Silviase/jgov_v1.4_full_ann huggingface dataset:
The developments of Japanese capital outflows to selected Asian countries are shown in Chart 7. Among others, trends in outward FDI and ODA loans $ ^{13} $ are compared. $ ^{14} $ It is shown that Japanese FDI flows into these Asian countries peaked out at around the time of the 1997 Asian crisis. $ ^{15} $ On the other hand, the amount of ODA loans corresponds to that of FDI in China, the Philippines, and Thailand at the end of the 1990s. Moreover, ODA loans have surpassed FDI in Indonesia and Vietnam. Although, the absolute volume of ODA loans in these five countries are in a relatively narrow range between 50 to 100 billion yen. It may be pointed out that ODA loans have played an important role of offsetting the declining trends in private capital inflows into these Asian countries. $ ^{16} $

### I V. Framework of CGE Model Simulations

To analyze the impact of Japanese economic cooperation measures, the Global Trade Analysis Project (GTAP) $ ^{17} $ model is employed for model simulations. In this chapter, after a brief discussion on the past quantitative studies assessing aid and trade, an outline of the fundamental structure of the model is presented and simulation designs, including the assumptions of the experiments, are discussed.

### 1. Past Assessments of Aid and Trade

Assessing Aid, published by the World Bank in 1998, is “intended to bring the results of World Bank research on development policy issues to take stock of what is known and is not known.” The two key messages concerning the effectiveness of aid in promoting growth and reducing poverty are “aid works in a good policy environment” and “assistance must be targeted more effectively to low-income countries with sound economic management.” As far as quantitative assessment is concerned, it states, according to cross-country studies, that under the good-management environments, “1 per cent of GDP in assistance translates to a sustainable increase in growth of 0.5 percentage points of GDP,” while it “reduces poverty by 1 per cent.”
However, these conclusions have been re-examined. Hansen and Tarp (2000), who address the aid-growth literature, reached rather different conclusions from those presented in Assessing Aid. It is pointed out that a coherent and positive picture of the aid-growth linkage emerges, even in countries hampered by an unfavorable policy environment. It is demonstrated that much is still not known about the complex linkage between aid, policy, and growth.

In the areas of global trade policies, the focus has been on relations between developed countries and developing countries. Among others, Shoven and Whalley (1992), who analyze the impact of protectionism of developed countries on developing countries by the General Equilibrium model of global trade, argue that the trade costs that developed countries impose on developing countries would be approximately equivalent to the values of annual aid flows. Therefore, it is pointed out that the effects of aid and trade on developing countries would offset one another.

Recently, poverty reduction is an increasingly important issue not just in terms of aid policies but also in conjunction with global trade liberalization. Most past studies that have analyzed the impact of trade liberalization on poverty have looked at average macroeconomic effects. However, it is misleading to judge from average effects, in light of the fact that poverty is not always reduced even under economic growth; therefore, improvements in living standards as measured by per capita income on average are not always a given. Hertel et al. (2002) show one departure that focuses on the impact of trade liberalization on households at the edge of poverty. It is expected that ambitious research will continue to push forward, addressing limitations mainly in data availability.

Acknowledging the current states of both policy concerns in aid and trade and developments of tools to empirically analyze those economic impacts, this paper will discuss the impact of Japanese economic cooperation measures by means of CGE model simulations. The most recent Japanese policies in aid and trade are compared with an emphasis of relative efficiencies from the perspectives of economic welfare.

### 2. GTAP Model

A CGE model numerically simulates the general equilibrium structure of the economy. It is built on the Walrasian general equilibrium system, in which the central idea is that market demand equals supply for all commodities at a set of relative prices. Moreover, a CGE model has solid micro-foundations that are theoretically transparent. Functional forms are specified in an explicit manner, and interdependencies and feedback are incorporated. Therefore, the model provides a framework for assessing the effects of policy and structural changes on
resource allocation by clarifying “who gains and who loses.”

These characteristics differentiate it from the partial equilibrium model, which is not economy-wide, the macroeconomic model, which is not multi-sectoral, and the input-output model, in which agents do not respond to changes in prices. Moreover, the multi-country model is required to analyze international economic affairs such as trade and investment policies, which affect not just one but a number of economies.

