China in Transition
Why Japan Should Continue to Provide ODA to China
- The Need to overcome market failures
Chi Hung KWAN
Consulting Fellow, RIETI
Demand for reducing or abolishing official development assistance to China is gaining momentum in Japan. Advocates of this view argue that Japan, experiencing severe economic and fiscal conditions itself, is now left with little capacity to continue its assistance to China, a country that enjoys robust growth. In addition, political complications between the two countries - as symbolized by the Shenyang incident in May 2002 - have given further support to such demands. The ongoing arguments, however, implicitly assume that ODA programs represent unreciprocated giving of benefits, without considering that donors can also benefit providing they use the program effectively.
Why do we need ODA, which is a form of government intervention in the market? In a capitalist system, a government is supposed to take a 'hands off' attitude and allow market forces to prevail. Nevertheless, in a number of economic areas characterized by "market failures," governments are still expected to play a significant role. Public goods, externalities, and inequality in income distribution are usually cited as problems embodying market failure in economic textbooks. In this context, let us examine some of the reasons for Japan to give China ODA.
Public goods are characterized by nonrivalry in consumption and nonexcludability. Thus consumption of a public good by one person does not reduce the quantity available to others, and it is therefore difficult to discourage consumption. If left entirely to the market, supply could not satisfy demand because producers of public goods are unable to charge beneficiaries. Parks and roads are typical examples of public goods. Likewise, we can also consider friendly international relations as a certain kind of public good. By improving relations with other countries through ODA programs, nations can better prevent the occurrence of wars and conflicts with the recipients of aid. Furthermore, through the giving of ODA, economic exchange such as trade and direct investment can be promoted.
In truth, there remain many unresolved conflicts over historical issues between Japan and China. More than half a century since the end of the Second World War, anti-Japanese sentiment still remains strong in China, despite the two governments' diplomatic efforts to promote Japan-China friendship. In launching business in China, many Japanese companies find themselves at a disadvantage compared with their U.S. and European counterparts, encountering strong anti-Japanese sentiment. If Japan could improve Chinese people's sentiment toward Japan through its ODA programs, Japanese companies' dealings in China would become less problematic. Despite its massive scale, Japan's assistance to China has not to date generated this desirable effect. Media reports suggest that Japan's assistance is winning little appreciation in China. To improve this situation, Japan should reinforce public relations activities in China and seek to create a solid spirit of trust between the two countries.
Externalities are the direct (negative) consequences of one economic entity impacting on another, pollution being a typical example. Against the backdrop of rapid population increase and industrialization, formidable destruction of nature - desertification as well as pollution of air and water - is taking place in China. By extending ODA to assist environmental conservation projects, Japan can not only help China improve its environment but also alleviate problems that spillover on Japan's own environment such as acid rain and yellow sand. In tackling environmental problems, China has a lot to learn from Japan not just in terms of advanced technologies but also in terms of experience and policy measures.
When income disparity among nations is large, rich countries may provide assistance to poor countries from a humanitarian standpoint. Elimination of poverty contributes to the political and social stability in countries receiving aid. China is Japan's neighbor, and Japan will be adversely affected if China experiences political turbulence, potentially prompting a flood of refugees. Thus, elimination of poverty in a neighboring country can help to prevent negative externalities. Despite remarkable economic development in the recent years, China is still a poor country with its per capita gross domestic product (GDP) below $1,000. Furthermore, China has huge internal disparities with inland areas lagging far behind coastal ones, and similarly rural areas lagging behind urban ones. Setting aside the urban areas in coastal regions which appear to be on a sustainable development track, the inland and rural regions, which contain the great majority of the Chinese population and make up the bulk of China's land mass, are far from ready to graduate from ODA programs.
September 6, 2002
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