The Address by Mr.Koichi Haraguchi, Deputy Minister for Foreign Affairs at the Fifth Symposium on Latin America and the Caribbean organized by the Inter-American Development Bank and the Export-Import Bank of Japan --

Session II: Regional Integrations, Infrastructure and Private Sector Participation

30 June 1998

Ladies and gentlemen,

I am deeply honored to have this opportunity to share my views on regional integrations, infrastructure and private-sector participation on the occasion of the Fifth Symposium on Latin America and the Caribbean, a forum jointly sponsored by the Inter-American Development Bank and the Export-Import Bank of Japan.

Allow me to start by taking a look at the three key terms that appear in the title of this session: regional integration, infrastructure and private sector participation. I would like to begin by sharing my thoughts on what kind of implications these terms have in the context of international economics and development.

Broadly speaking, I think there are two ways to look at regional integration.

If several countries collectively reduce tariffs and other barriers within their region, economic exchange within that region would certainly become more active. Countries outside that region, however, might find themselves in a position of relative disadvantage and the economic exchange between those countries and the regionally integrated countries might decrease. When one focuses on such possibilities, regional integration will be cast in a negative light. It is the countries outside, in particular, who will be wary of such integration. This is a widely known fact that customs unions prior to World War II did have the ?beggar-thy-neighbour? effect, and it was a desire to correct that situation that led to the promotion of the multilateral free trade system centered on the GATT after the war .

On the other hand, regional integration would promote active economic exchange within a region, and might benefit the region by the scale of economies and a more effective utilization of resources that could not previously be attained by a single country. Should that happen, intraregional growth could also create new and additional demand for economic exchange with countries outside the region. When one focuses on these possibilities, regional integration will be cast in a positive light. It is based on this logic that GATT/WTO, although based on multilateralism, also allows for regionalism under certain conditions.

In reality, regional integration seems quite attractive to many countries. As of 23 April this year, the number of regionally-integrated groups registered with the WTO Secretariat and recognized as effectively functioning amounted to 98. Many such regionally-integrated groups already exist in Latin America-Mercado Comun del Sur, the Andean Community and Central American Economic Integration to name a few. There are also movements toward the creation of a Free Trade Area of the Americas, which would span the entire continent of North and South America.

Japan is an exception in that it does not belong to any of such regionally-integrated groups. Right up to the present, it has consistently maintained a cautious stance with respect to regional integration. Of course, Japan has not dismissed regional integration as unacceptable; it's just that it believes the international economy can develop more efficiently under multilateralism and that any regional integration should therefore take place in strict compliance with the WTO rules. True, Japan does belong to APEC, but APEC is a unique mechanism for cooperation that advocates "open regionalism", which might look similar in some respects, but is different in substance from" regional-integration". In short, I think regional integration could be viewed either positively or negatively depending on how it is managed. It is our strong hope that the member countries of regional groupings always give due consideration to the potential dangers of regionalism.

Next I'd like to talk about infrastructure. Infrastructure is defined as "a substructure or underlying foundation" and generally refers to physical aspects such as roads, water supply, sewerage, electricity, communications, railways and airports. It could also include intangible aspects such as basic education, basic social security and others. Put simply, it means anything that helps form the important foundation of support for the broad-ranging activities of a nation. The basic thinking behind a market economy is that letting each and every member of a nation act freely in pursuit of his or her maximum profit will, in the end, bring about the most efficient results for society as a whole. Experience has shown, however, that private initiatives very rarely result in the development of adequate infrastructure. That's because enormous amounts of capital are required and it is difficult to quickly turn over a profit that matches the size of the investment. Therefore, infrastructure, as a public asset, has traditionally been developed through public funding.

Now let me turn to the "utilization of private-sector capital." Despite calls for a market economy and a small government, the demands for public funds are mounting and the capacity to meet all these demands is rapidly deteriorating - this is happening almost in every country. If such is the case, it's no wonder people started to think about taking greater advantage of market principles and utilizing private funds for some of the areas traditionally funded by the public sector. Already there is an increase in examples of infrastructure development through private-sector capital in areas where there are prospects for a reasonable profit.

It is often pointed out that inadequate infrastructure is a bottleneck to the economic development of developing countries. As I have just stated, however, building infrastructure requires enormous funding. To give you an example, the World Bank projects that an annual investment of 60 billion dollars is necessary to meet the infrastructure demands in Latin America and Caribbean region. That's equivalent to 4 percent of the total annual GDP of that region. Repair and expansion of the road network alone is said to require between 14 and 18 billion dollars by the year 2005.

