China and Japan’s Economic Cooperation with theSoutheast Asian Region:
The Foreign Aid of a Rising and a Mature Asian PowerDr. Dennis D. Trinidad
Associate Professor, De La Salle University, Manila
Visiting Research Fellow, the Japan Institute of International Affairs

Abstract
From a political economy perspective, this study argues that the notable divergence andresemblance between Japanese and Chinese aid are configured by domestic institutions,international influences as contextual factors, and the path-dependent nature ofdecisions pertinent to aid policy. Thus, the development experiences of the two Asian
donors, domestic institutional changes, and international exigencies have given rise toeach nation’s distinctive aid purpose, aid management system, choice of modalities,
geographical focus, priority by sector and aid strategies, which are both innovative andmarket/resource seeking as well as competitive and complementary. For example, it
was found, among others that the resilience in Japan and the practice in China of linking
aid, trade, and investments are due to the prominence of economic interests and thus,
absence of strong elements within and outside the government (such as civil society
groups) that advocate for aid-for-development norm. Moreover, in China, aid isadministered by its Ministry of Commerce while in Japan, the finance ministry and theMinistry of Economy, Trade and Industry had exerted strong influence in aid
policymaking until the establishment of a new JICA in 2008. Moreover, the ODA policy ofa mature economic power is driven by its commitment to fulfill international aid agenda
and national interest to rejuvenate the stagnant economy. On the other hand, the ODA
policy of a rising power is driven by growing demand for inputs to sustain its economic
growth. The case of Southeast Asia, particularly, CLMV, confirmed Japan’s mixed aid
programs that combine economic and social infrastructure and China’s overwhelming
focus on infrastructure and energy development.

Keywords: Mekong sub-region, ASEAN, China, Japan, Southeast East Asia

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To Rose and Sophie Ayn

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Highlights/ Executive Summary
1. Japan’s ODA:

(1) Japanese aid in the new millennium is characterized by policy innovation and morestrategic allocation to serve both diplomatic goals and industrial rejuvenation;(2) The following are policy innovations that were adopted since 2000:
a. Adoption of a more programmatic approach in aid programs. Examples are aid toimprove rule of law, aid for democratization, aid to support climate change
mitigation/adaptation, aid to assist regional integration, etc.,
b. Increase in the volume of grants, thus, increasing social sector allotments,
c. JICA’s adoption of schemes to engage civil society groups, particularly JapaneseNGOs, in aid implementation,d. Introduction of Public-Private Partnership (PPP) scheme in ODA programs under
the New Growth Strategy launched in 2010,
e. Introduction of so-called integrated infrastructure system which intends tocombine soft and hard infrastructure, hence, the mixed use of grants, loans andtechnical assistance in ODA projects,
f. Adoption of a more strategic and effective aid programs,(3) The policy innovations above were due to changes in both domestic and international
factors. Domestic institutional changes include:a. Revision of ODA Charter in 2003. This was crucial to address declining public
support for ODA,
b. Introduction of new form of financing or the use of bonds to finance ODA loans
as part of the overall financial sector reform in Japan. JICA’s bond issuance wasadopted in the context of Fiscal Investment and Loan Program (FILP) and postal
deregulation reforms.
c. Reconstitution of new JICA in 2008 as the lead agency in ODA project
implementation and the appointment of Sadako Ogata as its first president,
d. Designation of Ministry of Foreign Affairs (MOFA) as the lead agency that
formulates ODA policy, planning and evaluation. The new organizational
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structure and leadership under Ogata led to a more programmatic approach inJapanese aid-giving,
International factors as contextual factors include:e. The emergence of new development thinking which views underdevelopment in a
broader perspective and which focuses on poverty reduction rather than income
growth,f. Regional integration and increased economic interdependence in East Asia,
g. Aid community’s adoption of United Nations Millennium Development Goals(UN MDGs) as its international aid agenda,
h. DAC-OECD’s pledged to fulfill international aid agenda during the Monterrey
Conference of 2003,
i. Rise of non-DAC donors including China,(4) The practice of tying Japan’s aid to trade and investment (or the trinity development
cooperation/ sanmi-ittai) has remained and proved to be resilient;(5) The resilience is due to path-dependent nature of decisionmaking and persistence of stateinterventionism into the mode of economic governance even after Koizumi’s neoliberal
reforms,

2. China’s Foreign Aid:
(6) The aid in the new millennium of a rising Asian power is characterized by pragmatism
with a mixture of diplomatic and economic objectives. Ideology, as a factor in aid
appropriation, was diluted after the cold war,
(7) Aid was used as a tool of economic diplomacy to primarily support economic growth,particularly China’s growing demand for inputs (natural resources, petroleum, etc.)(8) The following are main features of Chinese aid:
a. The Ministry of Commerce/MOFCOM (in coordination with the finance ministry
and ministry of foreign affairs) is the lead agency in implementing China’s aid
programs,
b. The National People’s Congress is the highest policy-making organ in China,
including foreign aid policy,

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c. The prominence of commercial interests in Chinese aid was reinforced by asystem of aid management where economic interests, represented by MOFCOM,
SOEs, EXIM Bank of China, are dominant,d. Economic infrastructure is the priority sector of China’s aid. In 2009, 61 percentof concessional loans were spent for infrastructure projects,
e. Infrastructure projects funded by Chinese aid are awarded to state-owned
enterprises (SOEs),
f. China classifies its aid programs as South-South cooperation and prefers to callitself as a partner than as a donor, in contrast to DAC,
g. Chinese aid does not have political conditions that is commonly seen in DAC
donors’ assistance and multilateral aid,h. China officially claims that its aid appropriation follows the five principles ofpeaceful co-existence and the eight principles of aid, which both emphasize
equality, mutual benefit and win-win, and non-interference in internal affairs,
i. With interest-free and low-interest loans, China’s aid is as concessional as any of
DAC donors,
j. The geographical focus of Chinese aid (that is, emphasis on Africa and other
Least Developed Countries) is often justified under the context of China’s‘affinity’ with and overall foreign and economic policy toward developing
countries,(9) Some policy innovations that were adopted recently include;a. The introduction of new source of financing with the creation of China’s ExportImport (EXIM) Bank,
b. Introduction of aid-for-commodity financing scheme in Angola,

3. Japanese and Chinese Aid Strategy in Southeast Asia
(10) Japan’s aid strategy is based on strategic differentiation from China. Deliberately or not,there are efforts to distinguish Japanese ODA from Chinese aid through:a. Continuing compliance to DAC (particularly, focus on social sector allocation
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b. Support for ASEAN integration in the light of addressing the development gaps
within members,c. Promotion of value-oriented diplomacy during Aso’s term as foreign minister andlater as prime minister of Japan, which emphasized universal values such as
human rights, democracy, rule of law and others which China has difficulty
realizing,d. Emphasis given to environmental sustainability like the Green Mekong Initiative,
e. Institutionalized, straightforward engagement with CLMV in the form of‘plurilateral’ high-level meetings and summitries,
f. Partnership Programme or Triangular Cooperation scheme,(11) China’s aid strategy is based on historical connection and attraction,a. The former pertains to China-Southeast Asian country’s historical patterns ofrelationships,
b. Wang (2006) maintains that China has a divided perception of Southeast Asia. In
contrast to maritime countries of Brunei, Indonesia, Malaysia, and the Philippines,
the mainland countries have longer patterns of relationship and share strong
cultural affinity with China,c. Relations with Myanmar, Cambodia, and Laos date back to 2000 years,
d. A strategy of making Chinese aid attractive to recipients includes theincorporation of Five Principles of Peaceful Co-existence and the Eight Principles
of Chinese Aid, which both emphasize non-interference (as justification for its‘no-strings attached’ aid), equality, independent national development, andmutual benefit, contain ideals that many Third World countries value with great
importance,
e. By classifying its aid under the South-South cooperation modality and byasserting China’s current status as a developing country like them, China appears
to solidify its affinity with developing countries,(12) The largest recipients of Chinese foreign aid are:a. Usually those with very long historical and diplomatic ties with China (as in thecase of Myanmar, Cambodia and Laos),b. Had supported China’s UN position in the past, and6

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c. Countries whose ties with China need improvement or mending (as in the case ofIndonesia and the Philippines),
Some common features between Chinese and Japanese aid:
(13) Use of trinity development cooperation model or the synthesis of aid, trade andinvestment, and(14) Focus on physical rather than social infrastructure,(15) Practice of ‘request-based’ system

4. Implications to Japanese aid in Southeast Asia/CLMV:(16) Emphasis on environment-related projects recently under the Green Mekong Initiative,(17) Promotion of universal values that China has difficulty realizing on its own,(18) Adoption of a comprehensive scheme that combines soft and hard infrastructure and use
of Japanese superior technology,(19) Adoption of Triangular Cooperation, Japan’s version of South-South cooperation,(20) Introduction of a more favorable terms and conditions in Japanese ODA loans such as
MIRAI,(21) Shortening/Improving the ODA process, and(22) Establishment of a ‘pro-Japan’ group through high-level meetings and summitries with
Mekong basin countries.

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Table of Contents

Abstract1Highlights/ Executive Summary

3

Figures

11

Tables12

Chapter 1: Introduction

13

1.1 Foreign Aid as a Tool of Diplomacy: Framework of Analysis

17

1.2 Evolution of Japan’s and China’s Economic Cooperation: Implications to
Their Relations with Southeast Asia
Chapter 2: Emerging Patterns of Japanese Aid in the new Millennium

26
36

2.1 DAC-Membership and the “China Factor”:
Japan’s Aid Policy in the new Millennium
2.2 Towards More Balanced Aid Allotments: The Effects of Domestic Politics

37
44

2.3 Ensuring Aid Transparency and Environmental Compliance:
The Role of Civil Society

50

2.4 The Resilience of ‘trinity development cooperation’ andInnovations in ODA Loans

56

2.5 The Changing Developmental State of Japan and Viability of‘Aid, Trade, Investment Synthesis’
2.6 Green Innovation, Aid and Renewed State-Business Interface in Japan

61
72

2.6.1 Green Policy as a Pillar of Japan’s National Strategy and Diplomacy

75

2.6.2 2.6.2 From State-led to Partnership: Renewed State-Business Interface

80

Chapter 3: The Foreign Aid of a Rising Asian Power87

3.1 Introduction

88

3.2 Aid as an Instrument of Foreign and Economic Policies

90

3.3 ‘Mainstreaming’ Aid: The Role of DAC

93

3.3 Strategic, Commercial and Diplomatic Underpinnings ofChina’s Aid

97

3.5 Reorganization and Attempts at Policy Innovations in Aid since 1992

105

3.6 ‘Distinctiveness’ of Chinese Aid from DAC Aid

110
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3.6.1 Development Purpose of Aid

111

3.6.2 Aid Modality/Framework

113

3.6.3 Geographical focus

114

3.7 Chapter Summary
Chapter 4: Japanese and Chinese Aid Strategies in Southeast Asia

118
120

4.1 Introduction

121

4.2 Japan’s Aid Strategies

122

4.2.1 Compliance to DAC Agenda

122

4.2.2 Support for ASEAN Integration

122

4.2.3 Value-oriented Diplomacy

124

4.2.4 New Growth Strategy

125

4.2.5 Institutionalization of Mekong-Japan Cooperation

126

4.2.6 Other Frameworks of Cooperation

128

4.3 China’s Aid Strategies

131

4.3.1 Aid Strategy through ‘Attraction’134

4.3.2 Aid Strategy through Involvement in GMS Cooperation

135

4.4 Japanese and Chinese Aid to Southeast Asia
Chapter 5: Policy Implications and Conclusion
5.1 Implications to Japan’s Aid

137
142
143

5.1.1 Emphasis on ‘green aid’

143

5.1.2 Value-oriented aid strategy

143

5.1.3 Comprehensive new scheme that combines loan, grants,
and technical cooperation

144

5.1.4 Adoption of ‘triangular cooperation’ or Japan’s
version of South-South cooperation

144

5.1.5 More favorable terms and conditions for Japanese ODA

144

5.1.6 Improving the ODA process

145

5.1.7 Establishment of ‘Pro-Japan’ Group

145

5.2 Implications to International Aid Community

146

5.2.1

Economic or social infrastructure, which should be aid’s top priority?

146

5.2.2

There is complementarity between DAC and non-DAC donors

147
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5.2.3

High-level clarity of aid’s development purpose

147

5.2.4

Develop more favorable terms of repayment

148

5.3 Conclusion

148

Bibliography

156

Interviews

174

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List of Figures

1. Annual GDP Growth of Japan and China (%)

24

2. Economic Cooperation of a Rising and a Mature Power25

3. Reorganization of Japan’s Aid Management System

49

4. NPO Activities, 200752

5. Japan’s ODA: Gross versus Net Disbursements in million US dollars, 2002-10

59

6. FILP Allotments to ODA Loans, 2000-12 (in billions of Yen)

68

7. PSIF Scheme

85

8. China’s External Assistance in million US dollars

98

9. The System of Management of Chinese Aid107

10. Geographical Distribution of DAC Donors Aid in 2010-11 (%)

116

11. Geographical Distribution of Chinese Aid in 2009 (%)

117

12. DAC Donors Aid Allocation by Sector in 2011 (%)

118

13. Green Policies as Crossroads of Domestic, Foreign and Economic Policies

126

14. Japan’s ODA to Selected ASEAN members, 2006-10 (in million US dollars)

139

15. Japanese Aid to CLMV by Priority Sector, 2006-10 (by project)

141

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List of Tables

1. Japan’s Reparations Payments and Grants to CLMV

28

2. Chinese and Japanese Aid, Trade, and Investments in CLMV

34

3. JICA-NGO Cooperation Modality

55

4. ‘Milestones’ in Japan’s Green Policies

79

5. Milestones in Chinese Aid-Giving

100

6. The Eight Principles of Chinese Aid101

7. Aid from DAC Donors and China

111

8. High-Level Meetings and Summitries between Japan and Mekong Countries

128

9. Chinese and Japanese Aid to Selected ASEAN, various years (in US dollars)

138

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Chapter 1
Introduction

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The twenty-first century is an unprecedented era in the history of East Asia in which thePeople’s Republic of China (PRC, hereinafter China) and Japan are both regional powers andwhere neighboring countries have grown relatively more prosperous economically than everbefore. But while the new millennium marks China’s great ‘renaissance’ and ‘peaceful rise’,Japan’s economy has been mired by prolonged recession and stagnant growth. In 2010, China
overtook Japan as the second largest economy in the world. Japan’s Gross Domestic Product(GDP) in 2011 was US 5.867 trillion dollars while that of China was US 7.318 trillion dollars(World Bank 2013). Indeed, China is a fast-growing power while Japan is a declining, ‘mature’economic power. As a rising and declining powers, China and Japan, respectively, readjusted
their domestic and foreign policy priorities in close alignment with their economic conditions.
As a rising power, it is not so surprising to see China’s behavior in regional andinternational affairs resembles a bit of Japan’s during its high-growth era. Both countries haveprioritized modernization. Japan adopted the Yoshida doctrine which placed high priority on
economic development and eventually sought to improve ties with neighboring countries throughreparations payments and economic cooperation while Chinese officials have prioritized thesetting up of a peaceful environment in its diplomacy to sustain China’s continued economic
growth. Both countries adopted a more pragmatic stance on their economic policies. During thecold war, Japan adopted ‘seikei bunri’ or the policy of dissociating politics and economics toenable it to conduct limited economic activities with socialist countries. After the cold war,
China’s foreign and economic policies became less ideological and more pragmatic. It sought toimprove bilateral ties with countries it has ‘historical’ and territorial issues with and acceptedbilateral and multilateral development assistance from various donors, all for the sake ofmodernization.

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As they rise to power, each country has to deal with the dominating presence of theUnited States in East Asia. The rise of both countries has created concerns in the United Statesand elsewhere. The prospect of Japan overtaking the U.S. as the ‘world’s number 1’ in the 1970s
and 1980s was a manifestation of that apprehension. Today, China’s perceived eventual parity
with the United States in economic terms twenty years from now is also creating that kind (ormaybe much greater) of apprehension. Unlike Japan, which resisted in revising a post-war
constitution that ‘renounces war as an instrument of national policy,’ China is also a nuclear
power and possesses strong military capability. As a result, the apprehension arising from
China’s rise is also driven, in part, by a perception of threat. The ‘China threat thesis’ suggeststhat China, as a rising power, will eventually seek to use its economic power to strengthen its
military capability and consequently challenge the existing international order.
Moreover, China and Japan have both employed economic cooperation as a tool toadvance their economic, diplomatic/strategic, and commercial interests. In the 1960s and 1970s,
Japan’s economic assistance to Southeast Asia was mainly intended for enhancing market accessand developing strategic resources to sustain its continued growth. Japan adopted an aid doublingplan after the Fukuda doctrine and used it to assist Japanese industrial upgrading in East Asia in
the 1980s. Meanwhile, China’s foreign aid since the 1990s has been used as a form of subsidy toChinese state-owned enterprises (SOEs) by tying it to procurement of Chinese goods, contracts
and services. China is also using its aid to secure contracts for development of crucial resourcesand energy in order to sustain its economic growth.
There are more similarities between the two in terms of experiences and priorities otherthan the above mentioned as they rise to power. Nonetheless, the differences are also vast. For
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eventually sought to improve the quality of its aid, broadened its geographical distribution andincorporated the international aid agenda in its aid programs. In the new millennium, I would
argue that Japan’s aid policy is characterized by innovation and strategic orientation while
China’s aid has primarily remained market and resource-seeking. The divergence in terms of aid
purpose, modality, geographical distribution and priority by sector in both Asian donors’ aid isdue to changes in their national economies, domestic institutions and international exigencies as
they rise to power. The strategic orientation in Japan’s aid allotments in the new millennium isshaped by China’s economic ascent, growing assertiveness, and increased commercial activities
in the East Asian region. Some observers were convinced that China’s rise has led to a strategic
rivalry with Japan (Mulgan 2008; Nabers 2008). In a post-Cold War era where economic powerhas become the main basis of interaction among key actors (Zha and Hu 2006), economics (andthus, foreign aid as a tool of economic diplomacy) is expected to play a vital role in this strategic
rivalry.
The main objective of this volume is to understand in detail the changes in the foreign aid
of Japan and China to Southeast Asia by examining the domestic and international factors that
underpin those changes from a political-economic perspective. To contribute to the establishmentof ‘liberal’ peace and stability in East Asia and the world has been the underlying goals ofJapan’s bilateral and regional economic diplomacy (and thus, the use of foreign aid as well). It ispremised on the idea that fostering interdependence through increased commercial activities andcooperation would lead to democratic peace. Japan’s aid to China is also premised on this logic.
On the other hand, many scholars and pundits agree that China’s domestic concerns, namely,
sustaining rapid economic growth, ensuring continued Communist Party rule, and national
stability, are main priorities of Chinese leadership (Saunder 2006; Sutter 2006; Li 2010).

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At least in the case of older members of Association of Southeast Asian Nations(ASEAN), namely, Indonesia, Malaysia, the Philippines and Thailand, Japanese aid andinvestments have been instrumental in their economic transformation (Tsukasa 2006). On theother hand, because of social upheavals and political turmoil, Cambodia, Laos, Myanmar andVietnam (hereinafter, CLMV) had missed the opportunities to benefit fully from Japan’s
growing economy in the 1960s. On the other hand, China’s foreign aid to the region during thecold war was mainly to address its political and security concerns. In the new millennium, China
has also used aid to serve the national goal of modernization and the foreign policy objectives ofcreating a peaceful external environment to sustain China’s continued economic ascent.
Apart from the introduction, this study is divided into four major parts. The first part
discusses the domestic and international factors that underpin the changes in Japan’s foreign aid
policy as the 20th century draws to a close. The second part explains the foundation of aid
philosophy of a rising power. Using the findings of the previous sections, the third part compares
the aid strategies of Japan and China in Southeast Asia in the new millennium. The final partdraws some policy implications and conclusions.

1.1 Foreign Aid as a Tool of Diplomacy: Framework of Analysis
As an analytical approach, political economy has several variants derived from major
theories of politics and international relations. Realism views aid primarily as an instrument ofstate power to exert donor’s influence either by persuasion or sanction (that is, denial orsuspension of aid programs). This perspective is particularly interested in understanding the real
motivation of donors. Liberalism, on one hand, holds that aid is a form of economic cooperationthat seeks to strengthen interdependence and stability through promotion of economic
development. Aid is used to build the necessary social and physical requirements to national
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development of recipients. On the other hand, neo-Marxism avers that aid helps Western
capitalist countries maintain global dominance by creating a structure of financial dependence
and exploitation between donor and recipient.
Using any of these variants limits the explanatory factors that this volume seeks tounderstand and identify. For the purpose of this study, it is imperative that a political economy
framework that takes into account both domestic and international factors must be designed toenable us to understand more comprehensively China’s aid philosophy. This means examining
China’s motivation in aid giving as reflected in its foreign policies and studying the nature of its
aid programs in order to have a clearer picture of its principles and what it stands for. The
political economy approach assumes that the state is not a single, cohesive unit but is rather
composed of various political institutions. As an analytical approach, it combines both politics
and economic processes in understanding policy objectives and outcomes. It is an approach thatis close to what Gilpin (2004) described as the ‘new political economy’ and Putnam’s (1988)‘two-level’ game. As decisions are assumed to be path-dependent, the choice of aid policies in
the past and the philosophy it upheld is assumed to have a bearing on succeeding decisions.
Together with trade and investment, foreign aid is an important component of economic
diplomacy. As Okano-Heijmans (2012) points out, economic diplomacy has both ‘business end’on one side and ‘power play end’ on the other side of a single continuum. These two represent
the commercial objectives and the political goals of foreign policy, respectively. As an
instrument of economic diplomacy, aid is appropriated to achieve either or both of these aims.
Donors attach varying importance for each. This is where domestic structures come into play –they help shape the aid policy preferences and thus, the donor’s aid philosophy. In the case of
China and Japan, three domestic structures are critically important in the formation of their aid

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policies and philosophies: (1) aid management system, (2) state-civil society relations, and (3)changes in domestic economy.
The system of aid management of donors or what Lancaster (2006) termed as ‘the way
the government organizes its aid’ has significant bearing on the ‘official’ purpose of aid. This
includes institutions or mechanisms that facilitate coordination among aid agencies and to which
agency aid policy formulation is assigned. In some donors, aid issues are debated in thelegislature while in others, legislatures played no role (Lancaster, 2006). The reorganization thatJapan’s aid management system underwent and the structure by which China’s aid is organized
has a bearing in defining the development purpose of the two Asian donors’ aid.
The extent to which civil society groups exert influence on aid policy and the lack or
absence of civic entities that advocate for aid-for-development norm is crucial in shaping themanner by which aid is appropriated. Civil society groups like Non-Government Organizations(NGOs) have become ‘favored partners’ of multi and bilateral aid agencies since the 1990s andonwards (Johnson, 2002, p. 89). There are two perspectives as to why this is the case. One, thenegative perception on the role of government in the 1980s pushed aid agencies to partner with
NGOs, which were seen as neoliberal entities (that is, dissociated from state). Two, NGOs are
viewed as a ‘third sector’ that is less bureaucratic than government and more altruistic than thefree market. NGOs are thus, ideal type of organisation that addresses perceived shortcomings ofmarket and state (Johnson, 2002). Lancaster (2006, p. 213) concludes that NGOs have played therole of political constituencies for development aid and have been instrumental in advocating foraid-for-development norm in many DAC donors.
Several scholars agree that the goal of modernization is the top priority of the Chinese
leadership (Saunders, 2006; Shambaugh, 2006; Sutter, 2006; Li, 2010; and Yunling, 2010). Li

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growing need for resource inputs, the central government has been encouraging state-owned
enterprises (SOEs) to secure exploration and supply agreements with states that produce oil, gas,and other resources (Cheng, 2012, p. 8). As a tool of economic diplomacy, China’s foreign aid is
likewise expected to serve the goals of national development.
Aside from domestic factors, Japan’s and China’s foreign aid policies have been shapedby international exigencies. In particular, since the Afro-Asian movement in 1955, China has
projected an image that stresses affinity with the Third World. The main objectives of China’s
post-cold war foreign policy in the 1990s and beyond are to enhance a more peacefulenvironment for its domestic economic development, facilitate closer relations with Third World
countries, and isolate Taiwan and foil Taiwanese independence (Lin, 1996). On the other hand,
Japan’s active membership in DAC/OECD has contributed so much to the improvement of its
aid quality and refinement of aid’s development purpose. Thus, the institutional and contextual
underpinnings discussed above are keys in the formation of China’s and Japan’s aid policies andstrategies not just toward Southeast Asian region but elsewhere.
Japan’s aid in the new millennium is characterized by innovation and strategic orientation.
Innovation pertains to improvement of or introduction of new methods, ideas or practices. In aid
giving, innovation means improvement of or introduction of new mode of delivery, new sourceof funding and new objectives that go beyond the simple aim of broadening market access andenhancing resource security. There is policy innovation in aid when it seeks to improve thequality and efficiency of economic activities beyond the basic goal of expanding the scope of
economic relations. In broad terms, innovative economic cooperation can be utilized in a way by

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which it can promote entrepreneurship, encourage research and development (R&D), green
investment, upgrade the skills of workers, improve governance, and steer market actors towardinnovation-related investments. It may also address global issues such as health, climate change
and other environmental challenge (Based on the OECD conception of Innovation, OECD 2010).
Strategic orientation in aid means that, as a tool of economic diplomacy, aid is used topursue a broad range of security/diplomatic and economic purposes at the same time. The idea isquite related to what some scholars have recently called ‘economics-security’ nexus. Until the
1990s, diplomatic interests took a mere secondary position in Japan’s aid calculation while
commercial interests had been the most prominent. The regional ascendancy of China and its
growing influence and assertiveness is a crucial factor to strategic direction of Japan’s aid in the
new millennium.
The trend towards innovation and strategic direction in Japanese aid allotments is neither
planned nor self-initiated but rather the outcome of reactionary policymaking in response tochanging domestic and international conditions. As regards the former, the prolonged economic
stagnation of the post-bubble era has led to profound political-economic changes since the 1990s.
Amidst fiscal problems and declining public support, ODA charter was adopted, aid agencies
were reorganized, new source of funding for ODA loans was introduced, and civil society groups,
particularly NGOs have been involved in economic cooperation activities. The other is that given
Japan’s economic condition, industrial upgrading and product differentiation have become tallorders. By emphasizing on green innovation, Japan is seeking to create a new niche ininternational division of labor and comparative advantage in the production of consumer andintermediate goods that are environment-friendly. This has called for an aid policy that is closelyaligned with Japan’s New Growth Strategy launched in 2010.

