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Enhancing the Partnership between Latin America & the Caribbean and Japan

Greetings and Introduction

Mina sama. Kon ni chi uá!

It is a great honor and pleasure to be in Japan for what I hope will be the first of many visits. Japan is the largest shareholder of the Inter-American Development Bank outside of the Western Hemisphere, and our institution’s gateway to Asia. The Japanese government and the people of Japan have been steadfast partners of the IDB and key supporters of its work in promoting economic and social development in Latin America and the Caribbean for nearly 30 years. For this, we as an institution, and the countries and peoples of our region, are eternally grateful.

I want to thank all of you distinguished friends for being here today and for your interest in Latin America and the Caribbean and the work of the IDB. I particularly want to express my gratitude to Mr. Makoto Utsumi, a long-time expert in Latin America and the Caribbean and a dear friend of the IDB, and Senior Vice-minister Takemoto, who represents one of our Bank’s most important backers—Japan’s Ministry of Finance—, for joining us in what I hope will be a productive discussion about how to strengthen and enhance the partnership between our region and Japan.

I also want to thank the organizations and people that made this important event possible: the Asian Development Bank Institute, the Japan Institute for Overseas Investment, the Japan Center for International Finance, the Japan External Trade Organization, the Engineering Consulting Firms Association, the Latin American Society and the IDB Office in Japan.

Historical ties and opportunities

When I think about the long-standing relationship between Japan and Latin America and the Caribbean, I am reminded of a wonderful story about the first Japanese immigrants to my country, Colombia. In 1923, inspired by Jorge Isaacs’s 19th century romantic novel “María” and its rich descriptions of the lush valley of the Cauca River in South-western Colombia, five adventurous Japanese men departed Yokohama for the Pacific port of Buenaventura on the ship Anyo Maru. After 40 days at sea, and a further 12 hours by train, bus and foot, they finally laid eyes on the land of their dreams, the fertile plains surrounding the city of Cali. Their enthusiastic letters back home enticed 5 families of 25 individuals to make the journey to Colombia. These families were the seeds of the first Japanese community in our country, a vibrant and entrepreneurial group that contributed greatly to the development of the Cauca valley as Colombia’s premier agro-industrial center.

Like Samuel Kiyoshi, Adolfo Akira, Antonio Tokuji, Taro Matsuo and Katsumi Tadano—the five pioneers of our story—, for a hundred years, countless Japanese individuals and corporations have grasped the wealth of opportunities that exist in Latin America and the Caribbean, and many citizens and companies from our region, in turn, have looked to Japan as a successful development model, a unique source of know-how, capital and technology, and a substantial market for their products. During his trip to Brazil and Mexico last year, Prime Minister Koizumi highlighted the shared history and values that bind Japan and Latin America and the Caribbean together, and called for a “new partnership” between our nations and our peoples. Our joint challenge and the theme of our seminar today is how to realize the promise of this partnership for the 21st century. How to deepen the ties that connect our nations and ensure that our people can take full advantage of the immense possibilities that lie on both sides of the Pacific ocean.

The need for a “new partnership”

During a visit to the IDB in March of this year, Utsumi-san eloquently spoke about the tremendous potential for cooperation between Japan and Latin America and the Caribbean. “It is in Japan’s interest to strengthen its relations with Latin America, a region that’s rich in natural resources,” he noted. “And it is in Latin America’s interest to have a closer relation with Japan to benefit from its strong and competitive manufacturing sector. We could have an ideal relation,” he concluded. I couldn’t agree more. In an increasingly globalized and competitive world, where commodities and natural resources are increasingly scarce, and technology and know-how constitute the keys to competitiveness and sustainable growth, a stronger partnership between your country and our region seems like a match made in heaven. The IDB, as a close friend of Japan and the largest development institution in Latin America and the Caribbean, is wholly committed to serving as a bridge between these two very complementary parts of the world.

Despite this strategic complementarity and strong historical ties, the truth is that over the last 15 years, our economic relations have declined in relative importance. Although the international trade of Latin America and the Caribbean with the world has grown considerably over the past decade-and-a-half, and its trade with Asia-Pacific has shown particular dynamism, our exports to Japan remained virtually stagnant between 1990 and 2003. When the strong growth of 2004 is factored in, Latin American and Caribbean exports to Japan are up by only about one-third from 1990 (this compares to a nearly 4-fold increase in exports to Korea and a 17-fold increase in exports to China over the same period). As a result, the share of our exports going to Japan dropped from nearly six percent in 1990 to 3.7 percent in 2004.

