The following recommendations are based on my experience at the Secretariat as well as my experience as a manager and multilateral diplomat. They are my personal recommendations and do not represent the views of the United States Government or any non-governmental organization. They are divided into two types: policy recommendations and managerial or administrative recommendations.

Policy Recommendations

Additional Roles for APEC

From the beginning there has been a rash of proposals to expand APEC's mission, including such areas as security, global environment, population and even combating international trade in narcotics. While these proposals may be well-intentioned, they could spell disaster for APEC! Member countries should resist these efforts to expand APEC's role in non-economic areas. Adding security issues to APEC would overload this new organization and distort its focus. APEC's focus should remain on trade and investment liberalization, trade facilitation, and human resource development. There should be a balance in dealing with these issues. Together with the efforts to liberalize trade and investment, emphasis should also be given to programmes that will help the less developed members (for example, in human resource development, technology transfer and assistance to small- and medium-sized enterprises). As APEC matures, there will be more and more pressure to broaden its mission and this should be strongly resisted until the organization has proven itself in trade and economics.

RECOMMENDATION:

Membership

APEC should concentrate on developing the institution and resist taking in new members until the end of the present three-year moratorium. The only exception that should be made would be for new members of ASEAN and NAFTA. This could mean the entry of Vietnam and perhaps Cambodia, but countries outside these two trade groupings would have to wait until APEC becomes more established. If there is a steady stream of new members, it will be very difficult to consolidate gains and to continue the process of institutionalization. The latter is one of the reasons that Malaysia is such a strong supporter of a rapid increase in membership.

The challenge is to make the Asia-Pacific economy a source of strength for a liberal international system, and to encourage regional trade expansion without discriminating against non-regional nations. Despite the well-known limitations of GATT's most-favoured-nation based trade rules, they constrain the political threat of discrimination and provide a measure of security and political confidence in open international economic transactions.

Completing the unfinished business of the Uruguay Round is urgent. Yet, from the perspective of Western Pacific economies, the Uruguay Round is not the end of trade policy history, but the beginning, since it coincides with the region's continuing implementation of substantial reform and economic liberalization programmes within the region. APEC is of critical importance in defining the international trade and economic policy agenda beyond the Uruguay Round.

This is obviously a very important year for APEC. With the United States in the chair, and therefore with a strong interest in defining a substantial agenda for regional cooperation and negotiation, this is a time for laying out a long-term strategy for Asia-Pacific economic co-operation. The next APEC meeting is due to be held in Seattle in November. If the vexed question of participation by the People's Republic of China can be settled alongside representation from Taipei, this meeting will be the first attended by government leaders from most APEC economies. It will focus corporate attention and energies on regional developments.

There are four central policy interests in Asia-Pacific economic co-operation:

1. • Maintaining support for the “Western Pacific trade model”, within the region, especially through communications that give each economy confidence that its partners will continue down this path;

2. • Engaging North America in Asia-Pacific open regionalism;

3. • Defining an agenda of strengthening the “public goods” that facilitate trade. The measures covered by this agenda can profitably include region-wide understanding on rules for foreign investment; enhanced efficiency and compatibility in the provision of tangible international public goods such as transport and communications infrastructure; mutual recognition of standards; greater harmonization of legal and administration procedures; and effective means of resolving potential disputes.

As rapid economic growth has changed the structure of world economic power, it has challenged the old definition of political and security interests in East Asia and the Pacific in the post-Cold War era. With the end of American economic Hegemony, new regional and multilateral political structures are needed to define rules governing the relations between Asia-Pacific states, provide a framework for the emerging strategic significance of Japan and China, and ASEAN, and establish a forum for discussing a wide range of regional and sub-regional security issues.

U.S.-Japan economic tensions are more likely to be manageable if the established framework of security relations remains intact. The United States — a strong stabilizing factor in regional security — is more likely to maintain a presence in the Western Pacific if there is a strong enough economic rationale for it.

In political as well as in economic affairs, the pace of change must encourage experimentation with new structures to manage regional and sub-regional problems. To reflect the impact of economic policy on political and security arrangements, the aim should not be to develop a single over-arching regional structure dealing with economic, political and security issues. Rather, separate structures are more realistic, but to be successful they need to reinforce each other.

The manufacturing sector has become increasingly important to the Thai economy since the 1980s: in 1987 it comprised about 22 per cent of GDP and brought in 50 per cent of foreign exchange earnings. Manufactured exports largely consist of labour intensive industries, such as clothing and textiles, integrated circuit assembly and jewellery, which together accounted for around 54 per cent of manufacturing exports and 27 per cent of the country's total export earnings in 1987.

