ASEAN-South Asia Economic Relations 9789814377034

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The Indian Council for Research on International Economic Relations (I CRIER), registered in August 1981, is a non-profit making, non-political, research organization concerned with furthering international co-operation and accelerating national economic growth. ICRIER aims to study the interaction between the international environment and national development to achieve a deeper awareness of its impact on the country's economic and social progress; to promote interaction between researchers and decision-makers in government and industry; and to facilitate intellectual exchange in regard to international relations. To this end, it organizes and undertakes research, convenes workshops, seminars and conferences and brings together available knowledge on international economic 1ssues. The Marg'a Institute (Sri Lanka Centre for Development Studies) was established in April 1972. It devotes itself to the study ahd analysis of development problems in Sri Lanka and to improving the knowledge and understanding of development issues among the public. The Institute of Southeast Asian Studies was established as an autonomous organization in May 1968. It is a regional research centre for scholars and other specialists concerned with modern Southeast Asia, particularly the multi-faceted 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 and 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 Coordinator. A Regional Advisory Committee, consisting of a senior economist from each of the ASEAN countries, guides the work of the Unit.

ASEAN-South Asia Economic Relations

Contributors

Mohamed Ariff Dean Faculty of Economics and Administration University of Malaya Malaysia

S.A .L. Reza Associate Professor Department of Economics University of Dhaka Bangladesh

Mukul G. Asher Senior Lecturer Department of Economics and Statistics National University of Singapore

A.S. Rye Director Asian Center University of the Philippines

Juanjai Ajanant Lecturer Faculty of Economics Chulalongkorn University Thailand

Haliz G .A . Siddiqi Associate Professor Institute of Business Administration University of Dhaka Bangladesh

K.P. Kalirajan Lecturer D epartment of Economics and Statistics National University of Singapore

S. Sureshwaran Research Officer Marga Institute Sri Lanka

R . S. Pradhan Lecturer Faculty of Management Kirtipur Campus Tribhuvan University Nepal

C. Wadhva Professor of Economics Indian Institute of Management Ahmedabad India

ASEAN-South Asia Economic Relations

edited by

Charan D. Wadhva and

M ukul G. Ash er

Indian Council for Research on International Economic Relations and

The Marga Institute in collaboration with

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 consent of the Institute of Southeast Asian Studies.

© 1985 Institute of Southeast Asian Studies ISBN 9971-902-98-2 The responsibility for facts and opinions expressed in this publication rests exclusively with the contributors and their interpretations do not necessarily reflect the views or the policy of the Institute or its supporters.

Printed and Bo und by KI N KEONG PRI NTING CO. PTE . LTD . - Republic of Singapo re.

Contents

Page Foreword

vii

Exchange Rates of ASEAN and South Asian Countries An Overview Mukul G. Asher and Charan Wadhva PART ONE:

ix 1

ASEAN COUNTRY STUDIES

27

Economic Relations between Indonesia and South Asia K. P. Ka1i raj an

29

Malaysia-South Asia Economic Relations: Mohamed Ariff

66

A Preliminary Study

Philippine-South Asia Economic Relations Ajit Singh Rye

115

Economic Relations between Singapore and South Asia Mukul G. Asher

138

Economic Relations between Thailand and South Asia Juanjai Ajanant

185

PART TWO:

223

SOUTH ASIA COUNTRY STUDIES

Bangladesh-ASEAN Trade Relations Sadrel Reza

225

Bangladesh-ASEAN Investment Relations Hafiz G.A. Siddiqi

253

India-ASEAN Economic Relations Charan D. Wadhva

269

Nepal-ASEAN Economic Relations Charan D. Wadhva and Radhe S. Pradhan

321

Sri Lanka-ASEAN Economic Relations Sureshwar an

341 V

Page 375

Postscript Appendix:

SITC Classificat ion at One-, Two-, and Three-digit Levels

vi

377

Foreword

The Institute of Southeast Asian Studies (ISEAS) is an autonomous research centre for scholars and other specialists concerned with Reflecting this interest, modern Southeast Asia, including ASEAN. there are several region-wide programmes in economics, pal itics, and social change based at the Institute. Of particular importance is the work of the ASEAN Economic Research Unit (AERU). Established in 1979 in response to the need to deepen understanding of economic change and political developments in ASEAN, AERU is guided by an Advisory Committee consisting of senior economists from the ASEAN countries. It has progressed steadily and now has more than twenty-five projects under way or at various stages of completion, with several more in the pipeline. Together, these projects encompass all the priority areas for research recommended by the group of experts invited to the inauguration of the Unit: namely, Investment, Industry and Trade; Finance and Monetary Aspects; Food, Energy and Commodities; Transportation/Shipping; and Political Factors in ASEAN Economic Co-operation. The largest number of AERU projects come under the broad heading of "Investment, Industry and Trade". Within this group, those relating to ASEAN's economic relations with its main trading partners are the most prominent, and the project on ASEAN-South Asia Economic Relations falls into this category. It consists of a review of economic relations between the individual ASEAN countries and South Asi a on the one hand, and those between the countries of South Asia and ASEAN on the other. The project was a joint undertaking between the Indian Council for Research on International Economic Relations, the Marga Institute, Colombo, and the Institute of Southeast Asian Studies, and the co-ordinators of the project were Or Charan Wadhva, Professor of Economics and Marketing, Indian Institute of Management, and Or Mukul Asher of the Department of Economics, National University of Singapore. This is perhaps the first study of its kind on South Asia and ASEAN. It is therefore hoped that this pioneering effort will stimulate further research on the comple2-St.l~-1'-l's fa'Jour. Financial institutions from only India and Pakistan have operations in the ASEAN countries. There are no ASEAN financial institutions operating in South Asia. Given Singapore's importance as a financial centre, the presence of financial institutions from India and Pakistan is not surprising. The Indian institutions mainly finance third-country trade, but have also financed many Indian joint ventures in the region. They have also used the Asian dollar market to raise funds for Indian and other firms, and have participated in

20

syndicated loans. They have also been attempting to broaden the deposit base and loan portfolio. While impossible to demonstrate or quantify, it appears that there is a close connection between the operations of money-lenders in ASEAN, and foreign exchange transactions in the grey markets in South Asia. Many of the money-lenders, especially in Singapore and Malaysia, are of South Asian origin. The precise contribution of financial institutions, both formal and informal, to ASEAN's growth, however, remains to be investigated. Since the Indian financial institutions have financed many of the Indian joint ventures, problems faced by these ventures in Indonesia and in Malaysia have spilled over to these institutions as well. How these problems are resolved would significantly influence the future role of the Indian financial institutions in ASEAN. The discussion in this section suggests that the economic relations between ASEAN and South Asia are multifaceted. They are also not unimportant, especially when non-trade relations are taken into account. But what are the prospects for these relations? It is this question to which we turn next.

V.

PROBLEMS AND PROSPECTS

If the present levels of economic relations between the two regions

are to be expanded, attention would have to be devoted to several areas.

1.

Differences in Business Cultures and Environment: There are many important differences between the South Asian and ASEAN regions concerning business culture and environment. ASEAN has generally adopted an outward-orientation development strategy. This strategy has meant a broad acceptance of the present division of labour among the countries; concentration of efforts towards ways and means of benefiting from this division of labour; and seeking to increase international competitiveness. South Asia's strategy, at least until very recently, has been much more of the import-substitution type. As a consequence, the ASEAN market is much more of a buyer's market than that of South Asia. Moreover, industries in South Asia, once established, can look forward to government protection to a much greater extent than is the case in ASEAN. Multinational firms also play a proportionately larger role in ASEAN than they do in South Asia. While in both regions, the role of government is extensive, it would appear that the approach of the ASEAN governments has been somewhat more technocratic and result-oriented than has been the case in South Asia. The recent privatization drives in Malaysia and Thailand seem to have fewer counterparts in South Asia. Given these differences, it would be surprising if each side did not have problems operating in the other region. Since it is South Asia which has a substantial current account deficit with ASEAN, it is the South Asian countries which would need to make the greater effort to understand and adapt to the business environment of ASEAN. While there have been some signs that this is being done, the success of the South Asian countries is far 21

from assured in this respect. South Asia may need to rely less on their State organizations and more on the private sector. The State, however, can play an important role in ensuring quality and creating awareness of the need for an export culture. The State in South Asia may also need to become more technocratic and result-oriented. It would appear that ASEAN firms also need to make greater attempts to adapt to the South Asian domestic environment, especially if joint-ventures are contemplated. 2.

Problems of infrastructure: The above problems of adjustment are made somewhat more difficult by inadequate, and relatively expensive shipping and other infrastructural services between the two regions. This is even more relevant when perishable commodities, such as fruits, vegetables, and other such items, are involved. The efficiency of infrastructure within many South Asian countries also needs to be improved.

3.

Political and Psychological Factors: While a paper concerning these factors is not- included in this volume, given their importance, a brief mention of these factors is necessary here.14 ASEAN, since its inception, has evolved into a politically cohesive organization. In recent years, political differences have appeared between ASEAN and India on the issue of Kampuchea. The other South Asian states, such as Pakistan, Bangladesh, and Sri Lanka,15 have generally leaned towards the ASEAN position on this issue. These political differences, combined with ASEAN's psychological orientation towards the West and Japan (for example, Malaysia's "Look-east Policy") seem to have affected to a certain extent economic relations between ASEAN and South Asia, especially India.l6 With the setting up of the South Asian regional grouping in August 1983, it is hoped that such bilateral differences will not unduly affect the economic relations between the two regions. Political differences among the South Asian countries themselves also hamper economic relations. In both intra-South Asia trade and that between ASEAN and South Asia, political will would be necessary to expand economic relations, the benefits of which are generally conceded. Much would also depend on how political relations bet1~een the United States, China, Japan, India, the rest of South Asia, and ASEAN develop, as both the sub-regions are subject to great power rivalry.

4.

Financing Facilities: Many exporters in South Asia, especially India, have long complained of inadequate specialized export-financing which has made their exports, especially capital goods exports, less competitive. Recently, India has set up an Export- Import (EX IM) bank with an authorized capital of US$225 million, and a paid-up capital of US$84.4 million. The EXIM bank is also authorized to raise loans in international money markets)? The existence of such an institution is likely to mitigate the export-financing problem somewhat.

The above discussion, along with the current economic recession, would suggest that no sharp increase in the economic relations between the two regions is likely to take place in the near future. There are, however, several steps, in addition to those mentioned earlier, which may be taken to improve these relations.

22

Some Suggestions for Improving ASEAN-South Asia Relations 1.

It appears that in trade relations between the two regions, almost exclusive attention is being paid to the export (or re-export of) finished or intermediate goods. Such a preoccupation leaves at least two areas relatively unexplored. The first is the possibility of a division of labour between the two regions based on the various stages of production. As an example, Singapore which aspires to be a publishing centre, may undertake to have certain skilled, labour-intensive, earlier stages of production, such as editing, done in South Asian countries such as Sri Lanka or India. Such a division of labour would be mutually beneficial, as high value-added stages, such as marketing, could still be done in Singapore, and at the same time the South Asian countries would better utilize their labour resources. Similar situations may exist in other areas, such as in standardized goods and in computer software. The second area is the relative neglect of trade in services, such as in hotels, restaurants, consultancy, entertainment, and so forth.

2.

There may also be potential for the exchange of professional manpower between the two regions. Thus, a multinational firm operating in one or both regions may utilize the services of professional manpower from the other region. This may prove to be more cost-effective than importation from the West. Furthermore, as the ASEAN countries, besides Singapore, implement ambitious rural development plans, and as South Asian countries try to develop energy plans, an exchange of experts between the two regions may prove cost-effective.

3.

There appears to be areas in the two regions where trade and other links are negligible. For example, there are few, if any, economic links between Sabah and Sarawak and South Asia. The economic relationships between the Philippines and South Asia, especia1ly Sri Lanka and Pakistan, are also negligible. Therefore, some attention needs to be paid to these areas.

4.

There also appears to be some scope for unorthodox ways of engaging in trade between the two regions. These include barter trade, counter-purchase policy and its variations, nonconvertible currency trade on a multilateral basis, and other such schemes. These schemes can well supplement the conventional trade in hard currencies. Malaysia is already reported to be discussing barter trade with India.l8 These unorthodox schemes may also prove attractive, for different reasons, to Indonesia and the Philippines. Both these countries need to curb their hard currency imports. Given the large balance of payments deficits of South Asian countries, these schemes may also prove beneficial to them.

5.

The ASEAN and South Asian countries may also devise a joint strategy to increase the procurement shares of United Nations contracts and those of multilateral development banks going to the developing countries.

6.

There may also be scope for sharing ways and means of increasing the productivity of primary products, such as rubber, copra, tea, cocoa, etc., and to devise joint mark et i ng strategies for these products.

23

7.

