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The economic outlook for the Latin American and Caribbean (LAC) region is among the worst in the world. The International Monetary Fund (IMF) estimated a contraction of real GDP by 8.1 percent in 2020, with few countries recovering to pre-pandemic GDP growth rates until 2023. Real per capita GDP is expected to lag until 2025, at least. These figures are especially staggering when compared with outcomes in all emerging markets/developing economies and in advanced economies, which shrank by 3.3 percent and 5.8 percent in 2020, respectively, according to the IMF.
The foreign investment forecast is also a somber one. As Ana Novik, head of the Investment Division at the Organization for Economic Cooperation and Development (OECD), noted in a December 1 Inter-American Dialogue and Chilean Pacific Foundation online event, global FDI flows shrunk 50 percent in the first half of 2020, compared to the second half of 2019. The UN Economic Commission for Latin America and the Caribbean (ECLAC) has predicted a similar sharp drop of 45 to 55 percent in FDI inflows to the LAC region, due to disruptions caused by the pandemic.
In this context, collaboration with and assistance from long-standing economic partners is exceedingly critical, as indicated in a December 2020 OECD report on the LAC region’s response to the pandemic. Doing so would help to mobilize resources at the global level for vaccine production and distribution, and also to facilite sufficient knowledge-sharing, policy dialogue, and technology transfer in support of a sustainable and long-lasting recovery.
Of the region’s many economic partners, Japan has a promising role to play in each of the above areas, and indeed is already active in supporting the region’s Covid-19 response. In May 2020, for instance, the government of Japan contributed 2.7 million dollars to the Pan American Health Organization to help address Covid-19. More recently, the Japanese government extended Emergency Grant Aid of 8.8 million dollars to Central America for hurricane recovery.
According Satoshi Yoshida, Director General of the Latin America and Caribbean Department at the Japan International Cooperation Agency (JICA), who spoke at a December 9 Inter-American Dialogue event, JICA also offered short-term assistance to LAC through the supply of equipment such as masks, gloves, and test kits, as well as through a series of webinars. In the medium-term, the organization will focus on bolstering health sector capacity, among several other areas. As has been the case in other challenging moments, Japan’s private sector has also largely stayed the course in LAC in recent months, even seeking out new projects in some cases.
Japan’s Approach in LAC
Despite a recent leadership transition, Japan remains committed, our panelists noted in our December events, to its policy of heightened engagement with the LAC region. Key to this engagement is the “Juntos” policy, which was announced during Prime Minister Abe’s 2014 trip to São Paulo in a speech entitled “Juntos!! Bringing infinite depth to Japan-Latin America and the Caribbean Cooperation.” At the time, Abe suggested that Japan and LAC progress together (“progredir juntos”), lead together (“liderar juntos”), and inspire together (“inspirar juntos”), as well as enhance economic engagement and cooperate on regional and international affairs, social and economic development, and cultural exchange.
Because he was once former Japanese Prime Minister Shinzo Abe’s chief cabinet secretary, current Prime Minister Yoshihide Suga was closely involved in Abe administration policy-making, as Susan Hubbard of the Japan Center for International Exchange noted in our December 9 event. As a result, Prime Minister Suga will very likely retain key aspects of the previous government’s foreign policy, including a relationship with LAC based on the so-called “pillars of connectivity”—economies, values, and wisdom. According to the previous administration’s description, economic connectivity was viewed in terms of the mutual promotion of free and open economic systems, with emphasis on global value chains and quality infrastructure. Japan envisioned “leading together” with LAC on values connectivity by jointly supporting values-based and rules-based multilateralism. Knowledge connectivity involved collaboration on the sustainable development goals (SDGs), and employing innovative and evidence-based approaches to address regional development challenges.
In addition to likely government support for continued engagement with the LAC region, there is broad Japanese domestic support for overseas assistance, according to Susan Hubbard, even despite pandemic-related economic challenges in Japan. Hubbard noted a current push in Japan to double the percentage of overseas funding for health-related initiatives, which could very well create new opportunities for collaboration with LAC. Assuming continued or even enhanced engagement, Japan’s extensive commitment to sustainable development, as well as transparent, ethical, and high-quality overseas engagement, will be of critical importance, especially as LAC nations enter into this period of protracted recovery. Japan’s continued promotion of human security in LAC will also be exceedingly valuable, especially as the region grapples with extensive social and economic upheaval.
Thus far in LAC, Japan’s work in support of human security has included participation in multilateral programs on HIV/AIDS control and prevention in Cuba, maternal health work in Peru, and support for internally displaced populations in Colombia, among many other examples. JICA works to advance human security through extensive collaboration with aid recipients, aiming to “understand the underlying development challenges and the socio-cultural context, and [tries] to design the best solution possible in a collaborative manner,” according to Satoshi Yoshida. Most recently, in relation to Covid-19, JICA’s strategy focuses on better prevention, precaution, and treatment. Japan’s foreign direct investment in LAC and other regions is also committed to advancing human security, according to Susan Hubbard, by “looking at challenges from the perspective of individuals and communities and how they experience vulnerability in their daily lives.”
