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Part Two CURRENT ECONOMIC DEVELOPMENTS 91 Chapter I THE ASIA OF 1969 Nineteen sixty nine — penultimate year of the First Development Decade — was a year of mixed fortunes for the countries of Asia. In terms of the performance of national economies, output growth continued encouragingly for a second year: most countries in the region achieved rates of growth in national output greater than the target for the First Development Decade. Beset by social and economic uncertainties and constrained by the slow-down in assistance receipts, both India and Pakistan faced difficulties. However, in Pakistan, a further step forward was taken towards increasing per capital incomes and in laying the foundation for significant advances in social welfare in the next Plan. In the case of India 1969 was a good year with an estimated growth rate of some 5 per cent in net domestic product although industry has not yet completely emerged from the recession. Indonesia, one of the larger economies in the region, continued to achieve significant improvement. It is apparent that the runaway inflation has been brought under control. Given the understanding support of the m ajor providers of assistance, there is reason to look forward to the emergence of a rapidly developing Indonesian economy during the course of the Second Development Decade. Exports increased very satisfactorily in most countries. Only Burma, Cambodia and Ceylon, and perhaps Pakistan and India, may have fallen behind their 1968 performance. In such cases, however, the difference was marginal. Generally, the boom in exports was large in absolute volume; better prices for many of the primary products exported from the region helped to increase receipts. One of the most encouraging signs has been the continued increase in the exports of non-traditional (largely manufactured) goods from countries of the region. Domestic economic conditions, however, were not so satisfactory, in spite of the statistical assurances of higher growth. Where reserves were small, uncertainties in the receipt of foreign assistance and fluctuating export proceeds often led to the undue restriction of imports. In some cases, too, the singleminded pursuit of stabilization cast a shadow of depression over the economy and constrained imports. Often, imports of the very products needed to build further productive capacity in the economy fell. The inadequacy of imports also inhibited the utilization o f e x i s t i n g c a p a c i t y . A l t h o u g h t h e s i t u a t i o n is r e mediable to the extent that the stagnation of imports inhibited the creation of new capacity, valuable time has been lost. Table II -l-l. Developing ECAFE countries: Annual growth rates of gross product (percentages) Afghanistan Burm a Cambodia Ceylon China (T a iw a n ) 1960-1967 1.9 2.7 4.5 3.8 10.0 1968 1969 3.5 8.2 10.3 7.0 8.3 Korea (R ep. o f) Malaysia 5.7 India Indonesia 1960-1967 3.2 2. 0 7.5 7.8 1968 1.8 6.6 10.1 1969 5.5 13.3 15.5 Nepal Pakistan The Philippines Thailand 1960-1967 2.2 5.7 5.7 7.1 1968 1969 6.6 5.2 6.4 6.5 7.9 Sources: Notes: Iran 6.3 United Nations, Yearbook of National Accounts Statistics, 1968. United Nations, Statistical Yearbook for Asia and the Far East, 1968. National publications. Afghanistan: 1961/62-1967/68 GDP at 1965/66 m arket prices. Burma: GDP at 1962 market prices. Cambodia: 1960-1963 GDP at 1963 market prices. Ceylon: 1960-1967, 1968 GDP at 1959 factor cost; 1969 preliminary. China (T aiw an): GNP at 1964 market prices; 1969 preliminary. India: N N P at 1960/61 factor cost; 1968 preliminary; 1969 February 1970 Budget Speech. Indonesia: GDP at 1960 market prices. Iran: GDP at 1959 factor cost. Korea, Rep. of: GNP at 1965 m arket prices; 1969 preliminary. Malaysia: GDP at 1964 market prices. Nepal: 1964/65-1967/68 GDP at 1964/65 market prices. Pakistan: 1960-1967 GDP at 1959/60 factor cost; 1968 GNP at 1959/60 factor cost. Philippines: GNP at 1955 m arket prices; 1969 preliminary. Thailand: GDP at 1962 m arket prices; 1968, 1969 at 1965 m arket prices, preliminary. Calendar-year basis except as follows: Afghanistan and Iran: year beginning 21 March, India: year beginning 1 April, Pakistan: year beginning 1 July, Nepal: year ending 15 July, and Burma: year ending 30 September. P a r t Two. 92 Table II-1-2. Developing ECAFE countries: Total net official flows, 1965-1968 (in million US dollars) 1965 Afghanistan Ceylon China (T aiw a n ) India Indonesia Korea, Rep. of Laos Malaysia Pakistan Philippines Thailand Viet-Nam , Rep. of Unspecified 1966 1967 1968 53.9 15.7 67.5 1,286.7 42.9 220.4 68.2 34.4 523.2 109.0 46.8 315.7 22.1 51.2 31.5 60.8 1,225.8 81.5 209.2 68.5 47.2 411.6 67.6 53.6 508.7 24.6 39.7 46.2 85.6 1,354.3 248.5 261.5 73.6 39.9 535.2 113.7 60.9 448.4 20.1 27.9 44.6 65.7 993.1 291.0 287.2 60.5 59.8 491.7 104.5 70.3 445.1 27.2 2,859.3 2,903.9 3,414.3 3,043.6 Overall t o t a l ......... 6,646.9 Official flows to Asia as percentage of t o t a l ..................... 43.0 Official flows to India and Pakistan as percentage of flows to Asia 63.3 6,861.4 7,267.1 7,080.4 42.3 47.0 43.0 56.4 55.0 48.8 Source: O fficial average aid (1966-1968) as percentage o f im p o rts o f goods an d services (1967) 71.6 11.3 8.0 43.8 25.5 23.7 217.8 4.0 35.9 7.1 5.8 54.3 O.E.C.D. Table II-1-3. Developing ECAFE countries: Export perform ance (in million US dollars) C o u n try Afghanistan Burma Cambodia Ceylon China (T aiw an) India Indonesia Iran Korea, Republic of Laos Malaysia Nepal Pakistan Philippines Thailand Sources: N otes: H ig h est exp o rt value recorded fr o m 1960 to 1969 73 271 105 409 1,087 1,829 1,015 2,040 703 3.3 1,635 30 720 852 709 (1968) (1963) (1965) (1965) (1969) (1 9 6 9 )d (1969) (1 9 6 9 )a (1969) (1968) (1969) (1 9 6 9 )a (1968) (1 9 6 9 )f (1969) 1967 1968 66 123 83 348 641 1,613 770 1,930 320 2 1,217 73 111 89 342 802 1,753 876 1,879 455 3 1,343 29 720 848 658 22 645 821 685 1969 108a 64b 315c 1,087 1,829d 1,015 2,040a 703 1,635 30a 656e 852 709 IMF, International Financial Statistics and national sources. a 6 m onths at annual rate. b 3 m onths at annual rate. c It is estimated that export receipts for the year 1969 fell to a 15 year low. d 11 m onths at annual rate. e 9 m onths at annual rate. f 10 m onths at annual rate. C urrent Economic Developments A redeeming feature was that the smaller import bill, coupled with increased export receipts, enabled India, Malaysia and P akistan to add to their external assets. Significant additions to external assets were m