China's accession to the WTO, Japan agreed, ahead of the United States and the EU, in substance on market access with regard to tariff and non-tariff measures during Prime Minister Hashimoto's visit to China in September 1997. Further liberalization efforts by China in trade in services are expected, and Japan hopes that the above agreement will further promote the negotiation process for China's accession.

v) Issues for the future

The year 1998 will mark the 50th anniversary of the GATT/WTO system, and the Second WTO Ministerial Conference and 50th Anniversary of the GATT will be held in May in Geneva. Such opportunities must be seized to advocate the importance of strengthening the multilateral trading system, which underpins the sustainable development of the world economy, as well as the promotion of further liberalization. Japan, too, must continue to participate actively in efforts toward liberalization of trade and investment under the WTO.

c) Regional economic cooperation

Regional economic cooperation was lively again in 1997. Intraregional cooperation continued to deepen, with a simultaneous diversification and multilayering of cooperative frameworks, including cooperation between regional economic cooperation frameworks and cooperation with countries outside the region.

In the North American region, the North American Free Trade Agreement took effect on 1 January 1994, with the goal of reducing barriers to trade and investment among the signatory countries (the United States, Mexico and Canada), creating the world's largest free trade region, with a regional GNP of nearly US$7.6 trillion and a population of 380 million people-roughly equal to the size of the European Union-on the North American continent. This agreement is wide-ranging and contains provisions on the liberalization of trade and investment, including the elimination of duties and preferential conditions for investment, as well as provisions on protecting intellectual property, dispute settlement mechanisms, labor practices and the environment. NAFTA was shaken by the impact of the Mexican financial crisis at the end of 1994, the year it was launched, but has achieved a steady increase in trade among the signatory countries, with Mexican exports to the United States and Canada showing particularly strong growth. Canada and Mexico have completed negotiations with Chile with regard to Chile's scheduled accession to NAFTA, but negotiations with the United States have been hampered by the U.S. Government's delay in obtaining fast track authority (the authority to negotiate trade agreements).

The European Union widened the scope of cooperation in 1997, including signature of the Amsterdam Treaty in October 1997, as well as the addition of new areas considered to be under the role of the EU, such as employment and environmental protection. Progress has also been made with discussion on ways to coordinate members' fiscal and economic policies. The Stability and Growth Pact was concluded, making fiscal discipline obligatory for those countries introducing the European single currency; this will ensure stable fiscal and economic management once the single currency has been introduced in 1999. At the Luxembourg meeting of the European Council in December, members agreed to officially launch the EU accession process for Cyprus and a number of Central and Eastern European countries in March 1998. Economic ties between the EU and these countries will be deepened on the basis of the European Agreements, etc., which already link these countries with the EU. Japan is encouraging the expansion of regional cooperation in such a way that it contributes to the development of the world economy and does not put countries outside the region at a disadvantage.

The Southern Common Market (MERCOSUR), a customs union in Latin America comprising Argentina, Brazil, Paraguay and Uruguay, was officially inaugurated in January 1995, leading to the significant expansion of intraregional trade. In 1997, MERCOSUR both deepened and expanded, initiating negotiations toward liberalization of services, and taking forward negotiations with the Andean Community (Bolivia, Colombia, Ecuador, Peru and Venezuela) toward the establishment of a free trade area encompassing the entire South American continent. At the First Summit of the Americas in December 1994, it was agreed that negotiations on the establishment of the Free Trade Area of the Americas (FTAA) would be completed by 2005, and these negotiations are scheduled to begin in the spring of 1998. However, the U.S. delay in passing fast track legislation (a bill entrusting the trade negotiation authority of the Congress to the administration) has cast some doubt on the leadership of the United States in these negotiations. Japan held its second intergovernmental consultations with MERCOSUR in October 1997.

With an increase in the number of items under tariff reduction, Southeast Asia has seen an advance in cooperation for realization of the ASEAN Free Trade Area (AFTA). At the ASEAN informal Summit in December, leaders adopted the ASEAN Vision 2020, setting targets that include economic cooperation after the realization of AFTA in 2003. Main elements of this targeted economic cooperation include: advocating intraregional economic integration; ensuring a fair and multilateral trading system; accelerating liberalization of trade in services; realizing the ASEAN Investment Area (AIA); promoting modernization and the competitiveness of the small and medium enterprise sector; promoting liberalization of the financial sector; and promoting closer consultation in macroeconomic and financial policies.

