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First published in ejcjs on 1 March 2007

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Japan's Foreign Aid Policy Towards Malaysia

Case Studies of the New Miyazawa Initiative and the Kelau Dam Construction


Fumitaka FURUOKA, May Chiun LO and Iwao KATO

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This article focuses on Japan's foreign aid policy towards Malaysia and undertakes two case studies of more recent developments in Japan's ODA program. The first case study is the 'New Miyazawa Initiative', which was a rescue package introduced by the Japanese government in response to the Asian financial crisis of 1997-98. The Japanese government came up with its own plan to help the ailing Asian economies. As the Japanese government assessed properly the needs of its aid recipients and offered a viable alternative solution to the economic woes of its neighbours, Japan's help was positively received by the Malaysian government and the mass media. The case also highlighted some shortcomings in Japan's ODA program, such as excessive bureaucratic red tape and cumbersome procedures of funds distribution. The second case reviewed here is the construction of the Kelau Dam for which Japan also provided funds under the ODA program. The plan was met with a mixed reaction from the Malaysian public and attracted criticism from local NGOs. The second case highlights the necessity of a more stringent selection of projects to be supported by Japan's ODA program.

Key Words: Japan, Malaysia, Foreign Aid.

1. Introduction

Malaysia and Japan have enjoyed close diplomatic, economic and cultural relations since Malaya gained independence from Britain in 1957. The ties between the two countries have been further reinforced through the 'Look East' policy introduced in the beginning of the 1980s by the former Malaysian Prime Minister Tun Dr. Mahathir bin Mohamad. The Look East policy encouraged a closer look at work ethics, management styles and values of successful Asian economies, such as South Korea and Japan. To learn from its East Asian neighbours, the Malaysian government began sending Malaysian students for further study or training in Japan. As a result, thousands of Malaysians have graduated from Japanese universities and other educational institutions.

In the economic sphere, Malaysia and Japan are closely linked by international trade and investment. In terms of international trade, Japan is one of Malaysia's biggest trade partners; its exports to Malaysia include manufacturing goods, electronic devices, and transport equipment. For Japan, Malaysia is an important supplier of natural resources, such as timber and LNG (Liquefied Natural Gas). In recent years, Malaysian exports to Japan have diversified to include air conditioners and other electronic goods.

Besides being Malaysia's major trade partner, Japan also represents an important source of Foreign Direct Investment (FDI). For example, according to the Malaysian Minister for International Trade and Industry, Rafidah Aziz, Malaysia received a total of USD3.314 billion of Japanese investments from 1995 to March 2000 (Furuoka 2003).

Malaysia is an attractive investment destination for Japanese companies due to its good infrastructure and well-educated workforce. According to a survey conducted by the Embassy of Japan in Malaysia (2005), the majority of Japanese companies in Malaysia, or 850 out of a total of 1,400 companies, are in the manufacturing sector, while 200 companies are in services-related business. Some internationally well-known companies, such as Sony, Hitachi and Matsushita, have been operating in Malaysia for more than 20 years.

Overall, Japanese FDI has been beneficial to Malaysia. Japanese companies and multinational corporations (MNCs) offer job opportunities for the Malaysian workforce and create a venue for technology transfer. The presence of Japanese MNCs, however, has not always produced a positive effect in their host countries. One of the drawbacks is a so-called 'export of dirty industries', or a practice by developed countries to relocate their more polluting and environmentally damaging plants to developing countries. There has been one such case in Malaysia, where residents of Bukit Merah in Perak accused a Japanese MNC of illegally dumping radioactive waste (Furuoka & Lo 2005).

Besides bringing in FDI, Japan provides considerable amounts of foreign aid to Malaysia. The Asian economic crisis in 1997-1998 fortified bilateral relations between Japan and Malaysia. Despite the fact that Japan had undergone a decade-long economic stagnation before the crisis, the Japanese government came up with its own rescue package and offered financial assistance to the ailing Asian economies, such as Indonesia, Thailand, South Korea and Malaysia. It is interesting to note that Japan's rescue aid to Malaysia could be viewed as a unique case because other Asian countries received funds from the International Monetary Fund (IMF) while Malaysia decided to forgo that option and did not apply for the IMF funds.

