japan and south asia: toward a strengthened … a strengthened economic cooperation ... relationship...

Japan and South Asia:Japan and South Asia:Japan and South Asia:Japan and South Asia:Japan and South Asia:TTTTToward a Strengthened Economic Cooperationoward a Strengthened Economic Cooperationoward a Strengthened Economic Cooperationoward a Strengthened Economic Cooperationoward a Strengthened Economic CooperationMonir Hossain MoniMonir Hossain MoniMonir Hossain MoniMonir Hossain MoniMonir Hossain MoniAssistant Professor, Department of Political Science and Japan Study Center,Faculty of Social Sciences, University of Dhaka, Dhaka, Bangladesh

While in the whole scenario of contemporary Asia-Pacific’s economic prosperity, Japan’scatalytic role is continuing to evolve, ironically in this region’s sprawling vibrant landscape, theonly backward sub-region that has not yet kept pace with this changing trend is South Asia.Despite the magnitude of Japanese development aid to all South Asian nations, the region’sshare in Japan’s global trade and investment is too small to merit much attention. Moreover, inTokyo’s strategic-diplomatic agenda, South Asia has in fact figured little for a long time, becauseit has been relevant neither to Japan’s security necessities nor the needs for a global economicgovernance framework. Nonetheless, Japan has very recently shown a heightened interest inexpanding its cooperation with South Asia (particularly India). Under this backdrop, this articlestrives to explore the reasons why South Asia has today risen strategically in significance to thebreadth of Japanese foreign policy initiatives. The study argues that for mutual values andbenefits, the economic and geo-strategic partnership between Japan and South Asia needs tobe nourished more effectively and constructively. This comprehensive policy-relevant scholarlypiece concludes with a reasonable expectation that Tokyo’s policy towards South Asia willembrace a comprehensive review process with an action-oriented roadmap in a stronglycompetitive and dynamically changing Asia.

KEYWORDS: Japan, South Asia, India, economic cooperation, Asian integration, geo-strategicrelationship

John Hay, Secretary of State of US PresidentTheodore Roosevelt, declared in 1903 that “TheMediterranean is the ocean of the past, theAtlantic is the ocean of the present, and thePacific is the ocean of the future.” 1 The Pacificfuture is absolutely imminent. In today’s increasinglyinterconnected world, the term “Asia-Pacific” hasbecome a part of our daily politico-economicparlance. The nations of the Asia-Pacific regionhave today taken on accelerated global

significance, and the speed of the region’s progressduring recent decades finds no comparison inhuman history (Borthwick, 1998). The reasons forthis “miracle” can be found in the rapid growth ofthe region’s export-oriented industries and trademade possible by technological advancements,information revolution as well as intra-regional andextra-regional flows of capital (Terry, 2002;Thompson, 1998). It is indeed estimated that overthe next decade, all of Asia might contribute

2 VOL. 7 NO. 1ASIA-PACIFIC SOCIAL SCIENCE REVIEW

between one-half to two-thirds of world economicgrowth. Despite contemporary economic malaise,the prosperity made by South Korea, Taiwan andseveral Southeast Asian nations is reallyimpressive. With the implementation of reformplans, particularly since its entry to the World TradeOrganization (WTO) in 2001, China is also on thepathway to faster economic growth.

More strikingly, within this most sprawlingregion, Japan has not only emerged as an economicsuperpower, but also has become an enviable “rolemodel” for many developing economies. In theentire spectrum of today’s Asia-Pacific’s economicdevelopment, Japan’s growing catalytic “softpower” role has been quite recognizable.Furthermore, from the very outset of its accessionto the United Nations (UN) in 1956, Japan in amanner commensurate with its world status as thebiggest donor country has strenuously andconsistently been shouldering a greater financialcommitment to the entire system of the universalbody (Fukushima, 1999; Kawabe, 1994). Beinga nation belonging to Asia, Japan also remains akey regional geopolitical position (Blechinger &Legewie, 2000; Kobayashi, 1991), and it has comeforward to play a decisive role in a wider array ofdomains within the region in the new millennium(Tho, Yutaka, & Kwan, 2001), even defying itseconomic recession trend.

Notwithstanding, very regrettably in this region’sdynamic landscape, the only underdeveloped sub-region that has not yet kept pace with thisinvigorating look is South Asia, consisting of thefollowing seven member countries of the SouthAsian Association for Regional Cooperation(SAARC): India, Pakistan, Bangladesh, Sri Lanka,Nepal, Bhutan and the Maldives. It is evident thatin the scope of Japanese foreign policy towardsAsia, its relationship with China, two Koreas andsome member states of the Association ofSoutheast Asian nations (ASEAN) has been oneof the most prioritized agenda. In contrast, SouthAsia was rarely among Tokyo’s diplomaticpriorities. During the Cold War, ideologicalinhibitions and the insularity of the South Asiannations had pushed the region to the margins of

Japanese diplomacy (Hirose, 1996). Although theJapanese business circles have not demonstratedtheir considerable interest in the region for a longtime, apart from a very few that have recentlyshown eagerness regarding India, interactionbetween the two sides has entered a new phasesince the beginning of the 1990s.

Admitting that Japan, with the enormousness ofits official development assistance (ODA) hastoday become one of the most important factorsaffecting the national interests of all South Asiancountries, one should not overlook the glaringasymmetry that marks their economic relations. Thepotential of Japan-South Asia economiccooperation in the key areas of trade and foreigndirect investment (FDI) is yet to be fully tapped.The South Asian economies have already tried theirbest to attract Japanese investors by offering apackage of incentives and facilities. But the realityis that they have not yet shown synergy throughmoving forward with their investment resources inthis region. Likewise, there has always been a hugetrade deficit on South Asia’s part in its businesswith Japan, whereas Japan holds a notable positionin South Asian trade. However, while the strategicsignificance of South Asia in a fast moving Asia isnow recognized, it is unfortunate that the tarnishingimage of most South Asian nations abroadintrinsically caused by poor governance and politicalvolatility exists more gloomily against all theirpositive but not properly projected potentials.

Against this crux, this rigorous policy-orientedresearch endeavors to analyze the cardinalconstraints confronting Japan and South Asia inthe realm of their economic ties, and to exploreSouth Asia’s enormous alluring prospects, whichmight be reconsidered when boosting Japan’spartnership with this region in today’s most severelychallenging era of globalization. The scholarly piecesurmises that beyond Japan’s ever-greater ODAcooperation with South Asia, its strategic ties withthe region needs to expand far more extensively.The study adopts a macro approach, and to presentthe nature and extent of Japan’s role in South Asia,analyses encompass India to some extents, as it isthe largest country in this sub-continent in terms of

MONI, M.H. 3JAPAN AND SOUTH ASIA

population and status as well as commercial,strategic-diplomatic and cultural connections withJapan.

ECONOMIC COOPERATIONAND INTEGRATION IN ASIA

Though the terms “economic cooperation”2 and“economic integration”3 are often usedsynonymously, these two concepts are different.Indeed, “regional economic cooperation” is anevolutionary process comprising a number ofstages. While economic integration represents themost advanced or ultimate phase of economiccooperation, regional economic cooperationimplies collaboration among a group of nations oneconomic matters such that each member nationderives greater substantial benefits than whatwould be possible in the course of normaleconomic relationships without cooperation. In abroader sense, the scope of cooperation can covera wide range of economic issues such as trade,tariffs, technology, investment, joint ventures, andfiscal and monetary policies.

In Asia, over the past decade, an increasingawareness of the interdependence among nationsin the region and of the importance of regionalcooperation and integration in counteracting theglobalization forces has led to several decisive stepsto promote regional economic cooperation goals(Ohmae, 1995). The slow progress withmultilateral initiatives and the proliferation ofregional blocs in other parts of the world haverelatively offered extra impetus to morecooperation within the Asian region. Actually, thereis a realization that open regionalism can greatlycontribute to enhanced productivity and economicgrowth, and consequently to poverty reductionwithin the region. In Asia, the process of economicgrowth and development in the last few decadeshas been impressive (Kawai, 2005). Whileeconomic regionalism is still less advanced than inEurope (Katzenstein, 1997), market-drivenintegration through trade and investment has beena key driver of East Asia’s economic growth,

sustainable development, and poverty reduction.While the rise of huge regional productionnetworks has played a pivotal role since the mid1980s, economic cycles are at the same timebecoming more synchronized. In summary, thesedynamisms have fostered interdependence andfavored sustained economic growth in the Asianregion. Nonetheless, economic cooperation in Asiahas so far been limited principally to the bilateral orsub-regional levels as well as in the arenas of tradeand investment, money and finance, and infrastructure.Most recently, however, the geographic scope ofagreements has started to expand across thedifferent sub-regions, providing initial signs ofcooperation and integration in Asia as a whole(Asian Development Bank [ADB], 2005).

Another salient aspect is whether themomentum behind the institutionalization ofeconomic cooperation and integration is “market-driven” or “politically-driven.”4 It is evident thateconomic growth and development of the Asia-Pacific region has predominantly been market-driven, based on the growing inter-linkages amongthe business sectors in the region to support Asia-Pacific Economic Cooperation (APEC). In thisconnection, it is intriguing to note that Japan’s directinvestment in China rose 19.8 percent to a recordUS$6.53 billion last year, regardless of anti-Japanese demonstrations in China in April 2005(Japan’s direct investment, 2006). Nevertheless,it is true that some countries or firms obviouslyinvest for at least partly political motives, but eventhe most politically-driven economic partners areunlikely to actually make significant investmentsuntil an acceptable policy framework andreasonable institutional safeguards are in place.

