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

2 Japan’s Development Cooperation in East Asia: A Historical Overview of Japan’s ODA and Its Impact

8 Asian Development Experience, Vol. 1 2 Japan’s Development Cooperation in East Asia: A Historical Overview of Japan’s ODA and Its Impact Hirohisa Kohama 1. Introduction Japan’s economy was not fully developed in the 1950s. I think that Japan, in the high-growth period, can be described as the forerunner of Asia’s newly industrializing economies (NIEs). Japan had balance of payments difficulties until the mid-1960s. The country started its Official Development Assistance (ODA) programme in the form of technical cooperation in 1954 and commenced the ODA loan programme at the end of the 1950s. At first Japan’s ODA loans were fully tied aid. The tied aid in those days can be rationalized in the light of the balance of payments difficulties. In the process of the post-war reconstruction of its economy, Japan utilized World Bank loans. Japan’s development experiences had implicit influences on its aid policy. There are some misunderstandings about the economic development of East Asia. In the case of Japan, a common misunderstanding is that the rapid industrialization in post-war Japan was led by the government, especially by the industrial policy of the Ministry of International Trade and Industry (MITI). This is not true. Take the case of the steel industry, which was one of the leading industries in Japan’s high-growth era from 1955 to 1973. Many nonJapanese economists had the misunderstanding that large-scale investment could be made without risk in the steel industry due to the government’s heavy protection and promotion. What caused the rapid enhancement of the international competitiveness of the steel industry was not industrial policy but the entrepreneurial decision to import innovative modern technology, such as the Basic Oxygen Furnace (BOF) and continuous casting.1 8 Japan’s Development Cooperation in East Asia 9 In what economic environment does such innovative entrepreneurship fully function? This is a basic question, not only for economic development in general but also for aid principles. A competitive economic environment and “social capability” are crucial for enhancing the international competitiveness of the industry.2 It seems to me that competitive economic environments are realized not only in a liberalized economy but also in a protected and oligopolistic economy (Ohkawa and Kohama 1989, Chapter 8). It is difficult to explain this idea rigorously, but we can derive lessons from historical facts in post-war Japan and other East Asian countries in order to understand the economic development of East Asia (mainly Japan, the NIEs, and the members of the Association of Southeast Asian Nations or ASEAN). When we find a mechanism that promotes the innovative behaviour of private companies in protected and oligopolistic markets, we should modify the policy conditionality of the International Monetary Fund and the World Bank loans to developing countries.3 In Section 2, I briefly discuss Japan’s post-war economic development in order to understand the background of Japan’s aid policy. In Sections 3 and 4, I discuss economic co-operation to East Asia and the expansion of Japan’s ODA and its policy. In the last section, I present my view on East Asian dynamism and the role of development cooperation. 2. Japan’s Post-War Economic Development and its Policy 2.1 Change in Economic Structure in Post-War Japan Japan started heavy industrialization in the 1950s. Generally speaking, heavy industry includes the metal, chemical, and machine industries. We understand that heavy industry has two subsectors. The required level of technology for traditional heavy industry, such as the steel and shipbuilding industries, is different from that for the new heavy industry, such as the computer and mechatronics industries. The latter can be called technology-intensive industries. The rapid change in the industrial and trade structure in post-war Japan will be reviewed in order to understand that light industries, such as textiles and food processing, were the leading industries when Japan moved toward rapid economic growth. The rapid shift of key industries will be discussed below: a clear decline of light industry and the rise of traditional heavy industry, followed by technology-intensive industry. Such a shifting pattern has been transferred to the NIEs, with certain time lags, and then to the ASEAN countries, China, and other countries. The smooth diffusion of 10 Asian Development Experience, Vol. 1 dynamism from more developed countries to less developed countries is a major reason behind the dynamic economic development in...