ASEAN-China Economic Relations: In the Context of Pacific Economic Development and Co-operation 9789814377010

Citation preview

The Institute of World Economics and Politics is a non-profit organization of the Chinese Academy of Social Sciences. Established in 1964 as the Institute of World Economics, it was combined with the Institute of World Politics in 1981 to form the present Institute. It is concerned with theoretical and practical issues of world economics and politics, and provides consultative advice and policy recommendations to the government on major issues of China's foreign relations. The Institute of Southeast Asian Studies was established as an autonomous organization in 1968. It is a regional research centre for scholars and other specialists concerned with modern Southeast Asia, particularly the multifaceted problems of stability and security, economic development, and political and social change. The Institute is governed by a twenty-two-member Board of Trustees comprising nominees from the Singapore Government, the National University of Singapore, the various Chambers of Commerce, and professional and civic organizations. A ten-man Executive Committee oversees day-to-day operations; it is chaired by the Director, the Institute's chief academic anq administrative officer. The ASEAN Economic Research Unit is an integral part of the Institute, coming under the overall supervision of the Director who is also the Chairman of its Management Committee. The Unit was formed in 1979 in response to the need to deepen understanding of economic change and political developments in ASEAN. The day-to-day operations of the Unit are the responsibility of the Co-ordinator. A Regional Advisory Committee, consisting of a senior economist from each of the ASEAN countries, guides the work of the Unit.

ASEAN-CHINA ECONOMIC RELATIONS In the Context of Pacific Economic Development and Co-operation

Contributors

China Chen Dezhao Institute of World Economics and Politics Chinese Academy of Social Sciences Beijing Cheng Bifan Institute of Asia and Pacific Studies Chinese Academy of Social Sciences Beijing Feng Yushu Central Institute of Finance and Banking Beijing Han Zhenshe Institute of Asia and Pacific Studies Chinese Academy of Social Sciences Beijing Ma Chengsan International ]rade Research Institute Beijing Pang Rongqian International Trade Research Institute Beijing Wang Huaining Institute of World Economics and Politics Chinese Academy of Social Sciences Beijing Wei Yanshen Institute of World Economics and Politics Chinese Academy of Social Sciences Beijing Yu Kexing Institute of World Economics and Politics Chinese Academy of Social Studies Beijing

Indonesia Djisman S. Simandjuntak Centre for Strategic and International Studies Jakarta Malaysia Kamal Salih Malaysian Institute of Economic Research Kuala Lumpur Philippines Florian A. Alburo Faculty of Economics University of the Philippines and National Economic and Development Authority Manila Singapore Tan Kong Yam Faculty of Business Administration National University of Singapore Singapore Thailand Narongchai Akrasanee Thailand Development Research Institute Bangkok Deunden Nikomborirak Thailand Development Research Institute Bangkok

ASEAN-CHINA ECONOMIC RELATIONS In the Context of Pacific Economic Development and Co-operation

Edited by Chia Siow Yue National University of Singapore

Cheng Bifan Institute of WOrld Economics and Politics

Institute of World Economics and Politics and

ASEAN Economic Research Unit Institute of Southeast Asian Studies

Published by Institute of Southeast Asian Studies Heng Mui Keng Terrace Pasir Panjang Singapore 0511 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies.

© 1992 Institute of Southeast Asian Studies The responsibiliry for facts and opinions expressed in this publication rests exclusively with the authors and their interpretations do not necessarily reflect the views or the policy of the Institute or its supporters.

Cataloguing in Publication Data ASEAN-China economic relations in the context of Pacific economic development and co-operation I edited by Chia Siow Yue. 1. A SEAN countries- Foreign economic relations- China- Congresses. 2. China-Foreign economic relations-ASEAN countries-Congresses. 3. Pacific Area co-operation- Congresses. 4. Pacific Area- Economic conditions- Congresses. I. Chia, Siow Yue. HF1592.5 C5AB13 1992 sls92-63258 ISBN 981-3016-39-6 Typeset by Letraprint Printed in Singapore by JBW Printers & Binders Pte. Ltd.

Contents

List of Tables List of Figures Foreword

VII

XI

Xlll

1.

Trends in and Prospects for Pacific Economic Development: An Overview Narongchai Akrasanee and Deunden Nikomborirak

2.

The Changing Economic Position of Japan in the Pacific and Its Implications for ASEAN and ASEAN-China Economic Relations Kamal Salih

29

3.

