No. 1 — January 12, 1996


Weekly Review

--- by Christopher B. Johnstone

Despite its status as the world's largest provider of official development assistance, Japan clearly is not immune to the effects of "aid fatigue." Government officials announced in late December that the rise in foreign aid expenditures would be limited to 3.5 percent in FY 1996, the lowest increase since Tokyo formally began allocating ODA budgets in FY 1976. The latest figure marks the continuation of a slowdown that began in the early 1990s. The growth rate for ODA spending has fallen every year since FY 1991, and the increases were limited to record-low rates in the current fiscal year and its two predecessors. As a result, Tokyo may find itself unable to meet its present five-year target for overall ODA spending. Nevertheless, at a time when Japan is confronting severe fiscal difficulties ODA budget increases, however small, stand out, particularly because many other major donors — the United States among them — are reducing dramatically their own foreign aid budgets. Japanese aid officials, while disappointed at the slowing volume of new development assistance funds, thus appear confident that ODA will remain a central component of Tokyo's self-described "peace diplomacy."

The ODA budget for FY 1996 will reach ¥1.1 trillion ($11 billion at ¥100=$1.00). The Ministry of Finance, in light of increasing budgetary constraints as yet another year of low economic growth is anticipated (see article in this issue), reportedly first proposed that the gain in foreign aid outlays be limited to 2.8 percent. The Ministry of Foreign Affairs, the lead agency for foreign aid, originally had requested an increase of 7.3 percent. Foreign Ministry officials have argued that without such spending growth Japan would be unable to meet the goals of its fifth medium-term aid plan, which pledges Tokyo to contribute $70 billion to $75 billion in ODA over the 1993-97 period. Discussions between Finance Minister Masayoshi Takemura and Foreign Minister Yohei Kono eventually resulted in agreement on a 3.5 percent increase; the figure falls below the current fiscal year's ODA budget growth of 4 percent, which at the time already constituted the lowest increase in history.

Within the overall ODA budget the various components of spending are scheduled to grow at differing rates. Bilateral grant assistance, for example, will increase only 1.8 percent over the current fiscal year's figure to ¥277 billion ($2.8 billion), although even this volume reportedly was a significant improvement on MOF's original proposal. Among the winners were small-scale "grass-roots grants," which aim to assist the efforts of nongovernmental organizations in local projects; this line item received a boost of 50 percent, increasing to ¥4.5 billion ($45 million). Tokyo also pledged to increase emergency humanitarian assistance grants by some 44 percent in FY 1996 to ¥9.2 billion ($92 million). The government further announced the establishment of a ¥1.5 billion ($15 million) fund to provide aid for the reconstruction of regions devastated by military conflict. Japanese officials cited Bosnia and Rwanda as likely initial recipients of these funds.

Bilateral technical assistance will receive more generous support. Outlays for such programs — which, among a number of uses, provide for technical training and other educational programs in developing countries as well as support for project feasibility studies — will increase 5.7 percent in FY 1996 to ¥348 billion ($3.5 billion). Of this amount ¥1 billion ($10 million) reportedly will be used to subsidize the activities of NGOs, a nearly 32 percent increase over the current fiscal year figure. Finally, financing for bilateral loans — a component of Japanese ODA that has come under increasing criticism as the yen's appreciation adds to the payback burden for borrowers (see JEI Report No. 46A, December 15, 1995) — will edge up 2.1 percent to ¥390 billion ($3.9 billion).

The modest expansion of overall ODA spending set for FY 1996 left Japanese aid officials expressing "some concern" about Japan's ability to meet the target of its current medium-term plan without a significant appreciation of the yen during the next 24 months. Nonetheless, the FY 1996 budget hardly represents a crisis for Tokyo's foreign aid program. The 3.5 percent growth in spending exceeds the 1.3 percent increase in discretionary items listed in the FY 1996 general account budget, an indication that, despite the Finance Ministry's tight-fisted fiscal stance, the foreign aid program remains a budgetary as well as a diplomatic priority. Even Mr. Kono reportedly indicated that the ODA budget for the upcoming fiscal year was "quite satisfactory" when viewed in light of the current demands on the nation's finances. Further, set against the dramatic cuts in the foreign aid budget taking place in Washington (see JEI Report No. 36B, September 29, 1995), Japan's continued increases in ODA spending look generous. Although reductions in other donors' aid spending well could impact the future willingness of MOF to fund ODA budget increases, Japan's global dominance in the volume of foreign aid almost certainly will continue unchallenged. Amid the current trend toward aid fatigue in many capitals around the world and strained national budgets, virtually all donor countries are being forced to do more with less. Japan, at least, still has the luxury of trying to do more with (a little) more.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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