Over the same period, Japan has also become a less important supplier to Latin America and the Caribbean. While Japanese exports to our region grew by 100% from 1990 to 1997, they subsequently dropped by one-third between 1997 and 2002, and only last year did they recover their peak levels of the mid-nineties. This performance again compares unfavorably to a 5.5-fold increase in Korean exports and a 30-fold rise in Chinese exports to Latin America and the Caribbean over the last 15 years. Today, at the time when our purchases from other Asia-Pacific countries are rising rapidly, our region sources less than 5 percent of its imports from Japan.

On the investment side, the trend has been similar. Japan first became a significant player in Latin America and the Caribbean in the 1960s and 1970s, as it pursued a strategy aimed at securing a supply of primary materials for its industries. Large Japanese corporations like Toyota, Mitsubishi, Mitsui, Honda, Marubeni, YKK, and many others, made important investments in the region and have played an instrumental role in our development. However, in the last few years, Japan’s weight as an investor in the region has markedly declined: its share of the total FDI inflows to Latin America dropped from more than 20 percent in the early 1990s to less than 10 percent by the end of the decade. Although recently there have been some encouraging signs, like Sumitomo’s investments in copper mines in Chile and Peru, I believe there is tremendous room for growth for Japanese investment in Latin America and the Caribbean.

Interestingly, Latin American multinationals have begun to make inroads in the Japanese market. Two examples that are representative of this trend are opening a branch in Tokyo by Brazil’s Banco Itaú in October of last year, and the acquisition of 51% of NKK Corporation’s seamless pipe mill by Argentina’s Tenaris. I am confident that as our region’s main corporations become increasingly global and sophisticated, they will seek to tap the substantial opportunities that exist in the Japanese market.

To be sure, there have been areas of our economic relationship that have seen significant growth over the last few years. The most salient of these has been the steady growth over the last decade of remittances by Latin Americans working in Japan. Today Japan is the second largest source of remittances to Latin America and the Caribbean after the United States, and accounts for nearly 10% of the total remittance inflows to the region. And in the case of countries like Brazil and Peru, for an even greater share of the total. We estimate that the 400,000 or so Latin Americans that live in Japan sent home $3 billion dollars in 2003—a figure equivalent to 30% of total exports by Latin America and the Caribbean to Japan that year. These flows of money are crucial to the livelihoods of millions of people in Latin America and the Caribbean, and we at the IDB think they have a substantial role to play in expanding and deepening investment, saving and access to credit in the countries of our hemisphere.

Moreover, Japan has continued to be one of Latin America’s main sources of official development assistance. Japan made historical contributions to the weathering of the Latin American debt crisis in the 1980s and the Central American peace processes. Despite the sharp overall reduction in Japanese Official Development Assistance in the last few years due to fiscal constraints, Latin America and the Caribbean’s share of these resources actually expanded from 8.6% in 1993 to 9.4% in 2003. The IDB is grateful, for example, that contributions by the Japanese Minister of Finance to the development trust funds for the region that the Bank manages grew both in 2004 and 2005. Japan’s economic and technical cooperation to the region has focused particularly on economic reforms, poverty reduction, infrastructure development and the protection of the environment, directed at assisting the region in the fulfillment of the Millennium Development Goals. Japan has also played a crucial role in supporting electoral processes in Latin America and the Caribbean, and strengthening intra-regional cooperation in a variety of fields. Furthermore, it has contributed significant resources and know-how for natural disaster prevention, mitigation and relief efforts throughout the region. Recent catastrophic events have underlined how important this type of assistance is and how much work still remains to be done on this front.

A watershed point in Japan-LAC relations

The reasons for the relative lack of dynamism in our trade and investment ties over the last decade and a half are several. They include: Economic instability in Latin America and the Caribbean, and the region’s deep financial crisis of 1999 to 2002; the lackluster growth of Japan’s economy during the 1990s and the first years of the present decade; the reticence of Japanese investors to participate in Latin American privatizations (which accounted for the bulk of FDI in the 1990s) and more generally in other investment opportunities in the region; and, significantly, the growing importance of other countries—particularly in East Asia—in the trade and investment flows of both Japan and Latin America and the Caribbean. However, several of these obstacles are now longer present, heralding great promise for the future of our economic relationship.