The Changing Economic Position of Japan in the Pacific and Its Implications for China and China-ASEAN Economic Relations Ma Chengsan and Pang Rongqian

45

4.

The Changing Economic Position of the United States and Implications for the Asia-Pacific Region Florian A. Alburo

72

5.

The Changing Economic Position of the United States and Its Influence upon the Economic Relations between China and the ASEAN Countries U0ng Huaining

83

6.

Recent Developments in and Prospects for Pacific Co-operation and Possibilities therein for ASEAN-China Economic Relations Djisman S. Simand:funtak

109

7.

China Joins the Multilateral Trade System: Impact on Trade and Economic Co-operation between China and the ASEAN Countries Feng Yushu and Chen Dezhao

126

Contents

VI

8.

Pacific Co-operation and Regionalization of the World Economy Cheng Bijan and Han Zhenshe

150

9.

Industrial Restructuring in the East Asian Newly Industrializing Economies and the Implications for ASEAN and ASEAN-China Economic Relations Tan Kong lam

170

Role of Hong Kong in China-ASEAN Economic Relations Wei Yanshen and Yu Kexing

196

10.

List of Tables

1.1

1.2 1.3 1.4 1.5

2.1 2.2

2.3 2.4

2.5

3.1

3.2 3.3 3.4 3.5 3.6

3.7 3.8 3.9 3.10 3.11 3.12 3.13 3.14 3.15 3.16

Real GDP Growth Rates of Asia-Pacific Economies, 1987-90 Population, GDP and Per Capita GDP of Asia-Pacific Economies Degree of Trade Interdependence among Sub-Regions of the Asia-Pacific Degree of Trade Interdependence among Asia-Pacific Countries, 1981-87 Exchange Rates against the U.S. Dollar

4

13 20

24 26

Share of Manufacturing in GDP, 1965-85 United States and Japan - Current Account and Government Budget Balances, 1970-86 Trend in Japanese Outward Direct Investment by Region, 1985-88 Japanese Outward Direct Investment in Relation to the Current Account Balance, 1983-88 Japanese Outward Direct Investment in Asia by Industrial Sectors, 1985-87

31

GDP of Pacific Economies Percentage Share of Pacific Economies in World Trade Export of Manufactured Products of Pacific Economies Growth Rates in GDP and Demand Components in Japan Japanese Direct Investment in Asia Market Orientation of Japanese Subsidiaries in Manufacturing in Asia Sino:J a pan Trade Bilateral Balances in Sino-Japan Trade Sources of China's Foreign Direct Investment, 1979-87 Sources of Foreign Funds Employed by China Sources of Technology Imports by China, 1979-87 Japan's Imports from China, 1985-88 Commodity Composition of Japan's Imports from China Percentage Sectoral Distribution of Japanese Direct Investment, end-March 1987 Trade between China and the ASEAN Countries Direct Investment of ASEAN Countries in China

46

32 34 35 36

47 47

49 51

52 53 54 55 56 57 58 59 60

62 63

List of Tables

Vlll

3.17 3.18 3.19 3.20

4.1 4.2 4.3 4.44.5 4.6

5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 5.10 5.11 5.12 5.13 5.14 5.15 5.16 5.17 5.18 5.19

Commodity Composition of Trade between China and the ASEAN Countries China's Manufactured Exports to ASEAN Countries Balance of Trade with Japan Structures of Manufacturing Industry in ASEAN and China, 1985 Current Account and Savings-Investment Balances in the United States and Japan, 1975-87 U.S. Trade with Developing Countries, by Region Share of 11 LDCs in World Export of Manufactures Capital Account in U.S. Balance of Payments U.S. Trade Balances Net Flow of U.S. Resources to Developing Countries and Multilateral Institutions A Comparison of Overall National Strength of Selected Countries The Declining Share of the United States in the World Economy Foreign Trade of the United States in the 1980s The Changed Creditor/Debtor Position of the United States Fiscal Deficit and Debt of the Federal Government of the United States in the 1980s Savings and Investment of the United States A Comparison of Savings-Investment Gap of the United States, Japan and West Germany Output, Export and Import of Automobiles of the United States A Comparison of Productivity of Manufacturing Industry between Japan and the United States Direct Foreign Investment of the United States The Growth of U.S. Private Direct Foreign Investment Abroad Direct Foreign Investment in China by Region and Country, 1978-87 Cumulative Direct Investment in ASEAN Countries by the United States and Japan, 1987 Direct Investment of the United States and Japan in ASEAN, 1984-86 Sectoral Distribution of U.S. Direct Investment China's Trade with the United States Percentage Shares of the United States and Japan in ASEAN Exports Trade Balance between ASEAN and the United States and Japan The Exchange Rate between the U.S. Dollar and Selected Currencies