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As for international conditions, membership in DAC/OECD was instrumental in making
Japanese ODA responsive to international development agenda. In the past two decades or so,
the Japanese government through the Ministry of Foreign Affairs (MOFA) has articulated intheir official reports a set of ODA objectives that clearly followed the DAC aid agenda. The
2011 ODA White Paper (Chapter 2) expressed support for international commitments and thefulfillment of the United Nations’ Millennium Development (MDGs) Targets. A priority area forJapanese ODA that emerged in the past two decades or so is green aid. Japan’s commitment tofulfill MDGs has led to a more programmatic aid agenda. Very recently, aid for democratization
and aid for peacebuilding1 have floated among policy circles and academics as possible strategic
uses of Japanese aid in the coming years.
The region of Southeast Asia is significant for Japan’s and China’s strategic economic
diplomacy. For one, Cambodia, Laos, Myanmar and Vietnam (CLMV) offer alternative cheap
production sites for both Chinese and Japanese manufacturers. Two, maintaining strong bilateralties with countries in the region is strategically important for Japan, especially in a period when
Chinese political and economic clout is growing. By strengthening Japan’s economic
cooperation with the region, China’s increasing economic presence and influence will be incheck. More specifically, it prevents CLMV from depending too much from Chinese economic
assistance. For China, cooperation with Southeast Asian nations is crucial to its Western
Development strategy, that is, economic growth of its western region, and ‘good neighborhood’policy. CLMV countries are located in the front doors of China’s Yunnan province. Thus, aprosperous Mekong subregion would also benefit China’s western region. Moreover, the1

A group of scholars from the Institute of Foreign Policy Analysis (IFPA) and the Osaka School of International
Public Policy has recently published their report on U.S.-Japan Peacebuilding Cooperation: Role andRecommendations toward a Whole-of-Alliance Approach, co-edited by Hoshino Toshiya and Weston S. Konishi(2012)
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development of highway corridors that link Yunnan, China and all countries in the Mekong area
will also allow China to have access to Andaman Sea by way of land. A peaceful coexistencewith the countries in the region and with ASEAN countries which have claims over the Spratlys,
like Vietnam and the Philippines, could also help assuage the ‘China threat’ perception. For
Japan, fostering ‘mutually advantageous’ relations with ASEAN as a whole is part of the overall
strategic goal of maintaining a stable and peaceful Southeast Asian region. At least based in themanner by which it is conducted, Japan’s economic cooperation policy toward Southeast Asia is
intended to ‘rectify’ the development disparity between the older and newer members of ASEAN(see Japan’s Diplomatic Bluebook). The issue of economic disparity has become a major concern
within ASEAN when CLMV were admitted as members in the late-1990s (Severino 2007, pp.
35-44).
Wang (2006) asserts that China has a divided perception of Southeast Asia based on
historical patterns of relationship. China’s bilateral relations with Myanmar, Cambodia and Laosdate back to more than 2000 years while it has weak cultural relations with maritime countries ofIndonesia, Malaysia and the Philippines. Japan, on the other hand, has no single, coherent
economic cooperation policy toward the CLMV until in late-2000s. Japan’s economic
cooperation with these countries was generally covered by its Southeast Asian policy as a whole.
Shimomura (2012) opines that there was no explicit response by Japan toward the subregion
except under the ‘Arc of Freedom’ that was popularized by then Prime Minister Taro Aso. The
term eventually disappeared from Japan’s Diplomatic Bluebook. However, the first JapanMekong Ministers’ Meeting, which was initiated under his predecessor, Yasuo Fukuda, proved
to be more durable and has been institutionalized annually as a formal gathering of officials fromJapan and Mekong countries.

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Figure 1: Annual GDP Growth of Japan and China (in %)

20.00

15.00

Population: 1.3 billion
GDP: $7.318 trillion(2011)

10.00

China

5.00

Japan

-5.00

2010

2009

2008

2007

2006

2005

2004

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1980

0.00

Population: 127.8 million
GDP: $5.867 trillion (2011)-10.00Source: World Databank, World Bank
http://databank.worldbank.org/ddp/home.do?Step=1&id=424

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Figure 2: Economic Cooperation of a Rising and Mature Economic Power

Stability

Economic Diplomacy

Political objectives

Development of recipientsInterdependence

commercial interests

Economic cooperation

Development of recipients

Declining power (Japan)
Budget constraints
Liberal reforms

Rising power (China)

Synthesis of aid, trade and investment
weakening
strengthening

Focus on Innovation; diverse allocation
Green technology
Sustainability
Improve governance
Strengthen
Regional integration

Economic development
Catch-up ideology

Focus on Market access; resource security

Domestic institutions and international
environment as contextual factors:(1) State-society relations (role of civil society)(2) Aid management system(3) Domestic economy(4) Aid community (DAC-OECD, multilateral donors)

Infrastructuraldevelopment
Energy supplies
Resource security
Export promotion

Complementarity
Competition/ rivalry

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The study employed two qualitative methods, namely, documentary research andinterview of key informants. Just like the rest of studies on China’s aid, access to reliableprimary data is very limited. In this study, I relied on both primary and secondary data for
Chinese aid. The document on China’s Foreign Aid published by the Information Office of theState Council in 2011 is quite useful but not adequate because it only provides general
information on China’s foreign aid activities for the year 2009. Thus, in addition to this,secondary data from Japanese and Chinese sources were gathered. In particular the works of
Kobayashi (2008), Lin (1996), Zhu (2010, 2008), and Bangkok Research Center (BRC) JETROIDE reports (2008 and 2010) provided very useful and necessary information. Data on Chinese
aid to the Philippines was based from National Economic and Development Authority’s (NEDA)
website.
Meanwhile, primary data for Japanese ODA are easily accessible from MOFA’s ODA
White Paper and JICA Annual Report. I also conducted interviews of five key informants
between October 23 and November 26, 2012. Of the five, two were MOFA officials who are
directly involved in Japan’s ODA policy and evaluation, one was a JICA official, and two were
academicians with theoretical and experiential knowledge on Japanese aid programs.

1.2 Evolution of Japan’s and China’s Economic Cooperation: Implications to their
Relations with Southeast Asia
The beginnings of Japan’s and China’s economic cooperation toward the Southeast Asian
region can be traced back in the early-postwar period. As a result of U.S. procurement system
during the Korean War (1950-53), the Japanese government was able to achieve a balanced
national account. Thus after that war, the need to maintain a procurement system-like or at least

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adopt a similar strategy was seen as urgent to sustain Japan’s economic growth. There were threefactors that Japanese policymakers had taken into account in designing a post-war strategy. One
was the constraint imposed by the U.S.-sponsored constitution which renounces war as an
instrument of national policy. Two, the strategy to be adopted should not conflict with Japan’s
security relations with the United States and finally, with the fall of China into communism,
Japan had to look for new sources of supplies and markets for its growing export industry.
Hence, economic cooperation (keizai kyouryoku) was designed in view of these policy
challenges. Japan joined the Colombo Plan and started its first ever yen loan to India in 1958. In
order to ‘reenter’ the Southeast Asian market, Japan commenced the payments of war
reparations. The reparations payments, which were based on the request system, would
eventually become the model of Japan’s official development assistance (ODA). Patterned after
the procurement and reparations systems, Japanese ODA was used to procure goods from Japan,
as a form of financing to develop overseas extractive industries vital to national development,
and later as financing for infrastructural projects in recipient countries to help facilitate Japanese
investments there (Arase 1995). In 1987, this aid practice was articulated by the Ministry ofInternational Trade and Industry (MITI, now METI) as Japan’s New Asian Industries
Development (AID) Plan, a strategic plan to link aid, trade, and regional investment.
Meanwhile, in the Mekong subregion, the post-war period was characterized byindependence movements and social upheavals. Cold War bipolarity restricted political andeconomic interactions between democratic and communist states. In the same way, the natureand quality of early Chinese and Japanese economic cooperation with Southeast Asian countries,
including CLMV, were determined by Cold War bipolarity. Zhu (2008, p. 70) observed thatearly Chinese foreign aid to CLV in the 1950s and 1960s were intended to support national

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struggles and nation-building. Japan, on the other hand, had strictly adhered to U.S. foreign
policy throughout the Cold War period. In an attempt to circumvent the restrictions created by
the bipolar structure on its foreign relations, Japan adopted the policy of seikei bunri to “justify
trading with nearby communist countries while adhering to the western camp” (Potter 2008, p.
8). Chinese foreign aid would take a new shape and direction following China’s opening up andadoption of economic reforms in 1978 under Deng Xiaoping. In 1977, former Prime Minister
Fukuda Takeo declared his Fukuda Doctrine which stressed “heart-to-heart diplomacy” with
Southeast Asia, accompanied by a plan to double Japanese ODA to the region in the coming
years.
Japan’s aspiration to normalize relations with the CLMV can be traced back to thereparations period of the 1950s and ‘60s. Table 1 below summarizes Japan’s reparations andgrants signed with CLMV. It is interesting to note that Japan paid reparations to Vietnam twice;
one was before the unification and another after the unification. Myanmar also received
relatively higher reparations payments from Japan compared to Laos and Cambodia. This
provides us a glimpse of how relatively important each CLMV was to Japan during this period.
Eventually, Vietnam would become one of the major recipients of Japanese ODA from the 1990s
and beyond.
Table 1: Japan’s Reparations Payments and Grants to CLMVCountry
Burma (Myanmar)
Laos
CambodiaSouth Vietnam
VietnamYear of Agreement
1954
1958
1959
1959
1975

Settlement$340 million$2.8 million$4.2 million$390 million
Yen 8.5 billion

Payment Period
1955-1965
1959-1961
1959-1961
1960-1965
1975-1978

Source: Arase (1995, 29)

In 1992, Japan dispatched its Self-Defense Force (SDF) for the first time since WorldWar II to participate in the United Nations’ peacekeeping mission in Cambodia. The success of28

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this mission was significant in Japan-Southeast Asia relations in two ways. For one, the absenceof strong resistance from among ASEAN member-countries to the peacekeeping mission showedthat the region was becoming more receptive to Japan’s participation in regional politics andsecurity (Singh 2002). Singh (2002) further observes that this receptivity was due to the change
of Southeast Asian perceptions of Japan from an ‘economic animal’ into a model of development.
Two, the peacekeeping mission also marked the beginning of a more proactive Japanese foreign
policy and gradual departure away from the usual checkbook diplomacy. “The utilization of aid
for political-strategic purposes provides a new dimension to Japan’s involvement in the Asian
region and beyond” (Yasutomo 1989).
On the other hand, China-Southeast Asia relations were beset largely by political andsecurity concerns throughout the Cold War period (Ba 2003, pp. 623-626). China’s policy ofextending support to local communist insurgents among Southeast Asian countries especially inthe 1960s had left a legacy of mutual suspicion and distrust. However, US-China rapprochementin the early-70s provided an opportunity to improve relations. Malaysia normalized ties with
China in 1974 and then followed by the Philippines and Thailand in 1975. China’s main concern
in the Mekong subregion was the perceived expansionism of Vietnam in Cambodia beginning in
1979. This was made complicated by Vietnam’s alliance with the Soviet Union during the latterpart of the 1970s. In view of the situation, the Chinese sought strategic partnership with othermembers of ASEAN, particularly with Thailand, Singapore and Indonesia (Ross 1992, pp. 5266). The regional tension only dissipated in the late-1980s when Vietnam pulled its troops out of
Cambodia and when communism finally fell in Europe and in the Soviet Union.
By the mid to late-1990s, stability in the Mekong countries had improved. Vietnam wasadmitted to ASEAN in 1995, followed by Laos and Myanmar in 1997 and Cambodia in 1999.

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ASEAN has also adopted a number of agreements to accelerate the integration of the economies
of its members since the 1990s and onwards. In 1992, the ASEAN Free Trade Area (AFTA) was
launched to increase intra-regional trade among its members. AFTA’s ultimate aim is toeliminate all import duties within ASEAN by 2015. In 2003, ASEAN leaders had set the goal of
creating a three-pillared ASEAN community that aims to transform the region into a competitive
stable market and production base under the Bali Concord II. The member-countries also ratified
the ASEAN charter in 2008. In the area of investment, some initiatives were put forward since1998 such as the ASEAN Investment Area (AIA) and the ASEAN Investment Initiative (AII). A
more recent one was the signing of ASEAN Comprehensive Investment Agreement (ACIA) in
February 2009 which promises national treatment of all investments whether from the region or
coming from outside the region.
Japan, on the other hand, declared in principle its full support for ASEAN integration.
Japan’s assistance to ASEAN is not just a matter of principle per se but as a matter of national
interest. The 2010 Diplomatic Bluebook revealed the importance of a stable and prosperous
ASEAN to Japan, saying that a more closely integrated ASEAN functioning as a hub of regional
cooperation is important for the stability and prosperity of Japan. Meanwhile, since the adoptionof the ‘open-door policy’ by Deng Xiaoping in 1978, China has achieved remarkable economic
success. The economic rise of China has created mixed perceptions among the members of
ASEAN (Siow and Sussangkarn 2006, p. 102). There were concerns that foreign investments to
the region were being diverted to China (ASEAN-China Expert Group on Economic Cooperation
2001, pp. 22-23). Another is that, China’s rise offers both opportunities and threat. Southeast
Asians acknowledge the opportunities of a more open Chinese market while at the same timewary of the idea that China’s newly acquired economic power would be used to strengthen its

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military capability. In an attempt to dissipate the growing threat perception, China has gradually
established mutually advantageous political relationships with Southeast Asia, highlighted byvarious declarations, joint statements, multi-level meetings, and economic cooperation. In 1997,
ASEAN leaders and President Jiang Zemin signed a joint statement on “good neighborliness” asan important policy objective for China-ASEAN relations in the 21st century. Premier Zhu
Rongji also reiterated China’s support and increase of Chinese assistance to the region during the
4th China-ASEAN Summit. In 2003, Chinese and ASEAN leaders signed the Joint Declaration
on Strategic Partnership for Peace and Prosperity. China also acceded to the terms of the Treatyof Amity and Cooperation (TAC) during the same year.
Moreover, China and ASEAN have also strengthened their economic ties by concluding awide range of trade and industrial arrangements in the new millennium. In particular, bilateral
trade linkages have expanded steadily through the formation of ASEAN–China free trade area
(ACFTA). These positive engagements with ASEAN were in conformity with China’s regional
diplomacy that was articulated in a 2002 report of the 16th Party Congress which served as a
guideline in building ‘good neighborly relationships and partnerships’ with its neighbors(Medeiros 2009, pp. 126-27). The development of the Mekong river basin is one of the areas forcooperation between China and ASEAN that was stipulated in the second Plan of Action signedin October 2010 in Hanoi. There were also efforts to establish mutually advantageous political
relationships with ASEAN member-countries to which China has territorial disputes with,particularly the Philippines. These positive developments in China-Southeast Asia relations since
the late-1990s had created an impression among observers that China’s diplomacy had succeededin establishing deeper political and economic relationships with the region while Japan’s
relationship with ASEAN member-countries stagnated. Glosserman (2003) commented that31

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Japan was playing catch-up with China in its diplomacy with ASEAN member-countries. He
furthered that this was due to Japan’s shrinking profile in the region and its inability to take theinitiative in dealing with the region. Yoshimatsu (2010) concurred by saying that China’s
pragmatic diplomacy had created a gap in the relationships of the two Asian giants with
Southeast Asia. This gap, he averred, is due to domestic political institutions that created Japan’s
weak policy decisiveness and China’s policy credibility.
At the onset of the new millennium, China also actively sought to improve its ties withmaritime Southeast Asian countries with which it has territorial disputes with through economic
cooperation agreements. In the Philippines, China pledged to provide funds to the multi-billion
dollar North Rail Project, an ambitious rehabilitation and expansion of the only railway inLuzon, Philippines, during the second term of the Macapagal-Arroyo presidency. Lum et al.
(2009, p. 16) noted in their study that the country was reportedly the largest recipient of Chinese
aid in Southeast Asia. Nonetheless, this momentum dissipated when the dispute over the Spratlys
once again broke out. In September 2012, China demanded that the Philippines should pay backthe US$500 million aid it disbursed for the construction of the North Rail (Cheng 2012). Apartfrom ASEAN-4 (Malaysia, Indonesia, the Philippines and Thailand), there were also explicit
attempts by China to improve its political and economic ties with the Mekong subregion, more
specifically Cambodia through mixed use of aid, trade and investments. The Wall Street Journal(November 15, 2012) noted lately that China has successfully “built a new ally within the
Association of Southeast Asian Nations”. This was explicitly demonstrated recently when
ASEAN failed to produce a joint communiqué on the South China Sea dispute because of
Cambodia’s reluctance. The country served as the acting chair of the 2012 ASEAN Ministerial
Meeting. Reflecting on the gap between China’s and Japan’s relationships with Cambodia, Tsuji

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JIIA(2012, Interview) opines that Japan had simply ‘maintained’ almost the same level ofrelationship with this country since the 1990s while China actively sought to improve further its
relationship. The reason, he said, could be gleaned from China’s growing economy and Japan’s
economic decline. China, he suggested, had all the resources to increase its economic activities
there.
It is perhaps in this context why newly reelected President Obama visited Myanmar andCambodia lately and why Japan adopted a more straightforward relationship with CLMV
beginning in 2008 when it initiated the Japan-Mekong Ministers’ Meeting and hosted the firstJapan-Mekong Summit Meeting the following year. Amidst the seemingly increasing diplomaticcompetition between the Asian donors, the first Japan-China Policy Dialogue on the Mekong
Region was held in Beijing in April 2008. This is at least a positive gesture that the two major
Asian powers are interested to coordinate their development cooperation efforts in the Mekong
subregion. China and Japan also participate in various multilateral frameworks for thedevelopment of the Mekong subregion. One of the most important of these is ADB’s Greater
Mekong Sub-regional (GMS) development project which began in 1992.
China and Japan also partnered with ASEAN in implementing the Initiative for ASEAN
Integration (IAI) for the purpose of rectifying economic disparity between ASEAN membercountries. Nonetheless, the success of China-Japan cooperation for the development and stabilityof the entire East Asian region is held hostage by their political relationship, which is beset byvarious lingering controversial issues including sovereignty over the islands of Senkaku/Diaoyu,
history of Japan’s atrocity in China, the Taiwan issue, and Chinese concern over the rise of rightwing politicians in the Japanese parliament. In spite of the increasing severity of the security
environment in East Asia, Japan, China, South Korea and ASEAN members are keen on

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improving further the region’s interdependent economies. As Fu Ying recently told reporters at
the recently held free trade agreement talks among China, Japan and South Korea, “We do notwant to give overemphasis to the territorial disputes and the differences… we do not think it’s agood idea to spread the sense of tension in this region”. Table 2 indicates that Chinese andJapanese economic cooperation with CLMV, particularly in the areas of trade, investments, andaid from 2001 to 2010 have improved.
Table 2: Chinese and Japanese Aid, Trade and Investment in CLMV
CLMVEconomic
Cooperation

Cambodia
Trade

ExportImport2001
34.80
205.61
4.3

China
2006
35.09
697.76
717.1

2001
8,016
6,123
_

Japan
2006
120.09
81.9
2.098

2010
No data
No data
694.2

2010
208.3
157.8
_

No data

No data

No data

120.21106.25147.46

7.46
54.41
6.4

49.65
168.72423.2

No data
No data
607.4

843
1,428
0.735

12.3
20.5
401.5

37.5
61.8
7.04

93.7
(2000)
134.19497.35
3.25

No data

No data

75.47

64.05

121.45

252.651207.4281.2

No data
No data
5081.12

12,39822,695
4.69

245.6
103.8
_

387.5
263.2
_

186.7
(2000)
1010.75
1804.45_289.8(2005)
2486.087463.36396.4

No data

69.86

30.84

46.83

No data
No data
105

316,736
216,384
163

5,295
4,124
1,453

8,144.4
8,148.2
144

Investment
ODA
Lao PDR
Trade

ExportImportInvestment
ODA
Myanmar
Trade

ExportImportInvestment
ODA
Vietnam
Trade

ExportImportInvestment
87.5
289.8
No data
459.53562.73807.81ODA(2000)(2005)
Source: Compiled from various sources by the author.
Figures for investment are in million US$, compiled from ASEAN-Japan Center
Figures for CLMV export to and import from Japan (2006, 2010) in million US$, compiled from JETRO (2010)
Figures for CLMV export to and import from Japan (2001) in million yen, compiled from ASEAN-Japan Center
Figures for CLMV export to and import from China (2001 and 2006) in million US$, based from Xingmin Ying
(2008, p.27)
Figures for Japanese ODA to CLMV (2006, 2010) in million US$, compiled from Japan’ Ministry of Foreign
Affairs Online data (2011)
Figures for Japanese ODA to CLMV (2001) in million US$, compiled from Japan’s Official Development
Assistance White Paper 2002, Ministry of Foreign Affairs

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Figures for Chinese ODA to Cambodia are not available; for others, figures are for 2000 and 2005. Compiled from
Kobayashi (2008, p. 33)
Figures for China does not include that of Hong Kong“_” means the figure is nil, insignificant or minimal

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Chapter 2
Emerging Patterns of Japanese Aid in the new Millennium

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2.1 DAC-Membership and the “China Factor”: Japan’s Aid Policy in the new Millennium
Sunaga (2004) once described Japan’s ODA policy as an outcome of a ‘balancing act’
between domestic concerns and response to international community. To fully understand thechanges in the patterns of its ODA allocation throughout the years, one has to examine thecomplexity of Japan’s domestic political economies and the changes in development thinking
and aid modality in the international aid community. This section elaborates on the domestic andinternational factors that led to changes in Japan’s foreign aid policy. Japanese ODA allocation
recently (both in terms of priority by sector and geographical distribution) is more diverse thanever before, containing strategic, commercial, diplomatic intents and innovations. Following
Sunaga’s (2004) logic, it is assumed that policy innovations in Japanese aid are outcomes of the‘balancing act’ of policymakers between international and domestic concerns. A key toinnovative aid is Japan’s conformity to ‘mainstream’ development thinking among Development
Assistance Committee of the Organization for Economic Co-Operation and Development(DAC/OECD, hereinafter DAC) donors; sensitivity to western criticisms; and strategic responses
to China’s growing global economic activities. Domestic concerns that contributed to innovative
aid policy, on the other hand, include sensitivity to public criticisms, emergence of a‘development aid’ constituency, financial liberalization, and reorganization of aid agencies.
The intellectual underpinnings of aid giving can be traced back to the early proponents ofthe theory of development in which international aid was viewed as a supplemental capital tofinance the economic development of poor countries. In this light, poverty was viewed as anincome problem or lack of capital to finance development (Rosenstein-Rodin 1943; Rostow
1960). The inability of poor countries to produce capital was in part derived from the unequalterms of trade with industrialized nations which traded more expensive and high-value added37

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goods. In short, poor countries are poor because they are victims of ‘late-late’ development and‘vicious circle of poverty’. Thus, to break away from the ‘poverty trap’, industrialized countries
must provide trade concessions to poor countries and extend international financial assistance inthe form of aid. The initial premises of aid giving then were to promote growth and improve
national income. This view also implies that aid giving was originally more about addressing the
economic well-being of the recipient rather than the pursuit of donors’ interests. Riddell (2007, p.
25) adds that this view was also evident in U.S. President Truman’s recommendations for U.S.
aid, namely: (1) International aid is the pooling of resources of donor countries; (2) it requires awell-coordinated, concerted effort to make it work, (3) and it should be in line with the recipients’development needs. As donors put more emphasis on political and strategic considerations as thecold war intensified, the developmental purpose of aid was diluted. Lumsdaine (1993) later
argues for a moral vision of aid that gives primacy to addressing humanitarian concerns rather
than the promotion of donor’s political and economic interests.
The institutionalization of contemporary international aid regime was triggered by two
important events of the early-postwar period. One was the implementation of the Bretton Woods
system and two, the launching of the Marshall Plan in 1947. The post-war international aid
regime was embedded in larger international monetary and financial systems. Originally, theInternational Monetary Fund (IMF) was created to maintain global monetary stability built undera fixed-rate currency regime while the World Bank (WB) was to contribute financially to theEuropean economic reconstruction and rehabilitation after the Second World War. The eventual
collapse of the Bretton Woods system had reoriented the role of the IMF to providing short-term
capital to countries with balance of payments deficits since the seventies while the role of the38Trinidad, D.

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World Bank, after Western Europe’s complete recovery, has been extended to providing
multilateral development assistance to Third World countries.
The emergence of Anglo-American capitalism in the early eighties, occurrence of Debt
Crisis, and the subsequent adoption of the so-called Washington Consensus among industrializedcountries gave rise to ‘policy-based’ lending within DAC donors. The idea was to use foreign aid
as a leverage to compel debt-stricken nations to adopt ‘structural adjustment’ programmes,
which were basically neoliberal policies, as part of structural reform. Aid conditionality, hence,
was born. Unwittingly or not, neoliberal policies like trade and investment liberalization,
privatization, and deregulation became part and parcel of development strategies in many
developing countries. By this time, bilateral and multilateral aid agencies had also begun
partnering with NGOs as a new modality of aid delivery.
As the new millennium sets in, the goals of development has become ‘more
comprehensive, embracing all dimension of poverty including income poverty, illiteracy, poor
health, insecurity of income, and powerlessness’ (Goldin et al., 2002, p. 58). Reflecting this new
thinking, the focus of aid shifted from growth promotion to poverty alleviation (Saidi and Wolf,
2011). DAC donors also became more willing to pursue a common international aid agenda. It
declared its support for the United Nations Millennium Development Goals (MDGs); pledged toincrease their aid volumes; and to channel these funds for the fulfillment of MDGs (Akiyama
and Kondo, 2003). The DAC also reiterated the crucial role of appropriate policies andinstitutions in maximizing the effects of aid to poverty reduction efforts at the Monterrey
Conference. With this, social infrastructure has become the overarching theme of aid programsof DAC. In 2011, 40.6 per cent of DAC aid disbursements were allotted to social and39

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administrative infrastructure while only about 15 per cent was appropriated for economic
infrastructure (OECD 2012b).
On the other hand, overtime, the DAC debate on aid quality and effectiveness has shiftedfrom the issue of ‘how much’ that is, the ideal volume of aid to be provided by donors tocontribute significantly to growth (measured in terms of aid to GNI ratio), to the issue of ‘whatfor’, that is, which programs to support in order to maximize aid’s developmental outcomes. A
measure of great importance that was instituted to ensure aid quality and consistency among
DAC donors was the adoption of a common definition of ODA. The DAC definition contains
three essential elements that make economic assistance qualify as ODA: (1) it is provided
officially by state institution, (2) it is intended for economic development and welfare of therecipient, and (3) it must be concessional in nature, meaning the terms of payment is long, at avery low interest rate and, if it is in the form of loan, must contain a grant element of at least 25
per cent. Military aid and inflow of private funds, such as loans extended by private financial
institutions from donor country do not qualify as ODA.
DAC donors have also strived to improve the tying status of their aid. The OECDpublishes annually a statistics on each member’s tying status. In 2010, the total share of DAC’s
untied aid was 79.4 per cent. ODA is said to be tied when procurement is limited only tocompanies of donor countries or in a small group of countries. The idea of untying is tomaximize ODA’s effects to development by allowing the recipient government to freely choose,
under a system of fair bidding, the best supplier or contractor required in the implementation ofan aid project. Also important in improving ODA quality and effectiveness is DAC’s practice ofpeer review. In 2008, the OECD published the document, Effective Aid Management: Twelve
Lessons from DAC Peer Reviews. This report contains issues arising from aid experiences of40

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each member for the last five years and the strategies to overcome or achieve them. The issues
raised can be generally classified into three: that which pertains to development purpose,management, and focus. Bearce and Tirone (2010) demonstrate the trade-off between strategic
goals and aid effectiveness, arguing that foreign aid can facilitate economic reform that fosters
development only if the ‘strategic benefits associated with providing aid are small for donor
countries’. Thus, aid ‘involves no element of mutuality, bargain or quid pro quo’ (Economides
and Wilson, 2002, p. 124).
From the above discussion and with risk of oversimplification, the current mainstream
notion of ODA can be summarized as follows: (1) Aid flows from rich to poor countries, thus,
the traditional notion of North-South type of aid relations; (2) The use of political conditionality
to bring about liberal values; (3) Adoption of a common DAC definition; (4) Aid apportionment
follows the international aid agenda, particularly MDGs; (5) The goals of aid are based on abroader notion of development; (6) The main focus of DAC aid by sector is social infrastructure;(7) A modality of aid delivery which involves civil society groups particularly NGOs has
become a standard practice in many DAC donors, and (8) The practice of untying aid as a norm.
These ‘standards’ or ‘charity consensus’, as Saidi and Wolf (2011, p. 9) call it, have become themain basis of our ‘mainstream’ understanding of what aid ought to be.
Although a member of DAC for many years, Japan has developed an aid practice thatlinks aid, trade and investment or what Shimomura and Wang (2012) called ‘trinity development
cooperation’, or the synthesis of aid, trade, and investment. Ohno (2011) argues that this ‘Asian’view of development assistance was based on the catching up experience of Asian donors.
Japan’s use of this model has drawn criticisms from other DAC donors since the 1980s. By
linking aid, trade and investment, it was argued that Japan mainly pursued commercial interests

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in its aid allocation. These critics ignored the fact that DAC aid in the 1970s was also tied to
trade and investment. Even the Marshall Plan was used to procure consumer and intermediate
goods from the United States. Hjertholm and White (1998, p. 25) observed that a marked switch
in priority by sector among DAC donors occurred only after 1992.
The formation of ‘mainstream aid’ has profound implications to Japanese ODA. In Japan,
aid policymakers had encapsulated this new trend under the broad concept of human security. 2
Peng-Er and Ishikawa (2012, p. 28) trace back the beginnings of human security as a norm ofJapan’s international relations from former Prime Minister Obuchi’s declaration in Hanoi amidst
the Asian financial crisis in 1998. By the time Mrs. Sadako Ogata co-chaired UN’s Commission
on Human Security with Professor Amartya Sen in 2001, the concept of human security was
already an established institutional norm of post-cold war Japanese diplomacy. Peng-Er andIshikawa (2012, p. 29) add that a consensus that human security was a desirable and practicableapproach for Japan’s international relations among Japanese policymakers has emerged. Since
then, official aid documents from Japan’s MOFA and JICA have often referred to humansecurity as an important pillar of Japanese ODA policy.
Moreover, China’s growing regional ascendancy has produced both anxiety andoptimism in economic and security dimensions in Japan and elsewhere. The anxiety arises
largely from the ambiguity of China’s real intentions, whether it will eventually seek to alter therules under the existing international order or will remain as a status quo power (Bernstein andMunro, 1998; Mearsheimer, 2001). Schweller (1999, p. 7) says that the effects of rising powers
differ in kind and degree, arguing that neighboring states and world powers with interest in theregion will be affected more. Thus, the implications of China’s rising power status will be more
2

In broad terms, the concept pertains to both ‘freedom from fear’ and ‘freedom from want’. It refers to thesecurity and protection of human life from all forms of threat, including the state, poverty, financial crisis, climatechange, and so on. As such, it is often regarded as nontraditional security.
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pronounced in the United States being the dominant regional power in the Asia-Pacific and inJapan. The view that China is an economic threat to Southeast Asian countries is premised on
zero-sum competition for foreign investment, and trade with third party markets (Ravenhill
2006). China’s rising prominence in East Asia has also led to rivalry of sort with Japan in using
economic cooperation instruments like free trade agreements (Zha 2002). The two major
regional economic powers seek to develop mutually advantageous political and economic
relationships with ASEAN members.
China’s ‘charm strategy’ in Southeast Asia in the new millennium has stirred Japan tostrengthen its commitments to bilateral linkages and regional institution-building as a way tocounter China’s growing influence through the use of aid and other economic measures(Yoshimatsu and Trinidad 2010). Apart from U.S.-Japan alliance, the use of economic
cooperation measures in Japan’s strategy in dealing with China’s expanding influence in East
Asia is the only logical choice because of constitutional and other legal impediments in the useof ‘hard power’ instruments. Nonetheless, many Japanese academics and officials tend not tooveremphasize on the rivalry thesis. Shiga (2012, Interview) asserts that Japan’s International
Cooperation Agency (JICA) is more interested in developing aid cooperation instead ofcompeting with Chinese aid. One of the features that make non-DAC donors aid (including
China’s aid) attractive to borrowing countries is the relative speed by which aid negotiation takes
place. Shiga (2012, Interview) acknowledges this fact and reveals that JICA has lost some aid
projects in CLMV to China as a result. He adds that JICA at present is in the process of
shortening Japan’s ODA negotiation process.
Thus, the trend towards policy innovation and strategic orientation in its aid in the newmillennium was profoundly shaped by Japan’s compliance to mainstream DAC aid and by43

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China’s regional ascent. Nonetheless, as will be explained later, the practice of linking aid, tradeand investment has remained one of the distinctive features of Japanese aid even in the newmillennium.

