Foreign Trade and Economic Development

Japan's economy is often referred to as an “export-led economy”. The merchandise exports as a percentage of Japan's GDP, however, paint a different picture. According to the World Development Report 1986, the ratio for Japan was 15 per cent as of 1984, much lower than that for the United Kingdom, France, and West Germany, that is, 29 per cent, 25 per cent, and 31 per cent respectively. As for ASEAN member countries, the 1984 figure for Indonesia was 23 per cent, the Philippines 21 per cent, Thailand 24 per cent, Malaysia 56 per cent, and Singapore over 100 per cent. The fact that Japan's ratio has been relatively low may derive partly from its geographical and historical isolation. Moreover, since Japan's domestic market is so large with a sizeable population and a high per capita income, its dependence on the foreign markets to generate GDP is correspondingly lower. Perhaps for the same reason, the ratio for the United States has been low, registering only 8 per cent in 1983.

In the rapid growth period after World War II, the annual growth rate of Japan's export in real terms averaged 14.7 per cent during the 1965–73 period — slightly higher than the annual average growth rate of manufacturing production at 14.4 per cent, and much higher than that of GDP at 9.8 per cent. However, the contribution of the domestic demand to economic growth has consistently been larger than that of the export, as confirmed by several empirical studies.

Analysis on the Competitiveness of Manufactured Exports

Japan's Changing Trade Structure

The structure of Japan's foreign trade is dominated by the import of primary commodities and by the export of manufactured products. (See Table 2.1.) Manufactured exports as a percentage of the total merchandise exports have constituted more than 90 per cent during the last two decades. On the other hand, manufactured imports as a percentage of the total merchandise imports have been between 23 and 29 per cent.

A puzzle revealed by the previous two chapters is that, apart from PELNI, shipping firms have remained so small. At the end of 1982 no other firm owned more than 9 ships or, if ships leased from P.T, PANN are included, 12 ships. In the 1950s or 1960s this result would hardly have been surprising. At that time firms were still in their infancy and capital and foreign exchange were scarce indeed. Since the late 1960s, however, these constraints have become less pressing. Large amounts of capital have been invested in deepsea shipping — both liners and tramps — as well as in many other sectors of the Indonesian economy. Yet even interisland shipping firms associated with powerful economic groups have remained modest in size. Some explanation other than lack of capital is therefore required.

This chapter argues that interisland shipping firms are subject to diseconomies of scale beyond about 10 vessels. It is further argued that these diseconomies are associated with a life cycle of growth and decline. Such behaviour has important implications for new entry and the effectiveness of competition. The special case of PELNI will be considered in the next chapter.

THE TYPES OF INTERISLAND SHIPPING FIRMS

Under the requirements of Regulation No. 2/1969, interisland shipping firms must be legally registered perusabaan terbatas or P.T. (limited liability companies), perusabaan negara or P.N. (state enterprises), or perusahaan daerab or P.D. (regional government enterprises). Since PELNI was converted to the status of a state-owned limited liability company in November 1975, no state enterprises now remain. Apart from three surviving regional government enterprises — a form of organization introduced under the Old Order — all firms are now P.T, companies. According to the old Dutch company law and terminology which remain in force, the basic form of die P.T. company is a dewan komisaris (board) which, under a presiden komisaris (chairman), exercises supervision over the direksi (management), which is under the command of the presiden direkturot direktur utoma (general manager).'

Ever since the end of the economic reconstruction of post-war Japan in 1952 or so, there has been a steady process of unidirectional industrial restructuring, moving from a composite of the labour-intensive light industries to what the Japanese nowadays call the heavy, thick, long, and large (HETHILL) industries and on to the so-called light, thin, short, and small (LITHISS) industries. The prima donnas in the leading industries have shifted from textiles, low-cost apparel, toys, and plywood manufacturing industries through petro-chemicals, iron and steel, nonferrous metals, and heavy general and electrical machinery, and shipbuilding to consumer and industrial electronics including VTRs and semiconductors, precision equipment, biotechnology, and new materials such as optical fibres and new ceramics.

The process of Japan's industrial restructuring had proceeded very smoothly during the first phase in the 1950s and 1960s from the labour-intensive light industries lo the heavy and chemical industries. It coincided with the period when the Japanese economy, assisted by the ongoing international economic environment toward trade liberalization and the expanding world economy, fully took advantage of the well-educated and hard-working labour force, the high rate of domestic savings, the active entrepreneurial spirit precipitated by the structural reforms installed by the Allied Occupation Forces and the government's high-growth policies, and was growing at the annual average rate of over 10 per cent.

While there were some declining industries such as coal-mining appearing on the industrial scene even during the first phase, it was relatively easy for the Japanese economy to absorb the adverse impact on capital and human resources, since there were so many rapidly expanding industries creating new jobs and growth opportunities for all the enterprising private sector industrialists. All that the Japanese Government had to do was “not to stand in their way” and assist the private sector entrepreneurs to obtain the required technologies and markets overseas.

