Download Part Two CURRENT ECONOMIC DEVELOPMENTS

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.