2.2 Towards More Balanced Aid Allotments: The Effects of Domestic Politics
From the above discussion, Japan’s ODA policy has been shaped by the debate oninternational development, western criticisms and more recently, China’s rising economic
prominence in East Asia. Nonetheless, this is just half of the story why Japanese aid allocation
for social sector and social infrastructure has grown. The other half is explained by changes in
the country’s domestic political economy. The move towards a more innovative approach to aid
giving was demanded not just by international factors discussed above but also by domestic
conditions beginning in the 1980s. In broad terms, there were three political-economic factorsthat led to ODA policy innovation in Japan: (1) Financial liberalization and postal deregulation
have changed the structure governing state-market relations. Traditionally, the Japanese state has
been interventionist and developmental. Policy instruments like credit control and administrative
guidance have enabled the government to intercede in economic and social affairs. This kind ofstate structure was instrumental in the success of aid, trade, investment synthesis in Japanese aid
giving. However, liberalization reforms since the late-1990s had the effect of weakening thestate’s capacity to intervene by removing or limiting the policy instruments available. The
finance ministry lost its monopolistic control over credit and firms now have more options fortheir financing. Because the public sector no longer monopolizes the use of postal savings fund,which is a private fund, financial reform has paved the way for new, innovative ODA financing
schemes like public-partnership cost-sharing. (2) The enactment of the Nonprofit Organization

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as the 20th century drew to a close.
All of these have taken place under the backdrop of waning public support for ODA,
prolonged domestic economic recession, and problems related to ageing society. Nonetheless,these conditions have contributed to the incorporation of human security concept to Japanese aid‘philosophy’, making social sector allocation particularly from ODA grants more prominent thanever. Human security as an institutional norm of Japanese aid giving have slowly evolved out ofnecessity. In the 1990s, the government was struggling to justify to the public why ODA
allocation must continue amidst soaring public debts and economic recession. From the public’sview, the credibility of the entire aid practice was compromised after the highly sensationalized
Marcos scandal in 1986. The papers that were confiscated from Marcos when he fled to Hawaii
following his ouster in the Philippines revealed that the former President systematically received
kickbacks from Overseas Economic Cooperation Fund (OECF) projects through a system of bidrigging, contract fraud, and illegal payments (Arase 1995, p. 114). OECF at that time was theagency in-charge of ODA loans. This incident increased public clamor for more transparency inJapanese aid and brought Japan to international humiliation. Aid scholars also noted the lack ofan ‘aid philosophy’ in Japanese ODA and criticized its overwhelmingly commercial nature.
The commercial purpose of Japanese ODA can be traced back to the keizai kyouryoku
that was developed in Japan in the 1960s which was intended to openly support the country’s

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drive for economic development. Around this time, the precursor to Japan’s aid allocation model
began to take shape. A system of aid giving based on the recipient’s ‘request’ was introduced.
Aid implementation was done by various government agencies and there was no single agency
that ultimately decides what priorities ODA should pursue. ODA policy was enmeshed inbureaucratic politics and rivalry, particularly between MOFA and METI, the former promoting
diplomatic uses of aid while the latter the commercial uses of aid (Hook and Zhang 1998). As
Arase (1995) exposed in great detail, Japan’s economic aid was heavily and explicitly
commercial in nature, served well Japan’s growing need for resources and market in the 1970s
and supported Japanese local industries and investments abroad. ODA loans were initiallyinvested to projects in the primary sector and extractive industries in recipient countries.
Moreover, the geographical focus of Japan’s aid allocation was mainly Asia.
From the 1960s to 1980s, government officials involved in the aid process did not havean incentive or sense of urgency to reform Japan’s heavily commercial aid practice because adomestic constituency that promotes aid-for-development norm was still lacking (Lancaster,
2006, pp. 140, 220). Development-oriented NGOs and Non-Profit Organizations (NPOs) inJapan were politically weaker than their counterparts in the United States and elsewhere becauseof their dependence on the ‘parent’ ministry that granted them legal entity. Hence, they were
excluded from ODA policy development from the very beginning. The aid process also lacked
transparency because the role of Japanese Diet was either absent or ambiguous. Aid priorities
were not electoral issues and as such, the public was little informed about it. Moreover,
Lancaster (2006, p. 141, 220) also observes that the fragmented aid organization in Japan had led
to weak development purpose in government’s aid programs. Policy development was separate
from implementation which made coordination a challenge and further reinforced bureaucratic46

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JIIA‘sectionalism’. Lastly, the media did not pay much attention to aid policy prior to mid-80s(Potter, 1996, pp. 16-17).
To reinvigorate public interest to aid and respond to other challenges facing Japanese
ODA, the cabinet approved the 1992 ODA charter. The document highlighted four philosophicalunderpinnings of Japanese aid, namely, (1) humanitarian considerations, (2) Recognition of theinterdependent relationships among member nations of the international community, (3)environment conservation and (4) the principle of self-help. Taking into account the various
changes in international and domestic environment, the ODA charter was revised in 2003.
Sunaga (2004) identified two domestic reasons that led to its revision: the dwindling domestic
support for ODA and the growing public expectation that Japan’s national interest should bepromoted in the use of aid. On the former he noted:
While the Japanese government was rather complacent about its status as the world's
biggest donor, Japan's ODA has been steadily losing the support of the Japanese public.
According to a poll conducted by Japan's Cabinet Office in 2003, the percentage of
people having a positive attitude toward ODA dropped from 43.2% in 1990 to 19.0%,
while those who favored a reduction in ODA increased from 10.7 %. to 25.5%. The
reasons for this about-face in public opinion were clarified by the poll's respondents:
74.7% of those who responded negatively to ODA referred to Japan's sluggish economic
conditions and 44.8% to Japan's dire fiscal situation, 37.5% reported that ODA
implementation lacked transparency, and 34.8% said that ODA was not effective enough(Sunaga 2004, pp. 3-4).

Sunaga (2004) also mentions that the process used in the ODA revision was
unprecedented because of the intensive dialogue with various stakeholders including politicalparties, NGOs, business circles, the public, and academics. This nationwide consultation also
revealed how divided Japanese society was over major issues concerning ODA. For example,
academics and NGOs promoted the idea that ODA must be responsive to international
development agenda while the public and the business circles wanted the government to use
ODA to ensure the interest and prosperity of Japan (Sunaga 2004). The 2003 ODA charter

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therefore was a document based on compromise of various societal interests in Japan. The
concept of human security was incorporated as one of the basic policies of aid giving while theultimate objective of Japanese aid is to ensure Japan’s own security and prosperity. This is likethe tatemae and the honne of Japanese aid policy.
Moreover, the reorganization of aid agencies in Japan following the charter’s revisionand the subsequent appointment of Mrs. Sadako Ogata as president in 2008 had brought prestige
and clout to the new JICA (Lancaster 2006, p. 131) and had consolidated human security as an
institutional norm of Japanese aid philosophy and practice. In 2008, the Overseas Economic
Cooperation Operations (OECO) of Japan Bank for International Cooperation (JBIC) was
merged with JICA, transforming the latter into an independent administrative body in-charge of
implementing Japan’s loan programs and technical assistance. Export credit and other trade andinvestment promotion activities have been separated from ODA and are now under thesupervision of METI, JETRO, and JBIC. Grant aid, on the other hand, is implemented by MOFA
for the pursuit of diplomatic goals (Minato 2012, Interview). What is noticeable in spite of thereorganization is that fragmentation in aid implementation, evaluation and policy development
has remained. JICA is the main implementing aid agency while aid policy development is vested
in MOFA. The finance ministry and the METI share in the ODA loan policy development. Aidevaluation is carried out by either MOFA or JICA or both or by third party (Minato 2012,
Interview). Nonetheless, these organizational changes have pushed Japanese ODA closer thanever to OECD standard and definition of developmental aid.

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Figure 3: Reorganization of Japan’s Aid Management System
MoFA

EPA

MITI

MOF

ODA Policy
andGrantsOECF (1961)

Exim Bank

MergedJICA

Other official flows

JBIC (1999)

Overseas Economic Cooperation Operations of JBIC
New JICA (2008)

ODA implementation

Source: The Author

Under the new JICA’s management, priorities of ODA allocation have become more andmore target-oriented and approximating closely DAC’s established norms that emphasize
poverty reduction as an object of aid giving and focus on social infrastructure sector as a priority
in the allocation. The four missions stated in its website provides a glimpse of where the future
direction of Japanese ODA is heading at least in principle, namely, (1) addressing the global
agenda, (2) reducing poverty through equitable growth, (3) improving governance, and (4)achieving human security (JICA website). In addition to these, new, innovative aid programs
have also emerged recently. The government, for example, is considering a new type of loan
called ‘assistance for democratization’ as a form of support for Myanmar’s recent political andeconomic reforms. Shiga (2012, Interview) also notes the new programs that recently came out
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such as support for ‘rule of law reform’, support for ethnic conflict resolution, and a recent
request of the Vietnamese government for assistance to support the revision of its constitution.
On top of this, the Japanese government has also used aid to help recipient government deal with
political instability. A good example of this is the J-BIRD project in Mindanao, Philippines
which began in 2006. J-BIRD stands for Japan-Bangsamoro Initiatives for Cooperation andDevelopment. The objective of J-BIRD is to “enable the people and the communities in thetarget areas to enjoy the ‘dividends of peace’ through the Japanese ODA on the basis of ‘humansecurity’ principles” (Embassy of Japan in the Philippines 2012). The total amount of assistancealready disbursed for this project as of March 2012 is approximately ¥12.0 billion (PHP6.54
billion).

2.3 Ensuring Aid Transparency and Environmental Compliance: The Role of Civil Society
As noted earlier, one of the causes of delay and lack of urgency in aid reform in Japan
was the absence of effective domestic aid constituency, particularly civic organizations withsocial development policy advocacies. The role of civil society groups in democratic polity islike a double-edged sword. At worst, they can be a deleterious force that can wreak havoc todemocratic institutions. At best, they do not only contribute to deepening political freedom andcivil liberties, but also to better institutional performance (for a brief review of positive andnegative effects of civil society, see Tusalem 2007, pp. 364-67). What conditions determine theoutcome of civil society activities within a state requires a separate study and which this research
will not try to address. However, of late, civil society groups worldwide have become criticallyengaged in various social, environmental, and developmental activities. Recently, they are also
more aware of issues, more interconnected and collaborative due to progress in information and50

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communication technology (ICT) and the internet revolution. Japan’s Ministry of Foreign Affairs(2011a, p. 27) acknowledged that the influence and involvement of NGOs in promoting theinternational development agenda have increased. In Japan, civic organizations are now actively
participating in ODA implementation and policy formulation (Hirata 2002). Tsujinaka et al.
(2006) however found that Japanese NGOs exert relatively little influence on policymaking. Sato(2010, p. 234) notes that they prefer instead to work with the state.
In post-war Japan, civil society formation can be traced back to the development of
citizens’ and residents’ groups to address emerging issues arising mainly from industrialization
during the high-growth period including pollution problems, labor welfare, and environmental
degradation. NGOs with development advocacies were formed in the 1970s and continue togrow in the 1980s as a result of growing public interests in international issues (JANIC 2013).
What hindered civic organizations then to become effective domestic aid constituency in Japan?
Under the 1955 system, ODA policy formulation was predominantly a bureaucratic function.
The lack of a single implementing aid agency and inter-bureaucratic rivalry had led tobureaucracy’s dominance in ODA policy formulation and implementation. Before the passage of
the Non-profit Organization (NPO) law in 1998, the growth of civil society and expansion of
their operations were hindered by a number of institutional constraints. Juridical legal personality,
which is required to solicit and receive donations, comes from the ministries. Applying for legal
status in Japan also requires organizations to present certain amount of income. Moreover, thepublic was not sympathetic to them because they had caused industrial disruptions in the past.
Most civic organizations that were in existence were locally-based and were largely concernedwith domestic issues. As figure 4 below shows, this seems to be the case even today. The
increasing participation of civil society groups in political and development issues was part of51

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the changes in domestic politics that occurred in the 1990s. Following the series of political,
electoral and economic reforms that were launched during this decade, observers have noted thata new politics has emerged in the new millennium which is characterized by division, coalition
formation, competitive elections and increasing involvement of civil society groups in policy
development (Rosenbluth and Thies 2010; Kabashima and Steel 2010; Stockwin 2008; Pekkanen
2000; Pempel 1997).
Figure 4: NPO Activities, 2007
Occupational
Support fordevelopment
children andand employment
youth
5%
13%
Economic
activities
4%

Consumerprotection
2%

International
cooperation
6%

Human
rights andpeace
5%
Environmental
Conservation
9%

Health, medicine
or welfare
18%
Social education
15%

Promotion of
Science, culture,arts and sports
10%

Town life
improvement
13%

Source: Sato (2010)

The quick disaster response of many NGOs following the Great Hanshin Earthquake
showed that the activities of civic organizations were not only confined to advocacy and protests.

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This image was critical in the public’s perception toward civil society in general and a major
turning point. In 1998, with strong support from the public, media, and political parties, the NPO
law, which changed state-civil society relations in Japan (Pekkanen 2010), was enacted. Today,
civic organizations, with various advocacies, from environmental protection to social
development, have continued to flourish. According to Japan NGO Center for International
Cooperation (JANIC) website,“The fields of activity for international cooperation NGOs in Japan vary widely but canbe roughly classified into four areas: development, environment, human rights, and peace.
Among these areas, education/children, health care, vocational training, gender/womenand reforestation are especially actively pursued, while areas such as democracy/goodgovernance and peacebuilding are gaining greater attention”.

Recognizing their potential contribution to international development, JICA strengthened its
cooperation with NGOs in the 1990s (JANIC Website). At present, periodic meetings, trainings,
and joint project evaluation are held on regular basis between JICA and NGOs. There are 277
international cooperation NGOs in Japan. Of these, 70% operate in Asia. As of 2004, overall
income/expenditure was US$270.5 million.3
I argue that the growing participation of civic organizations in the Japanese policy
process have contributed to a more programmatic (i.e. social sector-based) ODA allocation, andenhanced transparency in project implementation. Potter (1994, p. 202) adds that in the case ofJapan, the country had “shown sensitivity to environmental concerns of opponents of highprofile projects”. In theory, civil society participation in ODA policy development andimplementation can lead to more transparency and accountability of donors (Winters, 2010).
Citing the activities of Mekong Watch Japan in the Mekong subregion, Shiga (2012 Interview)
concurs by saying that NGOs provide “vital information that would have been difficult if not
3

The figures and information from this section were drawn from JANIC Website:
http://www.janic.org/en/data.html
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impossible for the Japanese government to acquire”. Between 2008 and 2009, the Mekong
Watch successfully lobbied for compensation of local residents affected by MOFA’s Cambodia
National Road 1 project subject to relocation in the amount of the replacement cost (Mekong
Watch Japan 2008, p. 5). The Mekong Watch does not only monitor projects implemented by
JICA and JBIC but also loan programs implemented by the World Bank and the ADB in the
Mekong region. Aside from monitoring, environmental groups from recipient countries could
also compel donors, through protests, to cancel their aid projects if they potentially cause
environmental hazards (Potter 1994). Examples of cases where Japanese ODA-funded projects
were cancelled due to protests by NGOs: (1) Suspension of aid in 1990 for the Sardar Sardovar
Dam project in India following protest by local environmentalists; (2) In 1991, Japan cancelled
Philippine National Oil Corporations’ request for aid funding for a controversial geothermal
power plant project in Mindanao because of high-profile opposition by environmental groups;(3) In 1992, the OECF suspended an $US80 million loan for construction of the Calaca II coalfired power plant in Luzon following questions by NGOs about the adequacy of the plant’s
environmental equipment (Potter 1994, p. 202).
While foreign NGOs that lobby against aid projects have increased, many JapaneseNGOs prefer to cooperate with, while others receive funding support from JICA and MOFA.
Some also participate in project pre-implementation activities such as mission investigation andfeasibility studies conducted either by MOFA or JICA (Kuroishi 2012, Interview). Grants arealso provided to Japanese NGOs in support of their overseas activities. The table below
summarizes JICA-initiated cooperation programs with NGOs. Since 1989, MOFA’s so-called
grassroots human security program, which provided assistance to grassroots organizations and54

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overseas civil society groups that are involved in activities related to the mitigation of humansecurity, has grown in terms of volume and scope (Trinidad 2007, pp. 118-9).
Table 3: JICA-NGO Cooperation Modality (as of Fiscal 2010)
Cooperation Scheme

Participating NGOs

PurposeJICA Partnership Program (JPP) Japanese organizations, including Implement projects that utilize
universities and local government their experience and skills at
211 projects in 48 countries
entities
grassroots level in developing
countries
NGO-JICA Japan DeskJapanese NGOs operating inOffer consultation anddeveloping countries
information on various
aspects, for example, on local
laws, local systems, the social
situation and the state of local
NGO activities
Support for Capacity Building
NGOs engaged in international
Provide Project Cycle
cooperation activities
Management (PCM) method
374 persons participated intraining; human resource
trainings
development; and dispatch ofAdvisors were dispatched to 28
advisors with special expertiseorganizations
NGO-JICA Dialogue Meeting
Japanese/ non-Japanese NGOs
Exchange of opinions andinformation on various regionaland sectoral issues
JICA Donation Fund for theJapanese civil society groups
Support/encourage Japanese
People of the World
NGO activities aiming toalleviate poverty, improve
10 projects
healthcare, education, andenvironment of developing
countries
Source: Compiled from JICA Annual Report 2011, pp. 140-41. Available at:
http://www.jica.go.jp/english/publications/reports/annual/2011/pdf/36.pdf

As explained in the two preceding sections, Japan’s sensitivity to foreign and public
criticisms on its aid activities has, in part, given rise to a more diverse allocation beginning in the
1990s. Changes in both domestic and international environments have contributed to theenactment of the ODA charter which emphasizes human security and promotion of national
interests as pillars of Japanese aid. The enactment of NPO law has paved the way for an aid
constituency in Japan, though it is highly contentious at this point to conclude whether or notthey exert influence on actual policy making. Broadly speaking, NGOs have been instrumental in55Trinidad, D.

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aid transparency and conformity to sustainable development and protection of communities
affected by aid projects. Moreover, reforms in the ODA system has strengthened the role of
MOFA particularly in the use of grant aid and formulation of ODA policy while JICA became
the sole agency in-charge of aid implementation. These changes have provided an enabling
environment for Japanese ODA to become more responsive to international development agenda
and hence led to more social sector aid allocation. Nonetheless, more than half of Japan’s ODA
had been used for infrastructure development of recipient countries which, in turn, benefitted
directly or indirectly Japanese investments and domestic firms. The next section explains theresiliency of the trinity development cooperation model which links aid, trade and investment
and the factors that led to innovation in Japan’s funding for ODA loans.

2.4 The resilience of ‘trinity development cooperation’ and innovations in ODA loans
One of the long-standing features of Japanese aid is nurturing Japanese industries while
assisting the recipients’ economies (Shimomura and Wang 2012). Since its inception, ODA has
served Japan’s commercial interests by ingeniously developing an approach that synthesizes aid,
trade and investment. The beginnings of this approach can be traced back during the Korean War
in which American supplies were secured from Japan under a special procurement system.
Japanese manufacturers grew and benefited from this scheme. By the end of the Korean War,Japan achieved a balanced national account. The procurement-style modality was later
incorporated to Japan’s request-based reparations system, in which payments for war damages inSoutheast Asia were paid in kind and was tied to Japanese goods. The keizai kyouryoku system,
the antecedent of Japanese aid system, was developed based on the principles of procurement
and recipient’s request (Arase 1995) and ‘self-help’ (Soderberg 1996, p.33). Thus, in the 1960s

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and 1970s, Japanese aid served mainly Japan’s commercial objectives by tying aid to trade andinvestment. This practice would eventually become known as the trinity development
cooperation model (TDC) or the trinity/synthesis of aid, trade, and investment. Ohno (2011)
asserts that this modality, which is now followed by China and other non-DAC donors, wasdeveloped based on Japan’s catching-up experience. Alternatively, Soderberg (1996, pp. 32-33)
points out that the differences in the implementation of ‘official aid’ between Japan and otherdeveloped countries are rooted in two markedly different cultural backgrounds, more specificallyin the West’s tradition of helping people in the context of Christian-Judeo values which are notdominant in Japan.
Commercial interest is promoted when ODA is used for the procurement of goods andservices from the country that provided it (that is, the donor). The DAC/OECD called this ‘Tied
Aid’. Due to the practice of linking aid, trade, and investment, the tying status of Japanese aid
has been a recurrent criticism of its OECD peers. The DAC Peer Review of Japan in 2010 (p. 70)
for example, noted that Japan did not report the tying status of around 13 per cent of its bilateral
ODA. The Review also criticized Japan’s so-called STEP (Special Terms for Economic
Partnership) loans introduced in 2002 “which are explicitly tied to the procurement of Japanese
goods and services” (OECD 2010b, pp. 70-71). Commercial interest is also promoted when it isdistributed to countries which have strong economic ties (i.e. trade, investment relations) withthe country that provided aid. Moreover, Japanese aid was portrayed in various academic studies
as a “business foreign policy” (Schraeder, Hook & Taylor 1998); as a tool for the restructuring ofJapanese industries that were affected by the 1985 Plaza Accord (Soderberg 1996, p. 72); forfurnishing Japanese firms with advantage in a large and growing competitive Chinese market

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JIIA(Ma 2007, pp. 352–53 quoted in Shimomura and Wang, 2012, p. 117); and in securing essential
resources and market in the 1960s and ‘70s (Arase, 1995).
After the Plaza Accord and the subsequent rise of the yen, the Ministry of International
Trade and Industry (now METI) found an opportunity to justify the TDC model in its 1987 New
Asian Industries Development (AID) Plan, which purportedly aimed at supporting the economic
development of Asian countries by creating a new division of labor in East Asia centering on
Japan and by mobilizing aid in support of trade and investment. Terry (2002, p. 125) criticized
the Plan as a “nicer” version of the co-prosperity sphere. The new AID Plan nonetheless was thelast document where the trinity (san-mittai) model appeared as part of the official ODA strategy.
All references to the trinity model were muted afterwards. Shimomura (2012, Interview) concurs
that this was to circumvent Western criticisms. In actual practice, the linking of aid, trade andinvestment in Japanese ODA loans, in particular, has remained, although much less pronounced.
In Japan, loans are much preferred form of aid modality than grants due mainly toeconomic considerations. First, ODA loans “put less fiscal burden on donors, [and] tend tofunction as a stable source of development funds for recipient countries”. Second, loans tend to
be more efficient because projects are appraised, and they “provide incentive to recipients torecover the cost” (Ojima 2006, pp. 104-6). Moreover, since ODA loans are guaranteed by theborrowing sovereign state, principal and interest repayments are more secured. In the newmillennium, ODA grants had increased while total ODA disbursement patterns had been
inconsistent. Shimomura and Tsuji (2012, Interview) explained that while it was true that grossODA budget declined sharply in 2001, during much of that period to 2010, gross ODA
disbursements had in fact slightly increased but the actual (net) loan disbursements decreased(see figure 5). The reason for this is the inflow of repayments from previous loans that were58Trinidad, D.

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deducted from gross ODA outflow. Between 2004 and 2008, loan disbursements were less than
the total repayments received. In short, funding for ODA loans allocation had mainly come fromrepayments. This indicated that the government was cautious in appropriating ‘new’ funds forloans. There are four possible causes for this behavior: (1) Cost-reducing measures self-imposedby the LDP cabinets (from Koizumi to Aso), (2) Decreases in allotments from the FILP, (3)Redirection of loan allotments to ODA grants to support international development agenda andother diplomatic goals, and (4) Donor ‘fatigue’ syndrome.
Figure 5: Japan’s ODA: Gross vs. net disbursements (in million $US), 2002-10
25000
20000
15000

Net Loan
Repayments

10000

Loans disbursed
Grants

5000
0
2002

2004

2006

2008

2010

-5000

Note: Grants + Loans disbursed = ODA Gross disbursements
ODA Gross disbursements – Repayments (from loans) = Actual Net disbursements
Figures for grants also include technical assistanceSource: Compiled by the author from various issue of MOFA’s ODA White Paper. Contributions for andsubscriptions to multilateral organizations are excluded.