While this research explores economiccooperation with the notions of regionalism5 andintegration in Asia as a whole, such a macroapproach might not be the most appropriate forthis study. The Japan-South Asia economic tiesmay rather be perceived from a micro approach.One the one hand, as economic issues were notthe too decisive political factors within/among thenations of the South Asian region, a politically-driven economy has so far not been a success here.


On the other, in spite of its “superiority of economicadroitness,” Japan does not assess its relations witheach of the developing economies of South Asiafrom the political motivation or the “patron-client”angle. To be more specific, the South Asian market,particularly the Indian one, and its one billion pluspopulation, presents lucrative and diverseopportunities for Japanese exporters with the rightproducts, services, and commitments. Although the“Japan-South Asia relationship” may basically becharacterized as a “market-driven” one, theirmutual cooperation may also be viewed from thegeo-strategic and politico-diplomatic realms. Morenotably, Japan’s national security interest in theSouth Asian region may principally lie in realizingthe growing gravitas of India, because India aloneis in a position to strategically assist Japan forvarious grounds, particularly under China’s shadowin dynamically moving contours within Asia.

Moreover, one of the prominent features of therelations between Japan and South Asia, apartfrom its intellectual depth, is a prolonged dormantpast (Ohji, 1992; Yamazaki & Takahashi, 1993).Their historical ties go back to the beginning of the20th century when Asia’s first Nobel laureate,Bengal’s poet Rabindranath Tagore andinternationally well-known Japanese culturalideologue Tenshin Okakura profoundly affectedand influenced each other’s work through theirfriendship (Bharucha, 2006). The visit of Netaji[leader] Subhas Chandra Bose and Ras Bihari Boseto Japan to seek support and sympathy for India’sfreedom struggle was also a remarkable milestonein the history of India-Japan solidarity ties (Sareen,2004). More remarkably, for Japanese people ofold generation, Justice Radhabinod Pal’s lonedissenting judgment during the Tokyo War Tribunalabout the “validity of verdict on war crimesimposed by winners on losers” still remains vividin memory (Nandy, 1995). Such compassionconveyed by South Asian people moved andencouraged Japanese people faced with diversedifficulties in the revival following World War II,and thus left its good impression on South Asia.Judge Pal’s dissent is in fact frequently cited byIndian diplomats and political leaders in the frame

of reference to Indo-Japanese alliance. In return,when India was faced with economic hardship,Japan reciprocated India’s friendliness by choosingit as the first recipient country of its ODA loans in1958.

While the relationship between Japan and SouthAsia in recent years has been conciliatory, theyneed to come to be connected by a network ofshared interests in the political-diplomatic, geo-strategic and socio-cultural fields, beyond theeconomic sphere.

SOUTH ASIA’S INCREASINGGEO-STRATEGIC IMPORTANCE TO JAPAN

Some analysts predict that South Asia’s largerpopulation, lower gross national income (GNI) anda high degree of disparity in per capita income(PCI), make it difficult to envision the regionemerging as an economically stable one in the nearfuture (World Bank [WB], 2005). In other words,contemporary South Asia brings to minds theimages of a backward and often-neglected region,which faces socio-environmental disasters andpolitico-economic vulnerability. But there is nodenying the fact that it has today become a geo-strategically important region to the scope ofJapanese diplomatic missions, and will likely growin prominence in the future. It seems that SouthAsia’s rising geo-strategic profile is being raised anumber of notches by another global player. To bemore concrete and comprehensive:

First, because of its sheer size, South Asia hasgreater significance in the management of globalissues. The region, which covers a vast areaequivalent to the whole of Europe, represents morethan one-fifth of the world population. One maywell argue that this weight might naturally have anincisive impact on the future of the globe, withregard to pressing issues such as human development,energy supply, food production, environmentalsustainability, healthcare challenges, etc. Japan, inits quest for “responsibility sharing” in internationalmanagement, would thus find it relevant to seekcooperation and policy coordination with this region.


Second, South Asia is considered a strategicallykey area for Japan’s energy security in the sensethat Japan heavily (about 80 percent) depends onthe import of oil from the Gulf region, and SouthAsia is located midway between this region andJapan. The so-called “sea-lanes” run through theIndian Ocean (Graham, 2005), a conveyorconnecting the Pacific Ocean and the AtlanticOcean for the traffic and transportation of oil. Inparticular, the small island nation of Sri Lanka is ofimmense geographical importance because it liesin the primary Indian Ocean shipping lanes of bigoil tankers. It is in Japan’s vital interest that itsrelations with the South Asian countries remainstable and friendly, in contrast to its standing withsome East and Southeast Asian nations.Nonetheless, Japan, as the only country everto know the horrors of nuclear devastation, isscrupulously concerned that escalation oftension between India and Pakistan couldseriously damage the regional peace andstability, because both nations allegedly possessnuclear weapons of mass destruction (WMD).Japan, together with other countries, stronglyreacted to a series of nuclear tests conductedby India and Pakistan in May 1998, andsubsequently suspended yen loans for newprojects to both countries. Even its new yen loansand fresh grants-in-aid other than those forhumanitarian purposes were frozen. 6 Since then,despite Japan’s sincere efforts toward thenormalization of relations between these two long-time rival nations, which facilitated both countries’signing of the nuclear non-proliferation treaty(NPT) and comprehensive test ban treaty (CTBT)(Japan urges nuclear states, 2005) very sadlyneither of the nations has yet done so.

Third, it is clear that Japan’s long-cherishedaspiration to become a permanent member on theUnited Nations Security Council (UNSC) remainsas strong as ever, but materializing this desire inthe near future has become very complicated inthe face of stringent objections from severalcorners. As there are still some qualms aboutJapan’s permanent membership, Tokyo will have

to stipulate more sedulous action plans. Since thecountry is determined to be successful this time,Tokyo’s government will have to cultivate supportbases as comprehensively as possible in future.Although Tokyo formed a lobbying group calledthe “G4” comprising itself, Germany, Brazil andIndia, the further cultivation of South Asia isstrategically valuable, because Pakistan commandsa great deal of clout in a number of Muslim nations,and India has justifiable influence in emergingnations because of its active role in the Non-Aligned Movement (NAM). 7 Furthermore,Bangladesh has committed itself to supportingJapan in international affairs, reconfirming Dhaka’sapproval of Japan’s permanent seat on the UNSC.

Fourth, the turn of the new century has heraldedthat Asia’s time has come to be the key determinantin the global strategic calculus (Rozman, 2004).More inclusively, present-day Asia witnesses threegiants namely Japan, China and India. China’seconomic strength and military power is on theascendant and so is India’s (Buzan, 2002). It isapparent that in East and Southeast Asia, Japan’spolitical dominance is gradually waning owing tothe growing inroads by China in the region. In thischanging scenario, South Asia might anticipate thatJapan has some attractive alternatives in terms ofTokyo’s visionary drive toward Asian security andregionalism. It will anyhow call for a rigorousreorientation of Japan’s strategies regarding SouthAsia with a particular salience to India. While the“strategic triangle,” i.e., the Japan-China-Indiatrilateral axis, might be conducive to their prosperityas well as the rejuvenation of Asia, the emergingpower of India can no longer be ignored. It may,however, be enumerated that Japan has so far notfollowed any independent foreign policyconcerning South Asia, and it has ever taken cuesfrom the US policies to South Asia (Dillon, 2005).For a long time, Japan has actually perceived SouthAsia from the US strategic viewpoints, not fromthe contexts of Asian regionalism with specialreference to Japan’s own security and defensepolicies. Nevertheless, it appears that in the post-9/11 scenario, Tokyo is ready to change its “myopicpolicy” with regard to South Asia, and further assist


the nations of this region, keeping in mind Asiansolidarity and working to understand the region’ssecurity needs.

Finally and more importantly, from the economicstrategic perspective, South Asia has tremendouspotential as a Japanese investment and trademarket destination. Regardless of geographiclocation, most nations of this region have growinglarge markets of millions of middle-class citizens8

with huge buying capacity, high-caliber skilled andcheap labor forces, 9 rich natural resources,democratic frameworks, reliable legal systems aswell as economic liberalization policies. Among all,the issue of the rising economic strength of Indiamay be of particular reference (Buzan, 2002).It may be highlighted that India’s gross domesticproduct (GDP), calculated according topurchasing power parity (PPP), is next only toJapan and China in Asia. Recognizing theinherent strength of India’s economy, the US,China, South Korea and other countries hadmade substantial investments in the country. Forthese reasons, India in particular and South Asiain general deserve the accelerated attention ofJapanese investors and entrepreneurs. Japanesemultinational firms could begin to tap into theprospects of the South Asian nations by setting upexport bases either for home market-orientedconsumption or for third-country exports.