It appears that there is an absence of firms specializing in finding joint-venture partners in the other region. This is especially important, given the different business environments in the two regions, and in view of the general difficulty in finding suitable joint-venture partners. Perhaps such a firm could be set up as a joint venture between the two regions. As the ASEAN region moves to higher levels of technology, South Asia may provide a base for its labour-intensive operations.

8.

There has been a recent tendency of diplomatic missions of some countries to devote a substantial proportion of their energies to commercial and market intelligence efforts. However, this tendency does not seem to have been prominent in the dip 1omat i c missions of some of the countries of the two regions. These countries need to attach much greater importance to commercial and economic diplomacy than has been the case so far.

9.

Mention has already been made of a need infrastructural bottle-necks in the two regions.

to

overcome

Suggestions For Further Research The papers on ASEAN-South Asia relations in this volume are fairly aggregative and are based predominantly on secondary sources. Thus, there are many areas where further research efforts are likely to be productive, both from the policy-making and the academic points of view. A tentative list of such areas is given below. 1.

An analysis of South Asian joint ventures in manufacturing in ASEAN with a view to ascertaining their contributions to capital exporting and importing countries; and investigating their characteristics in contrast to those of investments from other countries would be useful. A similar analysis of ASEAN joint ventures in South Asia is also needed.

2.

A similar analysis of non-manufacturing investments by South Asian countries and by ASEAN in each other's region may throw some light on the possibilities of enlarging economic relations through such investments. In this connection, the role of formal and informal financial institutions should also be investigated.

3.

A detailed analysis of trade prospects for particular products or product categories, such as fruits and vegetables, between the two regions is needed to narrow the focus of efforts at increasing trade between the two regions.

4.

An investigation of the possibilities and desirability of unorthodox ways of trade, such as barter trade, between the two regions needs to be undertaken.

5.

A study on political relations between the two regions, with particular emphasis on future power alignments would also be useful. In this context, an examination of bilateral and multilateral relationships between China, the United States, Japan, the USSR, and the countries of South Asia and ASEAN would be particularly relevant.

24

6.

The differing roles of government in the two regions and their implications also require a searching examination.

7.

An investigation of the ways and means of improving infrastructure for expanding economic relations between the two regions is also likely to be useful.

That expansion of economic relations between ASEAN and South Asia is likely to be mutually beneficial is generally conceded. While there are impediments to the expansion of these relations, it is our hope that sustained efforts will be made by countries of both regions to expand these relations, thereby providing impetus to South-South economic co-operation.

NOTES Thus, real GNP growth of all industrial countries never declined below 3.4 per cent between 1976 and 1979, but was 1.3 per cent in 1980, 1.2 in 1981, -0.3 in 1982, and is projected at 1.3 per cent in 1983. See International Monetary Fund, World Economic Outlook, 1983, Appendix B, Table 1, p. 170. 2

Thus, while during 1963-72, the volume of world trade grew at an average rate of 8.5 per cent, the corresponding growth was 2.0 per cent in 1980, 0.5 per cent in 1981, -2.5 per cent in 1982, and is projected to grow at 1.0 per cent in 1983. See ibid., Appendix B, Table 8, p. 176.

3

In 1981, the external outstanding and disbursed public debt to GNP ratios were: Brazil, 16.0 per cent; South Korea, 32.1 per cent; Mexico, 18.5 per cent; and the Philippines, 19.3 per cent. See World Bank, World Development Report, 1983, Table 16, pp. 178-79. If private foreign debt were to be included, the ratio in countries such as Brazil would be substantially higher.

4

For an excellent general survey of the Third War ld and which also stresses the need to increase real incomes, especially of the absolute poor, and to urgently pursue both domestic reform and reform of the present international economic order, see Paul Harrison, Inside the Third World, 2nd ed. (Penguin Books, 1981).

5

As India's GDP is for 1980 and not 1981, the difference is somewhat overstated.

6

For a forceful defence of barter trade, especially in its multilateral form, see Andreas Goseco, "Barter Need Not Be Primitive", Far Eastern Economic Review, 5 May 1983, pp. 146-48.

7

Sanjay Lall, "The Rise of Multinationals From the Quarterly 5, no. 3 (July 1983): 619.

8

Ibid., p. 620. Between 1973 and 1981, total approved foreign equity investment in India was about US$60 million. In 1982, however, total foreign equity investment approved was US$65 million; India News 8, no. 3 ( 1983): 3. In contrast, actual foreign investment in manufacturing alone, in terms of gross fixed assets, totalled S$9.4 billion as at June 1982 in Singapore; Economic Survey of Singapore, 1982, p. 24.

9

Lall, op. cit., p. 619.

25

Third World",

Third World

10

The liberalization measures introduced in India in recent years have been favourably received in the United States. See, U.S. Department of Commerce, "A Changing India presents New Opportunities", Business America, 7 February 1983, pp. 2-13.

11

These indices are given in K. Kojima, "The Pattern of International Trade Among Advanced Countries", Hitotsubashi Journal of Economics 5, no. 1 (June 1964). See also, Peter Drysdale and Ross Garnaut, "Trade Intensities and the Analysis of Bilateral Trade Flows in a Many-Country World: A Survey", Hitotsubashi Journal of Economics 22, no. 2 (February 1982): 62-84.

12

H.G. Grubel and P.J. Lloyd, Intra-Industry Trade: The Theory and Measurement of International Trade in Differentiated Products (London: The Macmi llan Press, 1975), p. 21. See also, David Greenaway and Chris MHner, "Trade Imbalance Effects in the Measurement of Intra-Industry Trade", Weltwristschaftliches Archiv, vol. 117 (1981), pp. 756-62.

13

Charan Wadhva, "Note on the Revised Index of Complementarity Considering Trade Values", mimeographed (March 1982). The earlier version of this note was presented for discussion at a Workshop on UNCTAD (Asian) Studies at Marga Institute, Colombo, 14-17 December 1981. This index may be computed either at the overall level of balance of trade or sectoral level of trade (industry-wise) for any pair of trading partners. It may be better called an index of trade reciprocity rather than an "index of complementarity• as its link with complementarity at the disaggregated level of trade is at best indirect and only implicit.

14

See, however, Leo E. Rose, "India and ASEAN: Much Ado About Not Much", in Economic, Political, and Security Issues in Southeast Asia in the 1980s, edited by Robert A. Scalapino and Jusuf Wanandi (Berkeley: Institute of East Asian Studies, 1982), pp. 93-107.

15

Sri Lanka has applied for membership of ASEAN, but the application is unlikely to be favourably considered.

16

See Barry Wain, "Kampuchea Hampers Ties Between India and ASEAN", Asian Wall Street Journal, 8 August 1983. Wain quotes an Indian consultant in Malaysia as complaining that since 1980, their competitive offers are being passed over in favour of others. This is in contrast to the period up to 1979, during which Indian consultants' expertise was valued highly. Recently, however, Malaysia has shown an interest in setting up a training centre of the type run by the Tat a conglomorate of India in Singapore.

17

For more information, see EXIM Bank: October 1982).

18

Straits Times (Singapore), 27 July 1983.

India (Bombay:

26

Export-Import Bank of India,

PART ONE

ASEAN COUNTRY STUDIES

Economic Relations between Indonesia and South Asia K.P. Kalirajan

I.

INTRODUCTION

Recent empirical studies have shown that exports from the developing countries are not wholly dependent on the growth and trade policies of the industrialized countries. Since 1973, trade among the developing countries has shown an increasing trend .1 With the recent accent on collective self-reliance in the "South", an attempt has been made in this study to put together the existing empirical evidence to measure the strength of economic relations between Indonesia and South Asia.2 More specifically, the survey has been carried out in the broader perspective of economic relationships by examining the flows of capital and services between Indonesia and South Asia as well as the flows of commodity trade. Throughout the study, time series data covering the period from 1970/71 to 1979 have been used. These data were predominantly eo ll ected from Indonesian sources, as the study concerns Indonesia's economic relationships with South Asia. The following section briefly describes the general characteristics and the overall growth performance of the economies of Indonesia and South Asia. The rate of growth of gross domestic product (GOP) in constant prices has been used as a measure of overall performance. The second section measures the strength of economic ties between Indonesia and South Asia in terms of commodity trade. These links are examined by ea l cu l at i ng the export intensity index, import intensity index, and Grubel-Lloyd index. The third section reviews the trend of capital flow between Indonesia and South Asia in The following section terms of investment and joint ventures. describes the links between Indonesia and South Asia in terms of the movement of people as tourists, and other cultural and social organizations. The last section brings together the summaries of the earlier sections and suggestions for further strengthening the economic relations between Indonesia and South Asia. It may be worthwhile to begin the discussion with some salient economic features of Indonesia and South Asia. Until recently, the World Bank had classified Indonesia, Bangladesh, India, Nepal, Pakistan, and Sri Lanka as low-income developing countries with per capita gross national product (GNP) of US$370 or below in 1979. However, recently Indonesia has been moved up to become one of the middle-income countries, with GNP per person above US$370. This means that all the members of ASEAN are now middle-income countries, whereas all the South Asian nations are low-income economies.

The general characteristics of the economies of Indonesia and South Asia are summarized in Table 1. The per capita GDP was the highest (US$344) for Indonesia and the lowest (US$86) for Bangladesh. As a proportion of GDP, exports of goods and non-factor services are 29

TABLE 1 General Characteristics of the Economies of Indonesia and South Asia, 1979

GDP (US$ million)

Countries

Population (million)

Area (thousands of square km)

Exports of Goods and Non-factor Services as % of GDP

Resource Balance as ?o of GDP

Indonesia

49,210

142.9

1,919

30

7

Bangladesh

7,670

88.9

144

10

-12

India

ll2, 000

659.2

3,288

9

- 4

Nepal

1,760

14.0

141

12

- 5

Pakistan

17,940

79.7

804

ll

-13

Sri Lanka

3,160

14.5

66

34

-12

A11 Low-Income Countries

n.a.

2260.2

33,778

n.a.

n.a.

n.a. = not available. SOURCE:

World Bank, World Development Report, 1981.

roughly calculated to be 30 per cent for Indonesia. In South Asia, for Sri Lanka this ratio is at 34 per cent. However, as a share of GDP, domestic savings in Indonesia are roughly at the same level as exports but not so for Sri Lanka at 14 per cent. The last column in Table 1 shows the resource balance of the countries, or the difference between exports and imports of goods and non-factor services. Indonesia is the only country having a favourable balance. With this broad outline of the economies of Indonesia and South Asia, the rates of economic growth of these countries between 1970 and 1979 are given in Table 2. The rates of economic growth of South Asian countries have been low when compared with the rate of growth of Indonesia. The World Development Report of 1981 suggests that developing countries could improve on their record of the 1970s, when they grew at 5 .1 per cent a year. Except Pakistan, all the other South Asian countries, however, had growth rates well below the average growth rate for low-income countries (4.7 per cent) given by the report. It may be noted that Indonesia's oil exports help to insulate its economy from the extern a l influences that affect the oil-importing South Asian countries. Considering the major sectoral growth rate, Indonesia has the highest growth rates for all the sectors when compared with South Asia. The high rate of growth in the manufacturing industry in Indonesia is mainly achieved through import substitution. The growth of the other sectors, however, also boosted the domestic demand for industrial products.3 Using Chenery's formula,4 the factors affecting the growth of domestic production can quantitatively be measured from the existing input-output tables. The factors affecting the growth of domestic production can broadly be classified as exports, import substitution, intermediate demand, and domestic final demand. Table 3 gives the source of growth for the output of various major industries in Indonesia. The last column of Table 3 reveals that import substitution seems to be the major factor contributing to the growth of the paper, fertilizer and machinery industries. Intermediate demand for chemicals, rubber products and metal products appears to be the major cause for the industrial expansion. The increase in intermediate demand may be due to the increased import substitution strategy of Indonesia. Comparing the various issues of the World Development Report, an important quantitative association between the rate of economic growth and export performance in terms of the share of GDP can be derived. In the case of Indonesia, there seems to be a positive association between the rate of growth of GDP and the ratio of export to GDP. For example, as a share of GDP, exports of goods and non-factor services rose from 13 per cent in 1960 to 22 per cent in 1977 and then to 30 per cent in 1979. In the case of South Asian countries, this ratio remained more or less constant from 1960 to 1979. It may further be noted that the average annual growth rates of the ratio of export to GDP for the South Asian countries remained below the average for all low-income countries.

II.

TRADE RELATIONS

This section examines the bilateral commodity trade relations between Indonesia and South Asia. These commodity flows are analysed mainly by calculating the import intensity index, export intensity index and Grubel-Lloyd index. 31

TABLE 2 Growth Indicators of the Economies of Indonesia and South Asia, 1979

Average Annual Growth Rate, 1970-79 (%) (at constant prices, 1970)

Countries GDP

Agriculture

Industries

Manufacturing

Services

Indonesia

7.6

3.6

11.3

12.5

9.2

Bangladesh

3.3

1.9

7.0

5.9

4.9

India

3.4

2.1

4.4

4.5

4.5

Nepal

2.7

0.8

n.a.

n.a.