ade by China (T aiw an) and the Republic of Korea but, even at higher levels of trade, Burma, Ceylon and the Philippines continued to lose reserves, and Thailand, for the first time in a decade of unin terrupted accretion, drew on its accumulated reserves as a consequence of the continuance of the im port boom at a time when exports were flagging and invisible earnings were fading away. W ith the relatively comfortable external asset position, recourse to the IM F was limited d uring the year; net repaym ents were m ade by Ceylon, India and Indonesia. The flow of external assistance gave cause for concern. C om pounding the generally declining flow of assistance to the larger economies, the uncertainties of the flow increased the difficulties of planning for development. The stagnation of net official flows of foreign assistance which became evident d uring 1968 appears to have continued d uring 1969. The impact was essentially on India and Pakistan. F or well over a decade, these two large economies have been the recipients of a large p ro portion of the foreign assistance made available to Asia, although not in per capita terms. Total flows of foreign assistance to Asia appear to be diminishing, and this seems to be mainly a reflection of the fall in assistance flows to India and Pakistan. Indonesia and the smaller Asian economies have received assistance flows at increasing levels, perm itting significant im provement in their economies. Some p referential treatment for them is due to many factors. Strategically-timed assistance on a massive scale is increasingly being recognized as desirable for many developing economies. W orld flows of foreign assistant were unm istakably in the doldrums. Balance of payments problems in some donor countries were at best a partial excuse. The effect of the assistance p ro g ram me on the balance of paym ents is not unm anageable for the donors,1 and should be seen from the b roader viewpoint of the benefits of such assistance both to the recipients and to the donors. The decade of foreign assistance that has elapsed, though historically a brief period, appears to have induced a climate of doubt concerning foreign assistance, resulting from the increasingly articulate dem ands of the u n d erprivileged in some m a jo r donor countries and the burden of large-scale military expenditures. D uring 1969, the world m onetary situation rem ained in a state of uneasy calm. Occasional frenetic activity seemed to threaten the very founda- Chapter I. 93 The Asia of 1969 Table II-1-4. Developing ECAFE countries: International liquidity (in million US dollars) Burma Ceylon China (Taiwan) India Korea, Rep. of Malaysia Pakistan Philippines 1965 1966 1967 1968 181 (38.1) 73 (12.3) 300 (28.1) 599 (10.7) 146 (16.4) 449 (21.3) 184 (60.6) 43 (5.3) 337 (28.2) 608 155 (65.0) 55 ( 8.0 ) 416 (26.8) 662 (12.3) 356 (18.6) 457 (21.9) 161 (7.6) 180 152 (70.6) 51 (7.3) 381 (31.9) 682 (14.1) 409 (14.5) 515 (23.1) 252 (13.2) 161 (6.5) 1,009 (49.5) 1,021 245 (17.8) 470 (22.1) 221 200 ( 11 .0 ) 192 ( 11.6) 194 (10.5) 924 (54.4) ( 11.2 ) Thailand ( 11 .2 ) 739 (52.2) ( 8.0 ) Septem ber 1969 (44.7) 138 (92.0) 39 (5.4) 461 ( 21 . 8 ) 890 (22.7) 529 (15.3) 664 (31.9) 324 (16.1) 129 (5.3) 999 (43.0) Source: IMF, International Financial Statistics. Note: Figures in brackets refer to volume of international liquidity in terms of weeks of current imports. tions of the existing system, but the structure has survived. Increased co-operation between monetary authorities has helped stem the onslaughts on the system without removing the basic reasons for the occurrence of the strains. The strain in the foreign exchange markets was without doubt the result of past shortcomings in the policies of economic adjustment in the national economies concerned. However, the attempt to attack the inflationary tendencies in the United States by restrictive monetary measures caused interest rates to rise to unprecedented levels in all the m ajor money markets of the world. The continued lack of adequate and effective adjustment in the m ajor money markets of the United States and the United Kingdom continues to engender a state of flux. A state of continued stringency exists in the m ajor money markets with no assurance that the speculation which forced the devaluation of the French franc may not be repeated elsewhere. Belated adjustments in some of the convertible currencies have bought time but no assurance that the speculative tendencies have been curbed. The turmoil on the international monetary had some effect on the developing countries of Higher interest rates in world money markets induced increases in national rates of interest. front Asia. often More 1 “As important as the benefits provided directly to U.S. firms by A.I.D. financed activities is the fact that the A .l.D . programme now has a positive direct im pact on the U.S. balance of payments. . . . In FY 1970 w e estimate that the program m e will result in a net inflow of $197 million.” Agency for International Development, Programe Presentation to the Congress, Foreign Assistance Act of 1969, Proposed FY 1970 Programme, p. A-10 (emphasis in original). than that, the cost of foreign borrowing increased and the stringent monetary conditions in the developed economies made the increase in assistance flows more difficult. The introduction of the Special Drawing Rights Facility in the IMF was an important and striking development in the international monetary sphere. It remains to be seen whether the amount allocated to this region will be adequate. A further feature of interest to developing economies was the provision for IMF drawings for the purpose of financing buffer stocks under commodity arrangements. The agricultural breakthrough continued in most countries of Asia. The initial promise of the “ Green Revolution” was not found wanting. Food production remained ahead of population growth in most countries and was reflected also in reduced imports of foodgrains. In India, and perhaps in some other countries, the process at present appears to have fulfilled expectations more in the production of wheat than in other crops, which have not yet risen to the extent required by the growth targets. The “Green Revolution” has begun to have adverse effects on the main rice exporters of Asia. Problems of marketing a large surplus during 1970 are already causing anxiety in Thailand. It is not yet altogether clear whether the problem may at least partly stem from the price expectations of exporters. The export price of rice cannot possibly remain at the high levels of 1966 and 1967. In addition, alternatives to export taxes on rice need to be found as source of government revenue.2 It is to be hoped that the search for an agreement on rice will help to stabilize the situation with fairness to both exporters and importers. In many countries the “ Green Revolution” appears to have outstripped the development of industrial capacity to provide the inputs required by the new technology. The immediate effect has been to increase the import bill; on the other hand, there is no doubt that the import saving achieved by reduced imports of wheat, rice and some other food commodities has been substantial. Where imports were being paid for out of free foreign exchange, the import saving has been immediate and considerable. 