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The AIIB and Japan’s Development Assistance

Tags: China , Investment , Development Assistance , Japan-China Relations , Finance

Kato, Hiroyuki

July 22, 2015

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Tokyo’s decision not to join the AIIB may have been made in deference to Washington’s wishes, but given its distinguished record of assistance to developing countries, notes Hiroyuki Kato of Kobe University, Japan should pursue its own strategies for how it works with the bank to promote infrastructure investment in developing countries.

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After considerable debate, the Japanese government chose not to become a founding member of the Asian Infrastructure Investment Bank. Opinions differ, though, over the stance Japan should take in the future: Should Japan continue to keep its distance from the AIIB, or should it join the China-led bank as a regular member and exert influence from inside? Arguments pro and con are likely to be advanced for some time.

The AIIB is a new multilateral development bank that China is establishing with the aim of satisfying the huge demand for infrastructure investment in Asia—demand that, as estimated by the Asian Development Bank, will reach $730 billion through 2020. Fifty-seven countries signed up as founding members by the March 31, 2015, deadline, with China expected to provide a considerable share of the bank’s $100 billion initial subscribed capital. In addition to developing countries, a number of developed countries, such as Britain and Germany, scrambled to join at the last minute. What were they hoping to gain? What is China seeking to achieve from this initiative? And how should Japan respond? Below, I will approach these questions from the perspective of how Japan should provide assistance to developing countries.

A Variety of Agendas

The response of other states to the AIIB varies according to their aid recipient/donor status and how close they feel to China and to the United States. For developing Asian countries with immense appetites for infrastructure investment, nothing could be more welcome than the arrival of the AIIB as a new lender alongside the World Bank and the ADB. Competition between the new bank and the older ones can mean more relaxed conditions for loans.

For such Group of Seven countries as Britain and Germany, the decision to join the AIIB despite pressure from Washington to stay out can be attributed to a number of factors: For one thing, the amount of capital required from non-Asian members is modest. Membership is seen as offering improved access to the fast-growing Asian economies for the participating countries’ businesses. And their governments may be feeling strongly distrustful of the existing US-centered international financial order. For the United States, meanwhile, the establishment of the AIIB under Chinese leadership looks like a major challenge. Washington did its best to keep other countries from joining, but its efforts fell short. The decisions by other G7 countries and South Korea—which depends heavily on the United States—to seek membership in the new institution highlighted the decline of America’s influence in the international community. Some have even argued that it is a harbinger of change from a US-dominated world order to a multipolar structure.

The country that finds itself in the most awkward position vis-à-vis the AIIB is Japan. Our country achieved economic growth in the postwar era thanks to the US-centered international financial order. This order has survived a number of crises over the decades—notably, the Nixon shock of 1971, the Asian currency crisis of 1997, and the global financial crisis following the bankruptcy of Lehman Brothers in 2008. Each time, Tokyo stood by Washington’s side. In geopolitical terms and also in terms of its track record as a provider of development assistance, Japan could naturally have taken a leading role in the AIIB. The biggest reason for its decision not to become a founding member was its unchanging adherence to a policy of staying in step with the United States. And even if Beijing had promised Tokyo the number-two spot in the new bank, there would probably have been some resistance to the idea of playing second fiddle to China.

China’s Emergence as an Aid Donor

The move to establish the AIIB sheds some light on China itself, a country that has been sustaining rapid economic growth and is emerging as a superpower. The leaders in Beijing are aiming for more moderate economic expansion given the deceleration in the growth rate, expected to be around 7% this year. There has not yet been a fundamental change in China’s structure of excess capital accumulation—a chronic consumption shortage offset by excess investment (Marukawa and Kajitani 2015). Meanwhile, as a result of the export-promotion policies China has been implementing for many years, it has been running large current account surpluses with the United States, and these have caused global imbalances that adversely affect the stability of the world economy. China’s foreign reserves have grown to $3.8 trillion, and if it hopes to keep the yuan-dollar exchange rate steady, it needs to “recycle” more of this foreign currency. This means using it outside of China in such forms as official development assistance and direct investment. Recycling the funds in this way will also stimulate other countries’ economies, generating additional demand that can help absorb China’s excess production capacity.