Pakistan

4.5

2.1

4.9

3.7

6.3

Sri Lanka

3.8

2.6

3.6

1.7

4.5

All Low-income countries

4.7

2.0

4.2

3.7

4.5

n.a.

= not

SOURCE:

available.

World Bank, World Development Report, 1981.

n.a.

TABLE 3 Sources of Growth by Industries, Indonesia 1971-75

Percentage Share in the Growth of Sector

Intermediate Demand

Domestic Final Demand

63.5

154.9

-

3.4

85.0

-32.6

247.9

-121.4

6.1

57.0

41.8

- 1.8

21.0

Chemicals

135.0

21.5

6.1

-62.6

Paper

-52.9

11.7

8.3

132.9

73.8

42.0

Food & food processing Other food products Geber textiles

Rubber products

r ertilizers Metal products Machinery Transport equipment

SOURCE:

Exports

Import Substitution

-15.8

9.5

90.5

149.4

7.1

1.0

-57.5

8.6

-8.4

0.5

98.6

40.4

100.4

1.0

-41.8

H. Poot, "Indonesia", in The Development of Labour Intensive Industry in ASEAN Countries, edited by R. Amjad (1981), p. 120.

The merchandise trade of Indonesia and South Asia during 1979 is given in Table 4. The value of Indonesia's imports was approximately Using 1975 as the base year, Indonesia half that of its exports. appears to have had favourable terms of trade in 1979. The average annual growth rates of Indonesia's exports and imports for this period were 6.5 and 12.8 per cent respectively. Though the value of imports in absolute terms was much less than the value of exports, the rate of growth of imports was much higher than the rate of growth of exports. The large figure of Indonesia's export values, no doubt, was due to the increases in crude oil prices during the 1970s. Consequently, the value of imports of the oil-importing countries would be high. For all the South Asian countries, the value of imports exceeded the value of exports during 1979. Nepal and Sri Lanka, however, had favourable terms of trade, if 1975 is taken as the base year. Except for India, all the other South Asian countries had negative growth rates for exports during this period. On the other hand, except for Sri Lanka, other South Asian countries had positive growth rates for their imports. The major commodities exported and imported from Indonesia and South Asia are given in Table 5. The exports of these countries, as expected, consist mostly of primary commodities, with the exception of Indonesia (petroleum products) and India (manufactured goods). The commodity composition of imports of Indonesia and South Asia, however, appears to be similar. Machinery, transport equipment, manufactured goods and textiles appear to be the most common commodity groups imported by Indonesia and South Asia. The relative importance of machinery, transport equipment, and manufactured goods among the total imports of Indonesia and South Asia can be seen from Table 6, which describes the structure of merchandise More than 50 per cent of total imports of these countries. merchandise imports in 1978 consisted of machinery, transport equipment and manufactured goods for all the countries; with Indonesia leading with 67 per cent. The dependence on food imports appeared to be more or less the same in terms of the percentage share of total imports for Indonesia and South Asia. The South Asian countries were relatively more dependent on fuel and other primary products compared to Indonesia. Considering the structure of merchandise exports of Indonesia and South Asia, it may be observed that it differs from country to country (Table 7). Almost three-quarters of Indonesia's exports consisted of fuels, minerals, and metal during 1978. Textiles and other primary commodities were the two principal commodity groups taking major shares of Bangladesh's exports. Pakistan's structure of merchandise exports appear to be similar to that of Bangladesh. India is the only country which has about 40 per cent of its total exports consisting of Though Sri Lanka's fuels and manufactured and machinery goods. minerals exports accounted for 11 per cent of its total exports, primary commodities still dominated (81 per cent) Sri Lanka's total while Nepal's exports consisted mainly of primary exports, commodities, and their share in total exports was 87 per cent during 1978. In the 1 ight of the structure of merchandise exports, the total commodity trade flows between Indonesia and South Asia are examined next. It was noted earlier when discussing Table 6 that machinery and manufactured goods accounted for a major proportion of Indonesia's total imports. This indirectly indicates that the role of South Asia 34

TABLE 4 Merchandise Trade of Indonesia and South Asia, 1979

Exports (US$ million)

Countries

Indonesia

Imports (US$ million)

Terms of Trade (1975:100)

1970-79 Average Annual Growth Rate (%) Exports

Imports

15,590

7,225

119

6.5

12.8

662

1,537

90

-4.1

0.6

India

6,998

9,041

BB

4.6

2.3

Nepal

109

254

105

n.a.

n. a.

2,056

4,056

92

-0.9

4.2

9Bl

1,44B

116

-3.0

-0.6

Bangladesh

Pakistan Sri Lanka

n.a.

= not available

SOURCE:

World Bank, World Development Report, l9Bl.

TABLE Major Exports and Imports of Indonesia and South Asia

Principal Commodities Country Exports

Imports

Indonesia

Natural Rubber, Tin Ore, Petroleum and Products, Tea, Copra and its products.

Machinery and Transport Equipment, Textiles, Chemicals, Beverages, Live Animals, Tobacco and Food Items, and Manufactured Goods.

Bangladesh

Raw Jute and Jute Fabrics, Fish and Newsprint.

Machinery, Transport Equipment, Manufactured Goods, Textiles, Tea, and Food Items.

India

Jute Yarn and Fabrics, Tea, Sugar, Spices, Raw Materials, Hides and Skins, Chemicals, Leather Goods, and Manufactured Goods.

Machinery, Chemicals, Base Metals and Petroleum, Raw Cotton, Manufactured Goods, Transport Equipment, and Food Items.

Pakistan

Cotton Wool, Hides and Skins, and Textile Materials.

Machinery, Transport Equipment, Manufactured Goods, Chemicals, Textiles, Mineral Fuels, Lubricant and related items, and Food Items.

Sri Lanka

Natural Rubber, Tea, Coconut and Products.

Manufactured Goods, Textiles, Machinery, Chemicals, Mineral Fuels, Lubricants and related items, and Food Items.

SOURCE:

Compiled from U.N. ESCAP, Foreign Trade Statistics of Asia and the Pacific, various issues.

36

TABLE 6 Structure of Merchandise Imports of Indonesia and South Asia, 1978

Percentage Share of Merchandise Imports, 1978 Countries Food

Fuels

Other Primary Commodities

Machinery & Transport Equipment

Indonesia

18

9

6

36

31

Bangladesh

21

15

14

18

32

India

16

26

15

19

24

Nepal

13

10

16

20

41

Pakistan

19

19

7

25

30

Sri Lanka

30

16

4

24

26

SOURCE:

World Bank, World Development Report, 1981.

Other Manufactures

TABLE 7 Structure of Merchandise Exports of Indonesia and South Asia, 1978

Percentage Share of Merchandise Exports, 1978 Countries

fuels, Minerals, and Metals

Indonesia

Other Primary Commodities

Textiles & Clothing

Machinery & Transport Equipment

Other Manufactures

72

26

(.)

1

1

1

36

50

1

12

India

10

30

20

6

34

Nepal

0

87

6

Pakistan

4

38

44

11

81

4

Bangladesh

Sri Lanka

(.) = SOURCE:

negligible World Bank, World Development Report, 1981.

(.)

2 (.)

7 12 4

as the supplier of imports for Indonesia may not be relatively significant compared with other major suppliers. It can, however, be verified by examining Table 8 which gives the magnitude of Indonesian imports from South Asia. On the average, during 1970-79 only about 2 per cent of Indonesia's imports originated from South Asia. Although in absolute values, imports from South Asia increased from 1970 to 1974, its ratio to total Indonesian imports remained constant. Because of the 1974 depression, imports from South Asia decreased considerably in 1975 but regained the earlier trend from 1976. India had the major and Sri Lanka the small est shares of Indonesia's total imports from South Asia. The average annual growth rate of imports from South Asia by Indonesia was 26 per cent for the 1970-79 period. Indonesia's exports to South Asia also seem to be negligible (Table 9). On the average, only about 0.5 per cent of Indonesia's total exports went to South Asia during 1970-79. The share of South Asia in Indonesia's total exports, however, rose slowly and gradually during this period. Even after the 1974 recession, Indonesia's exports to South Asia did not decline. Comparing the figures of Indonesian imports from and exports to South Asia during the post-1974 recession period, it appears that the Indonesian economy, unlike that of South Asia, was not much affected by the recession. Pakistan was the largest consumer of Indonesia exports during 1970-79, while India and Sri Lanka ranked second and third respectively. Though the absolute volume of Indonesian exports to Bangladesh increased in this period, it was still negligible. The overall average annual growth rate of Indonesian exports to South Asia for 1970-79 was ea l cu l ated to be 119 per cent. One aspect of commodity trade flows between Indonesia and South Asia to be considered is the balance of trade. Table 10 shows the bilateral trade balance between Indonesia and South Asian countries individually and together. Though there are two different types of balance defined in the literature, this study gives only the balance of commodity trade which is the excess of Indonesian imports from South Asian countries over the value of Indonesian exports to South Asia.5 Considering South Asia as a group, there was always bilateral imbalance of commodity trade between Indonesia and South Asia during 1970-79. There had been a deficit in Indonesia's commodity trade with South Asia continuously from 1970-75. India was the only country which had a positive balance of trade with Indonesia throughout the period of analysis. Indonesia's trade balance with Bangladesh, Pakistan, and Sri Lanka, on the other hand was not uniform; it was in deficit for some years and then in surplus during others (Table 10). Indonesia's commodity imbalance with South Asia, however, did not seem to be serious as it is only one component of its overall balance. Calculating the multilateral balance, which is the sum of Indonesia's bilateral balances with all countries, Indonesia had positive balance throughout the period 1970-79. Table 10 also provides information on the long-run problem of trade -- that is, whether the prices of exports are rising or falling in relation to imports. Any country would like to raise the value of its exports, which means that the country would be able to receive more imports for its exports. This is true only if exports equal imports. In other words, trade is balanced if the value of exports equals the value of imports. This implies that the net barter terms of trade ( Px/Pml equals gross barter terms of trade ( Om/Ox). Thus, a country may start from the Vx = Vm identity to measure the capacity of its imports. It is clear from Table 10, that Indonesia's import value 39

TABLE 8 I~orts

of Indonesia from South Asia

Imports (in million US$) (c.i.f) Country of Origin

1970

1971

Bangladesh

n.a.

n. a.

India

5.355

Pakistan Sri Lanka Total for South Asia

1973

1974

1975

1977

1978

1979

O.Oll

0.213

0.968

0.289

0.428

0.395

4.142

5.986

9.442

19.410

1.042

123.lll

83.002

111.914

125.585

13.868

14.203

20.282

30.616

54.439

0.595

25.446

20.051

41.544

20.868

-

0.016

0.322

0.558

0.882

13.670

0.428

0.229

0.570

19.223

18.361 (1. 7)

26.619 (1. 7)

40.627 (1.8)

74.944 (1. 9)

16.275 (0.3)

149.274 (2.6)

103.710 (1. 7)

154.423 (2.32)

146.453 (2.04)

ll04. 256

1561.721

2295.114

3858.234

4769.717

5673.473

6182.581

6654.505

7163.430

Figures in parentheses are percentage shares of South Asia in total imports of Indonesia. n.a.

= not applicable zero or negligible

SOURCE:

1976

0.029

World

Note:

1972

U.N. ESCAP, foreign Trade Statiatics,of Asia and the Pacific, various issues.

TABLE 9 Distribution of Indonesian Exports to South Asia

Exports (in million US$) CQUntry of Destination 1970

1971

1972

1973

Bangladesh

n.a.

n.a.

0.001

-

India

0.055

0.037

0.063

3.151

Pakistan

0.017

0.018

0.381

2.150

-

Sri Lanka Total for South Asia

0.072

World

Note:

1976

1977

1978

1979

0.057

0.002

0.409

0.167

12.339

3.827

0.360

4.247

27.547

31.399

17.740

33.245

o. 289

33.704

53.981

28.810

29.500

-

-

0.395

-

-

36.523

0.395

2.525

0.275

4.000

0.055 (0.01)

D. 840 (0.05)

5.301 (0.17)

37.072 (0. 50)

37.229 (0.52)

38.348 (0.45)

84.462 (0.78)

60.651 (0.52)

63.579 (0.41)

1199.465

1777.670

3210.751

7426.338

7102.541

8556.310

10852.626

11643.175

15590.143

Figures in brackets are percentage shares of South Asia in total exports of Indonesia. n.a.

SOURCE:

1975

1974

=

not applicable nil or negligible

U.N. ESCAP, Foreign Trade Statistics of Asia and the Pacific, various issues.

TABLE 10 Indonesia's Trade Balance and Terms of Trade with South Asia

Trade Balance (in million US$) Country

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

n. a.