Whatever the degree or focus of Japanese engagement, a considerable portion will very likely be in the form of multilateral cooperation. As JICA’s Satoshi Yoshida mentioned, “JICA is fully aware that it alone cannot solve the overwhelming challenges that the region faces, so our strategy is to collaborate with our partners such as the Inter-American Development Bank and the World Bank and the private sector to reach our friends in LAC with the best possible resources and solutions available.” JICA has worked with the Inter-American Development Bank (IDB) since 2011 in quality infrastructure development, renewable energy, and energy efficiency through the Co-financing for Renewable energy and Energy efficiency (CORE) program, a US$3 billion framework. The two institutions are currently in discussion to expand collaboration to include health, with a focus on achieving universal health coverage and disaster risk reduction. Japan’s cooperation with the United Nations Development Programme (UNDP) on the Japan-Caribbean Climate Change Partnership is another example of Japan’s committment to multilateral partnership in LAC and other regions.
Promising Areas for Collaboration
In terms of overseas development assistance, Japan will very likely focus near and medium-term efforts in LAC on strengthening health systems across the region to address long-standing deficiencies, and considering, as public health expert Susan Hubbard did in our December 2 event, that “Covid-19 will likely not be the last pathogen to threaten the entire globe during our lifetime.” In just the past few months, JICA organized webinars with officials in Brazil, Central America, Colombia, and Peru to share Japan’s experiences combating the pandemic. JICA also provided a disbursement of a 50 million dollar loan to El Salvador under its standby facility in March of 2020, which was used for the construction of a hospital. Some of the facilities that JICA has established in the region, including Hospital Universitario Japonés in Santa Cruz, Bolivia, have been instrumental in responding to and educating the local population about Covid-19, according to Satoshi Yoshida.
Beyond this, as Yoshida also noted, JICA is dedicated to strengthening “health and medical systems, upgrading the disease prevention and research centers, as well as inviting researchers to Japan for disease prevention and global health [training].” One example of this work is continued collaboration with the World Bank, to provide better maternal and child nutrition in Guatemala and to strengthen health systems in Bolivia. Yoshida explained that JICA also seeks to provide concessionary loans to governments as a form of budgetary support to provide emergency packages to vulnerable people and businesses. After the 2014 Ebola outbreak, JICA intensified its efforts to strengthen health systems, including by supporting vaccine-manufacturing capacity, promoting routine immunizations, and by providing loans for procurement of vaccines.
There is also considerable opportunity for enhanced Japan-LAC cooperation on climate change, as panelists in our December 1 and 2 events noted. Part of this work will be focused on technical exchange, sharing technological and policy solutions that Japan has developed at home, and which may be transfereable to certain LAC nations. As JICA’s Satoshi Yoshida explained, “Japan is a disaster-prone country and we share the [LAC] region’s sense of uncertainty and fear against these intensifying natural disasters.” JICA has so far provided grants and technical assistance, and to support disaster risk reduction and management in Central American countries, Brazil, Chile, Colombia, Ecuador, and Peru. The Japan Center for International Exchange’s Susan Hubbard noted the urgent need to also focus on the effects of climate change on health, both in terms of infectious diseases and on the numerous non-communicable chronic diseases that affect public health.
In addition to overseas development assistance, Japan’s direct investment in LAC in the coming years may also help address the climate crisis. One likely area of focus is green hydrogen, for instance, or hydrogen fuel produced using electricity from renewable energy sources. Mitsubishi’s Tadashi Omatoi mentioned the possiblity of the LAC region becoming a prominent provider of green hydrogen to the world. He added that “some Japanese companies possess valuable technology in this area” and that Japan could potentially support the region’s production and shipment of green hydrogen. Vicente Pinto, InvestChile’s investment commissioner for Asia, who spoke at our December 1 Spanish-language event, noted a mutual interest in working with Japan on green hydrogen, suggesting that doing so would support Japan’s energy security. In the LAC region, Argentina, Uruguay, Colombia, Costa Rica, French Guiana and Chile are already developing projects supportive of green hydrogen production. At the “Chile 2020: Green Hydrogen Summit,” Chilean President Sebastián Piñera and Chile’s Minister of Energy, Juan Carlos Jobet, unveiled the country’s strategy to position Chile as one of the top producers of green hydrogen by 2040. Jobet stated that green hydrogen could one day be as important as mining to the Chilean economy.