This article provides an overview and critical examination of issues related to the Japanese government's foreign aid policy to Malaysia in the form of Official Development Assistance (ODA). In addition, the article presents two case studies of Japan's foreign aid program, both of which gained prominence and attracted the attention of the mass media in Malaysia.

The first case study analyses the so-called 'New Miyazawa Initiative', and the second focuses on the issues surrounding the construction of the Kelau Dam for which Japan provided ODA. The two case studies present a contrast in Japan's ODA policy towards Malaysia. Overall, the New Miyazawa Initiative was well accepted by the Malaysian government and general public and had received positive comments from the local mass media. However, plans for the construction of the Kelau Dam have met opposition and attracted criticism from the Malaysian public and non-governmental organizations.

The article consists of five sections. Following this Introduction, Section 2 provides an overview of the general characteristics of Japanese foreign aid policy. Japan's aid policy towards Malaysia is discussed in Section 3, while Section 4 offers a descriptive analysis of the two case studies, the New Miyazawa Initiative and the Kelau Dam project. Section 5 concludes.

2. An Overview of Japan's Foreign Aid Policy

Provision of foreign aid is one of the pillars of Japanese diplomacy. It is also an important policy instrument for the Japanese government. There have been cases when the government used its economic assistance to influence domestic policies and improve political situations in developing countries, such as Cambodia and Myanmar (Oishi & Furuoka 2003). This use of ODA as a policy instrument by the Japanese government is due in part to the fact that all military actions are prohibited by Article 9 of Japan's Constitution, which renounces the use of military force for conflict resolution.

Japan became a donor of foreign aid in 1954, when it joined the Colombo Plan and began accepting engineers and technicians from Asian countries as a part of its technical cooperation. An interesting fact is that Japan started giving economic assistance while it was still a poor country dependent on foreign aid. Until the 1960s, Japan was one of the major recipients of funds from the World Bank and other international organisations. This means that for some period of time, Japan had been a donor-cum-recipient country within the foreign aid regime. It was only in the year 1990 that Japan finally repaid all loans it had previously received from the World Bank (Kokusai Kaihatsu Jānaru, July 1990: 93).

As Japan's economy grew stronger, the Japanese government steadily increased the amount of foreign aid it provided. In the 1970s, the Japanese government doubled its foreign aid program. Since foreign aid-giving has been regarded by the Japanese government as a way for Japan to contribute to the development, security and prosperity of the international community and also as a means to forward the interests of the Japanese business community, the government recognised the need to streamline its foreign aid distribution practices and introduced the first Medium Term Target for Japan's Official Development Assistance (ODA) in 1977.

In 1975, the total amount of Japanese foreign aid was USD1.1 billion. By 1980, it had increased to USD3.3 billion, thus making Japan the second largest aid donor in the world after the United States. In 1985, the amount of Japanese foreign aid reached USD3.7 billion. Following the Plaza Agreement of 1985, the Japanese Yen sharply appreciated against the US dollar, and the total amount of Japan's ODA valued in US dollars soared. The year 1989 was an epoch-making year in the history of Japan's foreign aid giving as Japan achieved the status of the world's top aid donor (Furuoka 2006).

In 1991, the Japanese government announced new aid guidelines, the 'Four Guidelines of ODA'. In 1992, the 'ODA Charter' was promulgated (Furuoka 2006). By introducing new principles into Japan's foreign aid policy, the Japanese government aimed to project the image of an 'active supporter' of the new post-Cold War world order which was based on the 'universal values' of human rights and democracy. In the post-Cold War period, the promotion of human rights and democracy gained prominence in the agendas for summit meetings of the Group of Seven (G-7). Japan, as a member of the G-7, followed this political trend and began using its aid power to influence aid recipient countries. This was done through the employment of 'negative linkage' (i.e., the suspension or a decrease in foreign aid) and 'positive linkage' (an increase in foreign aid). The Japanese government imposed negative linkage on recipient countries where undesirable policy changes occurred, while positive linkage was applied to aid recipients that conducted desirable polices in the light of Japan's ODA Charter.