It should be noted that in Japan, there is a ‘second’ budget where loan funds are also
sourced from (more on this later). The ‘second’ budget can be used to offset any reductions inthe ‘first’ budget (or national appropriations). Tsuji (2012, Interview) suggests that the59Trinidad, D.

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reductions from ODA loan net disbursements were due to decline in national budget allocation(first budget) rather than reductions in the second budget. He and Shiga (2012, Interview) are of
the same opinion that there was no shortage from the ‘second budget’. Nonetheless, when the
Democratic Party of Japan (DPJ) came to power in 2009, net loan disbursements increasedslightly again while those of grants decreased. As will be shown later, the DPJ wants to ensurethat ODA is utilized to serve Japan’s national interest (i.e. economic recovery). Tsuji (2012,
Interview) commented that the DPJ policy on aid was intended to secure the public’s politicalsupport.
Continuing the use of ODA loans for infrastructure development also found support fromacademics. Highlighting the mutual benefits of donors and recipients from loans, Ojima (2006)
explains why infrastructure development should continue to be financed by Japanese ODA loans.
His arguments are summarized as follows: (1) Support for infrastructure from ODA declined
during the 1990s due to increasing focus on poverty reduction, and the expectation that private
funds would support more infrastructure development, (2) There is an increased demand forinfrastructure financing among developing countries, and (3) Infrastructure development
complements efforts for poverty reduction, social development, and international development
agenda like the MDGs. Given the country’s prolonged economic stagnation, there will be morepressure from various sectors in the coming years to suit ODA loan disbursements to Japan’s
economic recovery efforts.
In broad terms, the resilience of the TDC model can be attributed to the path-dependent
nature of policy choices in Japan, reinforced by the system of incentives that were created byearlier decisions. This is the reason why abandoning the commercial purposes of Japanese aid is
impossible if not difficult politically. In this case, Japan’s ODA policy formulation is about60Trinidad, D.

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policies in the ODA loan and grant allocations became imperative to hide its (particularly yenloans’) commercial orientation from criticisms. Moreover, the TDC model has persisted becauseof rents it generated among industries that benefited substantially from this scheme and the set of
institutions that facilitated its endurance and success. As regards the latter, there are two sets ofinstitutions that come to the fore. One is the set of rules that govern the nature of state-market
relations and, two, the institutional rules that govern the sources of funding of ODA loans. The
institutional changes attributed to these two political-economic factors have led to innovative
ODA loans. These will be the focus of discussion in the next succeeding sections.

2.5 The ‘Changing’ Developmental State of Japan and Viability of Aid, Trade, Investment
Synthesis
The success of tying aid with trade and investment can be attributed in part to the abilityof the state, through bureaucracies, to mobilize capital and coordinate industrial policies. In
particular, institutional measures that foster effective coordination between the state and business
are necessary. In Japan, the developmental state system fostered a domestic environment where
government and business could work together towards achieving specific goals. Nonetheless, tosuccessfully coordinate aid with trade and investment, an effective form of state interventionism
is necessary but not sufficient precondition. At the center of government-business coordinationin Japan was the Ministry of Finance (MOF) and the Ministry of Economy, Trade and Industry(METI, formerly MITI). These two occupy the highest position in Japanese bureaucratichierarchy. Beeson (2009) observes that interventionism in Japan has withstood the political andeconomic reforms since the 1990s and will likely remain so as the preferred mode of economic

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governance because of “path dependency, institutional ‘stickiness,’ and the interlocking patternsof political and economic power”.
Painter (2005, p. 336) maintains that a typical East Asian developmental state possesses a
combination of a powerful bureaucracy, incomplete democratic institutions, limited political
freedoms and a dynamic capitalist economy. The Japanese bureaucracy by comparison isrelatively powerful than their western counterparts. However, scholars are divided as to theextent of its ‘real’ power. One perspective contends that “politicians reign while bureaucrats rule”(Johnson 1982). On the other hand, some argue that the power of bureaucracy is overstated(Ramseyer and Rosenbluth 1997). A more popular view holds that Japan is governed by a ‘tripod’leadership of politicians, the bureaucracy and the business community. Whatever thebureaucracy’s true extent of power is, the bureaucratization of the policy-making process
throughout most of the post-war period was undisputedly evident (Pempel 1974).
One of the sources of bureaucratic power is the so-called administrative guidance or the
regulatory, reconciliatory and advisory functions of each ministry over individuals, corporations
and organizations (McVeigh 1998). Through administrative guidance, a ministry concerned can(1) point to illegality of action of a party and requests voluntary action to correct it before
resorting to legal recourse; (2) reconcile conflicting interests and (3) give advice to a party(McVeigh 1998). The threat of a sanction can be used for non-compliance. Administrative
guidance facilitated the relationship between the regulator and the regulated and has createdextensive distributive and developmental networks that tied government with businesses.
Distributive network is formed by the dependency of businesses upon government expenditures
while developmental network is created from government regulation of businesses (Kawabata,2006, p. 37).

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In relation to economic cooperation, two key features of developmental state model thatis relevant is state capacity, which enables political institutions to formulate and carry out
economic policies successfully, and interventionism. In order to work, the TDC model entails
some form of interventionism in the project level. An example is industrial targeting. The state
can identify specific industrial sectors that will benefit from infrastructure projects funded by aid.
There are two characteristics of state capacity that are necessary to achieve the intended goals of
TDC. One is the state’s ability to mobilize resources and two, the ability of the state to closely
coordinate with the private sector in the implementation of economic policies. This condition isreferred to as ‘embedded autonomy’ by Evans (1992) and ‘alliance capitalism’ by Wade (1992).
Hence, the success of coordinating aid, trade, and investment is dependent upon the strength ofstate-business coordination and state’s effective use of policy instruments like control ofpreferential credit. These features were very prominent in Japan especially under the ‘1955
system’.
In a way, when aid is tied to trade and investment, aid turns into some sort of subsidy orform of credit, directly or indirectly, to manufacturers and investors. Two key issues therefore
arise from this assumption. One is the accessibility of funds used to finance ODA loans andgrants to the public sector (viz. government aid agencies like JICA) and, two, the nature andavailability of this fund. In the first place, how are Japanese ODA loans funded? Prior tofinancial reform, funding for ODA loans generally came from two sources: (1) the national
budget, and (2) postal savings fund through the Fiscal Investment and Loan Program (FILP). In
Japan, they are the ‘first’ and ‘second’ budget, respectively. The national budget is prepared by
the Budget Bureau of the finance ministry annually. This task endows the MOF immense
political power and influence. Officials from the Budget Bureau engaged themselves in a very

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time-consuming process (nemawashi) of coordinating and consulting with all other ministries
and government agencies, including aid implementing bureaucracies like JICA.
The FILP, on the other hand, is a system of long-term, low-interest financing and credit
administered by the public sector. Its main objective is to provide continuous public financing
using private funds to sectors where private investment alone would not suffice. Today, the FILP
is utilized for various purposes including financial assistance to small and medium enterprises(SMEs), funding for welfare and medical care, building social capital, financing research anddevelopment of industries, assistance to local government functions, and financing ofinternational finance assistance and ODA loans (FILP Report 2011, p. 11). Prior to its reform,
the funding for FILP is sourced from an integrated fund management, consisting of Trust Fund
Bureau’s funds, the Postal Life Insurance Fund, the Industrial Investment Special Account Fund,and government-guaranteed bonds (Toshiki 2000, p. 2). The largest of these was the Trust Fund
Bureau’s funds which consisted of mandatory transfer of postal savings funds (PSF). The PSF is
the collective savings raised from Japan postal system deposits. It should be noted here that prior
to Koizumi’s postal deregulation, Japan’s postal system did not just perform mail collection anddelivery but also sold insurance and received deposits in the form of postal savings, wiretransfers and money orders. A general post office in Japan therefore was like a bank, aninsurance firm and a courier service firm rolled into one. The government established the Postal
Savings Fund (PSF) in 1875 to “encourage citizens, who were used to feudalistic economictransactions and unfamiliar with capitalism, to save money” (Kawabata 2006, p. 94). A law was
passed in 1947 which defined the PSF’s basic characteristics, types and maximum amount per
depositor. The PSF had steadily expanded throughout the post-war period despite efforts toliberalize Japan’s financial system and tax reforms (Kawabata 2006, pp. 116-17). Although PSF

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consists of funds from the private sector, it is managed by the government and is used for publicfinancing.
Under the Trust Fund Bureau deposit system, the MOF effectively held control of thecountry’s preferential credit through FILP. Prior to FILP reform, the Japanese government (i.e.
MOF) was considered the largest financial institution in Japan (Toshiki 2000, p. 1). Its use ofpreferential credit through FILP funds ensured private sector compliance to national
development objectives. Moreover, the government’s monopoly of preferential credit was further
reinforced by Japan’s highly regulated and closed financial market. Nonetheless, the 1997 Asianfinancial crisis called into question the efficacy of Japan’s developmental state system. The FILP
scheme was one of the targets of neoliberal reforms of Hashimoto and Koizumi cabinets. In
broad terms, these reforms sought for level-playing field in the financial market and an end to‘money politics’. In 1998, the Fundamental Law on the Reform of Government Ministries andAgencies terminated the automatic deposit of postal savings and pension reserves with the TrustFund Bureau’s fund (Toshiki 2000, p. 3). Moreover, the administration of the postal services wastransferred from the now defunct Ministry of Post and Telecommunication (MPT) to Postal
Services Agency (PSA). The PSA was eventually converted into a public corporation called
Japan Post (JP or Yusei Kosha) in April 2003 (Maclachlan 2004, p. 283). The Koizumi cabinet
sought further reform of the Japan Post by dividing them into four units, namely, JP Bank, JP
Insurance, JP Post and JP Holdings and privatizing them within a period of 10 years from 2007.
In 2005, total savings deposited in JP Bank was 214.1 trillion yen or about a third of the totalsavings in Japan at that time. This was also larger than the combined savings deposited inJapan’s four biggest banks (Japan Center for Economic Research, 2005).

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The loser in the new FILP scheme was obviously the Trust Fund Bureau of the MOF
which lost its clout over PSF. Since the reform, FILP funds, as a source of ODA loans, havecontinued to decrease since 2000 (see figure 6 below). Tsuji (interview, 2012) asserts that thiswas because FILP agencies involved in ODA loan programs like JBIC 4 was granted authority toissue their own bonds under the new FILP funding scheme. Shiga (2012, Interview) also notesthat JICA started to issue its own bonds to finance ODA loans in 2008. This changes show thatthe reforms of the Hashimoto cabinet and the postal deregulation of Koizumi’s administration
have the effects of extending flexibility to FILP agencies by allowing them to issue their own
bonds. As a result, these agencies are no longer overly dependent on FILP for funding. Koizumi
pursued relentlessly his postal deregulation plan because he viewed “the postal system as
symbolic of key problems within the political-economic system: electoral corruption, the powerof vested interests over the LDP, and the bureaucratic mismanagement of public funds”(Maclachlan 2004, pp. 309-10). Although the new FILP ended the mandatory transfer of PSF to
Trust Fund Bureau’s funds, Tsuji (2012, Interview) observes that JP Bank deposits are still used
to purchase considerable amount of FILP bonds. As of March 2012, records reveal that of the
195.8 trillion yen assets of the JP Bank, 144.9 trillion yen was in the form of Japanese
Government Bonds (JGBs) which includes those issued by various FILP agencies (JP Bank,
2012). This means that although the financing scheme of FILP has changed, its main source offunding is still basically dependent on deposits from JP Bank.
On top of this, the MOF also underwent organizational changes. In 1998, its supervisory
functions over banks and financial institutions were transferred to Financial Supervisory Agency(FSA, later changed to Financial Services Agency in 2000). These reforms have challenged an

4

ODA loans were administered by JBIC’s Overseas Economic Cooperation Operations (OECO). This was mergedwith JICA in 2008.
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important key feature of Japan’s developmental state particularly on the aspect of governmentbusiness interface which is essential to state capacity. The MOF lost two aspects of state capacitythat consolidated its monopolistic control over finance in the past: (1) access to postal savings
fund, and (2) ability to influence how FILP fund should be allocated. These had profoundinfluence in Japan’s ODA loan allocations and the TDC model in general. One, due to bondissuance capacity, JICA and other FILP agencies have become less dependent on MOFdominated FILP funds. This and the establishment of new JICA in 2008 as discussed earlier
reinforced JICA’s independent status as Japan’s main aid-implementing agency. The
consequence of this was greater leeway in securing funds as well as more autonomy in project
implementation and identification. As head of the new JICA in 2008, Mrs. Ogata also brought
human security to the fore of JICA’s aid agenda.
Furthermore, since funds for ODA loans are in part procured from bonds, it is also likelythat infrastructure financing will remain the top priority of ODA loan allocations because they
are government-guaranteed, thus, regarded as ‘safe’ investments. In short, the new financing
scheme for ODA loans through bond issuance are innovative source of funding that help reduce
financial burden on the part of the national government. This was in line with the Democratic
Party of Japan’s (DPJ) objective of putting an end to ‘wasteful spending of tax money’ andgovernance approach that ‘avoids excessive dependence on fiscal stimulus’ (DPJ Manifesto 2009,2010). The slight increase in FILP allotments for ODA loans under the DPJ leadership from2009 to 2012 (see figure 6) indicates that ODA loans are ‘not wasteful’ spending.

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Figure 6: FILP allotments to ODA Loans, 2000-2012 (in billions of yen)
2000
1800
1600
1400
1200
1000
800
600
400
200
0
2000

2003

2005

2009

2012

Note: Compiled from MOF’s FILP Plan report. Data for 2000 to 2005 include ODA loans and other loan
programs of JBIC. Data for 2009 and 2012 represents FILP plan allotments only for JICA. For further
clarification, see footnote 6, p. 51 of this text.

Moreover, the DPJ leadership has acknowledged the vital role of ODA loans to Japan’s
growth strategy recently in two separate reports published by MOFA and METI in 2010. Unlike
previously where references to TDC were cautiously avoided, the DPJ cabinet was more inclined
to trade western criticisms off for domestic political support than their LDP counterparts. Under
the pretext that ODA loans should be used more strategically and effectively, the ODA Review:
Final Report of MOFA and the New Growth Strategy of METI have once again emphasized thelinkage of aid, trade and investment. The highlights of the ODA Review can be summarized asfollows: (1) Domestic conditions are not favorable to promoting ODA. The fiscal conditions aretight and public sympathy to ODA has declined; (2) There is a need to mobilize all resources tomeet Japan’s development challenges; (3) ODA can contribute to poverty reduction, peace andstability, and supporting sustainable development; (4) In order to make Japan’s limited aid more

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effective, the direction of aid should be clear, the implementation procedures improved, andcoordination among various key stakeholders clarified; and (5) Promote public understanding
and support through increased public participation. Due to heavy emphasis put on sector
allocation and poverty reduction, the 2003 ODA charter might again undergo revision to embody
the changes in domestic and international environments.
The New Growth Strategy, on the other hand, released officially in June 2010, wasformulated by METI to address Japan’s contemporary economic problems. It is a “policy forsupporting Japanese companies’ entry into developing countries with a view to realizing a strong
Japanese economy” (JICA Annual Report 2011, p. 6). It offers 21 national strategic projects
under seven strategic categories for the revitalization of the domestic economy. The sevenstrategic categories are: (1) green innovation, (2) life innovation, (3) focus on Asia, (4) tourism
promotion and local revitalization, (5) Science and Technology/ IT, (6) employment and humanresources, and (7) financial sector (METI 2010). The synergy between ODA and pursuit of thesestrategic, commercial targets was lucidly expressed in sections 4 and 5 of chapter 3 of Japan’s
ODA White Paper of 2011. The report called for more ODA infrastructure projects in regionsthat are ‘increasingly expected to be the target of investment by Japanese companies and that
promote superior Japanese technology’ (p. 42). It also highlighted a type of ODA loan called
Private Sector Investment Finance by JICA which will “provide the funds and financing requiredfor development business implemented by private Japanese companies in developing countries”(p. 43). In addition, ODA loans would be used as well for the deployment of integrated
infrastructure systems to recipient countries. Broadly, an infrastructure pertains to “the resources
required for a society and its economy to function… it is either ‘physical fixed assets’ such asenergy, telecommunications, transportation systems, waste, water, etc., or ‘softer types of69

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infrastructure’, such as information systems and knowledge bases (Kukobat 2010). An integrated
infrastructure system is ‘cost-effective and sustainable’ because it combines both soft and hard
infrastructures. Under this scheme, a loan project for the development of urban light rail would
typically include transfer of know-how and skills from donor to recipient through training
programs so the recipient government would be able to operate and maintain the light rail byitself after the project is completed. This type of economic cooperation would require a mixtureof ODA loans, grants and technical assistance. This combination gives JICA the “ability to
implement package-type cooperation that extends from formulation of development plans toestablishment of hard and soft infrastructure by combining, for example, infrastructuredevelopment projects using ODA Loans and Technical Cooperation and then presenting them asintegrated packages to partner countries as a result” (JICA 2011a, p. 11).
Furthermore, the New Growth Strategy has called for some sort of ‘renewed’ statebusiness cooperation under a new name called Public-Private Partnerships (PPP). The PPP was apolicy recommendation from the Japan Business Federation (Keidanren) and other economic
organizations which urged the government to promote joint public-private initiatives “byapplying private-sector technologies, know-how and capital” and “development of basic
infrastructure with public funds (ODA)” (JICA 2011a, pp. 11-12). Another modality introducedis the so-called Base of the Pyramid (BOP) Business in which “private enterprises use businessprinciples to resolve problems that aid organizations have difficulty in tackling on their own”
(JICA 2011a, p. 12). These two ‘new’ approaches are innovatively rehashed modality based on
TDC. But unlike the latter, the public and the private sector ‘share’ in the cost of the project.
JICA (2011a, p. 12) believes that meaningful ODA-private-sector partnerships to expand
development and growth are desirable for both developing countries and Japan.

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Although based on traditional TDC model of linking aid, trade, and investment, the two‘new’ aid modalities are innovative in some ways. One, aid is not simply employed to assist
Japan’s domestic industries. It also seeks to stimulate a kind of investments that use superior,‘green’ Japanese technology and promote sustainable development in recipient countries whileserving Japan’s growth strategy simultaneously. Two, infrastructure development that isemphasized in the Strategy is not just road, bridge, airport construction, but consists ofdeployment of integrated systems which have more value for recipient’s money. Industrial
upgrading among developed countries like Germany and Japan lately is committed to sustainable
development through the use of ‘green’ technologies. The green innovation that METI identified
as one of the strategic areas of growth strategy is no coincidence. Japan intends to establish
competitive advantage in the use of ‘clean’ and green technologies as a key pillar of industrial
upgrading.
As explained above, Japan’s developmental state has undergone a very stressfulreformation since the 1990s. The Hashimoto and Koizumi cabinets in particular challenged theexisting government-business interface, an essential feature of Japan’s development model, by
introducing ‘selective’ liberalization reforms. The financial sector reforms were intended tocreate a ‘level playing field’ among players and to break the ‘collusive’ relationship between
government and business, the source of money politics. Nonetheless, the reforms have produceda ‘half-baked’ market economy. While funding for FILP is now sourced through bond issuance,
a considerable amount of money used for purchase of these bonds still come from JP bankdeposits (technically, the former PSF). Because of bond issuance, it is also likely that in theory
Japanese ODA would be used to finance ‘feasible’ projects, taking more into account therecipient’s capacity to repay the loan. Otherwise, the government would have to assume the71Trinidad, D.

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losses from non-performing loans. Moreover, trade liberalization is still problematic and noconsensus has so far been reached. The MOF was among the institutional casualties of reforms.
The ministry’s Trust Fund Bureau lost control of PSF, the main funding for FILP prior to reform.
It also lost supervisory power over banks and financial institutions and was transferred to FSA.
Koizumi’s postal privatization was also hampered by DPJ’s leadership which succeeded, withsupport from Koizumi’s fellow LDP lawmakers, in introducing a bill in 2012 that basicallyreversed postal privatization. These changes are indicative of policymakers’ choice of mode of
economic governance – interventionism. As of this writing (December 2012), the LDP has once
again won more than half of seats in the lower house. Radical changes in ODA policy would beless likely under the LDP regime because, as I argued in the beginning of this book, policy
choices are path dependent. On the contrary, some developments in international and domestic
settings have made TDC all the more appealing and conducive.

2.6 Green Innovation, Aid and Renewed State-Business Interface in JapanTo claim that Japan’s post-war rapid economic growth was facilitated in part by a highlyinterventionist state is already a cliché. Japan’s ODA system was developed along this line. The
tying of aid, trade and investment was viable due to a system of triangular relationship among
the LDP, the business sector, which is represented by Nippon Keidanren, and bureaucrats that
had existed since 1955. Arase (1995) exquisitely documented how aid was used as a tool ofJapanese diplomacy to pursue both commercial and political objectives in the 1960s and 1970s.
The close coordination between METI and industrial sector, on one hand, and MOF and financial
institutions on the other had made tying of aid, trade and investment possible. It can be said
therefore that ODA had served both Japan’s industrial policy and diplomatic goals. Nonetheless,72

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this close state-business interface that characterized Japan’s development model has been under
scrutiny since the Asian financial crisis. Government reforms pursued by various cabinets from
Hosokawa to Koizumi sought an end to the collusive relationship and ‘pork’ barrel politics thatthe 1955 system created. Because the system of funding for Japanese ODA is rooted in the heartof Japan’s public and private financial sectors, both the big bang reform and Koizumi’s postal
deregulation law had profoundly affected how Japanese aid was to be funded afterward.
Ironically, these changes have led to a more innovative system of ODA administration both interms of funding sources and actual implementation. The FILP reform discussed above paved theroad for bond issuance as a way to finance ODA loans while the new JICA found innovative
ways to engage the private sector in aid program implementation and to continue pursuingcommercial objectives particularly in the allocation of ODA loans.
If hindsight would serve as guide, Japanese policymakers have a knack in introducing
policies and doctrines that aim to accomplish multiple things at the same time. Think of the
Yoshida doctrine, Miyashita Initiative, Recycling Plan of the MOF, METI’s new AID Plan,ODA doubling plan, Koizumi’s postal deregulation, and Hashimoto’s big bang reforms in thisline. The search for an encompassing solution for Japan’s current socio-economic problems has
been an obsession of sort. The same can also be said of ODA. Policymakers have sought an aid
policy which could circumvent Western criticisms, support Japanese industrial rejuvenation andeconomic growth, contribute to international development agenda, and curb China’s growing
influence in the East Asian region while maintaining state ‘involvement’ in the process. Since
Koizumi left the kantei, interventionism has remained an essential feature of mode of governancein Japan. Contrary to what others have asserted, Japanese capitalism has not completelytransformed into Anglo-American type. State interventionism as a key feature of political and73Trinidad, D.

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economic structures not just in Japan but in East Asia will continue to be preferred because as
Beeson (2009, p. 8) states,.. there are complex dialectical processes at work in East Asia that will continue to shapepolitical and economic structures in the region, and ensure not only that it will continue tolook noticeably different from Anglo-American forms of capitalism, but that something
approximating the developmental state is likely to remain part of it… they are likely topersist as a consequence of path dependence, institutional “stickiness,” and theinterlocking patterns of political and economic power that are such a ubiquitous anddistinctive part of development in East Asia.

Identifying the complex dialectical processes involved in this phenomenon is beyond
what this chapter intends to accomplish. Instead, the paper assumes that domestic processes andchanges in international/regional environment as contextual factors contribute to the persistenceof interventionism. The global economic crisis in the late-2000s, for example, was “seen by
many in Japan to expose the shortcomings of ‘market fundamentalism’ and ‘financial capitalism”(Hatoyama 2009, cited in Okano-Heijmans 2012, p. 342) that gave a strong rationale forrestoring government intervention (Takenaka 2010, p. 3 cited in Okano-Heijmans 2012, p. 342).
While some important policy instruments were lost as a result of financial liberalization reforms,
the role of government in other areas particularly in promoting sustainable development isevolving. There is an increasing realization of late, at least among Japanese policymakers, thatenvironmental sustainability as a main feature of industrial policy offers both strategic andcommercial opportunities (Okano-Heijmans 2012). Together with trade and investment
promotion as tools of Japan’s economic diplomacy, ODA is vital in providing support for
exploring these prospects.

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2.6.1 Green Policy as a Pillar of Japan’s National Strategy and Diplomacy
Environmental sustainability as a key pillar of Japan’s diplomacy was not just a choice of
convenience but also takes into account the country’s “own pollution control experiences and adesire to sustain its role as a technology leader and foster the development of Japan’s own
environmental industries” (Asuka and Zhang 1999; Kim 2009 quoted in Okano-Heijmans 2012,
p. 343). During the high-growth period, environmental and labor hazards arising from thecountry’s rapid industrialization led to nationwide ‘residents’ and ‘citizens’ movements. The
high cost of petroleum in the 1970s had also paved the way for Japan to search for alternative,
renewable sources of energy, most notably, nuclear and solar power. Moreover, the occurrenceof acid rain in Japan caused by Chinese sulfur dioxide (SO2) emissions in the 1980s and 1990s
demonstrated the transboundary effects of pollution and the urgency of a program for theprotection of the environment. Rix (1993, pp. 124-7) notes that environmental aid was one of thepolicy innovations of Japanese aid in the early-1990s
Environmental issues made its way to government’s diplomatic agenda through Prime
Minister Takeshita Noboru who placed climate change high on his political agenda in 1988
(Okano-Heijmans 2012, p. 342). Allocating ODA for the specific purpose of contributing to theprotection of the environment of recipient countries began when Minister Eiichi Nakao of MITI
introduced the Green Aid Plan in a speech in Bangkok (Evans 1999, p. 826). Because green
technologies that help mitigate climate change are expensive, the Green Aid Plan was adopted“to support the diffusion of clean coal technologies aimed at controlling sulfur dioxide (SO2) aswell as energy saving technologies” (Evans 1999, p. 826). It also “provided technological andfinancial support to developing countries in the Asian region for the purpose of environmental
protection and energy conservation” (Okano-Heijmans 2012, p. 345). Evans (1999, p. 828) notes

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that there are three factors that triggered the Plan’s launching: (1) Growing concern on theimpact of acid rain in Japan from China, (2) Increased sense of vulnerability posed to Japan’s
security by the rapid increase in energy demand throughout Asia, and (3) The increasing
constraint posed by Japan’s request-based ODA system, since Japan had an interest in initiating a
range of green projects that otherwise might not have been requested by the recipient country.
The ODA charter of 2003 also declares sustainable growth and addressing global issues such as
global warming and other environmental problems as among the priorities of Japanese ODA
allocation. Public perception toward Japan’s active role in climate change mitigation andpromotion of environmental sustainability was also supportive. In a Public Opinion Survey on
Foreign Affairs conducted by the Cabinet office in October 2007, 58% of the respondents said
that ‘addressing global environmental problems’ was Tokyo’s appropriate role in internationalsociety (cited in Peng-Er 2010, p. 75).
Japan’s evolving ‘green’ diplomacy was not just rooted domestically. It was also part of
the growing global concern over environmental problems arising from rapid industrialization
among developed countries during the early-postwar period. Initially, economic development
and environmental protection were seen as incompatible, a notion that demoralized the economic
development efforts among Third World countries. In the 1970s and 1980s, the international
discourse on the environment centered on reconciling economic development and environmental
protection (Clapp and Dauvergne 2011). One of the most important international dialogues withprofound effects to future environmental discussion was the Brundtland Commission which
produced a report entitled, ‘Our Common Future’ in 1987 which introduced for the first time andpopularized the notion of ‘sustainable development’ (Clapp and Dauvergne 2011).