-0.028

-0.011

-0.213

-0. 911

-0.287

-0.019

-0.228

+12.339

-55.455

-80.515

-107.845

+33.93

-12.734

+8.632

-0.295

+4.00

Bangladesh

n. a.

India

-5.30

-4.105

-5.923

-6.291

-15.583

-0.682

-118.863

-13. 851

-14.185

-19.901

-28.466

-21.194

-0.306

+8.258

-0.016

+0.073

-0.558

-0.882

+22. 853

-0.033

Pakistan Sri Lanka

+2. 296

Terms of Trade

Export value index Import value index

n.a.

=

SOURCE:

0.2 36

0

33

46

11

74

lOO

76

170

188

228

166

132

lOO

313

184

277

263

not applicable nil or negligible U.N. ESCAP, Foreign Trade Statistics of Asia and the Pacific, various issues.

index has increased more than its export value index with respect to South Asia, and the former is greater than the latter. Table 11 and 12 show the commodity composition of Indonesia's imports from and exports to South Asia for two periods: 1974 (before the recession) and 1978 (after Indonesia's devaluation of the rupiah). It may be noted that there has not been any change in the commodity composition of Indonesia's imports from South Asia, with the exception of the commodity group, Beverage and Tobacco, which showed a declining trend. Food and Live Animals was the major commodity group, occupying about 65 per cent of total imports from South Asia in 1974, and this ratio increased to 72 per cent in 1978. Though there was a slight decrease in the Basic Manufactures group, the share of Machinery and Transport Equipment in Indonesia's total imports increased. Table 12 shows that a change occurred in the commodity composition of Indonesia's exports to South Asia. The share of Animal, Vegetable Oil and Fat in Indonesia's exports to South Asia decreased. The share of Chemicals on the other hand, increased sharply from 0.1 to 27 per cent. Increases in the export of Machinery, Transport Equipment and Miscellaneous Manufactured Goods were also observed during this period of analysis. Table 13, 14, 15, and 16 present the commodity composition of Indonesia's trade with Bangladesh, India, Pakistan and Sri Lanka, by SITC groups, for 1974 and 1978. The share of Food and Live Animals in the Indonesian imports from India increased from 1974 to 1978 along with the share of Manufactures, Machinery and Transport Equipment. On the other hand, Indonesia increased the share of Animal, Vegetable Oil and Fat in its exports to India along with the share of Chemicals from 1974 to 1978. Among the South Asian countries, Pakistan appears to be the major supplier of Food and Live Animals to Indonesia and in fact, Indonesia's imports from Pakistan for 1974 consisted almost wholly of Food and Live Animals. Basic Manufactures occupied the next major share of Indonesia's imports from Pakistan. However, the share of Basic Manufactures in Indonesia's imports from both Pakistan and India decreased in 1978, mainly as a result of the growth of Indonesia's manufacturing sector induced by import substitution po 1 i c i es. The share of Animal, Vegetable Oil and Fat in Indonesia's exports to Pakistan showed an increasing trend. Bangladesh and Sri Lanka appear to be strengthening their trade ties with Indonesia gradually. In summing up the commodity composition of Indonesia's trade with the South Asian countries, India and Pakistan were the major suppliers and consumers, and the products consisted in the main of Food and Live Animals, and Animal, Vegetable Oil and Fat respectively. Trade Intensity Indices 6 Table 17 gives Indonesia's import and export intensity indices for Bangladesh, India, Pakistan, and Sri Lanka for the period 1970-79. Because of the insignificant imports from Bangladesh, Indonesia's import intensity index worked out to be zero for the period 1970-79. In 1970, the import intensity index for India was calculated to be less than one, indicating that India was under-represented in Indonesia's imports. The import intensity index for India, however, slowly increased in subsequent years and reached 4.3 in 1979. No consistent pat tern of movement of Indonesia's import intensity index for Pakistan for the period 1970-79 was observed. The index was well 43

TABLE 11

Indonesia's Imports from South Asia by Commodity Sections ( In million US$)

South Asia

Wor Id SITC

Commodity Group

% Share in Indonesia's

Total Imports

1974

1978

1974

1978

Food and Live Animals

555.82

1024.47

47.93

110.59

8.62

10.61

Beverages and Tobacco

17.56

26.73

2. 50

0. 73

14.24

2. 73

Crude Materials excl. fuels

118.37

295.14

l. 85

7. 75

l. 39

2.63

3

Mineral Fuels etc.

185.47

582.52

1.82

0.01

0.98

0

4

Animal, Vegetable Oil, Fat

4.01

64.77

0

o. 01

0

0.02

Chemicals

585.89

756.21

2. 81

l. 76

0.45

D. 23

Basic Manufactures

923.42

1226.76

13.60

13.04

1.45

1.06

1375.67

2434.41

3. 99

19.61

0.28

D. 81

91.31

197.97

0.44

0.88

0.48

0.44

0. 70

27.52

0

0.04

0

0.15

3858.22

6654.50

74.94

154.42

1.92

2. 32

1974

1978

Non-Manufactures

0

MCYlufactures

Machinery, Transport Equipment

Miscellaneous Manufactured Goods 9

Goods not classified by kind All Commodities

SOURCE:

U.N. ESCAP, foreign Trade Statistics of Asia and the Pacific, various issues.

TABLE 12 Indonesia's Exports to South Asia by C011111odity Sections (In mi !lion US$)

World SITC

% Share in Indonesia's Total Exports

South Asia

Commodity Group 1974

1978

1974

1978

1974

1978

Non-Manufactures

4

Food and Live Animals

378.98

989.07

2. 73

13.66

a. 12

l. 38

Beverages and Tobacco

37.38

55.41

0

0

0

0

Crude Materials excl. fuels

1328.80

1891.15

0.14

0

0.01

0

Mineral Fuels etc.

5211.36

7986.22

l. 78

0

0.03

0

168. 28

214.43

32.27

30.70

19.18

14.32

30.66

55.17

0.07

16.08

D. 23

29.15

253.55

331.58

0.08

0

0.03

0

Machinery, Transport Equipment

6.68

70.62

0

0.02

0

0.03

Miscellaneous Manufactured Goods

2.10

30.52

0

0.13

0

0.43

Goods not classified by kind

B. 54

19.00

0

0.06

0

0.32

7426.33

11643.17

37.07

60.65

0. 50

o. 52

Animal, Vegetable Oil, fat

Mcnufactur~

Chemicals Basic Manufactures

All Commodities

SOURCE:

U.N. ESCAP, Foreign Trade Statistics of Asia and the Pacific, various issues.

TABLE 13

Indonesia's Trade with Bangladesh by Commodity Sections (In mi !lion US$)

SITC

Commodity Group

Exports to

Imports from Bangladesh

Bangladesh

1974

1978

0

0.031

1974

1978

Non-Manufactures

0

Food and Live Animals

0

0

0.005

Beverages and Tobacco

a. 2so

Crude Materials excluding fuels

0

Mineral Fuels, etc. Animal, Vegetable Oil, Fat

Manufactures

6

Chemicals

0.023

Basic Manufactures

0.190

0.155 0.068

Machines, Transport Equipment

0

8

Miscellaneous Manufactured Goods

0

0.007

9

Goods not classified by kind

0

0.009

o. 213

0. 395

All Commodities

SOURCE:

0

0

0. 007 0

0.167

U.N. ESCAP, Foreign Trade Statistics of Asia and the Pacific, various issues.

TABLE 14 Indonesia's Trade with India by Commodity Sections (In million US$)

SITC

Commodity Group

Imports from India

Exports to India

1974

1978

Food and live Animals

5.396

76.288

Beverages and Tobacco

1. 754

D.193

Crude Materials excluding fuels

0.541

o. 966

0

Mineral F"uels, etc.

l. 267

0.008

0

1974

1978

Non-Manufactures

D

4

Animal, Vegetable Oil, Fat

0

D.D75

D

0

D. D1D

3.677

19.474

O.D75

11.850

Manufactur~

9

Chemicals

2. 226

1.629

Basic Manufactures

4.038

12.916

Machines, Transport Equipment

3. 792

19.071

0

O.D04

Miscellaneous Manufactured Goods

D. 396

0. 8D9

0

D.035

D.023

0

O.D36

Goods not classified by kind All Commodities

SOURCE:

0 19. 41D

111.913

3.8257

31.399

U.N. ESCAP, foreign Trade Statistics of Asia and the Pacific, various issues.

TABLE IS Indonesia's Trade with Pakistan by Commodity Sections (In million US$)

SITC

Commodity Group

Imports from Pakistan

Exports to Pakistan

!974

1978

1974

1978

Food and Live Animals

42. s7a

34. 263

2. 653

13. 66a

Beverages and Tobacco

a. 744

a. 54!

Crude Materials excluding fuels

I.la9

6.495

a.137

Mineral fuels, etc.

a. 556

a

I. 782

a

a

28.596

11.224

Non-Manufactures

a

4

Animal, Vegetable Oil, fat

a

Manufactures

Chemicals

a.364

a.1as

Basic Manufactures

9.a58

a.a54

Machines, Transport Equipment

a.Ol4

a.a2I

0.016

Miscellaneous Manufactured Goods

a.a24

a.a6a

o.a47

Goods not classified by kind All Commodities

SOURCE:

54.439

3. 856 a.a75

a.aos

a.aa2

O.Oa7

41.544

33. 245

28.810

U.N. ESCAP, foreign Trade Statistics of Asia and the Pacific, various issues.

TABLE

16

Indonesia's Trade with Sri Lanka by C0111111odity Sections (In million US$)

SITC

Commodity Group

Exports to Sri Lanka

Imports from Sri Lanka

1974

1978

1974

1978

Food and Live Animals

a

a.012

a

Beverages and Tobacco

a

a

a

a. 8a5

a.aa4

a

a

Mineral Fuels, etc.

a

a

a

a

Animal, Vegetable Oil, Fat

a

a

a

a

a

a.a28

a

a.na

Basic Manufactures

a. a17

a

a

a

Machines, Transport Equipment

a.a28

a.518

a

a

Miscellaneous Manufactured Goods

a.a39

a.aa6

a

a.a44

a

a.aa3

a

a.012

a. 882

a.571

a.aaa

a.276

Non-Manufactures

Crude Materials excluding fuels

4

Manufactures

Chemicals

8

Goods not classified by kind

All Commodities

SOURCE:

U.N. ESCAP, Foreign Trade Statistics of Asia and the Pacific, various issues.

TABLE 17 Intensity of Indonesia's Trade with South Asia

1970

Country

1971

1972

1973

1974

1975

1976

1977

1978

1979

ImQort Intensiti: Index

India

D. 921

0.643

0.657

D. 795

l. 075

0.043

4.002

2. 500

3. 506

4. 374

Pakistan

6. 711

6. 803

7. 829

8.115

10.778

0.105

3. 847

3.134

5. 548

2. 299

Sri Lanka

0.033

0.016

D. 253

D. 340

D. 367

4. 453

0.131

D. 054

0.130

Bangladesh

0

0

0.024

0.008

0.121

D. 580

0.116

0.171

0.132

South Asia

l. 955

l. 768

l. 876

2.186

2. 749

0.473

3.460

2. 239

3. 267

3. 274

EXQOrt Intensity Index

India

0

0.005

0.007

0.184

0.085

0.007

0.093

0.455

0.475

0.233

Pakistan

0

0.006

0.135

0.408

2. 201

D. 017

1.821

2. 331

1.042

D. 779

Sri Lanka

0

0

D. 271

0

0

6.194

0.084

0.382

0.033

0.298

Bangladesh

0

0

0.001

0

0

0.008

0

0.037

0.015

0.685

South Asia

0

0.004

0.059

0.188

D. 508

0.467

D. 506

D. 832

D. 535

0.438

SOURCE:

Computation based on data from United Nations, Statistical Yearbook for Asia and the Pacific 1979. for a definition of the indices, see the Overview in this volume.

above one, at 6.7 during 1970, and then went down to 0.1 in 1975. It rose again to 5.5 in 1978 and then declined to around 2.3 in 1979. Thus, Indonesia's imports from Pakistan fluctuated more often than its imports from India. A lack of economic conplementarity may be a possible reason. With Sri Lanka, it appears that Indonesia did not have a consistent pattern of imports. On consolidating the above calculations, it may be noted that Indonesia has increased its imports from India and has considerable imports from Pakistan. It may be interesting to compare Indonesia's import intensity indices for ASEAN with those of South Asia. Table 18 gives Indonesia's trade intensity indices for ASEAN for the period 1973-79. The intensity indices of Indonesia's imports from Singapore and Thailand were very high. However, the intensity indices for Malaysia and the Philippines were even lower than those for India and Pakistan. This implies that Indonesia's imports do not appear to be much affected by geographical proximity, and South Asia seems to have as much influence on Indonesia's imports as the Philippines and Malaysia.