65 67

68 70

74 76 77 78 78 79

84 85 86 86 87 87 88

88 89 90 91 91 92 93 94 95 96 97

98

List of Tables

5.20 5.21 5.22 5.23 5.24 5.25 5.26

Central Bank Discount Rates in Major Capitalist Countries, 1950, 1960, 1970 A Comparison of Interest Rates between the United States and Japan Trade between China and the ASEAN Countries Changing Commodity Composition of Chinas Exports The Commodity Composition of ASEAN Export, 1986 Growth in Manufactured Exports of China and ASEAN Chinas Co-operation in Contracts and Services with Foreign Countries during 1976-87

ix

101 101 103 103 104 104 106

Per Capita GDP of Selected Asian Countries, 1987 United States Restrictions on Textile and Clothing Imports from China and the ASEAN Countries

136

8.1 8.2

Trade Matrix of Selected Pacific Countries and Areas, 1987 Trade of Selected Pacific Countries and Areas with EEC, 1987

152 153

9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9 9.10

GNP Per Capita of East Asian NIEs Annual Growth Rates of Manufacturing Export Export Structure of NIEs Japan's Top 10 Exports OECD Imports of Manufactured Products Market Share Direction of Exports, 1987 Bilateral Trade Balance, 1987 Korean Won, NT Dollar against U.S. Dollar Index Current Account Balances of NIEs Share of Value Added Accruing to Labour in the Manufacturing Sector Annual Real Wage Increase in the Manufacturing Sector Unit Labour Cost Index in Manufacturing Sector Direct Investment to and from Taiwan Destination of Taiwan's Outward Investment Based on Approval of New and Expansion Projects Overseas Investment from Korea Net Direct Investment Inflow Approved Foreign Investment in Thailand Approved Foreign Investment in Malaysia Application of Foreign Investment in Malaysia Direct Investment in Indonesia Realized Foreign Investment in Manufacturing Sector in Indonesia, 1967-85 Foreign Manufacturing Investment in Indonesia, by Country and Sector, 1967-85 Direct Investment in the Philippines Approved Taiwanese Investment in the Philippines

170 171 172 173 174 174 176 177 178

7.1 7.2

9.11 9.12 9.13 9.14 9.15 9.16 9.17 9.18 9.19 9.20 9.21 9.22 9.23 9.24

145

179 180 180 182 183 184 185 185 186 187 188 188 188 189 189

List of Tables

X

9.25 9.26 9.27

10.1 10.2 10.3 10.4

Direct Foreign Investment in China Actual Direct Foreign Investment in China by Source Country/Region Actual Direct Foreign Investment in China by Destination Provinces

189

Growth of Hong Kong Trade and Trade Balance, 1948-89 Hong Kong's Trade with Mainland China, 1978-88 Investment by Foreign Enterprises in China, 1979-88 Hong Kong Banks' Credits and Loans to China

199 202 209 210

191 191

List of Figures

1.1 1.2A 1.2B 1.3 1.4 2.1

9.1

Real GDP Growth Rates of Asia-Pacific Region and EC (1980-87 Average) Changes in Shares of World GDP of Asia-Pacific Region Changes in Shares of World Exports of Asia-Pacific Region Export Dependence of Asia-Pacific Countries Trade Flows of the Asia-Pacific

3 10 11 15 17

Production of Japan and the United States Induced by Industries of East and Southeast Asian Countries