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By this time, environmental protection would no longer be regarded as a tradeoff foreconomic development. There were other international environmental agreements that were
produced in the 1980s including the 1985 Vienna Convention for the Protection of the Ozone
Layer, the 1987 Montreal Protocol on Substances that Deplete the Ozone Layer, and the 1989
Basel Convention on the Transboundary Movement of Hazardous Wastes and their Disposal.
Clapp and Dauvergne, (2011) also notes that domestic actors, like West German Green Party inGermany, were instrumental in putting environmental issues on the German and the European
Union’s political agenda in the 1980s. In the international scene, world leaders came together in
the United Nations Headquarters in New York in September 2000 to declare their commitment to
reduce extreme poverty and set out specific targets to be achieved by 2015. These goals werelater known as the Millennium Development Goals (MDGs), in which environmental
sustainability was one of the targets identified. Donors also agreed during the Monterrey
Conference of 2002 to collectively direct their aid efforts toward achieving the MDGs.
Tokyo also strived to be at the forefront of climate change issues particularly in thenegotiations of the United Nations Framework Convention on Climate Change (UNFCCC). In
1997, it hosted the 3rd Conference of the Parties (COP3) meeting in Kyoto which produced the
Kyoto Protocol. Intending to become a leader in solar energy, Japan also provided subsidies forthe promotion of solar panel installation in 1994 (Peng-Er, 2010, p. 72). Japanese automobile
industry also made huge strides in producing efficient hybrid and electric cars for the global
market. In 2003, a document issued by Nippon Keidanren entitled, "Envisioning a Vibrant andAttractive Japan" called upon the government to adopt policies that focus, among other things,
on ‘economic environmentalism’ which would enable Japan to “remold its economy around theconcepts of reusing materials and preserving the global environment, [and] fostering industrial

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competitiveness in the process”. This Keidanren vision proposes to combine environmental
protection with industrial rejuvenation and economic growth. In 2009, the New Growth Strategy
adopted Green Innovation as one of the important components of Japan’s economic growth andindustrial rejuvenation.
Thus, policies related to the protection of the environment, hereinafter called ‘green’
policies, have become both a domestic strategy to support industrial revitalization in Japan and apillar of Japanese international diplomacy as a means of enhancing Japan’s status (bothpolitically and commercially) and contributing to the international development agenda. In short,green policies have become the crossroads of Japan’s international relations, economic
diplomacy, and economic growth strategy (Okano-Heijmans 2012). As part of Japan’sinternational relations, green policies are aimed at contributing to global environmental problems
and establishing a leadership role for Tokyo. Although not acknowledged officially, green
economic diplomacy also enables Japan to distinguish its economic activities in Asia andelsewhere from that of China’s which either ignores or discounts environmental compliance inhost countries. As part of Japan’s new growth strategy, green policies help Japanese industries
and manufacturers to establish a niche in the production of superior technology that isenvironment-friendly. The New Growth Strategy identified seven ‘strategic fields for global
standard-setting and for promotion: (1) advanced medical care, (2) water, (3) next generation
vehicles, (4) railways, (5) energy management, (6) contents media, and (7) robots. Pajon (2010, p.
28) stresses that in Japan, industrial interests pervaded even in the area of climate change policy
because of the prevalence of industry-led coalition in the policymaking process. The Nippon
Keidanren in particular (Federation of Japanese Business Organization) had essentiallyconstituted the third leg in the LDP-bureaucracy-business triad in Japan.

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Table 4: ‘Milestones’ in Japan’s Green Policies
Year

Policies Launched or Adopted

1988.

Climate Change in the political agenda of PM Takeshita Noboru

1992.

Launching of the Green Aid Plan

1997.

Action Plan for the Reform and Creation of Economic Structure

2003.

Okuda Vision
METI’s Declaration of Commitment to Development of an Eco-Oriented Nation

2007.

Abe Shinzo’s ‘Cool Earth 50’(Reduce global carbon dioxide emissions by 50% by 2050 and to achieve
Japan’s Kyoto Protocol Target

2008.

Fukuda Cabinet: Cool Earth Promotion Program
Cool Earth Innovation Strategy Energy Technology Program(Towards a low-carbon society)
Cool Earth Partnerships (Aid to developing countries to reduce greenhouseemissions and economic growth

2009.

New Strategy for Growth, Towards a Radiant Japan(To become an Environment and Energy Power through Green Innovation andPublic Private Cooperation
PM Hatoyama’s Initiative (continuation of the bilateral pillar of Cool Earth 50)
PM Kan’s ‘Fast-start Financing for Developing Countries up to 2012’2010.

Achieving Growth through Green Innovation (proposed by Nippon Keidanren)

Source: The Author

In spite of the pro-environment image that the Japanese green diplomacy is projecting,
Pajon (2010) and Peng-Er (2010) notice some discrepancies and inconsistencies in Japan’s green
policies. Both have pointed out the inadequacy of government compliance to the Kyoto Protocol.
As of fiscal year 2011, preliminary figures for Japan’s National Greenhouse Gas Emissions showthat total emissions of carbon dioxide equivalents increased by 3.6% compared to those of the1990 base year. This corresponds to 3.9% increase from fiscal year 2010 (National Institute forEnvironmental Studies 2012). This is contrary to the expected emission reduction efforts that are

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in place. However, Pajon (2010, p. 59) has acknowledged Japan’s generosity in financing efforts
of developing countries to mitigate or adapt to climate change and for mainstreaming climatechange in ODA, particularly in Asia. As a result, green aid (or broadly, assistance for theprotection of the environment, as distinguished from the Green Aid Plan) has become a mainfeature of Japan’s ODA in 2000s. Green aid is innovative for two reasons. One, it can be used toachieve multiple objectives simultaneously including support for international development
agenda (particularly, the pursuit of environmental sustainability under the MDGs), enhancing
partnership with NGOs with environment and sustainable development advocacies, restoring
public confidence in the use of ODA, and providing support for Japanese industrial upgrading
under the PPP and BOP framework. Two, linking green aid to trade and investment also makes
the TDC model more ‘palatable’ and potentially lessens foreign criticisms on Japanese loans. As
Okano-Heijmans (2012, p. 343) observes, “the shift to ‘green’ was strategically motivated having to do with the changing regional and global balance of power, looming challenges ofclimate change and resource scarcity, and foreign pressure”.

2.6.2 From State-led to Partnership: Renewed State-Business Interface
Hence, although the state-business interface that once underpinned the success of Japan’s
developmental state had been discredited by the Asian financial crisis and weakened byliberalization reforms of the 1990s and 2000s, the tying of green aid to trade and investment has
found justification in promoting green innovation. In the past, state capacity had facilitated theeffective coordination between state ministries and the private sector through state control overfinance and close relations between the government and business. Because aid was primarily
linked to trade and investment, Japanese businesses benefitted directly from ODA allocation.

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However, political and economic reforms since the 1990s have gradually undermined thesecapacities, making it increasingly difficult for the state (that is, MOF) to mobilize resources andsupport to promote specific national objectives. Nonetheless, with green policies at the core ofJapan’s emerging domestic policies and international diplomacy, ODA (more specifically loan
programs) is once again being employed to achieve the three-fold goals of economic growth,industrial upgrading, and enhancing Japan’s international/regional profile.
To strengthen coordination between the state and the private sector, semi-public
institutional intermediaries were established recently. Among them include: the New Energy andIndustrial Technology Development Organization (NEDO), Nippon Export and Investment
Insurance (NEXI), Innovation Network Corporation of Japan (INCJ), and Japan Climate Leaders’Partnership (Japan-CLP). The new NEDO (2012) has two-fold missions: one is addressing
energy and global environmental problems and the other is enhancing Japan’s industrial
competitiveness. As of fiscal 2012, NEDO has a budget of JPY123.6 billion. It is ‘Japan’s largest
public Research and Development (R&D) management organization’ and is involved in at least 7
functions including:

Coordination in integrating technological capabilities of private enterprises anddevelopment abilities of universities, and organization of technology development
activities as national projects to realize common fundamental technologies

Provision of subsidies for R&D



Demonstration of Japan’s environmental and energy technologies worldwide to expand
Japan’s presence in the global market, and

Ensuring compliance to Kyoto Protocol mechanisms

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NEXI was established by METI in April 2001 to ‘conduct insurance business in coveringrisks that arise in international transactions (mostly trade and investments) but are not covered byregular commercial insurance’ (NEXI, 2012). It is organizationally under the guidance of METI
and has a capitalization of JPY104.4 billion. By providing insurance to Japanese trade industry
and investors, NEXI in essence minimizes the potential political and commercial risks emerging
from conducting businesses in high-risk countries like in Africa and Middle East. Meanwhile,
the INCJ, a unique public-private partnership organization aimed at promoting innovation andenhancing the value of businesses in Japan, was launched in July 2009. The INCJ was created in
response to changes in the global economy including environmental issues that ‘can significantly
change the nature of industry structure and value chain’. It also provides financial, technologicaland management support in promoting next-generation Japanese businesses (INCJ, 2012).
Japan-CLP is a business coalition that sees commercial opportunities in the pursuit
towards sustainable low carbon societies in Asia. It was set up in July 30, 2009 (Japan-CLP,
2012). In addition to semi-public agencies, new offices were created for the purpose ofpromoting strategic industrial fields, namely, nuclear energy, railways, and water, identified
under the New Growth Strategy’s green innovation. These new offices are: international Nuclear
Energy Cooperation Council created at METI in June 2009, Office of Global Strategy for
Railways Development, which is under Japan’s Ministry of Land, Infrastructure, Transport andTourism (MLIT) and the Water Business International Infrastructure Promotion Office at METI
(Okano-Heijmans 2012, p. 348).
The METI is once again leading Japan’s industrial upgrading and economic rejuvenation,
which is reminiscent of the role of the old MITI played in the country’s industrialization process(Johnson 1982). This time, however, the circumstances are different. Industrial policies have to82

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be crafted in accordance with environmental sustainability and with sensitivity to ‘collusive’state-business interface that characterized Japan’s developmental state in the past. Instead, theidea of Public-Private Partnership (PPP) and coordination through newly established institutional
intermediaries are advanced as a new framework for this interface. How effective the state is in
drawing obedience from industries and manufacturers under this framework will need a separate
study and this paper will not venture into. Nonetheless, from the previous discussion, theframework that built Japan’s state-business interface in the past has been subjected to scrutiny
after the Asian financial crisis. We can assume therefore that the state’s moral ascendancy to leadand guide industries was traumatized by various reforms that were adopted in the 1990s and2000s. If interventionism remains as the preferred mode of governance then, this is a case of‘interventionism with consent’. The Japan-CLP for example is a business coalition whose
membership is ‘voluntary’.
In all of these, economic cooperation plays a supportive role. It should be emphasized
here that in Japan, economic cooperation pertains to ODA and flows of other official funds(OOF). Both JICA and JBIC have expressed support for the New Growth Strategy as reflected in
JBIC’s Medium-Term Business Plan FY2012-2014 released in July 11, 2012 and JICA’s Annual
Report (2012, p.27). The reconstitution of a new JICA in 2008 has left JBIC as the main agency
in-charge of promoting Japan’s commercial and national interests though financial support. JICA
on the other hand is the sole agency in-charge of implementing ODA (in contrast to aid or
financial assistance provided by JBIC). In principle, the former financial assistance is intended tosupport Japanese investments and to ensure undisrupted supply of important raw materials to
Japan. The latter on the other hand, implements ‘official’ aid programs that are either‘developmental’ or ‘humanitarian’ in purpose or both. In fiscal 2011, loan aid constitutes the83Trinidad, D.

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biggest share of JICA’s operations amounting to JPY609.7 billion, while expenses for grant aid
and technical assistance were JPY107.6 billion and JPY188.9 billion, respectively (JICA 2012, p.
21). In support of the New Growth Strategy, JICA’s operations in Asia during that fiscal year
were mainly “focused on cooperation for infrastructure development and institutional
development for the facilitation of trade and investment” (JICA 2012, p. 21). The PPP and the
Deployment of Integrated Infrastructure System are two approaches to facilitate these objectives.
Two financing schemes support PPP and Deployment of Integrated Infrastructure System,
namely: (1) JICA’s Private Sector Investment Finance (PSIF) and (2) JBIC’s Special Terms for
Economic Partnership (STEP Loans). The ODA White Paper of 2011 (pp. 38-39) also
highlighted the so-called ‘program approach’ as a new orientation of Japanese aid in the coming
years. All of these require effective state-private sector coordination to successfully work. The
PSIF is like a two-step loan scheme in which funds are provided (in the form of loans by JICA)
to a private sector in a recipient country (say, a local bank) and afterward loaned to firm/s
operating in that country for the purpose of implementing a development program. It is
implemented by JICA in close coordination with the private sectors in both Japan and therecipient country.
The first Loan Agreement signed under this scheme was with the Asia Commercial Joint
Stock Bank (ACB), a private commercial bank in Vietnam, to finance an Industrial Human
Resources Development Project. ACB in turn will lend capital to Esuhai Co., Ltd. for the
purpose of constructing school buildings and providing human resource training (JICA 2011b).
Esuhai provides training for Vietnamese workforce and dispatches apprentices to Japan. In a way,
the firm assists Japanese companies operating in Japan and Vietnam by ensuring the necessary
supply of skilled workers required by Japanese foreign investments or by supporting projects in84

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recipient countries that can potentially be awarded to Japanese contractors or manufacturers. In
some cases, however, the PSIF is loaned to a private sector in recipient country in the form ofequity investment. A good example of this is JICA’s loan to Pakistan’s First Macro FinanceBank which was signed in March 2012. The PSIF is a new program that was resumed in March2011 after being suspended for ten years.
Figure 7: PSIF Scheme

JBIC’s STEP Loans, introduced in 2002, is a financing scheme that requires procurementof equipment and materials from Japanese companies as a way to introduce Japan's technology
and know-how (Nakazawa 2007). It accounted for 10% of loan disbursements in 2008 (OECD2010b, p. 71). This loan program was somewhat criticized by DAC members because the scheme
provides an incentive to borrowing states by making the loan less concessional if the recipient
opts for an untied loan (pp. 70-71). Hence, STEP loans become more concessional (i.e. low

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interest rate) when it is tied. In addition to these, JICA also implements other schemes with theview to support Japanese businesses in the context of the PPP and BOP discussed above.

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Chapter 3
The Foreign Aid of a Rising Asian Power87

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international aid within its capability so long as its national economy
permits” (Chen Yongcai 1986 cited in Lin 1996, p. 56).

3.1 Introduction
The international aid activities of the People’s Republic of China (hereinafter, China)
have spanned for over six decades. The year 2012 marked the 62nd anniversary of China’s
foreign aid. Thus, it can hardly be considered an ‘emerging donor’ as some scholars have used
the term. In fact, China has longer experience in aid giving than some traditional donors from
Development Assistance Committee of the Organisation for Economic Co-Operation andDevelopment (DAC/OECD, hereinafter DAC). The content of China’s aid programs, beginningin 1950, has changed and diversified over the years, and has continuously adapted to shifting
international landscape, domestic situation, and national objectives. One estimate places China’s
aid volume in 2009 at around US 5 billion dollars (Shimomura and Kobayashi, 2013). Thisaffirms China’s position as one of the largest sources of foreign aid in the world today. The sheer
amount involved in China’s aid program (and still growing annually) is enough to generate both
apprehension and optimism among international aid community.
Perceptions on Chinese aid are mixed. Since it does not conform generally to DAC ideals
and seek only ‘money, access to raw materials, and international politics’, Naim (2007) labeled it,
together with aid from other emerging donors, as ‘toxic’. It is also claimed that China’s aid does
not have any commonality with DAC donors’ aid. If any resemblance exists, Chinese aid has
increasingly followed Japan’s practice of linking aid, trade and investment most notably
beginning the 1990s. But even this aid practice is not considered ‘mainstream’. In fact, it had
been the focus of critical reviews of OECD Peer Reviews on Japan’s official development

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assistance (ODA). The synthesis of aid, trade, and investment or what Shimomura and Ping
(2012) called ‘trinity development cooperation’ is a key converging feature of Asian donors’ aid.
Moreover, like Japanese aid, a huge proportion of Chinese aid is appropriated for infrastructure
projects.
Observers and critics are also divided over the impacts of China’s aid to recipients. On
one hand is the skeptical view that contends that aid from non-DAC donors, including those from
China, could harm traditional donors’ efforts to maximize the welfare-enhancing effects anddevelopmental outcomes of aid. Concerns were also raised regarding the support provided by
Chinese aid on governments of ‘rouge states’ like Sudan and North Korea. Manning (2006, pp.
381-82) adds that there are three risks that come with non-DAC donors’ aid. First, it canpotentially lead to unsustainable debts among Highly Indebted Poor Countries (HIPCs). Second,
without proper coordination with other donors, aid provision by non-DAC donors could lead topostponement of necessary reforms that other donors require before committing financial
assistance. And finally, haphazard appraisal of investments could result to waste andunproductive capital projects. A more optimistic view, on the other hand, suggests that at least
for some recipients, Chinese aid contributed to economic growth, increased export volumes, andhigher public revenues (Woods, 2008; Reisen, 2007). Moreover, if used efficiently, it can also be
an alternative source of infrastructure finance. Apprehension arising from China’s foreignassistance is also driven, in part, by a perception of threat that goes with China’s rise in the
global economy. The ‘China threat thesis’ suggests that a rising power will eventually seek to
use its economic power to strengthen its military capability and consequently challenge theexisting international order. Likewise, some aid scholars and practitioners worry that China andother emerging donors had undermined the international aid’s ‘standard.’

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The apprehension is fuelled further by the fact that China’s external assistance is notably‘different’ in practice and ‘philosophy’ that it poses risks to values and principles (for example,
promotion of good governance, rule of law, and others) that ‘mainstream’ aid (that is, ODA from
DAC donors) stands for. Foreign aid from China and other ‘emerging’ donors have allegedly
undermined the purpose of conditionality which is to improve policies among aid recipients. The
twofold aims of this chapter are to understand China’s aid philosophy from the standpoint of aSoutheast Asian observer and to explain the historical, institutional underpinnings that led to its
formulation using political economy analysis. It advances the contention that China’s aid
philosophy is an outcome of long years of China’s own development experience and is shapedby domestic institutional factors. International structures such as trade regimes, international aid
system, and foreign relations are regarded as contextual factors. It is assumed that in the case of
China, domestic politics and diplomacy are closely intertwined. This chapter is divided into fiveparts. The first section explains the analytical approach while the second part discusses theevents leading to ‘mainstream’ conception of development assistance. In the third section, theforeign policy bases/objectives of China’s aid are explained. The fourth section compares
Chinese and DAC aid. The final section concludes the discussion.

3.2 Aid as an Instrument of Foreign and Economic Policies
As an analytical approach, political economy has several variants derived from major
theories of politics and international relations. Realism views aid primarily as an instrument ofstate power to exert donor’s influence either by persuasion or sanction (that is, denial orsuspension of aid programs). This perspective is particularly interested in understanding the real
motivation of donors. Liberalism, on one hand, holds that aid is a form of economic cooperation

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that seeks to strengthen interdependence and stability through promotion of economic
development. Aid is used to build the necessary social and physical requirements to national
development of recipients. On the other hand, neo-Marxism avers that aid helps Western
capitalist countries maintain global dominance by creating a structure of financial dependence
and exploitation between donor and recipient. Using any one of these variants limits the
explanatory factors that this chapter wants to understand and identify. Thus, for the purpose ofthis study, it is imperative that a political economy framework that takes into account both
domestic and international factors must be designed to enable us to understand morecomprehensively China’s aid philosophy. This means examining China’s motivation in aid
giving as reflected in its foreign policies and studying the nature of its aid programs in order tohave a clearer picture of its principles and what it stands for. The political economy approachassumes that the state is not a single, cohesive unit but is rather composed of various politicalinstitutions. As decisions are assumed to be path-dependent, the choice of aid policies in the pastand the philosophy it upheld is assumed to have a bearing on succeeding decisions.
Together with trade and investment, foreign aid is an important component of economic
diplomacy. As Okano-Heijmans (2012) points out, economic diplomacy has both ‘business end’on one side and ‘power play end’ on the other side of a single continuum. These two represent
the commercial objectives and the political goals of foreign policy, respectively. As an
instrument of economic diplomacy, aid is appropriated to achieve either or both of these aims.
Donors attach varying importance for each. This is where domestic structures come into play –they help shape the aid policy preferences and thus, the donor’s aid philosophy. In the case of
China, three domestic structures are critically important in the formation of its aid philosophy:

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economy.
The system of aid management of donors or what Lancaster (2006) termed as ‘the way
the government organizes its aid’ has significant bearing on the ‘official’ purpose of aid. This
includes institutions or mechanisms that facilitate coordination among aid agencies and to which
agency aid policy formulation is assigned. In some donors, aid issues are debated in thelegislature while in others, legislatures played no role (Lancaster, 2006).
The extent to which civil society groups exert influence on aid policy and the lack or
absence of such entities that advocate for aid-for-development norm is crucial in shaping themanner by which aid is appropriated. Civil society groups like Non-Government Organizations(NGOs) have become ‘favored partners’ of multi and bilateral aid agencies since the 1990s andonwards (Johnson, 2002, p. 89). There are two perspectives as to why this is the case. One, thenegative perception on the role of government in the 1980s pushed aid agencies to partner with
NGOs, which were seen as neoliberal entities (that is, dissociated from state). Two, NGOs are
viewed as a ‘third sector’ that is less bureaucratic than government and more altruistic than thefree market. NGOs are thus, ideal type of organisation that addresses perceived shortcomings ofmarket and state (Johnson, 2002). Lancaster (2006, p. 213) concludes that NGOs have played therole of political constituencies for development aid and have been instrumental in advocating foraid-for-development norm in many DAC donors.
Several scholars agree that the goal of modernization is the top priority of the Chinese
leadership (Saunders, 2006; Shambaugh, 2006; Sutter, 2006; Li, 2010; and Yunling 2010). Li(2010) notes that Hu Jintao has called his foreign policy team to do everything possible inforeign policy to meet the needs of the domestic political economy. To meet the country’s

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growing need for resource inputs, the central government has been encouraging state-owned
enterprises (SOEs) to secure exploration and supply agreements with states that produce oil, gas,and other resources (Cheng, 2012, p. 8). As a tool of economic diplomacy, China’s foreign aid is
likewise expected to serve the goals of national development.
Aside from domestic factors, China’s foreign aid policy has been shaped by international
exigencies. In particular, since the Afro-Asian movement in 1955, China has projected an image
that stresses affinity with the Third World. The main objectives of China’s post-cold war foreign
policy in the 1990s and beyond are to enhance a more peaceful environment for its domestic
economic development, facilitate closer relations with Third World countries, and isolate Taiwan
and foil Taiwanese independence (Lin, 1996). As an instrument of foreign policy, aid is expected
to pursue China’s diplomatic goals as well. Thus, the institutional and contextual underpinnings
discussed above have contributed to the formation of China’s aid ‘philosophy’ and defined its
distinctive features which set it apart from the ‘mainstream’ DAC donors’ aid.

3.3 ‘Mainstreaming’ Aid: The Role of DAC
Most prejudices against non-DAC donors’ aid are shaped by the fact that our basic
notions of what constitute foreign aid nowadays are western. Since its founding in 1961, the
DAC/OECD was instrumental in refining/harmonizing the concept of developmental aid as
distinguished from other forms of economic assistance. In particular, two domains havedominated DAC’s aid harmonization agenda and consensus formation in the post-war and postcold war periods: (1) purposes/ goals of aid, (2) aid quality and effectiveness.
The developmental purpose of aid has been fundamentally shaped by our concept ofdevelopment. For example in the early post-war when ‘vicious circle of poverty’ and ‘poverty

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trap’ were widely viewed as major causes of underdevelopment, U.S. aid was allocated to spur
economic growth, stimulate private capital and to provide the economic platform to enable
underdeveloped countries to gain entry into the system of free trade (Economides and Wilson,
2002, p. 128). In 1949, U.S. President Truman mentioned that international aid ought to beprovided based on: (1) pooling of resources; (2) well-coordinated efforts, and (3) the needs of therecipient (Riddell, 2007, p. 25). As the cold war went to a full swing, aid programs had
increasingly been directed to achieve strategic intents and ‘quickly distorted the initial premises
on which the extension of foreign aid was based’ (Economides and Wilson, 2002, p. 128). The
choice of recipients, the development policies to promote, and the values ingrained in the aid
philosophy of donor countries from the two sides of the cold war camp were anchored on two
conflicting ideologies.
The emergence of Anglo-American capitalism in the early eighties, occurrence of Debt
Crisis, and the subsequent adoption of the so-called Washington Consensus among industrializedcountries gave rise to ‘policy-based’ lending within DAC donors. The idea was to use foreign aid
as a leverage to compel debt-stricken nations to adopt ‘structural adjustment’ programmes,
which were basically neoliberal policies, as part of structural reform. Aid conditionality, hence,
was born. Unwittingly or not, neoliberal policies like trade and investment liberalization,
privatization, and deregulation became part and parcel of development strategies in many
developing countries. By this time, bilateral and multilateral aid agencies had also begun
partnering with NGOs as a new modality of aid delivery.
As the new millennium sets in, the goals of development has become ‘more
comprehensive, embracing all dimension of poverty including income poverty, illiteracy, poor
health, insecurity of income, and powerlessness’ (Goldin et al., 2002, p. 58). Reflecting this new94

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thinking, the focus of aid shifted from growth promotion to poverty alleviation (Saidi and Wolf,
2011). DAC donors also became more willing to pursue a common international aid agenda. It
declared its support for the United Nations Millennium Development Goals (MDGs); pledged toincrease their aid volumes; and to channel these funds for the fulfillment of MDGs (Akiyama
and Kondo, 2003). The DAC also reiterated the crucial role of appropriate policies andinstitutions in maximizing the effects of aid to poverty reduction efforts at the Monterrey
Conference. With this, social infrastructure has become the overarching theme of aid programsof DAC. In 2011, 40.6 per cent of DAC aid disbursements were allotted to social andadministrative infrastructure while only about 15 per cent was appropriated for economic
infrastructure (OECD, 2012b). This is a striking contrast to Chinese aid, as will be shown later,which is appropriated mainly for infrastructure development projects.
On the other hand, overtime, the DAC debate on aid quality and effectiveness has shiftedfrom the issue of ‘how much’ that is, the ideal volume of aid to be provided by donors tocontribute significantly to growth (measured in terms of aid to GNI ratio), to the issue of ‘whatfor’, that is, which programs to support in order to maximize aid’s developmental outcomes. A
measure of great importance that was instituted to ensure aid quality and consistency among
DAC donors was the adoption of a common definition of ODA. The DAC definition contains
three essential elements that make economic assistance qualify as ODA: (1) it is provided
officially by state institution, (2) it is intended for economic development and welfare of therecipient, and (3) it must be concessional in nature, meaning the terms of payment is long, at avery low interest rate and, if it is in the form of loan, must contain a grant element of at least 25
per cent. Military aid and inflow of private funds, such as loans extended by private financial
institutions from donor country do not qualify as ODA.