Since the introduction of the new aid guidelines, the Japanese government applied positive reinforcement in three Latin American countries: Nicaragua (1991), El Salvador (1991) and Peru (1992). These nations had had a long history of civil disorder and struggled to establish more democratic political systems. Positive reinforcement was also employed in Africa in Madagascar (1991), Zambia (1992) and Guinea (1992). In Asia, positive reinforcement was used in Mongolia (1992), Cambodia (1992), the Asian republics of the former Soviet Union (1992), and Vietnam (1993). On the other hand, Japan used negative reinforcement and reviewed foreign aid to nine African countries: Kenya (1991), Zaire (1991), Malawi (1992), Sudan (1992), Sierra Leone (1992), Togo (1993), Zambia (1993), Nigeria (1994), and the Gambia (1994). In Latin America, Japan used negative reinforcement in Haiti (1991) and Guatemala (1993). To give some examples of positive reinforcement, Japan provided additional aid funds to Mongolia and Vietnam to support these countries' efforts to modernize their economies. Instances of negative reinforcement that could be cited are Japan's cutting off of aid assistance to Zaire or Sudan after serious political crises had broken out in these countries and the human rights situations had severely deteriorated (Furuoka 2006). However, it is worth noting that, in the 1980s, even before the ODA Charter was promulgated, Japan had already taken similar measures towards two Asian countries: Burma (1988) and China (1989).

The emergence of Japan as the largest aid donor coincided with the onset of economic stagnation in Japan. With the Japanese economy sliding into recession, taxpayers in Japan began to doubt whether disbursing vast amounts of money as foreign aid in times of domestic economic hardship was justifiable. To abate public concern and utilize increasingly limited tax avenues more efficiently, the Japanese government took measures to make the process of ODA disbursement more transparent and accessible to the scrutiny of the general public (MOFA 2002).

In addition to criticism from within the country, Japan's ODA programs became the focus of criticism from abroad. For example, the Japanese government was criticised for its preference of giving bilateral loans, which need to be repaid, rather than bilateral grants. An influential publication, The Economist, described Japan as a 'debt collector' because of the government's policy of giving loans to poor countries. As the journal critically commented, 'Although Japan gives large dollops of money each year, it also collects large debt payments from poor countries. Lenders have a right to be repaid, but this makes its net contribution look far less impressive than that of other rich countries' (The Economist 2004: 29).

Some deficiencies and flaws in Japan's ODA program are caused by the bureaucrats' dominance in Japan's political and economic life. One of these shortcomings is an excessively large number of parties involved in the policy-making process of Japan's ODA. Thus, in 1996, nineteen ministries and agencies participated in official development co-operation programs.

Rix (1993: 72) maintains that Japan's aid program is the product of day-to-day decisions across the whole of the Japanese government system. As such, responsibility for different aspects of Japan's ODA program is dispersed. More importantly, this decentralised aid giving mechanism allows easy entry for the business sector into official ODA programs. As Arase (1994: 178) puts it, 'This system of decentralised authority ... is also important to the private sector clients of the main ministries and agencies who use bureaucratic sponsorship to gain access to ODA resources'.

Another serious problem with Japan's ODA program is the lack of staff. Orr (1993) points out that the UK's ODA budget is about one-fifth of Japan's, while the number of aid staff in the UK and Japan is the same. Orr maintains that the lack of staffing is one of the reasons why the private sector can play such an important role in implementing Japan's foreign aid. As Orr (1993: 9) comments, 'It is not surprising that the private sector will have a lot of influence when such an inadequate staffing situation exists'. In a similar vein, David Arase (1994) asserts that Japan's aid administration would not be able to function properly without a private sector involvement through seconding (shukkō) when the business sector assigns its personnel to serve on temporary assignments in ODA administration. Such a practice 'builds public-private sector partnership in ODA' (Arase 1994: 184).

Finally, there exists intense rivalry among policymakers of Japan's ODA. As Rix (1993: 73) notes, 'Competition between those bodies has confused the purposes of Japan's aid and obstructed effective overall direction of the programs'. This rivalry is also one of the reasons why Japan cannot maintain a consistent aid sanctions policy. According to Okuizumi (1995), there was inter-ministry conflict when the Japanese government suspended foreign aid to Myanmar in 1988. Thus, the Ministry of Foreign Affairs (MOFA) supported the suspension of aid in the light of the worsening political situation in Myanmar. The Ministry of International Trade and Industry (MITI), on the other hand, was concerned about the effects that the suspension of aid would produce on Japanese companies. When aid sanctions were lifted, 'The decision to resume aid may be seen as a compromise between MITI and the MOFA. In such a way, bureaucratic conflicts and the corresponding lack of a central policymaking body, weaken the implementation of the ODA Charter' (Okuizumi 1995: 402).