Indonesia's export intensity index for Bangladesh and Sri Lanka showed a gradual increase which indicates that these two South Asian countries could be growing potential consumers for Indonesia. Indonesia's exports to India showed an inconsistent trend. The picture that is provided by Pakistan is different. Pakistan was the major consumer of Indonesia's exports from 1973 to 1979. Generally, Indonesia's export intensity was weaker and smaller than its import intensity for India and Pakistan. Comparing Indonesia's export intensity indices for ASEAN with those of South Asia, we find that Singapore was the major consumer, followed by the Philippines. Thus, among the South and Southeast Asian countries, Pakistan and Bangladesh appeared to be the next major consumers of Indonesian goods. Intra-Industry Trade 7 With the optimistic indications of a strengthening of trade relations between Indonesia and South Asia, it becomes necessary to identify the potential areas through which trade could be further intensified. The measure of intra-industry trade used by Grubel and Lloyd (G-L index) has been used to measure Indonesia's bilateral trade relations with individual South Asian countries. In calculating the intra-industry trade (G-L) index, the three-digit SITC was used to disaggregate the data for the periods 1970, 1974 and 1977. It can be seen that in Indonesia's trade with Pakistan, except for SITC 332 (petroleum products), in which the G-L index was 0.16, in none of the other items was positive G-L index found. Since intra-industry trade deals with differentiated products which are close substitutes belonging to the same product group, while inter-industry trade refers to trade in different products, the above values of the G-L index mean that there is only inter-industry trade between Indonesia and South Asia. Trade Reciprocity Index 8 The multilateral trade reciprocity index of Indonesia and South Asia in 1970 was 0.001, in 1974, 0.23, and in 1978 it rose to 0.27. 51

TABLE 18 Indonesia's Trade Intensity Index with Other AS£AN Countries

Country

1973

1974

1975

Imeort

1976

1977

Intensit~

Index

1978

1979

Malaysia

1.134

0.640

1.023

o. 721

0.620

0.635

0.917

Philippines

1.430

o. 722

0.631

0.886

0.752

2.468

1.481

Singapore

5.021

6.129

6.960

9.789

8.074

5.946

6.060

Thailand

7.378

5.630

1.899

9.592

12.244

3.543

6.772

Exeort

Intensit~

Index

Malaysia

1.481

1.513

1.619

0.387

0.259

0.245

0.454

Philippines

0.079

0.0719

1.275

3.290

3.397

5.211

3.043

Singapore

23.227

13.990

19.140

13.180

15.919

17.524

17.559

Thailand

0.109

0.324

0.139

0.068

0.104

0.433

0.643

SOURCE:

United Nations, Statistical Yearbook for Asia and the Pacific 1979.

To complete the analysis of the visible trade patterns between Indonesia and South Asia, it is necessary to briefly discuss Indonesia's tariff structure. It may be noted that Indonesia is one of the very few developing countries without any exchange control. A major reform in the tariff system took place in 1973 when tariffs were revised and simplified. Table 19 compares nominal and effective rates of protection in the period 1971-75, and reveals that the nominal rates of protection have been increased for almost all sectors, of which 10 per cent or more of total demand is imported. The effective rates of protection, however, experienced both declining and increasing trends during the period of comparison. Consumer goods sectors bear higher rates of effective protection than capital goods and intermediate industries.9 These tariff structures are, therefore, likely to have adverse effects on imports from South Asia, especially Pakistan, as they consist mainly of consumer goods such as food and live animals. The trade relations between therefore be summarized as follows:

I I I.

Indonesia

and

South

Asia

can

1.

India and Pakistan were the two major consumers of Indonesian imports and they were also the two major suppliers to Indonesia.

2.

Indonesia's imports from South Asia consisted mainly of food and live animals from India and Pakistan, and basic manufactures, machinery and transport equipment from India. Indonesia's imports from South Asia, however, occupied only about 2 per cent of Indonesia's total imports from all countries.

3.

Indonesia's exports to South Asia consisted mainly of animal, vegetable oil and fat, and chemicals to India, and food, animal, vegetable oil and fat, and chemicals to Pakistan. Indonesia's exports to South Asia, however, occupied only about 0.5 per cent of Indonesia's total exports to all countries.

4.

Consumer goods sectors in Indonesia enjoyed higher rates of effective protection.

5.

Indonesia's imports from and exports to South Asia showed an increasing trend, but imports often exceeded exports.

INVESTMENT LINKS

An examination of the investment relations between Indonesia and South Asia shows that there are no Indonesian investments in South Asia. On the other hand, 22 per cent of the foreign investment projects in the manufacturing sectors in Indonesia were made by companies based in developing, rather than developed countries.lO Indonesia, just like all the other ASEAN member countries, has pursued an open-door policy for foreign private investment in the exploitation and development of its vast natural resources and in the industrialization process. The Foreign Investment Law (FIL), which was enacted in 1967, provided for several tax concessions, exemption from import duties on initial capital equipment, and on raw materials, and accelerated depreciation 53

TABLE 19 Nominal and Effective Rates of Protection in Selected Import Competing Industries of Indonesia Nominal Protection 8

Sector

Effective Protectionb

1971

1975

1971

1975

30.2

38.4

224

270

4.0

21.1

3

607

40.6

-2.9

171

6

Beverages

61.7

98.7

372

216

Spinning

12.4

15.7

26

52

Other textiles

83.5

59.2

1909

217

Paper

19.5

31.1

28

50

6.1

-82.4

11

-87

Chemicals

20.9

27.8

20

52

Oil refining

10.5

5.3

34

17

Rubber products

51.6

91.9

345

4042

Non-metallic minerals

50.6

170.0

114

887

Cement

35.4

22.5

314

34

Steel

4.5

17.9

5

39

Non-ferrous metals

10.0

10.8

25

37

Metal products

21.2

24.5

63

56

6.8

18.9

15

29

Transport equipment

31.6

29.2

52

37

Others

23.0

27.8

44

68

Food processing Wheat flour Sugar refining

Fertilizers

c

c

Machinery

8

Nominal protection is import tax plus import duties divided by imports at c.i.f. prices.

b

Effective protection has been calculated according to the formula: ERP

1 -

l: i

8

i.

- 1

1 1 + t.

J

c

In 1975 imports of sugar and fertilizers were subsidized.

SOURCE:

Poot, op. cit.

allowances. The FIL also guaranteed that the foreign company would not be nationalized. Furthermore, in 1973, Indonesia set up the Investment Co-ordination Board (Badau Koordinasi Penanaman Modal or BKPM) as a co-ordinatinq authority to deal with foreign investment. The BKPM in 1978 issued guidelines for both foreign and domestic investors which did not show any basic change in Indonesia's preference for resource-oriented and domestic market-oriented investments. The Indonesian Development Finance Corporation (IDFC), which was set up in 1972, provides medium- and long-term credit to both foreign and domestic investors. The Indonesian Development Bank (lOP) also purchases shares in foreign-owned companies. These are the major institutions and policies used by Indonesia, among others, to encourage foreign investment in Indonesia. Indonesia's foreign investments are concentrated in basic metals, mining, and textiles (Table 20). As at the end of 1980, the 1 argest investments in Indonesia, amounting to about 37 per cent of total foreign investments, were made by Japan. Hong Kong and Canada were the next major foreign investors, each sharing 10 per cent of total foreign investments in Indonesia (Table 21). Among the ASEAN countries, the Philippines was the major investor (3.2 per cent) in Indonesia and Singapore came next with 1.4 per cent. Among the South Asian countries, India was the only country reported to have direct investment in Indonesia. As at the end of 1980, about 0.7 per cent of Indonesia's foreign investments came from India. Identifying the motivations of Indian companies to invest in Indonesia would probably require a more detailed study. They, however, may be grouped under the usual arguments of increasing foreign exchange earnings, safeguarding the foreign markets from protectionism, increasing exports of capital goods and technology,ll and restricting monopolistic tendencies of certain firms in home markets ,12 It may be noted that Indian direct investment in Indonesia has been usually understated by the BKPM and the Bank of Indonesia. This happens mainly because some of the Indian investment projects have been registered as domestic rather than foreign ventures, and this is possible with a sizable Indian community residing in Indonesia.13 The following information may well explain the situation. As at 1978, the BKPM revealed that Indian direct investment numbered only four projects, with investments amounting to US$2.64 million. The Financial Memorandum and Draft State Budget of the Finance Ministry data indicated, however, that Indian investments in Indonesia were five in number, amounting to US$11.4 million. On the other hand, data provided by the commercial section of the Indian Embassy in Indonesia gave the amount of Indian investment as US$76 million.l4 Table 22 shows the growth of Indian joint ventures in Indonesia as at 1978. With the recent actions taken by the Government of India to boost Indian overseas investment, coupled with the favourable investment opportunities in Indonesia, Indian investments in Indonesia are expected to grow further.l5

All the Indian investments are in the manufacturing sector. Specifically, Indian-based investments are in the manufacture of light consumer goods, such as food, beverages and textiles, light engineering goods such as steel files, pipe fittings and office equipments, chemicals such as dyestuffs, writing paper and coated cost paper. Indian-owned or managed investments are in the manufacture of textiles only. Thus, Indian direct investments in Indonesia are in 55

allowances. The FIL also guaranteed that the foreign company would not be nationalized. Furthermore, in 1973, Indonesia set up the Investment Co-ordination Board (Badau Koordinasi Penanaman Modal or BKPM) as a co-ordinating authority to deal with foreign investment. The BKPM in 1978 issued guidelines for both foreign and domestic investors which did not show any basic change in Indonesia's preference for resource-oriented and domestic market-oriented investments. The Indonesian Development Finance Corporation (IDFC), which was set up in 1972, provides medium- and long-term credit to both foreign and domestic investors. The Indonesian Development Bank (IDP) also purchases shares in foreign-owned companies. These are the major institutions and policies used by Indonesia, among others, to encourage foreign investment in Indonesia. Indonesia's foreign investments are concentrated in basic metals, mining, and textiles (Table 20). As at the end of 1980, the largest investments in Indonesia, amounting to about 37 per cent of total foreign investments, were made by Japan. Hong Kong and Canada were the next major foreign investors, each sharing 10 per cent of total foreign investments in Indonesia (Table 21). Among the ASEAN countries, the Philippines was the major investor ( 3. 2 per cent) in Indonesia and Singapore came next with 1.4 per cent. Among the South Asian countries, India was the only country reported to have direct investment in Indonesia. As at the end of 1980, about 0.7 per cent of Indonesia's foreign investments came from India. Identifying the motivations of Indian companies to invest in They, Indonesia would probably require a more detailed study. however, may be grouped under the usual arguments of increasing foreign exchange earnings, safeguarding the foreign markets from protectionism, increasing exports of capital goods and technology,ll and restricting monopolistic tendencies of certain firms in home markets .12 It may be noted that Indian direct investment in Indonesia has been usually understated by the BKPM and the Bank of Indonesia. This happens mainly because some of the Indian investment projects have been registered as domestic rather than foreign ventures, and this is possible with a sizable Indian community residing in Indonesia.13 The following information may well explain the situation. As at 1978, the BKPM revealed that Indian direct investment numbered only four projects, with investments amounting to US$2.64 million. The Financial Memorandum and Draft State Budget of the Finance Ministry data indicated, however, that Indian investments in Indonesia were five in number, amounting to US$11.4 million. On the other hand, data provided by the commercial section of the Indian Embassy in Indonesia gave the amount of Indian investment as US$76 million.l4 Table 22 shows the growth of Indian joint ventures in Indonesia as at 1978. With the recent actions taken by the Government of India to boost Indian overseas investment, coupled with the favourable investment opportunities in Indonesia, Indian investments in Indonesia are expected to grow further.15 All the Indian investments are in the manufacturing sector. Specifically, Indian-based investments are in the manufacture of light consumer goods, such as food, beverages and textiles, light engineering goods such as steel files, pipe fittings and office equipments, chemicals such as dyestuffs, writing paper and coated cost paper. Indian-owned or managed investments are in the manufacture of textiles only. Thus, Indian direct investments in Indonesia are in 55

TABLE 20 Foreign Investment in Indonesia by Sectors, 1967-80 8 (In million US$)

Sector

Agriculture Forestry Fishery Mining and quarrying Manufacturing

Food Textiles and leather Wood and wood products

Paper and paper products Chemical and rubber

Non-metallic minerals Ferrous and non-ferrous metals Metal products Others Construction Trade and hotels Wholesale trade Hotels Transport and communication Transport Communication

Real estate and business services Other services Totalb a b

Approved capital investment.