39

Trade Restrictions of Industrialized Countries

175

Foreword

ASEAN-China economic relations is an area of considerable significance. Indeed, if anything, this significance has been increasing in recent years. Yet this relationship remains poorly understood, particularly in terms of the overall issues involved and their implications for individual countries and the region as a whole. It was partly to correct this state of affairs and to put ASEAN-China economic relations in their proper perspective that a group of ASEAN and Chinese scholars came together in April 1985 to plan a three-year research project on ''ASEAN-China Economic Relations". Three themes were identified: Phase I - ASEAN-China Economic Relations: Trends and Patterns; Phase II - Developments in China and ASEAN and Their Implications for ASEAN-China Economic Relations; and Phase III ASEAN-China Economic Relations in the Context of Pacific Economic Development and Co-operation. The Institute of Southeast Asian Studies, Singapore, and the Institute of World Economics and Politics, Beijing, are the co-ordinating institutions for ASEAN and China, respectively. Dr Chia Siow Yue is the Co-ordinator of the ASEAN aspects of the project and Mr Cheng Bifan, the Chinese aspects. Both Dr Chi a Siow Yue and Mr Cheng Bifan are also the joint editors of the publications emanating from the project, with Dr Chia being responsible for the English edition and Mr Cheng Bifan, the Chinese edition. The papers of the first phase of the project were presented at a workshop in Singapore in June 1986, and published under the title ASEAN-China Economic Relations: Trends and Patterns in October 1987. The research findings of the second phase were presented at a workshop in Beijing in October 1987 and published under the title ASEAN-China Economic Relations: Developments in ASEAN and China. The papers of the third phase were presented at a workshop in Singapore in August 1989 and are published here under the title ASEAN-China Economic Relations in the Context of Pacific Economic Development and Co-operation. It is hoped that this third volume will also be useful to scholars and policy-makers concerned with ASEAN-China economic relations. The project on ''ASEAN-China Economic Relations" has benefited immensely from the contributions of all participants, and from the financial support provided by the Ford Foundation and the International Development Research Centre, Canada. The Institutes would like to record their appreciation of all this assistance and support. Responsibility for facts and opinions expressed in these volumes rests exclusively with the individual contributors, and their interpretations do not necessarily reflect the views or policy of the Institutes or their supporters, or the editors.

Pu Shan Institute of World Economics and Politics, Beijing

Kernial S. Sandhu Institute of Southeast Asian Studies Singapore

1

Trends in and Prospects for Pacific Economic Development: An Overview Narongchai Akrasanee and Deunden Nikomborirak

I. Introduction

Looking into the future, we see a rising relative importance of the Pacific region resulting from its persistent high economic growth and an increased mutual economic interdependence among the countries of the region. The former is obviously good news, whereas the latter leaves room for increased economic co-operation. With respect to the future of the Asia-Pacific region, China's economic development will probably have an enormous influence on economic activities throughout the region. The ability to mutually supplement each other's development will be vital to further facilitate the potentially high economic growth in the Asia-Pacific region. This paper offers an overview of the past, present and prospective economic dynamism of the region by examining key elements such as trade, investment, economic interdependence and the economic growth rate. The analysis covers Japan, the United States, Canada, China, the Asian Newly Industrialized Economies (Asian NIEs), ASEAN, Australia and New Zealand.

II. Rising Status of the Asia-Pacific Region The Pacific region has proved to be the most dynamic economic region in recent years although the process of industrialization had actually spread through the region since the 50s and 60s. The process began with Japan, followed by the Asian Newly Industrialized Economies (Asian NIEs) of South Korea, Taiwan, Hong Kong and Singapore, and most recently, the ASEAN countries. The region has emerged as a new growth centre of the world. The steady growth of the Pacific economy has become a major factor contributing to the development of world trade and economic growth. Pacific economic growth has been assisted mainly by three factors: First, most countries in the region have adopted a strategy of export-led growth. Many developing countries, especially the Asian NIEs, adopted this

2

Narongchai Akrasanee and Deunden Nikomborirak

strategy during the stage of their take off towards industrialization. The ASEAN sub-region also very recently shifted from a domestic-market-oriented and import substitution strategy to an export-oriented strategy in recognition of their limited market sizes as well as their need to diversify exports as prices of primary commodities declined. Parallel to their switch in trade strategy, many developing countries are also placing a greater emphasis on the market mechanism. There have been waves of deregulation and privatization in many economic sectors which have stimulated competition and led to increased economic efficiency. Second, the economic growth in the Pacific has been facilitated by the ability of member countries to complement one another in the development process. The "flying-geese" pattern of development of the Asia-Pacific region is block-wise complementary. The United States has been the major absorber of manufacturedgoods exports of the region, and at the same time, the main supplier of capital and technology for Japan and other Western Pacific countries. At present, Japan is gradually taking over this latter role and is investing in and supplying capital goods to the region's industrializing countries such as the Asian NIEs and ASEAN. In recent years, this role is also being increasingly shared by the Asian NIEs. Third, the improvement in infrastructures such as transportation, telecommunications, banking and other financial facilities have made the Pacific region attractive to investors. The export-oriented growth policies have led to the development of trade and financial networks generating more active and diversified international enterprises which help strengthen the productive capacities of the investment-recipient countries.