In 2001, the MITI was renamed METI (Ministry of Economy, Trade and Industry). Despite the change of the name, there was no significant shift in the Ministry's policies; also, the inter-ministry rivalry between METI and MOFA continues.

3. Japan's Foreign Aid to Malaysia

Malaysia is one of the biggest recipients of Japanese ODA in Asia. From January 1969 to March 2001, Malaysia received JPY827.4 billion (RM26.39 billion) as bilateral loans. Divided per person, the amount would be equal to approximately RM1,165, which is the highest in Asia (Ruhanie 2001). In 2003, the Japanese government decided to provide JPY82.40 billion (RM2.25 billion) as a bilateral loan for the Pahang-Selangor raw water transfer project. Besides, JPY17 million (RM0.52 million) was given as a bilateral grant to acquire Japanese language learning equipment for a residential school in Miri, Sarawak (Embassy of Japan in Malaysia 2004). As these figures are quite impressive, the question arises: Why does Japan give such large amounts of foreign aid to Malaysia, which is a relatively wealthy country among the developing nations?

On the official level, MOFA (1999) gives four reasons why Japan continues providing foreign aid to Malaysia. First, Malaysia is one of Japan's neighbours in Asia. Second, Malaysia and Japan maintain very good bilateral relations in economic, diplomatic, and cultural spheres. Third, despite Malaysia's impressive economic development, the country still faces some problems, such as environmental deterioration and income discrepancies, therefore cutting or reducing foreign aid would be a premature step. Fourth, after the Asian financial crisis in 1997-1998, Malaysia has made an effort to reform its economic system and needs Japan's assistance to carry out the reforms.

Besides these official explanations, there are other reasons why Japan provides substantial economic assistance to Malaysia. Researchers point out that by doing so Japan takes care of its own strategic interests. Orr (1987) offers two reasons as to why Japan is keen to continue giving economic assistance to Malaysia. First, Malaysia occupies a strategic location on the sea route to Middle Eastern countries from where Japan imports petroleum. Second, Malaysia is one of Japan's major providers of essential natural resources. Orr's line of reasoning remains valid today because the Malacca Straits remains an important sea route by which Japan imports natural resources, such as timber or liquefied natural gas (LNG), from Malaysia.

Though ostensibly Japan provides foreign aid to Malaysia to assist the latter's economic development, three aspects of Japan's aid policy toward Malaysia have become the focus of criticism. First of all, researchers and specialists on ODA maintain that Japan's ODA program is primarily designed to safeguard Japan's own economic interests. As Aslam and Piei (1994: 39) argue, 'Since 1976, Japan has been the second largest source of external finance to Malaysia after the United States But Japan extends the aid to Malaysia primarily to promote its own commercial and industrial interest'.

Secondly, as substantial amounts of Japan's ODA had been given to Malaysia in the form of bilateral loans, there were concerns that repayment of the loans could become a financial burden for Malaysia. From 1995 to 2000, Japan provided USD426.21 million (RM1.619 billion) to Malaysia as bilateral grants, i.e. aid that does not require repayment. In the same period, Malaysia's repayment of loans to Japan amounted to USD810.91 million (RM3.081 billion) (JICA 2002). This means that Japan's net foreign aid disbursement to Malaysia was negative. In other words, the amount of money that Malaysia had to repay Japan exceeded the amount of aid it received from Japan.

Finally, the high interest rates attached to Japanese loans were also subjected to criticism. A prominent Malaysian political leader suggested that Japan should review its aid policy and reduce the interest rates of its loans since 'the intention was a soft loan to help poor countries but has resulted to be a very high interest loan' (New Straits Times 1996).

At present, Malaysia is the fourth biggest recipient country of Japan's ODA among the developing nations. In 2004, Malaysia received USD256 million worth of Japanese bilateral aid, of which USD210 million were given as bilateral loans (MOFA 2006). Technical cooperation remained an important component of the ODA program amounting to USD45 million in aid funds. By contrast, bilateral grants represented a negligible part of the aid program amounting to less than USD1 million.

