JAPAN'S ECONOMIC ROLE IN THE DEVELOPMENT OF FREE ASIA

Created: 5/1/1967

OCR scan of the original document, errors are possible

Intelligence Report

Japans Economic Role

in the Development of Free Asia

Cor|jj(rtntial

"10

RR

JUN

CONTENTS

Summary

I. Postwar Japanese Economic Aid

Flow of Japanese Capital

Pattern of Aid aod investment Activities . .

Aid

Capital Flows

Inhibiting Increases in Aid

U.. Japanese Aid to Free Asia

Region's Share of Japanese Aid and Investment

Activities

Japanese Role in National Development

Activities

Official Aid Activities

Private Investment Activities

Japanese Role in Regional Development

Activities

III. Japanese Trade with Free Asia

IV

and Growth

Composition

Prospects for Japanese Economic Leadership

Free Asia

Outlook for Increased Japanese Aid . . . .

Future of Japanese Trade with Free Asia . .

XJOiSt'lMSNTIAL

of Japanese Long-Term Capital to the Less

Developed Countries and Multilateral Agencies.

Grant Aid to Free Asian Countries,

Some Uses of Reparations and Official Aid to

Free Asia aa of6

Academic and Technical Training of Free

Asians. Total

of Instruction oi" Free Asian Academic

Students and Technical Trainees in Japan,5

of Japanese Private Direct Investment in Free

Asia as of0

Flow of Japanese Private Direct Investment to

Free Asia, Total

Trade with Free Aaian Countries,

Japanese Share ot the Market in Free Asian

Countries.05

Composition of Japanese Trade with Free

of Free Asia in the Japanese Market for Selected

Commodity

Figure 1. Japan: Chronology of Aid to Less Developed

Countries (chart)

Figure 2. Japan: Selected Aid Projects in Free Asia

(photographs)

Figure 3. Japan: "Nonproject" Aid to the Philippines

(photograph)

Figure 4. Training in Japan of Students and Technicians from Free Asian Countries (photographs) . .

Figure 5. Japan: Overseas Technical Assistance toCountries (photographs)

Figure 6. Japan: Some Lines of Private Investment

in Free Asia.chart)

Figureapan: Prime Minister Sato AddressingAsian Ministerial Conferencein6 (photograph)

'. 1

29

33

34

36

39

-I

8. Manufacturing Output in Japan Compared with Minerals Output in Free Asia.

Figure 9. Japan: Rolling Stock Exported to Free Asia

Until quite recently, official Japanese aid to Free Asia centered onwhich were treated by Japan as obligations to be discharged as expeditiously as possible. Particularlyhe Japanesehasore positive approach to foreign aid, which has increasingly reflected an awareness of the long-run benefits to Japan of economic development in Free Asia.

05 the flow of long-termrom Japan to the less developed countries amounted toillion, and activity6 will probably raise this totalillion.illion of the flow5 as well as probably0 million6 were accounted for by official disbursements, the most important element of which consisted of the programs of reparationsumber of countries

* This reportwas produced solely by CIA. Itwas prepared by the Office oi Research and Reports and coordinated with the Office of Current Intelligence; the estimates and conclusions represent the best judgment oi the Directorate of Intelligence as of

The term Free Asia is used throughout this report to denote the non-Communist Asian countries extending from Afghanis tan eastward through South andSoutheast Asiaandnorth from there to South Korea. Australia and New Zealand are not considered parts of the region for the purposes of this report.

he expression long-term capital is used throughout this report to denote official and private capital flows involving repayment over periods of five years and more, although in some recent years data on private capital reflect only flows involving repayment terms ofhan five years. Because of frequent changes in classification of data by both the Japanese government and the principal international organizationseconomic assistance, the reader mayariety of relateddatadifferingfromthatshownin this report. Insofar as possible conflicting series oi data have been adjusted for this report to adhere to the standard described above, and differences with other reportsthe selection of other criteria for long-term capital.

ci'Jrcf Asia. As these programs drawlose, considerable attention

official grants andontributions to multilateral agencies, and private investment and export credits as to provideercent of national income that the Sato administration regards as its goal in these forms of development assistance. In addition to the usual impediments to foreign aid, Japan faces some peculiar obstacles, including low per capita income, particularly strong competing demand for domesticand pronounced rivalries among the ministries chat arewith aid planning.

Free Asia has been the principal beneficiaryof Japanese development assistance, with annual flows of long-term capital to the region increasing from an estimated S1illion0 to anS million. The Free Asian share in the various forms of long-term assistance has varied from almost the complete amount of grant aid tohird of the private capital flow. All of the countries of the region have received at least some long-term capital from Japan, andumber of cases this assistance has been noteworthy. InBurma, Indonesia, and thereparations have been principal sources of grant aid. Official bilateral credits extended by Japan through consortia have been significant sources of development capital for India andarge program of official and private assistance to South Korea and bilateral credits to Nationalist China and Malaysia will giverominent role in the present development plans In those countries.

Japan has made important official contributions in project and non-project aid to the rehabilitation and development of Free Asia.noteworthy among the project assistance is infrastructure such as the Balu Chaung hydroelectric dam in Burma and the Da Nhimdam in South Vietnam and assistance to heavy industry such as the constructionof fertilizer plants in India and steel plants in India and Pakistan. Among other official assistance that has been especiallyto development efforts is the supply of capital equipment for manufacturing facilities and agriculture and transportation equipment in the form of ships, railroad rolling stock, automobiles, and trucks. These programs of material aid have been complemented by extensive

* Following common usage, the terms loan and credit are usedin this report. It should be noted that virtually all Japanese "loans" have been suppliers' credits in the sense that they have been tied to procurement in Japan.

Japanese participation in technical assistance and by academic training through official Japanese channels, multilateral programs, or activities of the private sector.

In addition to providing increasing amounts of official bilateral aid to Free Asia, Japan has been an important source of numerous small private investment activities for the region. Thailand is clearly the principal beneficiary of this form of long-term capital,onservative estimate would put the total stock of Japanese capital in that countryillion. Other major areas of private investment for Japan are Indonesia. Singapore, and Malaysia, the last of which is the recipient of assistance in the constructionteel mill that represents one of the major Japanese private investments in heavy induatry in Free Asia. Especially in the case of the numerous investments in minerals and forestry in Indonesia, production-sharing has been an important means by which the Japanese have overcome obstacles to the entry of private capital into the less developed countries, and this form of investment will probably continue to play an important role in overseas Japanese economic activities.

The importance to Free Aaia of trade with Japan is steadily increasing as the Japanese market share expands in most of the less developed countries of the region, and rapid growth of the Japanese economy will continue to provide an important source of demand for many of Free Asia's primary products. Nevertheless, because Japan's growth rates in output and trade are greater than those of the regionhole, the share of Free Asiain Japanese imports and exports is shrinking. Thus,5he share of Japanese imports coming from Free Aaia fell fromercent toercent,imilar relative decline occurred in exports. Although there is every reason to believe that Japan will remain competitive in the heavy industrial exports to the region that have spurred its advance in the Free Asian market, the prospectsomplementary growth in the Free Asian share of Japanese imports of raw materials are not as promising. Production difficulties in Free Asia and Japanese emphasiside distribution of sources of low-priced raw materials militateubstantial rise in the Free Asian share of the Japaneseor such raw materials as sawlogs, iron ore, bauxite, and crude oil. Rapid expansion in Japanese imports of certain tropical foodstuffs suggests that there may be more growth potential in these commodities as the Japanese diet continues to diversify.

Although Japanajor industrial power and the most economically advanced of the Asian countries, efforts of the more progressive elements

CONFIDENTIAL

of che Japanese government io assume active leadership in theof Free Asia have been inhibited by at least two major factors, the future impact of whichis still uncertain- The first of these, whichis most prevalentin government circles, is anxiety over animosities throughout Free Asia lingering from World War II. The second impedimentore active role in Asian economic leadership is the fact that the Japanese people, whose standard of living is still relatively low on the European scale, have only recently become aware of Japan's advanced economic status. Moreover, strong domestic demand for public investment will continue to compete with foreign aid,oherent Japanese aid policy remains to be developed. Nevertheless, the declared goalercent of national income for the annual flow of long-term capital from Japan to the less developed countries probably will be achievedate of growthercent for national income, this wouldlow in that year of SI billion5 prices, and of this0 million or more might be expected to go to Free Asia. Grant aid is not likely to be expanded much beyond its present scale,rowing share of the official bilateral assistance to Free Asia will probably take the form of credits on terms softer than the interest rate of slightly less than6 percent characteristic of the past. Japan's growing awareness of the increasing competitiveness of its heavy industrial products will probably lead to more enthusiasm for disbursement of aid through such multi-late ral channels as special funds of the Asian Development Bank and the Mekong Commission. The geographic distribution of official economic aid to Free Asia0 is likely toelative concentration in East and Southeast Asia as opposed to South Asia, but Japan will probably continue toonstructive role in the consortia for India and Pakistan. Private investment will probably focus on Thailand, Indonesia,and Malaysia, but improvements in the climate for Japanesein the Philippines and South Korea could mean significant growth in private capital flows to those countries.

The outlook for Japanese trade with Free Asia is strongly conditional or. foreign aid to the region. Although Japan will probably continue to expand to some extent its market shares in the trade of the less developed countries of Free Asia, sustained growth in Japanese exports to the region will require the increased purchasing power that can only come from economic development- The Japanese are becoming distinctly more aware that their traditional conception of foreign aid aseans ofdirectexportpromotion is loo narrow and that Japan stands to benefit greatly from the growth-stimulating effects of both its own and other aid programs in the area.

Viewed from the perspective of the less developed countries of Free Asia, the crucial trade issue is how to increase Japanese imports from the region to help overcome large bilateral trade deficits. Among the factors liable to influence the expansion of these imports, the moatappears to be the stimulation of production in Free Asia of raw materials for heavy industry. The most direct means to achieve this endo-called "development and import formula" employed by theBecause this approach hasonsiderable measure of Japanese government support for the foreign investment activities of the private sector, its continued application will probably elicit increased anxiety on the part of the press and investors in the other advanced countries for what some of them see aa Japanese exploitation of Free Asia and an attempt to reestablish the Greater Cast Asia Co-Prosperity Sphere. This anxiety appears unwarranted, however, for it ia clearly not ia the national interest of Japan to establish any significant proprietary role in the region's economiesime when it is seeking to broaden its sources of supply of raw materials and its exports are benefiting from regional growth atimulated by capital assistance from other advanced countries.