1. Growth Performance The Pacific economy exhibited a remarkable growth in 1987, the recovery of growth having begun in the second half of 1986. The expansion in the North American economy was boosted by a persistent increase in personal consumption expenditures in the United States. Consumer spending grew along with increased employment, stable prices and gains in financial assets: despite the stock market crash in October 1987, personal consumption was still rising. The average economic growth rate during 1980-87 was 2.5 per cent for the United States, surpassing that of the European countries which stood at 1.8 per cent (see Figure 1.1). The outward-oriented Asian NIEs have the best growth record but their economies are especially sensitive and vulnerable to conditions in the world economy. External shocks such as oil price increases in 1973-74 and 1979-80 and the worldwide recession in the early 80s are reflected in the sharp drop in their growth rates. On the other hand, the Asian NIEs have an excellent record of structural adjustment, allowing them to take advantage of favourable external economic conditions such as the U.S. boom in 1983-84 and the yen appreciation in late 1985.

FIGURE 1.1 Real GDP Growth Rates of Asia-Pacific Region and EC (1980-87 Average)

(%)

8

6

4

2

0

I

liliiiiiili!!l!illlill:i::;lilllilll:!i!V ASIAN NIEs

ASEAN

SOURCE: Official statistics of each country.

JAPAN

u.s.

EC

4

Narongchai Akrasanee and Deunden Nikomborirak

The Asian NIEs have benefited mainly from the so-called "Three Lows", namely lower exchange rates against the yen, lower oil prices, and lower interest rates which together created a favourable condition for the export sector. Although the Korean won and the new Taiwan dollar appreciated in recent years, the yen and the Deutsch mark have appreciated even more. The average economic growth rate for the Asian NlEs during 1980-87 was 7. 7 per cent which is approximately triple the average rate for the developed countries. And in 1987 all four economies experienced double-digit GDP growth rates (see '!able 1.1). The ASEAN-4 (Indonesia, Malaysia, Philippines and Thailand) have had considerably lower rates of economic growth than the Asian NIEs during 1980-87, with an average of 1.9 per cent. The sub-region was hard-hit by a sharp drop in commodity prices in the first half of the decade. However, during recent years their economies underwent an economic transformation similar to that of the Asian NIEs, although less rapid. Manufacturing industries grew faster than the economies as a whole. The agricultural sectors remain the major sectors absorbing labour but contribute much less to GDP. Agriculture employed on average about half of the labour supply in the sub-region but contributed to only 20-25 per cent of GDP.

TABLE 1.1 Real GDP Growth Rates of Asia-Pacific Economies, 1987-90 Real GDP Growth Rates (%)

Indonesia Malaysia Philippines Thailand Singapore A SEAN Average

South Korea Hong Kong Taiwan Asian N!Es Average

U.S.A. Canada Japan China Australia New Zealand

1987

1988

1989

1990

3.2 5.1 6.4 6.3 8.8

4.7 7.9 5.8 11.0 11.0

5.4 8.9 5.8 9.5 7.0

5.1 6.1 5.9 8.5 6.5

5.1

N.A.

N.A.

N.A.

11. 1 13.5 11.9

11.0 7.4 7.1

7.6 6.1 6.5

6.7 5.5 5.9

11.5

N.A.

N.A.

N.A.

2.9 3.8 3.7 9.4 3.3 1.0

3.9 4.5 6.0 11.2 3.0 0.4

2.5 3.2 5.7 9.5 3.5 3.0

1.9 2.6 5.2 10.5 3.3 1.9

NOTE: 1987-88 figures are actual and from official sources; 1989-90 figures are estimates.