As such, therefore, Malaysia is also one of the biggest recipients of Japanese aid among ASEAN countries. For example, in 2004, Cambodia received USD86 million, Laos USD71 million and Myanmar USD26 million of Japan's ODA, respectively (MOFA 2006). In other words, Malaysia, which is a relatively wealthy country among ASEAN countries with a per capita Gross National Income (GNI) of USD4,520, received a bigger share of Japanese ODA than its poorer neighbouring countries, such as Laos, Cambodia and Myanmar, with a per capita GNI of USD390, USD350 and USD217, respectively (ADB 2006).

Malaysia is also the third largest recipient country of bilateral loans from Japan. In 2004, Malaysia's share was approximately 2 percent of the total amount of bilateral loans disbursed by Japan. The cumulative amount of Japan's bilateral loans that Malaysia received up to 2004 amounts to JPY916 billion (approximately USD8.32 billion). Good ties, both political and economic, between Malaysia and Japan were evident during the Asian financial crisis in 1997-1998, when the Malaysian government decided against receiving funds from the IMF and instead relied on rescue funds from Japan.

4. Case Studies

Case Study One: The New Miyazawa Initiative

To deal with the consequences of the Asian financial crisis of 1997-98, some experts used neo-liberal ideology by 'advocating a liberal framework for the internationalisation of capital' and 'some form of structural adjustment' (Gill 1999: 2). These experts criticised East Asian countries for 'giving unfair advantage to local (as opposed to foreign) firms, because East Asian firms obtain cheaper, state-subsidising supplies of capital while foreign firms are denied full market access' (Gill 1999: 2). For them, the solution to the Asian financial crisis was 'self-evident' and involved 'a shift away from state capitalism toward a free market system based on investor interests and the maximisation of shareholder value' (Gill 1999: 3).

The IMF was expected to play a central role in dealing with the crisis. However, its policies were quite harsh, which raised doubts about the adequacy of the IMF's measures. Some economists suggested that attention should be paid to the particularities of each of the East Asian economies and criticised the IMF for setting very strict conditions as the prerequisite for receiving rescue funds. For example, Professor Jeffrey Sachs of Harvard University maintained that the IMF had made a wrong diagnosis and prescribed the wrong 'medicine' to Asian countries. As Sachs pointed out, the IMF's rescue packages were workable for those countries where the problems were caused by the public sector's debts and government's overspending. In Asian countries, on the other hand, the private sector was at the root of the problem. Therefore, the IMF's demands that the countries hit by the crisis further cut government expenditure, tighten credit and carry out emergency bank closures were deemed too harsh for the already weakened economies. Furthermore, it was also argued that such measures were pushing the region into an even deeper recession (Khor 1997).

When the Asian financial crisis broke, Japan was prompt to offer assistance to the ailing Asian economies. In the initial stage, the Japanese government worked in cooperation with the IMF and used its funds to reinforce the IMF's programs. To assist bail-out packages planned by the IMF, Japan announced that it would provide USD4 billion to Thailand in August 1997, USD5 billion to Indonesia in November 1997, and USD10 billion to South Korea in December 1997. As Johnstone (1999: 15) puts it, 'Tokyo offered a total of [USD]19 billion to the 'second line' credit packages made available to Thailand, Indonesia, and South Korea, a sum that easily represented the largest contribution to the bail-out effort'.

It is interesting to note that governments in East Asian countries reacted differently to the Asian financial crisis. Among the countries that opted to apply to the IMF for assistance were Thailand, Indonesia and South Korea. The Malaysian government decided against borrowing money from the IMF. Instead, in order to overcome financial problems that were partially caused by the 'contagion effect' of the crisis, it introduced capital controls. As the economic situation in Asian countries, such as Indonesia or Thailand, remained bad and economic recovery was very slow, the Japanese government and top officials grew increasingly dissatisfied with the IMF's programs. One of the critics of the IMF's programs was Japan's Finance Minister Kiichi Miyazawa who 'obliquely criticised the IMF-led approach to recovery based on tight monetary policies' (Vatikiotis & Hiebert 1998/99).

As a next step, the Japanese government began looking for alternative ways to abate the consequences of the Asian crisis and, propelled by the initiative from Japan's Ministry of Finance, decided to set up a so-called 'Asian Monetary Fund' (AMF). At the G-7 meeting in Hong Kong in September 1997, Japan proposed to set up the AMF which would pool USD100 billion to address economic and financial woes in the region. The AMF was expected to implement rescue programs without imposing strict conditions on East Asian economies. As Gill (1999: 6) notes, 'What was significant about the Japanese plan (to set up the AMF) was that it would have imposed a gentler form of adjustment in the region'.

