Global Development Strategy and Japan’s ODA Policy

Izumi OhnoandKenichi Ohno

National Graduate Institute for Policy Studies (GRIPS)
2-2 Wakamatsu-cho, Shinjuku-ku, Tokyo
162-8677 Japani-ohno@grips.ac.jp
kohno@grips.ac.jp

March 12, 2002

The recent World Bank-driven development strategy regards poverty reduction as theprimary goal and emphasizes partnership, transparency, accountability, capacity building,empowerment, etc. There is also pressure to redirect the shrinking global ODA funds to thepoorest countries willing to adopt “international best practices.” As the largest ODA donor,
Japan participates in this global aid approach with considerable unease. The majority ofJapanese development officials and economists think the World Bank approach imposes toomuch procedural uniformity while disregarding local diversity and real-sector concerns
including the promotion of nascent industries under international integration. With its own
ODA budget on the decline, the Japanese government is currently reviewing its ODA
strategy. While some urge acceptance of the World Bank strategy as Japan’s own, this paper
proposes an alternative objective: sustaining Asian dynamism—unique regional growth
pattern fueled by close trade and investment ties. This must be pursued in a way that does
not exclude economies outside East Asia. External economic policies including ODA, tradeand investment policies should be redirected toward this goal, in addition to globallycommon concerns such as poverty and environment. Under this framework, Japan’s
existing aid portfolio can be reinterpreted, justified and expanded. Japan’s dual position asa member of Asia as well as a member of the developed world will also be easier to manage
and reconcile.

1. Introduction
Absence of clear principles that can be projected to the rest of the world as well as
slow and passive reaction to shifting external circumstances are the salient features ofJapanese diplomacy after World War II. These features are surely visible in Japan’s ODA
policy. While this followership attitude of a huge economic power such as Japan may havelessened potential tension in the Asia-Pacific region, it inevitably leads to the accusation thatJapan is not assuming the leadership role commensurate with its economic size.
In Japan, there is always bitterness that Japan’s monetary contribution to the world,which is huge, is not properly appreciated by the global community. This chagrin permeates
Nagatacho (political center) and Kasumigaseki (bureaucratic complex) as well as the business
community and the media at large. The reason for this under-appreciation is thought to be
the lack of attractive diplomatic goals into which funds can be poured as well as poor public
relations effort. The Japanese government wants to present “assistance with a visible face.”
Requiring to post a Japanese ODA logo on all cardboard boxes and structures donated by
Japan is a desperate attempt in this direction, but that seems hardly enough or to the point.
At present, Japan’s ODA policy is under critical review for two major reasons. The
first is fiscal crisis that forces the government to cut expenditures that are not deemedabsolutely necessary. The ODA budget, previously regarded as sacred, is now certain to shrink
in the future and the only question is in which areas and by how much. Surely, ten years of
economic recession has done much to prompt these unfavorable changes. Under fiscal
austerity and with the recent political scandals involving MOFA, a re-examination of past
formulae is unavoidable. Also from the viewpoint of ODA executing bodies, a new vision isneeded to minimize the damage and preserve their raison d’etre.
The second reason for ODA review is external. During the last decade as Japanemerged as No.1 supplier of ODA, Japanese officials and economists voiced their opinions
more loudly than ever and the World Bank also began to listen. Closer cooperation andmutual learning between Japan and the Bank have been promoted and produced positive
results, which should not be understated. Nevertheless, in fundamental policy orientation,
Japan and the Bank do not seem to have narrowed the gap significantly even after ten years
of intensive policy dialog. The Comprehensive Development Framework and the Poverty

Reduction Strategy Papers, the World Bank’s bold and most recent initiative (see below), is as
alien to the Japanese ODA community as neoclassical development economics was in the
1980s. This powerful reorientation of development strategy initiated by World Bank
1

President James Wolfensohn is plunging the Japanese aid officials into the usual ambivalence
between followership and silent disapproval.
This paper will discuss Japan’s current attempt to move away from the traditional
reactive mode and project its own ideas more strongly in ODA policy making. The next section
describes how Japan is cooperating with the World Bank’s new development initiative, so far
passively and without much enthusiasm. At the same time, there are many attempts to
re-make Japan’s own development strategy. After a brief review of these attempts, the second
half of this paper will present an alternative proposal. At this moment, whether Japan will
succeed in finding a new ODA vision very soon is difficult to tell.
It must be warned at the outset that views contained here are neither impartial nor
comprehensive due to the authors’ involvement in the Japanese ODA debate as practitioner
as well as advisor to the government. This paper depends heavily on our ongoing research
projects at GRIPS, METI and JICA as well as discussions with MOFA officials.

2. Japanese Reaction to the New Trends
Shifting Ideas in Development Economics
Development economics, as a policy-oriented discipline for improving the material
being of people residing in the developing world, was invented after World War II as former
colonial territories collectively gained political independence. Since then, roughly for half acentury, many models and paradigms were proposed for diagnosing various questions in thedeveloping world.
In the early postwar period, development economics was mainly concerned withsocio-economic engineering aspects such as the savings-investment balance, choice oftechnology, material planning, etc. Poverty was often attributed to inappropriate social
structure, such as rigidities and segmentation of labor and land markets (structuralism). In
the 1970s, global political movement which attributed poverty to forced inequalities between
the developed and the developing world accelerated (politicization of the North-South

problem). The developing countries accused the industrialized world for imposing “unfair”
trade and “invasion” by multinational corporations, and demanded establishment of the New
International Economic Order based on affirmative actions and significant transfer of wealthin favor of developing countries.