CONFI^NTIA L

I. POSTWAR JAPANESE ECONOMIC AID A. The Flow of Japanese Capital

05 the flow of long-term capital from Japan to the less developed countries totaled6 billion. As can be seen in Tablehis flow averaged0 million annually05 and. for the most part, has been significantly less than the Sato administration's goalercent of national income per annum. 6 the total was probably0 million0 million,ercent of the national income would have amounted to0 million in current prices.

Despite the common practice of calling total flows of long-term capital "economichese dataide array of capital transactions, such as reparations payments and official grants, official development loans, various private direct investments, and private and official export credits on relatively hard commercial terms. Of the total capital flowillion0illion was made up of net official disbursements, distributed among the various major kinds of aid as follows:

Killicr. US S

Official grant

(including reparations)

Official

Met contributions to nultilateral

As much0 million more in official aid may have been disbursedf which0 million is accounted for by grants.

a For the purpose of long-term comparisons, data on official and private credits in this reportcries of definitions in use by the Japanese government Because changes in these definitions have led to partial revision of the allocation of creditbetween the public and private sectors, the reader may encounter reports on official or private credit disbursements2 in other sources that do not agree with the data in this report. Since the problem is simply one of allocating capital flow between sectors, these differences have no effect on the total annual flows of aid in any report using the criteria described in the second footnote on p. bove.

Table 1

Flow of Japanese Long-Term Capital to the Less Developed Countries and Multilateral Agencies a/

Caoital Flov

a

Official

of

US

National Income

US S)

average)

Tata exclude private export credits for periods of less than five years9 and private export and official Bilateral credits of lass than five years since the beginning Because of the initial Inclusion ofapital transactions not generally regarded ass series cf data has heaa revised anduaber cf tir.es since Japan Joined the Deveiopr.ent Assistance Committee of the Irzar.iiation for ScOnOni^ Cooperation and Eevelopce.ltAlshcugh further revisions occurredhe data shown above areprimarily or. the syster. of classification in use5 in arder t= preserve cocpara'cility within the tinespan being discussed.

B. The Pattern o: Aid and investment Activities

I. Official Aid

The reparations programs were the first and most important phase o: the official Japanese effort in the postwar period to provide

which provided for bilateral negotiations on the reparations issue. As can be seen ir. the chronology (see negotiations on reparations between Japan and the affectedegan1 and continued intermittently through the settlement of outstanding issues with Singapore in

Grant commitments under various programs of reparations and indemnifications, including those in the "normalization" agreement with South Korea, have totaledillion. Actual disbursements were5 million Grants extended "in lieu of reparations" or ir. place of further reparations have amounted to an7 million. Finally, official loan commitments associated with the broad category of indemnification have added more than0 billion, but this type of aid has seen only limited use so far. Although more than half of the regular reparations grants have been disbursed so far, remaining obligations for this or related grant aid are still large in the cases of the Philippines, Burma, and South Korea; and the influence of indemnifications on Japanese aid programs and policies, although diminishing rapidly, will he present well

Thus far. official economic aid not related to reparations and indemnification has, for the most part, centered ongreements for yen credits and on suppliers' credits for more than five years extended by the Export-Import Bank of Japan. Although pertinent data are notably misleading prior0 andsince then, the disbursement of0 million5 probablyripling oi net annual disbursements under such credits since the late fifties. Japanese policy or. credit assistance to Less developed countries hasumber of basic changes In that year the scope of activities of the Export-Import Bank of

* An alternative position would be thai reparations do not constitute conventional economic aid. Nevertheless, because Japanesehave been an important source of foreign capital for development and have been included within "official grant and grant-likein aid reviews by the Development Assistance Committee

CONF.

NTTAL

(DAC) of the Organization for Economic Cooperation and Developmenthey are treated as economic aid in this report.

JAPAN:

OF A

SAN FRANCISCO PEACE TREATY (SEPTEMBER) REPARATIONS TALKS 6CGIN WITH INOONESIA

ASSOCIATE MEMBERSHIP IM ECONOMIC COMMISSION FOR ASIA ANO TKC FAR CAST (CCAFE)

(JANUARY)

REPARATIONS TALKS BEGIN WITH THE PHILIPPINES (JANUARY)

FULL MEMBERSHIP IN CCAFE (APRIL)

CABINET ANNOUNCES THREE-POINT PROGRAM OF ECONOMIC COOPERATION WITH SOUTHEAST ASIA (DECEMBER)

REPARATIONS TALKS N WITH BURMA (AUGUST)

FULL MEMBERSHIP IN THC COLOMBO PLAN (OCTOBER) ANO FIRST POSTWAR TECHNICAL

ASSISTANCE TO SOUTHEAST ASIA THROUGH THAT ORGANIZATION REPARATIONS AGREEMENT SIGNED WITH BURMA (NOVEMBER)

BURMA REPARATIONS AGREEMENT BECOMES EFFECTIVE {APRIL)

SETTLEMENT AGREEMENT ON SPECIAL YEW PROBLEM SIGNED WITH THAILAND FO* N CASH ANDILLION IN LOANS (JULY)

PHILIPPINES REPARATIONS AGREEMENT SIGNED (MAY}

PHILIPPINES REPARATIONS AGREEMENT BECOMES EFFECTIVE (JULY)

JAPAN DECLARES INTENTION TO ASSIST MEKONG DEVELOPMENT SCHEME (MARCH)

OVERSEAS INVESTMENT INSURANCE SYSTEM REVISED TO COVER LOSSES THROUGHANO TO INCLUDE COVERAGE FOR CAPITAL REPATRIATION PROBLEMS (MAY)

EXPORT-IMPORT BANK LAW REVISED TO ALLOW BROADER RANGE OF OVERSEAS ACTIVITIES (MAY)

I95fl, INDONESIA REPARATIONS AGREEMENT SIGNED (JANUARY)

FIRSTCREOIT AGREEMENTILLION) CONCLUDED WITH INOIA (Ft

INDONESIA REPARATIONS AGREEMENT BECOMES EFFECTIVE (APRIL) LAOS GRANTN LICU OF REPARATIONS1') AGREED TO (OCTOBER)

LAOS GRANT AIDN LtCU OF REPARATIONS*') BEGINS (JANUARY)

CAMBCOIA GRANT AlON LIEU OF REPARATIONS") ACREEO TO (MARCH) VIETNAM REPARATIONS AGREEMENT SGNED (MAY)

CAMBODIA GRANTIN LIEU OF REPARATIONS") BEGINS JjULY)

, ONFIJKNTIAL

FIGURE

aid to s developed countries

south vietnam reparations acreemen asian economic research institute. 5em (governmental organization w

over5eas economic cooperationore; liberal terms toapan admjtteo to the development ai for economic cooperation and deve first government-to-government cre

: special yen agreement with thailand settlement to grant alo (january) overseas technical cooperation agenc official ano private technical ass

ME5 EFFECTIVE (JANUARY) (ZEO0ECOMES

t MILLIONILLION ANNUAL BUOGCT

ESTABLISHED TO PROVIDE CREDITS ON ihtrVes (March).

AWCE COMMITTEE OF THE ORGANIZATION

EXTENDED TO PAKISTAN (NOVEMBER)

D TO CONVERT LOAN PORTION OF

SET UP TO COORDINATE ALL

E EFFORTS (JUNE) /

ENT <OECD) (SEPTEMBER)

AGREEMENT ON ECONOMIC AND TECHN |CAL .COOPERATION INVOLVING0 MILLION IN GRANTS SIGNED WITH BURMA (MAKCH)

; EXPORT-IMPORT DANK LAW REVISED TO PROVIDE FOR REFINANCING LOANS TOCOUNTRIES WITHPROBLEMS (MARCH)

JAP AX MAKES FIRST CONTRIBUTION TO FOREIGN EXCHANGE OPERATIONS FUND FOR LAOS (APRIL)

JAPAN AGREES0 MILLION CREDIT FOR NATIONALIST CHINAN SIGNS NORMALIZATION AGREEMENT WITH SOUTH KOREA PROVIDING FOR0 IN GRANTS, CREDITS, ANO INVESTMENTS (JUNE) FIRST GROUP OF JAPAN OVERSEAS COOPERATIONCACE CORPS1') SENT TO LAOS (DECEMBER)

PLEDGES sG J F,

SCHEME (MARCH)

JAPAN CONVENES SOUTHEAST ASIAN MINISTERIAL CONFERENCE TO DISCUSS ECONOMIC

DEVELOPMENT IN REGION' - J

EMERGENCY CREDIT OF MILLION EXTE IDED TO INDONESIA (MAY) "V. JAPAN SUBSCRIBES0 MILLION TO CAP TAL OF ASIAN DEVELOPMENT BANK (JULY) jAPA* CONVENES MEETING OF INDONESIAN ^EDITORS IN TOKYO (SEPTEMBER) REPARATIONS AGREEMENTW?SINGAP0RE (OCTOBER)

OFFICIAL BILATERAL CREDIT FOR SSO MIL JON EXTENDED TO MALAYSIA (NOVEMBER)

JAPAN CONVENES CONFERENCE ON AGRICULTURAL DEVELOPMENT IN SOUTHEAST ASIA

w2

Japan was enlarged toider range of credit activities involving foreign governments and foreign corporations. Following this liberalization of credit policy, the Export-Import Bank entered into its first major government-to-governmento-called "special yen agreement"ong-term creditillion to India innd this sort of Loan activity has expanded rapidly since then.

The necessarily high interest rates charged by the Export-Import Bank impede credit assistance to less developed countries. To help overcome this obstacle, the Japanese government created the Overseas Economic Cooperation Fund (OECF) in This organization, initiallyapital fundillion, was set up under the Economic Planning Agency to provide credits with provisions foroverears (including five-year grace periods) and interest rates ofercent or less. Although the OECF is authorized to loan directly to foreign governments or foreign firms, no such loans were extended untilnd its funds had instead been disbursed primarily to Japanese firms engaged in development projects.

