Pro-poor Growth and Aid
Coordination from theJapanese Perspective
Kenichi Ohno
National Graduate Institute for Policy
Studies, Tokyo

Topics for Discussion
1. Pro-poor growth 2003
2. Development experience ofEast Asia
3. Aid harmonization
4. Japan’s engagement principle1(1) Pro-Poor Growth 2003
The first round of poverty reduction
drive is over (MDGs, PRSP) Renewed recognition that growth isneeded for sustained poverty reduction
 Attention now turns to:--Ensuring “pro-poor growth”--Trade, investment, infrastructure--Contents of growth strategy “Pro-poor growth”???
Morally correct, politically convenient andcurrently very popular, but...

Definition?
 Desirability?--is more equality always

good? Should we not balance equality andincentive?
Channels and linkages--many ways to
cut poverty, direct and indirect. Strategy
should be geared to each country.

2Equity vs. Incentive Tradeoff
John Rawls: “Choose the society which
maximizes the welfare of the poorest”
Deng Xiaoping: “Those who can, get richfirst. Let others imitate and follow”
Innovation requires reward, but too
much inequality destabilizes society. Theright mix is needed for each country.

Perfect equality is the ideal ofcommunism. Does pro-poor growth(faster rise of the poor) support it?
--Where do we stop (criteria)?

Society can be too equal and stagnant:--General poverty in poorest countries--Transition from socialist egalitarianism--Welfare state in excess

3East Asian Way to SuccessTwo-tier approach Primary: create source of growth.
 Supplementary but very important: deal
with problems caused by growth—income gap,
regional imbalance, environment, congestion,drug, crime, social change, etc.
Yasusuke Murakami: “industrialization policy must
be combined with supplementing policies or it
will fail” (Theory of Developmentalism, 1994)

Revised Technocratic Model (E. Asia)
Economic growth
START

Developmental state

Rising inequality

Political stability
ED
Freer & more democratic society afew decades later: ex. Korea, Taiwan)(checked)
Supplementing
policies

Adopted with revision from: Samuel P.Huntington and Joan M. Nelson, o Easy Choice:
Political Participation in Developing Countries, Harvard Univ. Press, 1976.

4

Three Channels of Pro-Poor Growth(1) Direct channel (impacting the poor directly)--Health, education, gender, rural jobs &development, etc.

(2) Market channel (growth helps poor via economic
linkages: a.k.a. trickle down)--Inter-sectoral and inter-regional labor
migration (cf. Chinese TVEs)--Increasing demand (cf. proto-industrialization,multiplier effect)--Reinvestment (formal, informal and internalfinancing)Three Channels (contd.)(3) Policy channel (supplementing the marketchannel)--Price support, taxes, subsidies--Fiscal transfer, public investment,infrastructure--Micro and SME credit and other financial
measures--Proper design of trade and investment policies--Pro-poor legal framework

5

Broadening the Scope

So far, disproportionate attention on
direct channel—question of sustainability
and the risk of permanent aid dependencyEmerging emphasis on pro-poor growth--Focus still too narrow, not integrated--Past studies have not been incorporated--The right mix depends on each country(2) East Asian Experience
Growth driven by trade and investment
 Collective growth, not isolated or random Staggered participation in the regional
production network
 Region as an enabling environment for
catching up (model and pressure)6

Asian Dynamism (Flying Geese)
Geographic diffusion of industrialization
 Within each country, industrialization
proceeds from low-tech to high-tech Clear order and structure (with possibilityof re-formation, new entry and dropouts)
Per Capita GDP(In 1990 internationaldollars)Graph:
GDP inGeary-Khamis
EA vs Africa
4000
3500

East Asia

3000
2500
2000

Africa

1500
1000
500
0
1950

1960

1970

1980

1990

1998

Source: Angus Maddison, The World Economy: A Millennial Perspective, OECD Development Centre, 2001

7

Per Capita Income (2000)

US$40,000

Graph:percapita
incomeat Actual
ExchangeRate
30,00020,000at PPP

10,000

Cambodia

Lao PDR

VietnamIndonesia

China

Philippines

T hailand

M alaysia

Korea

SingaporeJapan

Hong Kong

0

Source: World Bank, World Development Indicators 2002 .

