East Asian Experience and South Korea-Japan Collaboration in Official Development Assistance (Summary)

OIKAWA Kozo
Chairman, RIETI

It is only natural that Japan and Korea, two countries with a multitude of shared experiences as aid recipients and aid donors, should seek the possibilities of ODA collaboration. In today's discussion, we will endeavor to cover what areas both countries should work toward in terms of assisting and what systems should be put into place.

MAEDA Mitsuhiro
Consulting Fellow, RIETI
Senior Analyst, Trade Finance and Economic Cooperation Division, Trade and Economic Cooperation Bureau, Ministry of Economy, Trade and Industry (METI)

The current state and prospects for Japanese ODA can be viewed from three perspectives. First, as is well known, Japanese ODA is centered on yen loans and the economic sector. Second, the modalities, especially the tying status of ODA, have been influenced by many different international assistance regimes over a long period of time. Third, Japanese ODA has issues in three areas: funding scale, debt sustainability, and aid allocation.

When thinking about the future of Japanese ODA, it is indispensible that we consider the overall development financing activities of Japan, and not just those that fall under the definition of ODA. In particular, ODA can be considered both in terms of Public Private Partnerships (PPP) that realign public organizations with private companies and new policies to realign citizens with public organizations.

LEE Hongshik
Professor, Department of Economics, Korea University

I have compared both macro and micro considerations in my studies of whether rapidly increasing assistance by Korea is taking the same path as the assistance programs of Japan.

First, on the macro level, I have found that Japanese ODA and Korean ODA are similar in the types of assistance, levels of the recipients, and the prioritized sectors for aid.

On the micro level, I have been investigating whether Korea's external assistance triggers foreign direct investment (FDI) like Japanese assistance does. I have discovered that there exists a positive correlation between the amount of assistance given by Korea or Japan and their FDI flows, suggesting that assistance by these countries brings about a vanguard effect.

My conclusion is that the assistance system in Korea is very much like that of Japan in the 1980s.

KASUGA Hidefumi
Professor, Faculty of Economics, Kansai University

The similarities that were pointed out between Japanese and Korean ODA are quite insightful. We also need to take into consideration robustness verifications based on an analysis using corporate data, an analysis into the relationship between export levels and direct investment, and finally, the effect of exchange rates.

TODO Yasuyuki
Faculty Fellow, RIETI
Assistant Professor, Graduate School of Frontier Sciences, the University of Tokyo

I have carried out empirical analysis on whether ODA has a vanguard effect triggering FDI. For each pair of donor and recipient countries, I have calculated the total amounts of aid and bilateral FDI and analyzed whether development aid had any of three effects on FDI, namely, an infrastructure effect, a rent-seeking effect or a vanguard effect. The infrastructure effect means a positive effect caused by improving the economic/social infrastructures of developing countries. The rent-seeking effect is a negative effect by encouraging unproductive rent-seeking activities. The vanguard effect means a positive phenomenon in which ODA from a donor country to a recipient country stimulates FDI between the same countries. The results of my research show that in general, ODA does not have any of these effects on FDI; however, in Japan's case alone, I have discovered that Japanese ODA effectively triggers FDI from Japan. I believe that there are two reasons for this: 1) In Japanese ODA, relations between the government and the private sector are close and information and personal exchanges are often carried out, meaning that useful information on the recipient countries such as economic/social infrastructure, legal systems and employment situations are well passed on; and 2) technical cooperation is proactively carried out using a skill test system, meaning that the skills and know-how of Japanese enterprises are effectively transferred to the recipient countries. Both of these reasons have created a favorable environment for Japanese enterprises with respect to investment.

PARK Bokyeong
Director, International Macroeconomics and Finance, Korea Institute for International Economic Policy

Unlike existing research, Professor Todo has employed data on bilateral assistance amounts and FDI flows as well as the precise results of econometric analysis. His conclusion that Japan's ODA creates a vanguard effect for FDI from Japan is innovative and should be highly regarded. I believe that by delving further into the possibility of a reverse causality between ODA and FDI (the idea that ODA might be a possible channel to encourage FDI), the effect of information distribution from the government to the private sector, and the effect of eliminating investment risk, we will be able to debate the nature of the relationship between ODA and FDI more concretely.

Would it not be more productive for policy debates if we studied the effects of exchange rate fluctuations and had area-specific discussions?

SAWADA Yasuyuki
SAWADA Yasuyuki, FF, RIETI
Associate Professor, Graduate School of Economics, the University of Tokyo

We should also discuss post-MDG rule-making moving forward, new assistance modalities including PPP, as mentioned by Mr. Maeda, and the complementary relationship between ODA and private investments such as the so-called "BOP" businesses. In this context, discussion of the extent to which Japan and Korea should collaborate is indispensible. Specifically, we need to explore in what sectors and what modalities Japan and Korea should work together on.

Professor Kasuga
When I evaluated donors based on sector-specific assistance data, I discovered that Japan's aid allocation is in line with the requirements of recipient countries in few sectors compared to the United States or donors in Europe. On the other hand, the amount of assistance given by Japan is large and aid allocation is efficient in such vital areas as food, health, and communication. As such, I can state that Japan's overall aid allocation is not inferior to that of the United States or donors in Europe.

Japan and Korea should proactively work together to define new post-MDG numerical targets and overall rules for ODA. It is especially critical that numerical targets be decided upon in an appropriate way, and it is necessary that ODA be studied and evaluated from an academic perspective.

Professor Lee
Korea, as an emerging donor country, has the advantage of being able to transfer its own economic development experiences to other countries; an advantage which I believe puts the country in a comparatively superior position. A focus on the economic sector and an assistance structure combining infrastructure investment with policy proposals are the key strategies of Korean ODA.

On collaboration between Japan and Korea, it is important that the two countries share their experiences of economic development, foster ODA experts, support the capital accumulation of donor countries, and discuss the substance of aid. Japan-Korea ODA collaboration is vital in order to enable "green growth," which is environmentally friendly economic growth, as well as provide assistance to North Korea.

Mr. Maeda
I would like to point out three points for the ideal form of Japan-Korea collaboration. First, both countries need to support each other's projects based on the existing assistance regimes of the OECD. Second, Japan and Korea should play central roles in establishing new development financing modalities and defining new rules. Third, the two countries should collaborate with each other to establish a new financing system. I believe that the two countries can work together in many other areas as well. In doing so, the two countries should fundamentally think about what Japan-Korea cooperation can do for global poverty reduction and the economic development of developing countries.

Mr. Park
The Korean government is currently interested in consolidating loans and grants, reducing tied aid, exploring priority areas for assistance, and introducing new modalities like PPP. These are hot issues for the establishment of a new form of Korean ODA.

The advantages for Korea in terms of working with Japan on ODA are that it can learn from the past experiences of Japan as an ODA donor, it can establish a unique ODA model specific to Asia, and it can expect the deepening of discussions on the effects of loan-based assistance. Collaboration between the two countries is also indispensible for assistance to Sub-Saharan Africa.

Assistant Professor Todo
ODA collaboration between Japan and Korea can bring about expansive vanguard effects, such as the triggering of Korean FDI via the ODA. Mutual proactive information sharing will be vital in order to enhance such vanguard effects in an efficient manner.