1967-73

99.7 429. a 2B.O 477.5 1,139.B 92.0 SJ?. a 7. 7 14.6 179.1 11a. 5 54.7 130.4 3.0 44.1 l20.a 10.9 109.9 30.1 24.0 6.1 98.7 16.1 2,4B4.6

1974

1975

2. 6 S4.a 16. B 69.0 B32. 0 31.6 351.6 B. B l.J 6a.o 129.5 179.5 59.4 2. 6 14.4 13.0

l.O 12.3 13.7 507.2 1,159.2 19. a 29.2 21.9 1a. 2 66.6 99.6 a7S. 6 2a. 3

13.0 2.4 2.4 81.4

21.3 20.3 16.9 3.4 9.5

1,086.4

1,753.1

a.6 21. J

1976

B. 2 34.1 5. B 3.6 357.2 74.9 24.2 5. 5 66.2 36.2 72.0 11.9 66.1 0. 2 1.2 14.2 0. 7 13.5 4.0 4.0

1977

41.1 33.5 4.9 200.0 361.9 7. 7 72.6

l97a

1979b

19BOb

lB. 2 14.3 36. B -175.0 1, 164.9 80.6 43.4 15.3 10.5 340.6 27.3 617.2 30.0

3.4 0.6

2.2 35.6 21.1 44.9 299.0 16.1 119.2 l.O 0.5 22.9 1a.4 10.0 104.0 6. 9 5. 2 9. 7

-3.2 -22.7

493.9 1.6 33.2 10.5 -B.6 1a2. 7 244.3 -5.2 34.4 0. 7 1.6 JJ.9

0.6 5. 0

9. 7 36.5

-22.7 -5.0 -5.0

JJ. 9 30.6 30.6

27.3

5.0 6.0

455.6

656.4

36.5 22.7 2.0 47a. 9

32.4 -2.2 l,osa.5

6.0 -l. 3 614.5

9. 7 7a.o 99.0 la.4 76.5

20.0 2B. B l.O

Total 1967-BO 193.0 643.2 12a.1 1,127.2 5, ao7. 9 324.3 1,212.9 71.0 112.4 974.1 Boa.6 1,762.1 529.1 13.4 75.3 190.8 11.6 179.2 123.9 72.9 51.0 2a4.0 14.6 a,SBB.O

Amounts represent original approval plus approved expansion minus cancellation.

Statistics for 1979 and 1980 have been included in this table from more recent BKPM annual statistics issued for each of these two years separately.

SOURCE:

Bulletin of Indonesian Economic Studies (alES) 17, no. 1 (Canberra:

Australian National University, March 1981):

22.

TABLE 21 foreign Investment in Indonesia by Country of Origin, 1967-80

1980

1967-80 Country

Number of Projects

Japan Hong Kong USA Nether lands United Kingdom Australia Singapore West Germany Malaysia Switzerland South Korea Belgium Philippines France India

Panama Thailand Taiwan Canada Liechtenstein Denmark Brunei Liberia Bahamas New Zealand Poland Norway Haly Sur in am Joint Countries Total

Intended Investment (US$m)

New Approvals (US$m) No.

Net a (US$m)

1

29.8 22.5 46.4 31.6 2.3 1.8 31.6

43.5 5.4 99.4 39.6 3.3 -4.2 31.2 7.5

1

4.4 4.3

4.4 4.3 16.5 -4.5

8.0

6.7 4.0

2.0

2.0

0.3

0.3

5 2 6 2 1

69

3,336.0 890.9 571.6 320.0 110.8 208.4 129.3 204.9 59.6 144.6 73.4 72.6 292.6 39.5 61.6 39.9 16.7 91.3 863.3 17.8 33.4 16.8 0.5 2.4 0.9 3.0 9.0 6.2 6.1 1,427.1

6

303.5b

355.1

801

9,050.2

29

488.5

614.5

198 126 77

47 41 37 34 23 21 19 17 15 14 10

8 7 6 5 5 4 4 4 2 2 2 1 1

1

a

1980 projects, plus expansion of existing projects, less changes from foreign to domestic investment status, less cancellations. It should be noted that these 11 net figures" are only for approvals; "realized" investment tends usually to lag behind. Implementation for the period 1967-79 equalled only 43 per cent of approvals.

b

Includes US$193.4 million for Andalas cement, of which the United Kingdom has 30 per cent share, Switzerland 11 per cent, Indonesia 25 per cent, and others 34 per cent.

SOURCE:

BIES 17, no. 1 (1981):

24.

57

TABLE 22 Indian Joint Ventures in Indonesia

Year of Approval

Indian Collaborator

Field of Collaboration

1972

Century Spg. & Mfg. Co., Bombay

Textiles

1973

M/S Shabibag Entrepreneur (P) Ltd., Ahmedabad

Textiles

1974

M/S Raymond Woollen Mills, Bombay

Engineering Steel Files

1974

M/S Bharat Commerce and Industries Ltd., New Delhi

Spinning Plant

1974

M/S Southern Steel Ltd., Calcutta

Cold-Rolled Box Strapping

1975

M/S Vishal Malleables (P) Ltd., Ahmedabad

Malleable Iron Pipes

1975

M/S Kusum Products Ltd., Calcutta

Oil Seeds Crushing, Solvent Extraction

1975

The Ballapur Paper & Strawboard Mills Ltd., New Delhi

Coated Art Paper

1976

M/S Godrej & Boyce Mfg Co., Bombay

Steel furniture

1976

M/S Sarabhai Chemicals Ltd., Baroda

Bulk Antibiotics

1976

M/S ASC: Engineers & Consultants, Calcutta

High Tensile Reinforcement

1977

M/S Bhallarpur Industries Ltd., New Delhi

Paper

1977

M/5 Apart Pvt. Ltd., Baroda

Aluminium Alloy with Rods

1977

The Maharashtra Sugar Mills Ltd., Bombay

Sugar Mill

1978

M/5 Gwalior Rayon Silk Ltd., Birlagram

Viscose Staple Fibre

1978

M/S Thungabhadra Industries Ltd., Secundrabad, and M/S Amar Dye-Chem Ltd., Bombay

Dyestuffs

SOURCE:

Federation of Indian Chambers of Commerce and Industry.

58

the main domestic-market oriented. All but one of these investments are located in Java, the exception being a textile plant operating from Padang in West Sumatra. The largest Indian investment in an enterprise, amounting to US$9 million, is in the paper industry, while the smallest, amounting to US$2 million, is in the base metals and non-ferrous metals industry. Normally, the import of capital in cash form from India by Indian investors is limited by the Indian Government, but imports of machinery and capital equipment needed for the investments from India are generally encouraged. Calculating the benefits of Indian direct investments in Indonesia, it was estimated that the investments had provided employment to about 7,500 Indonesian workers.16 The existing investment relations between Asia can be summarized below:

IV.

Indonesia and South

1.

There does not seem to be any Indonesian direct investments in South Asia. On the other hand, only India has direct investment in Indonesia.

2.

Indian direct investments in Indonesia have been growing and they are in the manufacturing sector, producing light consumer goods, light engineering goods, and chemicals.

3.

Indian investments in Indonesia Indonesian domestic market.

produce

mainly

for

the

OTHER RELATIONS

In this section, other major forms of financial relations between Indonesia and South Asia are discussed. The presence of Indonesian banks in South Asia and South Asian banks in Indonesia, and the number of tourists visiting Indonesia from South Asia, and vice versa, are examined. There does not South Asia. India which have banks in (namely, State Bank origin (Habib Bank).

appear to be any bank of Indonesian origin in and Pakistan are the two South Asian countries Indonesia. There are two banks of Indian origin of India, and Bank of India), and one of Pakistan

Indonesia and South Asia are both generally considered to be places of interest for tourists. Due to the negligible number of Indonesians visiting South Asia compared to the number of South Asians visiting Indonesia, and also since this study per se is on Indonesia's economic relations with South Asia, this section examines the flow of tourists from South Asia to Indonesia. Table 23 shows the distribution of tourists visiting Indonesia from other countries. The number of visitors arriving in Indonesia from all over the world shows an increasing trend. They include those on business trips to Indonesia. Indonesia has been receiving a large number of visitors from Australia, the United States, Japan, Europe, and ASEAN. The number of visitors from South Asia has also been increasing, and during 1980, about 1.3 per cent of total visitors to Indonesia came from South Asia, of which 76 per cent were of Indian origin. Though this percentage does not mean anything specifically, it does indicate 59

TABLE 23 Distribution of Tourists Visiting Indonesia by Country of Origin, 1973

Number of Tourists (in '000s) Country of Origin

1973

1974

1975

1976

1977

1978

1979

1980

57.6

54.1

57.4

60.9

56.5

56.9

46.8

52.6

CWJada

4.2

4.3

6.8

6.5

6.5

7.6

7.7

8.6

Europe

57.8

75.9

90.9

115.3

134.6

153.6

171.6

187.3

ASEAN

41.1

51.1

64.0

59.5

80.0

97.2

122.4

125.9

Australia

35.5

47.3

57.2

56.2

53.1

60.8

61.0

82.0

Japan

36.1

36.8

36.7

53.1

53.7

55.1

53.3

61.7

India

1.8

2.0

3.4

3.8

2.6

4.4

4.5

5.3

0.2

0.3

0.4

1.0

0.9

1.3

1.3

1.7

270.3

313.5

366.3

401.2

456.7

468.6

501.4

561.2

USA

Bangladesh, Pakistan & Sri Lanka

All countries

SOURCE:

Directorate General of Immigration, Indonesia.

TABLE 24 Summary Table of Economic Relationships between Indonesia and South Asia, 1979

Country Description

Units Indonesia

South Asia

South Asian Exports

1ii of total Indonesian imports

2.04

n.a.

Indonesian Exports

::; of total Indonesian exports

n. a.

0.41

South Asian (Indian) Investment

:0.: of total foreign investment

0.68

n.a.

Indonesian Investment

1ii of total

nil

n.a.

foreign investment South Asian Tourists

% of total foreign visitors

1.16

n. a.

Indonesian Tourists

1ii of total

n.a.

neg.

foreign visitors

n.a. neg.

= =

not applicable negligible

that India's links with Indonesia seem to be stronger than those of other South Asian countries. This may be due to the existing Indian direct investments in Indonesia.

V.

PROSPECTS FOR FUTURE CO-OPERATION

The foregoing analysis has shown that trade relations between Indonesia and South Asia appear to be growing gradually, though they are still small in both absolute and relative terms. The natural unforced bilateral trade restrictions between Indonesia and South Asia stern from the fact that the demand and supply of each largely do not eo i ne i de with the interests of the other. Thus, the strength of direct ties in commodity trade should be increased to avoid the unb ala need dependence of Indonesia and South Asia on the deve l aped countries. Commodity diversification by both may be one of the ways for increasing the intensity of trade. Quotas and quantitative restrictions do not seem to affect the volume of trade between Indonesia and South Asia. Thus, the overall commercial policies of Indonesia and South Asia do not appear to be restricting among them. Though petroleum products, rubber and pal m oil dominate Indonesian exports to South Asia, and food and live animals and light engineering products dominate South Asian exports to Indonesia, other areas of trade can be identified by appointing appropriate trade promotion agencies and trade fairs between Indonesia and South Asia. Recently, India sent a study team to the Southeast Asian region to look for more trade and investment opportunities. With the vagaries of oil-price movements in the international market, Indonesia should also now devote its attention to diversifying its exports and should try to look for the technology suitable to its developing economy. South Asia, especially India, in this context, appears to have potential to offer to Indonesia the required technology. Having obtained Western advanced technology much earlier than other developing countries, India has proved that it can adapt and modify the advanced technology successfully to suit the country's specific production conditions and requirements. The production conditions and requirements of Indonesia are more or less similar to those of India, and both are predominantly agricultural countries. Thus, the possibility of Indian-adapted agricultural technology working successfully in Indonesia is greater. Indian direct investment in Indonesia should, therefore, be further encouraged, so that Indonesia, combining its abundant resources of raw materials with India's low-cost technology, will be able to capture the markets of Third World countries. Indonesia's requirement of intermediate technology also provides vast scope for South Asian, especially Indian, consultancy exports to the country. As such, Indonesia offers potential for Indian consultancy in the field of railways, which needs rehabilitation, ports, harbours, irrigation and petro-chemical complexes.l7 On 10 February 1982, an agreement on scientific and technical co-operation was signed between the governments of India and Indonesia _18 The agreement, wh i eh is a major step in increasing further the economic co-operation between the two countries, amongst other things, provides for: 1.

Exchange of information on technical, scientific, organizational and management matters, and information on existing

62

training facilities in technical, industrial, and educational institutions; 2.

Exchange of scientists, advisers, scholars, and research fellows;

3.

Execution of joint research in fields of common interest;

4.

Other forms of technical and scientific co-operation.

experts,

technicians,

With the largest market in Southeast Asia, and political stability and harmony between India and Indonesia, the latter seems to offer a warm welcome to Indian investors. With the recent favourable changes (from 1978) in the Indian Government's policies towards the exportation of liquid capital, Indian direct investment in Indonesia is expected to grow faster. On the other hand, if it is profitable, Indonesia can export its cheap raw materials to India and, through joint ventures, produce and import the finished products. At present, India does not have an agreement with Indonesia for the avoidance of double taxation, but with the growing interests of both countries, measures which encourage closer understanding between the nations should be implemented. The ultimate responsibility for strengthening economic relations between Indonesia and South Asia, however, rests with the governments. There should be new negotiations between the governments of Indonesia and South Asia to intensify their trade and investments links. This study, though limited in several respects, provides basic information on the existing trade and investment relations between Indonesia and South Asia, and also suggests issues that call for further research. For example, a systematic study of tariff and non-tariff barriers to Indonesia-South Asia trade, which includes estimates of the rates of protection implied by the barriers may be useful. Indonesia's requirement of intermediate technology provides vast scope for South Asian countries, especially Pakistan and India, in the field of agricultural consultancy, an area which is worth exploring.