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Throughout much of the 1950s, 60s and 70s, official activism was deemed essential
for correcting both domestic rigidities and international injustice. Governments in thedeveloping world often adopted economic planning and nationalized key industries. In thosedays, government intervention flourished not only in socialist China and USSR, but also inother developing areas including South Asia and Sub-Saharan Africa. Over time, however,development strategy based on naïve optimism on the role of the government inevitably led toeconomic inefficiency and stagnation. Except for a number of countries including Japan andEast Asian NIEs which used official intervention with light touch and sufficient care [WorldBank 1993], heavy official intervention failed spectacularly as a means to catch up with theWest. Dismay and reflection followed, producing two main currents in development economics
which dominated the policies of the World Bank and IMF during the last quarter of the 20th
century—even to date.
The first trend is economic liberalism which either negates or severely limits theuseful role of government in the development process. According to the radical proponents ofneoclassical development economics, the key to economic success consists of removing official
intervention and unleashing market forces as fully and quickly as possible, regardless of
initial conditions and development stage. Externally, bold trade and investment liberalizationmust be accomplished. Since the 1980s, this radicalism—or orthodoxy, depending on one’s
standpoint—has guided the actual policy conditionalities of the World Bank and IMF imposedon developing countries seeking their financial assistance to execute “structural adjustment.”
The second trend is a rising interest in personal and institutional aspects ofdevelopment, rather than (or in addition to) macroeconomic and industrial concerns.
Optimism of the early postwar period that economic growth will naturally eliminate poverty(“trickle-down hypothesis”) is now strongly rejected; instead, direct attack on poverty has
been elevated to the primary goal as well as the most effective means of development. Today,
all strategies and projects must be evaluated in this light. Furthermore, all countries are
required to address the questions of environmental protection, administrative efficiency,
creation of participatory process, etc. even in the early stages of development. It is no longer
permissible to wait until economic growth will gradually solve these social and politicalquestions in the future. Positive actions on all these fronts are required now, or you are out.
Global common sense and Japanese dissent
The current Western thinking on economic development (as embodied in the actual
policies of international financial organizations) can be summarized as follows [Izumi Ohno

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2000].1z

The ultimate objective of development is poverty reduction. This encompasses not justrising income, but also the regaining of human quality such as dignity, security, voice andchoice by all people. Development assistance should be evaluated mainly by thecontribution to this goal.

z

Economic development (i.e., poverty reduction) requires a wise government. To build it,
administrative capacity must be enhanced by intense institutional reforms. In particular,transparency, accountability, good governance and promotion of civil society are among
the goals for which all governments should strive.

z

The private sector should be deregulated and given a level playing field. Government
should not do what the private sector can do. As to official intervention for industrial
promotion, a few countries may have implemented it successfully, but it is too difficult formost countries. General economic liberalization combined with an open door policy issuitable for the vast majority of countries.

z

ODA should be re-directed to the poorest countries with increased grant components.
Middle-income countries with an access to private capital should graduate from ODA. As
to countries unable to implement “correct” policies with ownership, policy advice should
be given, not financial assistance.

z

Development must proceed in a cooperative framework involving all stakeholders insideand outside the country. Piecemeal policies and assistance will not produce results.
These ideas are typically represented by the Comprehensive Development

Framework (CDF) and the Poverty Reduction Strategy Paper (PRSP), a new assistancestrategy by the World Bank.2 In essence, CDF is a permanent country forum set up by
government, private businesses, NGOs, donor countries and international organizations for

Here, the West particularly means the Anglo Saxon and Nordic countries. They seem to beleading the global development debate and are most comfortable with the recent trends
emphasizing poverty reduction, although disagreements at the level of strategy exist.
2 At the Bank-Fund Annual Meetings in October 1998, World Bank President James
Wolfensohn argued that good macroeconomic management was necessary but not sufficientfor economic development, and proposed a new development approach (then called the “NewDevelopment Framework”), which incorporates social and environmental needs andemphasizes institution building. The new approach also calls for broad participation of civilsociety, NGOs, private businesses, government, donors, etc. In January 1999, President
Wolfensohn named this approach as the “Comprehensive Development Framework” in his
proposal to the Board of the World Bank. In September 1999, the Bank and the Fund decided
to require a “poverty reduction strategy paper” (PRSP) from any country that receives
concessional financial support. Roughly speaking, CDF is a general principle while PRSP is adocument that concretizes the poverty reduction strategy for each country. The updated
details can be obtained from the World Bank’s website.
1

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discussing and allocating development tasks in both economic and non-economic fields. CDF
has been experimented in 12 pilot countries (in East Asia, Vietnam is the only country
implementing this approach). Subsequently, the CDF approach has been incorporated into
PRSP―a working document which translates a country’s poverty reduction strategy into a
focused and time-bounded action plan (typically three years). PRSP is required for all
low-income countries to obtain debt relief under the HIPC initiative and to seek concessional
financial support from the World Bank and the IMF.
Importantly, over the last two years, PRSP has emerged to become the primary policy
and operational vehicle to support poor countries’ effort for poverty reduction. In mid-January
2002, the World Bank, jointly with the IMF, hosted an international conference on the PRSP
review. With the participation of various stakeholders, it assessed the achievements andchallenges of PRSP and discussed ways to improve its development impact. The final report isto be submitted to the World Bank-IMF Development Committee in April 2002. The
conference participants broadly endorsed the key principles underlying the CDF/PRSP
approach, including the properties of country-driven (involving broad-based participation),results-oriented (with outcomes benefiting the poor), partnership-oriented (involving
coordinated participation of development partners). They also agreed on the need formethodological refinements. As the PRSP process is firmly established, interest in CDF as a
general guideline seems to be waning.
Whether the CDF/PRSP approach will turn out to be the ultimate solution, an
important step forward, or just another fad in development aid to be largely forgotten several
years later, remains to be seen. Many Japanese development officials and economists are
skeptical.3 While Japan has been the largest donor in development assistance since the early
1990s, it has kept its distance from the dominant development thought emphasizing economic
liberalization and poverty reduction [Izumi Ohno and Kenichi Ohno 2002].
It is not that Japan wants to deny every aspect of the dominant development
thinking. In fact, there are many things Japan can learn from it. However, as a non-Westerncountry with different developmental experience of its own, Japan should be able tocontribute more to global development thinking through constructive criticism rather thanuncritical endorsement. Japan should also offer a dissenting view when Western systems are
hastily imposed on a society with entirely different history and social structure from the West.
3 Certainly, this should not be taken to imply that all Japanese economists and officials are
critical. There are some who are dedicated to or think highly of the recent global aid strategy.
Still, it is undeniable that, relatively and collectively speaking, Japan is much more skepticalthan the US or EU.