The GTAP model is a standard CGE model, which depicts the behavior of households, governments, and global sectors across each economy in the world. It is composed of regional models, which are linked through international trade. Prices and quantities are simultaneously determined in factor markets and commodity markets by accounting relationships, by the equilibrium conditions specified by the behavior of economic agents, and by the structure of international trade. The model includes three main factors of production: labor, capital, and land. Labor and capital are used by all industries, but land is used only in agricultural sectors. Capital and intermediate inputs are traded, while labor and land are not traded between regions.

The standard version of the GTAP model includes several key assumptions. $ ^{18} $ First, perfect competition, therefore constant return to scale, is assumed. Second, imperfect substitution in goods and services between the home economy and abroad and those among different origins of economies are assumed by Armington parameters. Third, the amount of total labor--one factor endowment--is fixed. This means that the model assumes full employment and no unemployment. The amount of total capital is also fixed in the standard GTAP model.

However, a standard version of the GTAP model can be modified that deals with capital formation. Important “dynamic” effects of capital accumulation are introduced $ ^{19} $ into the standard static model. According to the growth theory, a medium-run growth or accumulation effect induces additional savings and investment. The induced savings $ ^{20} $ and investment (larger capital stock) in turn links to the production capacities and causes a further increase in income. $ ^{21} $
The GTAP database currently consists of 57 disaggregated sectors and 66 economies, $ ^{22} $ which are aggregated to the appropriate version for simulations. In this study, as is shown in Table 3, economies are aggregated into 15 areas, and six areas are allocated to the larger six Asian recipient countries. Those are China, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam, whose benefits from Japanese economic cooperation measures are analyzed in this paper. Industries/commodities are aggregated to eight, following a classification in the sectors of ODA loans.

Table 3: Regional and Sectoral Aggregation

Countries and Regions	Industries/Commodities
Japan	Asian NIEs	AGR: Agriculture, Forestry & Fisheries
China	Oceania	MFG: Mining & Manufacturing
Indonesia	USA	EGW: Electricity, Gas & Water
Malaysia	Canada	CNS: Construction
Philippines	Latin America	T\_T: Trade & Transport
Thailand	Western Europe	CMN: Communication
Vietnam	Rest of World	OSP: Other Private Services
South Asia	PUB: Public Services

### 3. Assumptions

In this paper, two model simulations are carried out. One is on the impact of Japan’s ODA capital flows $ ^{23} $ to the six Asian countries listed above. Another is that of unilateral trade liberalization of Japan for imports from those countries. The precise designs of these two experiments are discussed below.

## a) ODA loans

It is assumed that the entire amounts of Japan’s ODA loans $ ^{24} $ are spent for the construction of infrastructures in the recipient countries, $ ^{25} $ which result in expansion of capital stocks. $ ^{26} $ On the other hand, it is assumed that capital formation is reduced in Japan by the corresponding amount of total flows of ODA loans to the six Asian countries compared with
instances where this is not the case.

The annual size of such total amount of capital flows is calculated by a simple five-year average (1996 to 2000) of Japan’s ODA loans to Asian countries in terms of gross-disbursement, $ ^{27} $ as shown in Chart 7. $ ^{28} $ Sectoral disaggregation of these total ODA loans $ ^{29} $ is guided by the cumulated ODA loans by sector at the end of fiscal 2000. Exogenous shocks implemented in the model simulation are shown in Table 4. $ ^{30} $

Table 4: ODA Capital Flows to Asian Countries

AGR	MFG	(Average percentage of sectoral capitals in 1996 - 2000)
EGW	T_T	CMN	PUB	Total
China	0.27	0.02	3.26	1.03	0.43	1.11	0.31
Indonesia	0.39	0.29	28.85	1.46	3.64	1.58	1.11
Malaysia	0.07	0.11	10.11	0.23	0.32	3.22	0.38
Philippines	1.05	0.64	9.09	2.38	3.45	5.65	1.55
Thailand	1.12	0.09	3.99	1.45	4.02	3.51	0.65
Vietnam	0.00	0.19	137.78	22.61	68.29	29.14	4.05

Source: Author’s calculations based on GTAP database Version 5 and Annual Report of JBIC, Japan Bank for International Cooperation

## b) Trade liberalization

Instead of providing ODA loans, it is assumed that Japan will unilaterally eliminate protection on the import of goods from the six Asian countries. This means that Japanese import protection for the other economies remains unchanged. Moreover, import protection of the other countries, including the six Asian countries and not Japan, also remains unchanged. The magnitudes of such exogenous shocks on Japanese import prices are shown in Table 5, which are compared with the import protection in those six Asian countries that Japan faces.