From a comparative context particularly drawnfrom China, which is linked with South Asia byland and water, mountains and rivers unlike EastAsia and Southeast Asia , its growing presence inSouth Asia is riding on its economic and strategicinfluence in the region. One measure of China’seconomic outreach is its current trade volume withall South Asian nations, which approaches US$20billion a year. China has rather satisfactorilyinvested in South Asia’s smaller economies as well.Besides gaining a strategic foothold, China hasbenefited diplomatically from its increasedconnections with Bangladesh, Pakistan, Sri Lankaand Nepal. For instance, all of these nations todayaffirm the “one-China” policy, stating that Taiwanis an inalienable part of the People’s Republic ofChina (PRC). This effort has transformed the

region from India’s “near abroad” into China’s“own backyard.” In short, China’s rapid economicgrowth has its neighbors change their geo-politicalperception on it. The shift from a “China threat” to“China opportunity” theory unfolds the option toexplore the benefits that can be drawn from thegigantic Chinese market to the inner natural andspiritual bonds with China. Whilst China’s gains inreaching space in both South Asia and SoutheastAsia practically stand in sharp contrast to thedeepening conflicts in China-Japan relations, thereis still a lack of institutionalized dialogue mechanismbetween South Asia and China.

With a particular focus on the SAARC, sinceits creation in 1985, the organization has sought toincrease economic unity among its member states.Although the organization was designed to improvethe socio-economic prosperity of its members, itmay be asked whether it has been capable ofsuccessfully pursuing its visions. When the SAARCis compared with other regional trading bodies likethe ASEAN, ASEAN Regional Forum (ARF) andthe EU, it performs poorly in terms of the effortstoward boosting economic cooperation. Unlike theEU or the ASEAN, trade among and within theseven SAARC nations remains low, regardless ofthe fact that all are located within close proximityof one another, as well as being part of the WTO.It is also a critical question whether the SAARCwill be able to play an exemplary role inameliorating the region’s prosperous tomorrowbecause of the dominant power of India over othermember states of this organization. This imbalanceof power indeed allows conflicts between Indiaand its neighbors to undermine organizational unity.The clashes between South Asian nations end upjeopardizing the creation and effectiveness ofregional trade agreements. Besides, they leadindividual SAARC states to promote theireconomic interests through bilateral agreements,reducing the incentive to engage in multilateralrelations.

While South Asia’s geo-strategic relationshipwith other Asian economic giants needs to enter amore meaningful phase, there is a growingrealization that unless India and Pakistan take bold


Total 1,418.10 854.06 -

Average 202.59 122.01 885.70

Source: World Bank

decisions to resolve the “Kashmir issue” towardensuring a lasting peace and expediting sustainabledevelopment in South Asia through a cohesiveregional integration among the countries of the region,they will not count much in the competitive world.Japan has a closer relationship with the ASEAN,because this institution plays an effective role in theregular consultations and exchanges that the Japanesegovernment prefers over bilateral negotiations.Hence, Japan expects that the SAARC will play asimilar role, by resolving territorial and othercommon problems within the regional cooperationframework, and speak with a collective voice.10

This notwithstanding, it is evident that India issmartly marching towards full capital accountconvertibility on the back of a robust economicexpansion. Since joining the WTO in 1995, andwith this opening to the world’s markets, both asan importer and exporter, India indeed expects alarger voice towards setting the rules and normsof the global economy. However, while India hasgenuine economic and strategic grounds for stakinga claim to a great power status, it is not such apower in the classic sense. It is because the nationis not yet able to challenge the world’ssuperpowers. Nevertheless, in a transformedinternational order, its assets and resources are

more important to a wider array of Japaneseinterests than they have been for over half a century.As they have been in the past, the enormousprospects of India in particular and South Asia ingeneral should not simply be overlooked in thefuture.

ECONOMIC COOPERATION

Considering that the predominant determinantof Japanese foreign policy is “economic,” and thecentral consideration of South Asian nations is“developmental,” it is simply better to understandthe economic perspective of their cooperativerelationship in the aspects of ODA, trade and FDI,before other prevailing various facets of theirrelations are considered.

ODAWhile Japan’s participation in the Colombo Plan

in October 1954 marked the beginning of its ODAto South Asia, Tokyo provided India with its firstlow-interest yen loans in 1958. Since then, Japanhas gradually expanded its ODA schemes in Indiaand other South Asian countries to help promote

Table 1.Selected Parameters of South Asian Economies, 2004

140.490.89

1,079.720.30

25.19152.06

19.45

61.230.68

674.580.756.54

90.6619.62

440760620

2,510260600

1,010

Country Population (million) Total GNI(US$ billion) GNI Per Capita(US$)

BangladeshBhutanIndiaMaldivesNepalPakistanSri Lanka


the socio-economic development of the region. Ina nutshell, ODA has formed the core of Japan’spostwar interaction with South Asia, and the nationhas today emerged as the topmost aid donor inthe region. From fiscal 1990-1991 to 2001-2002,Japan’s ODA to all South Asian countriescumulated at about US$8.5 billion. In total ODAinflows from different multilateral donororganizations, Japan’s sole contribution is almost50 percent. According to factual data, all thecountries of South Asia rank high among the “top10” recipients in Japan’s bilateral aid program, e.g.,for the fiscal year 2002, India had the 5th rank, SriLanka the 6th, Pakistan the 7th rank and Bangladeshthe 9th rank according to the net disbursements ofJapan’s ODA (Ministry of Foreign Affairs[MOFA], 2002). In spite of this, Tokyo repeatedlyannounced its plans to examine resumption of multi-million yen loans to India and Pakistan, if NewDelhi and Islamabad stop production of ballisticmissiles and sign the nuclear NPT and CTBT(Japan wants Pakistan, 2004). Concerned with SriLanka, the military conflicts in the nation’s northernand eastern areas and the continuation of humanrights violations are a matter of concern.

As mentioned in an earlier section, South Asiahas today risen geo-strategically in significance inthe scope of Tokyo’s diplomatic efforts, whichmight genuinely appeal for Japan’s attention to bemore responsive to the region’s changing needs.South Asia prominently features in Japan’s ODA,because it is considered one of the regions thatseriously suffers from the merciless onslaught ofnatural disasters and epidemics. All nations of theregion (except India), which also face flounderingeconomies, accumulated debt and chronic poverty,fit quite well with Japan’s bilateral ODA priorities,as its aid cooperation with South Asia attempts toconcentrate on poverty reduction incorporatingTokyo’s new economic foreign policy paradigm for“ningen no anzenhosho” [human security](Ministry of Foreign Affairs [MOFA], 2004), andapproaches the issues such as the improvement ofbasic living standards and stable economic growth.More to the point, Japan is committed to offer along-term support for peace building in Sri Lanka

as well as for rehabilitation efforts after damagescaused by the 2004 tsunami (Japan InternationalCooperation Agency [JICA], 2005).

Given that the SAARC member states are leastdeveloped countries (LDCs), Japanese ODA tothe region primarily consists of grant aid andtechnical assistance. It is noticed that the ratio ofthe grant element is higher in case of the smallernations in this region, while it is minimal in the caseof India. In terms of interest and maturity, Japanprovides assistance on the most concessionaryterms among its ODA projects to this region aswell. The interest rate for loans to South Asiancountries is around 1 percent, having a repaymentperiod of 30 years with a grace period of 10 years.It should also be spelt out that Japan regards itsODA as one of the most important instruments for“kokusai koken” [international contribution] inrespect to the South Asian economies, not fromthe “donor-dependent” point of view, as explainedbefore. It is in this sphere that Japan and SouthAsia have essentially developed a fair measure ofcloseness and understanding (Esho, 1994).

It is an illustrative fact that a number ofcontributions of Japan’s ODA loan aid programsto South Asia, principally in the infrastructuredevelopment sectors, have by this time beenidentified as “milestone successes.” In thetransportation and communication sector, forexample, largely financed by Japan, together withthe World Bank (WB), Asian Development Bank(ADB) and government of Bangladesh, theUS$950 million project of Jamuna MultipurposeBridge (JMB), the longest in South Asia and 11th

longest in the world is one of the most thriving ones(Japan Bank for International Cooperation [JBIC],2003), as this bridge has integrated the economy,commerce and communication of Bangladesh,particularly the country’s northern region with therest of the territory where the hub is—perhapsmore than any other physical investment has done.Nevertheless, the Karnaphuli Fertilizer CompanyLtd (KAFCO) issue in Bangladesh, the NarmadaRiver Dam Project in India, and the Arun IIIHydroelectric Project in Nepal all have been thesource of heated controversy surrounding Japan’s


ODA in South Asia. About technical assistanceunder the JOCVs program, one of the majorprojects of the JICA, it is enthusiastic that JOCVs inthe real sense take Japan’s ODA to the grassrootslevel, by working hand in hand with local people, andthus advance sustainable development cooperationthrough sharing skills and knowledge on the groundin the nations of South Asia (Moni, 2004).

However, as the previous examples illustrate, itcan fairly be questioned whether the bulk of Japan’seconomic assistance has been significantlyefficacious in helping contribute to South Asia’ssustainability attempts, or whether its funded-projects were suitably adapted to ensure a climatefavorable for investment and export promotion aswell as overall economic development of theSouth Asian nations. On the one hand, whilepoverty reduction is given topmost priority withmore emphasis being put on the quality of aid,Japan’s ODA policy considerations regardingSouth Asia are oftentimes called into question dueto the perception that its aid deals predominantlywith large-scale infrastructure developmentprojects, i.e., Japan’s ODA is too “gigantic” and“radical.” In other words, its development aid is

still “much quantitative” and “less qualitative,” 11

whereas aid from other donors in the South Asiannations hinges on reinforcing pro-poor policy andself-help grass-roots assistance programs towardssucceeding in their poverty emancipation targets.Accordingly, in order for South Asia to reap thefullest benefits from Japanese foreign aid to thisregion in the years to come, the ODA strategy indealing with the region needs a new way of thinking(Moni, 2006a). One the other hand, despiteabundant donations from Japan as well as othermajor bilateral partners and donor organizations,most South Asian countries still have sizeableshortfalls in key areas like poverty alleviation,basic educat ion, public heal thcare andenvironmental hazards. Also, as Japan’scooperation with each of the South Asiancountries has simply been termed as “one-sideddependency,” these countries should undertakestern measures to secure prompt economic growth.Each individual nation in the region must serve asa “unique model” in order to convince Japanesetaxpayers who are often anxious about the properutilization of their money that it is worth theinvestment.