2 T he export price of rice from Thailand reached a m axim um of 3,534 baht per metric ton in 1968. This was 51.2 per cent higher than the average for the period 1963-1965. In 1969, export price fell to 3,100 baht per metric ton, 32.6 per cent higher than the average for 1963-1965. T he immediate impact of the fall in the rice export need not necessarily be on the producer. Export taxes on rice remain heavy. In Thailand, even the reduced rice export premium, which came into effect in December 1969, imposes a 37 per cent levy on rice (unbroken) and 42 per cent on rice (5 per cent broken). With the continuing change in the structure of the economy and the decrease in the revenue importance of the rice premium, there is added reason to use the rice premium more flexibly. In Burma, the margin accruing from the export of rice is shown mainly as profits in the operations of the Agricultural Marketing Board. 94 However, where food imports are available under concessionary assistance terms, the policy issues in achieving self-sufficiency become somewhat different. This is not to suggest that the policy of importsubstitution in essential food is w rong; rather it is to suggest that, under specific circumstances, the order of priority in development m ight well be reconsidered. Unless there are pressing political and social reasons, priority m ight well be given to the building of an industrial base for the supply of inputs into agriculture. Import-substitute inputs (equipment, fertilizer and other agricultural chemicals) would then be available for the development of both food and non-food agriculture. Problems of resource mobilization from the increasing incomes in the agricultural sector will require the exercise of political and adm inistrative ingenuity in most countries in Asia. W here the increased agricultural production seeks export markets, the problem is easily handled throug h export taxes and the like, provided that such taxation does not price the commodity out of world markets. Where agricultural production is mainly for domestic consumption, a general increase in the use of measures of indirect taxation may be expected. A policy of subsidizing agricultural inputs may be m ore appropriate than the provision of incentives to producers through higher final prices. W ith increased availability of basic foodstuffs, a decline in their prices permits an increase in the real incomes of the mass of consumers. Problem s of domestic resource mobilization are likely to become m ore complex, given the need for resource mobilization from the growing agricultural sector. In some countries of Asia today, this problem has been eased by the budgetary support provided by counterpart funds arising from com m odity assistance. In the event such assistance is phased out, entire systems of taxation and the efficacy of the existing machinery of tax adm inistration may well be subjected to a critical re-appraisal. A reduction in the trade in food (particularly rice) would also imply a smaller volume of intraregional trade unless trade in non-traditional com modities can be developed. F u rth er progress in the expansion of intra-regional trade requires a general opening of markets and not one confined to particular categories of goods of interest only to a few countries. Even the granting of selective and reciprocal tariff or other concessions to intra-regional exporters would necessarily have to include a wide range of consumer articles of interest to countries which do not have a heavy industrial base. With the slackening of assistance flows, an export orientation in development policy becomes a crucial necessity to continued development. An export p ro gramme, particularly in manufactures, has yet to P a rt Two. C urrent Economic Developments emerge in m any countries; the effort thus far has been to extend the process of import-substitution into exports. Despite the persistence of the barriers erected by the developed economies, some developing countries have clearly shown that satisfactory increases in exports can be achieved. If these achievements are to be sustained, a reorientation of the trade, aid and production policies of the international comm unity will be required. The move towards a greater share of m anufactured products in exports will necessitate greater attention to domestic economic conditions in the future. Most often, the semi-isolation of the plantation sector insulated export prices from the effect of all but large increases in domestic prices. With industrial products, competitiveness in price is critical and, because the m anufacturing sector is closely integrated with the rest of the economy, domestic economic conditions will have much more direct effect on export prices; under these circumstances, the effects of devaluation will at best be only tem porary. Such circumstances place a prem ium on the careful management of the economy and the avoidance of inflationary increases in costs; costs and prices depend largely on the skill with which resources are mobilized and used. A more open economy appears likely to follow success in exporting m anufactured goods. Policies of liberalization have, however, not been easy to implement. Stabilization program m es have often required freedom from the adm instrative controls which were blamed for having distorted prices and warped resource allocation. Most often, attempts at liberalization have become possible only with the availability of increased foreign resources for imports. Internal regional disparities in development have raised difficulties. Problems of concentration of wealth and economic power have emerged in some countries. It is becoming increasingly apparent that the single-minded pursuit of economic