Among important developments in the OECF5 were aincrease in disbursements, increases in capitalization, changes in the OECF law permitting domestic borrowing and the issuance of bonds, and provisionsotal of0 million in official credits for South Korea and Nationalist China to be disbursed through the OECF at relatively liberal terms. * By the endoans outstanding (that is, disbursements less repayments) under the OECF amountedillion, and total commitmentsillion at the end of umillion was appropriated in the Japanese budget for Fiscal Year*apital subscription to the OECF. ike sum was authorized for lending to the OECF by the Trust Fund Bureau during6 to heip meet the OECF's growingbut there was general recognition among the ministries and agencies concerned with foreign aid that continued borrowing of this sort could prejudice the low interest rates of OECF loans. The Director of the OECF Loan Department has estimated that onlyillion would be borrowed by the OECF in

" The credits to South Korea and Nationalist China are the first cases in which the OECF actually has authorized terms as liberal asinterest with repayment overears, the most liberal terms through5 having beenercent andears. *" The Japanese fiscal year beginspril of the year specified.

-

Net contributions to multilateral agencies have been the principal remaining category of official Japanese capital flows classified by the Development Assistance Committee (DACJ of the Organization for Economic Cooperation and Development (OECD) as economic aid.05 this category accounted for5 million, orercent of the total flow of official Japanese capital to the less developed countries. Included in it were grants to variousagencies and subscriptions to the International Bank for Reconstruction and Development (IBRD) and its affiliated organizations.5 these net contributionsillion,pecial increase in the capital of the IBRD and an initial paymentillionapital subscription0 million to the Asian Development Bank probably raised the figure toillion

Special note should be taken of the small but increasing role played by technical and academic assistance in Japan's official and private aid programs. Disbursements of official bilateral grants for technical cooperation (other than the limited amounts under reparations) totaledillion0ut over the period the annual disbursements grewillionillion. The Japanese government has frequently argued that Japanistinct contribution to make in the area of technical assistance, and this attitude will probably be reflected in the continued growth of technicalgrants.

The creation of the Overseas Technical Cooperation Agency (OTCA) under the Ministry of Foreign Affairs in2 was an important step forward in the coordination of public and private technical assistance programs. Programs of the public and private sectors supervised or coordinated by this agency include training in Japan, the dispatch of Japanese experts to less developed countries, the establishment and Operation o: overseas technical training centers, and the preparation of feasibility studies. 5 the OTCA broadened its activities through the creationapanese Peace Corps, known officially as the Japan Overseas Cooperation Volunteers (JOCV). Budgetary appropriations for technical cooperation in56 covering the activities of the OTCA and various subsidies for private technical aid amountedlion4 million, respectively.

en hetore this, however, the Japanese government subsidized much o: the nominally private activity in this field.

-

Disbursements of private loans and investments have accountedonsiderable share of the flow of Japanese long-term capital to the less developed countries. Totaling0 million0hese disbursements have accounted for aboutercent of the total net flow. These figures for private assistance include direct investment in developing countries, net private trade credits of over five years, and portfolio investments in multilateral agencies. Of these categories, direct investment, which amounted to two-thirds of the net private capital flow1s the most significant; but the relatively volatile category of trade credits has also been an important component in the private capital flow.*

The cumulative value of Japanese private direct investment in productiven the less developed countries1 was in excess0 million at the end of The flow of this amount was in no small measure facilitated by Export-Import Bank credits that in some instances provided up toercent of the value of project costs directly to Japanese firms and through them to foreign partners. Various institutional measures such as the Export Proceeds Insurance Scheme, the Overseas Investment Principal Insurance System, and the Overseas Investment Profit Insurance Program also have contributed to an improved climate for private credit and investment activities abroad, but Japanese businessmen are still quite apprehensive about political and economic uncertainties in the developing countries.

Such Japanese private direct investment abroad as has taken place so far has followed three basic patterns. The two most prevalent are those in which the Japanese party to an agreement acquires stockoreign :irm by supplying capital, technology, or cash and those in which the Japanese investor extends credits for basic funds for equipment or working capital in exchange for claims for subsequent repayment in cash or through production-sharing. The second arrangement usuallyong-termonship tantamount to equity investment. Though it may provide less

* Using the new definitions adopted by the Japanese governmentirect investment accounted forercent and private trade credits forercent of the private long-term capital flow from Japan to the less developed countries2

ft* That is, enterprises other than commercial facilities for Japanese exports and overseas branches of Japanese firms.

CONFL

TIAL

-

Japanese controlirm's Operations, this arrangement is often used to gee around the various restrictions imposed on foreign investments ir, the underdeveloped countries and to reduce the risk of losses through nationalization, hird and less frequent method ofabroad, the most notable example of which is the Japanese-owned Arabian Oil Company in the Middle East, is that wherein the Japanese firm directlyroject through the acquisition of real estate or mining rights,

C. Factors Inhibiting Increases in Aid

As Japan passes from the period of reparations andinto one of more conventional economic aid, there is much interest in its prospects forarger aid burden commensurate with its positionajor industrial power. On the one hand, Japan may ultimately be able toore active role in economic assistance than any of the European nations, because its national product probably is destined to exceed all but those of the United States and the USSR; and the small share expended on defense is unique among the major powers. On the other hand, Japanarger population than any of the European powers except the USSR, and its per capita national output is relatively small. Moreover, in the short run at least, the degree ofthat characterized Japan's efforts to normalize its economic relations with former enemies is notlikely to be matched in its responseshe pressing capital requirements of the developing countries.

The problems that inhibit increases in the flow of Japanese capitaldeveloping countries are those common to all donorsew that are peculiar, at least in some degree, to Japan- Like all the major donor nations. Japan is concerned about the effect of foreign aid on its balance of payments. The balance on current account, in deficit swung into Surplus56 with strong improvement in merchandise trade. ontinued large deficit in the capital account, another overall surplus, this time amounting5 million, occurred in the balance of payments Nevertheless, Japanese officials and businessmen are wary of long-term capital commitments that might produce or aggravate balance-of-payments difficulties.

The Japanese, in common with others, are also inhibited by conditions in the recipient countries. Japan has been particularly vocal in pointing out the limited absorptive capacity of the developing countries for foreign capital. Thus far, this attitude has led the Japanesevoid meeting the Long-term development requirements of less

-

CONFIDENTIAL

developed countries and to focus on aid to specific projects. Over time, however, Japanese participation in aid consortia may foster a

greater sense of responsibility for comprehensive development efforts. Recognition oi the limitations of less developed countries in planning and staffing economic programs ultimately could be channeledreatly

expanded Japanese technical and academic assistance effort, but6

Japan was still under attack in the DAC annual meetings for its small

contribution in this field.

Another factor inhibiting the flow of Japanese capital to the less developed countries is the unfavorable climate for private investment in these areas. Despite the national fixations of the Japanese on the necessity for export growth and the desirability of diversification of sources of raw materials, the private sector is still essentially cautious about extending its holdings in politically unstable nations. Of probably greater importance has been the high return available on investment at home. Some of the obstacles to overseas investment have been offset by the various government insurancend Japanese investors have appeared ready to accept greater risks in certain countries, such as Indonesia and Thailand, in which they hope toreeminentin particular industries.

Although the problems discussed above have been significantto increased capital flows to the developing countries, they do not particularly explain why Japan's contribution to economic development abroad has been proportionately smaller than that of many other industrial nations. The explanation lies in problems that affect Japan more strongly than other nations. Some oi the most important of these relate to Japan's comparative stage of economic development.

Among the DAC nations, which include all of the major Western aid donors. Japan has the next to the smallest national income per capita, as car, be seen in the following tabulation

* See B,bove.

CONR

TIAL

Country

us S

States

Sveden Canada Denmark

West Gerxany United Kingdom

France Jlorvsy Belgium

Netherlands

Italy Japan Portugal

Japan's per capita national income stood5 and grew rapidlyhe order of rank shown above did not change. Viewedhe context of per capita incomes, the United Nations Conference On Trade and Development (UNCTAD) and DAC aid goalercent of national income can be describedort of regressive tax, and Japanese arguments in the past of inability to meet this standard because of income levels are more convincing than those of most other donors. Indeed, Japanese performance by this criterion alone haste respectable. omputation of the net flow of official and private long-term capital to less developed countrieshare of national income shows Japan ranking with Italy, Canada, and Norway (which cluster aroundignificantly ahead of Austria and Denmark, and behind such nations as Belgium, West Germany, the Netherlands, the United Kingdom, and the United States (which approach or slightlyercent).

Aid is inhibited also by economic problems arising from the unusually rapid pace of growth in Japan. The flow of long-term capital from the country is affected by rapid growth in at least three unfavorable ways. First, the strong demand for domestic investment in manufacturing that has sustained Japanese growth rates yields high domestic interest rates that tend to make overseas investment less attractive. Second, these highharges affect the rates at which funds may be borrowed by government agencies such as the Export-Import Bank and the OECF, andew instances in the last two years) credits extended to the less developed countries by these agencies have had to be offered at terms no more attractive than those of the IBRD.* Finally, the remarkably

* Although the OECF now loans at lower rates, all bilateral Japanese loans to less developed countries are tied to procurement in Japan. Thus Japan is not strictly competitive with the IBRD in loan assistance.

-

CONj^ENTIA l

strong demand for investment in the private sector, of which the tight domestic capital market is symptomatic, has meant inadequatein the public sector. This last consideration Suggests that budget appropriations for Japanese aid will have to compete against increasingly strong demands for Japanese government spending on housing and public works at home-

umber of reasons, the Japanese find it hard to secure public and parliamentary approval of significant enlargement of their official aid effort. Although the public is aware of the importance of foreign trade to Japan's industrial growth, it has only the most tentativeof the recent emergence of the national economy into the front rank of major economic powers and generally has no conception of how Japan might contribute to the needs of developing countries. Public confusion on Japan's roleonor country is compounded by the lack of or constructive Suggestions from the Japan Socialist Party. Areas of bipartisan agreement on foreign aid policy are notably absent in Japanese politics, and the fact that the Socialists have had no experience in administering Japanese aid only aggravates this problem, ate6 the Socialists embarrassed the Sato government internationally by blocking che passage in regular Diet session of an appropriation for the Asian Development Bank. At the same time the Socialistsather naive "long-range policy" on Japanese aid that called for, among other things, the creationPeace and Prosperity Force" from personnel of the Japan Self-Dofense Forces to improve relations with ocl-.er countries. Besides the fact that the Japan Overseas Cooperation Volunteers are already performing the function of such an organization, this proposal raises the question of how Southeast Asians might react to she presence of an organizationapanese military background.