The clothing and textile industry has become particularly important to the Thai economy in recent years. Clothing and textile exports grew so rapidly that in 1985 they became the highest foreign exchange earning commodity. In 1986 the clothing and textile industries contributed about 26 per cent to GDP from manufacturing and had the highest employment share in the manufacturing sector with around 500,000 workers. In 1988 exports of textiles and clothing increased to $2.4 billion compared with $0.8 billion in 1984. (All dollar values are in U.S. dollars.) Since 1986 clothing exports have become the highest export commodity; the export value was $1.9 billion in 1988.

The clothing and textile industry is likely to become the largest manufacturing industry if Thailand follows the industrial development path of Japan, Hong Kong, the Republic of Korea and Taiwan.

Nominal protection has been high for clothing and textiles, and production capacity has been controlled to limit domestic competition. The tariffs on spinning, weaving, clothing and man-made fibres have been high. This could have been expected to restrict export growth. High protection on intermediate products such as fabric could have been expected to reduce the competitive edge of downstream industries, notably clothing. High tariffs on clothing suggested that there was no incentive to export. From 1978 to 1986, moreover, the production capacity of spinning and weaving was controlled. Neither expansion nor new establishments were permitted.

The Indonesia Update Conference is a major opportunity for Australians to be informed about and to assess economic and political developments in our largest and most important neighbour.

The Australian National University, and especially those concerned within the Research School of Asian and Pacific Studies, deserve congratulations for the way this conference has attracted distinguished Indonesian representation, and for their contribution, and those of other Australian scholars, to knowledge about Indonesia in government, business, academia, the media and the wider community. This is reflected especially in the presence of Professor Dr Ali Wardhana who, as a senior Minister for twenty years and now as Special Adviser to the President, has played a distinguished role in overseeing the sound macroeconomic management of the Indonesian economy. Impressive attendance at this conference is also a tribute by the wider community to the strength of scholarship about Indonesia within this University.

More and more Australians are aware that Indonesia's economy has been growing strongly, and that Indonesia has played an important role in enhancing security and stability in Southeast Asia. But I wonder how many appreciate the scale of change which has taken place in Indonesia over the past thirty years, the dramatic nature of change which is continuing now, and the fact that Indonesia is becoming a very influential nation in world affairs.

By the. middle of the next century Indonesia will be, in terms of population, the third largest country in the world, after China and India. Indonesia's population will have overtaken that of the United States, and may be between 300 and 350 million. If Indonesia should sustain average GDP growth rates of recent years, by the year 2050 Indonesia's economy will be larger than that of Japan today and will be close to that of the United States.

Per capita gross domestic product by then is likely to be greater than that of contemporary Spain. If Indonesia's GDP should grow at an average of 7 per cent annually, per capita GDP would be higher than that enjoyed today by Australia and approaching that of Canada.

I would officially take up my duties as Executive Director in January 1993 and would leave for Singapore right after Christmas. Examining the draft organization plan for the Secretariat it was obvious that improvement was needed. The budget allocated for running the Secretariat appeared arbitrary and the structure too rigid. While cost control was very important, there was a mean-spirited tone to the document. This reflected the lack of management experience on the part of the authors, who wanted tight control from Washington.

There was no time to negotiate significant changes before the December SOM. Instead, I concentrated on learning from Sandy all I could about APEC. I came to have great respect for Sandy's talent. We had many productive discussions and I left for my assignment confident that she accepted the need for flexibility and freedom on the part of the Executive Director if we wanted to set up a first-rate organization. Of course, all significant decisions would have to be approved by the Senior Officials. Informing the Senior Officials of all our plans and seeking their approval at every important decision point was essential to the Secretariat's success.

Even before the first SOM, it was necessary to make a quick two-day trip to Singapore to clear up some questions about the diplomatic status of the Secretariat under Singapore law. I came back more exited than ever about serving in Singapore, a clean and bustling city. My reaction was like most first-time visitors to Singapore. Europeans were most impressed. I remember especially the reaction of some good friends of ours, the former Lord Mayor of Frankfurt, Walter Wallmann, and his wife, Margarethe. The gleaming new skyscrapers, the well-ordered traffic, teeming with Mercedes, BMWs, and Volvos, and the throngs of well-dressed young Singaporeans participating in Singapore's “national sport” (shopping) made a great impression. But the most striking thing of all to them was the spotless subway system, free of graffiti and drugs, in sharp contrast to Frankfurt!

With the excitement of parliamentary elections in 1992 and the Presidential election in 1993 out of the way, it may appear on the surface that political life in Indonesia during 1993-94 had paused for breath. Yet to some extent formal political events like elections are, in any country, distractions from the real business of politics, and in a very real sense the year just passed can be seen as one in which the fundamental political debates, conflicts and issues of contemporary Indonesia were to reassert themselves.

