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Opinion: Japan’s aid policy in dire need of revamp

New Straits Times, Malaysia

Opinion: Japan’s aid policy in dire need of revamp

By Mohamed Ariff

28 April 2007

The second largest economy in the world is in the midst of change and one crucial area it needs to look is its official development assistance programme.

Believe it or not, Japan is changing!

Surely, no country, no matter how conservative, can afford to ignore changes taking place in the global and regional arena. Japan is indeed a case in point. A country that remains oblivious to changes would risk becoming irrelevant and ineffective. It is a good thing that Japan is embracing, not resisting, change. But change is not easy, not only because there is a strong constituency against change in every society, but also because the trends that call for shifts in policies and strategies are so diverse and complex. It is difficult to strike a balance in the face of seemingly contradictory global, regional and bilateral interests.

Japan, like the legendary phoenix, had risen from the ashes of Hiroshima and Nagasaki to be a global player and the second-largest economy in the world. Japan had remained steadfastly committed to a multilateral trade regime within the framework of the Gatt (General Agreement on Tariffs and Trade) and the WTO (World Trade Organisation). Japan had looked upon itself as a footloose global trading nation, unwilling to anchor itself to the East Asian region. Until recently, Japan had enjoyed the rare distinction of being one of the few countries in the world that had no regional or bilateral trade agreements. That is now history.

In a sense, it is unfortunate that Japan has chosen to keep up with the Joneses by entering into regional and bilateral trade ties, knowing full well that these are clearly inferior to the multilateral option.
Upon close scrutiny, however, it does appear that Japan hardly has a choice in this regard. The opportunity cost of not doing so, while others are actively sealing regional and bilateral trade deals, is indeed very high for Japan in terms of the potential loss of market share in these countries. That said, one must hasten to underline the cost this would entail in terms of tonnes of paperwork, not to mention the plethora of rules of origin that vary from country to country or even commodity to commodity, aptly dubbed as the "noodle bowl syndrome".

All this seems to be an exercise in futility, as bilateral FTAs tend to cancel out as concessions and privileges given to a country are extended to others, with more and more countries joining the bandwagon.

It is not unthinkable for a country to enter into bilateral deals with every other country and enjoy special market access until its trading partners extend the same privileges to other competitors as well.

Although the end result may well be similar to that of multilateral trade agreements, the bilateral route is extremely clumsy and messy. It will be much neater and simpler to go for multilateral solution based on the most-favoured-nation principle.

One of the reasons, if not excuses, for the proliferation of FTAs is that the WTO process is too slow, as shown by the lack of progress in the on-going Doha Round which is seen to be going nowhere. But the fact remains that FTAs are taking the wind out of the sails of the WTO trade negotiations.

It is indeed a pity that Japan, a bastion of multilateralism, had succumbed to the temptations of bilateralism. All is not lost, however. Japan can still save the WTO process by multilateralising its bilateral concessions, but this calls for courage and wisdom.

Be all that as it may, there is merit in what Japan has done thus far in bilateral trade deals. A major breakthrough is that Japan has finally arrived at a point where it can at least discuss such sensitive items as agricultural and services trade in a meaningful fashion.

Japan now seems willing to un-bundle sensitive issues and treat some parts differently from others, instead of treating them all in a holistic fashion. Bilateral FTAs also provide a convenient tool to slowly tear down domestic resistance to trade liberalisation. What’s more, bilateral trade deals may also help lock in the reform process currently under way in Japan.

It has named its bilateral agreements as EPAs and not as FTAs. The difference between the two, if any, is only marginal, if not cosmetic. Evidently, all the FTAs go far beyond trade matters into such realms as trade facilitation and removal of restrictions on foreign investment. Some even venture into competition policy, government procurement, intellectual property rights and environmental concerns.

Development assistance, capacity building and S&T (science and technology) co-operation are not confined to EPAs only, as they are found in FTAs as well. All said and done, EPA is really no more than a Japanese brand name for FTA. Generically speaking, they mean the same thing.

Japan’s shift in foreign economic policy may be in response to China’s activist stance. Indeed, the importance of the China factor in Japan’s decision to forge EPAs can hardly be exaggerated. There is no need here to belabour the point that the Sino-Japanese rivalry and tension has long been an overriding concern for Japan. Understandably, Japan will not allow itself to be eclipsed by the rise of China as a regional player.

Japan is also keen on engaging India, which can provide a counterweight to China’s influence in the region.

Japan remains the kingpin of the informal integration of the East Asian economies that has long been under way thanks to market forces, manifested through the production and distribution network that spans the entire region. Until recently, Japan has shown no interest in formalising this process through a region-wide FTA. Nonetheless, Japan is still wary of the concept of East Asian Economic Grouping that comprises the Association of Southeast Asian Nations (Asean) plus Japan, China and Korea, again apparently fearing China’s looming domination. Japan would be more comfortable with a wider regional grouping which includes not only Asean+3 but also India, Australia and New Zealand (Asean+6), as this would dilute the China concerns.

Japan’s ODA (official development assistance) policies and strategies are also changing, due not only to budget cutbacks but also to changing circumstances. It is unfair to judge a country’s aid track record by using tough moral standards. Altruism has never been the basis for any ODA programme anywhere in the world. Japan is no exception. Donor countries, more often than not, expect economic returns mainly in the form of market access or non-pecuniary gains in the form of geopolitical mileage in the recipient countries.

Evidently, Japan has used its ODA to promote Japanese business interests. Japan’s ODA has helped secure access to raw materials for Japanese industries, gain markets for Japanese exports, and defuse bilateral trade frictions.

In fairness, it is important not to ignore the softer side of Japan’s ODA. About one-fourth of the Japanese ODA has gone for meeting basic human needs in the recipient countries. Roughly one half of Japan’s ODA has been directed at the development of social and economic infrastructure, while financial support for structural adjustments, debt relief, etc. has accounted for the rest.

Nonetheless, the criticisms levelled at Japan’s ODA are valid. To say the least, Japan’s ODA appears to be somewhat ad hoc without philosophical underpinnings. It even appears that Japan does not have an independent ODA policy of its own. Security-motivated economic assistance is on the increase, due primarily to the US demands for "burden sharing", directed at countries identified by the United States, e.g Iraq, Afghanistan, Egypt and Pakistan.

A sizeable proportion of the Japanese aid is likely to be targeted increasingly at Eastern Europe, Central Asia and Central America, again under the US pressure, ostensibly to support democratisation.

Paradoxically, the share of poverty-stricken least-developed countries in Asia and Africa remains dismally small.

It is encouraging to note that there has been some domestic debate in Japan on its ODA lately, with a clear shift in public opinion, questioning the content, direction and cost-effectiveness of the ODA programmes. There is a need not only to spell out the criteria but also to assign weights to each and every criterion for ODA disbursements.

The use of ODA for purposes of sanction, in particular, appears repugnant. It is time that Japan charted out an independent ODA policy based on sound logic, which must include both efficiency and equity considerations.

The writer is the executive director of the Malaysian Institute of Economic Research