The most pressing problem is the need for better administrative organization and coordination between official agencies. The principal agencies concerned with foreign aid and investment and theirare as follows:

Ministry of Foreign Affairs

Assumes Leading role in generating aid proposals; supervises Overseas Technical Cooperation Agency;

-

CONEmENTIA L

Ministry of Finance

Occupies pivotal budgetary position; wields important discretionary power Ln extensions of credits and allocation of some grants; supervises Export-Import Bank and exercises strong influence on operation of the Overseas Economic Cooperation Fund;

Ministry of International Trade and Industry (MIT1)

Presses commercial interests in formulation of official aid policies; supervises Asian Economic Research Bureau;

Economic Planning Agency

Participates in formulation of long-term aid goals; officially responsible for supervision of OECF.

There are rivalries among these organizations that reflect both the particular perspectives of the various organizations and the fact that ministers are often chosen so as to balance the Liberal Democratic factions in the Cabinet. Thus the attributes cumulatively described as

commercialism" in Japanese aid activities arc readily associable with MITI'a primary mission of promoting exports or the caution of the Finance Ministry in assessing credit risks. The Foreign Ministry, which characteristically takes the most positive stance towardc more liberal aid, has found itself embarrassingly ahead of the rest of the Japanese government on many occasions. This gap has been partially closed by the growing emphasis of Prime Minister Satoreater Japanese roie in regional economic affairs in Asia, by the repeatedons o: former Finance Minister Fukuda that Japan would meet the KNCTAD aid goalercent of nationalnd by the relatively

* Iz isoting that the achievement of this much-discussed goal was not tied to any particular time until the Ministry of Foreign Affairs picked3 as target yearraft three-year economic cooperation program completed in The program apparently has not yet received the biessing of the Ministry of Finance. At the annual DAC review o: Japan's aid program in Foreign Ministryjre still unwilling toarget year.

,

CONFIDENTIAL

primary products to less developed countries that emanated from MITI under the leadership of the politically ambitious Takeo Miki, One of the most encouraging features of the Southeast Asian Ministerial Conference on Development held in Tokyo in eariy6 was the direct involvement of the whole Japanese Cabinet in discussions of regional economic cooperation. Participation in such an international conference created pressure for more creative thinking on economic development, and, exposed to public view, the various Cabinet members discussed assistance in joint development activities more daring than they would otherwise have been inclined to support.

CONK

-

II. JAPANESE AID TO FREE ASIA

A. The Region's Share of Japanese Aid and Investment Activities

Asia has been the principal beneficiary of Japanese aidlthough basic data are often inconsistent, the following crude estimates may be made of annual Japanese official and private financial assistance to the Free Asian countries:

Year

US S

comparison of these figures with the data inhows that Free Asia received aboutercent of all Japanese assistance to the less developed nations0 Although data for earlier periods are inadequate to make specific, reliable comparisons, the Free Asian share of Japanese official and private assistance was probably significantly higher than two-thirds in most years prior to

Reparations and indemnifications have been the mostf:ici.il ^ran'. aid,boutf the total to date. All of the disbursements under these reparations programs were made to Asian countries, as wellillion in official bilateral grants (see Official grant aid has gone almost exclusively to Asia, and this trend is likely to continue for the foreseeable future. Although the regular reparations programs in Burma and South Vietnam have been completed, such currentas reparations to the Philippines, continued grant aid to Burma and Indonesia, and grants under the normalization treaty with South Korea will probably account for well over half of the disbursements of bilateral grant aid over the next few years.

" For major details of commitments of official grant and credit aid to Asian countries, see Table 3.

-

Table 2

Jaoan: Grant Aid to Free Asian

Asian Countries

Grantand

to all Countries Indemnifications

Grants

Gran-Aid a/

i

5

0

0

000 c/

0coC0

because of rounding, components may not add to the total.

i. Inducing settlement of an Indonesian trade deficit of

rillicn and pay=ents for the Thai Special Ten Account-

c. Including disbursements under the Thai Special Yen Account for

3Uarcral grants other than those related to reparations, Korean normalization, and the special grant program (or 3urma have been disbursed primarily for technical assistance. In this category, Asia has again been the principal beneficiary. Thus,otal ofillion in grants for technical assistance2lmost three-fourths went to Free Asia. In addition to financing the overseas activities of Japanese technicians, these grants have funded :he Japanese share of establishing technical training centersumber of .Asian countries.

The share o: Southeast Asia in Japanese official loans is more difficult to gauge because of recurring changes in classification of data. In annual presentations to DAC, the Japanese government has ci:ed figures indicating that3 well over three-fourths of the

-

annual net disbursements of all official loans to less developed countries have gone to Free Asia. * By far the largest part of these disbursements has been channeled through the Export-Import Bank of Japan. After adjusting available regional data of the Export-Import Bank for34 to exclude credits to developed countries, the Free Asian share of credit commitments to the less developed countries in those years amounts to overercent. This figure may misstate the region's share of long-term assistance, for it includes credits for less than five years. Despite the inadequacy of such an indicator, it is clear that credit commitments by the Export-Import Bank to Asian countries arc both numerous and of major importance. Indeed, by the end ofspecial yen"ith India and Pakistan had accounted forercent of all credit commitments since the founding of the Export-Import Bank* Finally, using all Export-Import Bank loans outstanding to the less developed areas of the world at the end of4 as another crude index of this organization's participation in Japan's long-term credit assistance, loans to Free Asia account for about half the total.

*12 the Asian share of net official credit disbursements stood at an unusually lowercent. This was the result of heavy disbursementsteel mill in Brazil and lags in implementation of 'special yen" credits to India and Pakistan. a* See I,bove. 3etween the end of4 and0 million of major credits were extended to India, Pakistan, Nationalist China, and Malaysia alone by the Export-Import Bank.

-

1 the OECF has also participated in Japan's credit assistance, and the activities of this institution again indicate the primary position of Free Asia in official Japanese aid. Although only about half ofillion in total commitments of the OECF as o: the end of6 was accounted for by Free Asian countries, the OECF was responsible for disbursing funds overears to South Koreaine of credit0 million related to the normalization treaty and to Nationalist China over five yearsortioniillion line of credit also agreed to The Director of the OECF Loan Department indicated in6 that,illion in the national budget fore expected half o: the total fundsillion available to the OECF to be required to6 disbursements under the Korean and Nationalist Chinese commitments. Increasing pressure from other donors and from the less developed countries themselves for more liberal Japanese credit terms

COiVb-LkWNTLAL

may lead to further expansion of OECF activities; but, partially becauseense of familiarity with the region, Japanese business interests probably will tend to focus these activities on Southeast Asia in general and Indonesia in particular. *

Although regional data on long-term private capital flows'* from Japan to the less developed countries are both scarce and inconsistent, available information indicates that Free Asia receivedhird of such capital2 Over this period the annual flows to the region ranged from less than one-third to an exceptional one-half of total Japanese investment and long-term private credits to the less developed countries. Of the two major categories, Free Asiareater net share of guaranteed private export credits than of net direct investment. Indeed,onsiderable number of individual investmentside variety of enterprises throughout Asia, the stock of Japanese investment in the region at the end5 amounted to only aboutercent of total Japanese investment in less developed countries. In no small measure, this patterneflection of the unreceptive attitude toward foreign private investment on the part of several governments of the region.

S. The Japanese Roie in National Development Activities

Al: of the countries of Free Asia have been recipients of Japanese long-term capital. In some of these countries the relative importance o: :hia assistance to economic development has been especially 0 million in reparations have been by far the most important postwar source of official foreign grants for Burma, and the successor program0 million in grants occupies the same position among Burma's present resources for financing development, Inand the Philippines, Japanese reparations have beennly to US aidource of grant disbursements, and unpaid balances under the reparations program in the Philippines are

>A In Indonesia, OECF credits have helped provide capital for production-sharing investments in petro!eum> nickel ore, and forestry development projects.

fc*hat follow are for private direct (equity) investment and government-guaranteed credits for more than five years.

-

CONFiamNTlAL

grants and loans to bc provided to South Korea under thetreaty will make Japan the second-ranking donor of aid to that nation. Through its "special yen" credits, Japan,ember of aid consortia, has alsoignificant participant in the economic development of India and Pakistan. redit0 million to be disbursed over five years to Nationalist China will bring the annual amount of Japanese assistance to that country almost to the level of the remaining US economic assistance. Japan has alsoajor contributor of official foreign aid for the current Malaysian five-year development program through the extensionillion credit in late Conclusion of an agreementillion credit to Thailand, which is still under discussion, would greatly enhance the Japanese role in that nation's development activities.

1. Official Aid Activities

The quality or yield of official Japanese assistance in the countries of Free Asia is difficult to describe in other than general terms. Japan, like other donor countries, has encounteredin administering project aid. ecurrent theme in criticisms o: Japanese aid has been the failure to consider the requirements of the recipient. There are reasons to suspect that this criticism, although valid, may lose some of its applicability as the reparations payments drawlose. The Japanese have felt that reparations payments should be completed as expeditiously as possible, and the nature and mechanics of these transactions are not conducive to strong Japanese suggestions on end use. Officials of the Philippine government have done some soul-searching in recent times,epresentative judgment is that only aboutercent of thedisbursed in that country were effectively used for national economic development. Both ex-President Macapagal and President Marcos have expressed concern over waste by Philippine recipients

* The remaining reparations commitments to Indonesia are not as large or accessible as0 million or more as yet undisbursed to the Philippines. illion still due Indonesia as ofillion secures loans upon whichLl probably be unable to make further payments.

CONF.

NTIAL

-

More effective coordination of Japanese aid activities with national development programs of the recipients might be achieved through increased involvement in aid consortia. The Japanese have been regarded as cooperative participants in the consortia for India and Pakistan. To avert the disorder that mightoosely administeredprogram in Korea, the United States sought to haveonsultative Group for that country, and the Japanese joined the group for its first formal meeting in The activities of consortia provide the Japanese Ministry of Foreign Affairs with justification in arguing to the Ministry of Finance that Japan is being asked to give its "fair share" in assistance to the recipients. Thus far, however, this has done little to overcome the necessity that the Foreign Ministry justify aid programs on the basis of potential trade gains.