For some time the overriding focus of political activity in Indonesia has been upon the tasks of managing and influencing the succession to the post-Soeharto era. For the various elites of wealth and power that have emerged under the New Order, the examples of transition in the former Soviet Union and Yugoslavia have been particularly salutary lessons. If one objective binds them together it is a determination that the transition should be orderly, and that the essential features of the social order remain intact. Yet, despite their agreement on stability and order as primary objectives, there is a wide range of views within elite circles about how the transition should be organised, the roles that various groups and interests should play, and the form that the new political regime should take.

The system of authoritarian corporatism dominated by the so- called iron triangle of President, military and bureaucracy which has characterised much of the New Order period has already undergone important changes. Although the veto power of the military should not be underestimated, nor its coercive apparatus considered dispensable to the present government, its influence has clearly faded. At the same time, there has been an increasing concentration of political and economic power in the hands of important families emerging from that strata of politico- bureaucrats dominating the state apparatus. The succession, therefore, involves more than political mechanisms or a change of leadership; it is about constructing a new political shell for social forces incubated in the past three decades.

The economic reforms that had unfolded progressively in the 1980s have brought about changes in all domains of society. The favourable effects are numerous, an important one being higher economic growth. But side by side with the positive effects are negative socio-economic consequences arising from failure to contain the excesses of the reform policies.

The effects of the reforms on the growth rate can be studied from a comparison of the growth rates of two main indicators, namely: (a) national income, as given by statistics on the material production system (MPS), which is the system used in Vietnam; (b) gross domestic product, which is mainly the national account in United Nations statistics and adjusted for conditions in recent years in Vietnam. Although both indicators reflect the value of output newly created by the economy in one year, they differ in terms of the nature of output covered.

National income includes value added only in material production while gross domestic product comprises value added in all economic activities, both goods and services. Both indicators are used here because Vietnam's statistics prior to 1986 had no data on gross domestic product, and figures on national income are used instead in a comparative study of the stages when different economic policies were being implemented.

1 Growth rates of national income

Figure 6 shows the growth indices of national income of the whole economy and of its main sectors, namely, industry and agriculture. Below is an analysis of the economy's growth during 1976–92:

(1) Overall, the economy achieved a positive growth rate although the rate was not high. If population growth (which was in fact relatively high) was taken into consideration, the economic growth rate could barely compensate for the still-low consumption needs of the population. Generally speaking, in the course of the fifteen years from 1976 to 1991, Vietnam's national income had increased by an average of 3.8 per cent per annum while the population growth was more than 2 per cent a year.

Since the mid-1980s, more than half of the increase in world production of goods and services has occurred in East Asia. Between 1986 and 1991, growth in Japan added annual output equivalent to an economy the size of France. Internationally-oriented growth became firmly entrenched in East Asia's most populous economies, China and Indonesia, and commenced in Vietnam. Most remarkably, strong growth in the region's developing countries continued undiminished in the early 1990s, despite deep and prolonged recession in the advanced industrial economies of the northern hemisphere. As rapid growth has become established in each of these countries, foreign trade has expanded more rapidly than output and expenditure, although less outstandingly so in Japan than in the region's developing economies.

It happens that the East Asian economies which have grown rapidly through the post-war period have had initial relative resource endowments that are very different from those of the established industrial economies. Japan, Hong Kong, Taiwan, Singapore, Korea and the coastal provinces of mainland China are all densely populated by the standards of the established industrial economies of the North Atlantic, or the rest of the world. Their patterns of specialization in international trade are therefore distinctive, both in the early stages of industrialization when incomes are low, and later when they are high. This increases pressures for structural adjustment in the rest of the world as their foreign trade expands, at the same time as it expands the potential gains from trade. It also leads to criticism that East Asia does not behave “normally” in its trade relations with the rest of the world, and to arguments that the old trade rules are not suitable for the new big players.

The emergence of East Asia as one of three major centres of production and trade, alongside Western Europe and North America has placed great strain on the international trading system.

The vibrance and optimism in Southeast Asia during 1993 was palpable. In the wake of the end of the Cold War, the region built upon the development that was already on track. Even so, the pace has been surprising. Not only did the ASEAN economies perform well generally, Vietnam surged ahead in economic development, and Myanmar registered strong signs of economic growth.

Politically, the region enjoys dynamic stability even though the South China Sea continues to pose a potential conflict area, and a North Korean nuclear capability will be destabilizing. The political transition in Cambodia proved to be a greater success than anticipated. The major concern remains the question of an emerging power balance in the larger Asia-Pacific region, especially with the new economic weight of China.

What will the next year look like?

Regional Outlook was first published in 1992, to meet the needs of the general reader, the busy executive and decision-maker, who seek to follow and understand the fast-changing regional scene. It aims to be succinct yet substantial, general yet nuanced in its analysis. Above all, it strives to be readable.

We hope you will find this volume useful and, if you care to, tell others about it.