development, to the detrim ent of social objectives, requires substantial modification. The Second Development Decade opens with uncertainty. By the mid 1970s the “ Green Revolution” will have gone beyond national markets in the search for export markets. To what extent agricultural development can be flexibly planned to satisfy national wants, and yet avoid em barrassing surpluses, remains to be seen. On the other hand, surpluses might well be a tem porary feature of a process in which output has an upper limit, given the technology, while consum ption climbs inexorably upwards. If so, a decision to limit production for fear of a surplus would do irreparable dam age for decades to come. Chapter I. The Asia of 1969 Patterns of trade are changing; given freer conditions of world trade, most developing countries in Asia should be able to participate more fully in the trade of the world community. Intra-regional trade is likely to continue to decline before it recovers. Progress in this sphere has been less than satisfactory during the 1960s, and it is to be hoped that the next decade will bring more purposeful efforts and better results. The uncertainties of Viet-Nam cloud the entire picture. Disengagement from Viet-Nam is a stated aim of United States policy and may perhaps lead to a reduction in expenditure and procurement from a number of other countries in Asia. Apart from the effects of such a move on the economics of the defence of southeast Asian countries, the economic impact of the reduction in United States military spending will be undeniably severe in certain economies. Whether greater assistance flows will be substituted is uncertain. The end of the conflict in Viet-Nam will likely be followed by large-scale efforts for the reconstruction of that ravaged country. Participation of other Asian countries in this reconstruction will permit a wider sharing of the stimulus of increased economic activity. Aid from the developed world for the reconstruction of Viet-Nam should be planned in conjunction with development assistance to the Asian participants in the joint effort. There is more reason now than ever before to link the post-Viet-Nam era and the Second Development Decade in a massive programme of reconstruction and development in Asia as a whole. The stage of development reached by most Asian countries is such that the extra effort in assistance, required at a strategic point of time to push them over the threshold to self-sustained development, is comparatively small and certainly well within the capacity of the developed economies to achieve. The economic and social problems confronting the developing countries of the ECAFE region remain enormous. Continued rapid population growth demands serious attention in nearly every country in the region. Rapid urbanization has sharpened the contrast of great wealth amidst urban squalor; rural backwardness also continues to reflect the extreme inequalities of income distribution. In essence the broad problem facing the ECAFE countries in the coming decade is the achievement of an adequate rate of economic growth and at the same time ensuring that the benefits of that growth are widely diffused. Some of the important policy problems are common to the majority of the develojjing ECAFE countries; others are highlighted in the experiences of only a few. Several m ajor policy issues are discussed in the sections which follow. 95 Trade and aid. Faced with the need to mobilize capital and to obtain sufficient foreign exchange in order to pay for the import of essential capital and intermediate goods, most countries depend on their ability to achieve an adequate expansion of their exports as well as upon their ability to attract and properly utilize foreign investment and foreign aid. Although import substitution supported by import-licensing, tariff and non-tariff restrictions will continue, it is probable that the old assurance that this is the best way to achieve balance of payments stability and industrialization will increasingly be questioned. Often these policies have yielded negligible and perhaps even negative net savings of foreign exchange, because they have promoted industries which are themselves heavily dependent upon imported capital and intermediate goods and because they have retarded the growth of the export sector. Moreover, they have had seriously adverse effects on economic efficiency. The region as a whole has experienced a decline in foreign aid flows in real per capita terms and, especially towards the end of the 1960s, debt servicing and repayment have become more burdensome. While emphasizing that what is true of the whole is not true of all countries in the region, it is nevertheless almost certain that these problems will become still more serious in the decade of the 1970s, if international efforts are not urgently initiated to cope with them. Many of the countries in the region have experienced declining world pxices for their traditional exports. In some countries that are heavily dependent upon the export of a single crop (such as Ceylon), this problem has been particularly onerous. There is, moreover, little likelihood that the market forces of the 1970s will make for a better economic environment for the majority of the traditional exports of the region. Finally, despite the internal structural and institutional impediments to growth, all countries in the region have had their export prospects frustrated by the unwillingness of the developed countries to abandon the protection of their domestic agricultural and light-consumer goods industries. The likely continuation, and in some cases exacerbation, of these problems suggests that the developing countries of the region will need to make even greater efforts to promote economic efficiency and even greater sacrifices in self-help. In most cases a m ajor problem is not merely to achieve a sustained expansion of exports but to do so by developing new exports. Export diversification is inhibited by inflexibility in the structure of production; the develop- 96 m ent of capacity to produce new exports will generally require specific incentives to encourage investment and channel it into export-oriented activities. The adoption of two basic strategies may be suggested. First, it is desirable to appraise carefully the policies adopted by such countries as China (T a iw a n ), the Republic of Korea and Pakistan, which have resulted in export expansion. By the use of incentives for foreign investors, export prom otion schemes, multiple