According to the protection data in the current GTAP database, $ ^{31} $ it is shown that
Japanese import protection is still significantly high in the primary sectors compared with that in the manufacturing sectors. Moreover, variation in the import protection among the countries within the same sectors is also suggested. $ ^{32} $

Table 5: Import Protection

Japanese Import	Japanese Export
Primary	Secodary	Average	Primary	Secodary	Average
China	33.2	8.0	8.6	11.3	15.6	15.2
Indonesia	14.2	5.6	5.5	11.1	9.9	9.6
Malaysia	2.7	2.0	1.9	40.0	8.5	8.4
Philippines	40.8	3.5	5.6	20.0	6.4	6.2
Thailand	22.8	14.9	13.4	33.3	17.3	16.8
Vietnam	19.7	12.0	11.5	0.0	19.0	17.5
World	42.1	6.8	7.0	12.2	7.0	6.1

Source: GTAP database Version 5

### V. Simulation Results

The main purpose of this paper is to compare the economic impacts of Japan’s ODA loans to Asian countries with that of other Japanese external policy measures such as trade liberalization, while employing the same version of the economic model for simulation experiments. Before doing such comparison, however, the impacts of these two policy measures will be presented first.

It must be noted that the estimated economic impact by the CGE model is not a forecast. As described in Dee et al. (1996), economic policy measures will be implemented over time and adjustments to those changes may take time. During the course of such adjustments, other economic changes will also take place. However, those changes, including economic growth and structural changes in trade and industries, are not taken into account in the current analysis. The model simulation shows the differences at a certain point in time between when economic cooperation measures were implemented and when they were not.

### 1. Impact of Individual Measures

a) ODA loans
The macroeconomic impact of capital formation in the six Asian countries by the inflows of Japan’s ODA loans is summarized in Table 6. Investment and capital accumulation are key elements for economic growth. Capital inflows from abroad enable the recipient countries to invest more than domestic savings. Expansion of capital stock, and therefore production capacity, would raise the permanent level of real GDP compared instances in which this is not the case. This magnitude ranges from 0.1 per cent in China to 1.6 per cent in Vietnam in terms of the rate of change. It is a sizable impact, however, and it must be admitted that the relative contribution of ODA capital flows to economic growth may be limited in light of the recent rapid economic growth (from 5 per cent to 10 per cent) in these countries.

Table 6: Impact of Japan's ODA Loans

Real GDP	Export Volume	Import Volume	GDP Price	Trade Balance $ ^{*} $	Utility
Japan	-0.10	-0.12	-0.01	0.03	-387	-0.07
China	0.12	0.14	0.05	-0.06	139	0.08
Indonesia	0.50	0.59	0.35	-0.22	67	0.41
Malaysia	0.20	0.19	0.16	-0.13	13	0.14
Philippines	0.71	0.90	0.54	-0.60	6	0.49
Thailand	0.49	0.34	0.20	-0.29	29	0.42
Vietnam	1.65	2.53	1.24	-0.69	28	0.99
World	0.00	0.02	0.02	-0.01	0	0.00

Note: Deviations in million US dollars

Expansion of production capacity is expected to lower production prices. $ ^{33} $ In fact, the current simulation suggests that the GDP price index would decline by 0.1 per cent to 0.7 per cent in the six Asian recipient countries. Lower production prices would enhance the competitiveness of those countries in the international market. Export volumes would increase due to these price effects. Moreover, import volumes would be stimulated by the income effects according to the expansion of the economy on the one hand, while those could be mitigated by the same price effects on the other hand. The current simulation shows that both export and import volumes would increase but those rates of changes in exports would tend to be larger than those in imports.