Table 2.Country-wise (South Asia)* Distribution of Japan’s Bilateral ODA, 2004(Net disbursement basis; Figures in US$ million)

Country

ODA Grants

Loan Total Grant aid Technical assistancecooperation Total

Bangladesh 271.51 32.07 303.58 -265.35 38.23Bhutan 0.55 9.95 10.51 0.00 10.51India 7.73 19.59 27.32 -109.37 -82.05Maldives 3.08 2.02 5.10 0.00 5.10Nepal 36.86 19.27 56.13 0.30 56.43Pakistan 41.45 17.06 58.50 75.60 134.11Sri Lanka 25.31 22.45 47.76 131.77 179.53

Source: MOFA of Japan*“Southwest Asia” in the usage of JICA


Trade12

Although one of the major factors of Japan’seconomic interaction with South Asia is trade, theshare of the region in Japan’s global trade isnegligible. There is a serious imbalance in Japan-South Asia trade, i.e., the volume of trade of theSouth Asian countries with Japan currentlyconstitutes only about 5.5 percent of that with theworld (Japan External Trade Organization[JETRO], 2005). The marginal share in Japan’strade that the South Asian region has been havingwith Japan came down drastically in the 1990s. Inspite of the fact that trading volumes have growndramatically in Japan over the past decade, thisremarkable progress of Japanese trade hashowever not been reflected in the South Asiantrade graph. It is evident that there is an inadequateeffort on the part of this region to promote newitems to export to Japan. Moreover, in terms ofvalue, the rest of the South Asian countries lag farbehind India and Pakistan in exploring the exportopportunities of the Japanese market. The otherside of the crux is that Japan seems to be onlyreluctantly giving up its image of this region as oneincapable of exporting little more than primaryproducts. Despite these facts, the components thatmight make the South Asian region attractive in

promoting its trade with Japan include cheap andrich human resources, wealth of agriculturalproducts, good infrastructure at specific points inthe region, and low inter corporate competitioncompared to that in the East and Southeast Asiannations. Truly, South Asia has many comparativeadvantages as the basis of its expanded traderelations with Japan, and a number of export itemshave recently come to assume a great potential.

With a particular focus on India, foreign tradeis quickly spreading here, in services rather than inthe traditional manufacturing sector. Theinformation and communication technologies (ICT)industries in Japan and India complement eachother. The nascent software industry is the onesector of the Indian economy that has blossomedthe most from its Bangalore, Chennai andHyderabad base in recent years. It is nowsearching for new customers abroad, particularlyin Japan and the US. According to recent data,software exports are growing at an annual rate of50 percent. Japan, the second largest ICT marketafter the US, is looking at India to outsourceactivities in the ICT field. In fact, Japanese industryis aware of Indian ICT capabilities in terms ofexecution of projects and quality processes,

Table 3.Japan’s ODA Disbursements to Bangladesh, 1996-2001

Year Grant Loan aid Total

Grant aid Technical Total Gross Net TotalCooperation

199619971998199920002001

184.77169.60216.35204.43201.96169.22

Source: MOFA of Japan

30.5226.8322.8325.0440.5533.06

215.28196.44239.19226.47242.52202.28

105.5675.9993.3277.68

161.06105.29

-41.25-66.45-50.14

-102.81-40.90-76.65

174.03129.98189.05123.66201.62125.64


confidentiality, cost and quality focus. It has alreadystarted admitting the significance of off-shorization.Both sides have also agreed to set up a joint task-force to identify and explore the possibility of jointventures and stand-alone projects in the areas ofbroadband, mobile communication, e-governance,information security, research and development(R&D) and ubiquitous computing. However, as Indiansoftware exports to Japan presently account for only3 percent of the total market, there is a necessity forunveiling future scopes for the Indian companies tointeract with the leading Japanese ICT industries suchas Nippon Telephone and Telegraph (NTT), NipponElectric Company (NEC), Matsushita, Toshiba andFujitsu. A strengthened collaborative partnershipbetween Japan and India might bring about thefulfillment of an unparalleled ICT power (India,Japan sign pacts, 2005). Furthermore, whilstoverseas firms, which endeavor to do business inIndia, see the country as a US$100 billion market,especially in infrastructure sectors like electricpower generation and roads, they still complainabout bureaucratic hurdle and protectionism.

Another product that is an attractive prospectto the Japanese market is Bangladesh’s ready-made garments (RMGs). Though Bangladesh hasalready succeeded in introducing its RMG sectorto the US as well as the EU markets, it has not yetpenetrated the Japanese market (LDC NeedsProtection, 2003). Also, many Japanese areunaware of it. Japan is within Asia, and nearer toBangladesh compared to the US and Europe. Itis, therefore, very logical to think that Bangladeshshould have exported even more to Japan. But thereality is rather different. Bangladesh’s RMGexport volume to Japan fell primarily due to thepoor quality of the products as seen by theJapanese market. At the same time, the RMGsector has been facing setbacks due to competitiveprice and late delivery of products to the agenciesof importing countries. In this context, it may benoted that China currently occupies about 80percent of Japan’s total RMG market due to itsgeographical closeness and cultural proximity.Furthermore, it is undeniable that Chinese productsare highly competitive, and their productivity is

much higher in comparison to Bangladesh and otherdeveloping countries. Chinese business practice issomewhat different from others as well. Even so,Bangladesh might have prospects of increasing itsapparels exports to the Japanese market, but itmust have something more attractive than Chinafor Japanese buyers. For Bangladesh, comparedwith Chinese productions, to enhance the presentpace of growth in exporting RMGs to Japan, thefollowing might be the best suggestions:manufacturing higher quality (in both dyeing andfinishing) products and selling at a reasonable pricein order to meet the demands of Japanese buyers;making the lead-time short; removing barriers ofinvestment; engaging in promotions throughexhibitions, sessions, etc., about Bangladeshigarments in Japan; building up a good businessrelationship with Japanese counterparts; andexpanding markets. 13

From the regional and global circumstances, incontrast to the volume of intra-trade among themember nations of the EU, the volume of intra-trade within the SAARC countries is veryinsignificant. In the face of increasing competitionin the world economy, while collaborativecooperation among the nations of the South Asianregion has become compelling, the globalizationprocess has practically spearheaded the conceptof interdependence (Vanaik, 2004). Granted thatin the South Asian region, there are a number ofgood possibilities for embellishing a workableeconomic interaction, which can attain aremarkable uplift of the socio-economic front ofthe teeming millions here, these potentials are beingoutshined by huge trade imbalances among theSAARC nations. To cite an example, there is ahuge trade gap between India and Bangladesh, theannual trade deficit being over US$1.07 billion inthe first half of fiscal 2005-2006, which wasUS$945 million in the corresponding period offiscal 2004-2005; while the share of India is over90%, Bangladesh has only 8.16%, Nepal 1.03%and Bhutan 0.10% (Bangladesh trade deficit,2006).

Even supposing the South Asian PreferentialTrading Agreement (SAPTA) has been in place for


more than a decade, trading within the SAARCaccounts for less than five percent of the members’total global trade simply due to differences betweenIndia and Pakistan over the disputed region ofKashmir. However, the South Asian Free TradeArea (SAFTA) agreement among the nations,effective from the start of 2004, may be seen ashaving the potential to pave the path to prosperityin this sub-region. While the ASEAN Free TradeArea (AFTA) established in 1992 is viewed as adynamic model in the Asian trade scenario as wellas global economy, the pact made by sevenSAARC nations, which came into effect with theonset of 2006 to set up a free trade area (FTA),brings heartening news for the people of thisdeveloping region (SAARC free trade, 2006),because it promises to open the markets of allcountries to each other by deepening regional traderelations, and thus bring synergy to economicgrowth. Although this is a good first step, thereare a number of challenges toward gaining a FTAin reality.

In this connection, it may be noted that Japanhas very recently proposed to create the Asian freetrade agreements (FTA) covering half the world’spopulation and four major trading powers (China,India, Japan and South Korea) (Japan Proposes,2006). However, both scope and timetable areregarded as ambitious in the light of Japan’s strainedrelationship with China, and the track record ofone-on-one trade agreements in the region. It ismanifest that Japan intends to push the East Asiaeconomic partnership agreements (EPA) plan inorder to take the lead in reinforcing theintegration of the Asian economy (Govt to Push,2006). But it is uncertain whether other Asianeconomies will agree on such a plan. It is also aquestion of whether there are merits for eachEPA country, and Asia as a whole is likely to havean impact on the negotiations. In addition, someanalysts hold that Japan wants a regional tradegroup, because it is at present concerned aboutfalling behind China in global trade (Lack ofleadership handicap, 2004).