Pacific Economic Development: An Overview

5

In the past the ASEAN-+ relied on natural resources to help sustain growth. Their ability to export primary commodities allowed them to pursue an inwardlooking strategy, but recent sluggish commodity markets made these nations resort to exports of manufactures. Economic performance among the Asean countries is varied. Thailand has out-performed all her neighbours. Like the Asian NIEs, the country also benefited from the "Three Low", and showed a high economic growth in 1987, caused mainly by the boom in export industries and rapid investment expansion. Economic performance in the Philippines has been inferior to that of its neighbours. The overvaluation of the Peso and the import-substitution strategy have limited exports and created inefficiency among the protected domestic industries. In addition, government intervention in both wage rates and price levels has detached the economy from the market mechanism. The country, just recovering from economic doldrums since 1983 due to internal political instability, experienced a 5.0 per cent real GDP growth in 1987, as against a 0.8 per cent average growth per annum during the first half of the decade. Similar to the Philippines, Indonesia's economy was highly regulated, as evidenced by the inward-looking strategy adopted. However, recent years have seen waves of deregulation and privatisation in various industries and rapid expansion of foreign capital inflows. Indonesia was hard hit by the sharp fall in oil prices which saw export values halved in 1986 as compared to 1980. Exports of crude petroleum, petroleum and petroleum products represented approximately 80 per cent of total exports. The country is undergoing a major effort to promote export diversification. Since 1980 the Malaysian economy has also recovered from an economic slowdown caused by a slump in primary commodity and oil prices. GDP growth rates remained at less than 2 per cent until 1987 when the rate climbed up to 5.1 per cent. However, the average GDP growth rate during the first half of the decade was maintained at 5.2 per cent by government efforts to boost the economy. Government consumption expenditures made the largest contribution to national economic growth. Since the beginning of the 1980s, Singapore registered real economic growth of a high 8-10 per cent except in 1982 when the world economy was depressed. The high growth was contributed by various factors. Singapore is very well endowed with human and financial resources as well as with an industrial infrastructure. These combined with the legal system and the promotion of foreign investment have contributed to the success of industrialization. Another factor behind the rapid economic expansion was the construction boom facilitated financially by the large savings of Singaporeans. The service sector is also a major growth contributor and represented over 60 per cent of total GDP in 1987. The financial sector, telecommunications and tourism are also rapidly growing industries. Japan's economy recorded a 3. 7 per cent average economic growth rate during 1980-87. The currency realignment since 1985 had an immediate negative effect on the economy, resulting in a drop in the real GDP growth rate to 2.6 per cent in 1986. However, in 1987 the currency appreciation began to have a positive

6

Narongchai Akrasanee and Deunden Nikomborirak

impact on the economy as price stability contributed to an increase in consumer spending. There was an expected shift from foreign to domestic demand. In 1987 the growth rate of domestic demand was over 4 per cent. In 1988 the economy still exhibited a strong growth led by a sharp rise in domestic demand based on personal consumption expenditure, plant and equipment investment and expansionary fiscal measures.

2. Future Prospects

The international environment will have an important effect on how rapidly the Asia-Pacific countries grow. Within the region there is general recognition that external conditions for growth have become less favourable. Despite the lower prices of primary commodities and increased protectionist threats against manufactured exports, especially from the developed countries, Asia- Pacific developing countries have not abandoned outward-looking policies. The Asian NIEs and ASEAN-4 nations continue to place a strong emphasis on exports and foreign investment in the belief that these will lead to an increasingly efficient use of resources and continued economic dynamism. Despite the unfavourable external economic environment this rapid economic growth is expected to continue, being driven by domestic expansion in infrastructure rather than the external sector as the expansion in exports has not generally been matched by that of transportation and telecommunications. Infrastructural capacity is being strained especially in countries with very high economic growth rates such as Hong Kong and Thailand. Government spending has become the main source of income growth and job creation especially in the trade surplus countries of Japan, Taiwan and South Korea. Nations with less strong financial positions, such as Indonesia, the Philippines, Thailand and Malaysia, are looking to the private sector for financial sources. Major infrastructural expansions include Taipei's mass rapid transport system (US$14.8 billion), the expansion of Kai Tak airport and a new airport in Hong Kong (US$7.6 billion), Bangkok's mass rapid transit system (US$1.68 billion), and the Bangkok expressway (US$1.12 billion). 1 As for economic growth in North America, there is a consensus that since 1987 the U.S. economy has been in transition from a domestic consumption-led growth to an export- and investment-led growth. The rate of growth will depend on the rate of contraction of consumption expenditure versus the rate of expansion in investment and export. Slower growth is forecasted for 1989 and 1990. Real GDP growth rate is expected to drop from 3.9 per cent in 1988 to 2.5 per cent and 1.9 per cent in 1989 and 1990 respectively (see Figure 1.1). A restrictive monetary policy which drove short term interest rates up between mid-1988 and the first few months of 1989 is beginning to have an impact on the interest ratesensitive sectors of the economy such as construction and automobile sales. As for Canada, the U.S. economic slowdown contributing to a weakening of Canadian export growth combined with an inflationary pressure from the rapid increase in raw materials prices and wage pressures led to a tight fiscal and