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More specifically, there seem to be three major bones of contention between Japanand the dominant view: they are concerned with poverty, market, and integration. We discussthem in turn below.
Questions about poverty
In the Western donor countries and international organizations such as the World
Bank, UNDP, ADB, etc, poverty reduction as the primary purpose of economic development is
now accepted as a self-evident proposition. The definition of poverty has also been expandedfrom the simple numerical poverty line of one dollar per head a day, to include social
dimensions such as literacy, infant mortality, medical access, clean water etc. More recently,

empowerment—whether the poor themselves are the master of the development
process—became the buzzword. It is true that very few of us can suppress the feeling ofsympathy and charity when viewing destitute people deprived of basic human rights on TV.
But this and the argument that both the purpose and the means of development must solely
be helping the poor are two separate issues.
In ODA policy debate, the Western countries no longer seem to be enthused overbuilding industrial infrastructure such as roads, ports and power plants. Certainly these are
not “pro-poor” projects and, at any rate, they should be financed with private money, not ODA.
True, in middle-income countries with improving institutions and sufficient industrialization,
infrastructure development on a commercial basis should be both possible and desirable. But
there are also many poorer countries whose infrastructure is absolutely lacking and markets
are undeveloped. Unfortunately, for those most critical countries private-sector initiative ininfrastructure construction, whether domestic or foreign, is hardly forthcoming. To reducepoverty, it is not immediately clear whether improving hygienic conditions is a better use ofaid money than building a trunk road; the conclusion should depend on each case. “Seepoverty, lend a hand” is emotionally appealing but perhaps shortsighted as a long-term
development strategy. If too much attention is paid to the poverty in sight, we may run therisk of neglecting other important tasks for overall growth, which are the prerequisite forpoverty reduction.4 Apparently “pro-poor” policies may not be the best way to reduce poverty
in the long run. Industrial promotion may be out of fashion in Washington, but its proper
execution is absolutely necessary for sustained development.
4 Shigeru Ishikawa, the leader of JICA’s intellectual ODA to Vietnam in 1995-2001 as well as
chairperson of Enshakkan Kondankai (see below), warns that in an effort to implement CDF
and PRSP, Vietnam’s budget may become excessively biased toward “pro-poor” expendituresat the cost of other economic needs including infrastructure building.

6

From a historical perspective, successful economic development has almost always
been a highly politically charged process in which each nation-state aims to bolster its
autonomy and influence against the prevailing international pecking order of each age.
Prussia and Japan in the 19th century as well as postwar Korea and Taiwan were all driven
by strong nationalism to catch up with the leading nations, not by the goal of poverty
alleviation. Social achievements including poverty reduction were realized in the long run asa consequence of successful industrialization. It is highly unlikely that latecomers in the 21st
century will achieve sustained growth with pro-poor policies alone, if wise industrial
promotion strategy is missing.
How to generate a market economy
The second issue over which Japan often disagrees with the dominant view is related
to systemic transition. It is now widely noted that the big-bang privatization in the former
Soviet bloc failed dramatically (or to put it more mildly, did not yield the anticipated results).
Poland, Hungary and Baltic countries were previously integrated with and constituted a partof European civilization. For them, systemic transition meant revitalization of the market
system which existed in the past. To the east, however, virtually all of the former Soviet
republics had no market experience to speak of in their history and thus were unable to createa market economic system simply by deregulation and privatization. Whether transition tomarket is relatively easy or almost impossible depends on the historical conditions ofindividual countries.
This conclusion was already clear to the majority of Japanese economists from thevery beginning [Ohno & Ohno, 1998]. But the Japanese criticism was too weak to influence
the dominant view. During much of the 1990s, international organizations and Westernconsultants continued to blame the Russian stagnation on either political instability or initial
economic structure, rather than their policy prescription [Lipton and Sachs 1992, Sachs andWoo 1994]. After nearly a decade of very mixed transition results, some Western economists
have finally began to echo Japanese common sense [for example, Stiglitz 1998]. They argue
that systemic transition of a latecomer country will take a long time. In such a country,
markets can grow only as a result of slow evolution of private businesses, which must be
appropriately supported by official action. There is no guarantee that this lucky event will
occur in all developing or transition countries.
Even today, however, neoclassical liberalism in development and transition is still inthe majority. Belief that removal of control will automatically generate a market economy is7still held strongly. In other words, the proponents of this view consider “wrong policies” as theprime cause of economic stagnation in the past. As a matter of principle, the World Bank and
IMF continue to advise fast and bold liberalization and external integration to member
countries, regardless of levels of industrialization or competitiveness. In Sub-Saharan Africaalso, the current aid strategy is simultaneous elimination of economic control and external