Official Japanese reparations and aid have been disbursedide variety of end purposes, as can be seen inwhich shows some of the forms of official Japanese aid to Free Asia}. Principal projects have included major public works (such as power plants, an irrigation scheme, bridges, and water supply systemsee Figureontributions to industrial development through the construction o: numerous plants in both light and heavy industries throughout the region. Within the recipient countries, these projects frequently have beer, notable for either scale or type. Thus the Balu Chaung hydroelectric plant in Burmahe Da Nhirr. hydroelectric plant In South Vietnarrfare the largest such installations and the principal elements of installed capacity in these countries. The Brantus River development project in Indonesia has been racked with difficulties ir.d, at best, can only be completed well past the target datehis project, which was to include the nation's second or third largest hydroelectric installation, was intended to supply the power necessary to regional industrial development in eastern Java and major irrigation and flood control facilities for the nation's leading agricultural area.

CONR

TIAL

* To secure more effective use of these funds. Marcos has urged leg-.slatior. to charme: all remaining reparations to the public sector. This installation has not been in full use since May5esult of Viet Cong sabotage to the power lines.

CONFIJgeNTl Al,

CONFUmNTIAL

0ft

3sS

**"

C

',-

. 1

3c

*J

V

*1

e

5 *

J!

a

i

i

?

1ll

DC

v is

mi

Ii!!

I 1

3

1

3

s

!

p

1 -

a "

c

yen" credits have included The construction of two particularly large fertilizer plants and the nation's leading plant for making alloy and special steels, on steel ingot plant that is, in essence, Pakistan's modern steel industry isapanese-aidedwo of the eight operating cement plants in the Philippines, accounting for overercent of annual production, were equipped under the reparations program,hird plant had not yet received all of its reparations-financed equipment in late

Nonproject assistance by the Japanese government to the less developed countries has also been extensive and has taken the forms of both capital equipment and consumer goods. The reparations agreements covered such aid, and subsequent grants have also provided for various types of nonproject uses. Those suppliers' credits and government-to-government credits of the Export-Import Bank that until recently comprised Japan's only loan assistance program to the less developed countries were frequently nonproject aid. Although future "special yen" credits to India and Pakistan and loans under the normalization agreement with South Korea probably will be oriented primarily to specific development projects, nonproject assistance will continue to be an important element of the capital flow from Japan to the other Free Asian countries. Attempts toharp line between project and nonproject aid or to assign aggregate values to either category may cause unnecessary confusion. In the case of Japan, the major role played by transportation equipment and industrial machinery in nonproject aid increases this risk. Thus it is somewhat arbitrary to describe the supply ofarge oceangoing freightersmaller interisland ships to the Philippines asid when it might as easily be regardedajor component of an infrastructure "project" for the Philippinee imilar problem would arise in connection with the first normalization loan by the OECF to Korea, which provided Simillion for purchases of rolling stock. As the Japanese aid program moves out o: the era of reparations, Japan (bothilateral donorember of consortia) will become increasingly concerned with coordinating its nonproject aid with national development goals abroad. Foreign pressures on the Japanese government to restrict supplies of

- Openedhis plant will be increasedapacityetric tons over the next few years. tjcs arc given in metric tons.)

CONE

JAL

-

consumer goods in favor of nonproject aid in the forms of industrial and transportation machinery and agricultural equipment will tend to increase. At the same time, the numerous difficulties encountered by the Japanese textile industry in the United States and other markets willontinuing effort on the part of that industry to sustain sales through participation in official aid programs, and it is likely that the Japanese government will continue to offer textiles in such emergency credit assistance as that extended to Ceylon and Indonesia5

*escription of the forms that Japan's technical assistance takes, seebove.

The latter category includes the US-Japan Joint Third Country Training Program, under whichersonnel were trained before it phased out beginningnd the various United Nations programs.

-

Extensive technical assistance has also been provided by Japan to the developing countries of Free Asia. The most important element ai the Japanese technical assistances the training of students and technicians in Japan (see Country totals for this activity, shown In Table 4, reflect trainees both under programs ;'or which Japan bore full expenses and under those for which it bore only part of the costs."*

' " .1

t

Academic and Technical Training of Free Asians Total fora/

of Kuaher of Trainees

Freeb/

b/

Ibix as -cco'cer lyoo

Totalh/

Although it may be useful to distinguish between the categories of "academic students" and "technical trainees" for some purposes, the thrust of the Japanese training effort can best be visualised as an effort to provide advanced or specialized training to both experienced nondegree and degree students or trainees. On the basis ofdata, it appears that aboutoercent of the technical and academic trainees from Free Asia probably have received instruction in agriculture and fishing, with distinctly smaller shares being trainedariety of other-fields. As can be seen from Tablehich shows the number of Free Asian students and trainees in Japangriculture currently places second to engineering among academic disciplines and second to the field of public utilities in technical training.

Table 5

fields or Instruction of Free Asian Acadeoic Students and Technical Trainees in5

Field

Of

Id

of Technical Trainees

transport, and

rsinlng, and

sciences

administration

sciences

services

addition to training programs at home, Japan sponsors considerable technical assistance abroad (see Since

-

CONF1JMFNTIAL

FIGURE S

JAPAN: OVERSEAS TECHNICAL. ASSISTANCE TO FREE ASIAN COUNTRIES

INSTRUCTION ON THE OPERATIONISH DETECTOR IN THE PHILIPPINES

TRUCT ION ON THE OPERATIONHRESHING MACHINE AT THETRAINING CENTER IN PAKISTAN

-

CONE0tNTIAL

coNFi0mriA i.

he Japanese government has dispatchedxperts to Free Asian countries.' 5xperts and technicians in Free Asia being financed by the Japanese government were distributed by fields as follows:

Agriculture

Industry, mining* and handicrafts

Economic planningurveys

rower, transport, and cooaucications

and Technicians

116

105

85

55

Field

Education Health services

Other services

Experts and Technicians

0

also hasumber of Free Asian countries establish training centers. These have included eight agricultural demonstration farms in India, agricultural training centers in Cambodia andisheries center inarine-products center in India, small-scale industry centers in Afghanistan and India, telecommunications centers in Pakistan and Thailand, medical centers in Cambodia and Thailand,oadcenter in Thailand. Related to this form of assistance areplans of the Ministry of International Trade and Industry to assist in the construction and operation of model industrial plants abroad. Proposals for7ice-bran oil plant for Cambodia and an agricultural implements plant for Laos. Finally, Japanese technical assistance has inclndsd many preinvestment and feasibility studies on mineral resources, infrastructure projects, and industrial development.

2. Private Investment Activities

Consideration of the role of Japan's private sector in the national development activities of Free Asian countries is hampered by inadequate data and the fragmentary nature of reports on specific transactions. Data

= Although pertinent figures are extremely sparse and outdated, it is possible that the private sector has sent five times as many technicians tc Free Asia in connection with exports of machinery and equipment and private investment in the region.

-

CONEL0ENTIAL

recently published by the .Ministry of Finance show the following percentage distribution by productive activitiesotal Japanese investment flow8 million to Free Asia from1 through

Activities Percent

Agriculture,

and fisheries

Mining

Food processing Textiles

Productive

Steel and other

General

Electrical

Note that the data are in no way additive because of the gap0ome flow data are available for this period but, because of various inadequacies, are not shown here.

The Japanese apparently have been unable or reluctant to publishshowing the related information on the stock of their investment by projects or countries, Some sense of the kinds of projects in which the Japanese have participated can be derived from the list (which is less than exhaustive) of lines of postwar investment in Figure 6. Data on the stock o: investment by countries0 have been extracted forromf the relatively rare Japanese releases of information on this topic. Sead in conjunction with Tablehich shows the net flow of Japanese direct investment to Free Asia, these dataumber of reliable general impressions.

figure" c

JAPAN; SOMC LINES OF PRIVATE INVESTMENT IN FREE ASIA

I Ml tl

PHINCIPAL POiTWW LINES OF JAPANESE PRIVATE INVESTMENT

TIN AMD TUNC ST IN MINIS) AUTOMOUIII. TRUCK. AND MOTORCYCLE ASSEMBLY PLANTS.

GALVANIIKD IRON SHEETS) RADIO EQUIPMENT, MANUFACTURE OP APPAREL* flSMINO NUTS, SUGAR REFINING

NICKEL ORE MINES, TIMI11R EXTRACTION

STEEL MILL. CEMENT Mill.. STEEL TUBFS. ELECTRIC WIRES AND CAIILt.

ELECTRIC APPLIANCE Si POLYVINYLCHLORiOE PIPES, PLYWOOD, PAPERATCHES,

ore minis. iron and steel mm lino, tin smelter, cement mi.lv timber and wood products. textiles ano wearing apparel, pooo procesbing, fisheries

ORE MINES, COPPER MINES) TIMBER EXTRACTION

ORE MINES, SPECIAL STfEi WIRES AND WIRE ROPE, ELECTRIC WIRES ANO CAUlE. POLYVINYLCHLORIOE PRODUCTS) BICYCLE TIRES

KONG

NATIONALIST CHINA

AND APPAREL, SHIP SALVAGE, STEEL PRODUCTS

agricultural machinery, wire rope, fluorescent lamps) chemical and Syn-ThETiC textile processing

Thailand (and especially its manufacturing sector) is clearly the major beneficiary of Japanese private investment, with the surge in Japanese activities in this country beginning Both before andhere has been significant Japanese investment in Malaysia and Singapore.* The data also reflect considerable Japanese investment in Indonesia, which indicates that the production-sharing approach to investment is sufficiently attractive in that case to counterbalance myriad problems of political and economic instability. India, where private initiatives have been stymied by extensive government controls and participation in industry, has received little Japanese private investment; and this point becomes even more apparent whenillion of investment in Goa,ortuguese colony, is deducted from0 data.** Finally, the two tables pointecline in the share of the Philippines in Japanese private investment that results from two unrelated factors. First, Japanese investment in the minerals sector and in forestry took the form of production sharing, and initial-outflows of capital from Japan were later offset by inflows of resources from the Philippines that thereby rep resented Japanese disinvestment. Second, Japanese investment in any joint ventures has been held up by the reluctance of the Philippine Congress to ratify the Treaty of Amity, Commerce and Navigation signed in0 and ratified shortlyby the Japanese Diet.

C. The Japanese Role in Regional Development Activities

Durings, Japan slowly reestablished its presenceignificant participant in the economic affairs ot Free Asia. Increasing bilateral aid, trade, and private investment were important factors in this recovery. Somewhat greater difficulty was experienced by the Japanese in trying to iind their place in regional efforts to develop the nations of Free Asia. This difficulty resulted from the lackense of community or common purpose among the other Free Asian nations.