Since around 2004, Beijing has been encouraging Chinese enterprises to invest abroad. The volume of China’s outward direct investment is now on the same order as that of industrially advanced countries like the United States and Japan, and within the next few years it is expected to exceed the volume of inward direct investment. In July 2014, the five BRICS countries (Brazil, Russia, India, China, and South Africa) agreed to establish their own development bank and foreign currency reserve pool. The establishment of the AIIB may be seen as an extension of these earlier moves.

China’s decision to create the new bank is evidence of its emergence as an aid donor and its desire to put a stamp of its own on its development assistance. When viewed by Western value standards, China’s ODA program is problematic in a number of respects, as typified by its resource diplomacy in Africa. At the same time, however, China’s ODA has been offering opportunities for meeting needs that have not been effectively addressed by the international aid community centered on the OECD Development Assistance Committee and the World Bank (Shimomura and Ohashi 2013). Dambisa Moyo, an economist from Zambia, notes: “The West sent aid to Africa and ultimately did not care about the outcome. . . . China, on the other hand, sends cash to Africa and demands returns. With returns, Africans get jobs, get roads, get food, making more Africans better off” (Moyo 2009, 152).

Put Japan’s Experience to Work in the AIIB

When we consider the particulars of China’s ODA, we find much that is similar to Japan’s aid program in the past. Japan joined DAC in 1961 and has a history of over 50 years as a donor. Japan’s ODA has focused on developing industry through human resources development, provision of technology, and infrastructure investment based on a long-term perspective.

Japan deserves high marks for the major contributions it has made to industrial development in places throughout Asia, but given the fiscal constraints that our country now faces, we need to shift from being a big donor to a “smart” donor, making effective use of the limited budget available for aid. Japan need not imitate Western countries’ prioritization of poverty relief and humanitarian assistance but should pursue its own strategy, focusing on developing human resources, providing technologies, investing in infrastructure, developing supporting industries, and extending financial support. It should aim for synergistic coordination between the official aid program and direct investment by the private sector (Kurosawa and Otsuka 2015).

Japan’s experience confirms the crucial importance of infrastructure investment in development assistance. But it is wishful thinking for donors to believe that simply building infrastructure will be enough to create the necessary environment for investment by private companies and successfully achieve industrialization. As suggested by the experience of countries like Thailand and Indonesia, where assistance from Japan promoted successful industrialization, infrastructure investment must be conducted in tandem with assistance in other areas, such as human resources development, the provision of technology, the development of supporting industries, and financial support; only with this sort of multifaceted approach can industrialization be achieved.

It is not yet clear what sort of lender the AIIB will become. If, true to its name, it specializes in infrastructure investment, then Japan should tap its strengths to cooperate with it from the outside. And if Japan becomes a member, it should make good use of the bank as a channel for the implementation of development strategies based on its own experience. Whether it joins or cooperates from outside, Japan should act with firm conviction, confident in the knowledge that drawing on its store of experience can promote the success of the new bank.

 

References

Kurosawa, Suguru, and Keijiro Otsuka, eds. 2015. Kore kara no Nihon no kokusai kyoryoku (Japan’s International Cooperation in the Future). Tokyo: Nippon Hyoron Sha.

Marukawa, Tomoo, and Kai Kajitani. 2015. Cho taikoku Chugoku no yukue 4: Keizai taikokuka no kishimi to inpakuto (The Future of Superpower China [4]: Tensions and Repercussions of China's Emergence as a Major Economic Power). Tokyo: University of Tokyo Press.

Moyo, Dambisa. 2009. Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa. New York: Farrar, Straus and Giroux.

Shimomura, Yasutami and Hideo Ohashi, eds., with the Japan Institute of International Affairs. 2013. Chugoku no taigai enjo (China’s Foreign Aid). Tokyo: Nihon Keizai Hyouronsha.

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