Pacific Economic Development: An Overview

7

monetary policy which will slow real GDP growth from 4.5 per cent in 1988 to 3.1 per cent and 2.6 per cent in 1989 and 1990 respectively. In Japan, the domestic consumption-led economic boom is likely to be further maintained and stimulated by the government's tax reform bill. The growth of consumption expenditure and the large increase in housing investment were stimulated by wealthy households which enjoyed enormous capital gains. The strength of corporate investment results from capacity expansion among manufacturing industries. As the economy grew 5-6 per cent, which is above the predicted medium-term growth rate of approximately 3 per cent, firms found themselves short of productive capacity. However, real GDP growth rate is expected to decline slightly due to uncertainties of the present investment boom and the expected decline of the trade surplus resulting from the yen appreciation. As for ASEAN, most of the economies are likely to continue a healthy economic growth caused by expansion in manufactures export and accelerated foreign and local investments. Indonesia, Malaysia and the Philippines are expected to make a recovery in economic growth. Future growth in Indonesia and the Philippines will be facilitated by the shift towards an export-oriented growth strategy. Deregulation, privatization, and liberalization will reduce inefficiency which has resulted in high-cost industries. The present growth of the Philippines economy is likely to be sustained by political stability and the large inflow of foreign capital. The availability of foreign exchange will support the financial requirements of economic expansion and further investments. Real GDP growth in 1989 and 1990 is forecasted to be 5.8 and 5.9 per cent respectively. In 1988 the Malaysian economy unexpectedly improved sharply. The 7.9 per cent real GDP growth in 1988 was contributed by increasing export demand and an improvement in commodity prices. In addition, domestic demand recovered after several years of stagnation. The surge in investment was a result of private optimism and liberalization measures taken toward foreign investment. Thus substantial foreign and domestic investment should improve productive capacity in the next two to three years. Given a reasonable external environment, the prospects for the Malaysian economy is likely to remain bright for several reasons. The surge in both domestic and foreign investment in 1988 will lead to higher output. Exports are expected to continue to grow at a double-digit level because of the high export propensity of foreign direct investment. Most importantly, the lowering of the corporate tax rate and the liberalization of ownership regulation are expected to continue to boost investment. The growth rate of real GDP is predicted to be 8.9 per cent and 6.1 per cent in 1989 and 1990 respectively. The Thai economy is predicted to slow down after an exceptionally good year in 1988. Foreign direct investment is expected to remain buoyant at least until 1990. However, the country will face increasing protectionism from developed trading partners, especially the United States. A tighter monetary policy to cool the economy is also anticipated. The Asian NIEs which had the best growth record in this decade are forecast to experience a slower growth rate in 1989 and 1990, the main reasons being