debt, the two negative legacies of the past. After these are removed, African economies are
expected to take off.
Are these policies correct? The majority of Japanese development economists remain
unconvinced. In their view, simple removal of “wrong policies” will not create healthy markets
in the poorest or transition economies of today. These economies remain underdeveloped
precisely because they lack basic conditions for creating a market economy, including
sufficiently high productivity (especially in agriculture), distribution system, political andsocial stability, observance of contracts, mutual trust, long-term perspective, etc. Some ofthese inadequacies may have been imposed during the colonial days, but many others datefurther back in history and are deeply engraved in the society. From the cultural or spiritual
viewpoint, these may be unique social characteristics that must be preserved. But they canhinder a more materialistic goal of economic development.
For latecomer countries aspiring to industrialize and raise income, a tactful mergerof domestic base society and incoming foreign systems—which are often at odds with whatalready exists—is required. There should be different modalities of merger reflecting thedifferences in history and social structure. This will inevitably be a long process strewn withmany setbacks. The idea that market creation is tantamount to replacing past policies withinternational best practice is too naïve.
Globalization and LDCs
As a key economic policy component, developing countries are being asked tointegrate rapidly with the global market economy in a large number of fields including goods,
services, investment, capital, law and institutions. This pressure has accelerated during thepost Cold War period, as the USSR disappeared and the US-centered unipolar order emerged.
Not only highly and moderately developed countries but also the poorest and transition
countries are striving to integrate into the world economy. From this perspective, the role ofinternational organizations such as the World Bank, IMF and WTO is to support (andsometimes force) the globalization of latecomers with the appropriate carrot and stick.
However, the industries, policies and institutions of latecomer countries remain very8

weak while the world economy into which they are jumping is highly competitive andunstable. Unprepared integration often leads to socio-economic crisis and loss of national
identity. While developing countries must make utmost effort to integrate, it must proceed ina way that preserves the ownership and continuity of domestic society. This naturally
requires a lot of caution and an element of gradualism. It appears that, under an excessive
integration pressure, many latecomers are unable to become the master of their own fate.
From this perspective, the Asian crisis can be understood as a temporary but very
severe macroeconomic shock caused by LDCs’ inability to properly sequence the capital
liberalization process. When the domestic banking sector is unsound and its monitoringmechanism is not in place, bold financial opening often leads to overborrowing and its
eventual reversal, resulting in the loss of macroeconomic control. The IMF should share theblame not only for encouraging such reckless opening but also for the clumsy policy response
after the crisis erupted [Yoshitomi and Ohno 1999]. At present, international organizations
are not always benevolent promoters of LDCs’ globalization.
Trends of liberalization and integration are likely to continue in the early 21st
century, and the management of international integration will remain the central policy issue
in economic development. Review of the current integration rules must be undertaken by bothdeveloping and developed countries, especially by the latter as the builder of the international
order.

3. Searching for a New ODA Principle
Developments since the Asian Crisis
Recently, Japanese external economic policies have shifted. These policy shifts may
significantly reshape Japanese ODA in the near future.
First, Japan has abandoned its sole reliance on multilateralism and begun to use
regional and bilateral channels as additional means of economic diplomacy. Traditionally anduntil only a few years ago, Japan strongly supported multilateral systems including the World
Bank, IMF and WTO and remained very skeptical about bilateral and regional schemes. Even
when APEC was created in 1989, Japan emphasized its feature as open regionalism [Suehiro
and Yamakage 2001]. Since around 1999, however, Japan became increasingly willing toaccept regionalism and bilateralism. In trade, disappointment with the slowness of WTO’s
new round talks prompted Japan to diversify its diplomatic channels. It started to vigorously
9negotiate bilateral free trade agreements with Singapore, Korea, Mexico, Chile and Australia(progress varies; the agreement with Singapore was concluded at end 2001). The METI White
Paper [METI 2001] argues that the use of multiple channels facilitates (i) creation of new
trade rules; (ii) sustaining momentum for multilateral talks; (iii) accumulation of experience;(iv) removal of demerits associated with having no bilateral agreements; and (v) domestic
structural reforms. However, whether deviation from multilateralism accelerates or hinders
global trade in the long run remains unsettled—as METI [2001] itself recognizes.
Second, the Asian crisis further stimulated Japan to act more independently fromthe US and international organizations. Perceived arrogance and incompetence of IMF at thetime of the crisis forced Japan to build alternative safety nets in cooperation with Asianneighbors. The crisis countries also strongly requested Japan to provide additional aid. Whenthe idea of the Asian Monetary Fund was shot down by the US in November 1997, Japan
moved swiftly to provide bilateral assistance to the crisis countries including through the New
Miyazawa Plan and the Japan Special Fund, in addition to large contributions to the
IMF-negotiated packages. According to Suehiro [2001], these emergency measures bore thecharacteristics of (i) supply side emphasis; (ii) intellectual cooperation (i.e., policy advice); and(iii) building regional networks. The first—real-sector concern—is not new, but the other two
reflect Japan’s struggle for more independent and regionally based policies. The ASEAN+3
framework as well as the Chiang Mai Initiative for central bank cooperation also serve topromote more policy independence for the region.
Third, somewhat contrary to these developments, Japan may have become lesstolerant with surging imports from Asia (especially China) and turned more protectionist.
After a decade-long recession, weakened domestic producers and threatened workers
naturally clamor for higher import barriers. In 2001, the government became more
sympathetic with these producers by seriously considering safeguard measures and actually
imposing some of them (see below). However, this policy was severely criticized by economists
as well as export-oriented industries, and immediately greeted with retaliatory measuresfrom China.
As always, the interests of outward-looking ministries (MOF, METI, MOFA) andother ministries do not coincide, and this may explain the seemingly contradictory policies ofcooperating with Asia and refusing Asian goods simultaneously. Moreover, Japanese relations
vis-à-vis ASEAN, characterized by economic dominance, unilateral assistance and relativelack of bilateral political disputes, should be distinguished from that with China which ismore equal and complex.

