Economic Series (1): Official Development Assistance Policy

Since my background is economics, I thought it might be beneficial for me and others if sometime I write about an economic topic. I will start with a topic on ODA. Hope it’s going to be beneficial.

ODA, or Official Development Aid, in a simple term, it means assistance that a country (called donor country) gives to other countries (called recipient countries) in promoting recipient countries’ development. The assistance could be a grant, low cost debt, technical assistance or training, debt relief, humanitarian aid, or even contribution to international development entities, such as United Nations.

In the past 30 years, at least, the biggest donor countries in the world are USA and Japan. Nonetheless, the characteristic of their ODA is quite different. US usually gives ODAs in the form of social infrastructure, such as programs to improve education level, health, and related thing in targeted country; while Japan’s ODA has been more in the form of infrastructure development. I will focus more on Japan’s ODA.

There are many reasons which explain Japan’s ODA policy; I will try to explain some of them. First, Japanese government and Japanese society at large, believe that development is the result of self-help and industrialization policy, where government’s role is quite significant. I believe this is caused by their experience of which Japan managed to be developed, not by huge Foreign Direct Investment (FDI) as in the case of Korea and China, but more on the ability to improve their technological capability by investing more in education. Secondly, Japan also wants to get benefit from ODA that it gave to developing countries. This brings me to my next point about the ‘hidden agenda’ of ODA.

Usually, Japan will give ODA to countries which can benefit it economically, for example by making Japanese companies have a better infrastructure in recipient country. For example, if there are some Japanese companies operate in rural area of Vietnam, maybe because of the availability of resources, etc., and it is quite far away from the city or the port. then Japanese government will be very willing to give to cheap loan to Vietnam to build road from where Japanese companies operate to the city to the port. In this situation, Japanese as a whole will gain quite a lot. Government will receive interest on loan that it gives (usually the interest rate will be higher than Japan’s domestic interest rate), Japanese companies will also get benefit from a better infrastructure in Vietnam. Furthermore, a sad side, usually the companies which will get the contracts to build the road are usually also Japanese companies. So Japan really get high benefit from this ODA.

Is this something wrong? Is this exploitation? Yes it seems that both sides are happy, Japanese government and companies get profit, Vietnamese also get a better infrastructure. Nonetheless, I would think that the benefit that Vietnam get will be higher if their own national companies can get the road project, so that there will be additional (multiplier) impact to Vietnamese economy. In addition, sometimes that aid that developed country give is a tied aid, where the project should be carried out by the donor country. In this aspect, usually the project cost is not efficient, which give higher burden to the recipient country.

Lastly, developed countries are very keen to continue with this model. Even Japanese government give subsidy or loan for its corporation to take part in this system. In addition, whenever an ‘isolated country’ open-up their economy, such as China in 1980s, Vietnam, and now Myanmar, many countries are rushing into these new ‘open-up’ countries to get more project. To conclude, now maybe we can see that there is no such free gift or sincere help nowadays. Policy makers, mainly in developing countries, should be cautious and mindful that decision or policies that they take should be really base on cost and benefit analysis so that their citizen will not be disadvantaged. That’s all, wallahua’lam.

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