One concern in the analysis of the FDI behavior and developments is whether FDI and trade can be substitutes or complements. The theoretical literature indicates that these depend on the assumptions. In the empirical works, earlier general equilibrium modeling studies of
FDI $ ^{34} $ have generally concluded that FDI and trade are likely to be complements at the economy-wide level. The current simulation outcomes are in line with these studies that show capital inflows by means of the Japan’s ODA loans in the Asian countries would create rather than destroy trade. However, the current framework of a CGE model does not explicitly incorporate the behavior of FDI $ ^{35} $ and other capital movements. Therefore, the relationship between trade and investment is an issue to be further elaborated in the future.

As far as the efficiency of resource allocation is concerned, capital inflows raise the relative value of labor in the host countries, while a relative value of capital would decline. This would result in increases in wages and therefore a surplus in workers. On the other hand, if capital moves from capital-rich countries to capital-poor countries, the investor country gains a larger return on the capital and enjoys surpluses. It is expected that international capital movements benefit both the investor and host countries by these efficiency effects.

## Chart 8: Decomposition of Wefare Gains

The overall impact on economic welfare may also vary according to the terms of trade effect. The six Asian recipient countries would generally face deterioration of the terms of trade due to lower prices in the domestic market. In addition to the static impact of efficiency effects and terms of trade effects, the dynamic impact of capital formation may also be a concern. $ ^{36} $ In fact, as shown in Chart 8, welfare gains in the recipient countries are largely explained by capital formation rather than static efficiency and terms of trade effects. The rate of change in utility improvements ranges from 0.1 per cent to 1.0 per cent, which is relatively
small compared with those changes in real GDP.

It is not surprising that those welfare gains may vary according to the sectors that ODA loans go into. As discussed in Box 1 below, recipient countries tend to gain more from capital formation in the production and energy sectors. On the other hand, world-wide benefits are shown to be large in the case of capital formation in the manufacturing, trade and transportation sectors. Moreover, capital inflows to developing countries in an unspecified manner, rather than being limited to those directions to a certain sector, would be much more beneficial.

## Box 1

## Efficiency of Capital Formation by the Sectors

Welfare gains by ODA capital inflows may vary according to sector and to the countries of such additional capital formation. “Multipliers” of capital expansion by US$1 billion are estimated by the same version of the CGE model employed in this paper. Simulations are carried out independently by shocking exogenously the individual sectoral capital of Agriculture, Forestry and Fisheries (“AGR”), Mining and Manufacturing (“MFG”), Electricity, Gas, and Water (“EGW”), Trade and Transportation (“T_T”), Communication (“CMN”) and Public Services (“PUB”). Those outcomes are compared with the case titled “Unspecified” in the following table, in which the capital expands by the same volume but its allocation is endogenously solved by the model.

As concerns welfare changes in recipient countries, which are measured by Equivalent Variation, capital formation in the production and energy sectors tends to show larger gains. Moreover, the impact of capital formation in communication and public services is generally smaller. These outcomes are in line with the expectation that those sectors that gain more from additional investment are economically profitable. From the viewpoint of economic development of the developing countries on average, it may be efficient to concentrate capital formation in those sectors. However, there must be other key concerns, such as poverty reduction, in view of a balanced development in the developing countries.

## Welfare Gains in Recipient Countries

(Changes in Equivalebt Variations in billion US dollars)

AGR	MFG	EGW	T T	CMN	PUB	Unspecified
China	0.86	0.84	0.85	0.72	0.49	0.73	0.74
Indonesia	1.08	0.86	0.81	0.62	0.75	0.81	0.67
Malaysia	0.65	0.70	0.74	0.50	0.50	0.67	0.61
Philippines	0.68	0.80	0.66	0.63	0.59	0.65	0.67
Thailand	0.82	0.84	0.98	0.66	0.77	0.81	0.77
Vietnam	0.64	0.87	0.43	0.70	0.39	0.51	0.69

Moreover, sectoral differences in the efficiency of capital formation are clearly shown when those welfare gains in the world economy as a whole are looked at. Including the spillover effects outside the recipient countries, although those are not the primal concerns of the economic cooperation measures, manufacturing, and trade and transportation are the two distinguishing sectors in which capital formation
in those sectors bring about significant economy-wide benefits. The larger impact arising from the capital formation in trade and transportation sector may partly be a reflection of the feature of the model, which is the general equilibrium model of global trade, in which trade linkages among the regions are one of the aspects highlighted.