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DAC donors have also strived to improve the tying status of their aid. The OECDpublishes annually a statistics on each member’s tying status. In 2010, the total share of DAC’s
untied aid was 79.4 per cent. ODA is said to be tied when procurement is limited only tocompanies of donor countries or in a small group of countries. The idea of untying is tomaximize ODA’s effects to development by allowing the recipient government to freely choose,
under a system of fair bidding, the best supplier or contractor required in the implementation ofan aid project. Also important in improving ODA quality and effectiveness is DAC’s practice ofpeer review. In 2008, the OECD published the document, Effective Aid Management: Twelve
Lessons from DAC Peer Reviews. This report contains issues arising from aid experiences ofeach member for the last five years and the strategies to overcome or achieve them. The issues
raised can be generally classified into three: that which pertains to development purpose,management, and focus. Bearce and Tirone (2010) demonstrate the trade-off between strategic
goals and aid effectiveness, arguing that foreign aid can facilitate economic reform that fosters
development only if the ‘strategic benefits associated with providing aid are small for donor
countries’. Thus, aid ‘involves no element of mutuality, bargain or quid pro quo’ (Economides
and Wilson, 2002, p. 124).
From the above discussion and with risk of oversimplification, the current mainstream
notion of ODA can be summarized as follows: (1) Aid flows from rich to poor countries, thus,
the traditional notion of North-South type of aid relations; (2) The use of political conditionality
to bring about liberal values; (3) Adoption of a common DAC definition; (4) Aid apportionment
follows the international aid agenda, particularly MDGs; (5) The goals of aid are based on abroader notion of development; (6) The main focus of DAC aid by sector is social infrastructure;

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become a standard practice in many DAC donors, and (8) The practice of untying aid as a norm.
These ‘standards’ or ‘charity consensus’, as Saidi and Wolf (2011, p. 9) call it, havebecome the main basis of our ‘mainstream’ understanding of what aid ought to be. They also
make non-DAC donors’ aid, including Chinese aid, ‘different’.

3.4 Strategic, Commercial, and Diplomatic Underpinnings of China’s Aid
Although there is no reliable source available that provides accurate time-series data on
the real amount of Chinese aid, most estimates that have been made so far have noted aremarkable increase in its volume since the 1990s (and is still increasing as this chapter is being
written, see figure 8 below). These increases came at a time when China’s economy is expanding
and its political assertiveness is growing particularly in its dealings with East Asian neighbors.
Aid has provided China the luxury of enhancing its influence and the instrument to promote its
strategic interests in East Asia and elsewhere. One example of such growing influence is on
Cambodia. Acting as chair of ASEAN, the country was seen as largely responsible for July 2012
episode in which the ASEAN Ministerial Meeting (AMM) failed to release a customary jointstatement at the end. China followed this up with a military aid agreement signed in January
2013 which commits China to provide military training and to upgrade the military hardware of
Cambodia (Bangkok Post, 2013). While the trend among DAC donors is to refine the definition
of ODA to exclude other forms of financial assistance that are not developmental, theintersection of military, commercial, and developmental goals in the use of Chinese aid canbecome potentially (and dangerously) the trend. This is why, of late, scholars from various fieldsof study have developed great interest in understanding China’s aid philosophy. Such interest in97

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the West is fuelled by the fact that this aid is from a rising power with an authoritarian
government that follows a different (nondemocratic) political ideology, and the fact that therising power is another ‘Asian’.
Figure 8: China’s External Assistance Expenditures in US million dollars

6000
5000
4000
3000
2000
1000
0

Source: Figures for 1990-2005 from Kobayashi (2008, p. 5). Figure for 2009 is based on theestimate of Kobayashi and Shimomura (2013).

China is not an emerging donor in the strictest sense. Its history as an aid provider can betraced back in 1950 after the establishment of the People’s Republic of China, when material
assistance was provided to socialist countries of North Korea and North Vietnam. China’s status
as an aid donor throughout the cold war was unique and nonconventional in a certain way
because development theories assume that international aid would come from advanced
industrialized countries. Aid is traditionally regarded as an economic tool available only to richcountries. China was neither advanced/industrialized nor a rich country. In fact, after the98Trinidad, D.

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communist takeover, the country itself needed capital for its own national development. And yet,due to domestic and international exigencies, aid programs were developed.
During the period between 1950 and 1978, Chinese aid was embedded in a broader
context of China’s cold war strategy and struggle for international recognition. The former wasconspicuous in its early economic cooperation with neighboring Southeast Asian countries while
the latter was evident in its foreign policy towards Sub-Saharan Africa. In the 1950s/60s,
political and security concerns dominated China’s relations with the Southeast Asian region (Ba,2003). The foreign aid appropriated during this time was intended to support national struggles
and nation-building (Zhu, 2008, p. 70). China’s policy of extending support to local communist
insurgents within ASEAN had left a legacy of suspicion and distrust (Ba, 2003, p. 624).
Meanwhile, aware of the ‘one-country, one-vote’ principle at the U.N.’s General
Assembly, China’s aid to Africa during this period (and later, to Latin America) was part of abroader campaign for international recognition and to isolate internationally the Republic ofChina/Taiwan (Lin, 1996). The pursuit of international recognition was highlighted by former
Premier Zhou Enlai’s tour diplomacy of Asia and Africa in the 1950s and 1960s. During his visit
to Mali in 1964, he declared the Eight Principles governing the country’s aid which still apply
today. It is worth noting that Zhou’s declaration also contained the core philosophies that wereadopted earlier in Bandung Conference of 1955 — political self-determination, mutual respect
for sovereignty, non-aggression, non-interference in internal affairs, and equality. These
principles paved the way for the ‘no conditionality/ no-strings attached’ philosophy of Chinese
aid. The PRC’s diplomatic efforts finally bore fruit when in 1971, 26 African countries voted infavor of its membership in the United Nations (Kobayashi, 2008). Lin (1996, p. 52) notes that 3199

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out of 34 countries that received aid from Beijing voted in favor of the Albanian resolution
which expelled Taiwan from the U.N.
The Bandung Conference and the success of China’s aid diplomacy in Africa and Asia ina way demonstrated the potential political power of developing countries in international politics.
This experience also strengthened China’s strong affinity with developing countries and shaped
its relations with Third World countries in general. It also set the contextual factor for theestablishment of ‘South-South’ cooperation modality, which pertains to the ‘mutually beneficial’
resource sharing between developing countries. The decade of the seventies also witnessed theimplementation of various Chinese-funded infrastructural projects in Africa. The largest so far
was the massive Tan-Zam Railway project built between 1970 and 1975 to connect Zambia with
the Tanzanian port, Dar Es Salam. Between 1972 and 1978, twenty-seven countries received aid
commitments from and subsequently established formal diplomatic relations with Beijing (Lin,1996, p. 50).
Table 5: Milestones in China’s Aid-Giving
Year

Programs

1950

Start of material assistance to Democratic People’s
Republic of Korea and Vietnam
Asian-African Conference in Bandung, Indonesia

1955
1956
1964
1971
1978

1990s
1993
1995

Aid to Africa began
The Eight Principles for Economic Aid and Technical
Assistance were adopted
Resumption of legal seat in the United Nations. Major
infrastructure projects in Africa began
Deng Xiaoping’s reform and opening up
Form of aid was diversified, mutually beneficial
cooperation emphasized, aid was aligned to China’s actual
condition
Sources and means of funding aid were diversified
Foreign Aid Fund for Joint Ventures and Cooperative
Projects was set up
Medium to long-term low-interest loans of Export-Import

Principles
Ideology-driven
South-South
cooperation,ideology-driven, cold war strategy
Ideology-driven, cold war strategy
Equality, mutual benefit, and ‘nostrings attached’ as core values
Isolation of Taiwan
National development

National development
National development
Commercial interest and national

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bank of China to developing countries began
development
Technical Training Programs were expanded
2000 Forum on China-Africa Cooperation (FOCAC) was initiatedCommercial interest, Isolation of
Expansion of foreign aid began
Taiwan, and national development
2004- Rapid increase in China’s foreign aid volume
Commercial interest, Isolation of2009 Aid for agriculture, infrastructure, education, healthcare, Taiwan, and national development
human resources, and clean energy were strengthened
Participation in various multilateral/development forums:
UN High-level Meeting on Financing for Development
UN High-level Meeting on the Millennium Development
Goals
Forum on China-Africa Cooperation
Shanghai Cooperation Organization
China-ASEAN Leaders’ Meeting
China-Caribbean Economic and Trade Cooperation Forum
China-Pacific Island Countries Economic Development andCooperation Forum
Forum on Economic and Trade Cooperation between
Portuguese-speaking countries
2010 National Conference on Foreign Aid
Improvement of aid quality
Source: Compiled from “China’s Foreign Aid” (Information Office of State Council, PRC, 2011)

The period between 1978 and 1992 marked the beginning of transition of China’s
economic and foreign policies. In 1978, under Deng Xiaoping’s leadership, the Third Plenum of
the Central Committee of the Communist Party launched the country’s ‘Reform and Opening Up’
policies. The Chinese leadership, in effect, chose to be a trading state as its road formodernization (Zweig, 2008 quoted in Mingjiang, 2010, p. 211). In foreign policy, the toughideological stance of cold war bipolarity was replaced by pragmatism (Li, 2010). During thisperiod, China also began to reach out to democratic countries starting with neighboring states in
East Asia. In 1978, China signed the Treaty of Peace and Friendship with Japan. During his visit
to Malaysia, Singapore, and Thailand, Deng pledged not to export revolution, to develop friendly
relations on the basis of ‘Five Principles of Coexistence’, stop material support to Southeast
Asian communist parties, and not to interfere in other countries’ domestic politics using overseas

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Chinese as excuse (Lu, 2010, pp. 115-35). The latter two were especially major concerns forSoutheast Asian countries with local communist party and with huge Chinese immigrants.
Table 6: The Eight Principles of Chinese Aid
i.
ii.
iii.
iv.
v.
vi.
vii.

Mutual benefit, equality, and ‘win-win’
Respect for sovereignty, No conditionality
Flexible, long-term repayment
Self-reliance and independent economic development
Low-cost but with quick results
Ensure best quality
Facilitate technology transferviii. Equal treatment of Chinese and local experts
Source: Based on Cheng (2012, p. 30)

Indeed, as Li (2010, p. 208) aptly observes, ‘China’s grand transition has been
multidimensional.’ In the international level, China’s isolation during the cold war, the financial
cost of maintaining a global cold war strategy and pursuit of international recognition, and theperiod of rapprochement in Asia were significant contextual factors. In this light, Deng’s 1985
declaration that the world has entered a new era of ‘peace and development’ was viewed by
Saunders (2006, p. 3) as a political justification to reduce defense spending and focus on
economic development. The cold war strategy was cumbersome to the national treasury. China
spent about US 1.1 billion dollars in 1970 alone in the form of aid (Kobayashi, 2008, p.5). If theestimate was accurate, the Chinese government had allotted funds for its aid programs beyond
the economy’s capacity, considering that the nation was also struggling from underdevelopment
problems. This was the peak of China’s foreign aid spending throughout the cold war days.
Succeeding aid budgets were far below this level until the late-2000s.
Domestically, leadership change, the disastrous outcome of Mao’s ‘Cultural Revolution’,and the political legitimacy of the Chinese government were crucial. The latter, in particular, has
become increasingly associated with economic performance (Li, 2010). Nonetheless, when102

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forces of reform threaten to undermine national stability, Chinese leaders were willing to bite thebullet and accept western sanction and criticism if these would be the consequences of restoring
order and stability in a still highly fragile society. This was demonstrated in the Tiananmen
Incident of 1989. Indeed, emphasis on stability in China is first priority of government (Breslin,
2011, p. 1330). While the other countries tried to isolate China thereafter, ASEAN reached out toBeijing (Shambaugh, 2006, p. 26). Japan was also the first to break the impasse on foreign aid to
China which was temporarily suspended after that incident.
The top priority given to modernization required the Chinese government to mobilize
capital (both domestic and foreign). This gave rise to the strategy of pragmatism, whichemphasized practicality. While continuing its foreign aid programs, China received external
assistance from Japan beginning in 1979 and from other industrialized countries. Simultaneously,
China ‘adjusted the scale, arrangement, structure, and sectors of its foreign aid in accordancewith its actual condition’ (Information Office of the State Council, 2011, p. 2). Reflecting theobjective of national development, aid increasingly took a variety of forms during this period
such as contracted projects, joint ventures, and lease management schemes. Aid programs were
pursued in the context of ‘win-win’, mutual benefit, and common development (Kobayashi and
Shimomura, 2013). Moreover, aid volume was drastically reduced. In his study, Kobayashi(2008) found that the level of aid inflow during this period (1978-92) would not reach or matchthe volume it had in the early-1970s and that beginning in 1981, the volume of aid inflow to
China from other donors was higher than the amount of aid outflow from China. Due to aid
budget cuts in the nineties, Lin (1996, p. 55) was skeptical on the vital role that aid would play inBeijing’s policy toward the developing countries in the future.

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The period from 1992 onwards coincides with the country’s objectives of rapid ‘catch-up’
economic growth and reintegration to global economy. Interestingly, there were also some policy
innovations that were adopted during this period. In March 1992, the National People’s Congress
declared that the objective of economic reform was to establish a ‘socialist market economy’. In
the foreign policy realm, the goal was to continue to create a ‘peaceful environment’, that wasarticulated earlier by Deng, which would help facilitate and sustain China’s economic growth.
The ‘China threat’ thesis had also spread like wildfire within international community aroundthis time so, in part, foreign policy was directed to assuage those fears by embanking on theconcept of a ‘peaceful rise’ and by increasing its economic cooperation with developing
countries.
The next two decades, however, would be replete with simultaneous episodes of conflictand cooperation in China’s foreign relations with East Asian countries. The ensuing politicalconfrontation between the Philippines and China over the Mischief Reef in 1995 (Panganiban
Reef in Filipino) and the unified stance of ASEAN toward the issue astounded many politicalelites in Beijing. This episode was contrary to what had happened in July 2012 in Phnom Penh
where a joint statement on the issue of South China Sea (West Philippine Sea) divided ASEAN
leaders.
After the Mischief Reef Incident, China adopted a new diplomatic approach based on‘Good-Neighbor’ and ‘Going Global’ policies and increasingly participated in multilateral
forums and institutionalization of economic cooperation not just in East Asia but also elsewhere.
In 1997, then President Jiang Zemin and ASEAN leaders issued the Joint Statement on ‘Good
neighborliness’. During the fourth China-ASEAN Summit, Premier Zhu Rongji reiterated
China’s support and increase of Chinese assistance to Southeast Asia. In 1999, the Going Global

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policy was launched. The country was finally admitted as a member of the World Trade
Organization (WTO) in 2001. The report of the 16th Party Congress in 2002 provided guidelines
in building ‘good neighborly relationships and partnerships’ (Medeiros 2009) and in 2003, China
and ASEAN signed the Joint Declaration on Strategic Partnership for Peace and Prosperity.
China participated also in various multilateral forums and meetings like ASEAN Regional
Forum (ARF), ASEAN+3, various High-Level Meetings on development and aid conducted by
the United Nations, among others. In 2000, it initiated the establishment of Forum on ChinaAfrica Cooperation (FOCAC), which would become the main platform of China-Africa
dialogues, and co-founded the Shanghai Cooperation Organization (SCO) in 2001 with
Kazakhstan, Kyrgyzstan, Russia, Tajikistan, and Uzbekistan. China also agreed with Japan andSouth Korea to begin the negotiation for a trilateral free trade agreement in late-2012.

3.5 Reorganization and Attempts at Policy Innovations in Aid since 1992
The way the Chinese government organizes its aid explains why commercial interest is
prominent in its aid policy. To effectively carry out the objective of creating a peacefulenvironment required to sustain economic growth, Chinese leaders introduced some policy
innovations in aid on three areas: (1) in terms of funding source, (2) aid management, and (3)financing schemes. Material assistance, grants, interest-free and low-interest loans had been
financed mainly through China’s national budget during the cold war days. The source offunding for Chinese aid has started to diversify beginning in the 1990s. In 1993, using a portionof the repayments from interest-free loans, the Foreign Aid Fund for Joint Ventures andCooperative Projects was set up to support small and medium-sized Chinese enterprises that seek
to build joint ventures or conduct cooperation with aid recipient countries in the production and105

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operation spheres (Information Office of State Council, 2011, p. 3). In 1994, the state-owned
Export-Import (EXIM) Bank of China was established and began providing medium- to longterm low-interest loans to developing countries a year later while funding for grants and interestfree loans still comes from China’s national budget. By creating new source of funds, foreign aid
became less taxing to national government’s annual capital outlay.
In terms of aid management reform, the trend since 2008 has been to enhance interagency coordination mechanism (Cheng, 2012). Overall supervision of bilateral aid including
policy formulation since 2003 lies mainly with China’s Ministry of Commerce (MOFCOM).
Prior to this, material assistance from 1952 was controlled by the Ministry of Foreign Trade(MFT). Following a series of reorganization in 1982, MFT became the Ministry of Foreign
Economic Relations and Trade. This ministry was later renamed to Ministry of Foreign Tradeand Economic Cooperation in 1993 and finally to Ministry of Commerce in 2003. Today, themanagement of Chinese aid is done by a huge bureaucratic organization of the Chinese
government. MOFCOM together with the Ministry of Foreign Affairs (MFA), and Ministry of
Finance (MOF) established a foreign aid inter-agency liaison mechanism in 2008. This was
upgraded later into an inter-agency coordination mechanism in February 2011 to enhancecooperation and efficiency (Information Office of the State Council, 2011, p. 20).

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Figure 9: The System of Management of Chinese Aid

Overall Planning

Policy formulation andproject approval

Implementation(complete projects, technicalcooperation, material aid, andtraining programs)

Application, feasibility studies•National People’s Congress•State Council•Ministry of Commerce (Department of Foreign Aid) incoordination with:•Ministry of Foreign Affairs, Ministry of Finance (formultilateral subscriptions), Export-Import Bank of China(concessional loans), other departments of State Council•Executive Bureau of International Economic Cooperation•China International Center for Economic and Technical
Exchanges•Academy of International Business Officials•State-owned Enterprises (SOEs), China Development
Bank, Export-Import Bank of China, Chinese embassies

Source: Based from Cheng (2012, pp. 5-8) and Information Office of the State Council, PRC (2011)

As China’s economy expands during this period (1992-present), the demand for resources
also increased. Ensuring continuous, adequate supply of resources became the national objectiveof economic diplomacy. This situation had also called for new (perhaps, more appropriately,
rehashed) ideas to tie up Chinese foreign aid programs with other forms of economic cooperation,
including trade and investment. In 1994, minister Wu Yi of Foreign Trade and Economic
Cooperation (the predecessor of MOFCOM), launched the Grand Plan for Trade and Economic
Cooperation which practically tied succeeding Chinese aid appropriations directly to trade andinvestment. Because of the ‘tied’ nature of Chinese aid and its close resemblance to the trinity
development cooperation strategy of Japan first articulated in 1985 by MITI under the New

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Asian Industries Development (AID) Plan, Shimomura and Wang (2012) conclude that China’s
aid has followed Japan’s sanmi ittai strategy of linking aid, trade, and investment. Wang (2013)
further argues that it was actually a product of intensive studies of Japan’s aid.
Although not officially part of the aid process, Cheng (2012) notes that SOEs, including
construction, I.T. (Information and Technology), and mining firms, have increasingly become
influential in shaping China’s foreign aid policy. SOEs involvement in aid programs was driven
primarily by self-interest to profit, particularly in their search for new business opportunities
overseas like resource extraction, investment expansion, and market access (Cheng, 2012).
Jakobson (2009, p. 414) cites that the Chinese government supports SOEs by providing
preferential tax treatment, low-interest bank loans, and foreign exchange access. SOEs also assist
potential recipient countries prepare aid requests, conduct preliminary project assessment, andimplementation of contracted projects. They are instrumental in maintaining the commercial
orientation of Chinese aid by reporting their experiences and enquiries and by providing policy
suggestions to aid officials (Cheng, 2012, p. 9). SOEs have also been a cause of backlash in
China’s global activities by routinely evading environmental and labor regulations likely tointerfere with profitability (Saunders, 2006, p. 29). Other private Chinese firms like labor service
companies have also benefited from China’s aid, particularly in sending Chinese personnel torecipient countries. According to the MOFCOM website, there are 963 of such companies, as ofFebruary 2013, that are qualified to send Chinese workers, engineers, consultant, and experts
abroad.
Another recent policy innovation in Chinese aid worth mentioning is the adoption of a
new financing scheme. The Information Office of State Council of China (2011) writes that oneof the basic features of China’s foreign aid is,108

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adapts its foreign aid to the development of both domestic and international situations,pays attention to previous summarizing (sic) experiences, makes innovations in the fieldof foreign aid, and promptly adjusts and reforms the management mechanisms so as toconstantly improve its foreign aid work.’

One that stands out recently is the so-called ‘Angola Model’, which is a type of commodities-forinfrastructure concessional finance initiated by the EXIM Bank of China in 2004 (Davies, 2010,
pp. 11-14; see also Inada’s case study in this volume). The Angola Model is a type ofconcessional loan structure in which payments are backed by commodities, in the case of Angola,
supply of oil to China. This model has become a common feature of Chinese aid in Africa which,as Davies (2010, p. 14) notes, has set a new benchmark in international lending and compelled
other international commercial banks to offer more favorable terms to compete with China’s
EXIM Bank.
China’s adoption in 2006 of Indigenous Innovation Strategy has linked indigenous
innovation to government procurement (Pan and Zheng, 2011). China introduced the strategy to‘improve its competitiveness in the global economy, promote science and technology
development, and enhance national innovation capacity’ (Pan and Zheng, 2011, p. 44). It
prioritises clean technologies, particularly in key areas like energy, water and mineral resources,and environmental protection. It envisions China as ‘innovation-oriented nation’ by 2020.
Although the strategy is more of a ‘wish list’, it comes with two institutional incentives toencourage compliance of Chinese firms: (1) tax and financial incentives to encouragetechnological innovation at the enterprise level, and (2) linking government procurement toindigenous innovation policy. Due to heavy involvement of SOEs and private Chinese firms toaid programs, the Chinese government may eventually grant preferential treatment to those firmsthat innovate and comply with environmental sustainability in the future.

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3.6 ‘Distinctiveness’ of Chinese Aid from Mainstream Aid
Many scholars, particularly western ones, view Chinese aid as different. Just how‘different’ is Chinese aid from DAC donors? Dismissing it as ‘rogue’ and ‘toxic’ simply because
it does not conform generally to DAC standards is unjustified. What is clear is that Chinese aid
was appropriated mainly for infrastructure and energy development projects in developing
countries (Kobayashi, 2008; Lum, et al. 2009). Economic assistance from China has become an
important source of infrastructure finance especially in Africa (Foster, et al., 2009, p. 11). Basedfrom a document released by China’s Information Office of the State Council in 2011, 61 percent of China’s concessional loans in 2009 were allotted for economic infrastructure. It also
reported that China offers foreign aid in eight forms including complete projects, goods andmaterials, technical cooperation, human resource development, medical missions, humanitarianaid, volunteer programs, and debt relief. As the succeeding section would show, Chinese and
DAC aid differs substantially in four areas, namely, in terms of (1) development purpose, (2)modality/framework, (3) geographical focus, and (4) priority sector. These four collectively
define the distinctive characteristics of Chinese aid from those of DAC donors’ aid.
Contrary to DAC definition of ODA, the Chinese government adopts a concept of aid
that comprises of the total value of overseas contracts, labor exports, consulting services, andnon-financial foreign direct investment (Foster, et al., 2009, p. 9; Zhu, 2010). Nonetheless, China
and DAC donors share some similarities in terms of the form of aid extended. For example, bothprovide grants (including technical assistance) and concessional loans. China, however, offers amore inexpensive type of financial assistance in the form of interest-free loans, which are used
for construction of public facilities and other projects. Interest-free loan has a term of twenty

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years, including five years of use, five years of grace and ten years of repayment (Information
Office of the State Council, 2011, p. 6).
Table 7: Aid from DAC-donors and China
Areas

DAC Aid

Chinese Aid(1) Development
focus/purpose

Socialandinstitutional
underpinnings of development,
Social capital,
Poverty reduction‘Self-reliance’,‘Win-win’,
Physical capital,
Growth in income(2) Framework

North-South cooperation,
Participatory

South-South cooperation,
Mainly state-centred(3) Priority Regions

Strategic, historical importance

Strategic,
diplomatic,
commercial importanceSocial sector/infrastructure

Hard infrastructure(4) Priority Sector
Source: The Author

3.6.1

and

Development Purpose of Aid

Although not well-articulated officially, the disproportionate focus of Chinese aid on
infrastructure development indicates that China puts more premium on the physical capitalrequirement of economic growth. The Information Office of the State Council (2011, p. 4)
justifies that China provides assistance for infrastructure finance ‘to lay the foundation for future
development based on self-reliance and independence’. The DAC, on the other hand, emphasizes
the social and institutional underpinnings of development and focuses on a more comprehensive
notion of development that embraces all dimension of poverty (Goldin et al., 2002, p. 58). Thus,
the political conditionality that is attached to their aid is intended to promote democratic values
and good governance which are found to be conducive for growth (Arvin, Barillas, and Lew
2002, pp. 171-72). By stressing these areas, in a way, DAC donors help build the social capitaland institutional prerequisites of development of recipient countries.

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On the contrary, Chinese aid is usually provided without political conditions and is not
used to promote a specific model of development. Jiang (2011) defends China’s ‘no-strings
attached’ principle of aid by arguing that it was essential to upholding the Five Principles ofPeaceful Co-existence and respecting the recipient countries’ right to independently select theirown path and model of development that is suitable to its unique conditions. Moreover, China’s
focus on infrastructure and the prominent role of SOEs in the aid process is conditioned by its
domestic political institutions. As elaborated above, the main agency in-charge of Chinese aid isalso the lead agency that supervises businesses, the MOFCOM. Hence, the way Chinese aid isadministered allows for commercial interests to dominate. In almost the same manner, thecommercial and diplomatic goals in Japan’s aid policy was the result of inter-bureaucratic rivalry
between MOFA on one hand and MOF and MITI on the other until aid policymaking was
ultimately vested to MOFA in 2008. Aid in many DAC donors is managed by independentagencies that uphold aid-for-development norm and ensure policy coherence. Examples are
Germany’s Federal Ministry for Economic Co-operation and Development and Sweden’s four
aid agencies under the Ministry of Foreign Affairs – Sida, SADEV, the Nordic Africa Instituteand the Folke Bernadotte Academy.
Two, effective aid constituents, either from within or outside the government, that
advocate for aid-for-development norm commonly found in industrialized democratic countries
are still lacking in Chinese political system. Certainly, there are civil society groups in China, but
their ability to exert influence on decisionmaking is rather limited. Political decisions rest mainlyon the collective authority of the Chinese Communist Party (CCP) through the National People’s
Congress although the current leadership is now more amenable to public demands. Other
individuals and societal groups can only play a very marginal role in the process (Li, 2010, p.

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208). In stark contrast, some political parties and NGOs particularly in Western Europe are
advocates of specific development issues like environmental sustainability. The green parties in
Belgium and Germany, for example, were crucial in putting environmental issues in the political
agenda not just in these countries but in the European Union in general. These kind of politicalactors are largely absent or weak in contemporary Chinese politics.