exchange rate systems and various monetary measures, these policies have provided substantial incentives to non-traditional exports, mainly manufactures. The success of such policies invites the consideration by other countries of the possibility of their adoption. The use of multiple exchange rate mechanisms could be expanded. Ceylon, Indonesia and Pakistan are already using such systems and other countries have shown a definite interest. Multiple exchange rates are no m ore discrim inatory than are subsidies and taxes on exports and imports. Yet subsidies involve a use of public revenues that is rarely questioned, and taxes on trade for revenue purposes are in common use. The use of a multiple exchange rate system offers greater flexibility and has much to commend it, provided the grounds for discrimination exist. F urtherm ore, such a system makes it easier for a country in balance of payments difficulties to carry out an exchange rate alteration which, for political reasons, would be m uch m ore difficult with a unified rate. The attainm ent of adequate export growth and diversification suggests also that foreign aid flows should be directed towards the removal of institutional barriers and other bottlenecks which prevent adequate flexibility in the structure of production in the economies concerned. Another m ajo r way in which the international trade and financial policies of the countries of the region could change is in the adoption of regional policies of self-help to foster intra-regional trade and to overcome the difficulty of achieving adequate multilateral remedies. It has sometimes been said that the countries within ECAFE are too diverse politically, socially and economically to attain areawide co-operation and that instead sub-area schemes may be considered as a first step. There are three m ajo r fields in which wider forms of co-operation could occur. First, the countries could consider the possibility of establishing regional trade a n d / o r payments systems similar to those established p reviously in Europe and in South and Central America. The benefits would be a more rational development of production (particularly in new lines of activity) within the area, and an expansion of trade as the P a r t Two. C urrent Economic Developments result of better credit facilities provided by some form of regional credit and payments system. Secondly, the developed countries of the region could co-operate in aid program m es within the area. One of the forms which this co-operation m ight take is regional extension of the Australian trade preferences scheme. Finally, the developing countries of the region could co-operate m ore fully in m atters of general fiscal, monetary and balance of payments interest. For instance, they could adopt uniform incentives to private foreign investors in order to eliminate the present situation whereby each country competes with the others to attract foreign investment. While m any of the above suggestions involve the use of discrim inatory measures, it is intended that the case for discrim ination should be reasonably well established before action is taken and that all countries of the area will at the same time continue to press for multilateral solutions to their problems. Financing governm ent spending. In all countries within the ECAFE region, government sector spending has risen substantially d uring the past decade. The dem ands on the government sector continue to g ro w ; it is generally accepted that this sector should build and m aintain adequate infrastructural facilities, n a rrow the gap of widely divergent development among different regions within the country, attempt to p ro vide some social services on a national scale, reduce the grow ing disparity in income distribution, and provide adequate incentives to desired lines of activity besides m aintaining sufficient defence forces. A part from the problem of securing sufficient skilled personnel to plan priorities and to fulfil these tasks efficiently, the governments in the region are constantly confronted by the problem of finding the financial resources to perm it an increase in government spending each year without generating excessive inflationary pressures. W ith population grow ing in most of the ECAFE countries at some 2.5 per cent ann um and with prices rising by 5 per cent and m ore per annum , government current expenditure has to rise by 7-8 per cent per ann um to m aintain existing standards of government services. T he growth of the young non-working age population (that section of the population which is most heavily dependent on government services), the need to service recently-created capital works and the need for larger defence outlays increase still further the growth rate of government current expenditure. While there is considerable scope for rationalization and for expenditure p ru n in g in all of the ECAFE countries, each would have difficulty in reducing the growth rate of its current government expenditure significantly below 10 per cent per annum. Chapter I. The Asia of 1969 Few ECAFE countries have managed to achieve income growth rates of 10 per cent per annum and, apart from brief periods when new taxes have been introduced, few Governments in the region have achieved revenue growth rates (both tax and non-tax) much faster than that of GNP. Consequently, almost all Governments have struggled desperately to avoid substantial dissaving. Against this bleak picture is the fact that government capital expenditure has been rising each year and, in many countries, is equal to 30 per cent or more of government current expenditure. A large part of this expenditure has to be financed either by borrowing at home or abroad or by foreign aid. In a number of countries heavy dependence has been placed on inflationary deficit finance, on foreign aid and, particularly in more recent years, on foreign borrowing. The arrangement of a sizeable and dependable flow of foreign aid is becoming more difficult, the growing problem of debt servicing is placing restraints on foreign borrowing and governments are becoming increasingly concerned with the distortive effects of inflation, particularly on resource allocation and income distribution. In consequence, the level of government fixed capital formation has tended to stagnate in several ECAFE countries (India and Pakistan, for example). The one alternative which has not been fully explored is the prospect of raising more domestic loan finance, particularly from the agricultural sector. Arguments