8

Narongchai Akrasanee and Deunden Nikomborirak

the appreciation of their currencies, increasing labour cost and rising labourmanagement disputes. The impact will be more severe on Taiwan and South Korea. Both countries are forced to stimulate domestic demand, following the path of Japan. Real GDP growth rate for South Korea is forecast to drop from 11 per cent in 1988 to 7.6 and 6. 7 per cent in 1988 and 1989 respectively. As for Taiwan, the forecast is 6.5 and 5.9 per cent in 1989 and 1990 respectively. Economic growth in Hong Kong and Singapore are also forecast to decline despite the rapid expansion in entrepot trade. Both countries are predicted to face further wage increases as a result of tight labour markets. In addition, Singapore's graduation in 1989 from the U.S. GSP scheme is a forerunner of a gradual graduation of the country from special privileges granted to developing countries. The real GDP growth rate of Singapore is forecast at 7.0 and 6.5 per cent for 1989 and 1990 respectively. Hong Kong's growth rates are estimated at a slightly lower level, 6.1 and 5.5 per cent respectively. In 1988 China experienced a very high inflation rate resulting from inadequate macroeconomic control of the rapidly expanded economy, and this is likely to result in a forced slowing down of aggregate demand. Overall investment in fixed assets will be cut by 10 per cent in 1989-90 compared to 1988. However, the country will be able to sustain the high economic growth rate as the new investments since 1984 led to increased production capacity. A continuous trend of improved labour productivity is also expected. In conclusion, Japan, South Korea and Taiwan are moving in the same direction to become more reliant on domestic consumption-led growth in addition to the traditional export-led growth as their currencies are pressured to continuously appreciate due to persistent large trade surplus. Growth in these countries will be boosted by government measures, such as tax-reforms and investment incentives, to increase domestic expenditures. This implies larger export markets for China and other Asian trade partners. Hong Kong and Singapore, the other two Asian NIEs, are forecast to be able to sustain slightly lower but still healthy growth rates. While their exports may face a decline in competitiveness due to rising labour wages and increased international protectionism, entrepot trade is expected to continue to boom. The ASEAN sub-region is predicted to expand at only a slightly lower rate than the Asian NIEs, with the exception of Thailand whose real GDP growth rate will surpass all countries in the Pacific region except China. Low labour costs, weak national currencies and improving productivity are major contributing factors to bright prospects for their exporting industries. Heavy foreign and domestic investment will also contribute to a sustained growth at least until 1992. The opening economy of China is expected to have a very significant impact on the Asia-Pacific economies. The large expansion of trade will result in two effects: China will offer a giant market for the region's exports but at the same time, China's exports will be competing with exports of light industrial products and agricultural goods from the developing economies in the region, such as from ASEAN. However, in the short run the Chinese economy will continue to grow due to strong domestic demand, which may imply a sustained growth in imports.

Pacific Economic Development: An Overview

9

3. GDP and Export Shares As a result of a continuous healthy economic growth, the Asia- Pacific region captured a larger share of the world's nominal GDP, rising from 41.2 per cent in 1980 to 52.2 per cent in 1985. The United States contributed a large part of this increase. The above-average GDP growth rate combined with a large economic base significantly raised the U.S. share of world GDP from 23.3 per cent to 31.9 per cent during 1980-85 (see Figure 1.2A). Japan's G DP share expectedly increased in reflection of her remarkable growth rate (at least for the developed economies), which was export-led. The country's 3.7 per cent annual economic growth rate during 1980-87 boosted its share of world GDP from 9.2 per cent in 1980 to 10.7 per cent in 1985. Smaller economies such as ASEAN, the Asian NIEs and Canada also experienced an increase in their shares as shown in Figure 1.2A. As for exports, the region's export share increased from 29 per cent in 1980 to 36.7 per cent of world exports in 1987 (see Figure L2B). As a result of the export-oriented strategy adopted by most nations in the region, the share expectedly increased. For individual countries, the United States was the only country whose share dipped from 11.5 per cent in 1980 to 10.4 per cent in 1987. A combination of the strong dollar and increased competition, especially in manufacturing products, from the East Asian countries limited the country's economic growth. During the same period Japan's export share rose from 6.8 to 9.6 per cent due to the double digit growth of the export sector, supported by undervaluation of the yen during the first half of the decade. Only after the realignment of the dollar and the yen in late 1986 did the growth rate drop to a single digit. In addition, Japan, acting as a growth pole for the region, has been a major supplier of capital goods for the developing industries in the Asian NIEs and ASEAN. The growth of the country's export sector resulted directly from the surge in import demand of capital goods from the Asian NIEs and ASEAN to assist their industrialization process. The small export share of ASEAN has declined very slightly. The sub-region was hard hit by the slump in commodity and oil prices during the first half of the decade. The economies started to recover only in the second half of 1986, due to growth in manufactured exports which grew at approximately 25 per cent in 1986, in consequence of the sharp rise in demand from the United States and Japan. Export performance varied widely among the ASEAN countries. The value of exports from Thailand nearly doubled during 1980-87, from US$6.5 billion to US$11.2 billion. Malaysia and Singapore experienced approximately a 50 per cent increase in value of exports during the same period. In contrast, Indonesia's exports were halved from US$21.9 billion to US$10.8 billion due to the sharp drop in oil prices. Internal political instability led to a stagnation in the value of Philippine exports at US$5.6 billion between 1980 and 1987. The externally oriented Asian NIEs had the best growth record and their

FIGURE 1.2A Changes in Shares of World GDP of Asia-Pacific Region

%

60 52.2%

50 Asian NIEs

41.2%

•

40

30

.

ASEAN

Japan

u.s. Canada Oceania

20

China 10

0

I

lt',tt(t'•