While East Asian countries supported Japan's proposal to create the AMF, the US government opposed this initiative. According to Johnstone (1999: 125), 'Governments in Southeast Asia immediately offered support to the Japanese proposal, at least in part out of a desire to avoid the strict conditions imposed on IMF lending. American officials condemned the idea for precisely that reason, arguing that the AMF risked creating a regional 'moral hazard' problem'. Opposition from the US government put a strain on Japan-US relations and effectively cancelled Japan's plans for the AMF. As the US government pressed for 'an IMF-centred response to the crisis Tokyo quietly abandoned the AMF proposal and continued to disburse bilateral financial assistance to afflicted economies' (Johnstone 1999: 126).

Despite a fiasco with the AMF, the Japanese government continued its search for a viable alternative to deal with the crisis and, in October 1998, it introduced an economic recovery strategy a so-called 'New Miyazawa Initiative' drafted by the Ministry of Finance (Vatikiotis & Hiebert 1998/99). In an uncharacteristic move for the Japanese government, Prime Minister Keizo Obuchi in his speech at the Asian Leaders Summit in Hanoi in December 1998, called for greater cooperation between Asian countries without relying on help from Western countries. At the Summit, Japan pledged to give foreign aid worth USD1.9 billion to Thailand and USD2 billion to Malaysia under the New Miyazawa Initiative.

According to the provisions of the New Miyazawa Initiative, Malaysia was to receive the following types of assistance: 1) bilateral loans amounting to USD1 billion, 2) the Export-Import Bank's loan totalling USD500 million, and 3) trade and investment insurance amounting to USD500 million. The bilateral loan was to be divided between the following seven projects: 1) the 'Look East' Policy (USD127 million), 2) Higher Education Loan Fund Project II (HELP II) (USD75 million), 3) Universiti Malaysia Sarawak (USD168 million), 4) Beris Dam (USD88 million), 5) Pahang-Selangor Raw Water Transfer Project, (USD10 million) 6) Port Dickson Power plant (USD445 million), 7) Small and Medium Scale industries and enterprises (SMIs) development fund (USD147 million) (Embassy of Japan in Malaysia 1999).

One of the most interesting features of Japan's aid to Malaysia under the New Miyazawa Initiative is that the Japanese government provided funds for the development of human rather than physical capital. In other words, Japanese aid under the New Miyazawa Initiative was to be spent to increase the stock of knowledge and skills through education. Out of the six projects that received funds under the New Miyazawa Initiative, three projects (the 'Look East' Policy, HELP II, and Universiti Malaysia Sarawak) were directly involved in educational activities.

Reasons as to why Japan chose to support human resource development projects under the New Miyazawa Initiative could be explained by considering Japan's own interests in offering the assistance. Thus, under the 'Look East' policy, scholarships had been given to Malaysian students to pursue their studies in Japanese universities. Funds distributed under the New Miyazawa Initiative helped to ensure that this part of the 'Look East' policy would not be discontinued. The Japanese government was interested in attracting foreign students to Japan. As MOFA (2005:149) maintains, 'In accordance with the "Plan to accept 100,000 foreign students", Japan has made efforts to enhance various measures for foreign students, including a systematic development of the Japanese Government scholarship, financial aid to privately financed foreign students'. Therefore, the decision to offer financial support to educational projects in Malaysia also supported Japan's own interests.

The second project that received funds under the New Miyazawa Initiative, HELP II, was engaged in training engineers under a Malaysian-Japanese universities' twin program. Under this program, Malaysian students were trained in Malaysia first and then transferred to Japanese universities. According to MOFA (2004), the project helped to 'improve the cost-effectiveness of studying in Japan'. In other words, Japan too benefited from supporting this project.

By offering a timely help to its Asian neighbours Japanese foreign diplomacy was able to score a success. Japan's initiative helped to reinforce ties with the country's Asian neighbours. In Malaysia, Japan's rescue package was well accepted by the government and lauded by local mass media. As the then Second Finance Minister, Datuk Mustapa Mohamed, commented, 'The package ('New Miyazawa Initiative') indicates Japan's seriousness and commitment to help countries in the region overcoming the financial crisis' (New Straits Times 1998).