confirming the difficulty of taxing agricultural income should not obscure the scope for raising loan finance from this sector provided suitable financial assets are made available and the rate of return is appropriate. Just as it is desirable to adjust the rate of exchange with reference to the free market foreign exchange rate, so it is desirable to adjust the characteristics of the organized money market towards those of the unorganized money market if the role of the former is to be extended. Korean experience has demonstrated that, in any economy where inflation is a recurring problem and where the ability to invest in equities is limited by the small size of the corporate sector and by the dominance of closely-held corporations, a high rate of interest combined with appropriate saving instruments not only directs saving towards the organized money market but also increases the average propensity to save. Moreover, the concomitant high interest rates charged on loans have not discouraged investment activity. It would seem that greater efforts could be made to explore the scope for extending the role of domestic loan finance as a source of government finance. Problems of land-locked countries. The latter half of the sixties witnessed a growing awareness of the international agencies of the need to give special attention to solving the difficulties of landlocked countries. The Convention on Transit and Trade of 97 Landlocked Countries adopted by the United Nations Conference of Plenipotentiaries in 1965 and brought into force in 1967 constitutes the most significant beginning of positive international assistance in this regard. Afghanistan, Laos and Nepal are the three landlocked countries in the ECAFE region (apart from Mongolia), and they also happen to be among the least developed of the developing countries in the region, with per capita income currently in the range of 70 to 80 US dollars. Speedy ratification of the Convention by the concerned transit states would greatly ameliorate the conditions for international trade and economic development of these landlocked countries. Equally important is the ratification of, and accession to, the Conventions on International Transport (CMR Convention, Geneva, 1956 and TIR Convention, Geneva, 1959) that are being increasingly adhered to by the European countries, in the light of the increasing transport of goods across the boundaries by road and rail. Afghanistan has recently taken a commendable initiative in overcoming the difficulties of being landlocked. Presently the international trade links of Afghanistan are through the port of Karachi in Pakistan to the south and the railroad system of the USSR to the north. Apart from direct trade with the Soviet Union, transit through the USSR accommodates Afghan trade with East European countries and a small fraction of trade with Western Europe. However, the port of Karachi is the only outlet for seaborne trade with Western Europe, America and the F ar East. Road links with India across Pakistan currently face difficult problems. In terms of freely convertible foreign exchange earnings through exports of high-priced commodities, trade with Western Europe is of the greatest importance, and this trade is carried in transit almost wholly through Pakistan. The lengthy road and rail journey to Karachi and the unpredictable delays in transhipment cause some of the high-priced items to be air-lifted in spite of the high costs involved. The measures that Afghanistan is pursuing to establish alternate transit facilities promise to be rewarding. They have been made possible by the co-operation of Iran and Turkey. Steps are being taken to operate Afghanistan’s containerized transport fleet on the land-route (Asian Highway) across Iran and Turkey to the Istanbul railhead, which connects several points in Europe. This would mean a total time interval of 15-21 days for Afghan goods to reach Europe in contrast to 45-180 days through Karachi. The operation of its own transport fleet results in sizeable economies in foreign exchange payments. In addition, Afghanistan is in the process of developing the landroute to the Persian Gulf port 98 of Bandar Abbas with entrepot facilities outside Iran ian customs; this will constitute the quickest and shortest link for overseas trade.3 Although Laos is landlocked, under norm al conditions the country enjoys access to the sea at several points across South Viet-Nam, N orth VietNam, Cambodia and Thailand. In the present military situation in the region, however, connexions are exclusively through the port of Bangkok in Thailand. T he principal export commodity of Laos to countries other than Thailand consists of tin concentrates which are wholly destined for P enang in Malaysia. Other export items such as coffee and spices are of m inor importance. Presently all external trade is carried in transit across Thailand by a Thai government transport organization. With tin concentrates destined for P enang as the only im portant export, and the existing rail link directly from Nongkhai (Thai-Laotian frontier) to P enang (and on to Singapore) there is an obvious advantage to Laos in using its own rolling stock to carry its external trade on the Thai-Malaysian railroad. An a rran g ement of this kind may help to provide the country substantial economies in costs of transportation. Nepal’s overseas trade at present is carried exclusively through the p ort of Calcutta in India. The alternative use of the port of Chittagong in East Pakistan would imply a short transit through India. An agreement for regulation of traffic in transit was signed with Pakistan in Jan u a ry 1963. Problems of overseas trade of Nepal are currently intertwined with the problems of bilateral trade with India, complicated by open borders, Nepal’s relativelytions in India. Moreover, the present agreement combines the aspects of trade with India and those of transit through India. In these circumstances the problems of bilateral trade between Nepal and India require separation from the issue of transit facilities for external trade through India. Agreement on the provision of full facilities for Nepal’s transit trade should be possible in the context of friendly relations between the two countries.4 The Iran-Afghanistan 3 Afghanistan signed a transit agreem ent w ith T urkey in June 1968, and negotiations w ith Iran are at an advanced stage. T h e latter include reciprocal transit facilities for Iran across Afghanistan to Pakistan (Asian H ig h w a y ). 