Manufactured Exports(% of total exports)
100%

Japan

Graph: manufactured exports

TaiwanKorea

80%Singapore
Malaysia

60%

ThailandPhilippines
40%

Indonesia
China

20%

Vietnam
Myanmar
1998
1999
2000

1996
1997

1993
1994
1995

1990
1991
1992

1988
1989

1987

1984
1985
1986

1981
1982
1983

1980

1978
1979

1975
1976
1977

0%

Source: ADB, Key Indicators of Developing Asian and Pacific Countries , 2001/1993; IMF, International Financial Statistics Yearbook 1990. ForJapan, Japan Statistical Yearbook 2002/1999, Statistics Bureau/Statistical Research and Training Institute, Ministry of Public Management,
Home Affairs, Posts and Telecommunications, Japan.
Sources: ADB, Key Indicators of Developing Asian and Pacific Countries , 2001/1993; IMF, International Financial Statistics Yearbook 1990. For Japan, Japan

8Structural Transformation in East Asia
3Country2Latestcomers

Latecomers

ASEAN4NIEs

1

Japan
Garment

Steel

Popular TV

Video

Digital
CameraTime

East Asia's Trading Partners
100%

OthersEurope80%

N. America
60%

Japan
40%

East Asia

20%
0%

1980

1985

1990

1995

1996

9Foreign Direct Investment Flows(Billions of USD / year)[1st Half of 1990s][2nd Half of 1990s]

Japan

Japan
2.4

2.4
2.6

NIEs

NIEs
8.7

4.8
7.8

8.5

2.2

ASEAN4ASEAN4
1.3

9.8

4.3
1.3

11.5

China

China

Source: Ministry of Economy, Trade and Industry, White Paper on International Trade 2002, p12.
Note: Flows less than $1 billion are not shown. The “NIEs to China” flow excludes Hong Kong.

Trade in Machine Parts(Billions of USD / year)[1990][1998]

Japan

Japan
8.5

18.6

NIEs

NIEs
7.2

5.0

ASEAN4

29.9

21.7

15.3

19.2

ASEAN4

7.6

6.9
5.5
6.8

ChinaChinaSource: Ministry of Economy, Trade and Industry, White Paper on International Trade 2001, p12.
Note: Flows less than $5 billion are not shown.

10

Poverty Reduction in East Asia

Extreme poverty in E Asia already halved(1990: 27.6%  1999: 14.2%)

National strategy for equitable growth inplace (even before PRSP/MDGs)
 Aid coordination centered on pro-poor
measures is unlikely to work in East Asia
Redefining “Good Governance”
and “Selectivity”
To initiate trade-driven growth, different
and narrower conditions are needed--Strong leader(ship) with ownership--Strong administration for policy consistency andeffective implementation

High-performing East Asia did not have--Transparency, accountability, participatory process,clean government, privatization, free trade(maybe not necessary for initiating growth?)11

(3) Aid harmonization
Harmonize aid practice to reducetransaction costs!?
 Japan gives only conditional support
Yes we recognize the value of coordination BUT--Don’t impose uniform modality (non-projectaid) on all countries and sectors--Don’t deny or discredit ODA loans
Japan reacts strongly to harmonization
hardliners, but accepts its milder form

“Best Mix” Approach

Nonfungibility of ideas & strategy--Multiple options for different countries

Inseparability of money and ideas
 Donors according to their comparativeadvantage
 Harmonization for aid implementation?
--Policy & institution also key to effective development--Need to also discuss contents of growth strategies

12Regional (VN) & Global (Rome)
Forums on Harmonization
Japan intervenes to relativize
harmonization:
 “Ensure partner country ownership”
 “Adopt country-based approach”
 “Ensure diversity of aid modalities”
 “Cost-benefit analysis of harmonization isnecessary”

Diversity in Strategy Formulation& Implementation
StrategyFormulation:

Implementation:
Diverse Modality underCommon Framework

Choosing from Alternative
Strategic Options

Strategy A
 Strategy B
 Strategy C...
Projects
 Non Projects
 Pooled TA Non Pooled TA