The Malaysian National Economic Action Council (NEAC) appreciated the fact that under the New Miyazawa Initiative interest rates on the loans were low (Raj 1999). During his visit to Japan in June 2001, Malaysian Prime Minister Mahathir Mohamad expressed 'Malaysia's appreciation for Japan's Yen loan in supporting Malaysia during financial crisis' and was assured by his Japanese counterpart, Prime Minister Junichiro Koizumi, that Japan would continue supporting Malaysia's efforts in reforming its economy (Samad 2001).

Despite the positive comments that the New Miyazawa Initiative received, the rescue package was not free of shortcomings. The main problem had been delays in the disbursement of funds, which prompted Mahathir Mohamad to comment that 'Japan's aid package is so slow-footed that the financial crisis would be over before it was spent' (Selvarani 1999). Observers attributed the delays to cumbersome bureaucratic procedures in Japan and excessive 'red tape'. To fend off the criticism, the Japanese government maintained that before handing out the money it needed a detailed plan on how the funds were to be spent (Selvarani 1999).

It should be noted that the criticism of tardiness was valid as the decision-making process of Japan's economic assistance is slow, complicated and fragmented. Any bilateral loan has to be first officially approved by several ministries and governmental agencies in Japan before the money can be disbursed; this makes a speedy delivery of funds difficult. This cumbersome procedure undermines efficiency in funds distribution. This highlights the necessity of streamlining the decision-making and approval process of Japan's ODA programs, especially in the cases of emergency aid, in order to increase the efficiency of Japan's ODA program.

Case Study Two: The Kelau Dam Construction Project

The Pahang-Selangor Raw Water Transfer Project was one of the seven projects to receive bilateral loans from Japan under the New Miyazawa Initiative. This project would enable water transfer from a less populated Pahang state to a more densely inhabited Selangor state, which surrounds the federal territories of Kuala Lumpur and Putrajaya. As a part of the project, the construction of a dam and water transfer tunnel was planned. Japan Bank for International Cooperation (JBIC) explained reasons behind the decision of the Japanese government to support this project. According to JBIC, Selangor had been experiencing an increase in water demand and suffered occasional water shortages during the dry reason. Therefore, 'an interstate project to transfer water from Pahang state to Selangor state has been considered in order to cope with the increase of future water demand in Selagor state and Kuala Lumpur region' (JBIC 1999).

One issue that engendered debates was the plan for construction of a new dam, the Kelau Dam. There were both positive and negative sides to this plan. On the one hand, the Kelau Dam was supposed to meet the water demands of the highly populated urban areas of Selangor and the capital city, Kuala Lumpur. However, some parties argued that the dam construction would 'have serious impacts on the Kelau River ecosystem and will require the resettlement of 325 indigenous people and 120 Malay farmers, seriously affecting their lives and livelihoods' (Carling and Friends of the Earth-Japan 2005).

Resettlement of indigenous people became a controversial issue. The proposed area for the dam site included the ancestral land of the Temuan people (an indigenous forest people in the area). Besides, as a Malaysian Non-Governmental Organization Sahabat Alam Malaysia (SAM) maintained, these affected people 'did not give their free, prior and informed consent to the relocation' (SAM 2003:32). According to the Centre for Orang Asli Concerns (COAC 2002), the village chief said that the villagers had to relocate but 'if we have a choice, we want to stay where we are'.

On the other hand, the Malaysian government was critical of the NGO's stance and the top government officials urged NGOs not to oppose the government's plan. For example, the Works Minister, Samy Vellu, said that 'the NGOs are stumbling block to the Government's efforts to get water supply from Pahang to Selangor'. He called on NGOs to assume a 'positive' attitude towards the project because 'a positive role of the NGOs will help us to secure the RM3.8 billion loan from the Japanese Government' (Perumal, 2002). In a similar vein, Chief Minister of Selangor, Mohamad Khir Toyo, advised the NGOs to 'evaluate the situation wisely' and warned that 'any delay in the implementation of RM3.8 billion water transfer project from Pahang to Selangor will lead to a major water crisis in the state in future' (The Star 2002a).