* Over five years ending inapanese investment in joint industrial ventures in Singapore reportedly amountedillion (which was distributed amongompanies}, illion more was expected to be invested Japanese investment in Malaysia,ew overseas branches of Japanese firms, was more reliably assessed by6illion spread amongnterprises.

*" Inapanese newspaper reported the stock ofinvestment in India toillion, spread overifferent industrial ventures. All but somef these ventures took the form of technical collaboration (or licensing}.

-

CONFJmZNTIAL

the necessary Japanese preoccupation with reconstruction and growth, and the reluctance of the Japanese to be accused ofew version of the Greater East Asia Co-Prosperity Sphere.

The postwar involvement of Japan in regional development activities can be traced back to its acceptanceull member of the Economic Commission for Asia and the Far East (ECAFE) in3 or of the Colombo Plan ineeut the real thrust of Japanese efforts toositive role in regional development activities came7 with the "Asian-centered diplomacy" of Prime Minister Kishi. Kishi toured the countries of Free Asia7 and carried the messages of Japan's peaceful interest in Asian economic development and the necessity for closer regional cooperation. The Kishi government concluded reparations agreements with Indonesia and Vietnam, liberalized the credit functions of the Export-Import 3ank, initiated the "special yen" credits to India, and took measures to stimulate private investment in less developed countries- It alsoew cogent proposals for regional development. One of the most interesting of these was the suggestion that the advanced nations, particularly the United States and Japan, should contribute capitaloutheast Asia Development Fund from which Free Asianh: borrow. ariety of other Japanese assistance efforts in Free Asia under the Kishi government, the dispatch9 of three Japanese missions to survey the Mekong River stands out as one of the earlier activities of the Mekong Commission* and one of the first tangible Japanese contributions to what can legitimately becg:cnal project.

There was no real diminution in Japanese economic activitiesFree Asia under the ikeda government, which came to power in This new administration, however, was not as convinced:he ultimate primacy of Free Asia in Japanese trade opportunitiesas more concerned with problems of domestic economic growth. Nevertheless, Japan took an increasingly active part in meetings of ;he ECAFS under the Ikeda government,

An important element in Japan's confident emergence inos as the economic leader of Free Asia is the growing national co^TVzance o: advanced industrial status. With Japanese income

Mekong Commission came into being

-

CONFJ^NTIAL

per capita less than that of Italy or Venezuela and frequent uncertainty among Western economists as to whether Japan should beeveloped nation, many Japanese only began to appreciate the nation's new economic status with its attainment of regular membership in the OECD and its elevation to Article Vin status* in the IMF ineinforcing the sense of coming of age4 were repeated foreign comments on the remarkable progress of reconstruction and industrial growth in Japan and the country's successful job in hosting the Olympics. Stimulated by the plea of the UNCTAD for donors to increase aidhare of national incomeercent, the Japanese were reviewing their own aid programs when President Johnson made5 speech calling for Asian initiatives to effectively employillion in regional economic development in Southeast Asia. For many Japanese (especially those in the Foreignhe President's speech was the long-awaited opening for positive Japanese leadership in regional affairs and anto cooperate more directly with the United States in the development of Free Asia.

Since5 the Sato administration has shown considerable interest in increasing Japan's role in regional economic projects as part of the effort to expand its development assistance. One of the most impressive aspects of this new interest is the fact that Japan'sof SZOO million to the capital of the Asian Development Bank* an organization conceived by the SCAFE, was as large as that of the United

States. Indeed, the Japanese have even informally suggested to the United States the multilateral creationpecial fund for regional agricultural development to be administered by the ADB. As originally proposed iny Takeo Miki. Minister of International Trade and Industry, this agricultural fund was to amount to0 million outside of the SI billion oi basic ADB capital and was to be used to advance low-interest loans for individual agricultural projects and community development. At variou

* Article VIII of the Fund Agreement of the International Monetary Fund (IMF) requires the country concerned to refrain from imposing restrictions on current payments and transfers of foreign exchangeprior approval. Attainment of this status by Japanreater responsibility for the operation of the international monetary system. ** The Asian Development Bank, which opened formally on6 in Manila,otal capital of Si billion subscribed by the nations of Free Asia and the advanced countries. Half of this amount is to be paid into the bankeriod of five years. In lateapan made its first annual paymentillion.

'IAh

points in the discussion of the Miki plan, the Japanese Foreign Ministry has spoken in terms of Japan0 million tound. This concept is now under intensive study by the Japanese government, and thereood chanceodified version of the Miki plan will be made public

Japan's initiatives in the Mekong Committee also represent increased participation in ECAFE-sponsored programs for regional development. Inapan agreed torant ofillion to helpotal costillion for the Nam Ngum hydroelectric projectekong tributary in Laos. More recently, the Japanese Foreignwith unofficial encouragement from the United States, has taken the lead in trying to organize financial support for constructionultipurpose dam under the Mekong Committee on the Prek Thnot Riverambodia. In7 the Japanese government notified the Mekong Committee that it was prepared to provide upillion, of whichillion would be in grants, toward the cost of the dam if :he other donor countries could come up with theillion.

c: potentially greater importance to Free Asian development than Japan's participation in the projects of multilateral agencies is itsonfidence in openly assuming the leader's role in attacking regional ecor.orr.ic problems. The clearest (and, indeed, the first) manifestation o: thl* new confidence was the Southeast Asian Ministerial Conference an regional economic development convened by Japan in Tokyo in early6 (sec This two-cay conference was attended by

figure 7

economic ministers from Japan, the Philippines, Malaysia. Singapore, Laos, South Vietnam, and Thailand and observers from Indonesia and Cambodia, and covered such basic issues as capital formation,development, access to export markets, agricultural develop* ment. industrialization, and improvement of public works and services. Althoughrief gathering could only Scratch the surface ofin these areas, the Tokyo Ministerial Conferenceumber of merits beyond its contribution to Japan's growing international First, it didurely Asian setting in which represent* atives of Southeast Asian countries with divergent political attitudes could discuss their problems. More importantly, it dramatized to the Japanese people and to elements of the Japanese bureaucracy not usually concerned with foreign relations the new responsibility for regional economic leadership incumbent upon Japan as an advanced industrial nation. The conference also thrust upon the moreand parochial Japanese ministries the new role of seeking areas in which they could assist in regional development, and this challenge was enthusiastically met by proposalsariety of regional cooperation schemes. Finally, the Tokyo Conferenceew round of Japanese offers of credit assistance,illion proposed forillion for Malaysia, and S7 million for Cambodia.

In addition to giving rise to plansimilar meeting in Manilahe Tokyo Ministerial Conference in April provided for another conference in Tokyo in Rescheduledhis second Tokyo conference was to bc concerned exclusively with Southeast Asian agricultural development. The December meeting was attended by approximately the same group o: countries that went to the April ministerial conference* and by observers from various international organizations. This meeting strongly endorsed the ideaegional agricultural development fund, thereby clearing the way for more active Japanese involvement in this field. It also called for feasibility studies for fishery training and research centers in Southeast Asia. By7 the Japanese government was well under way with plans to establish four such centers, beginning with one in Bangkok to be in operation

* The April meeting represented no small diplomatic triumph in securing Indonesian and Cambodian attendance in observer status. Ln December, Indonesia and Cambodia sen: regular delegations, Heroic Japanese efforts to secure Burmese participation in December were unsuccessful.

-

CONEBENTIAL

UJ. JAPANESE TRADE WITH FREE ASIA

A. Magnitude and Growth

Japan's exports to Free Asia5 were valued atillion and imports atillion (see Comparable US trade with che regionillion in exports7 billion in imports. The region's growing trade deficit with Japan in recent years has in part reflected and been facilitated by the increased flow of long-term capital from Japan. On the average,hird of the trade deficits05 were covered by the flow of Japanese long-term capital, and most of the rest was financed by the less developed countries out of credits received from multilateral agencies and hard currency earnings on other markets.

Japanese trade with Free Asia grew rapidly0hen exports to this area increased almostercent andercent annually. Nevertheless, because the overall expansion of Japanese trade was even morehe Free Asian shares in total Japanese trade declined. Thus exports to Free Asia5 representedercent of Japan's totalignificant relative decline from theercent of Japanese exports that had gone to the regionimilarly, the Free Asian share of Japanese imports declined from overercent0 to aboutercent Both of these trends were continuations of secular declines from corresponding shares ofercent for exports andercent for imports Although some significant changes occurred6 in the patterns of trade with some Free Asian countriesrimarily because of the cessation of insurance of exports to Indonesia, the war in Vietnam, and the beginning of normalization payments to South Koreahe relative shares of Free Asia in Japanese exports andercent andercent, respectively/ showed little change

The overall expansion of Japanese trade was spurred on by remarkable growth in the already large exports to the United States and other advanced countries and by increased imports from countries outside Free Asia. Doth of these overall growth patterns are likely toustained increase of exports to advanced countries is likely because Japan is continuing to develop its productive capacity and internationalin those sophisticated lines of manufactured consumer goods that are

Japan's exports grew at an average annual rateercent0 Over the same period the import growth rateercent.

-

CONFIDENTIAL

e ?

3 I

rj

*o

m

S?

-i

f.

r>

-

rf

-3

.N

-

S3

i

:

* z z

Hill

* 5

3. 1

2 S 5 ^

H

3

ii 'l.

:

*o

<5 -

5 -

-

CONFIDENTIAL

most easily marketed in high-income countries. <! ontinuation of the decline in the share of Japanese imports originating in Free Asia is equally probable because, first, the rapid pace of expansion of Japanese requirements for industrial raw materials significantly exceeds the rate of growth of production of most of these commodities in Asia, and second, the Japanese government and importers are making every effort, within the bounds of sound cost relations, to diversify their sources of raw materials.

As long as the growth of Japan's trade continues to outpace that of the less developed countries of Free Asia, it will be possible for the share of these countries in the Japanese market to fall while Japan's share in the region's market grows. Thus, despite the relative changes described above, the share of Free Asian exports going to Japan increased fromercent0 to aboutercentnd the Japanese market share o: Free Asian imports increased correspondingly fromercent to almost IS percent. These increases are continuationsonger trend, for in the period Japan has been the country showing the largest gain ir. market shares in the region's trade.

