AJISS-Commentary

A New Mission of Japan's Infrastructure-FDI Nexus Model in the 'Beyond-Aid' Era

03-30-2020
Yasutami Shimomura (Professor emeritus, Hosei University)
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*Series: Trajectory of Heisei, way forward to Reiwa (No. 8)

Introduction

In his epoch making book The Structure of Scientific Revolutions, which launched the concept of 'paradigm', Thomas Kuhn stressed that the existing theory is to be reconsidered when it apparently cannot explain the accumulation of irregular phenomena (Kuhn 2012, p.6). Kuhn's proposition is, in my view, relevant to the development experiences of East Asia and suggests that the studies of East Asia's 'irregular' and 'exceptional' experiences could work as an incubator of new paradigm of development.

The belated spring for Japan's development cooperation

The trajectory of Japan's development cooperation, i.e. the total resource flows to developing countries for the purpose of promoting development, in the last three decades, or during the Heisei era, gives a complicated picture; it is composed of lights and shadows. On the one hand, Japan has lost the position of the largest aid donor in 2006, as a result of longstanding stagnation after the burst of bubble. In addition, there is concern about the gradual but persistent revival of commercial orientation, shown in the increasing tied conditions under the aid procurement. On the other hand, Japan's approach to development cooperation began to enjoy the 'belated spring'. As OECD experts observe, the East Asian mode of aid and development is "progressively gaining momentum" (Saidi and Wolf 2011: 32). A former high ranking official of the OECD-DAC admits "that Japan and other East Asian providers have been able to provide a model that worked well in growing economies" (Manning 2016: 291).
Paying attention to the spread of positive assessment in the international community, this article focuses on the new opportunity for Japan's approach to development cooperation in the 'beyond-aid' era. In this era, various actors such as emerging economies and private sector are to assume crucial roles, replacing the dominance of the traditional donors.

Path from periphery to the center of stage

It is to be admitted that neither the East Asia's development achievements nor Japan's approach to development cooperation has been treated seriously by the mainstream economists for long time. The widely shared skeptical views seem to have come from the fact that the East Asian development strategy as well as the Japanese development cooperation approach are not necessarily in accordance with the set of prevailing doctrines, which had been invented and promoted by the traditional donors.

Many prominent scholars and professionals regarded what occurred in East Asia as unsustainable; a notable example is Krugman 1994. Also many predicted after the financial crisis of 1997-98 that corruption, cronyism, and nepotism would lead East Asia to stagnation that had happened in Latin America" (Gill and Kharas 2007: 1). By the same token, Japan as an aid donor has never been free of criticism, as was illustrated in Susan Pharr's list of international criticism of twelve points, such as lack of philosophy and an 'overly commercial' aid program (Pharr 1994: 167-177). Under the circumstance, Japan has been urged to follow the dominant international development norm. Japan has watched carefully how other donors behave, and tried the best to follow the norm. Perhaps one notable exception is the emphasis on infrastructure, more specifically the assistance to export-oriented industrialization through infrastructure-FDI (foreign direct investment) nexus model.
The tide was turned as the East Asian success stories began to be taken for granted. The turn of tide was accelerated by the rise of China as a global power and development cooperation provider, as is hinted in the remarks of OECD experts, Saidi/Wolf and Manning. The turn of tide became further apparent in the Sustainable Development Goals (SDGs), which contains an infrastructure related target; there was no infrastructure related goal in the preceding Millennium Development Goals (MDGs).
Needless to say, Japan's development cooperation is not irrelevant. To put it differently, it is not advisable to dissociate the East Asian achievements from Japan's development cooperation, as Japan has persistently been the largest bilateral aid donor and the largest investor in the region.

Rationale of the infrastructure-FDI nexus or the synergy among aid, investment and trade in Japan and East Asia