Table 4.Japan’s Balance of Trade (by Region), 1999-2004 (US$ million)

Year 1999 2000 2001 2002 2003 2004

Total 107,697 99,601 54,057 79,030 88,335 110,370North America 60,184 69,242 56,928 61,027 56,541 63,577 USA 61,147 70,479 58,192 60,915 56,754 64,404 Canada -963 -1,237 -1,202 173 -142 -760EU25 32,957 32,791 21,136 18,936 25,280 31,107East Asia 32,902 40,125 15,298 33,567 49,137 68,843 Asian NIEs 54,033 68,351 49,412 58,890 71,569 92,890 Korea 6,873 10,256 8,098 13,093 16,834 22,174 ASEAN4 -1,587 -3,350 -7,100 -3,497 -4,458 -3,637 China -19,545 -24,876 -27,014 -21,826 -17,974 -20,409Middle East -20,741 -39,657 -34,036 -29,316 -38,071 -48,240Central South America 9,810 10,081 8,194 6,648 6,190 7,907 Mexico 2,736 2,828 2,093 1,972 1,855 3,013Russia -3,275 -4,021 -3,247 -2,334 -2,454 -2,583Africa 1,388 86 -113 -772 -860 -1,038

Source: JETRO Tokyo


This notwithstanding, it can be said that thecenter of gravity of world commerce has recentlyshifted to the Indian Ocean, South China Seas andthe Pacific Ocean, which now carry 52 percent ofthe global output (Gravity of world commerce,2006). It is anticipated that the people of Asia andits leaders, by overcoming their shortsightedattitudes, will sincerely unveil their vision of an“integrated, prosperous and poverty-free” Asia inthe 21st century. They will work together towardfiring the growth engine of the region in order toexpand the size of the economic pie, share itequitably, and thus close the disparity gap betweenthe richer nations and the poorer ones. The ASEANand the SAARC might, in particular, be regardedas the key building blocks for the integration ofthe entire Asia-Pacific region. Japan would,however, continue to explore the best possible

approach towards trade partnership with SouthAsia, while watching how India is integrated intothe international economy.

Conclusively, whilst South Asia is peripheral toJapan, the nation is of great importance to thiseconomically underdeveloped sub-continent.Japan’s trade with South Asia might have achance of improving only if Japan wishes to shifta little of its trade from other regions to SouthAsia. Even a slight alteration could purposefullycontribute to the improvement of trade of theSAARC countries.

FDI14

Japanese multinational corporations (MNCs),with their massive FDI outflows, have been the“lead goose” in the “flying geese pattern” 15 thathave spurred the economic growth of a number of

Table 5.South Asia’s Trade with Japan, 1999 (US$ million)

Exports/Imports Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka

Exports to Japan 92.76 0.17 2,554.00 4.08 3.27 252.00 160.00Imports from 430.93 23.33 2,755.00 9.23 32.70 606.00 430.00 JapanSource: MOFA of Japan

Table 6.Intra-Regional Trade of South Asia by Country (%)

Year 1970 1975 1980 1985 1990 1995

Bangladesh n.a. 6.9 4.9 3.0 5.9 12.8India 2.7 2.0 1.9 1.5 1.4 2.6Nepal 70.3 67.0 45.7 34.4 10.0 14.9Pakistan 0.9 4.1 3.5 2.9 2.6 2.2Sri Lanka 8.1 7.8 6.5 5.2 5.1 6.1

Intra-South Asia 3.5 3.9 3.2 2.6 2.4 3.7

Extra-South Asia 96.5 96.1 96.8 97.4 97.6 96.3

Source: SAARC Secretariat


countries in East and Southeast Asia since the mid-1980s (Encarnation, 2000). In contrast, South Asiahad nearly been non-existent during the rebelliousyears of ever-changing investment destinations. TheSouth Asian nations, by and large, have missed outon the Japanese foreign investment boom, and havealways been a negligible destination for JapaneseFDI. The nationalistic attitudes to foreigninvestment, socio-political unrest and rampantbureaucratic corruption in almost all South Asiancountries have been regarded as the majorstumbling blocks that have only served to furtherinhibit FDI in the region.16 Although most SAARCstates have already adopted economicliberalization policies and welcomed foreigninvestment for their rapid economic growth, therehas still been a slight increase in the flows ofJapanese FDI into the region. The statistical dataindicate that South Asian economies have receiveda marginal share of Japanese FDI outflows—lessthan 1 percent of Japan’s total FDI volume to theworld. According to data, India has received themajority of Japanese FDI among the South Asiannations, followed by Sri Lanka, Pakistan andBangladesh.

Even with a continuing economic recession inrecent years, Japanese companies have expandedtheir investments overseas, especially to theeconomically vibrant destinations in East andSoutheast Asia. The South Asian countries, mainlyIndia and Bangladesh, over the years, have triedto woo Japanese investors by providing as liberalan environment as possible within their owndomestic and political restraints. In search of tradeand investment, the prime ministers of these nationshave frequently visited Japan, but have found theJapanese business community reluctant. 17 In thecase of India, while several big names in Japansuch as Mitsubishi, Sony, Nippon, Fujitsu, Mitsui,Hitachi, etc., have become household names, theactual inflow of Japanese FDI in India is still low,indicating a considerable degree of caution. 18

Although only a few selected sectors likeautomobiles (Honda and Suzuki), and mostrecently electronics and telecommunications havereceived Japanese investors’ attention to South

Asian countries, Japanese business people graspa triad of investment obstacles, and their referencepoint very often is the offshore facilities that theirexpatriate community enjoys in such ASEANcountries as Malaysia, Singapore and Thailand(Ken & Keiichi, 1997).

Indeed, the parallel of Japanese investmentinflows in South Asia with those in China and theAsian NIEs is irrational, because the latter are farmore alluring to Japanese investors. It is estimatedthat in some of these countries, Japanese MNCshave invested in “one week” what they invested in“one year” in all of the South Asian nations. Onemore rational contrast is Japanese investment inVietnam, which now attracts three times moreinvestment than in India. 19 It is, in this context,necessary to explore what are the secrets for theexemplary success of Vietnam20 as one of the mostattractive destinations throughout Asia for Japaneseinvestors21 and other global partners. First,Vietnam is endowed with rich natural resources,and a half of its 80 million people have not yetturned 30. Most of these youths are poor butrelatively well educated and eager to work andlearn, even at a minimum wage of just US$38 amonth. Second, the nation has made notableprogress in maintaining socio-political soundnesswith its poor ratings on government corruption, aswell as developing its macro-economic andbusiness drifts during the past decade. Third,Vietnam has sustained a high growth rate, doublingGDP over the years. Fourth, the business climatein the country continues to improve and becomemore alluring for enterprises in all of the economicsectors. The reforms and improvements have beenimplemented in the finance and banking industry,including constructive changes in fiscal policy, suchas fixing the exchange rate flexibly and makingresources available for socio-economic growth.Finally, the Vietnamese economy has becomeincreasingly integrated with the regional and globaleconomic system. Within the frameworks of theASEAN, the APEC and the Asia Europe Meeting(ASEM), Vietnam has also amplified itsdetermination to join the WTO in 2006. Althougha number of hurdles still exist, many can just see


the continuation of one of Asia’s most celebratedsuccess stories. As Vietnam has widely beenpraised as a successful model, the South Asiannations should learn lessons from it.

It may further be emphasized that among theBRICS (Brazil, Russia, India, China, and SouthAfrica), India has a larger middle class, as citedbefore, than the ASEAN, possesses an inexpensivebut highly skilled labor force, can provide anopportunity to hedge risks from relying too muchon China, as well as having a people with verypositive attitudes toward Japan. But it is a commonquestion among those involved is why Japanesecompanies still have not come to India. Despitesome institutional barriers, a number of Koreanfirms with their huge FDI inflows have alreadymanaged to become successful here. In fact, mostof the successful foreign firms in India have reallybeen forward-looking by putting forth a largeamount of funds into the initial investment. 22 Astrong commitment from the top-level managementmakes this kind of large-scale initial investmentpossible. Another key factor leading to success inIndia is the capacity to maintain a high level ofquality in human resources. However, it may furtherbe asked what makes the successful foreign firmsdistinct from the unsuccessful Japanese ones. Inorder to find the answers to these questions, arigorous field study in India needs to be conducted.This research, however, finds that the recentlyincreasing conflicts of interest between Japaneseand Indian joint venture (JV) partners have madethe Japanese even more cautious. 23

This notwithstanding, there are some JapaneseJV enterprises in India that have proved to besuccessful. The successful collaboration betweenthe Indian Maruti Udyog Ltd. (MUL) 24 and theJapanese Suzuki Motor Corporation does offer anumber of valuable insights on the adaptability ofJapanese work practices in an Indian organization.In summary, Maruti-Suzuki JV provides a uniquecombination of long-term finance, technology,training, know-how, managerial expertise andmarketing experience in South Asia. Although ithas recently experienced some constraints, 25 it isalso evident that there is a little difficulty in adopting

Japanese management practices in Indian JV withthe Japanese as an equal partner. The success storyof this JV company has really revolutionalized theIndian automobile industry, 26 while at the same timedemonstrating that the Japanese management hassome appeal, if not an universal one, outsideJapan’s borders. This example can be a forerunnerfor other JV that have sprung up in the liberalizationphase.