One of the central objectives of the Association of Southeast Asian Nations (ASEAN), as embodied in the Bangkok Declaration under which ASEAN was founded, is the promotion of Southeast Asian Studies. In this context, ASEAN warmly welcomed the offer of Mr Zenko Suzuki, Prime Minister of Japan, in early 1981 to support the launching of an ASEAN Regional Studies Promotion Programme (ARSPP).

After extensive consultations among ASEAN member countries and between ASEAN and Japan, it was agreed that the ASEAN Regional Studies Promotion Programme, initially to extend over a period of five years (FY 1982–86), should focus on policy-oriented socio-economic research. Thus far, the co-operative effort has resulted in the publication of two joint ASEAN-Japan overview papers: ASEAN-Japan Industrial Co-operation: An Overview published in September 1984 resulting from the first phase; and Effective Mechanisms for the Enhancement of Technology and Skills in ASEAN: An Overview published in March 1986, from the second phase. This volume is the product of the third phase of the programme on “Industrial Restructuring and Adjustment for Japan-ASEAN Investment and Trade Expansion”. Like the two previous volumes, it is based on the results of studies conducted by the Japanese research team and the ASEAN country research teams.

The recent history of ASEAN-Japan relations has been marked by a degree of ambivalence. As the first Asian nation to industrialize successfully and to have risen as a phoenix from the ashes of war-time destruction to the leading heights of industrial and technological power, Japan has always been regarded with a degree of awe and admiration by its southern neighbours. Such awe and admiration have, however, been tinged with a certain amount oi anxiety, especially as the impact of Japan's post-war economic expansion becomes increasingly felt in the ASEAN region.

On the Japanese side, historical circumstances and the need for economic reconstruction in the early post-war years made it unavoidable that its external relations were initially to a large extent oriented towards the West, especially the United States.

In 1985, further research was carried out to focus on two areas: 1. the relocation of certain industries from other countries, in particular from Japan, to the ASEAN countries; and 2. the environment necessary to speed up the process of transfer. The research studies attempted to identify constraints perceived to be responsible for the slow pace of redeployment and to formulate measures at national, bilateral, and multilateral levels to enhance the process of industrial development in ASEAN.

In this research, industrial restructuring is defined as the process of bringing a country's industrial activities in line with its existing or emerging comparative advantage in order to make more efficient use of its resource and skill endowments. It also involves the manipulation and adjustment of economic parameters such as investment incentives, prices, wage levels, exchange rates, and tariff and non-tariff barriers to trade. Consequently, the country research studies aimed at generating information and recommendations, based on the experiences of various firms, for industrial development in the ASEAN region. A key indicator of successful redeployment of industries to the ASEAN countries based on comparative advantage is the ability of the recipient country to compete in the world market for these types of manufactures, evidenced by a rising share of manufactures in the country's export total.

Background on Selected Industries

The common industry chosen by the research teams from the ASEAN countries for their case studies is the electronics/electrical industry. This industry is chosen because of its significance in the industrial development strategies of the ASEAN nations. It not only accounts for a large segment of industrial investment and employment, but also reflects very significantly the dependence of the ASEAN countries on such investments from Japan and other developed countries. Furthermore, it has been perceived that there are within this industry economic activities in which ASEAN countries have or are gaining comparative advantages. This in turn implies potential opportunities for economic co-operation between ASEAN and Japan.

COMPETITION AND REGULATION

The poor performance of the interisland shipping industry has been seen to be the outcome of the often conflicting forces of competition and regulation. Competition has been a sanction against inefficiency because the market is highly contestable. Besides a large number of firms already in the industry, new entry has been facilitated by, in practice, fairly low barriers to entry and a large pool of firms able to diversify into interisland liner shipping should profitable opportunities become apparent. These structural conditions have predictably given rise to both price and non-price competition unimpeded by any form of cartelization. Over time more efficient firms with lower costs relative to their quality of service have been able to increase their share of cargo and capacity at the expense of less efficient firms. This process has been referred to as the ‘transfer mechanism'. Insofar as this mechanism has been effective, the industry has been able to rationalize itself.

The spontaneous improvement in efficiency through the forces of competition has been impeded rather than assisted, however, by the impact of regulation. Although efficiency has been a declared aim of regulatory policy, some measures have weakened the effectiveness of market sanctions. Thus, licensing policy has endeavoured both to reduce the number of firms in the industry and to restrict new entry. Exit has also been impeded by allowing less efficient firms, which in some cases have not even met licence requirements, to retain control of lucrative public facilities in the form of front-line godowns. Some less efficient firms have also benefited from the provision of subsidized investment funds through P.T. PANN. These effects of regulation help to explain why competition has not been more effective in reducing the dispersion of efficiency within the industry.

Yet if regulation has weakened the effectiveness of competition, so has competition frustrated the implementation of government policy. The attempt in 1974 to consolidate the many independent shipping firms into about a dozen groups was a failure — the groups were formed as required but never functioned as co-ordinated units and were soon disregarded.

Competition has the twofold virtue of eliminating inefficiency and of doing so by a process internal to an industry. Provided firms are subject to strong market pressures, an industry will be self-regulating as far as performance is concerned. Whether a market structure is conducive to effective competition depends very much upon the ease of entry. If there is easy entry, firms already in the industry will lack market power either to earn long-run excess profits or to operate in the long-run with excessive costs. In contemporary jargon, such a market would be described as highly contestable.