3.6.2

Aid Modality/Framework

China classifies its aid framework based on the so-called ‘South-South’ cooperation. As
such, it prefers to call itself a development partner instead of a donor. By classifying its aid under
this modality, China affirms its ‘affinity’ with the Third World which began way back during its
isolation and participation in the Afro-Asian movement. Since then, aid has become an essential
component of Beijing’s Third World policy (Lin, 1996). This is reflected in the eight principles
of Chinese aid, which are strongly grounded on premises that appeal mostly to developing
countries like equality, respect for sovereignty and non-interference in each other’s internalaffairs, independent development, and no-strings attached principle. Although China’s GDP is
the second largest in the world, it is still a developing country by categorization, with a status ofan upper middle income as of 2013 (World Bank, 2013).
In the traditional sense, the transfer of development finance takes place between
industrialized and poor countries. In the post-cold war period, DAC donors have provided aid fora wide variety of reasons including strategic, commercial, developmental, moral, and otherconsiderations. The World Bank introduced its policy-based lending in the 1980s to induce debtstricken countries to adopting structural adjustment policies. Following the shift in development
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principles and values of western democracy such as human rights promotion, good governance,and democratization (Economides and Wilson, 2002, p. 136). Conventionally, aid-funded
projects had been implemented by governments of recipient countries. In the 1990s, a moreparticipatory modality of aid implementation emerged, featuring civil society groups asintermediaries of international development. Because of grassroots orientation and association
neither with the state nor the market (for being, in principle, not-for-profit organizations), NGOs
portray an image of altruism and flexibility (Johnson, 2002). In 2011, Australia, Denmark,Norway, Sweden, and the United States are among DAC donors that channeled considerable
amount of development assistance to civil society (OECD, 2012b). One issue which NGOs faceis their lack of financial autonomy which often results in a gap in accountability particularly intheir ability to promote projects that reflect the need and preferences of their intended
beneficiaries (Johnson, 2002, p. 92).
In contrast, China’s aid modality has remained state-centered with SOEs, especiallyforeign contract engineering companies (FCECs), playing a central role in the implementation.
FCECs are ‘usually state-owned enterprises in China which undertake public projects indeveloping countries with the help of the Chinese government’ (Kagami, 2010, 4). Saunders(2006) explains that Chinese policymakers see important roles for the state in helping the
economy to develop, more specifically in providing assistance to national firms in securing
access to resources, much like the developmental states in East Asia.

3.6.3

Geographical focus

The determinants of DAC aid allocation are certainly diverse. For some DAC donors thatformerly held colonies in Africa, Latin America, Asia and elsewhere, cultural affinity (including

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language) and colonial ties are major determinants in foreign aid allocation. Schraeder et al.,(1998) confirmed that at least in the case of France, all of the top ten recipients of French aid in
Africa were former French colonies or protectorates. The 2010 DAC Peer Review of United
Kingdom also reveals that eight of the top ten recipients of British aid in 2007-08 were former
British colonies as well. There are donors like Sweden whose aid giving is premised mainly onhumanitarian grounds while economic interests generally predominate in Japan’s choice ofrecipients. In 2010-11, six of the top ten recipients of Swedish aid are least developed countries
or LDCs (Afghanistan, Mozambique, Sudan, Somalia, Uganda, and Ethiopia). Only one, Liberia,of the ten major recipients of Japan’s bilateral aid in 2010 was from Sub-Saharan Africa. LDCs
from Southeast Asia, namely Cambodia and Laos, were ranked seventh and tenth, respectively,
as major recipients of Japanese aid while Afghanistan was third (MOFA, 2010, p. 175). The first
and the second spot went to India and Vietnam, respectively, two countries where Japanese
investments and trade have risen in the last decade. Overall, as figure 10 below shows, a huge
portion of DAC aid was disbursed to Sub-Saharan Africa (37.9 per cent) and South and Central
Asia (20.3 per cent) in 2010-11.

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Figure 10: Geographical Distribution of DAC Donors Aid in 2010-11 (%)
Latin America
and Caribbean,
9.9

Europe, 5.6
Middle Eastand North
Africa, 9.2

Sub-saharanAfrica, 44.8

South andCentral Asia,
20.7
Other Asiaand Oceania,
9.7

Source: OECD (2012a)

Unlike many DAC donors, colonial ties is not a determinant factor in Chinese aid. But if
history would serve as a guide, Sub-Saharan Africa has traditionally been the focus of Chinese
aid. China’s struggle for international recognition, affinity with Third World countries, and cold
war bipolarity were strong motivations in its initial aid activities in Africa. Lin (1996) pointed
out that African countries that voted in favor of China, which in effect expelled Taiwan from theUnited Nations, were rewarded with foreign aid. As a result, Chinese aid in the early seventies
rose. But as China’s economy expands rapidly since the onset of the new millennium, politicostrategic motivation has been mixed with commercial considerations, particularly securingcontinuous supply of important resources and expansion of businesses of Chinese SOEs.
According to the Information Office of State Council of China (2011), by the end of 2009, China
provided aid to 161 countries and more than thirty international and regional organizations. At

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32.8 per cent of the total, Asia is the second largest recipient of Chinese aid in 2009 (see figure
11).
Figure 11: Geographical Distribution of Chinese Aid in 2009 (%)

Latin America
and the Europe
OthersCaribbean
0%
4%
13%
Oceania4%

Africa
46%

Asia
33%

Source: Information Office of the State Council, PRC (2011)

3.6.4

Priority sector

China’s aid priorities by sector in 2009 are obviously concentrated in the economic
infrastructure sector, allotting 61 per cent of the total concessional aid disbursed. This figure
excludes public facilities which if added, would constitute 64.2 per cent. Meanwhile, 29.3 percent was allocated to the production sector which includes energy and resources development,
agriculture, and industry. The remaining 6.5 per cent was allotted to other sectors. In comparison,
33.73 per cent or almost one-third of Japanese aid disbursed in the same year was allocated for
economic infrastructure and services followed by social infrastructure sector at 29.25 per cent. In
2010, Japanese aid allotted for economic infrastructure increased to 49.28 per cent. These figures
reveal (and confirm) that China’s aid is heavily concentrated on infrastructure development and117Trinidad, D.

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closely follows Japan’s emphasis on physical capital requirement of economic development. On
the other hand, DAC donors collectively spent nearly half or 41 per cent of their ODA to social
and administrative infrastructure in 2011 (see figure 2.4). Japan’s aid allotment for economic
infrastructure during this year was the largest among DAC members at 41.5 per cent followed bySouth Korea at 36.7 per cent. It is interesting to note that Asian donors, whether DAC or nonDAC member, emphasize economic infrastructure in their development assistance in contrast to
western DAC donors that focus mainly on social and administrative infrastructure.
Figure 12: DAC Donor Aid Allocation by Sector in 2011 (%)
Administrative
expenses
6%
Humanitarianaid 9%

Other and
unspecified
5%

Action relating
to debt crisis
4%Social andadministrative
infrastructure
41%

Programme
assistance 3%
Multisector
10%
Production
7%

Economic
infrastructure
15%

Source: OECD (2012b)

3.7 Chapter Summary
The brief quote from Chen Yongcai in the opening part of this chapter summarizes quite
succinctly what the foreign aid policy of a rising Asian economic power is like: (1) gaining new
friends/allies while maintaining old ones, (2) enhancing international reputation, and (3) serving
pragmatically the goals of national development. China’s experience as an aid donor is indeed

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long. The pattern of aid disbursement closely followed the national goal of modernization andforeign policy objectives.
The distinctiveness of Chinese aid from the mainstream one is a product of both history
and the ensuing unique domestic institutions that combine socialist authoritarianism and market
principles with international factors serving as milieu of decisionmaking. The focus on Africa
was driven initially by the need for international recognition and cold war strategy and later byrising demand for resource inputs to sustain China’s continued growth. China’s aid is different
because it did not evolve into a pattern similar or approximating those of DAC donors’ aid. It is
not the typical aid that flows from rich to poor countries; it does not attach political conditions; itfollows a different definition of aid; only a small amount is allotted for the fulfillment ofinternational aid agenda, particularly MDGs; the focus by sector is economic infrastructure; itdoes not (yet) use an aid delivery modality that engages civil society groups particularly NGOs,
and; the practice of untying is not (yet) the norm.
Nonetheless, in spite of these, China’s aid is as concessional as those of DAC donors’ aid and it
garnered more appreciation from recipients as Lum, et al. (2009) claimed because it is cheaper,and is spent in a hugely in-demand sector in many developing countries – infrastructure.
Moreover, by incorporating certain ideals (such as non-interference, win-win, independent
development and so on) into its aid philosophy, China has succeeded in making its aid more
‘attractive’ to borrowers.

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Chapter 4
Japanese and Chinese Aid Strategies in Southeast Asia

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4.1 Introduction
In the new millennium, five factors have set the tone of Japan’s aid strategy in the postcold war Southeast Asia. These are: Japan’s compliance to DAC aid strategy which aims tofulfill international aid agenda such as the MDGs and the new emphasis on poverty reduction;
support for ASEAN integration; the value-oriented diplomacy adopted in 2007; and the New
Growth Strategy, launched in 2010. On the other hand, China’s post-cold war aid strategy inSoutheast Asia is defined by its policies of good neighborliness (1997), going out strategy (1999),
the Joint Declaration on Strategic Partnership for Peace and Prosperity with ASEAN (2003) andChina’s western development strategy. These factors have to be viewed in the context ofdomestic institutional changes in both countries and international exigencies that help shape thepreferences of policymakers.
As discussed in details in the previous chapters, in Japan, a new ODA charter was
adopted in 2003. That decade also saw the establishment of new JICA, financial liberalizationand postal deregulation, and the emergence of ‘new politics’; as government officials soughtways to rejuvenate the stagnant economy, address fiscal deficits and the problem of aging. The
Chinese government, meanwhile, declared that Chinese economic reforms were intended toestablish a socialist market economy, reorganized its aid agencies and financial resources, andfound justification for the Chinese Communist Party’s continued rule from rapid economic
growth. As Sutter (2006, p. 290) aptly points out, China’s priority is domestic economic
development, political stability and avoiding major confrontation or controversy in foreign
affairs. These considerations have to be taken into account in understanding Japan’s and China’s
aid strategies in Southeast Asia and elsewhere.

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4.2 Japan’s Aid Strategies
4.2.1

Compliance to DAC aid agenda

The emergence of a new perspective on development in the 1990s has important
implications for Japanese aid which, in contrast, heavily emphasizes infrastructure development,
self-help principle, and geoeconomic interests. The adoption of a broader concept ofdevelopment, support for UN Millennium Development Goals, and commitment for Monterrey
Consensus have led to a more ‘programmatic’ Japanese ODA spending in Southeast Asia,
particularly in the countries of Cambodia, Laos, Myanmar and, to a lesser extent, Vietnam. Japan
has also gradually allotted more funding for civil society organizations, under its grassroots
assistance, and JICA designed a number of schemes to engage Japanese NGOs in its ODA
implementation.

4.2.2

Support for ASEAN integration

The entry of Cambodia, Laos, Myanmar and Vietnam into ASEAN as members has
widened further the economic disparity between them and the older members (Brunei, Indonesia,
Malaysia, the Philippines, Singapore, and Thailand). Regional disparity in the level ofdevelopment impedes ASEAN economic integration because: (1) the economies of member
countries tend to compete rather than complement each other, and (2) it creates obvious winners
and losers since less developed members would not be able to compete equally with moredeveloped members (Yoshimatsu and Trinidad 2010, p. 206). Japan’s support for ASEAN’s goalof correcting the development gaps between its members was first enunciated in the Obuchi Plan
at the ASEAN+1 Summit Meeting in 1999. In 2000, ASEAN launched the Initiative for ASEAN

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Integration (IAI), aimed at ‘narrowing the development gap within ASEAN and between
ASEAN and other parts of the world’.
In January 2002, then Prime Minister Koizumi envisioned a new partnership for Japanand ASEAN in the new millennium during a speech 5 in Singapore. Amidst the various
challenges facing the region — from globalization to problems arising from cultural diversity
and regional economic disparity — Koizumi called for a new partnership based on ‘acting
together, advancing together’ principle. This was followed by the Tokyo Declaration of 2003 inwhich Japan and ASEAN agreed to establish an ‘enduring and dynamic partnership’ in the newmillennium. In the Declaration, Japan pledged to give ‘high priority to ASEAN’s economic
development and integration efforts as it strives to realize the ASEAN Community’ through theuse of ODA. To realize the goals of the Tokyo Declaration, the ASEAN–Japan Plan of Action
was later drawn up, outlining three specific areas for cooperation, namely, (1) cooperation forreinforcing integration of ASEAN, (2) cooperation for enhancing economic competitiveness ofmember countries including investment promotion, and (3) cooperation for addressing terrorism,
piracy, and other transnational issues. Hence, Japan’s support for ASEAN integration and
ASEAN’s efforts to address the development gap among its members constitute Japan’s aid
strategy for the region. These were reiterated in various issues of Japan’s Diplomatic Bluebook.
Japan also supports the efforts of ASEAN in addressing the development gaps among its
members through the IAI during the ASEAN-Japan Commemorative Summit held in Tokyo in
December 2003. As part of rectifying the development gaps, the IAI Work Plan seeks to
implement four priority areas, namely, (1) Infrastructure development, (2) human resources
development, (3) Information and Communication Technology (ICT), and (4) regional economic
integration in CLMV (ASEAN website 2011).
5

A copy of Koizumi’s speech is available in http://www.mofa.go.jp/region/asia-paci/pmv0201/speech.html
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The first phase of implementation of the IAI Work Plan was between 2002 and 2008. For
this period, a total of 258 IAI projects were identified for implementation, 186 of which werecompleted as of October 2009 (ASEAN website 2011). The older members of ASEAN
collectively contributed funding worth US$33.4 million for 177 IAI projects. Singapore provided
34 percent of the total funding. Among the IAI dialogue partners, Japan was the largest
contributor during the first phase. It funded 47 IAI projects worth US$8.08 million. South Korea
was the second largest contributor, providing fund of about US$5.1 million for 7 projects. China
provided US$200,000 for the project, development study for the inland waterway improvementin CLMV (ASEAN website 2011). Japanese-funded projects focused mainly on human resource
development and training. The IAI Work Plan is currently on its second period of
implementation (2009-2015).

4.2.3

Value-oriented diplomacy

In an effort to adopt a more strategic thinking in Japanese diplomacy, former minister offoreign affairs and later Prime Minister Aso introduced the concepts of ‘value-oriented’
diplomacy and ‘arc of freedom and prosperity’ in several of his speeches. In his November 2006
speech at JIIA, Aso clarified his concept of value-oriented diplomacy as ‘placing emphasis on
the "universal values" such as democracy, freedom, human rights, the rule of law, and the market
economy’ 6 . The ‘arc of freedom and prosperity’, on the other hand, pertains to ‘a band ofcountries’ or the network of ‘successfully budding democracies that line the outer rim of theEurasian continent, forming an arc’. Aso specifically cited Cambodia, Laos, and Vietnam as
three of those countries that lie within that arc. Creating the arc of freedom and prosperity meansthat Japan should support the promotion of these universal values as objects of its diplomacy.
6

A copy of this speech is available at http://www.mofa.go.jp/announce/fm/aso/speech0611.html
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These concepts were officially incorporated in Japan’s Diplomatic Bluebook of 2007 (pp. 2-3) asa new pillar of Japanese diplomacy. Aso (2007) added that another role for Japanese diplomacy
was to undertake investments that would precede private-sector investments that would bringabout the so-called "cowbell effect." 7 The value-oriented diplomacy is the basis for some ofJapan’s aid programs such as support for rule of law and aid for democratization in CLMV andelsewhere since 2000s.
After the LDP’s crushing defeat to DPJ in 2009, all references to Aso’s value-oriented
diplomacy and the arc of freedom and prosperity had disappeared from succeeding editions ofJapan’s diplomatic bluebook. Three years later, however, the LDP successfully regained its ruleat the lower house of the Japanese Diet. Taro Aso was again appointed as foreign minister under
the new Abe cabinet. There is a chance that minister Aso would rearticulate these concepts.

4.2.4

New Growth Strategy

The New Growth Strategy was officially released in June 2010 as Japan’s policy “forsupporting Japanese companies’ entry into developing countries with a view to realizing a strong
Japanese economy” (JICA Annual Report 2011, p. 6). It consists of seven strategic categories forpromotion: Green Innovation, Life Innovation, Focus on Asia, Tourism and Local Revitalization,
Science and Technology, Employment and Human Resources, and Financial Sector. The New
Growth Strategy is notable because of its emphasis on ‘green policies’ and innovation. By
making them a pillar of Japan’s industrial revitalization, green policies have become thecrossroads of Japan’s foreign policy, economic diplomacy, and economic growth strategy.
Emphasis on green innovation creates business opportunities and enables them to build a new

7

Keynote Address by Minister for Foreign Affairs Taro Aso "Global Management and the Mission for Japanese
Diplomacy" available at http://www.mofa.go.jp/announce/fm/aso/address0705.html
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niche in the production of superior technology that is environment-friendly. As a pillar of its
foreign policy, it also enhances Japan’s profile in international society. Moreover, emphasis on
green has wide public support. In a Public Opinion survey conducted in 2007, 58% of the
respondents said that ‘addressing global environmental problems’ was Tokyo’s appropriate rolein international society (cited in Peng-Er, 2010, p. 75). A number of projects funded withJapanese aid in Southeast Asia and elsewhere were in line with this goal.
Figure 13: Green Policies as Crossroads of Domestic, Foreign and Economic Policies

Economic
Diplomacy
ODA:
Contribution to
International
Institutions

Green policy:
Environmental
sustainability,

Green aid
programBilateral
ODA

Climate change
Mitigation &adaptation
Industrial
revitalization

Foreign policy
ODA loans
Support for Climate Change
Mitigation and Adaptation &MDGs

Promotion ofGreen technology

Source: The Author

4.2.5

Institutionalization of Japan-Mekong cooperation

In addition to providing aid bilaterally to ASEAN member countries, Japan has engaged
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Dialogues conducted so far, the first was held in Beijing on April 2008 while the fourth was in
September 2011 in Tokyo. In their third Policy Dialogue on the Mekong region, the twocountries exchanged views on the ‘possibility of Japan-China cooperation’. In December 2012, a
cooperation program was finally carried out in which a Chinese instructor participated in the
training courses conducted by JICA Yokohama (Kuroishi 2012, Interview). This third-country
training program, named, ‘Nature Conservation/ Revegetation of Degraded Land in Asia andAfrica’, was conducted for participants from Myanmar, Vietnam and Laos.
Further, while engaging China in the Policy Dialogue, Japan, at the same time, sought toestablish a much more straightforward relationship with downstream Mekong river basincountries through regular high-level meetings and summitries beginning in 2004 (see table 8 fora partial list of these meetings). These initiatives were notable in many respects. First, it wasTokyo’s attempt to deal with CLMV as one group, contrary to the usual bilateral cooperation thatit had with each of them in the past. Second, the reference to the ‘Green Mekong’ concept,‘sharing of values’ or universal values such as rule of law and human rights in summitries andhigh-level ministerial meetings, and reference to the ‘arc of freedom’ are clear efforts todistinguish Tokyo’s approach from that of China’s. The Green Mekong Initiative envisions a
Mekong regional development that is sustainable, one that has ‘rich biodiversity, rich land andwater resources, high resilience to natural disasters, clean urban environment, and lush greenery.’
By focusing on programs that China has difficulty realizing, Japan’s Mekong policy is cautiously
crafted strategically in consideration of China’s rising prominence in the region. Third, thecontents of the programs and priority sectors covered in the talks were reflective of interests ofall stakeholders in the region. This is particularly reflected in the fourth Mekong-Japan Summit
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physical infrastructure, and DAC donors’ emphasis on social infrastructure and fulfillment of
MDGs particularly, environmental sustainability. On top of this, Japan also pledged to provide
approximately 600 billion yen in ODA for 2013-2015 periods.
Table 8: High-Level Meetings and Summitries between Japan and Mekong countries (CLMV)
Date

Event

Provision

November 2004

First Summit Meeting with CLV
hosted by PM Koizumi

January 2007

Third Japan-CLV Foreign
Ministers’ Meeting

US$20 million in assistanceJapan-Mekong Partnership Program

January 2008

First Japan-Mekong Foreign
Ministers’ Meeting

Pledge of US$20 million

November 2009First Mekong-Japan SummitTokyo Declaration was adopted
500 billion yen ODA for 2010-12

July 2010

Third Japan-Mekong Foreign
Ministers’ Meeting

Green Mekong Initiative introduced

October 2010

Second Mekong-Japan Summit

Green Mekong Initiative adopted
Mekong-Japan Economic and Industrial
Cooperation Initiative adopted

November 2011

Third Mekong-Japan Summit

Agreed to establish new pillars forcooperation

April 2012

Fourth Mekong-Japan Summit

Three new pillars were adopted:(1) Enhancing Mekong connectivity(2) Developing Together(3) Ensuring Human Security andEnvironmental Sustainability

Source: compiled by the author from International Cooperation Bureau, Ministry of Foreign Affairs andfrom http://www.mofa.go.jp/region/asia-paci/mekong/fm1207/pdfs/jm05_ap3.pdf

4.2.6

Other Frameworks of Cooperation

Japan also participates in three existing regional cooperation frameworks for thedevelopment of Mekong river basin countries. These frameworks include: (1) ASEAN’s

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Initiative for ASEAN Integration (IAI); (2) Asian Development Bank’s Greater Mekong
Subregional (GMS) Development, and (3) Mekong River Commission (MRC).
The Greater Mekong Subregion (GMS) program, which was launched by six GMS
countries in 1992, is a subregional economic cooperation to “enhance their economic relations,building on their shared histories and cultures, covering nine priority sectors: agriculture,energy, environment, human resource development, investment, telecommunications, tourism,
transport infrastructure, and transport and trade facilitation” (Asian Development Bank 2011).
Since 1992, about US$11 billion worth of projects have either been completed or being
implemented. One very prominent project under the GMS program is the development of
economic corridors which would link eventually the countries of the Mekong subregion. China
has committed to the development of the North-South economic corridor, which will extend
from Kunming, Yunnan, China to Bangkok, Thailand via Laos and Myanmar routes, when it
was endorsed for implementation in November 2002. Japan, on the other hand, has committed tothe development of the East-West Corridor which will extend eventually from Andaman Sea to
Da Nang, Vietnam.
Meanwhile, the Mekong River Commission (MRC) was established in 1995 by Thailand,
Cambodia, Laos and Vietnam. Japan is one of the 14 development partners which contributes
financial assistance to the projects and activities of the Commission while China and Myanmar
are dialogue partners. The mandate of the MRC is to ensure “an economically prosperous,socially just and environmentally sound Mekong River Basin” (Mekong River Commission
website 2012). Being the uppermost riparian state of the Mekong river basin, China’s role inachieving or obstructing this objective is of primary significance. As China’s demand for energy
increased, the Chinese government started constructing hydropower stations in the mainstream

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of Lancang in the 1990s. Several studies warned of the environmental degradation and potential
inter-state conflict that these power stations posed especially to downstream Mekong river basincountries (Go 2004, Roberts n.d.). In 2009, China vehemently denied that its hydropower
stations in Yunnan were the main cause of unusually low water level in downstream Mekong,and that its government “pays equal attention to the development of the Mekong and its
protection” (Ma 2009). The issue prompted Chinese officials headed by Vice Foreign MinisterSong Tao to attend the first MRC Summit held in Hua Hin, Thailand on April 5, 2010 tostrongly reject accusations that its dams in Lancang were the main cause of low water level inlower reaches of the river and to put the blame on climate change.
Aside from bilateral economic cooperation with CLMV and participation/contribution to
GMS and MRC, Japan is also active in other development cooperation schemes with CLMV.
These include participation in (1) the Ayeyawady-Chao Phraya Mekong Economic Cooperation
Strategy (ACMECS), proposed by then Thai Prime Minister Thaksin Shinawatra in 2003.
ACMECS outlines Thais’ economic cooperation programs with CLMV under the South-South
Cooperation modality; (2) The ASEAN-METI Economic and Industrial Cooperation Committee(AMEICC), established in 1998 which assists in the enhancement of ASEAN’s competitive
potential, promotion of industrial cooperation and provision of support for its new members, and(3) JICA-ASEAN Regional Cooperation Meeting (JARCOM) which ‘is a needs-oriented project
formulation support mechanism to promote South-South Cooperation among ASEAN countries
under the technical cooperation framework of Japan International Cooperation Agency (JICA).’

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4.3 China’s Aid Strategies
China’s post-cold war aid strategy in Southeast Asia8 must be viewed in the context of
their relations from a broader historical context. In the 1950s and 60s, China’s external assistanceto Southeast Asia was driven primarily by political and security concerns. Material assistance
was provided to support independence movements and local communist insurgents in Southeast
Asia. With the demise of cold war bipolarity, the emergence of a more stable environment in theregion by 1990s, and China’s goal of modernization, an aid strategy that puts less emphasis on
ideology and more on pragmatism was subsequently developed. I would argue in this section that
China’s aid strategy to Southeast Asia is driven primarily by its historical ‘connection’ with eachcountry and China’s growing demand for resource inputs. The former constitutes the diplomaticand strategic goal of Chinese aid as an instrument of economic diplomacy while the latter
represents the commercial goal behind aid. The two represents what Okano-Heijmans (2012, p.
342) call the power play end, which brings about the political goals of foreign policy, andbusiness end, which represents commercial objectives that advance national interests, of
economic diplomacy. The emphasis on historical connection helps us understand why Chinese
assistance was effectively influential in Cambodia but not so much in the Philippines.
For this purpose, historical connection shall pertain to China-Southeast Asian country’s
historical patterns of relationships. Wang (2006) maintains that China has a divided perception ofSoutheast Asia. In contrast to maritime countries of Brunei, Indonesia, Malaysia, and thePhilippines, the mainland countries have longer patterns of relationship and share strong culturalaffinity with China. The cultural connection has long been gone since Islamization andChristianity (in the case of the Philippines) made their way into the Malay world in 13th and 16th
8

The term Southeast Asia is used interchangeably with ASEAN in this section. Strictly, ASEAN pertains to the
Association of ten Southeast Asian countries while Southeast Asia refers to the region consisting of eleventhcountries (Timor-Leste as the 11 country).
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centuries. Thus, Wang (2006, p. 196) adds, “In its bilateral relations, China has worked hard to
respond to the varying needs and expectations of each of these states.” On the contrary, Lu (2010,
p. 123-24) notes that in the case of Myanmar (Burma) and Cambodia, their relations with China
date back to 2000 years. Myanmar was one of the first few countries that recognized China in
1949 and one of the first to peacefully resolved border issues with China in 1960. China
provided refuge to King Sihanouk in the 1970s when Cambodia was invaded by Vietnam. He
also notes that China and Laos have peacefully coexisted since ancient times and that China
provided material support to the anti-U.S. group, Lao Patriotic Front during the cold war days.
Lu (2010, pp. 128-30) divides China-ASEAN post-cold war relations into three. The
period between 1991 and 1996 was the era of putting in place a comprehensive dialogue
framework. The period from 1997 to 2002 marked the beginning of increased regional
cooperation and mutual trust. While the third phase, from 2003 to present, is the era ofconsolidation and developing strategic partnership. Seeking to gain the trust of its neighbors
following the political confrontation with the Philippines over the Mischief Reef in 1994/95,
China launched its Good Neighborliness policy in 1997 as a Joint Statement by President Jiang
Zemin and leaders of ASEAN. This ‘friendly’ gesture was subsequently reinforced by othersigns of goodwill such as China’s decision not to devalue the renminbi during the Asian financial
crisis and participation in the regional currency swaps under the Chiang Mai Initiative. In 1999,
the Go Global policy was launched to encourage Chinese enterprises to invest overseas and tosecure petroleum exploration and supply agreements (Cheng 2012). During the third phase,
China signed several cultural, political, security, trade, and investment cooperation with ASEAN
as a group. In October 2003, China and ASEAN signed the Joint Declaration on StrategicPartnership and Prosperity during the seventh ASEAN-China Summit. At the same time, China

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was also acceded to the Treaty of Amity and Cooperation (TAC), the first among ASEAN’s
dialogue partner. China has since engaged ASEAN through summits, ministerial meetings,
senior officials and experts meetings, as well as through ASEAN-initiated regional architecture
like ASEAN plus Three (APT), ASEAN Regional Forum (ARF), the East Asia Summit (EAS)and ASEAN Defense Ministers Meeting Plus (ADMM Plus). These bilateral and multilateralengagements are crucial to overall goal of building a peaceful external environment needed tosustain China’s continued economic growth. Bui Truong (2010, p. 170) summarized China’s
rationales in seeking proactive engagement with ASEAN in general:(1)

Facilitate a more peaceful regional security environment critical to China’s

continued economic rise,(2)

Reduce risks from globalization after accession to WTO,

(3)

Allay the China threat perception,(4)

Assist in implementing China’s Western Development Strategy, and(5)Demonstrate China’s regional leadership ability.