There are a number of reasonable justificationsas to why South Asia could/should be an attractive“hub location” for FDI flows by Japanese MNCsin particular and global flows of FDI in general.First of all, the current global trend of economicreforms is much in evidence in South Asia. Inrecent years, the nations of this region havedrastically changed the entire spectrum of theirindustrial policies and attitudes toward FDI.Another most significant aspect is the huge marketpotential of South Asia, a region of one fifth of theworld’s population. Half of the South Asian nationsbeing bracketed as the LDCs enjoy easy globalmarket access. As cited before, India alone has apopulation of more than 1.2 billion. The closenessof China to the region is also a plus point since thedemand for a number of goods such as automobilesand other white goods is growing there.Consequentially, the industries could be set up tocater to the demands in China, in addition to thosein the region. The availability of cheap and skilledcomputer literate human resources in the regionsuggests future opportunities as well. The entireenergy sector, including petroleum, natural gas,power and captive coal mining, offers excitingpossibilities. With regard to the intra-regional flowsof FDI, the South Asian region also possessesprospects. Summarily, there is currently anexcellent scope to fuel FDI in numerous sectors inSouth Asia. Consequently, Japanese MNCs coulddiffuse their involvement in the South Asian growthprocesses.

Whilst South Asia has a number of inspiringpotentials for Japanese enterprises, it is worthasking why these do not materialize. Thedifferences in variability of Japanese MNCsregarding population and income of host countries


do not explain the neglect of the South Asiancountries by them. As the export orientation ofJapanese investments is actually responsive to thegeographical distance between home and hostcountries, Japanese MNCs prefer to invest inneighboring countries. It is also important to askwhat forces internal to Japan are driving Japanesefirms to East and Southeast Asia, and why do firmsinvest in these specific Asian locations. Theframework of this analysis may be based on threespecific concerns. First, rising cost conditions in Japanare motivating firms to seek alternative locations.Second, globalization of the economy is creatingpressures to seek production locations thatminimize cost, while effectively serving customerneeds. Third, and in the context of the first twofactors, a variety of country characteristics(attractiveness of the domestic market, productionconditions, and incentives for FDI) as well as rivalrybetween firms lead to location choices.Nevertheless, as Japanese MNCs are becominggrowingly global in their future orientations, thecomparative prominence of geographical distanceand cultural proximity as cardinal determinants of theirlocation might diminish, and they will be more inclinedto diversify their ventures into South Asia. Comparedto other investing nations, while Japan has remainedsomewhat hesitant, now is the time to seize SouthAsia’s opportunities. Above all, there is everyreason to believe that Japanese investors wouldfurther make more investments in South Asia toreduce the trade gap, taking diverse advantagesof the region’s encouraging FDI climate.

South Asian nations can now take fulladvantage of the ongoing economic situation inJapan, through relocating the Japanese “sunsetindustry,” i.e., small and medium-sized enterprises(SMEs), in the respective country with JVs,because the traditional keiretsu [collaboratingenterprises] structure has almost failed in Japan.The subcontracting keiretsu framework, which wasa driving force behind Japanese industrialization,has become useless due to the stronger yen andhigher labor cost, compelling big companies to buyback spares from outside. As a result, most SMEsin Japan that used to supply spares for over the

decades to heavy companies like Toyota, Nissanand Hitachi are now in the doldrums. It is estimatedthat in recent years, at least 70 percent of JapaneseSMEs have been looking for outside partners forthe sake of their survival (Small business checksin, 2004). The countries of South Asia with theircheaper labor forces can take the opportunity toattract these SMEs right now.

Albeit globalization has resulted in a vastincrease in FDI, and the greater inflow of FDI hasin turn boosted deeper integration of worldeconomies, South Asian countries are still not in aposition to turn back from FDI due to a number ofsevere administrative drawbacks and managerialshortcomings. But the region now desperatelyneeds to concentrate on the improvement of itsinvestment environment, and it must develop acomprehensive common investment policy. It ishigh time that they at least agree on somefundamental policy frameworks so that there is notmuch unfair competition among themselves. Theother world regions have already realized theimplications of regional cooperation, and havetaken initiatives accordingly. As a result, they havenow started receiving rewards. The South Asianregion needs to learn from these experiences.Otherwise, it will lag further behind, and thepotential of huge FDI inflows here in South Asiawill not be harnessed. Simply providing incentivepackages and liberalization measures will notautomatically attract FDI, nor has FDI alwaysproved to have a positive impact on economicgrowth of a country. To ensure that it does, it isnecessary that South Asian governments retain theright to choose the types and directions of FDIthey attract, according to their own necessities. Itis redundant to say that in this new epoch ofglobalization, the investors enjoy enough flexibility,and they may easily transfer their destination whenthey face any kind of hurdle that adversely affectstheir businesses. Hence, to attract Japaneseinvestors with an extensive amount of FDI outflowsin the near future, South Asian nations mustundertake concerted, aspiring and spirited efforts,by removing all FDI impediments sooner ratherthan later.


Table 7.FDI Inflows by Host Regions and Economies (US$ million)

Host Region / 1989-94 1995 1996 1997 1998 1999 2000Economy

World 200,145 331,068 384,910 477,918 692,544 1,075,049 1,270,764

LDCs 1,430 2,016 2,450 2,976 3,679 5,176 4,414Share in World 0.71% 0.61% 0.64% 0.62% 0.53% 0.48% 0.35%FDI (%)

Asia 37,569 575,293 94,351 107,205 95,599 99,728 143,479Share in World 18.77% 22.74% 24.51% 22.43% 13.80% 9.28% 11.29%FDI (%)

South Asia* 816 2,945 3,684 4,936 3,541 3,057 3,035Share in World 0.41% 0.89% 0.96% 1.03% 0.51% 0.28% 0.24%FDI (%)

Source: UNCTAD*Excluding Bhutan, because of non-availability of data for required years.

Table 8.South Asia’s Major Sources of FDI Inflows (US$ million)

Source / Country Bangladesha Indiab Nepalc Pakistand Sri Lankae

JapanUSAGermanyUKFranceKoreaHong KongSingaporeMalaysiaAustraliaMauritiusChinaNetherlandsItalyBermudaPhilippinesDenmarkNew ZealandUAESweden

3 (7.6)1 (29.5)8 (1.9)2 (13.9)-6 (2.8)4 (7.5)5 (5.9)---9 (1.3)--------

5 (4.4)1 (22.1)6 (3.8)3 (7.6)9 (2.5)4 (4.5)--8 (2.75)7 (3.0)2 (10.4)--10 (2.2)------

6 (6.1)7 (1.1)-5 (6.2)--10 (2.1)----4 (7.5)--2 (14.6)3 (9.6)8 (3.1)9 (2.1)--

4 (11.6)-5 (7.0)9 (1.4)-1 (32.7)3 (11.9)6 (6.4)-2 (15.0)---------8 (1.4)

3 (15.0)1 (41.6)4 (6.2)2 (22.7)5 (2.2)8 (1.6)------6 (1.7)-----7 (1.6)-

Source: SAARC SecretariatNOTE: ( ) percentage of total FDI; aup to June 1999 (proposals); b1991-1999 (up to August 1999); cas of December 1995 (proposals); d1998-1999 (July-March); e1978-1995 (in operation as of December 1995).


FUTURE OUTLOOK

In the face of today’s competitive worldeconomy, in order to boost economic cooperationamong the nations across Asia (especially SouthAsia and Southeast Asia), a “regional blockbuilding” is essential. The creation of a “Pan-AsianForum” like the EU and the North Atlantic FreeTrade Agreement (NAFTA) is now being

vigorously emphasized. Through the establishmentof such an organization, all the member nationscould reap benefit from each other. In this respect,it can critically be claimed that, while 21st centurywill be the “Asian Century,” and the West alwayslooks toward the East, and more importantly,everyone requires a “backyard” of the surroundingcountries for economic growth, Japanese businessplanners unluckily do not find such within Asia. They

Table 9.Japanese FDI in India, 1991-2001 (US$ million)

Year Investments Actual Inflows

19911992199319941995199619971998199920002001

21.5233.284.0127.8482.3432.8531.5324.8379.7192.578.2

2.327.426.487.972.387.5164.8197.6151.3158.5101.8

Total 2,888.3 1,077.8

Source: Government of India

Table 10.FDI Inflows in SAARC Countries (US$ million)

Year 1980-1985 1990 1995 1998

BangladeshBhutanIndiaMaldivesNepalPakistanSri Lanka

-0.1n.a.62.0-0.30.275.042.0

3n.a.162n.a.6

24443

2n.a.

1,96475

71953

Source: UNCTAD

317n.a.

2,25879

497345


most often look at the West for marketing of theirproducts, defying the fact that there are hugemarkets emerging in Asia because of the rise innumber of middle class people. Thus, Japanmay now be called upon to undertake furtherdrive to form a similar platform for strengtheningeconomic cooperation and revitalization of thehinterland region. The pan-Asian FTA, as recentlyproposed by Japan, can be viewed as the futureof Asia. However, Japan ought to take activeinitiatives so that it could open up new growthavenues for the Asian economies, particularly theSouth Asian ones.

Beyond the economic aspects, Japan’sdiplomacy regarding other parts of Asia has beenundergoing a phenomenal shift in recent times.Tokyo today seems to be in the process ofredefining its strategic future and priorities. It isstimulating to know that Japan is presently takinga keen interest in cooperating for South Asia’seconomic prosperity, and has also ratified a newapproach in its security and defense policies to thenations of South Asia. According to a recentreport published in a Japanese conservativenewspaper (Japan bypasses China, 2006), theMOFA of Japan has already began to reorganize andreinforce itself when the Parliament Session ended inJune 2006. It is preparing to create a special “SouthAsia Department,” 27 designed to coordinatediplomacy with India, and monitor China’s growingregional influence. The new Department will alsobe responsible for focusing greater attention onPakistan and other South Asian nations. While itcomes some weeks after the Bush administrationmerged the State Department’s Bureau of Southand Central Asian Affairs into a single unit, thetiming of Japan’s latest effort toward steppingup engagement with South Asia is reallyimportant. The initiative has come at a timewhen the South Asian trade balances areimproving, making them well placed to takeadvantage of Japan’s constructive partnershipwith them. The geo-political locus of South Asiaalso underwent a sudden change in November2005 when Nepal successfully tied Afghanistan’sSAARC membership to observer status for China.