NOTES World Bank, World Development Report 1981, p. 11. 2

Indonesia is an immensely populated member country of ASEAN. There is no single, uniform definition of the region of South Asia but for the purpose of this study, South Asia includes Bangladesh, India, Nepal, Pakistan, and Sri Lanka.

3

H. Poot, "Indonesia", in The Development of Labour-Intensive Industry in ASEAN Countries, edited by R. Amjad (AEP-ILO, 1981).

4

H.B. Chenery, "Patterns of Industrial Growth", American Economic Review, 1960.

5

The other is balance of overseas exchange transaction.

6

See the Overview in this volume for the formula used to measure trade intensity.

7

See the Overview in this volume for the formula to measure intra-industry trade.

63

8

For the formula and its implications, see the Overview to this volume.

9

Poot, op. cit.

10

L. T. Wells and V. Warren. "Developing Country Investors in Indonesia", Bulletin of Indonesian Economic Studies, 1979.

11

See D. A. Heenan and W. J. Keegan. Harvard Business Review, 1979.

12

See D. Lecraw, "Direct Investment by Firms From Less Developed Countries", Oxford Economic Papers, 1977.

13

In fact, quite long ago when the T~il kings from India had cordial trade relations with Indonesian rulers (especially with the rulers of Java, Sumatra and Bali) a considerable number of the Indian community had settled in Indonesia.

14

See K.W. Thee. "Indonesia as a Host Country to Indian Joint Ventures" Multinationals from Developing Countries, edited by K. Kumar end M.G. McLeod (D.C. Heath & Co., 19Bl).

15

Like Japanese investors, Indian investors prefer to set up joint ventures with the Indonesians rather then to set up fully owned Indian firms.

16

Thee, op. cit.

17

Suresh Mehta, "Prospects of Engineering Exports to South-East Asia", Engineering Exporter 16, no. 4 (1979).

lB

Details are provided in Government of India, Foreign Affairs Record (Ministry of External Affairs, 1982).

"The Rise of Third World Multinationals",

Indian

28, no. 2

REFERENCES Australian National University. Bulletin of Indonesian Economic Studies. Department of Economics, RSPecS, Australian National University, 1970-81. Chenery, H.B.

"Patterns of Industrial Growth".

American Economic Review, 1960.

"ASEAN External Economic Relations with Australia and New Zealand". Chi a, S. Y. ASEAN External Economic Relations. Singapore: Chopmen, 1982. Dar,

U., and P.K. Dar. Sterling, 1979.

Investment Opportunities in ASEAN countries.

In

New Delhi:

Government of India. Foreign Affairs Record, 28, no. 2 (External Publication Division, Ministry of External Affairs, 1982). Grubel, H.G. and P.J. Lloyd. 1975. Heenan, D.A. end W.J. Keegan. Business Review, 1979. International Monetary Fund.

Intra-Industry Trade.

New York:

John Wiley and Sons,

"The Rise of Third World Multinationals".

Direction of Trade.

64

Washington, D. C.:

Herverd

IMF, 1970-79.

Lecraw, D. "Direct Investment by firms from Less Developed Countries". Economic Papers. 1977.

Oxford

Mehta, Suresh, "Prospects of Engineering Engineering Exporter, 16, no. 4 (1979).

Indian

Poet,

Exports

H. "Indonesia". In The Development of Countries, edited by R. Amjad. AEP-ILO, 1981.

to

South-East

Labour

Asia".

Intensive

Industry

in

Thee, K.W. "Indonesia as a Host Country to Indian Joint Ventures". In Multinationals from Developing Countries, edited by K. Kumar and M.G. McLeod. Lexington Books, D.C. Heath & Co., 1981. UNESCAP.

foreign Trade Statistics of Asia and the Pacific.

United Nations.

Yearbook of International Trade Statistics.

Bangkok: New York:

ESCAP, 1970-80. U.N., 1970-79.

Wadhva, C. "A Note on a Possible Index of Measurement of Complementarity in the foreign Trade Sector of a Group of Countries". Papers presented at the Workshop on UNClAD Studies, Colombo, 14-17 December 1981. Wells, L. T. and V. Warren. "Developing Country Investors in Indonesia". Indonesian Economic Studies, 1979. World Bank.

World Development Report, 1981.

65

New York:

Bulletin of

Oxford University Press, 1981.

ASEAN

Malaysia-South Asia Economic Relations Mohamed Ariff

I.

INTRODUCTION

The beginning of Malaysia-South Asia economic relations can be traced historically back to the pre-British and pre-Islamic period. Historical evidence suggests that brisk trade flows had taken place between the Indian and Malay kingdoms. In modern times, this relationship has grown stronger in absolute terms, although it has been overshadowed in relative terms by the emergence of stronger economic links which have dominated the external relations of Malaysia and South Asian countries. An attempt is made in this paper to outline and analyse the extent and pattern of Malaysia's economic relations with the South Asian countries.

II.

MALAYSIA-SOUTH ASIA TRADE

The seventies witnessed increasing two-way trade flows between Malaysia and most of the South Asian countries. Malaysia's exports to and imports from South Asian countries during the period 1970-80 are given in Tables 1 and 2, respectively. Malaysian exports to South Asia as a whole increased from M$37. 9 million in 1970 to M$929. 5 million in 1980, while Malaysia's imports from South Asia rose from M$78.1 million in 1970 to M$269.1 million in 1980. It is clear that the growth in the trade flows had been very assymetrical, with Malaysia's exports to South Asia growing by 244 per cent and Malaysia's imports from South Asia registering an increase of 25.3 per cent over the decade. In other words, Malaysia's exports to South Asia had grown roughly ten times faster than its imports from South Asia. Among the South Asian countries, India has almost always been the single most important trading partner of Malaysia. In 1970, India accounted for 50.7 per cent of Malaysia's exports to South Asia and by 1979 its share had increased to 73.3 per cent (see Table 3). India figures even more prominantly in the imports of Malaysia from South Asia: it accounted for 81.9 and 93.9 per cent of Malaysia's imports from South Asia in 1970 and 1979, respectively (see Table 4). Pakistan is the second most important South Asian country in Malaysia-South Asia trade relations, although its stake in Malaysia's exports to and imports from South Asia fell considerably during the seventies. Pakistan's share of Malaysia's exports to South Asia shrank from 29.8 per cent in 1970 to 18.0 per cent in 1979 (Table 3), while its share of Malaysia's imports from South Asia dwindled from 15.6 per cent to 4.2 per cent between 1970 and 1979 (Table 4). 66

TABLE 1 Exports of Malaysia to the South-Asian Countries* (In thousand M$) Year

India

Pakistan

Sri Lanka

Bangladesh

Nepal

Total

1970

19,200

11' 293

7,382

n. a.

-

37,875

1971

28,800

7, 824

3, 766

n.a.

-

40,390

1972

42,600

11,074

4,545

2,240

-

60,459

1973

74,600

571

1,597

7,689

-

84,457

1974

62,100

1,583

5,249

7,086

-

76,018

1975

64,900

83,548

6, 955

17' 077

22

172,502

1976

75,300

52,252

6,108

19,593

91

153,344

1977

391,300

95,324

7,148

5,383

6

499,161

1978**

565,500

140,800

14,600

18,900

-

739,800

1979**

509,600

123,300

15,600

43,800

-

692,300

1980 **

620,900

192,500

23,500

92,600

-

929,500

* **

There were no exports to Bhutan during this period. Preliminary figures nil or negligible n.a. :: not applicable

SOURCE:

Annual Trade Statistics of Malaysia, various years.

TABlE 2 !~arts

of Malaysia from the South-Asian Countries (In thousand M$)

. Nepal

Total

n.a.

-

78,107

1,692

n.a.

-

87' 262

21,063

1,404

9

-

76,776

89,200

223

2,797

434

-

92,654

1974

133,400

380

2,059

323

-

136,162

1975

112,200

10,310

2,790

1,222

78

126,600

1976

148,800

10,070

3,371

3,486

49

165,776

1977

.... 1978

140,900

7,441

3,956

1,647

43

153,987

171,100

9,200

2,600

2,000

-

184,900

1979

190,400

8,600

2,000

2,000

-

203,000

1980

221,200

20,800

18,000

9,100

-

269,100

Yesr

India

Pakistan

Sri Lanka

1970

64,000

12,195

1,912

1971

67,800

17,770

1972

54,300

1973

....

....

Bangladesh

.

There were no imports from Bhutan during this period. Preliminary figures nil or negligible n.a. = not applicable

**

SOURCE:

Annual Trade Statistics of Malaysia, various years.

TABLE 3 Exports of Malaysia to South Asia

1970

Country

1979*

1975

%

M$ million

M$ million

%

M$ million

%

India

19.2

50.69

64.9

37.62

503.9

73.32

Pakistan

11.3

29.82

83.5

48.43

123.6

17.99

17.1

9.90

43.8

6.38

7.0

4.03

15.6

2.26

0.02

0.02

0.3

0.05

Boogladesh 7.4

Sr-i Lanka

19.49

Nepal Sub-total (a) Total Exports of Malaysia (b) Per-centage

ba x

lOO

37.9

100

10,194.7

5,163.1

lOO

172.5

0. 73%

687.2

100

19,047.1

1.69%

* Peninsular- Malaysia only

- = nil

or negligible

SOURCE:

Annual Trade Statistics of Malaysia, 1970, 1975, and 1979.

3.61%

TABLE 4 Imports of Malaysia from South Asia

1979*

1975

1970 Country

M$ million

%

M$ million

%

%

M$ million

India

64.0

81.94

ll2.2

88.63

175.1

93.89

Pakistan

12.2

15.61

10.3

8.14

8.1

4.34

Bangladesh

n. a.

n. a.

1.2

0.97

1.5

o. 78

1.9

2.45

2.8

2.20

1.8

0. 97

0.08

0.06

0.03

0.02

Sri Lanka Nepal Sub-total (a) Total Exports of Malaysia (b) Percentage

ba x

lOO

78.1

lOO

8,497.5

4,288.4

lOO

126.6

1.82%

100

15,370.7

1.49%

*

Peninsular Malaysia only nil or negligible n.a. = not applicable

SOURCE:

186.5

Annual Trade Statistics of Malaysia, 1970, 1975, and 1979.

1. 21%

However, it is of interest to note that for a brief period in 1g75 Pakistan overtook India as the leading South Asian market for Malaysian exports. It is clear that India and Pakistan dominate the export and import trade of Malaysia with South Asia. These two countries jointly accounted for g1.2 per cent of Malaysia's exports to, and g8.2 per cent of Malaysia's imports from the South Asian region. Bangladesh and Sri Lanka occupy the third and fourth positions respectively as the South Asian markets for Malaysia's exports, although Sri Lanka is marginally more important than Bangladesh as a source of Malaysia's imports from the South Asian region. Nepal accounts for only a negligible proportion of Malaysia-South Asia trade flows, while trade relations with Bhutan are almost non-existent. Therefore, data for Bhutan are not presented in the tables. Malaysia enjoys extremely favourable balance of trade with South Asian countries, as shown by the substantial trade surplus in 1g7g (Table 5). This, however, is only a recent phenomenon, for prior to 1g77 Malaysia had been registering huge bilateral trade deficits with India. It is of relevance to note in passing that virtually all of the exports of Malaysia to South Asian destinations originate in Peninsular Malaysia. Similarly, almost the entire imports of Malaysia from South Asian sources are meant for Peninsular Malaysia. Thus, in 1g77 for instance, more than gg_g per cent of the Malaysian exports to India, Pakistan and Bangladesh originated in Peninsular Malaysia, while about g2 per cent of Malaysia's imports from India and Pakistan were imported into Peninsular Malaysia. It is, therefore, obvious that the East Malaysian states, that is, Sabah and Sarawak, have very little trade dealings with the South Asian countries.

TABLE 5 Malaysia's Trade Balances with South Asian Countries (In million M$)

Country

1970

1975

1979*

India

-44.8

-47.3

+328.8

Pakistan

-0.9

+73.2

+115. 5

Bangladesh

n.a.

+15.9

+42.4

Sri Lanka

+5.5

+4.2

+13.7

-0.06

+0.3

Nepal

* Peninsular Malaysia only n. a.

= nil = not

SOURCE:

or negligible applicable

Tables 1 and 2.