Funds must come from outside sources if these capital demands are to be met. One important source is official development assistance and other official financial support from foreign governments. Japan, for example, earmarked some 67.9 percent of its bilateral ODA loans in FY1997 -a total of 705.6 billion yen- for the building of economic infrastructure. In 1997, Japan's ODA to Latin America and Caribbean countries, including ODA for infrastructure development, reached 715 million dollars. Another 388.6 billion yen in loans was extended in FY1997 from the Export-Import Bank of Japan. Such official funding makes Japan one of the top donors to Latin America. Still, though, this is not enough to meet all the demands for the funding of infrastructure in this region. The remainder must come from other sources. This is where private-sector capital from overseas comes into play. According to the latest data released on 19 June by the Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD), the flow of funds from industrialized countries to developing countries in 1997 amounted to 272 billion dollars, of which ODA totaled only 47.5 billion dollars. Looking at these figures, it is only natural to turn our focus to the utilization of private-sector capital.

To mobilize private-sector capital, however, it is essential to believe that the invested funds have a good chance of yielding a reasonable profit. Investing in infrastructure overseas, however, carries an extra risk not found in ordinary investment. Let me offer an example. In a case where private-sector funds were to be utilized for a power generation project or an expressway construction project in a country, the government authorities in that country set the utility fees or tolls in advance, promising the investors that they would maintain those fees or tolls at that level. Next, the investors, as a result of careful calculations based on the promised levels, concluding it would benefit them as a business, made their investment, but that following that investment there was an election and a change in government, and that the new government authorities ordered the investors to lower the fees or tolls in response to the wishes of the residents. The initial premise in planning the project was thrown out the window and the project fell apart. If such problems would occur repeatedly, we would not be able to count much on infrastructure development through private-sector capital.

In a nutshell, if a country wants to promote infrastructure development through private-sector capital, it is essential that it establish a reliable environment and systems that will make investors feel comfortable about investing.

I said earlier that regional integration makes sense if it is possible to take advantage of economies of scale. In this connection, the development of infrastructure within an integrated region becomes an extremely important factor so as to ensure active economic exchanges within that region .

In Latin America and the Caribbean, economic interaction among member countries of regionally-integrated groups has not traditionally been very close. Due to concerns related to national defense and other matters, road network, for example, have been developed linking the economic centers of a country with the ports of that country, but not much has been done to the routes between and among the member countries. If regional integration in Latin America is to bear fruit in the future, there is a need to focus on infrastructure development, especially through private-sector capital.

To do this, as I have already pointed out, a government must of course establish firm, credible, foreign investment-protection policies. However, the most important factor is stability in the political and economic situation of that country.

In the 1990s, the Latin America and Caribbean countries entered a period of stable growth through promoting privatization of state-run enterprises and other fiscal reforms, transition toward a market economy, liberalization of external economic policy and solution of its debt problems. The impact of the Asian economic crisis has been limited so far, too, owing to their sound macroeconomic management based on the lessons learned from the economic crises of the 1980s and the Mexican monetary crisis at the end of 1994.

With this stability on the economic front, combined with the spread of democracy on the political front, the region has entered a period of overall stability.

Turning to my own experiences, I have been involved in G7 Summits (or G8 Summits, as they have now become), on several occasions. One of the traditional topics discussed at these summits has been the "regional situation." Under this topic, the G7/G8 heads of state and government have traditionally called upon "problem countries" to correct the respective problems they confront. At the summits last year and this year, however, not a single Latin American country was mentioned in discussions under this topic." This fact, I think, speaks of a remarkable political and economic stability and development in Latin America which has been achieved in recent years.

With a view to supporting this sustainable economic growth, we emphasize support for the development of infrastructure through private-sector capital. In February 1996, we announced "the Initiative for the Support of Infrastructure Projects through Private-sector Capital" and have made efforts for its steady implementation. The Initiative aims at promoting (1) policy dialogues for the improvement of the project environment, (2) the establishment of supporting infrastructure through ODA loans, (3) project formulation, institution building and training for maintenance and management personnel through technical cooperation schemes, and (4)the utilization of OECF private sector investment scheme, Export-Import Bank of Japan loans, trade insurance and the private-sector infrastructure funds.

To ensure the sustainable economic growth and to stabilize the economic foundation of the Latin America and Caribbean countries under increasing of regional integration, we will continue to cooperate in infrastructure development by mobilizing the private sector capital, and strive to produce successful cases of such initiatives.

Thank you for your kind attention.


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