4 “ W ith the objective of giving Royal G overnm ent of Nepal every feasible facility of transit of goods through India, the two countries should, in our view, in friendly consultation, explore the possibilities of providing special storage and warehousing facilities both in Calcutta and at Haldia. Quite obviously also friendly relations between the customs administration of the two countries should be established and developed. It should be ensured that apart from the m in im u m necessary checks and controls by port and customs authorities no other impediments are placed on the transit of goods consigned to and from Nepal. Agreed and suitable procedures should be evolved for speedy transmission of goods to and from Nepal through the ports of Culcutta, H aldia in sealed condition.” Conclusions in the Report m ade by H .E. Mr. T. Sw am inathan, Am bassador of India, Brussels, 1968. P a r t Two. Current Economic Developments agreement for the use of the port of B andar Abbas could serve as a model. T ransit facilities through the adjacent countries for international trade acquire great importance for the economic development of the landlocked countries of the region. International technical and financial assistance is of exceptional interest in this regard. Growth and investm ent finance. The economies of China (Taiwan) and the Republic of Korea can be compared to derive lessons from their experience. Both are basically agrarian societies engaged in the process of industrialization; neither possesses sufficient raw materials for rapid development, and both have small populations which are increasing rapidly with the result that labour is cheap. In addition, the domestic saving rate has increased m arkedly in both countries, investment rates are high and increasing, both enjoy high growth rates, and both are foreign trade oriented. However, both have experienced growing current account balance of payments deficits in recent years. Despite these m any similarities, differences do exist between them. Korea is relatively in an early stage of industrialization as com pared with China (Taiw an) since the latter even before W orld W a r II had a resource base on which some degree of industrialization could be built. The per capita national income in Korea is lower than that of China (Taiw an) and wage rates are lower. A m ajo r difference between the two countries is that the Korean economy is absorbing m ore than is produced domestically and this gap is reflected in the current balance of payments, whereas in China (Taiw an) this problem is not as acute. As a direct result, the balance of payments deficit is both large and increasing in the Republic of Korea. T here are some differences in the financing of investment in these two countries; Korea finances capital formation from foreign resources to a much greater extent than China (Taiw an) and the inflow of foreign capital, particularly private foreign capital, has accelerated rapidly in Korea, with a notable rise in the ratio of debt service to net export earnings. In respect of price stabilization, Korea has m anaged to reduce the rate of inflation quite significantly, but it is still in excess of that in Taiwan. The Korean money supply has been allowed to increase at a far higher rate than in China (T a iw an ), largely to prom ote investment and to facilitate the absorption of the capital inflow in order to foster economic growth. There is a growing feeling in some quarters that the low rate of inflation in China C hapter I. T he Asia of 1969 (T a iw a n ), less th a n in m any developed countries, reflects a cautious m onetary policy a n d that an easing of credit (especially if associated with ra th e r greater inflows of capital) m ight stimulate growth. In Korea there is a grow ing feeling that perhaps relatively slower growth is advisible since it would require less capital inflow and would lead to less strain on the economy. T h e role o f g ov e rn m e n t vis- à -vis the private sector. The question of the relationship between the state and the private sector continues to be of general relevance to mixed economies. W h ere private enterprise com prises the bulk of economic activity an d the state has assumed responsibility fo r p ro m o tin g economic change, the governm ent role becomes im portant pari passu with the m agn itude of the development aims. Recent changes in policy orientation in Indonesia, Malaysia and the Philippines endow this issue with ra th e r special im portance for the present and the foreseeable future. In the Philippines the change is perhaps least abrupt. Though there have been repeated efforts to turn the acceptance of responsibility by the Governm ent into action to prom ote development, the efforts have not been well sustained. T here has apparently been a lack of consensus concerning the need for and the a p p rop riate role of the state in the process of development. Changes in the economy, stagnation in p ro ductivity growth and the subsidence of the development impetus have created a situation in which new initiatives were accepted as necessary. In spite of some possibly tran sitory unrest, there is now continuity in government and a feasible development program m e. The past four years have witnessed significant progress, qualified by the partial achievement of fiscal reform . It is p rim a rily in im plem entation of the new p ro g ram m e for the re-development of ind u stry th a t m odifications will become necessary in the government role. T he inducem ents provided by the Investment Incentives Law of 1968 have sketched the outlines of the governm ent role vis-a-vis the private sector qua investors; fu rth er steps will need to be taken to ensure that investment is channeled in the necessary directions. T echniques will be found to encourage efficiency in production, both at the plant level and in the balancing of capacity am ong and within industries. R ationalization will be re q uired in some industries; m easures to induce existing enterprises to utilize domestically produced inputs will help to create m arkets sufficient to su pp o rt production facilities on an economically feasible scale. P lanning of priorities on criteria of inter-industry linkages will require greater articulation of m easures to ensure that private interests respond effectively. In the case of key industries where private enterprise cannot be expected to take the initiative, governm ent should be prepared to act. M ethods m ust be devised to ensure that 99 established capacity is fully utilized. T he