I sincerely believe we are at a potential watershed point in the relationship between Japan and Latin America and the Caribbean. The economic “renaissance” currently under way on both shores of the Pacific provides us with a unique opportunity to substantially deepen our strategic partnership. Bolstered by favorable external conditions and generally sound economic policies, Latin America and the Caribbean have exhibited three years of strong growth with low inflation, fiscal prudence and booming trade, investment and asset prices. I believe it is safe to say that on the economic front, our region has never been better managed. At the same time, and despite the differences that are natural to the democratic debate, I also think that the region has attained a new level of political maturity. I am confident that the 14 presidential elections of the next 18 months in Latin America and the Caribbean will provide clear proof of the consolidation of our shared values of democracy and market-based development. A democratic and growing region is increasingly deepening its engagement with the world, and Japan clearly emerges as a key priority for trade, investment and cooperation.

On the other shore of the Pacific, the news is also encouraging. The Koizumi government is carrying out a bold reform agenda, with majority support from the Japanese people. Four quarters of economic expansion, the good news last week on consumer prices, the rise in underlying bank lending, and the surge in real estate and share prices are a clear testament to the effectiveness of the reforms. Moreover, as stated by the Prime Minister in his two recent visits to the Latin America, there is renewed interest in our region as a strategic partner. The most notable example of this improved spirit of cooperation and strategic engagement is the recently signed Japan-Mexico Economic Partnership Agreement (EPA). The EPA is not only Japan’s first extra-regional free trade agreement, but also, after Singapore, only the second FTA the country has signed.

The future of LAC-Japan Relations

So given that the stars seem to be aligned for a renewed strategic partnership between Japan and Latin America and the Caribbean, what are some of the areas that we at the IDB see as crucial for taking advantage of this historic opportunity?

I. Trade

One clear are of common interest is trade. Trade provides perhaps the most immediate and tangible benefits from closer ties between our nations, particularly in light of the immense complementarities that exist between the Japanese and Latin American and Caribbean economies. Japan is uniquely positioned to become the gateway for greater trade integration between our region and Asia-Pacific.

By providing Mexico with an advantageous foothold in the Japanese market, the Japan-Mexico EPA is generating immense interest from traders and investors on both sides of the Pacific. Other Latin American and Caribbean economies would be well served to place Japan at the top of their trade and integration agenda. I encourage Japan to also take greater initiative in this front and to pursue further FTAs with countries in the region. These would be powerful tools for diversifying and energizing the still small trade flows between our region and Japan—and for exploring new dimensions in the bilateral partnership.

In this context, Japan’s development experience could contribute to the formulation of a new generation of agreements which would explicitly take into account the need to generate opportunities for all sectors—in particular, to ensure that the rural sector has full capabilities to access the new open markets, and that SMEs are fully integrated into the inter-regional and global production chains.

Moreover, opportunities for bilateral trade in services have yet to be fully harnessed. One vastly unexploited reservoir for services trade is tourism, where the entire Asia-Pacific region represents less than two percent of all tourism to Latin America and the Caribbean, and the flows are no higher in the other direction. Importantly, in forming new agreements, Latin America and the Caribbean and Japan will be well served to adopt commitments that are fully consistent with and contribute to the multilateral trade regime—and, by extension, further the principle of open regionalism in trans-Pacific ties.

The IDB stands ready to support these efforts, which are in line with its focus on promoting regional integration within Latin America and the Caribbean and between the region and the wider world, with resources, studies and information and technical cooperation.

II. Infrastructure

But to realize the full benefits of expanded trade, Latin America and the Caribbean must greatly expand and upgrade their infrastructure base. The IDB estimates that over the next decade, the region will need to invest more than $80 billion dollars a year in infrastructure. The mirror-image of the enormous challenge this represents for Latin America and the Caribbean is the great opportunity it entails for a country like Japan.

Japan is widely recognized as a world leader in designing and building large-scale and complex infrastructure projects. The Japanese government has been emphasizing the importance of infrastructure in its Official Development Assistance, recognizing that infrastructure contributes to the enhancement of competitiveness, and consequently, to economic growth.  Indeed, Japanese ODA has funded numerous infrastructure projects in Asian countries particularly and contributed to the dynamic economic development of the Asian region.