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Proposals for ODA reform
From the late 1970s to the mid-1990s, the Japanese government placed high priority
on expanding ODA by pursuing ambitious numerical targets. The First ODA Medium-term
Goal in 1978 aimed to double ODA in three years. Similar aggressive targets were set in theSecond (1981), Third (1985), Fourth (1988) and Fifth (1993) ODA Medium-term Goals.
Thanks to these efforts, Japan became the number-one donor in 1989 and has maintained its
status since 1991. However, as the decade of prolonged economic recession compels thegovernment to reduce ODA budget, the need to strategically prioritize Japan’s ODA is called
for in order to ensure its effective implementation. Recent proposals for ODA reform include
the following:(1) Nijuisseiki ODA Kaikaku Kondankai (The Consultative Committee on ODA
Reform toward the 21st Century, an advisory body to the Minister of Foreign Affairs, chaired
by Saburo Kawai of IDCJ, the final report published in January 1998).
This committee urged the government to shift its ODA policy from quantitative
expansion to qualitative improvement. Mindful of fiscal constraints, the committee proposed
to replace the conventional numerical goals with the medium-term ODA policy framework. It
also proposed clear prioritization of ODA allocation, paying greater attention to social
development and poverty reduction as well as environmental and gender concerns. While thesupport for infrastructure development remains important, due attention should be given tocomplementarities between ODA and non-ODA funds. The committee further recommended
the government to: (i) formulate country-specific assistance strategies; (ii) enhancecoordination among various ministries and aid agencies with MOFA playing the coordinating
role; (iii) broaden the support base in the Japanese society by inviting the participation ofvarious stakeholders and increased information disclosure; and (iv) build the capacity of aid
professionals, particularly in policy, institutional, and social aspects. Following theserecommendations, the medium-term ODA policy was formulated in August 1999, with theobjective of setting a guiding principle of ODA operations for the next five years.
(2) Enshakkan Kondankai (The Advisory Committee for ODA Loans, an advisory
body to the Director General of the Economic Cooperation Bureau of MOFA, chaired by Prof.
Shigeru Ishikawa, the final report completed in August 2000)
This committee focused on ODA loans and recommended four priorities and 26
specific measures to enhance their efficiency and effectiveness. While guided by the above
ODA Reform Committee (1998) and Medium-term ODA Policy (1999), this report also took11

note of intensified debate over the assistance to HIPCs (especially the Enhanced HIPC
Initiative agreed at Koln Summit in June 1999). The four priorities proposed by thecommittee included: (i) selective provision of ODA loans based on strategic concerns such as
effective and efficient use of ODA loans by recipient countries (i.e., shifting focus fromdebt-ridden Sub-Saharan Africa to Asia), availability of private resources for infrastructuredevelopment at various stages of development etc; (ii) addressing diverse needs of recipient
countries with due consideration of their stages of development and balance between
infrastructure and social development; (iii) active participation in aid coordination, reinforced
effort in intellectual aid, aid coordination network, and capacity building of Japanese aid
professionals; and (iv) strengthening accountability and public disclosure of ODA operations.
(3) Seisaku Koso Forum Paper (July 2001)
The Forum for Policy Innovation published a paper entitled “Need to Formulate the
National Strategy for ODA.”5 Citing the lack of strategic vision and a coherent institutionalframework for ODA operations, the paper proposed reforms in three areas: (i) increasing theparticipation of various stakeholders of Japanese ODA; (ii) shifting the focus to international
public goods such as poverty reduction and environmental protection, (iii) improving thequality of ODA through intellectual aid, country assistance strategies, and active adoption of“international best practices”; (iv) strengthening strategic planning capacity by establishing
International Development Agency and/or Strategic Council for ODA under the Prime
Minister’s Office, and developing the capacity of aid professionals.
(4) ODA Reform Proposals from the Business Sector (Keidanren’s proposal in October
2001, Kansai Keizai Doyukai‘s proposal in November 2001)
Keidanren and Kansai Keizai Doyukai, the two key Japanese business organizations,separately prepared proposals for ODA reform. Although the two proposals are not identical,
they largely share common features. These include the needs to: (i) clarify Japan’s ODA
strategy and priority (e.g., the articulation of a coherent ODA strategy with prioritization
which reflects Japan’s national interests, the creation of Strategic Council for ODA with broad
membership including the concerned ministries and the representative of the business,academic, and NGO sectors), (ii) improve the institutional capacity of ODA operations to

The Forum for Policy Innovation is organized by academic professionals in social sciences
for the purpose of making pragmatic policy proposals. This paper is based on the work of Prof.
Masahiro Kawai (former chief economist of the World Bank’s East Asia-Pacific Region andcurrently an advisor to Vice Minister of International Affairs of MOF) and Prof. Shinji Takagi(Osaka University, former IMF economist).

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respond to diverse needs of recipient countries (e.g., country-assistance strategies); (iii)
strengthen public-private partnership in ODA operations; and (iv) increase transparency andbroad participation of Japanese citizens in ODA operations (e.g., public disclosure,development education).