Looking to economic cooperation which goes beyond the regional limits of Asia and the Americas, the Asia-Pacific Economic Cooperation (APEC), in which Japan participates, is significant as the main pillar of economic cooperation in this region, covering Asia, Oceania, North America and South America (with the addition of Russia in 1998), with great diversity in terms of the social backgrounds, economic systems and stages of development of its members. Features which distinguish APEC from other types of economic cooperation are its non-binding intergovernmental cooperation, consisting of concerted unilateral actions by members, and its advocacy of open regional cooperation, extending the benefits of trade and investment liberalization broadly to non-APEC members. (Refer to Chapter I, Part B, Section 6 for more on the Vancouver APEC Meetings.)

Between Asia and Europe, the Asia-Europe Meeting (ASEM), launched in March 1996, proceeded smoothly in 1997. In particular, a series of ministerial meetings was held in response to the First Asia-Europe Meeting in March 1996, with the Foreign Ministers' Meeting in February, and the Finance and Economic Ministers' Meeting on separate occasions in September. These occasions served to develop the ASEM structure toward the Second Asia-Europe Meeting in London in April 1998. (Refer to Chapter I, Part B, Section 6 for more details on ASEM.)

As indicated above, while regional economic cooperation has the potential for complementing the multilateral trading system, it could also lead to the breakdown of the world economy into protectionist blocs. Care therefore needs to be taken to ensure that regional economic cooperation leads to more open trade, without throwing up barriers to extraregional countries. The Committee on Regional Trade Agreements established under the WTO has been investigating the consistency of the various agreements with the WTO Agreement, in 1997 examining NAFTA, MERCOSUR and the enlargement of the EU. At the same time, this committee is also considering the overall relationship between regional integration and the multilateral trading system, including the clarification of rules under the various regional trade agreements. Japan is taking an active role in the committee, making proposals on a framework for discussion, etc., with a view to contributing to the maintenance and strengthening of the multilateral trading system.

d) Responding to the new challenges of globalization

The advance of globalization, or the movement of goods, money, information and people, has put before the human race new opportunities and new challenges which go beyond the bounds of traditional trade relations.

i) Need to create new rules

In the world economy of today, deepening interdependence is imbuing the cross-border economic activities of multinational companies with far greater importance. Moreover, as seen in the Asian Newly Industrializing Economies (NIEs), foreign investment is playing a central role in promoting economic growth. While instruments such as bilateral investment treaties have formerly been the main means of ensuring investment discipline, investors now need strong and effective multilateral rules which will enable the smooth and stable conduct of their investment activities. It is from this perspective that Japan has been active in work on drawing up the OECD's Multilateral Agreement on Investment (provisional title). Japan must continue to involve itself deeply in multilateral attempts to establish these kinds of investment regimes of this kind.

Electronic commerce is an area which has grown rapidly in recent years, in line with the development of advanced information and telecommunications technology. Major powers such as Japan, the United States and EU are already deeply engaged in considerations toward the development of the domestic and international environment, and the economic and social importance of this area was recognized at the APEC Economic Leaders' Meeting in Vancouver. Deliberations are currently underway at fora such as the WTO, the OECD, APEC, the World Intellectual Property Organization (WIPO) and the United Nations Commission on International Trade Law (UNCITRAL) toward the development of a consistent legal environment with the minimum necessary regulations for the promotion of electronic commerce.

ii) Responding to new challenges

The advance of globalization has also given growing importance to action in regard to new challenges such as terrorism, transnational organized crime, money laundering, narcotics and infectious diseases. At the Denver Summit, leaders proclaimed the need to strengthen international efforts in regard to infectious diseases and reaffirmed their determination to combat terrorism in all its forms, calling on governments to strengthen the capability of hostage negotiation experts and counter-terrorism response units, etc. Transnational organized crime will be a main topic on the agenda of the Birmingham Summit in 1998, aiming to strengthen cooperation between Summit members and to appeal for action by the international community. The narcotics issue is also under active discussion at fora such as the United Nations. Japan is working proactively to combat money laundering through its participation in international conferences and the development of domestic systems.

iii) Internationalization of domestic issues

One product of the advance of globalization is intensified competition, presenting countries with social problems such as unemployment and social security systems. While these have always been treated as essentially domestic social problems, factors such as the deepening interdependence of recent years have highlighted the need for international action on these as world economy issues. In regard to social security systems, at the Denver Summit, Prime Minister Ryutaro Hashimoto's "Initiative for a Caring World" served as a platform for intensive discussion on the aging issue, with leaders advocating the concept of "active aging." Moreover, at fora such as the OECD, Japan is exchanging knowledge and experience with other countries toward the establishment of sustainable social security systems. In this context, Japan held the Kobe Jobs Conference in November 1997. In addition, recognizing that bribery of foreign public officials is damaging fair competition in terms of international business transactions, the OECD undertook negotiations on an international convention to criminalize such behavior. This convention was adopted in November 1997 and signed on 17 December by 33 countries, including Japan.

