Asian Development Experience Vol. 1: External Factors for Asian Development

3 Japan’s ODA and Poverty Reduction: A Cross-Donor Comparison and a Case Study of Malaysia

Japan’s ODA and Poverty Reduction 47 3 Japan’s ODA and Poverty Reduction: A Cross-Donor Comparison and a Case Study of Malaysia Yasuyuki Sawada and Hiroyuki Yamada 47 1. Introduction Since the mid-1990s, the international community’s development objectives seem to have converged on poverty reduction. The current policy statements of multilateral institutions and aid donor countries are stressing explicitly the importance of poverty reduction at the global level. Particularly, the international community is supporting the initiatives in order to achieve the Millennium Development Goals (MDGs). The MDGs, which were adopted by the United Nations Millennium Summit held in September 2000, defined specific targets and a time frame for reducing poverty in the world. The first goal of the MDGs is to eradicate extreme poverty and hunger in the world by the year 2015. The explicit indicators employed in measuring this goal are the proportion of population living on less than one dollar per day and the poverty gap ratio. 2. Review of the Related Literature In this chapter, we investigate the effectiveness of Japan’s ODA in reducing the recipients’ poverty from two different aspects. First, we do so by employing the poverty targeting framework of Besley and Kanbur (1988) based on the Foster-Greer-Thorbecke (1984) poverty measure, we compare the effectiveness of eleven donor countries, i.e., France, Germany, Japan, the Netherlands, the United Kingdom, the United States, Canada, Italy, Finland, Norway, and Sweden. Second, by using a detailed case study of Malaysia, we investigate the effectiveness of Japan’s ODA over a period of 30 years. Two main empirical results emerged. First, in the late 1990s, 48 Asian Development Experience, Vol. 1 grant allocations of Japan, the Netherlands, United Kingdom, Canada, Norway, and Sweden were consistent with the theory of poverty targeting. Secondly, while Japan’s bilateral ODA allocations to Malaysia have concentrated on economic infrastructure, our quantitative assessment suggests that they have also significantly contributed to poverty reduction in Malaysia. The remainder of this chapter is organized as follows. After reviewing the literature in Section 2, Section 3 presents theoretical and econometric frameworks to evaluate the aid allocation. Then these empirical results are reported and discussed. Section 4 analyzes the case of Japan’s ODA provisions to Malaysia over 30 years. The final section summarizes the analyses. It would be useful to review the literature on the effectiveness of international aid. The existing studies on the role of international aid can be divided into two groups, according to their focus on recipients or donors (Alesina and Dollar 2000). First, there are studies on the policy response of recipients to aid provisions (Boone 1996; Burnside and Dollar 2000; Collier and Dollar 2002; World Bank 1998). For example, a very influential study by Burnside and Dollar (2000) found that the impact of aid on growth of recipients is positive with good fiscal, monetary and trade policies but has little effect for recipients with poor policies. Yet, they found no evidence that aid has systematically affected policies of recipients. This finding is in line with the findings of Boone (1996) who found that while aid does increase the size of government, it has no effect on investment and human development indicators. A number of other studies such as Alesina and Weder (2002) also concluded that the aid quantity does not alter the quality of policies of recipient countries. Rather, as Alesina and Weder (2000) found, an increase in aid is likely to increase corruption, probably because an unexpected transfer will induce rent seeking activities. Second, several researchers have examined the motivations and the determinants of donors’ aid allocation. In fact, there is substantial controversy over the motivation behind aid provisions. Aid donor countries may be concerned with diverse factors such as mutual or individual benefits through international trade or political relationships, poverty reduction and equity of recipients, and international security. For example, a welfare function estimation suggests that donors as a whole have significant inequality aversion in the international distribution of aid (Behrman and Sah 1984). Based on a rigorous theoretical model of ODA, Trumbull and Wall (1994) found that foreign aid allocations are determined by the needs of the recipients represented by infant mortality and political/civil rights. Yet, according to the recent studies, donor countries largely seem to be motivated by strategic Japan’s ODA and Poverty Reduction 49 considerations rather than altruism or the real needs of the recipient countries...