Infrastructure is another possible area of focus among Japanese investors and donors. As World Bank Chief Economist for Latin America and the Caribbean Martín Rama noted in our event, quality infrastructure “is clearly one of the strengths of Japan.” He added that the region’s need for quality infrastructure presents an opportunity for enhanced Japan-LAC engagement in the coming years. Although Japan Bank for International Cooperation (JBIC) lending has been suspended since mid-2020, JBIC has been an active lender in LAC for extractive sector and infrastructure projects, focusing on so-called GREEN Operations, which support energy efficiency and quality infrastructure development. In March 2020, for instance, JBIC, in cooperation with CAF-Development Bank of Latin America, issued a 200 million dollar credit line for projects such as the supply of water, the prevention of water pollution and the maintenance and upgrade of electric power distribution networks. JICA will also provide concessionary finance for the promotion of quality infrastructure in the region, according to Satoshi Yoshida. These funds are intended to support better infrastructure governance, transparency, value for money, and infrastructure resiliency, as part of the G20 Quality Infrastrucutre Investment Principles promoted by Japan.
Japan is also well-positioned to engage with LAC in the development of digital solutions. As noted in the OECD’s 2020 Latin America Economic Outlook, digital transformation is expected to play a pivotal role in LAC’s economic recovery, as well as in support of increasingly inclusive and sustainable development. In our December 1 meeting, Mitsubishi’s Tadashi Omatoi indicated that Japanese companies indeed aim for greater involvement and cooperation in the development of growth-promoting digital infrastructure, including in 5G-related technologies and the construction of submarine fiberoptic cables.
Japan’s Softbank Group has also played a central role in LAC’s digital transformation by heavily investing in technology start-ups across the region. In 2019, Softbank launched its $5 billion Latin America Fund, the largest-ever technology fund focused exclusively on the LAC region. According to VentureSource, Innovation Fund activity has thus far been equivalent to all venture investments in LAC in 2017 and 2018 combined, mostly through investments in the region’s e-commerce, health care, and fintech sectors. In 2019 alone, SoftBank invested $1.6 billion across 17 companies and two venture capital firms, with more than 50 percent of investment directed toward Brazil.
Japan may also be a critical partner for actors in the public and private sectors in LAC seeking to use artificial intelligence (AI) for education or labor market solutions and to facilitate access to finance and health services. As Tetsuro Narita of the IDB Lab noted on December 2, artificial intelligence is promising for the region, but must be managed in such a way to assure greater socioeconomic inclusion. Japan, among others nations, has sought to ensure ethical application of technologies and careful data handling, including through a series of AI R&D guidelines, which were presented at the 2017 Ministry of Internal Affairs and Communications Conference toward AI Network Society, and call for a principled approach to AI policy-making. In fact, Japanese initiatives such as Society 5.0, whose purpose is to use technology to reinvent society and set the precedent for “super smart” societies around the world, have made Japan a global leader in AI adoption. Society 5.0 initiative focuses, among other things, on boosting productivity among the country’s aging population through the digitalization of infrastructure, finance, healthcare, and logistics.
Assuming Japanese firms continue to focus on the development of resilient supply chains by diversifying their sourcing and production, there may be some new opportunity for Japan-LAC partnership in key industries. Indeed, Japan has already worked for many years to integrate LAC industry into its global value chains (GVCs) through targeted investment and technical cooperation. As the World Bank’s Martín Rama indicated in our event, “the kind of scheme that worked with those Hondas and the Panasonics in the past is something that may be considered as part of the diversification of global supply chains.”
Ensuring Maximum Cooperation
Regardless of Japan’s commitment, the LAC region will need to work to maximize participation by Japanese and other partners. Still-protected markets are an impediment to investment, whether by Japanese or other companies. As Martin Rama noted, although import substitution policies have formally ended “vested interests that are cozy with governments…can manage to keep competition in their favor, to keep [themselves] protected.” With this in mind, any future agreements must go beyond trade, focusing on competition, subsidies, state-owned enterprises, and intellectual property rights.
For Mitsubishi’s Tadashi Omatoi, the greatest challenge for Japanese investment in LAC is the degree of political and social instability of the region. This has long been a problem for investors in the region, but due to the effects of Covid-19, which have taken an unprecedented human, economic and political toll, and thus exacerbated the region’s decades-old structural deficiencies, further political and social instability is likely in the coming months and years. It will be difficult for governments to mitigate many of the effects of Covid-19, but as the OECD’s Ana Novik recommended, “in the current context of uncertainty and rising protectionist tendencies,” LAC nations must at the very least increase transparency in government procedures, simplify licenses, and automatize procedures. This would do much to incentivize Japanese and other established and would-be investors in the region, as well as to capitalize on Japan’s likely promotion of Japanese private sector and JICA engagement with the region, “once Covid-19 infection rates come down,” as JICA’s Yoshida predicted.
Our speakers nevertheless emphasized Japan’s continued interest in engaging with the LAC region in the coming months and years, whether through development assistance, as investors in certain economic sectors, such as green energy and digital infrastructure, or possibly even in coordination with the US. Japan alone won’t meet the region’s considerable need for investment and finance, but much of Japan’s intended activity will ideally be supportive of a sustainable recovery.