iv) Long-term tasks

In terms of long-term issues such as food, energy and the environment, the environment was highlighted at the Denver Summit as one main agenda item. In addition, APEC has been analyzing the impact of population growth and rapid economic development in the Asia-Pacific region on food, energy and the environment, taking forward work in this area as a long-term APEC task.

v) Development issues

Action must be taken in regard to those countries which globalization is leaving behind. Leaders at the Denver Summit discussed the kind of policy measures which should be taken in terms of development assistance, trade and investment, and peace building, etc., in regard to the least-developed countries, particularly in sub-Saharan Africa, which globalization could shut out of the world economy.

e) Natural resources and energy

While world energy demand is forecast to expand more than 40 percent over the next 15 years, it is becoming more necessary to secure the stable supply of energy and take measures for protection of the environment against, for example, global warming. In 1997, the Third Conference of Parties to the UN Framework Convention on Climate Change was held, and particular attention was paid to energy and environmental issues.

Climate change was the focus of the 16th Governing Board Meeting of the International Energy Agency (IEA) at Ministerial level, held in May in Paris, with recommendations made based on the current situation of the energy sector. The IEA is expected to contribute to implementing the Kyoto Protocol and considering the details of the schemes which were not covered in Kyoto. The meeting also dealt with themes such as deregulation and energy security from the perspective of the government's role amid changes in the energy market and the international situation as a whole. The Chinese Energy Minister participated as a guest in the informal session, the first minister from a non-member country to do so.

At the Second APEC Energy Ministers' Meeting, held in Edmonton, Canada, in August, ministers confirmed the progress which had been made since the first meeting in Sydney the previous year. They discussed concrete measures such as improvement of energy efficiency (proposed by Japan), promotion of private sector investment in infrastructure development, environmentally sound infrastructure and harmonization of standards. The third meeting will be held in Okinawa in October 1998.

Interests have also increased in Eastern Siberia and the Russian Far East in particular as potential energy resources in the Asian region. At the November Japan-Russian Federation Summit, the leaders agreed to strengthen energy dialogue. A symposium was held later the same month in Tokyo among relevant parties from Japan and abroad ("The Path to the Asian Energy Community").

Global interest is growing on the topic of food supply, given the rapid rise in population and higher food consumption levels in developing countries with high levels of economic growth, as well as concern about natural resources and environment issues. The World Food Summit in November 1996 saw the adoption of the Rome Declaration and an action plan for the implementation of this, affirming the political commitment of member countries to tackle these issues; how to follow up on these steps is a crucial question. Japan has been undertaking cooperation in a variety of forms, including food aid and grant aid for an increase in food production, directing these efforts both through international organizations and on a bilateral level.

2. Development issues and Japan's Official Development Assistance (ODA)

a) Japan's ODA

i) A turning point for ODA

ODA also faced a major turning point under fiscal structural reform and administrative reform in 1997.

Amid a fiscally critical situation, a Cabinet decision was adopted in June to reduce the FY1998 ODA budget by at least 10 percent compared to FY1997 as part of across-the-board government cost-cutting. Moreover, in the process of budget formulation, efforts were made to improve ODA quality and effectiveness toward deriving maximum effect from limited funds. This entailed greater prioritization of areas where ODA was to be used-for example, to respond to environmental issues, to promote social development and to contribute in the humanitarian sector, as well as human resources development in developing countries-and comprehensive coordination based on these priority sectors, going beyond jurisdictional boundaries.

Prior to this, in April, the Council on ODA Reforms for the 21st Century was established under the leadership of the Minister for Foreign Affairs, drawing together eminent figures from a wide range of areas to discuss ODA reform. The Council presented a final report in January 1998 with recommendations on a broad spectrum of issues related to ODA. These included: formulation of country-specific assistance programs; enhancement of the functions of assistance implementation agencies and field offices; strengthening of support for South-South cooperation; improvement of preliminary surveys and ex post facto evaluations; enhancement of public participation, including coordination between NGOs and local governments; and utilization of private sector initiatives. The Ministry of Foreign Affairs attaches great importance on this extremely thought-provoking report, and is working to ensure that it is adequately reflected in future ODA reform, starting from those areas where it is possible to implement.