Over the next decade or so, Latin America and the Caribbean will need to embark on many large infrastructure ventures, including trans-national gas pipelines and LNG facilities and terminals, large hydro-electric projects, the projected expansion of the Panama Canal, and the possibility of alternative inter-oceanic linkages, among others. Japanese corporations and banks are uniquely positioned to take advantage of these opportunities and at the same time contribute to our region’s development and its expanded ties with Japan.

In this area, too, the IDB can play a crucial role as the catalyzer of large and complex cross-border infrastructure projects, and as an effective and trust-worthy intermediary between companies and governments on both sides of the Pacific.

III. Private sector development

The countries of Latin America and the Caribbean recognize that a vibrant and growing privates sector is crucial for the sustainable and equitable economic growth that the region so desperately needs. The IDB has recognized private sector development as one of its key priorities going forward and is working to expand its activities with private sector clients in terms of volume, a wider array of sectors and more flexible and market-driven instruments and processes. At the same time, the Bank will redouble its efforts to engage regional governments to improve the conditions for business in the region for all players—large and small, domestic and foreign—by strengthening regulatory stability and transparency and the rule of law, and reducing the costs and hurdles to business activity.

We believe Japanese corporations, with their leading-edge technology and world-class management know-how, and Japanese banks, with their sectorial expertise and low funding costs, can play a key role in propelling private sector development in Latin America and the Caribbean.  We are beginning to see growing interest in the region by Japanese players in natural resources and some areas of manufacturing (autos, auto-parts and home electronics).

I would invite you and other Japanese companies and entrepreneurs to take a fresh look at Latin America and the Caribbean. The potential for growth, and the synergies with Japan are clearly there. Moreover, we believe that the good conditions of the past few years should prevail in the medium-term, and that the improvement in economic management gives good reason to believe in favorable long-term prospects. Now is the time to re-think how Latin America and the Caribbean fit into the global strategies of Japanese companies and to give serious consideration to entering forcefully into these markets and partnering with key Latin and Caribbean players.

IV. Remittances

As I mentioned earlier, I believe there is significant potential for capitalizing on the growing flow of remittances from Japan to Latin America and the Caribbean. Much more can be done to harness the sizable remittance flows from Japan and channel them, in a cost-effective way through the Banking systems, to productive investments, micro-credit, housing, etc., throughout Latin America. Brazil’s Banco Itau and others have clearly recognized the potential in this market. I believe the magnitude of these flows and the fact that the majority of them occur outside the financial system represents a unique opportunity for Japanese and Latin American banks to expand their client bases and activities both at home and abroad. In doing so, they will also be providing an important social service by bringing hundreds of thousands of new individuals, who have lacked access to banking services, into the financial mainstream.

V. Capital Markets

The IDB has played a pioneering role in tapping the vast and liquid Japanese capital markets. Recently, it has begun to issue its own bonds, denominated in Latin American currencies, in Japan and other key international markets. These bonds are especially important because they pave the way for Latin American and Caribbean governments and companies to issue paper in their home currencies and thus lessen their dollar and foreign-currency exposure and risks. Japanese investors have shown great receptivity for these type of issues. We look forward to continuing to innovate on this front and to have a closer dialogue with Japanese government agencies and financial institutions to explore ways of assisting Latin American and Caribbean issuers in tapping Japan’s vast savings pool in innovative and cost-effective ways. We believe these type of operations provide important diversification benefits to both regional issuers and Japanese investors.

Conclusion

These are just a few of the areas where I see great potential for further collaboration between Japan and Latin America & the Caribbean, and where I think the Bank can play an important intermediary role. However, I am sure private players on both shores of the Pacific will think of many more innovative ways to strengthen the ties that bind our nations for the benefit of all of our peoples. We are keen to support these initiatives in any way we can, and I encourage you to take the best possible advantage of our office here in Japan—which this year is celebrating its tenth anniversary and is always ready to serve as a bridge between the Bank and Latin America and the Caribbean, and Japan and other Asian countries.

I greatly appreciate the opportunity of having this dialogue with you today. Japan’s post-war rise was no short of a miracle, and constitutes a prominent role-model for Latin America and the Caribbean. In a span of merely a few decades, Japan has accumulated a wealth of experience that is now available to our region in such key areas as: institutional reform; strategic investment in infrastructure; educational policies of excellence; promotion of SMEs; building social capital; export-led growth. and the creation of a high-tech economy. I hope this seminar will contribute to bolster the exchange of views and mutual learning between our nations and citizens.

Dómo arigáto gosai máshta.