As is well known, the emphasis on economic infrastructure is a central feature of East Asian development approach. East Asian policy makers have persistently put a high priority to infrastructure construction.
But the idea of infrastructure-FDI nexus is more than that. The basic scenario is as follows. To start with, economic infrastructure is constructed. It improves conditions for investors, in particular foreign investors, preferably in conjunction with socio-political stability; rural development is crucial for this purpose. Attracting foreign investment, in particular export-oriented one, would strengthen international competiveness, increase export and enhance the capacity of foreign currency acquisition that determines the domestic resource mobilization capacity, and lead to self-reliance or graduation from the status of aid recipient. Figure 1 illustrates that the point of departure and the linchpin are reliable infrastructure system.
This is exactly what occurred in East Asia, and obviously, in contrast to the charity based poverty reduction-oriented philosophy of the traditional western donors. Most importantly, two types of concerted actions play a vital role to streamline the above scenario. The first is a cognitive model being shared by the East Asian economies and Japan. In 1985, the five ASEAN economies1 jointly urged the Japanese government to accelerate direct investment for export-oriented industrialization. One Japanese response was the 'New AID Plan (New Asian Industries Development Plan), which was launched by the former MITI (Ministry of International Trade and Industries) in 1987, together with the idea of 'trinity' of aid, investment, and trade (promotion of manufacturing export) (Shimomura 2013:156).
It is imagined that China copied Japan's idea of 'trinity'. Although this is seemingly a popular view, Wang Ping found that the reality is more complicated. The strategy of 'Da Jingmao' (The Broad-Based Strategy of Foreign Trade and Economic Cooperation) of 1992, which stressed close linkage between aid, investment and trade, outlined current Chinese foreign aid strategy. Afterwards, since the mid-1990s, the Chinese scholars and experts made intensive study of Japan's trinity' approach. Combining the endogenous idea of 'Da Jingmao' and external vision of trinity approach, current Chinese foreign aid model, which asserts 'win-win' effect, emerged (Wang 2013: 126-136).
Another type of concerted action is found between public sectors and private investors.
The representative case appears in the linkages among public investment in infrastructure2 and private investment in industrial estate and the production facilities of export-oriented manufacturing. The mutual enhancement as a result of concerted actions have made enormous contribution to industrial development. Moreover, it should be stressed that "anchor firms", whose products, such as an automobile, are composed of great number of parts, play important roles in the industrial clusters in East Asia. Once an anchor firm locates its factory, a big number of parts and materials suppliers follow. The backward linkage make the production facilities closely and efficiently related. Examples are the accumulation of aid-funded infrastructure and privately constructed industrial estates in the Eastern Seaboard (today it is called 'Eastern Economic Corridor') in the outskirts of Bangkok, and the 'Hanoi-Haiphong corridor' in the northern Vietnam. It should be stressed that it is not easy to find anchor firms in the Chinese funded industrial estates in abroad3. Here is a clue to differentiate the Japanese from the Chinese cooperation.
The concerted actions were promoted by similar expectations or understanding of what other actors would do or how the world works. In other words, shared 'cognitive model' among the stakeholders is the engine of concerted actions. A shared cognitive model was created neither by force nor order in East Asia. Instead it emerges as every actor knows what others would do and everybody knows that others know it.

New opportunities for the Infrastructure-FDI nexus in the 'Beyond-Aid' era

Since the Busan Partnership for Effective Development co-operation of the 4th High Level Meeting Forum on Aid Effectiveness of 2011, the strong demand for the 'new partnership', between traditional an emerging donors and public-private partnerships, is emerging. The SDGs has accelerated the inclusion of new actors. The change of tide furnishes the Japan's development cooperation approach with an ample opportunity, as the essence of Japan's development cooperation trajectory in East Asia, in particular the infrastructure-FDI nexus model. The essential feature of that model is seamless and closely-knitted public-private collaboration. Unfortunately, Japan as well as East Asian providers, except Korea, are not well equipped as far as the collaboration with the non-profit-making private actors; it is a notable weakness in this region. This article, accordingly, focuses the attention on the collaboration with the private companies.
As a matter of fact, the effective new partnership, or more specifically the effectively concerted actions between the two sectors, cannot be achieved by the prevailing explicit knowledge, which can be stated in word, number, code, and so on. What is crucial is a set of tacit knowledge based on experiences (Polanyi 2009: 4-8). As we saw in the previous section, the concerted actions were promoted by sharing similar expectations or understanding of what other actors would do. The infrastructure construction is to be started, on the basis of knowledge that private investment is to follow; the conviction comes from a series of detailed researches on the private companies' investment strategies. In other words, market-oriented public investment is the key of effective public-private partnership.
The accumulation of the above tacit knowledge in East Asia has the feature of Thomas Kuhn's 'anomaly' or irregularity, it is expected to contribute to the policy issues in the 'beyond-aid' era as an alternative to the existing development norm.


References

Krugman, Paul (1994), "The Myth of Asia's Miracle", Foreign Affairs, November/December 1994Kuhn, Thomas (2012), The Structures of Scientific Revolutions, fourth edition, The University of Chicago Press Manning, Richard (2016), "OECD-DAC and Japan: Its Past, Present, and Future", in Hiroshi Kato, John Page, and Yasutami Shimomura (eds.), Japan's Development Assistance Foreign Aid and the post-2015 Agenda, Palgrave MacmillanPharr, Susan (1994), "Japanese Aid in the New World Order", in Craig Garby and
Mary Bullock (eds.), Japan A New Kind of Superpower?, The Woodrow Wilson Center
Press and The John Hopkins University Press
Polanyi, Michael (2009), The Tacit Dimension, The University of Chicago Press Saidi, Myriam and Christina Wolf (2011), Recalibrating Development Cooperation: How Can African Countries Benefit from Emerging Partners?, OECD Development Centre
Working Paper No. 302, July 2011
Shimomura, Yasutami (2013), "The Japanese View: With Particular Reference to the
Shared Cognition Model in Asia", in Yasutami Shimomura and Hideo Ohashi eds., A
Study of China's Foreign Aid An Asian Perspective
, Palgrave Macmillan
Wang Ping (2013), "The Chinese View: Reflection of the Long-Term Experiences of Aid Receiving and Giving", in Yasutami Shimomura and Hideo Ohashi eds., A Study of China's Foreign Aid An Asian Perspective, Palgrave Macmillan






1 Indonesia, Malaysia, Philippines, Singapore, and Thailand.
2 Such as ports, airports, highways, bridges, telecommunication networks, power plants, transmission lines.
3 In China, there are industrial clusters with anchor firms.