At the same time, vigorous discussion on ODA reform is also proceeding among non-government parties, with independent ODA reform recommendations put forward by economic organizations and NGOs.

As part of reorganization of the Central Government and other administrative reforms of the government, the final report presented in December by the Administrative Reform Council suggested that to ensure more effective and efficient ODA utilization, the Ministry of Foreign Affairs should play the central role in coordinating among the various related parties on overall plans for economic cooperation, including comprehensive strategies for recipient countries.

The domestic environment is becoming increasingly difficult in regard to ODA. However, at the same time, more than one billion people around the world are still living in extreme poverty, and global issues such as the environment, population and AIDS show no signs of disappearing. Given this situation, taking action on these issues continues to be one of Japan's important duties. ODA plays an instrumental part in the peace and stability of the international community by contributing to the stability and growth of developing countries. It also contributes to the promotion of Japan's national interests by, for example, guarding the livelihoods of the people of Japan and creating an international environment favorable to Japan. The Government of Japan intends taking advantage of this difficult period to engage in a sweeping review of ODA to date, working to improve ODA quality and to ensure efficient and effective implementation. Due attention should be paid to the principle of Japan's ODA Charter, and efforts will be made to garner the understanding of the Japanese citizens.

ii) Japan's ODA in 1996

Japan disbursed US$9.44 billion in ODA in 1996 (excluding aid to Eastern Europe and to countries no longer dependent on aid), making it the world's largest donor for the sixth consecutive year. However, factors such as reduced subscriptions and contributions to international development finance institutions, increased repayments on earlier yen loans and major depreciation of the yen pushed down total ODA more than US$5 billion compared to the previous year (US$14.49 billion). This also reduced Japan's share of total aid provided by the OECD Development Assistance Committee (DAC), which comprises the main donor countries, from 24.6 percent in 1996 to 17.1 percent in 1997. Japan's ODA/GNP ratio also fell from 0.28 percent in 1996 to 0.20 percent in 1997, putting Japan in 19th place among the 21 DAC countries (the DAC average being 0.25 percent).

b) New trends in aid policies

Japan's proactive assistance and assiduous contributions resulted in the 1996 adoption by the DAC of the New Development Strategy (officially titled "Shaping the 21st Century: The Contribution of Development Co-operation"). Partly as a result of pressure from the developed countries, efforts together with developing countries toward implementation of this strategy began to move forward steadily in 1997. In addition to enhancing policy dialogue with the various developing countries, Japan worked to increase acceptance of the philosophy behind the New Development Strategy (NDS) through, for example, an NDS seminar co-organized with the Netherlands in October and a development seminar on the NDS and Egypt co-organized with the Egyptian Government and major donors in November. Japan has also seized a number of opportunities to work toward construction of a framework for aid coordination in the developing countries where the assistance is implemented, as well as working to build a shared understanding among donor countries and organizations with regard to concrete implementation of the NDS, etc.

Discussion in 1997 focused particularly on aid to Africa, with African development issues also a major theme at the G-8 Denver Summit. To make African assistance efforts more concrete, Japan will hold the Second Tokyo International Conference on African Development (TICAD II) in October 1998, inviting not only African countries but also Asian countries as well as donor countries and organizations. A preparatory meeting was held in November 1997, with members deciding on elements such as the themes for the action plan to be formulated at the 1998 meeting.

Japan also announced new policies for tackling environmental issues through ODA. (Refer to Chapter I, Part C, Section 2.)

Moreover, recognizing the marked currency and financial crises experienced by a number of Asian countries since mid-1997 as having serious repercussions not just for the region but also the world economy as a whole, Japan has contributed proactively to resolution of the issue, coordinating with the relevant countries and organizations. Examples of concrete actions using bilateral ODA include utilization of yen loans to support structural adjustment, human resources development and intellectual assistance through the Japan-ASEAN Comprehensive Human Resources Development Program, etc., assistance for foreign students and medical supplies through emergency grant aid schemes.

In addition, the Government and NGOs joined forces in 1997 to evaluate ODA projects and aid projects conducted by these NGOs as an initial experiment aimed at promoting public participation in ODA. The Japan Disaster Relief Teams, established a decade ago with the entry into force of the Law Concerning Dispatch of Japan Disaster Relief Teams, responded swiftly to incidents such as the forest fires in Indonesia and the oil spill accident in Singapore, which deserved high commendation from the recipient countries.

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