While the strategic contours of Beijing’s SouthAsia policy are becoming clearer, Japan’s formerPrime Minister Junichiro Koizumi agreed with hisIndian counterpart to work for a closer strategicand trade partnership following moves by India tobuild a compact tie with China (Japan, India share,2005). Tokyo was motivated to build an organizedlink with New Delhi in the light of China’s increasingfriendship with India, as well as to face China’sgrowing clout in a dramatically changing Asia. OneJapanese diplomat used the phrase “hop step jump”to describe the recent visits of Koizumi and hisForeign Minister Taro Aso to India and the returnvisit of India’s Prime Minister Manmohan Singh toJapan, when Tokyo was hopeful that the two sideswould be willing to “jump” to a new level ofunderstanding. From the Indian viewpoints, thegrowing engagement with Japan makes good sense,because the politico-strategic dimension in theirrelationship is relatively new, while the twocountries have dealt with each other on theeconomic front for more than half a century.However, how to remain strategically engaged withJapan while also developing a strategic relationshipwith China and South Korea is a serious diplomaticdilemma that India will have to cope with. NewDelhi sees Japan as a major support to its UN bidbecause of Koizumi’s closer relations with USPresident George Bush, but will be cautious not tojeopardize the ardent relationship with Beijing. Verybriefly, it is apparent that diplomatic attempts toredefine historical power balances throughout Asiaare continuing. In particular, they are reshaping a“new dynamism,” with continuous dialoguesbetween Japan and South Asia on forgingeconomic, political and strategic alliances.

It should be mentioned that current JapanesePrime Minister Shinzo Abe is also fervent aboutIndia. In his book (Abe, 2006), published when hehad been the Chief Cabinet Secretary in the Koizumiadministration, Abe said that it would not be surprisingif, in another 10 years, Japan-India relations overtakeJapan-US and Japan-China relations. He also wrotethat it is of crucial importance to Japan’s nationalinterest that the country would further strengthenits ties with India. Although it is not yet convinced


how Abe’s vision will come true, a more positive phasein the relationship between Japan and South Asiaunder his regime is expected.

Under this changing scene, South Asia right nowurgently needs to exploit its potentials, bydeepening and diversifying the region’s currentinvolvement with Japan. The nations of the regionshould not miss out on the opportunity of being anactive part of Japan’s recent awakening and itsrenewed interest in engaging itself with the region.But without efficiently curbing pervasive corruption,upholding social justice, and stressing harmoniousdevelopment by practicing democracy for the sakeof nation building, South Asia will doubtlessly bein peril of destroying its prosperous tomorrow.Moreover, South Asian governments lacksteadfast foreign policy stances. Their hesitantrapprochement as well as wary, low profile orslow-moving diplomacy is hurting the region’seconomy. Again, very sad to say, with theadvent of two nuclear powers, South Asia hastoday become a special theater of concern notonly for Japan but also for the internationalcommunity. However, the real war that Pakistanand India should fight is not one involving“nuclear weapons,” but rather one against the“chronic poverty” of this region, a home to two-thirds of the world’s poor with one in threesurviving on less than US$1 a day. There is alsoa wider array of disparities in the distribution ofeconomic resources among the South Asian nations.Beyond politico-economic issues, there are stillsome controversial socio-cultural issues that dividethem. But Mahatma Gandhi, a universallyacclaimed leadership personality in whom India aswell as South Asia can genuinely take pride,provided an example of a good neighborlypolicy. In his words of wisdom, “One whoserves his neighbors serves all the world.”Regrettably, the political leaders of India andother South Asian nations have neither followedsuch valuable counsel nor learned lessons fromhistory nor gathered experiences from the boomingneighbor regions. In this fast moving world, theultimate fate of South Asia’s millions of ordinarypeople lies in the hands of their leaders, who must

prove visionary leadership with true will andchanged mindset.

In light of its changed ODA Charter, Japan isalready set to make a historic economic policydecision, shifting its foreign aid focus away fromChina to India. Nonetheless, as it is evident thatODA alone will not be adequate to meet theemerging needs of India and other South Asianeconomies, and in view of the uncertainty aboutthe continued smooth flow of ODA from Japan infuture, it is indispensable to them to look for thealternative sources for funds, and captivate FDIon a large scale. Looking at the successful storiesof some East and Southeast Asian nations, it isclear that an expanded role of FDI shouldered byJapanese MNCs could valuably contribute topoverty reduction, human security and sustainabledevelopment in low-income and low-savingeconomies such as those in South Asia. It is,therefore, earnestly hoped that South Asiancountries will diligently work together for theimprovement of their domestic political and socio-economic situations in order to attract a grater shareof FDI inflows made by Japanese entrepreneursin the days to come.

While some analysts argue that Japan’s relativeeconomic decline and China’s rapid ascent havealtered the dynamics of Asian regionalism, it shouldbe remembered that the real resurgence of Asia(including China) began with Japan’s “economicmiracle.” To be more explicit, Japan’s ODA,provided mostly in the form of loans to some Asiancountries, assisted with infrastructure building, abase for economic growth, and supported projectsof private enterprises, significantly resulting in“dramatic development” in a number of countriesthroughout this region, which are today known asthe “little dragons” or “emerging tigers.” Morerelevantly, Japan is still the world’s second largesteconomy, and its economy is currently seven timesthe size of China’s. Despite the endless stories aboutits economic slump in recent years, Japan remainsa nation of global significance, and a major powervitally important not only to South Asia but also tothe rest of the world. Besides, the strong “Japan-US Alliance” as well as their increasing


collaborative engagement in Asia is an influentialfactor. While some further suggest that the SAARCmember states should take full advantage of theachievements of China, as their immediateneighbor, it must be acknowledged that Japan, withits mammoth foreign aid programs, has been a“tested, trusted and longstanding” 28 developmentpartner to all the South Asian impoverishedeconomies. Japan truly wishes South Asia tobecome a “just, equitable and prosperous” regionwith a sustained pathway to development. So, itmust be stressed that South Asia’s “look Eastpolicy,” which had partly been evolved to attractFDI from the East and Southeast Asian nationsover the years, should now be more stable,productive and speedy, and be concentrated onJapan.

CONCLUSION

South Asia has frequently been regarded as a“conflict-prone region,” or “Kashmir, a nuclearflashpoint.” But there is no denying the fact thatthe nations of this region, amongst the worstvictims, ultimately were able to loosen the twocenturies old colonial stronghold after a heroicstruggle for independence. The end of the ColdWar has indeed brought a number of noteworthyrepercussions to South Asia, which might genuinelyappeal Japan’s attention to be more responsive tothe region’s changing needs. While most SouthAsian countries now have democratically electedgovernments, they have come to understand thattheir earlier restrictive economic strategies will notbe in tune with the changing realities of theglobalization process. They are now realizing thatthey must be able to settle some of their deepdifferences over the political issues to enhanceeconomic cooperation with each other. The sevenmember states of the SAARC also understand thatthe region desperately needs a greater integrationto marshal its resources, and help stimulatedevelopment that will offer its citizens better livesas well. They have, therefore, vigorously opted foreconomic liberalization measures. Under these

programs, they now welcome FDI as one of themost important means to achieve economic growth.

With particular focus on India, because of thenation’s sustained economic progress in recentyears, its technical excellence globally, itsdiplomatic activism, especially as a major playerin the Group of 20 developing countries, as wellas its push to secure a G4 membership bidding tobecome a permanent member of the UNSC, anumber of countries are paying increasing attentionto India, and Japan is no exception. While India isalready one of the major players in Asia, thenation’s rising prominence on the world stageshould be taken into consideration. In the futurepolitics of Asia, India and Japan could be strongand reliable partners, as both countriesfundamentally share common values such asdemocracy, press freedom, market economy andso on. Both nations would be able to work hand inhand to nurture such values in a peaceful and stableway in Asia. It may also be stressed that with Japanand India so bonded, China might extend strategicspace to these two powers, and thereby pave theway for Asian security. But for that to happen,Japan ought to recognize how much India haschanged, and India needs to act like a “responsiblepower” with its growing strengths.

It may reasonably be assumed that Japan’sforeign policy radar will orient itself toward buildingthe cohesive strategic ties with South Asia to keepwith changing times and trends. Because a strategiceconomic partnership between Japan and SouthAsia has many potentials, Japan ought to helpeffectuate it to the fullest. Japan and South Asiawould share strategic interests in concretizing whatmay be called an “arc of Asian prosperity,” as wellas dealing with such global threats and challengesas environment, energy, terrorism and the UNreform. Tokyo would positively benefit fromcontinuing to recognize South Asia’s strategicweight in a fast moving Asia, and showing ever-greater interest in increasing its utmost help to theregion so that it can rise to a plethora of hurdles ofglobal competition.

