Japanese ODA to China and Indonesia in the Context of FDI: A Comparative Multisectoral Approach - An Abridged Version

Shuntaro Shishido (Professor Emeritus, International University of Japan & University of Tsukuba), Osamu Nakamura (International University of Japan), Naonobu Minato (Foundation for Advanced Studies on International Development), Motohiro Kurakawa (Niigata University) & Akira Kawakami (University of Tsukuba)

This is an abridged version of the full paper, which has been published in the Journal of Econometric Study of Northeast Asia, Vol. 4, No. 2, 2003.

Most studies of the effects of ODA have only dealt with its direct impact on the macroeconomy without considering the indirect effects of FDI (foreign direct investment) on structural changes induced by ODA. This paper presents a structural analysis of the overall impact of Japanese ODA on China and Indonesia, the two largest recipients of aid from Japan, taking into account both the direct and indirect effects of ODA. A multicountry multisectoral econometric model is used in the present analysis with special attention paid to complex dynamic adjustments of ODA, FDI, sectoral investment and capacity expansion, aggregate consumption and foreign trade.

More specifically, Japanese ODA to China and Indonesia are evaluated by using sensitivity analysis based on submodels which are disaggregated into ten sectors in place of the conventional studies that are mostly based on an aggregated approach. The results are installed into a multi-sectoral econometric model for each country in order to evaluate the direct and indirect impacts of Japanese ODA. For a dynamic evaluation of ODA, the complex interdependence of sectoral variables should be explicitly taken into account. This kind of approach is particularly useful in the case of developing economies, where ODA and FDI tend to have a longer gestation period than they are in the case of developed economies.

Our empirical findings regarding the impacts of Japanese ODA on China and Indonesia can be summarized as follows:

First, our study of Japanese ODA, characterized by its emphasis on the infrastructure and economic growth of recipient countries, has revealed that their induced growth in terms of both demand and capacity is much greater than has generally been expected. In this context, it is particularly important to note that induced FDI makes substantial contributions as a catalyst for Japanese ODA.

Second, in contrast to recent studies by the World Bank at aggregate levels covering a much wider area, our findings on Japanese ODA to China and Indonesia have yielded more encouraging results regarding the impact of ODA. This is partly because during the late 1980s and early 1990s the both countries made active commitment to open their doors to foreign investment, especially FDI.

Finally, the present study suggests the importance of constructing some elaborate statistical data base in addition to the conventional macroeconomic data base. The improvement of input-output tables and the provision of a consistent set of data bases on ODA and FDI, not to mention sectoral series on capital stock and employment, are essential if we are to extend our study to other developing countries. The importance of constructing such data systems could not be over-emphasized if we wish to draw effective policy implications from our empirical analysis of developing economies.