Other countries in Asia are also offering incentives, not just China

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Unpacking Asia’s Evolving Landscape of Aid and Development Finance

The Asia-Pacific region, renowned for its dynamism, grapples with substantial development needs, as estimated by the Asian Development Bank (ADB) at a staggering $1.7 trillion annually until 2030. Rapid economic growth has spurred demands for critical infrastructure, including roads, railways, power stations, ports, and digitalization. However, a significant portion of the region still contends with poverty, inadequate access to education and healthcare, governance challenges, and susceptibility to natural disasters and climate-related threats. These multifaceted issues are exacerbated by the ongoing repercussions of the COVID-19 pandemic.

Emerging Aid and Development Initiatives:

The positive development lies in the growing recognition of these challenges by Asia’s more affluent nations and regional organizations, such as the ADB. Japan, South Korea, Australia, and Taiwan have recently formulated new aid and development policies designed to enhance the efficiency of their limited financial resources, emphasizing the importance of collaboration. This underscores two fundamental realities. First, the majority of Asia’s appetite for aid and development funding will be met by regional donors, as the United States’ bilateral aid contribution to the region remains relatively modest, despite its significant security presence. A report by the Lowy Institute revealed that four out of the top five donors to Southeast Asia from 2015 to 2021, accounting for 73% of the $200 billion official development spending, were Asian entities: China, the ADB, Japan, and South Korea, with the World Bank being the fifth.

The second reality entails the geopolitical implications of these developments. China’s position as a major source of development finance in Asia has faced competition even before recent financial challenges at home and strained overseas loans prompted a reduction in lending activities. Development finance and cooperation are emerging as crucial tools in Asia’s geopolitical landscape, as described by the Lowy Institute. How Asian donors engage with their less affluent neighbors may significantly influence the region, just as the competition between China and the United States in defense and security has.

Diverse Approaches to Development Finance:

China has exerted its influence on development primarily through President Xi Jinping’s Belt and Road Initiative, focused on enhancing infrastructure and reducing trade barriers while promoting China as a benevolent global leader. In Southeast Asia, China has emerged as the primary provider of official aid, disbursing approximately $5.5 billion annually, constituting a fifth of the total assistance. Nevertheless, it faces formidable competition, particularly from Japan and South Korea. China excels in infrastructure, accounting for almost 40% of all development finance in this sector, whereas Japan focuses slightly more on funding transportation, and South Korea rivals China in the communications sector. China’s dominance extends to energy, while it is conspicuously absent in water and sanitation.

The Chinese approach has occasionally generated resentment due to its tendency to underdeliver on promised projects. Additionally, the extensive use of Chinese companies and labor often leads to reduced emphasis on local employment and training. Borrowers from China’s two primary policy banks typically incur the full, non-concessional interest rates, and instances of corruption and substandard work have been reported. In countries such as Sri Lanka, the Maldives, and Laos, Chinese loans have soured as borrowers struggle to meet their repayment obligations. The extent of these challenges remains unclear, partly owing to a lack of transparency in China’s approach.

In contrast, poorer countries often prefer to partner with Japan, as its approach to aid is characterized by a long-standing and understated engagement. Japan initiated its aid efforts in the 1950s, partially as a form of atonement for its wartime aggression. Today, Japan aims to build both infrastructure and capacity, often collaborating with local contractors. Major projects, such as the development of complex subway systems, include technical assistance on operational aspects. Surveys consistently depict Japan as the most trusted power in the region, and the involvement of young Japanese volunteers in overseas poverty-alleviation initiatives reinforces this trust.

Unlike China, Japan primarily extends development-assistance loans at concessional rates, mainly through the Japan International Co-operation Agency (JICA). JICA also leverages Japanese expertise to provide advice and training. The Japan Bank for International Co-operation (JBIC) offers project financing for infrastructure development, creating a winning combination. In India and Bangladesh, Japan stands as the most significant bilateral donor, and in the Philippines, Japan is noted for its substantial contributions, often surpassing those of China, according to a Southeast Asian diplomat.

South Korea’s approach to aid mirrors Japan’s, benefiting from its status as an exporting powerhouse, with substantial foreign exchange reserves and numerous high-profile companies in sectors such as infrastructure, mining, and communications. President Yoon Suk-yeol has actively increased aid spending, particularly focusing on healthcare initiatives. South Korea’s status as a mid-level rather than a global superpower makes it a non-controversial benefactor.

Strengthened Relations and Collaboration:

Historically strained relations between Japan and South Korea have improved, leading to discussions of collaborative aid initiatives. Australia, a prominent donor to Pacific island states with ambitions to expand its presence in Southeast Asia, also expresses interest in collaborating with like-minded partners. While the prospect of synergizing their respective strengths, such as financial expertise or proficiency in training and renewable energy, holds potential, there are significant challenges, including aligning fiscal calendars and making investment opportunities attractive and secure for private capital