In particular, the report by Kansai Doyukai emphasized “Trinity ofODA,” namely “strategies,” “needs,” and “support,” as three guiding principles for ODA
reform.
(5) Dainiji ODA Kaikaku Kondankai (The Second Consultative Committee on ODA
Reform, an advisory body to the Minister of Foreign Affairs, chaired by Prof. Toshio Watanabe,
the interim report published in August 2001, ongoing)
The Second ODA Reform Committee was launched in May 2001 to makerecommendations on the effective and efficient implementation of ODA in the context oftighter budget constraints. While its final report is to be published by end-March 2002, theinterim report highlights the following priorities: (i) increasing participation andtransparency in ODA operations; (ii) making country assistance strategies more selective,
with clear prioritization; (iii) more strategic, coherent, and coordinated institutionalframework by establishing Council for Comprehensive ODA Strategy under MOFA; and (iv)strengthening collaboration with international organizations and sharpening the focus ofbilateral ODA into the areas where Japan has comparative advantage.
Additionally, in a discussion memo presented to the METI’s study group on Asian
Dynamism, Kimura [2001] proposes to divide ODA into two categories: the one for East Asiaand the other for poor countries outside East Asia. In East Asia, Kimura urges Japan to use
aid, trade, investment and other policies for promoting regional economic integration.
Unilateral aid giving should be replaced by mutual cooperation on a more equal footing as the
majority of Asian countries rise to the status of middle- to high-income countries by 2020. For
countries remaining desperately poor in the rest of the world, Japan will have to choose
between continuing to (pretend to) support their industrial development on the one hand andconfining its ODA to humanitarian aid only, assuming that they will never be active players
in global competition in the future on the other. Kimura’s two-way distinction of ODA issomewhat similar to what we will propose below.
In what remains, we will present an alternative proposal for reorganizing Japanese
ODA, which is currently discussed at the METI’s study group mentioned above.

13

4. Trade and ODA Policies for Asian Dynamism
Inconsistency in external policies
Ideally, various components of external economic policy including trade and ODA are
the means to promote national goals concerning how the world economy should be run andwhat role Japan should play in it. However, despite its huge economic size and the status of
the largest ODA donor, Japan has not succeeded in establishing clear long-term national
objectives in either trade or ODA policy. As a result, two policies are often mutuallyinconsistent.
For example, Japanese ODA still places much emphasis on industrial promotion in
low-income countries, although other development goals such as education and environment
are increasingly important. To help industrialization, funds are provided for infrastructure,technical assistance, human resource development and, more recently, policy advice onnational development strategy (to Vietnam [JICA-MPI 2001], Laos, Myanmar, etc). In suchpolicy advice, the key issue is how to foster domestic industries under intense integrationpressure. Japan feels comfortable with discussing specific industrial promotion measures,
since its own industrialization depended much on policy guidelines and coordination.
However, certain Japanese ministries oppose this type of intellectual ODA because increasing
the competitiveness of developing countries will mean trouble for Japanese industries such as
agriculture, food processing, and textile and garment.
Another example is related to Japanese firms investing abroad for survival or
expansion. As these firms begin to re-import their products back to Japan, domestic firms inthe same industry lobby for import protection. Conflicts between industrial winners andlosers may not be unique to Japan. But it is noteworthy that the Japanese government
recently—for the first time—imposed interim safeguards on three agricultural items (freshshiitake mushroom, leek, and tatami mat surface) which were mainly imported from China.
This signaled official concern over the livelihood of losers rather than preserving the
dynamism of winners. It remains unclear whether this policy is consistent with Japan’s main
challenge today, namely the revitalization of Japanese industries.
These are the issues that touch the very root of Japan’s external economic policies.
They should not be settled in an ad hoc manner by realigning the interests of affected parties
alone. Policy changes with such significant repercussions should be designed consistently,
guided by a general rule that promotes long-term goals. The level of policy discussion needs tobe elevated from domestic interest adjustment to the pursuit of national goals in the context
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of the world economy.
Domestic reforms and external policies are one
The world economy has changed greatly since the beginning of the 1990s. Most
important among the changes are IT revolution and asset market inflation (and subsequent
deflation) originating from the US, greater international integration, and reorganization ofindustries driven by these changes. Unfortunately, Japan was not a very active player in anyof them. During the last decade the country was caught in a prolonged recession andassociated pessimism permeating through the society. Since 2001, a reform-minded
government has attempted to break free from the vicious circle.
Comprehensive supply-side reforms encompassing not just the ailing financial sector
but virtually all Japanese industries seem unavoidable. It must be underscored thatstructural reforms are closely integrated with external developments such as foreigncompetition and overseas investment. Supply-side improvements cannot be achieved bydomestic measures alone such as deregulation, budget reviews, and administrative reform. It
must be guided by appropriate external policies.
Contact with foreign systems is a very potent catalyst for reform (whether in Japan,
CIS or elsewhere). In particular, foreign competition injects a powerful stimulus for change
into society. Schumpeterian entrepreneurs who respond to foreign challenges by technicalinnovation or overseas expansion are the agents of change. Many Japanese firms are seeking
new values and cost reduction through re-focusing business activities, M&As and businesscooperation. This is precisely the dynamic process of shifting comparative advantages. The
rise and fall of firms and industries are determined by their performance in global markets,and the government cannot guide industrial restructuring independently from it. In the age ofglobalization, revitalization of the Japanese economy means re-creation of its industrial
status in the context of the changing world economy.
Here lies a big dilemma for Japan, which aspires to domestic reforms but hopes
simultaneously to keep or even accelerate protectionism. Domestic reforms and external
policies are the two sides of the same coin, and we cannot have the one without the other. If
Japan erects a wall against high-value, low-price goods produced by Japanese firms abroad or
emerging firms in developing countries, momentum for change will be lost. This is killing
entrepreneurship, which is bad for both Japan and the world.
While the weak must be adequately supported through reallocation, retraining and15