The growing role of Japan in the trade relations of the other Free Asian countries has tended zo increase the attention paid by theirto adverse bilateral trade balances with Japan. In recent times. pakiscan and Cambodia, among other countries, have expressedanxiety over the size and persistence of their bilateral trade deficits with Japan, and, in the latter case, this anxiety has resulted in athat an existing trade agreement be renegotiated every six months. Concern for bilateral trace deficits can be expected to lead to greater pressure on Japan to apply corrective measures such as forms of regionaland assistance in diversification of export commodities of the region.

The patterns of change in Japan's shares of the imports and exports of Free Asian countries, which areableary significantly by country. Notable increases in shares of the market have occurred

- Someercent of the value of US imports from Japan are goods related co personal consumption expenditures. These include such items as metal manufactures, cameras, radios, television sets, motorcycles,porting goods.

-

confidential

with respect lo Such relatively important regional trading partners as thendonesia, and Thailand. Despite much greater rates of growth of global trade for Japan than for India, the Japanese shareshe Indian market have declined slightly. lso show chat, among the major Asian trading partners, trade with Malaysia has suffered the greatest relative stagnation, and Japan's shares of that country's trade have declined markedly. ecently concludedcreditillion to be disbursed by Japan over five years, growing Japanese private investment, and the reopening of reparations discussions may provide the necessary stimulants to the Malaysian trade.

Table 9

The Japanese Share of the Market in Free Asian Countries

5

Percent of Country's Percent oftofrom Jacar.

y

b/

c/

China

,

=/

V

a

2/

r.

0

Countries are shovr. in the order of their rank5 trade tura-;ver with -Japan.

=:- Eacause cf statistical inadequacies oral trace patterns, iatare

:- rati are adjustednclude Portuguese India

The Philippines provides the one instance in which the data are adequateeparate reparations deliveries from normal commerce. Thus subtracting reparations from Philippine imports from Japan05 yields an ir.rrease in the Japanese share of the Philippine import market fromo

ercent.

-

an exchange of manufactures for raw materials, but importanthave occurred within this pattern in the postwar era (see. Major factors in these changes have been the steady growth of heavy industry in Japan and that of light industry in the less developed countries of Free Asia. Growth of Japanese heavy industry has both facilitated and been supportedontinuing shift from light to heavy industrial manufactures in Japan's exports to the region, although in recent years the rate of growth of heavy industrial exports from Japan to the advanced countries has exceeded that for such exports to Free Asia. At the same time, the growth of light industries and increased protection for their products in the less developed countries has ledecline In the share of such traditional Japanese exports as textiles in total trade. Japanese imports from Free Asia have also been affected by the steady growth of heavy industry at home. To sustain rates of expansion of industrial output in Japan that exceed the annual increases in supply of raw materials in Free Asia, additional sources of primary commodities have been sought throughout the world. The dimensions of this problem o: divergent growth can be partially perceived in Figure 8_

The data on shares of various commodity categories in Japanese trace with Free Asia highlight the rapid growth of exports of capital goods to the region. Such growth derives directly from the increased demand for these goods in the development programs of Free Asian countries, forGhe Japanese share of the market in the region's imports of machinery and transportation equipment held steady atoercent. Some significant changes have occurred in ehe mix of these Japanese machinery exports Taken together, elecrricai and general machinery have movedosition in which they accounted for about half ashare of exports as textiles0 to one in which their combined share was greater than that of textiles The fact that the share of general machinery in trade with Free Asia has been greater than its share in Japan's total trade is indicative of the important role the region plays inarket for Japan's heavy industrial exports. This is particularly true for such items as metalworking machinery, textile machinery, internal combustion engines, and cargo-handling equipment. The share of exports of electrical machinery in Japan's trade with the region has lagged somewhat behind the corresponding share in Japan's total trade, but Free Asia has accounted for well over half ofxports of heavy electrical equipment, such as generators, motors, and transformers.

-

lit recent years. Although the relative share of transportationin Japan's trade with Free Asia declined slightly05 and was significantly less than the share of this category in Japan's total trade, the region is still the principal market for exports ofrolling stock (see Figurend an important recipient ofexports. Rapid growth in exports of rolling stock and motorcycles to Free Asia6 suggests some recovery of the share ofequipment in trade with the region.

The increased share of metals and metal products in Japan's trade with Free Asia also reflects the growth of industry and construction activities in the region. By far the largest share of this category is made up of basic iron and steel products such as sheets, shapes, bars, pipes, and tubes. Rapidly expanding capacity in Japan's steel industry, distinctly competitive prices,olid international reputation for its products Suggest that, despite any impact of recent US measures" totronger "Buy American" policy in procurement of steel products for Overseas aid activities. Japan's exports of steel products to Free Asia will continue to growast pace.

Conspicuous growth has also occurred in Japanese exports of chemicals to Free Asia. Japan's market share in the region's imports in this category moved from aboutercent0 to aboutercent mall but rapidly growing element of the trade with Free As La has been Japanese exports of plastics, which increased fromillion0illion4illion* The greatest part of the trade in chemicals, however, has been accounted for by fertilizers. elatively slow and faltering growth in exports of chemical fertilizers to Free Asia04 gave wayudden spurtnd exports to the region for that yearillion, orercent ot total Japanese iertiliEcr experts, r'uifne: growth in fertilizer exports to Free Asia is likely, as the Japaneseis persuaded by other aid donors to increase commodity assistance in its bilateral aid programs. Another factor favoring such growth would be the creationevolving fundillion for long-term, low-interest

The impact of these measures on Japan is indirect. Japanese sheet steel galvanized in South Korea and Taiwan for shipment to South Vietnam is most directly affected,eclining market for the galvanized sheet in South Vietnam reduces import demand for Japanese iron sheet in South Korea and Taiwan.

e*: The growth of shipments of synthetic plastics, among which polyvinyl-chloride resinarticularly important component, is anotherof the development of light industry in the region.

-

CONFUmNTIAL

MANUFACTURING OUTPUT IN JAPAN COMPARED WITH MINERALS OUTPUT IN FREE

ROLLING STOCK EXPORTED TO FREE ASIA

INDIA; T ELECTRIC LOCO-

THAILAND: LT DIESEL-ELECTRIC LOCOMOTIVE

-

CON^fENTlAL

fertilizer loans to Southeast Asian countries that was under consideration in the Ministry of International Trade and Industry in

The mosc prominent feature of Japan's imports from Free Asia is the steady decline of the share of raw materials in total trade0 percent0ercent This relative decline has been accompaniedroportional drop in the share of mineral fuels over the period. orresponding increase in the share of foodstuffs reflects more transitory demand factors, the nature of which is discussed below, Japanese imports of raw materials and mineral fuels from Free Asia grew at annual rates ofndercent, respectively, while the rates for total Japanese imports of these goods wereercent. The growth of Japanese imports from Free Asia will depend mainly on the regional supply of raw materials for some time to come. Further growth in Japanese food imports from the region is not likely to be great, andapid rise in demand for imported manufactures, which accounted for lessercent of Japanese imports from Free Asia will have little overall effect over the next few years.

Changes in the Free Asian share of the Japanese market for certain important raw materials are shown inhis table particularly highlights the falling shares of Free Asia in Japan's imports of iron ore. sawlogs, and crude oil, which together accounc for aboutercent of the value of Japan's imports from the region. In the cases of sawlogs in the Philippines and iron ore in the Philippines and Malaysia, increased domestic consumption is or may soonignificant factor in restricting the amounts of the commodities available for export. Generally, however, the problem has been the slow growth of production in che region. Increased foreign investment and managerial participation in the exporting countries1 extractive industries probably will be necessary ii production of quantities and qualities satisfactory to Japanese importers is to be achieved. The alternative mayreater Japanese emphasis on participation in the development of sources of raw materials in countries with more liberal investment policies such as Australia, Canada, and the United States. These three countries have recently assumed more important roles in current and prospective Japanese imports o: hard minerals, petroleum, and natural gas. ore remote, but still plausible, alternative is Japanese investment in Siberiaroduction-sharing basis.

That Japan has been able to evolve satisfactory production-sharing arrangements with Indonesia in petroleum and timber extraction indicates that obstacles imposed by tight government control of the minerals industries in less developed countries are not insurmountable for Japanese

-

CONEMENTIAL

development activities probably will contribute little or nothing to Japanese petroleum imports until0 and are not likely to offset the decline in the Free Asian share of the Japanese petroleum market significantly until much later than that.

A clear example of some of the difficulties encountered in expanding production of raw materials in Free Asia in response to Japanese import requirements is iron ore extraction in India. In this instance, despite the challenge raised by large Japanese contracts with Australia for supply of pelletized ores, an Indian delegation took the occasion of an ECAFE meeting ino propound an official view that, were lump ore from India not purchased by Japan at the same premium prices as Australian pelletized ore. it wouldefinite sign of Japaneseto Indian economic development. This argument completely begged the crucial issues of improvement of India's ore extraction and processing facilities, changes which might be effected by more liberal altitudes toward foreign private Investment.

mpressive aa the declining share of raw materials is the growing share of foodstuffs in Japan's imports from Free Asia. Comparison of Tablesnduggests that, particularly cereals (which accounted for aboutercent of foodstuffs imported from Free Asia inhaverominent role in this growth. In fact, rice imports from Free Asia, the United States, and Communist China have increased greatlyut leveling demand for rice and greater government emphasis on research to increase yields will probably reduce import demand in the long run. year forecast of Japanesedone in6percent growth in rice production accompaniedecline in per capita consumption that would leave Japan virtually self-sufficient in rice.

COS

Free Asian exporta to Japan of foodstuffs other than rice have better prospects. One commodity that has made considerable headway in the Japanese market has been maize, primarily for useeed grain. Thailand hasajor beneficiary of this expansion, as Japan's maize imports from this source have increased from less0 tons per year prior8 toons per year Prospects

for further expansion are generally good as Japanese meat consumption steadily increases, but Thailand and other Free Asian exporters will have to remain competitive with the United States.

Particularly strong growth has also been sustained in recent years by such tropical products as bananas and canned pineapple, which together accounted forercent of the value of foodstuff imports from Free Asia5 compared withercent Tropical fruits will probably continue to encounter an expanding market in Japan for years to come. Sugar,ropical product, has performed less impressively in Japanese imports from Free Asia. 5 this commodity accounted forercent of the value of foodstuff imports from the region compared withercent Nevertheless, the annual growth of sugar imports came toercent over the period. Large amounts of sugar probably will continue to be imported because domestic production meets only aboutercent of Japan's requirements at present and domestic consumption is growing atercent annually. With this expansion of domestic demand. Japan could be an important purchaser of Philippine sugar if that country were forced to make its way on the relatively depressed international market rather than enjoying premium prices in the united States.