In this chapter some of the major characteristics of home and host government behaviour that are considered to be “strategic” are examined. It is to be expected that such policies will influence FDI through the impact of home country policies on ownership and internalization advantages and the impact of host government policies on location advantages. Japanese and host government FDI-related policies are then summarized. The resource and welfare implications of such policies are also examined.

Strategic behaviour refers to policies to promote economic activity in certain industries because of the impact of those industries on long-term growth of incomes and employment. By fostering backward linkages to the local economy and forward linkages to markets for goods and services, and by promoting knowlege and skills accumulation, governments can “create” comparative advantages independent of traditional factor endowments. Home government policies include trade protection and support policies that target the growth of certain industries; host government policies induce foreign investment in certain industries to catch up to industrialized economies and to create comparative advantage.

Teece (1991) summarizes what is known about the benefits and costs of home government support policies: i.e., subsidies and protective measures targeted at certain industries. From the available evidence, he makes several observations. First, targeting has a better chance of success when it is used for the purpose of “catching up” than for advancing the technological frontier, because of the greater efficiency with which resources can be used when the way forward is known. Second, targeting works better when governments can co-ordinate policies to ensure all are supportive of the economic objective. He notes that, with the possible exception of Japan, government guidance is less and less used in industralized countries today. Firm-level studies suggest that firms' ownership advantages, such as organization and management, are more important to competitiveness than are public sector support policies.

The purpose of this chapter is to apply the conceptual discussion and qualitative data analysis in preceding chapters to econometric tests of the determinants of Japanese FDI in the East Asian economies. The existing econometrics literature consists almost exclusively of studies of European and U.S. FDI. It is surveyed in UNCTC (1992b) which summarizes results from studies using cross-sectional and time series data. Very few econometric tests exist of Japanese or other Asian outward FDI because of the paucity of comparable data. As will be seen, such problems arise in this study as well.

Cross-sectional studies reported by UNCTC test the significance of factors such as the intensity of a firm's use of R&D, skills and advertising. Time series studies, most of which are focused on FDI in industrialized countries, examine the impact of dynamic variables such as market size in the host country (as a proxy for potential economies of scale), tariffs (to reflect barriers to trade), capital controls (as influence on FDI), financial variables such as long bond yields (as a measure of the opportunity cost of capital); trade balance; measures of institutional arrangements such a free trade areas and common markets (the latter as proxies for trade barriers); and currency changes.

One of the few attempts to study determinants of Japanese outward FDI to East Asia was carried out by Urata (1992, p. 188) on data for the 1977-86 period. He analysed flows of Japanese FDI to Asia across 8 manufacturing sectors. Using Dunning's eclectic framework, he tested the influence on FDI of establishment size, product differentiation, and R&D-intensity as well as measures of export dependence and import penetration. Urata found that neither product differentiation nor technological superiority were important determinants of outward FDI in Asia during the study period. Trade variables both provided significant explanatory power, however: both export dependence and import penetration were positively associated with FDI.

This chapter focuses on foreign direct investment. While it begins with a comparative summary of the distributions of accumulated U.S. and Japanese FDI across economies and industries in the region, the main focus in this chapter is on the interactions among firms, and between firms and governments, to create production networks. Such networks increasingly characterize the behaviour of globalizing multinational enterprises, but some empirical analyses of firm behaviour in East Asia have observed that Japanese firms are creating de facto exclusive production networks, replicating keiretsu and other domestic structures abroad (Borrus 1992; UNCTC 1991a; Doner 1991).

Between 1980 and 1990, the stock of world FDI tripled to $1,500 billion from $524 billion. (UNCTC 1992c, p. v). Japan's share of this stock grew to 11 from 4 per cent in the same period (UNCTC 1991a, p. 32). The distribution of stocks of Japanese and U.S. investment among the major regions in 1990 was compared in Table 1. Europe and North America have been the main destinations for both Japanese and American investors. While the East Asian economies have small shares of the totals, the region's share of Japanese FDI was roughly twice that of U.S. FDI by 1990.

Charts 3 and 4, comparing the distributions of U.S. and Japanese stocks of FDI in East Asia in 1980 and 1990, show similar distributions among economies and industries. Chart 3 contains a comparison of distributions of FDI among host economies. Both Japanese and U.S. FDI was concentrated in both years in Indonesia, Hong Kong, and Singapore. Japanese FDI in 1980 was concentrated in Korea while U.S. FDI was concentrated in the Philippines, reflecting in both cases the density of contacts, knowledge and commitments each had built up in these economies during and after World War II. Between 1980 and 1990 Japanese stocks built up rapidly, with a focus on Hong Kong, Singapore and Thailand, and to a lesser extent Taiwan, while in Korea, the Philippines and Indonesia, shares had dropped.