unemployment benefits, help must be provided in a way that preserves their “ownership” forchange and economic dynamism. If they are protected without regard for economic rationality
and at the cost of consumers and growth industries, the entire economy—including theprotected themselves—will suffer in the long run. Japan can hardly afford such a policy. An
operational guideline to reconcile the needs of winners and losers is seriously needed.
Asian dynamism as a guiding principle6
As Japan gropes for a new ODA principle, we think such a principle should reflect
Japan’s historical position as a non-Western country with a strong manufacturing base as
well as an active builder of East Asian production network. While comparative advantage
theory and the political economy of import protection are certainly useful as analytical tools,
they do not quite capture Asia’s unique development experience. Though there is no need toconfine our vision to Asia, it is difficult to ignore the existence of a unique development
pattern observed in this region and Japan’s heavy contribution to as well as reliance on it.
Japan’s new ODA principle should be proposed in the context of this Asian dynamism.
Asian economies have a history of dynamic structural shifts through intra-regional
trade and investment. Such dynamism was visible even in the 19th century up to the early
20th century,7 as well as during the 1960s and 70s. This trend accelerated considerably after
the Plaza Agreement of 1985 and the subsequent yen appreciation. External economic
relations of LDCs are normally dominated by transactions vis-à-vis developed countries,
while economic relations among themselves are often very weak. Asia is highly unique in thatinteraction among developing countries promoted regional industrialization. In this Asian
growth, Japan has played a key role not only through its dominant economic size but as abuilder of East Asian production network through FDI.
Some argue that the traditional flying geese pattern has come to an end as China

The term Asian dynamism was the title of a recent book by Hara [1996]. The book examines
not just Asia’s recent manufacturing surge but its ecological diversity and the long history ofmaritime trade as well. We prefer this term to refer to Asia’ s development pattern instead of
the usual flying geese which entail a definitional problem as discussed below.
7 Collecting and compiling available data, Sugihara [1996] demonstrates that India andJapan were the two countries that stimulated intra-Asian trade from the late 19th to theearly 20th century. The rise of Japanese cotton clothes industry and transformation of India
from a user to an exporter of raw cotton marked the major shifts in Asia’s trade pattern. Later,
China also built its textile industry (partly through Japanese FDI) while Southeast Asia
remained absorbers of manufactured goods without becoming their supplier. It is noteworthy
that trade with the West continued to be dominant throughout the prewar period, and thesustainability of intra-Asian trade very much depended on it.
616emerges as a formidable factory of the world [METI 2001]. In their opinion, Asia’s growth will
be more like acrobatic flying in the future. But the validity of this argument depends on thedefinition of flying geese. If the flying geese pattern means that Japan must always be theleading bird and NIES, ASEAN and China are the followers in strict order, emergence ofChina as a first bird (at least for some products) may be a disturbing factor. However, if theflying geese pattern is defined more generally as ordered shifts of industries across countries
through trade and investment, it is unlikely to disappear in future Asia; in fact, in someindustries such as IT equipment, apparel, etc, the pattern is expected to be further
strengthened. In the foreseeable future, Asia will remain the most important overseas
production base for Japan. Similarly, through trade, investment and ODA, Japan willcontinue to be a large provider of development momentum for the rest of East Asia.
We propose that the totality of Japan’s external economic policies—trade, investment,
aid, finance, exchange rates, labor migration, etc—be rearranged and integrated for the
purpose of strengthening this Asian dynamism. Japan as the dominant economy in Asia has
the responsibility to sustain this dynamism. Moreover, Japan’s own economic and social
development depends on it. A new ODA vision consistent with Asian dynamism willcontribute to Japan’s revival as well as its leadership in the global rule making. On the other
hand, if Japan chooses to slow down this dynamism for short-term domestic reasons, such abehavior will surely disappoint its Asian neighbors and may even prompt new “Japan
passing” where the source of regional growth is sought without Japan’s active participation. If
that happens, it will mean the loss of intellectual leadership in external economic policies.
This proposal however should not rule out cooperation with non-Asian regions.
Geographical expansion of Asian dynamism (for example, to transition countries in Indochina,
South Asia, or Central Asia) should be welcomed.
Poverty reduction and industrial promotion
The current ODA charter, issued as cabinet decisions in 1992, requires thatenvironmental concerns, military abuse, democratization and market orientation of therecipient country be considered in providing bilateral ODA. As such, these are noble ideas but
too general to serve as a national or regional aid strategy. They may be used as an excuse forcutting aid to some countries, but they lack concrete contents for solving specific development
problems or improving the global economic system. At the operational level also, theaid-executing ministries and agencies (main players are MOFA, MOF, METI; JICA and JBIC)
are too preoccupied with daily works and have little time to design a long-term development
vision worth presenting to the world. In addition to project formulation, a considerable
17