Adoption
Jointly with
Client Country

13Matching Aid Modality with Needs
Non Project
Aid
Recurrent-exp. intensive(esp. social sector)
Investment-exp. intensive(esp. infrastructure)
Policy ReformProjectAid〇〇〇

Pilot innovation(requiring trial-and-error)〇

Matching Technical Assistance
Modality with Needs
PooledTA
Transfer of universal skilland knowledge

Non PooledTA〇(established best practice)Transfer of tailor-madeskill and knowledge〇(choosing from alternative models)14

Japan Also Needs to Change
Take advantage of harmonization to: Enhance dialogue with other donors
 End unnecessarily rigid procedures
 Reduce high grant cost  greater use oflocal human resources Delegate authority to field offices, andstrengthen their capacity(4) Japan’s Engagement
Principles
Japan’s Uneasiness:
The gap between current strategy and E
Asian development experience--Due to cultural and historical differencesInability to clearly articulate Japan’s aid
goals: unspoken ideas, systemic rigidity,language barrier

15

ODA budget is declining (-5.8% inFY03) while EU and US are increasingaid Uncomfortable with aggressive aid
harmonization (budget support,SWAPs...) Fear that Japan’s aid will be discredited
or marginalized (though still large)
Japan’s Approach to ODA

Two-track principle(1) For the prosperity of Japan and East Asia
(2) For solving global issues (poverty, education,health, environment, refugees, peace building...)Helping the “self-help” effort of LDCs--Aid is not humanitarian charity--To grow and become equal trading partners--Not for all LDCs; but we encourage eligible
countries to try16

Japan’s Approach (contd.)
Respect for each country’s uniqueness Long-term and holistic perspective
 Tacit knowledge, shared experience (ratherthan explicit rules/matrices and quantified targets)Real-sector concern (trade, investment, keyindustries, technology...)Help in good times as well as badGrowth Contents Differ
West: privatization, free trade, rule of law,clean & transparent government, levelplaying field, market comes first...

Japan: active government, national dev. vision,
proper design of industrial, trade, FDI policy,
sector/industry specific intervention...

Common: political & macro stability, HRD,
SME support, environment, HIV...

 Back to the 1980s? (unresolved issue)

17

New ODA Charter

New ODA charter by Fall 2003?--withinputs from LDP (ruling party), ODA Comprehensive
Strategy Council, NGOs, general public, etc.

Likely to feature:--Two-track principle (for Japan and for world)--From request-based to multiple policy dialogue--Human security, peace building, MDGs--Country Assistance Plans (clearer goals & strategy)--Strengthening transparency, evaluation, popularparticipation

New Country Strategy Plan forVietnam
Now Short Draft, final draft Sep. 2003
 Clarifying national interest--Vietnam’s role in Japan’s China-ASEAN
diplomacy & economic ties--Humanitarian and social needs--Vietnam as Japan’s ODA model country

Vietnam at crossroads--Soar and join the geese or stagnate?
(need to dramatically improve FDI policy)

18Vietnam (contd.)ODA for growth, social needs, andinstitution building (targeted areas, subsectors,etc. to be clarified by September)Quantitative direction linked (loosely) topolicy performance and absorptive
capacity

Strategies for Sri Lanka, Mongolia, Indonesia,
Pakistan, India also under review

What Japan Should Do
Japan should be fully engaged in global
aid strategy, not isolation or rejection
 Japan should bring a new perspective asa non-West industrialized country
 To do so, Japan should clearly define its
aid goals and comparative advantage
 Leadership, networking, and institutional
reform are needed

19

Japan as Aid Partner--Japan is a clumsy speaker--Japan is very sensitive to what others
say about its policy (fear of isolation)
 Understand, and even respect, Japan’svision while noting mutual differences(praise works better than criticism) Help it voice its views (when possible)
 Don’t tread on its sensitive spot

Japan-DfID Partnership?
Potentially very fruitful:
 Complementarity because we aredifferent in aid goals, modality
 East Asia: Japan has money, but needsintellectual partner
 Infrastructure as entry point--Start with joint study on its growth/poverty impact--Cooperation in social sectors also?

20