Hence, China’s economic activities, including aid, in Southeast Asia have to be viewed in
the context of historical connection and most importantly, China’s Great Western Development 9
strategy that was launched in 1999 in order to address the growing regional development
disparity across the nation. The western region has lagged behind central and eastern regions
ever since the national economy was opened up in 1978. Following the launching of the strategy,
the support of the central government increased and has become more comprehensive (Onishi
2001). Due to proximity of mainland Southeast Asian countries (that is, those located in the
Mekong region), China’s economic diplomacy with these countries was aligned in realizing the9

China’s western region consists of Chongqing, Sichuan, Guizhou, Yunnan, Tibet, Shaanxi, Gansu, Qinghai, Ningxia,
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goals of Great Western Development. Zha (2002 quoted in Bui Truong 2010, p. 168) maintains
that one reason why China agreed to form the ASEAN-China Free Trade Agreement (ACFTA)
was due to its potential to “assist China in materializing the Western Development strategy,
particularly for increasing cross-border trade of the four land-locked provinces of Yunnan,
Guangxi, Sichuan, and Guizhou with Laos, Myanmar and Vietnam”.

4.3.1

Aid Strategy through Attraction

China has made use of both bilateral and multilateral approaches that is, aid as agovernment to government agreement and participation in regional development framework suchas through Asian Development Bank (ADB) and ASEAN. In order to pursue successfully theobjectives of foreign policy, a strategy of making Chinese aid attractive to recipients,
deliberately or unintentionally, has been followed. For example, the incorporation of Five
Principles of Peaceful Co-existence and the Eight Principles of Chinese Aid, which bothemphasize non-interference (as justification for its ‘no-strings attached’ aid), equality,
independent national development, and mutual benefit, contain ideals that many Third World
countries value with great importance. By classifying its aid under the South-South cooperation
modality and by asserting China’s current status as a developing country like them, China
appears to solidify its affinity with developing countries. China also provides a moreconcessional aid in the form of interest-free loans; spends on tangible projects, usually public
facilities of symbolic national importance to recipients (Lum, Fischer, Gomez-Granger andLeland 2009; Kobayashi 2008); emphasizes ‘friendship’ and ‘low profit’ in its contracted
projects (Zhu 2010); and offers a more favorable, non-traditional terms of repayment like thecommodity-for-aid financing scheme introduced in Angola (Davies 2010). These features

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prompted Lum, et al. (2009, p. 4) to claim that China’s aid and other economic activities“garnered appreciation disproportionate to their size”.
To achieve the ultimate end of contributing to national development, aid activities havebeen aligned to assist SOEs in their business activities overseas and in securing essential
materials for China (Zhu 2010; Saunders 2006). The practice of linking aid, trade and investment
has also become more pronounced beginning in the 1990s. In consideration of its Western
Development Strategy and historical connection, the geographical focus of Chinese aid should
logically be the countries of Cambodia, Laos, and Myanmar while its priority sector is economic
infrastructure. In Southeast Asia, Chinese aid was appropriated for infrastructure development,
particularly, the construction of hydropower stations, roads and highways, bridges, public
facilities in Mekong countries (Zhu 2010, 2008) and elsewhere in the region. China’s interest tocontribute more in the construction of hard infrastructure in the countries of Cambodia, Laos,
Myanmar and Vietnam is reflected in the last country report provided by its National
Development and Reform Commission (NDRC) and from the briefing report it presented to the10th Ministerial Meeting of the ASEAN-Mekong Basin Development Cooperation (AMBDC) in
2008.

4.3.2

Aid Strategy through Involvement in GMS Cooperation

Apart from bilateral approach, China has also been involved in the development of the
Mekong sub-region by providing aid through multilateral channels like the Greater Mekong Subregion Cooperation (GMS) of the Asian Development Bank and ASEAN-Mekong Basin
Development Cooperation (AMBDC). The ASEAN-initiated AMBDC was established in 1996
while the GMS was launched in 1992 to enhance the economic relations of Mekong basin

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countries through cooperation in nine priority sectors including agriculture, energy, environment,
human resource development, investment, telecommunications, tourism, transport infrastructure,and transport and trade facilitation” (Asian Development Bank 2011). Together, they constitutethe cooperation development frameworks in the Mekong sub-region. Several prominent Chinesepolitical figures like Mr. Qiao Shi in 1993, Vice Premier Jiang Chungyun in 1996, then President
Jiang Zemin when he signed the joint statement on ‘Good Neighborliness’ with ASEAN leadersin 1999, Premier Zhu Rongji during the fourth China-ASEAN Summit, and Premier Wen Jiabao
during the second Summit of the GMS in Kunming in 2005 had encouraged China’s active
participation in the GMS framework of ADB. The Chinese government also hosted ministerialand summit meetings with other Mekong countries under the two frameworks.
As of 2008 under the AMBDC framework, China had been actively involved in five key
sectors — transportation, energy and power, human resource, health, and rural development(NDRC briefing 2008). In the report, China expressed interest in the construction of SingaporeKunming Rail Link (SKRL) and provided funds of about 20 million RMB for the conduct of afeasibility study on the eastern route of SKRL which would connect Bat Deng and Loc Ninh.
Chinese government also incorporated the SKRL projects to its Mid- and Long-Term Railway
Network Plan (NDRC briefing 2008). In the power sector, more feasibility studies were carriedout to improve regional power grid interconnection, power transmission and distribution. China
also pledged to offer more scholarships for GMS countries to study in its western region andexpressed its interest to broaden cooperation in the health sector between China and ASEAN,
particularly on cross-border contagious disease prevention and control. It also unveiled its planof constructing 1500 rural household bio gas-generating pits for its ASEAN neighbors. Moreover,
the NDRC Country Report of 2008 highlighted China’s efforts in connecting its western region,

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particularly Yunnan and Guangxi, to Southeast Asian Mekong basin countries by supporting
financially the construction of North-South corridors and highways under the GMS cooperation.

4.4 Japanese and Chinese Aid to Southeast Asia
First of all, the usual caveat that applies to the study of Chinese aid also applies in thissection. Due to very limited primary sources on Chinese aid, I have to rely on both primary and,to a greater extent, secondary sources for data. The primary sources include the 2011 publicationof the Information Office of State Council of China on China’s aid, China Statistical Yearbook
when available, and data from website of China’s Ministry of Commerce and China ExportImport Bank. Secondary sources of Chinese aid are mostly Japanese sources including
publications from JICA, IDE-JETRO, and various academic publications of Japanese scholars.
Data for Japanese aid are conveniently available from Ministry of Foreign Affairs’ White Paper
and JICA Annual Reports.
In terms of volume, the total amount of Japanese aid is almost thrice as large as Chinese
aid in 2009. Kobayashi and Shimomura (2013) estimate the volume of Chinese aid to be aroundUS5 billion dollars while Japanese aid allotted in the same year was about US14.8 billion dollars.
A comparative overview of how their aid was appropriated is provided in table 9 below. China’s
foreign aid is concentrated mainly on less developed members of ASEAN, namely, the Mekong
countries of Cambodia, Laos, Myanmar, Vietnam and less advanced maritime countries ofIndonesia and the Philippines. Figure 10 below, on the contrary, reveals that Japan had
consistently disbursed huge amount of loans to the three most populous states within ASEAN,
Indonesia, the Philippines and Vietnam, while Cambodia and Vietnam received considerable
amount of grants and technical assistance in the period shown. Table 9 also indicates that China

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is a major donor to both Myanmar and Cambodia. While Japan’s ODA to Cambodia was focusedmore on grant programs, China’s aid was largely in the form of loans (interest-free andconcessional).
Table 9: Chinese and Japanese aid to selected ASEAN countries, (various years in US dollars)
China
Japan
Cambodia:
Grants (2000-09) 204.41 million+
1018.7 million (includes Technical Assistance)
Interest-free loans (2009) 74.80 million+
None
Concessional loans 500.00 million+
60.81 million (ODA loans)(2000-08)
Laos:
FY2000-08 123.47 million^
768.44 million
Myanmar:
FY2000 186.70 million*
51.78 million*
FY2005 289.80 million
25.49 million
Vietnam:
FY2000 87.50 million*
923.67 million
FY2005 299.20 million*
602.66 million
Indonesia
FY2005 534.60 million*
1223.13 million
Philippines:
CY2008 (Jan.-Dec) 1110.00 million#
470.68 million
Sources: *Kobayashi (2008); +Chap (2010); ^Syviengxay (2010); #National Economic and Development
Authority, Philippines (NEDA) (2008); Figures for Japanese aid are cumulative consisting of grants,
technical assistance and loans for each year, compiled by the author from various edition of ODA White
Paper

China’s historical connection with CLMV as well as its interest to successfully develop
its western region as discussed above provides implicit reasons for Chinese aid appropriation in
those countries. Nonetheless, the case of the maritime countries (the Philippines and Indonesia)
requires further elaboration. It can be argued that at least in these two cases, Chinese aid carried
explicit strategic/diplomatic and commercial/economic goals. China’s aid strategy was part of abroader effort to improve bilateral ties with both countries following years of hostility andsuspicion in the past. China’s support for local communist insurgents in Southeast Asia in the
1950s/60s had left a legacy of distrust in Indonesia during the Suharto era and in the Philippines
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when the Maoist-based Communist Party of the Philippines (CPP) was formed in 1968.
Unresolved territorial disputes between China and the Philippines had occasionally led tosevered bilateral relations. Table 9 indicates that, for a while, the Philippines seemed to be thelargest beneficiary of Chinese aid in the region. While difficulties in their bilateral relations
remain, economic interdependence has progressed. In 2011, China is the third largest trading
partner of the Philippines after the United States and Japan with trade volume amounting to US
12.3 billion dollars (NSCB website). Many cooperation deals were also signed after 1999
especially in agriculture sector.
Figure 14: Japan’s ODA to selected ASEAN members (2006-10 in US$ million)
7000
6000
5000
4000

2010
2009

3000

2008
2007

2000

2006
1000

Laos

TA

GrantsTA

Loans

GrantsLoans

TA

GrantsLoans

TA

GrantsTA

Loans

GrantsLoans

TA

GrantsLoans

TA

GrantsTA

Cambodia

Loans

GrantsLoans

0Myanmar Vietnam Indonesia Malaysia Philippines Thailand

Source: Compiled by the author from various issue of Japan’s ODA White Paper

Since 2000s, China has offered financial assistance in various forms to the Philippinesfrom humanitarian aid for typhoon victims to grants and concessional loans. A number ofprojects funded supposedly by loans from China were monumental including the US 329.5
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million dollars allotted for Philippine National Broadband Network (NBN) project and the US
400 million dollars, which represented the first tranche of loans to finance the North Rail project.
But while Chinese economic cooperation helped to cement ties with Cambodia, as a form ofChina’s regional ‘charm offensive’ it failed in the Philippines. Instead, the two Chinese flagships
in the Philippines were mired with controversy which culminated to the filing of three graft cases
against former president Gloria Macapagal-Arroyo. Moreover, China’s increasingly aggressive
stance toward the South China/ West Philippine Sea has been viewed widely among Filipinos as‘creeping invasion’ of the Philippine sovereignty.
In stark contrast, although concentrated largely in Vietnam, Japanese aid to Mekongbasin countries from 2006 to 2010 was more balanced, when counted in terms of number ofcases/projects rather than by volume, and reflected the interests of all stakeholders in the region.
Figure 11 below indicates that, during this period, Japan gave high importance to international
aid agenda in its ODA allocation to CLMV. Of the 228 cases, support for projects related toclimate change adaptation/mitigation and basic human needs collectively represented 34 percentof the total. This is almost comparable to the sector that traditionally received high priority inJapanese aid, infrastructure, at 35 percent. The JICA Annual Report of 2012 (p. 29-30) declaresthat social and economic structure would remain the top priority of Japanese ODA to Cambodia
as the country seeks to integrate itself to ASEAN. For Laos, “JICA’s aid approach is centered on
support for the achievement of the MDGs and for building a foundation for economic growththat will be a driving force for the country’s self-reliant and sustainable growth” (p. 30).
In light of the on-going political and economic reforms in Myanmar, Japanese ODA
would be used to support the reform efforts of its government and to enlarge the scope of Japan’s
aid programs while continuing the existing priorities on supporting basic human needs. The

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sectors under consideration for inclusion are health, agriculture and economic infrastructure(JICA Annual Report 2012, p. 30). In the case of Vietnam, JICA maintains that Japan’s ODA
would be used to support the country’s goal of improving national competitiveness and support
for the creation of strategic industry. Vietnam is also the only country among CLMV to receive
ODA under the PPP scheme for its Lach Huyen Port Infrastructure Construction Project and thefirst to receive ODA loan for satellite procurement (p. 30).
Figure 15: Japanese Aid to CLMV by Priority Sector (project-based, 2006-10)

Hard and soft
Infrastructure

0%
31%

35%

Climate change
adaptation/mitigation
Basic human needs

21%

13%
Assistance for NGOs/ andgrassroots projects
others

Notes: hard and soft infrastructure includes scholarship grants; Climate change mitigation includes floodmitigation related projects; Basic human needs include MDG targets. Source: Compiled by the author
from MoFA data, excludes technical cooperation projects.

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Chapter 5Some Policy Implications and Conclusion

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5.1 Implications to Japan’ Aid
Although some JICA staffs are more interested in developing aid cooperation with China,
it is notably evident that Japan’s aid strategy has responded to China’s rise as a non-DAC donor.
Although not articulated as the ‘official’ response, there is an on-going formulation of an aid
strategy in Japan that seeks to strategically differentiate Japanese aid to Chinese aid in terms ofvalue orientation, modality, and process and to enhance Japan’s competitiveness in the light ofChina’s cheaper economic assistance. The ODA Review Final Report (2010, p. 3) released by
Japan’s Ministry of Foreign Affairs emphasized that the increasing competition from emerging
countries (including China, though not specified) and increasing competition for markets andresources have eroded Japan’s international presence. The Report also mentioned that thedomestic situation in Japan was not favorable to ODA expansion. Hence, it was recommended
that ODA allotments from 2010 should be more ‘strategic and effective’.
5.1.1

Emphasis on ‘green aid’

The launching of the Green Mekong Initiative and the Green Innovation incorporated in
the New Growth Strategy gives credence to Tokyo’s image as promoter of environmental
sustainability in stark contrast to Chinese firms that evade environmental compliance to achieve
maximum profitability. China faces gargantuan tasks of reducing carbon emissions and otherpollutants from industries, vehicles and households.
5.1.2

Value-oriented aid strategy

The emphasis on value-oriented diplomacy, first introduced by Taro Aso in 2006, clearly
capitalizes on universal values such as human rights, democracy and rule of law where China has
difficulty realizing.

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Comprehensive new scheme that combines loan, grants, and technicalcooperation

The intense competition that DAC and multilateral aid face from Chinese aid especiallyover contracts for infrastructure projects in developing countries has led some donors, like Japan,
to focus on quality and ‘value for money’, which includes use of superior technology and highgrade materials, as selling point. Against this backdrop, in Japan, the New Growth Strategy
recommended a ‘package of infrastructure-related system export’ or the “strategy to expand
Japan’s overseas involvement in the infrastructure field that is based on public-private sector
collaboration” (JICA Annual Report 2011, p. 11) was launched in 2010. Japan also promotes the
deployment of integrated infrastructure systems which combines hard and soft infrastructure andmixes loans, grants and technical cooperation.
5.1.4

Adoption of ‘triangular cooperation’ or Japan’s version of South-South
cooperation

Coincidental or not to China’s rise as South-South development partner, Japan’s own
version of South-South Cooperation, the so-called Triangular Cooperation, has come to the fore
recently as one of JICA’s aid strategy under its Partnership Program (JICA News from the Field
2010). South-South cooperation pertains to ‘sharing of resources, technology, and knowledge
between developing nations’. As of November 2009, JICA reported that it has concluded
Partnership Programs with twelve countries: Singapore, Thailand, Egypt, Tunisia, Chile, Brazil,
Argentina, Philippines, Morocco, Mexico, Indonesia and Jordan.
5.1.5

More favorable terms and conditions for Japanese ODA

In part, developing countries were attracted to borrow from Chinese aid due to its morefavorable terms and conditions. Apart from grants and concessional loans, China offers interest-

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free loans which can be used as infrastructure finance. In fiscal 2006, the Government of Japan
introduced the Minimal Interest Rate Initiative (MIRAI) for low-income countries which offers
nearly zero percent interest rate (at 0.01 percent). MIRAI is intended for the most impoverishedcountries in Africa, where Chinese aid is geographically concentrated.
5.1.6

Improving the ODA process

It was observed in one study that Chinese assistance “are often made available relatively
quickly and easily without the political, economic, social, and environmental conditions andsafeguards and bureaucratic procedures that major OECD aid donors, multilateral financial
institutions, and multinational corporations typically impose” (Lum, et al. 2009, p. 4). An
interview with a researcher from JICA Research Institute reveals that there is a need to shorten
the ODA process from conception to implementation due to some complaints about the long
period it takes (Shiga 2012 interview).
5.1.7 Establishment of ‘Pro-Japan’ Group
Japan’s aid differentiation strategy is evident in its recent plurilateral diplomacy with
Mekong countries in the new millennium. Plurilateralism 10 refers to a small group of selectcountries that cooperate to address specific issues. Since 2004, the Japanese government has
sought ways to engage the Mekong countries collectively in a more straightforward manner. The
ODA White Paper justifies that such engagements and their subsequent institutionalization were
aimed at enhancing Japan’s efforts to contribute more effectively to ASEAN integration byaddressing the development gap between its members. Except for Thailand and Vietnam, theeconomic significance of CLM to Japan’s economic interest in Southeast Asia is much lessevident. A BRC Research Report (2010) showed that in 2008 China was the largest trading
partner for CLV while Japan came in third behind South Korea. Japan is neither the largest
10

Some scholars like Bayne (2010, p. 205) add a qualifier, ‘like-minded states’ to the definition.
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investor in CLMV. The same report showed that the accumulated Japanese FDI inflow from1995 to 2008 to Cambodia was nil at 0.6 percent of the total while that of China was 24.5 percent.
For Laos, Japan’s accumulated FDI inflow from 2001 to March 2009 was 4.4 percent compared
to China’s 15 percent. Thailand is the largest investor in the country with 34.3 percent of total
investments. It is only in Vietnam where Japanese FDI inflow is significant. Up to October 2009,
Japan’s accumulated FDI inflow to Vietnam was 10.2 percent of the total compared to the 12.2
percent of total investments from its largest investor, Taiwan.
Thus, it can be said that Japan’s economic cooperation with CLMV has more strategicand diplomatic relevance. As one MOFA official admits, Japan’s Mekong strategy is intended toestablish a ‘pro-Japan’ group in the Southeast Asian region (Kuroishi 2012, Interview).

5.2 Implications to International Aid Community
Cheng (2012, pp. 24-26) admits that Chinese aid deviates from DAC-accepted principles
of aid giving in four counts — deviation from conditionality, untying, debt sustainability, andtransparency. This set of aberration has put Chinese aid as well as those from other emerging
donors in the limelight of debate within international aid community recently (see Woods 2008;
Reisen 2007; Manning 2006). While there is so much to improve on the quality and effectivenessof non-DAC donors, there are major concerns that DAC donors have to reconsider too:
5.2.1

Economic or social infrastructure, which should be aid’s top priority?

Non-DAC donors like China, Brazil and India ARE developing countries. As such, aid
strategies would be shaped logically by their desire to develop economically. This explains why‘win-win’ and ‘mutual benefits’ typically underpin their aid ‘philosophy’. Western donors should
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since many of them were born) as ‘measure’ of the country’s economic success even though thismanner of assessment is, at best, fallacious. Since politicians in developing countries areinterested to show tangible results to the public for whatever purposes they may serve them, they
will naturally seek foreign aid to finance infrastructure projects. The point here is that, DAC
donors should reconsider giving priority to economic infrastructure in their aid appropriation in
an equal manner that they assign for social infrastructure. DAC can help recipients identify
which economic infrastructure will give the maximum benefit to their development effort.

5.2.2

There is complementarity between DAC and non-DAC donors

China’s focus on economic infrastructure complements DAC donors’ emphasis on social
and administrative infrastructure. The rise of non-DAC donors provides more choices todeveloping countries in securing much-needed capital for national development.

5.2.3

High-level clarity of aid’s development purpose

Perhaps the strongest neoliberal argument against aid effectiveness is that since it consistsof public funds, aid is inherently political (Economides 2002, p. 130). As such, thestrategic/diplomatic goal of aid takes precedence over its developmental purpose. And as Bearce
and Tirone (2010) found in their study, foreign aid effectively promotes economic reform and,
thereby, economic growth when “strategic benefits associated with providing aid are small for
donor governments”. It is therefore imperative that donors (both DAC and non-DAC) to define

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clearly the development purposes of their foreign assistance in the highest political level as
possible. As emphasized in an OECD Report (2008), one way to do this was through legislation.
5.2.4

Develop more favorable terms of repayment

Least Developed Countries (LDCs) borrow because they are strapped of cash. Other
donors should take China’s commodity-for-infrastructure scheme introduced in Angola as achallenge to develop more favorable (and maybe innovative) terms of debt repayments.

5.3 Conclusion
The study found that the aid policy of two major Asian donors, Japan and China, wereshaped by changes in domestic institutions and fashioned by international exigencies. As amature economic power, Japan’s ODA was characterized by innovation to effectively pursue (1)the international aid agenda defined in the context of UN MDGs, (2) rejuvenation of industries
and Japanese businesses as part of New Growth Strategy to address the stagnant economy, and(3) the strategic goal of limiting China’s growing influence in the region.
Amidst declining Japanese ODA budget and deteriorating public support for continuing
its aid programs, a new ODA charter was adopted in 2003; new development goals reflecting the
new broader perspective on development such as poverty reduction, education, addressing
human security and environment sustainability issues were highlighted. The implementation of
ODA projects was also transferred to a new JICA in 2008 while inter-bureaucratic rivalry over
ODA policy ended when MOFA was finally designated under the ODA reform as the main
agency in-charge of ODA policymaking. These changes have led to increased grant allocation
for social infrastructure, climate change mitigation/adaptation, support for rule of law, anddemocratization in Southeast Asia particularly CLMV recently.

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On the other hand, the brief quote from Chen Yongcai in the opening part of chapter 3
summarizes quite succinctly what the foreign aid policy of a rising Asian economic power islike: (1) gaining new friends/allies while maintaining old ones, (2) enhancing its international
reputation, and (3) serving the goals of economic development. China’s experience as an aid
donor is indeed long. As an instrument of economic diplomacy, its aid disbursement patterns
underwent transformation from advancing political and security concerns to serving a mixture of
diplomatic, strategic and economic intents.
The volume of Chinese aid has increased dramatically annually since 1992. The gap in
the amount of aid between some members of DAC and China is closing. However, if compared
to a major donor, for example, Japanese aid, whose volume was around US14.8 billion dollars in
2009, Chinese aid is still small. Nonetheless, it was much more appreciated by many recipientsas Lum, et al. (2009) claimed because it does not carry any political conditionality, is cheaper,and is spent in a hugely in-demand sector in many developing countries – infrastructure. Two,
Africa is a geographical priority. China has allotted funds in several sub-Saharan Africancountries which would not qualify to receive assistance, much more loans from DAC donors due
to human rights record, debt sustainability issues and the likes and finally, economic
infrastructure is the top priority sector.
For ASEAN, Chinese and Japanese economic aid to CLMV is necessary in order toachieve the goal of rectifying the economic disparity between ASEAN members. This goal isimportant to ASEAN integration and a good opportunity for ASEAN to engage both Asian
donors constructively for the development of the sub-region and the Southeast Asian region as awhole.

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More specifically, for China, foreign aid to Mekong countries also serves its Western
Development strategy, particularly the provinces of Yunnan and Guangxi. As such, the politicaland economic stability of CLMV is advantageous to China and its expanding economy. This ismanifested by China’s emphasis on energy sector, specifically hydropower stations andinfrastructural projects which would link Yunnan to the countries south. The diplomatic goal of
China’s broad economic cooperation with CLMV is intended to demonstrate its policy of ‘goodneighborliness’. For China, it is an opportunity to demonstrate its long-term benign intentions to
the region. Economic cooperation is also a way to allay the ‘China threat perception’.
Nonetheless, with increasing assertiveness in the South China/West Philippine Sea, China’s
relations with maritime countries like the Philippines has went down to an all-time low.
For Japan, economic cooperation with CLMV is a demonstration of its desire to remain
relevant by supporting ASEAN goals and aspirations in the belief that, in the long run, politicaland economic stability of the region is beneficial to Japan. However, Japan has to take into
account China’s growing political and economic clout in the region in its Southeast
Asia/ASEAN policy. To some extent, Japan’s development assistance to CLMV is intended toprevent these countries from relying too much on China’s economic assistance.
Japan is still undisputedly the largest source of foreign aid to Southeast Asia including
CLMV although it was observed that China’s foreign aid has also expanded. Japan’s ODA ishighly concentrated in Vietnam while Chinese aid is more concentrated in Cambodia, Myanmar
and Vietnam. A huge proportion of Chinese aids were spent for hard infrastructure so was
Japanese aid to Vietnam while aids to CLM were mostly in the form of grant which were used
for the development of both hard and soft infrastructures. It is should be noted that China’s aid to
CLMV was tied to Chinese contractors under the FCEC scheme. As such, Chinese aid also

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serves China’s economic expansion and growth. On the other hand, Japanese aid has 94.8
percent untied since 2008. The diplomatic goal of Chinese aid to the Philippines was asimportant as serving China’s economic growth. For a while, the Philippines was the largest
recipient of Chinese assistance in Southeast Asia, with around US 1.1 billion dollars in loan
assistance in 2008 alone. Some projects were of symbolic significance such as the rehabilitationand expansion of the only Philippine railway or the North Rail Project and expansion of thenational government’s broadband network or the ZTE-NBN Broadband Project. Both weresuspended on the basis of alleged unscrupulous awarding of contracts to Chinese firms andreescalation of territorial disputes once more.
Both countries have resorted to high-level meetings and summitries to engaged Southeast
Asian countries either collectively as a regional group or plurilaterally. In its efforts to strengthenties with CLMV in a more straightforward way, Japan has employed a ‘plurilateral’ strategy byinstitutionalizing the Japan-CLV foreign ministers’ meeting and Japan-Mekong Region
Partnership. In so doing, Japan hopes to shape development efforts in CLV based on its own
preferences and outside the IAI, ASEAN and GMS frameworks.
The resource and market-seeking types of economic cooperation of China is represented
by the economy’s continuing growth and expansion that is reflected in “Go Global” policy,
prominence of Chinese contractors and suppliers in its economic aid, and huge investments in
CLMV’s primary and energy sectors. Meanwhile, the innovativeness in Japan’s economic
cooperation with CLMV is demonstrated in its emphasis on “Green Mekong” initiative,
absorption of CLMV’s export products, emphasis on sustainable development, initiatives fromAMEICC, and promotion of “common values”. Moreover, domestic factors such as public debts,
strong yen, issue of financial and pension reforms, and rehabilitation of Tohoku region after the151Trinidad, D.

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March 11 disaster may cause Japanese policymakers to scale down further on its financial
assistance not just to CLMV but to other countries and regions as well.

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Interviews
Kuroishi Ryo, Deputy Director, International Cooperation Bureau, Ministry of Foreign Affairs,
November 2, 2012.
Minato Naonobu, Director, ODA Evaluation Division Ministry of Foreign Affairs, October 23,
2012.
Ohashi Hideo, Professor, Senshu University, November 26, 2012.
Shiga Hiroaki, Deputy Director, Division 1, Japan International Cooperation Agency, October25, 2012.
Tsuji Kazuto, Professor, Saitama University, November 20, 2012.

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