The then Malaysian Prime Minister, Mahathir Mohamad, suggested the members of the NGOs who opposed the water transfer project should go and live in the forest. As he said, 'If you don't want to destroy the forest, go and live in the forest'. The Prime Minister admonished NGOs for their opposition to the project and added that 'it is easy for our NGOs to oppose such projects. But they want the water. If they don't want the projects to be implemented, we shouldn't give them water' (The Star 2002b)

The main argument put forward by the NGOs was that the dam construction was not really necessary; instead, a more efficient water management was required. For example, Sahabat Alam Malaysia (2003: 30) argued that per capita water consumption in Selangor and Kuala Lumpur had been very high due to 'grave inefficiencies' in the area's water management system. According to the NGO, more than 40 per cent of water consumption in the area 'is lost by distribution system through leakage and theft'. In a similar vein, other NGOs pointed out that water shortage in the area could be caused by: 1) inefficient water distribution, 2) careless per capita water usage, 3) wasteful leakage in the antiquated pipe system, and 4) reckless denudation of watershed areas (Hui and Antares 2005).

Therefore, instead of the Kelau Dam construction, Sahabat Alam Malaysia (2003: 31) proposed the following two water saving measures: 1) replacement of the old water pipes installed decades ago with new and more durable ones, and 2) to introduce more stringent measures against illegal connections to water pipes.

The Japanese government was aware of the negative reaction towards the plan to build the Kelau Dam. According to a Malaysian newspaper, The Star, the Japanese government would provide loans for the 'water transfer project from east coast to Selangor only if at least five non-governmental organizations support the plan' (Perumal 2002). This consideration of NGO's responses by Japanese policymakers indicates that Japanese foreign aid policy is gradually becoming more concerned about the environmental impact and the general public perception of the projects funded under the ODA program.

5. Conclusion

Malaysia and Japan have been enjoying very good bilateral relations for several decades. The two countries maintain close diplomatic ties, conduct active cultural exchange and have robust economic relations. Japan is a major source of FDI to Malaysia, and also provides Malaysia with substantial economic assistance. Though Japan's ODA program has been criticised for being commercially motivated, overall, Malaysia has benefited from the economic assistance it has received from Japan.

This article has undertaken two case studies of Japan's ODA to Malaysia. In the first case study the New Miyazawa Initiative Japan's offer of assistance was positively evaluated by the Malaysian government, the mass media and general public. It should be noted that in response to the Asian financial crisis Japan was able to assess properly the needs of its aid recipients affected by the crisis, including Malaysia, and was able to come up with its own rescue plan. The case also highlighted that much still needs to be done to improve the efficiency of Japan's ODA program.

The second case study on the construction of the Kelau Dam, for which Japan has also provided funds, revealed that Japan's economic assistance to Malaysia has not been free from controversy and that the Japanese government has not always been very meticulous in selecting projects to be funded through its ODA program. The plan for the construction of the dam was met with a mixed reaction from Malaysian NGOs and attracted the criticism of local residents. However, the fact that the Japanese government required support from at least five local NGOs for the dam construction before it would distribute the funds indicates an increased awareness among the Japanese ODA policy makers about the environmental and social impacts that projects funded by the ODA would have.

To conclude, much needs to be done to increase the efficiency and bolster the image of Japan's ODA program. First of all, the Japanese government may want to consider giving more bilateral grants than bilateral loans to its aid recipients, so that poor countries are not burdened with the repayment of loans. Secondly, excessive bureaucratic red tape needs to be removed in order to ensure a speedy delivery of funds. Third, there is a need for a better assessment of the potential environmental and social impacts that projects supported by Japan's ODA program are likely to produce in the aid recipient countries. Avoiding funding projects that are either not beneficial to, or that raise opposition from, the local residents would help steering clear of controversy and bad publicity, and thereby maintain the good image of Japan's ODA program. Finally, the validity of the projects supported by Japan's ODA as well as the fundamental principles of aid giving should be considered more thoroughly by Japanese policy makers before Japan's ODA funds are distributed.


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About the authors

Fumitaka Furuoka is Lecturer at the School of Business and Economics, Universiti Malaysia Sabah (Malaysia).

Lo May Chiun is Lecturer at the Faculty of Economics and Business, Universiti Malaysia Sarawak (Malaysia).

Iwao Kato is Associate Professor at the Faculty of Economics and Business, Wako University (Japan).

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Copyright: Fumitaka Furuoka, Lo May Chiun and Iwao
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