-

IV. PROSPECTS FOR JAPANESE ECONOMIC LEADERSHIP

IN FREE ASIA

The explosive growth oi industry and the steady rise of the standard of living toward European levels have givenegitimate claim to che economic leadership of Asia. Only in the last few years, however, has Japan begun toignificant share of the responsibility for active leadership in helping to meet the development problems of Free Asia. In no small measure, the hesitation of the pastesult of the time required to overcome antipathy toward Japanese imperialism in the region duringss. An equally important deterrent to more active Japanese concern for Free Asian economic problems was the national preoccupation with rehabilitation and closing of the gap between Japanese and European stages of economic development. teadily increasing stream of indicators has attested sinceowever, Japan has arrived as an advanced industrial nation, and this fact is understood by the Sato administration ii not by the Japanese peoplehole. Although continued Japanese economic growth is itself vital to the security and general prosperity of Free Asia, it is also fair to question the extent to which the Japanese government is prepared to go in providing long-term capital and skills required in the development programs of Free Asia. It is only in this last sense that Japanese economic leadership in the region can legitimately be judged, for Japan has the less constructive option of simply withdrawing into its new roleember of the community of advanced nations.

A. The Outlook for Increased Japanese Aid

Two aspects of the current stage of development of Japanese aid programs and policies complicate the task of estimating the prospects for increased Japanese aid to Free Asia. The first of these is the lack o; coordination in the administration of aid. The Japanese government not only has no real equivalent of the US Agency forut it is also burdened with radically different aid philosophies within its executive branch. Although the ultimate power in making decisions on the amounts and terms of aid generally rests with the Ministry of Finance, this office rarely articulates its general views on aid and, for the most part, restricts itself to conservative statements on the wide range of Japanese international obligations and the tightness of the Japanese capital market. Given the ministerial conflicts in the field of economic assistance, ambitious and visionary statements by the Foreign Ministry on how much aid Japan is willing to provide in any particular context generally must be discounted. On the other hand, it

-

of Finance have not been in tune with the more aggressive policies of Prime Minister Sato and the rest of his administration.

The second complication in estimating Japanese aid is the fact that Japan has only recently begun toole in guiding development activities in the region. The implications of this fact are that Japan is moving out of an era in which obligations for capital assistance were both fairly well defined and assumed under pressure from other countries into one in which the initiative for development aid in as yet unspecified amounts must come more frequently from the Japanese government itself. Symbolically, this is the differenceeparations program negotiated with Burma and more recent Japanese efforts to drum up support among lukewarm capital donorsam project of the Mekong Committee in Cambodia. Although creative Japanese response to the development of Free Asia suggests an ultimate requirement for better internal coordination of aid policies and programs within the Japanese government, the current status of Japan's initiative is thatonsiderable array of specific suggestions by private and public agencies for particular projects. Thus we may know that elements of one ministryevo-ving Japanese fund for fertilizer loans and technical assistance in agriculture while other elements in the same ministry back an internationally subscribed agricultural development fund for Free Asia without knowing what, if any. relation the two approaches bear to each other. The enthusiasm that Japanese official and private agencies have recently shown for conjuring up grandiose Free Asian development schemes* in some respects has been an overzealous response both to President Johnsonsillion aid proposal and to the spirit of their own ministerial conferences. This positive initiative, however, is bound to be temperedraditional Japanese realism concerning the absorptive capacities of the less developedo: Free Asia.

Vt'ithitt the limits imposed by these problems, some crude estimates Hill seem warranted. First, the Japanese government has publicly repealed the goalercent of national income as an annual target for

* In addition to some of the less ambitious schemes such as thedevelopment fund and the fertiliser fund, the Japanese press inreflected discussion of an Asian Seaway (that isf extensive maritime rehabilitation)outheast Asian submarineubstitute television satellite network,ong-range purchasing programor:ec rice.

CONFL

TIAL

- 60

CONFmENTLlL

Long-term capital flow to the less developed countries with sufficient frequency that it is hard to believe that it will not be approximated at least Allowing for growth of national income50 at an annual rateercent, this would mean that Japan's official and private development assistance would amount toillion5 prices Although the shares of Japanese official aid going to Africa and Latin America have grown in recent years and private capital flows are likely to continue to be distributed widely, Free Asia would probably receive at least ashare of the long-term capital flow as it did for the period0* This wouldombined official and private assistance flow0 million or more5 prices to the region

Second, most of such assistance to Free Asia probably will be in the form of long-term credits, although, within the private sector, export credits will probably be matched by direct investment. The most prominent exceptions to this rule would be the official reparations and grants already projected or now under discussion for Burma, the Philippines, South Korea, Indonesia, the ADB, and other multilateral funds. The terms of official bilateral credits would probably be softer than the rate ofercent that prevailed for almost all such credits until quite recently. Within this context, it appears likely that the activities of the OECF would expand to facilitate softer loans without complicating or jeopardising the normal commercial loan activities of the Export-Import Bank. The predominant credit activities would probably be made more flexible with respect to use for commodity (as opposed to project) assistance, but use of credit funds would still be tied to procurement in Japan.

Third. Japan probably will concentrate most of its bilateral aid activities in Southeast and East Asia. This does not rule out acontinued role within the consortia for India and Pakistan, but it does suggest that Japanese official aid and private investment activities Ln the other countries of Free Asia will growaster pace. In addition to the principal recipients of major grant assistance identified above, official Japanese aid in the form of credits will probably be an important source cf developmental capital in Thailand, Malaysia, and Taiwan Private investment will continue to focus on Thailand. Indonesia, and Malaysia, and, with modest improvements in the climate for Japanese investment, will pick up significantly in the Philippines

* See II. above.

-

and South Korea. ast point to be considered is that increasing Japanese enthusiasm for multilateral aid activities may mean more suggestions and programs for special development funds for Southeast Asia.

B. The Future of Japanese Trade with Free Asia

Over the lastears the Japanese have shown increasingof the relation of expanded economic aid to the long-run growth of Japanese exports to Free Asia, The prevailing view among the Japanese has been that the stimulative effects of foreign aid to trade consist merely of financing exports and helping to Introduce Japanese products. Accordingly, budget proposals for economic assistance have long been presented to the Diet as "trade promotion" expenditures. This view is changing, however. Japan has now established Its competitive strength in heavy industrial exports; and overseas investments in manufacturing, such as thosehe listaveavored position for Japan in future Free Asian importsariety of semimanufactures and producers'goods. Under these circumstances, it has become more apparent that the principal limitation on the growth of Japanese exports to Free Asia is the prevailing level of income in the region. Although Japan will probably continue to enlarge somewhat its market shares in the trade of the region's less developed countries, the primary means for further stimulation of Japanese exports to Free Asia will have to be an expanding market based on sustained economic development, The Japanese arc beginning to recognize that they are likely to benefit from any aid which stimulates tha area's economic development. Thus participation in multilateral aidree Asia is seen increasingly to be in Japan's commercial interests.

Viewed from the perspective of the less developed countries of Free As:a, the crucial trade issue is how to increase Japanese imports from the region. As in the past decade, when the Japanese economy grew aboutercent annually, the Japanese market will expand rapidly. Nor arc Japanese traderoblem, exceptew agricultural products and manufactures. The most important factor limiting Japanese imports from Free Asia will continue to be the slow growth of production o: industrial raw materials in the region.

J Soe Figure.bove.

-

CONFjjj&fTIAL

The most direct means of increasing Free Asian minerals

production is what the Japanese frequently refer to as the "development and importhis method is based on such facets as Japanese government credits, private investment, and technical assistance for the developmentrimary product required by Japan, Instances of application of one or more of the facets of this approach are maize in Thailand, iron ore in India, copper ore in the Philippines, crude oil iu Indonesia, and timber in Malaysia and Indonesia, Through the Ministry of International Trade and Industry, the Japanese government covers up to three-fourths of the expenses of surveys and technical assistance related to the development of sources of primary products in the less developed countries.

Perhaps more than anything else, the combination of government assistance in initial surveys, government facilities for long-term loans to Japanese private investors,ong-range contracts for purchases oi Free Asian minerals under production-sharing has elicited criesariety of Western sources that the Japanese are seeking to reconstruct the Greater East Asia Co-Prosperity Sphere, This concern appearsfor the Japanese havetrong preferenceide distribution of sources of raw materials, and the external features of what is characterizedew form of purposive Japanese imperialism can be too readily explained on purely economic grounds. Thus Japanese credit assistance to private investors in Free Asian minerals production is most plausibly seen as an attempt to overcome problems of high domestic interest rates stemming from strong competing demand for domestic investment. Similarly, Japanese participation in minerals surveys iseflection of the fact that governments in the region have inadequate knowledge of natural resources and. for the most part, have done little to overcome this obstacle to foreign investment.

CONF.

NTIAL

Two considerations that tend to favor mineral development through Japanese overseas investment over similar agricultural development are the prospects for continued expansion of the large Japanese demand for raw materials for heavy industry and the advantage to the less developed countries of dependence on exports, the supply of which is not subject to such random shocks as bad weather. On the other hand, the extensive application of the "development and import" method to agriculturalcould have greater direct impact on the standards of living of rural population in many areas of Free Asia. If this diversification were directed toward tropical agricultural products having relatively high income elasticities of demand in Japan, the prospects for an expanding market in Japan would be enhanced.

A less satisfactory approach to the problem of expanding Japanese imports from Free Asia is that of providing preferences to the less developed countries in this region. Given the Japanese adherence to the General Agreement on Tariffs and Trade and other commitments to international bodies, this method would depend on subsidies for Japanese importers rather than any direct preference scheme. The issue of to less developed countries is presently under heated discussion among advanced countries, but there are at least two reasons why this sort of solution to the problem of large trade imbalances with Free Asian countries is not likely to be satisfactory. First, unless preferences were extended across the board to all less developed countries, the political conflicts thatystem would engender would be monumental. In the absence of regional preferences, however, there is only limited reason to believe that Free Asian primary exports would benefit much. Second, although preferential treatment might divert Free Asian exports of raw materials to the Japanese market, this diversion would probably have only limited impact on the production of such commodities,

-

CONFIDENTIAL

Original document.

Comment about this article or add new information about this topic:

CAPTCHA