Welfare Gains in the World (Changes in Equivalebt Variations in billion US dollars)

AGR	MFG	EGW	T_T	CMN	PUB	Unspecified
China	-0.40	2.48	1.73	1.94	1.91	0.79	2.22
Indonesia	0.43	1.76	1.00	1.51	0.68	0.67	1.72
Malaysia	1.84	2.72	1.05	2.12	0.07	0.69	2.32
Philippines	1.62	1.01	0.73	1.16	0.65	0.99	0.98
Thailand	1.02	2.41	0.22	1.43	0.98	0.73	2.09
Vietnam	0.46	2.03	1.35	1.64	0.69	0.85	1.44

Moreover, from the viewpoint of efficient allocation of capital, it may also be pointed out that capital inflows to developing countries in an unspecified manner--as opposed to limiting those directions to certain sectors--would be much more beneficial. This is consistent with the expectation that more efficient resource allocation would result in higher economic welfare.

The donor economy of Japan would lose rather than gain both in terms of real GDP and utility. This is primarily due to less capital formation according to the outflows of Japan's ODA capital. However, it must be noted that the income gains arising from investment abroad are not taken into account entirely in the current framework of model simulations. Including such income effects--which may not necessarily be large in the case of ODA loans compared with commercial loans--the negative impact on the Japanese economy could be limited to some extent.

## b) Trade liberalization

According to the conventional simulations by a CGE model of global trade, trade liberalization measures including tariff reductions would stimulate trade by lowering prices on tradable goods. This would result in increases in national output of exporting countries, while increasing access to the markets of trading partners. On the other hand, domestic production resources--land, capital, labor, and intermediate inputs--would be used more efficiently in importing countries in particular, when domestic distortions, including those due to trade barriers, are reduced. These combined effects--one from foreign markets and the other from the domestic market--are expected to result in the expansion of production and an increase in income and welfare.

The macroeconomic impact of import liberalization in Japan from the six Asian countries is summarized in Table 7. Although trade volumes for both exports and imports
would generally be stimulated by a sizable amount, $ ^{37} $ increases in real GDP could be relatively limited. This is not surprising because production in different sectors competes for a limited supply of labor, capital, and land. An expansion of one sector would be accompanied by a contraction of another sector, except when the expansion is the result of significant resource accumulation or technological improvements. $ ^{38} $

Table 7: Impact of Japan's Import Liberalization

Real GDP	Export Volume	Import Volume	GDP Price	Trade Balance $ ^{*} $	Utility
Japan	0.06	2.85	2.87	-0.45	-790	-0.11
China	0.08	1.82	2.73	1.51	1,514	0.78
Indonesia	0.06	0.87	1.51	1.10	168	0.49
Malaysia	0.05	0.10	0.16	0.16	33	0.16
Philippines	0.00	-0.36	0.34	1.10	-72	0.43
Thailand	0.22	2.21	3.52	2.29	617	1.56
Vietnam	0.21	1.80	3.32	4.23	-20	1.86
World	0.04	0.30	0.30	-0.03	0	0.03

Note: Deviations in million US dollars

In comparison with macroeconomic gains in real GDP, those gains measured in utility would be significantly larger in all six Asian countries. This is mainly due to terms of trade effects. Asian countries would gain larger benefits in terms of changes in Equivalent Variations, and therefore utilities, from unilateral import liberalization in Japan from those countries. It is indicated that terms of trade effects are much more significant compared with the efficiency effects of resource allocation discussed above.

One key issue in north-south trade has been these terms of trade effects on developing countries. There have been several interpretations and empirical studies concerning the reason why the persistent deterioration of terms of trade has been observed in the developing economies. One is to look at differences in the income elasticity of imports between north and south. $ ^{39} $ Another is to attribute the higher growth in the south compared with the north.