planning of capacity in excess of prospective domestic needs in anticipation of exporting the surplus may fre quently provide the link between im po rt substitution a n d export expansion. W here this is not feasible, it m ay be as im portant to limit capacity as it is to induce its form ation. These tasks, born of the necessity to re-develop and diversify industry, will require m ore specific planning and m ore sophisticated control instrum ents, fiscal and other. T heir creation and utilization will define pragmatically a new and expanded role for government vis- á -vis the private sector. For M alaysia it is the initiation of the new strategy for industrialization which is re-defining the governm ent role in relation to the private sector. Relatively little emphasis has hitherto been given to m anufacturing. Government support was m ainly in the provision of lists of products and industries eligible for preferential treatm ent in the form of tax incentives and tariff protection, and the provision of infrastructure for the encouragem ent of private enterprise. The new d epartu re has been taken in response to the challenge of increasing unem ploym ent: A new strategy has been developed. In the past, we relied on the initiative of the private sector to ca rry out investment and establish industries. Now the Governm ent is taking a positive and aggressive approach to industrialization. The Government will identify feasible projects and m ount a prom otion drive to mobilize local as well as foreign capital. The Government will take the initiative in industrialization and, if necessary, will participate in the establishment of industries either by itself o r in joint venture with the private sector, both local and foreign. This participation by the Government will enable us to give new direction and to influence the employment policies of these industries.5 Institutions are being evolved which will bridge the gap between governm ent aims and private-enterprise action. A private enterprise advisory panel has been established for participation at the planning level and the new N ational C orporation will encourage the development of a Malay entrepreneurial class. A considerable degree of flexibility is desirable if effective participation of the private sector is to be forthcom ing. Beyond this, the decision to develop a viable pattern of industry m ay require that governm ent assume final responsibility for the establishment of key enterprises, for the enforcement of priorities 5 T un Abdul Razak, Deputy Prime Minister and Director, National Operations Council, pp. 2 and 3 in Malaysia, A N ew Industrial D evelopm ent Strategy, Kuala L um pur, July 1969. 100 and the discipline of the private sector. It is apparent that such a regime of co-operation and joint-participation, in which government is ultimately in control of the direction of development, implies a new role and a new set of param eters for the government-private sector relationship. A fundamental change in the role of the state has occurred in Indonesia, where the present Governm ent has abandoned the commitment to state socialism and opted for the predominance of private enterprise. At the same time, a commitment to rational economic and social planning has been made. The role of the Government under the new conditions will nevertheless continue to be influenced by the heritage of the past, not least by the existence of a substantial publicly-owned production sector.6 This element distinguishes the Indonesian case from those of Malaysia and the Philippines. F o r the rest, the commitment to development under predom inantly private enterprise has implications which are generally similar for Indonesia. The dem arcation between public and private sectors in production need not be fixed for all time; in all likelihood the line will shift gradually in the direction of private ownership as government divests itself of establishments which are not crucial to the attainm ent of development goals. As long as the considerable publicly-owned segment of the economy shares fields in which private enterprise also operates, the conditions under which the two segments function will remain an im portant area of government and 6 T h e governm ent-ow ned production sector is large in comparison w ith m any other non-socialist countries in the region. In addition to activities com m only governm ent owned and operated, the Indonesian governm ent production sector includes a large part of the plantations and of the m odern m anufacturing sector, mines, transport, commercial banking, state trading corporations and some service activities. P a r t Two. C urrent Economic Developments private enterprise interaction. Conditions of entry into industries occupied by government enterprise, the conditions of competition, access to credit, to tax and other advantages and to m arketing facilities (especially in connexion with the state trading corporations) will affect the param eters within which private enterprise must operate. The indications are that government will attempt to treat the two segments as equally as circumstances perm it and will require public enterprise to operate un der the prevailing m arket conditions.7 The country notes which follow are intended to analyse some of the m ore significant and m ore urgent problem s of the developing ECAFE region. It has not been possible to include notes on all the developing countries in the region. In some, particular circum stances have made it infeasible to attempt a discussion of their economic position and policies. H ong Kong and Singapore, which have given enviable perform ances in economic development in recent years, require quite special analysis as the character of their economies differs fundamentally from that of most of the other developing countries in the region. The hostilities in the Republic of Viet-Nam quite u n d e rstandably create a situation which is scarcely am enable to meaningful economic analysis. The lack of sufficient inform ation, statistical and other, has m ade impossible the inclusion of an inform ed discussion of Brunei, Burm a, Fiji, Mongolia and Western Samoa. It is hoped that these countries will be included in future. 7 A discussion of the requirem ents for the effective perform ance of the Indonesian state trading corporations is found in J. Panglaykim and I. Palmer, State T rading Corporations in D eveloping Countries (R otterdam , 1969), especially chapter 6, the implications of w hich are relevant to public enterprise in general.