The interisland shipping industry is a good example of a highly contestable market. The number of firms already in the industry is large and new entry is easy. This chapter will first identify the main sectors of the industry and then examine in detail the dry cargo liner sector.

THE SECTORS OF THE INDUSTRY

Regulation No. 2/1969 divides the interisland shipping into several separately licensed sectors. These sectors are distinguished according to characteristics of supply, primarily the type of vessel with some regard to the nature of its employment (that is, whether'tramp” or “liner”). Despite some substitutability of different vessel types in meeting shipper demands, these sectors are nevertheless a workable basis for economic analysis. Table 3-1 indicates their relative importance according to their share of interisland trade in 1981. It should be noted that the customs documents from which the figures are derived appear heavily to understate the role of small-scale shipping.

The largest individual sector, accounting for no less than 40 per cent of the total cargo flow, is the carriage by tanker of crude oil, petroleum and other refined products. However, because domestic oil tanker shipping is a monopoly of the state oil company PERTAMINA, this sector belongs more logically not to the interisland shipping industry but to the vertically-integrated oil industry. This study will therefore be confined to the other 60 per cent of interisland trade which may loosely be referred to as non-oil or dry cargo.

The ASEAN economics are open and trade oriented, with the degree of trade dependence varying inversely with population size among member countries. Compared with other developing countries, each has a relatively large external sector and high exports to GNP ratio. The characteristic feature is the peculiar position of dependence on the West and Japan for trade, capital, technology, and even decision-making to generate domestic economic growth. This peculiar position of dependence reflects: 1. the inter-relatedness of investment (both foreign and domestic, imports and exports (most of these economies are dependent on machinery and equipment from the industrial countries which ultimately have to be accounted for by increased exports); and 2. the sensitivity of current output to the impact of external changes.

The Growth Performance of ASEAN in the 60s/70s

For nearly three decades up to the early 1970s, industrial countries experienced continuous and sustained growth. This extended period of economic growth was in part aided by trade liberalization measures which stimulated vigorous expansion of world trade. While the industrial countries concentrated on manufactured and capital goods, the developing countries as a whole were relegated to the export of primary products and were not able to share proportionately in this expansion of world trade. Nonetheless, the scope and vigour of this expansion promoted export growth in developing countries.

In the 1970s, dramatic changes in the world economic scene with important implications for trade and growth started to emerge. Beginning with the breakdown of the international monetary system established under the Bretton Woods Agreement, currency instability became the order of the day. This was followed by the two major oil shocks of 1973 and 1979 which changed the costs of production, production structure, and the balance of payments position of countries the world over. The world industrial market economies went through two recessions separated by a four-year period of modest growth. The first recession of 1974–75 though deeper than the second was quickly overcome in 1976 by a conventional combination of fiscal and monetary expansion. However, the results were not very satisfactory as inflation persisted at high levels.

If there is a common impression of the Vietnam war, it is that the United States entered a quagmire from which it was able to extricate itself only with considerable awkwardness. It has been said that the military won all the battles it fought, but lost the war to the political process. If there is a common view on the economy of wartime South Vietnam, it is the one promoted by the popular media that the economy was built around the black market, prostitution, and corruption. If there is a common view on foreign aid to Vietnam, it is that aid was a failure. There may be elements of truth in all of these impressions, but whereas the views and analyses pertaining to military and political affairs have been presented abundantly in books and journals, there is no good source dealing with the economic events that contributed to the final outcome. This book is a modest attempt to inject economic matters into the general analysis of the failed experiment that we refer to as the Vietnam experience.

The experiment to transform a very poor and insecure country into a democratic nation able to stand alone in a relatively short period of time was ambitious. Military, political, and economic activities had to be well orchestrated for the effort to have any chance of succeeding, and rapid economic development was just as important to long-run success as battlefield victories and the general acceptance of democratic political institutions.

An interesting and unresolved question of the Vietnam war pertained to economic “burden sharing.” At appropriations hearings on foreign aid, U.S. congressmen wanted to know if the Vietnamese people were bearing “their share” of the economic burden of the war. This was not an ethical question, but was intended to elicit only the simple response that x percent of the war budget was being financed by Vietnamese taxation and 1 – x percent by U.S. aid.

As seen earlier, witnesses were not able to answer this “simple” accounting question because of the lack of consensus on the foreign exchange value of the piaster. Better answers to this and other questions of Vietnam public finance depend on the kind of information provided in Chapters 9 and 10.

With the situation that prevailed in wartime South Vietnam, it would not have been possible for the Vietnamese to raise sufficient revenues to finance government operations at the expenditure levels recorded. Basically, there were three sources of financing: domestic revenues, deficit (or inflationary) financing, and foreign aid. We have seen that foreign aid was programmed in a way to keep the deficit under control. Foreign aid generated counterpart funds for budgetary use and promoted growth of income that potentially increased the domestic tax base. But foreign aid cannot be counted on to fill the budgetary gap or to fuel growth over an indefinite period.