Seemingly, Tokyo is determined to extend itshands of cooperation with South Asia, and it has


already outlined a roadmap to devote itself to thisgoal. What is now necessary is to escalate it towardaddressing the deficiencies in the institutionalframework of relationship between the two sides.It may fairly be concluded with optimistic aspirationthat Japan may take South Asia rather seriously tomake it a “flourishing region,” applying the nation’s“know-how” from its past admirableaccomplishments in case of East and Southeast Asia.The ongoing multifaceted ties, especially in investmentand trade ones, will continue to grow from strengthto strength not only to the benefit of both peoples,but also to contribute to the regional solidarity andintegration, helping connect South Asia withSoutheast Asia in particular and the whole Asianlandscape in general in the years ahead.

ACKNOWLEDGEMENTS

The author gratefully acknowledges sincereassistance of the concerned personnel at theMOFA and METI of Japan, JICA, JBIC, JETROand the Embassies of South Asian countries herein Tokyo, who had been cooperative enough toprovide him with useful information and referencematerials. He also extends his gratitude to theanonymous referees for their valuable comments/suggestions on the earlier manuscript of this article.

NOTES

1 Quoted in Prueher (1997).2 “Economic cooperation” refers to the practice of peopleor greater entities working in common with commonlyagreed upon economic goals, and possibly methods,instead of working separately in competit ion.“Cooperation” is the antithesis of “competition,” theneed or desire to compete with others in a very commonimpetus that motivates individuals to organize into agroup and cooperate with each other in order to form astronger competitive force.3 “Economic integration” is a term that is often used butrarely defined. It is popularly used to describe howdifferent aspects between economies are integrated. Inthe 1960s, the Hungarian Economist Bela Balassa wrotethe basics of this theory. As economic integrationincreases, the barriers of trade between markets lessen.

The most integrated economy today, betweenindependent nations, is the European Union (EU) andits euro zone. The degree of economic integration canbe categorized into the following six stages: preferentialtrading area, free trade area, customs union, commonmarket, economic and monetary union, and completeeconomic integration.4 The basic differences between “market-driven economy”and “politically-driven economy” is that under a market-driven economy, goods and services are apportioned bybids among prospective buyers, while goods andservices are apportioned solely by political decision-makers under a politically-driven economy.5 In International Relations, “regionalism” (or“regionalization”) is actually the set of processes thatlead states to work together in an internationalframework on a regional scale. Regionalism alsoconstitutes one of the three constituents of thein te rna t iona l commerc ia l sys tem a long wi thmultilateralism and unilateralism. It refers to theexpression of a common sense of identity and purposecombined with the creation and implementation ofinstitutions that express a particular identity and thatshape collective action within a geographic region(Fawcett, 1995; Nye, 1968).6 As mentioned in the previous section, the earlierJapanese ODA loans to India and Pakistan were a partof its Cold War Strategy. So, the end of the Cold Warshould naturally have lessened South Asia’s strategicimportance to Japan. But the opposite happened, forthe following two intrinsic reasons: First, within thecontemporary global strategic setting, India has beenworking to strengthen its ties with the US and othermajor powers with which it had limited engagementduring the Cold War era, and its recent advances indefense cooperation with the US are of particular note.As Japan perceives that this Indian initiative mightcontribute to peace and stability in Asia, the nationis helping to foster stability and prosperity in the Asia-Pacific through the Japan-US Alliance. Second, Japan,at the same time, firmly maintains that improvementin Pakistan-India relations is vital for Japanesecompanies here to be able to perform durableeconomic activities. Such development will make theIndian market more attractive for investors, and thuscontribute directly to the economic growth of Indiaitself as well as the region as a whole.7 NAM is an international organization of 115 states thatconsider themselves not to be formally aligned with oragainst any major power bloc.8 Lured by estimates that India’s huge middle class is thesize of the population of the US or several Europeancountries combined, makers of everything from cornflakes to cars flocked here after free-market reforms inl99l began to transform the economy. Now, with


inventories mounting, multinationals are discovering thatthe middle class of India is not the middle class of theWest, by a long shot. In much of the West, a middleclass family has a mortgage, car, personal computer andenough savings for an annual vacation. In India, middleclass is a family that can afford to eat a balanced diet,send the children well clothed to school and buy a blackand white television.9 While a recent survey conducted by the Japan ExternalTrade Organization (JETRO) shows that the South Asiannations are competitive in terms of labor costs, otherfactors such as telecom expenses, transportation costsand times to major ports like Yokohama and Los Angeles,and taxation rates are less competitive than other citiesin China or even Vietnam.10 Since 1993, through the “Japan-SAARC SpecialFund,” Tokyo has recognized the importance of theSAARC as an organizat ion that can provide aframework for stability and prosperity in the SouthAsian region.11 As described earlier, in order to meet the newfangledglobal problems, especially the Millennium DevelopmentGoals (MDGs) adopted by the UN, the government ofJapan has however recently brought a remarkable reformtoward its ODA Charter in a more explicit outlook, defyingthe nation’s prolonged economic recession and reluctantdomestic atmosphere.12 See Moni (2006b).13 However, in the post multi-fiber agreement (MFA)period, the prime question is whether Bangladesh couldcontinue to maintain its present growth impetus drivenby rapid export expansion, or will the country suffer a“trade shock” with disadvantageous consequences forits economy? Even so, in order to overcome the presentstagnant situation, Bangladesh and other South Asiannations need to carefully investigate the changingpatterns of Japanese demands, and to observe how theycould meet those demands.14 See Moni (2005).15The V-shaped “Flying Geese Model” is a perception ofJapanese scholars upon the technological developmentin some East and Southeast Asian countries, includingSouth Korea, Taiwan, Singapore, Malaysia and Thailand,viewing Japan as a leading power. Under this dynamicprocess of regional economic development, leadingcountries with a comparative advantage over the othersfirst made a shift towards more capital and technology-intensive industries, with successive economies thenmoving up the ladder. This distinctive model wasdeveloped in the 1930s, but gained wider popularity inthe 1960s after its author, Akamatsu, published his ideas(Akamatsu, 1962).16The problem is not one-sided however, because theforeign investors including the Japanese ones are oftenseen highly demanding without exploring the existing

relative advantages of some South Asian countries aspotential investment locations.17It should, however, be mentioned that consideringJapan’s current reluctant stance, South Asia mightnaturally look for other sources of FDI. As the newlyindustrializing economies (NIEs) have funds to investoverseas, South Asian nations now have alternatives inAsia to consider, beyond Japan.18 Nonetheless, Mitsubishi Corporation has recentlyidentified India as one of the six emerging marketsworldwide in which this conglomerate plans to developits business operations from a long-term perspective(Mitsubishi puts India, 2003).19 In recent years, Japanese combined investment inIndia, Sri Lanka, Pakistan and Bangladesh has somewhatincreased, but in proportion to Japanese investment inother Asian countries, the South Asian share is indeedinsignificant.20In Vietnam, FDI inflows have reached a record highUS$10.2 billion, far exceeding the 2006 target of US$6.5billion. This Asian upstart is also challenging China inlight manufacturing and pulling in nearly as much foreigninvestment as India.21Among Vietnam’s 62 trading and investment partners,Japan is the largest, endeavoring to make a significantcontribution to modernizing the country.22 For example, Korea’s LG and Samsung have managedto gain a huge share of the Indian market in a very shorttime by their use of a large-scale initial investment. Theadvantages of a large-scale initial investment comprisenot only a faster attainment of brand image but also theability to achieve an upper hand in negotiations withlocal government bodies.23In this example, it may be observed that the bitterexperience of Toshiba Corporation in trying to withdrawfrom Toshiba Anand Batteries, and the reluctance of theIndian government to allow Suzuki to expand andmodernize Maruti have concealed the image of India asan investment market. A similar imbroglio involvesanother of Suzuki’s Indian partners, the Madras-basedTVS, one of the leading two wheeler manufacturers, inthat Suzuki not only wants to increase its stake from thecurrent 26 percent in the company’s equity, but alsowishes to play a key management role, as it does withMaruti.24Established in February 1981 (though actualproduction commenced in 1983) it is one of India’sleading automobile manufacturers and the market leaderin the car segment, both in terms of volume of vehiclessold and revenue earned—18.28 percent of the companyis owned by the government, and 54.2 percent by Suzukiof Japan. The Indian government held an Initial PublicOffering of 25 percent of the company in June of 2003.25For instance, the relationship between the Indiangovernment, under the United Front (India) coalition,


and Suzuki Motor Corporation over the JV was a pointof heated debate in the Indian media till Suzuki gainedthe controlling stake. The high profitability of the JV,which had a near monopolistic trade in the Indianautomoble market and the nature of the partnership builtup till then were the underlying reasons for most issues.26Through 2004, Maruti has produced over 5 millionvehicles that were sold in India and various othercountries, depending upon export orders. The successof the JV actually led Suzuki to increase its equity from26 percent to 40 percent in 1987, and further to 50 percentin 1992.27Prime Minister Toshiki Kaifu, following his visit toSouth Asia in 1990, also initiated several measures topromote a wider exchange and better understandingbetween two sides. Towards this end, a platform named“South Asian Forum (SAF)” was created in the ForeignMinistry in the following year. The forum, however, laterbecame ineffective because of Tokyo’s increasedattention to other parts of Asia.28The year 2002 marked the 50th anniversary of theestablishment of Japan’s diplomatic relationship withIndia, Pakistan, and Sri Lanka, and the 30th celebrationwith Bangladesh.

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