amount of their time is taken up to respond—often passively and belatedly—to domestic
political pressure and policy initiatives of the G7, World Bank, UNDP, OECD and otherinternational organizations.
As discussed earlier, the World Bank is now increasingly targeting their assistance topoverty reduction and Westernization of the development framework. The former elevatespoverty reduction to the sole purpose of development and requires evaluation of all projects inlight of this criterion. The latter is an approach in which participation, transparency,
accountability, ownership, etc. are emphasized for all countries regardless of development
stage or political regime. We think that this framework-oriented approach has some merits
but is insufficient by itself. In view of Japanese and Asian development experiences, thecurrent lack of interest in real-sector problems is extreme and unfortunate.8 Moreover, we are
not convinced that the best way to reduce poverty is to help the poor in sight.
We are not denying the importance of institution-building or poverty alleviation.
What we would like to point out is that these general and procedural approaches should be
supplemented by concrete real-sector analyses that enable each country to design specificindustrial strategies. These strategies should reflect both the unique circumstances of eachcountry as well as unavoidable integration pressure. In low-income developing countries andtransition economies with undeveloped markets, coherent official guideline for futureindustrial structure and promotion policies is essential.9 For latecomer countries in Asia, thedevelopment strategy must realistically and concretely address the question of how toparticipate in the regional production network since that is the common source of sustained
development in this region. Similar long-term real strategies will also be needed even for
countries outside the Asian region, with appropriate adjustments as needed.
A keen interest in the manufacturing sector and concrete advice on the way to join
the existing trade and investment systems can be the two main features of our proposed
In Hanoi, the Vietnam Development Information Center opened recently to display and selldocuments of the World Bank Group as well as other multilateral and bilateral donors.
Poverty, environment and human resources sections were relatively well stacked but industry
section was initially thin and later abolished as the Center introduced a new shelving system
in 2001. Under the current system, most reports produced by Japanese experts in Vietnam
will have no place to go.
9 There is an ongoing JICA research project jointly with the National Economic University(NEU) in Hanoi which studies Vietnam’s key industries in detail. This project, reflecting
Japanese interest in real-sector questions, is about to produce a report whose contents arequite different from—but not necessarily inconsistent with—those of the World Bank reports.
In Vietnam, UNDP/UNIDO and MUTRAP (EU) are also engaged in policy dialog over specificindustries while World Bank studies are more general. For more on the JICA-NEU project,
see: http://www.neujica.org.vn.
818

ODA-cum-trade principle. These latecomer perspectives are unlikely to emerge from the West.
With this principle, Japan’s current assistance portfolio—including human resource
development, technical assistance, SME promotion, infrastructure construction, industrial
survey, development policy advice, the New Miyazawa Plan, etc—can be re-interpreted andjustified. It can also expand the area of assistance and cooperation in the future, as well as
provide guidance on the question of external dynamism versus domestic interest.
For Asia and for the world
We propose that Japan’s ODA policy should be structured in two pillars. The one isdirected toward Asia while the other is more globally oriented [Ohno 2001ab].
The first pillar should aim at sustaining and developing the unique growth pattern of
East Asia with particular attention to dynamism of regional production networks, meaningful
participation of latecomers in it, and formulation of domestic policies consistent with it. For
this purpose, ODA policy should be integrated with other external policies including trade,investment, finance, exchange rate, crisis response, labor migration, etc. In other words, ODA
should be one instrument among many for pursuing a broader national (and regional) goal. As
an external policy, Asian dynamism should be pursued in close consultation with neighboring
countries and in an open way which does not exclude countries outside Asia. The boundary ofAsia, which receives special attention by Japanese policy makers, should be flexibly anddynamically defined. If advice on non-Asian countries is sought, it should be given indirectly
by applying Asian lessons to different regional circumstances.
The second pillar of bilateral ODA should be selective but intensified cooperation
with multilateral institutions. While promotion of Asian dynamism is important for Japanand Asia, it does not cover the entire areas of economic assistance. For issues touching moreor less all humanity, such as poverty, environment, education, health and nutrition, natural
disaster relief, fighting terrorism, etc, Japan can support and cooperate with relevantinternational organizations. Such assistance can be given multilaterally through theseorganizations, but Japan can also contribute bilaterally in the areas where Japan feels it hascomparative advantage or additional assistance is warranted. Simultaneously, based on its
development vision and national objectives, Japan should shape the policies of theseinternational organizations rather than passively reacting to them.
The two pillars of ODA policy proposed here, regional and global, should enable
Japan to pursue its own development agenda—real-sector concerns which are unique to eachregion and country—while continuing to cooperate with the World Bank and other19

multilateral institutions. In a broader sense, this will enhance Japan’s dual identity as amember of Asia as well as the developed West. Since the mid 19th century, this dual identity
has caused considerable distress for Japanese leaders who tried to choose one or the other.
But we do not think this duality is a problem. Rather, ability to combine two different
principles flexibly and to our advantage is a blessing inherited from our history as a lateindustrializer. With a proper mix of the two, Japan will no longer feel intellectuallymarginalized despite its large financial contribution. At the same time, the first pillar will
force Japan to think strategically about its responsibility in Asia, more consistently and incooperation with its neighbors.10
We do not support the idea that Japan’s ODA principle should shadow the WorldBank’s policy priorities as the Forum for Policy Innovation report (see above) suggests.
However useful these policies—poverty reduction and environmental protection—may be,that would hardly be the answer to Japan’s missing ODA vision. Suppressing unease with theBank’s approach which many Japanese development officials and economists feel will only
increase our psychological stress. We also doubt if regional economic integration per se shouldbe the primary goal as Kimura [2001] proposes. Fruitful participation in regional dynamism
by both developed and developing countries should precede integration as a goal of external
economic policies. Too much emphasis on integration may shut out the possibility of evenlimited and temporary protection by latecomers, which should be allowed in certain
circumstances.

10 A workshop on Asian Dynamism sponsored by RIETI/METI was held in Tokyo on February
13, 2002. Speakers from academics, concerned ministries, aid implementing agencies,
research institutions, business and press were invited to discuss the various aspects of our
proposal as presented above. The vast majority of the participants endorsed the dualistic ODA
goals, some enthusiastically and others with reservations. Opinions were divided as towhether Asian dynamism should be pursued with limited membership and preannounced
timetable toward economic integration or more informally in the spirit of open regionalism.
China’s emergence and how to cope with global development initiatives were also debated.
For details of this study group and workshop, see: http://www.rieti.go.jp/meti/asia-d (inJapanese).

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