71

Rapidly increasing trade flows between Malaysia and the South Asian countries notwithstanding, it cannot be denied that South Asia as a region occupies an inconspicuous position in Malaysia's external trade. At the end of the seventies, South Asia accounted for only 3.6 per cent of Ma 1 ays i a's tot a 1 exports, and 1. 2 per cent of Ma1 ays i a's total imports, as shown in Tables 6 and 7, respectively. It is also of interest to note that while the share of South Asia in the total exports of Malaysia increased from 0.7 per cent in 1970 to 3.6 per cent in 1979, its share of the total imports of Malaysia fell from 1.8 per cent in 1971 to 1.2 per cent in 1979. Very interesting changes in the composition of Malaysia's exports to South Asian countries can be observed in Tables 8-12 which present export figures by major commodity sections. The share of manufactured goods (commodity section 6) in Malaysia's exports to India fell from 75.5 per cent in 1970 to 11.0 per cent in 1979, despite the fourfold increase in the v a 1ue of manufactured exports. Meanwhile, the share of crude material inedible (commodity section 2) increased from 5.2 to The most dramatic increases were 10.9 per cent over the decade. registered in the case of vegetable oils/fats (commodity section 4), the share of which in total exports to India jumped from a low 0.5 per cent in 1970 to a high 83.4 per cent in 1977, although it sl ided subsequently to 76.6 per cent in 1979, as shown in Table 8. Strikingly similar changes can be noticed in the composition of In Malaysia's exports to Pakistan as well, as depicted in Table 9. the case of Malaysian exports to Bangladesh, food (commodity section 0) figured more prominantly than in the case of any other South Asian As was seen in the Malaysian exports to India and trading partner. Pakistan, the share of manufactured goods (commodity section 6) in Malaysia's exports to Bangladesh fell while that of vegetable oils/fats (commodity section 4) increased sharply, as shown in Table 10. The commodity composition of Malaysia's exports to Sri Lanka was quite different from the rest in that manufactured goods (commodity section 6), and machinery and transport equipment (commodity section Crude material inedible 7) figured prominantly in relative terms. (commodity section 2), food (commodity section 0), and mineral fuels (commodity section 3) also formed substantial proportions of the total exports to Sri Lanka, although the share of food had fallen (Table It is thus fairly evident that the degree of commodity 11). concentration has been considerably less in the case of exports to Sri In the case of Lanka, compared with other South Asian counterparts. Nepal, mineral fuels (commodity section 3) formed the main part of the Malaysian exports (87.2 per cent), as shown in Table 12. Changes in the composition of Malaysia's imports from South Asian countries are depicted in Tables 13-17. An attempt is made here to compute the price indices of Malaysia's exports to and imports from India, Pakistan and Sri Lanka These price indices refer to weighted for three benchmark years. unit value indices, with 1970 as the base year.1 The volume index for any given year was arrived at by simply dividing the value index by It is clear that export prices have increased the unit value index. more than import prices with respect to India, while the price index of imports from Pakistan has increased more than that of exports to Malaysia's net barter terms of trade with India improved Pakistan. In particular, the income terms of significantly during 1970-77. trade of Malaysia vis-a-vis India exhibited phenomenal improvement, as presented in Table 18. By contrast, the net barter terms of trade of Malaysia with Pakistan suffered some deterioration during the period 1970-77, although the income terms of trade remained favourable to 72

TABLE 6 Percentage Share of South Asian Countries in the Total Exports of Malaysia

Country

1970

1975

1979*

India

0.37

0.63

2.65

Pakistan

0.22

0.82

0.65

B111gladesh

n.a.

0.17

0.23

Sri Lanka

0.14

0.07

0.08

0.73

1.69

3.61

99.27

98.31

96.39

Nepal

South Asia Rest of the World

lOO

Total

*

lOO

lOO

Peninsular Malaysia only

n.a. SOURCE:

nil or negligible not applicable Annual Trade Statistics of Malaysia, 1970, 1975, and 1979.

73

TABl£ 7 Percentage Share of South Asian Countries in the Total Imports of Malaysia, 1970, 1975, and 1979

Country

1970

1975

1979*

India

1.49

1.32

1.14

Pakistan

0.28

0.12

0.05

Bmgladesh

n. a.

0.02

0.01

Sri Lanka

0.05

0.03

0.01

l. 82

1.49

1.21

98.18

98.51

98.79

Nepal

South Asia Rest of the World

lOO

Total

100

100

* Peninsular Malaysia only n.a. SOURCE:

nil or negligible not applicable Annual Trade Statistics of Malaysia, 1970, 1975, and 1979.

74

TABLE 8 Malaysia's Exports to India, by C011111odity Sections 1970 Section

0

1975

1979*

1977

Description

Food

M$ million

%

0.2

1.04

0.8

l. 73

3.4

o. 87

2.0

0.40

1

5.21

0.1

0.16

0.7

0.18

55.0

10.91

-

0.2

0.04

M$ million

%

M$ million

%

M$ million

%

Bever age/Tobacco Crude Material inedible Mineral Fuels

-

4

Animal/Vegetable Oil/Fats

0.1

0. 52

26.4

40.68

326.3

83.39

386.0

76.60

5

Chemicals

0.3

1.56

0.2

0.31

0.2

0.05

0.3

0.06

6

Manufactured Goods

14.5

75.52

32.9

50.69

57.8

14.77

55.2

10.96

7

Machinery and Transport Equipment

0.6

3.13

0.4

0.62

1.3

0.33

0.5

0.10

-

-

-

0.1

0.03

13.02

4.1

6.31

1.5

0.38

4. 7

0.93

8

9

Miscellaneous Manufactured Articles Miscellaneous Transactions Total

*

-

2.5 19.2

lOO

Peninsular Malaysia only.

- = nil or negligible SOURCE:

Annual Trade Statistics of Malaysia, 1970, 1975, 1977, and 1979.

64.9

lOO

391.3

lOO

503.9

lOO

TABLE 9 Malaysia's Exports to Pakistan, by Commodity Sections 1970 M$'000

D

1975

Description

Section

Food

%

M$'000

1979*

1977

,,

M$'000

,,

~

M$'DDO

%

1,613

14.28

807

0.97

1,47D

1.54

2,139

1. 73

5, 514

48.83

6,023

7.21

7,139

7.49

15,530

12.56

18

D.02

Beverage/Tobacco Crude Material inedible Mineral Fuels

-

-

7.69

71,598

85. 7D

BD, 129

84.D6

9D, 553

73.26

33

0.29

452

D.54

92

O.lD

806

D.65

3, 122

27.65

3,714

4.45

5,429

5. 7D

12,D62

9. 76

28

0.25

68

D.08

164

0.17

597

0.48

Articles

27

0.24

324

0.39

142

0.15

290

0.23

Miscellaneous Transactions

88

0. 77

562

0.66

759

D. 79

1,612

1.31

Chemicals Manufactured Goods

6

-

868

Animal/Vegetable Oil/Fats

4

-

Machinery and Transport Equipment

Miscellaneous Manufactured

8

9

Total

11,293

100.0

83,548

Peninsular Malaysia only.

= nil SOURCE:

or negligible Annual Trade Statistics of Malaysia, 1970, 1975, 1977, and 1979.

100.D

95,324

100.0

123,607

100.0

TABLE 10

Malaysia's Exports to Bangladesh, by Commodity Sections 1975 Description

Section

0

M$'000

1, 372

8.03

1,186

22.03

2

0.01

5

0.09

3, 535

20.70

127

2. 36

31

0.18

-

-

8, 996

52.68

2,474

338

1. 98

2,649

%

209

0.48

45.96

29, 348

66.98

346

6.43

336

0.76

15.51

845

15.70

1,295

2.96

74

0.43

237

4.40

157

0.36

Articles

55

D. 32

125

2. 32

108

D. 25

Miscellaneous Transactions

25

0.16

38

0. 71

1,038

2. 36

Mineral Fuels

4

Animal/Vegetable Oil/Fats

Manufactured Goods Machinery and Transport Equipment

Miscellaneous Manufactured

Total

17' 077

100.0

* Peninsular Malaysia only.

= nil or negligible

SOURCE:

M$'000

0.66

Chemicals

-

%

289

3

9

%

25.19

Crude Material inedible

8

---

ll,038

Food Beverage/Tobacco

6

M$'000

1979*

1977

Annual Trade Statistics of Malaysia, 1975, 1977, and 1979.

5, 383

100.0

43,818

100.0

TABLE 11 Malaysia's Exports to Sri Lanka, by Conwnodity Sections 1970

Food

0

1975

Des er iption

Section

M$' ODD

"

4, 955

67.12

1979*

1977

,,

M$ '000

%

950

13.66

1,542

21.57

1, 810

11.64

1, 490

21.42

424

5. 93

2, 989

19.22

1, 300

18.69

864

12.09

981

6. 31

904

12.65

164

1.05

M$ '000

M$ '000

%

Beverage/Tobacco Crude Material inedible Mineral Fuels

17

D. 23

709

9.60

56

D. 76

152

2.19

9

0.13

457

2. 94

Manufactured Goods

981

13.29

2,453

35.27

2, 665

37.28

6,126

39.39

Machinery and Transport Equipment

241

3.26

167

2.40

301

4. 21

2, 585

16.62

Miscellaneous Manufactured Articles

6

0.08

43

D. 62

9

0.13

153

D. 98

Miscellaneous Transactions

417

5.66

400

5. 75

430

6.01

287

1. 85

Animal/Vegetable Oil/Fat.s

4

Chemicals

9

Total

*

7, 382

100.0

-

6, 955

Peninsular Malaysia only.

= nil or negligible SOURCE:

Annual Trade Statistics of Malaysia, 1970, 1975, 1977' and 1979.

100.0

7,148

100.0

15' 552

100.0

TABLE 12 Malaysia's Exports to Nepal, by Commodity Sections 1975 Section

M$'000 0

1979*

1977

Description %

M$'000

%

M$'000

%

food Beverage/Tobacco Crude Material inedible

19.00

-

Mineral fuels 4

86.37

-

-

5.00

l. 53

-

285.00

87.15

32.00

9.78

Animal/Vegetable Oil/fats Chemicals

-

Manufactured Goods

7

Machinery and Transport Equipment

-

3.45

1.00

0.31

Miscellaneous Manufactured Articles

-

-

1.00

0.31

3.00

0.92

8

9

Miscellaneous Transactions Total

*

-

6

3.00 22.00

13.63 100.0

Peninsular Malaysia only.

= nil or negligible SOURCE:

Annual Trade Statistics of Malaysia, 1975, 1977, and 1979.

5.00 5.00

96.55 100.0

327 .DO

100.0

Malaysia's

I~orts

TABLE 13 froa India, by

C~odity

1975

1970 Section

Sections

M$'000

~

M$'000

~

M$'000

28.1

43.91

32.9

29.32

45.1

Beverage/Tobacco

2.8

4.38

0.5

0.45

0.4

2

Crude Material inedible

1.4

2.19

3.7

3.30

3

Mineral Fuels

4

Animal/Vegetable Oil/Fats

5

Chemicals

6

Manufactured Goods

7

Machinery and Transport Equipment

0

Food

8

9

%

56.3

32.15

0.28

0.3

0.17

6.3

4.47

6.6

3. 77

32.0

-

-

0.3

0.27

0.5

0.36

0.8

0.46

3.0

4.69

5.4

4.81

8.4

5.96

8.0

4.57

12.3

19.22

16.3

14.53

25.4

18.03

22.4

12.79

6.9

10.78

40.9

36.45

33.5

23.78

58.3

33.30

12.5

10.5

9.36

19.3

13.70

17.1

9. 76

8

Miscellaneous Transactions

1.5

2.33

1.7

1. 51

2.0

1.42

5. 3

3.03

64.0

100.00

112.2

100.00

140.9

100.00

175.1

100.00

* Peninsular Malaysia only. nil or negligible

SOURCE:

M$ 1 000

~

Miscellaneous Manufactured Articles

Total

- =

1979*

1977

Description

Annual Trade Statistics of Malaysia, 1970, 1975, 1977, and 1979.

TABLE 14 Malaysia's l11ports fr011 Pakistan, by C.-odity Sections 1970 Section

1975

1977

1979"

Description M$'000

~

M$'000

1;;

M$'000

~

M$'000

10

712

5.84

2,272

22.04

2,064

27.74

1,052

12.98

Crude Material inedible

571

4.68

4,489

43.54

1,766

23.73

3,281

40.50

3

Mineral fuels

-

3

0.03

4

Animal/Vegetable Oil/fats

5

Chemicals

6

Manufactured Goods

7

Machinery and Transport Equipment

0

food Beverage/Tobacco

8

9

235

1.93

197

1.91

206

2. 77

91

1.12

10,197

83.62

2,505

24.30

2,911

39.12

3,036

37.47

40

0.33

189

l. 83

26

0.35

40

0.49

Miscellaneous Manufactured Articles

303

2.48

309

3.0

121

1.63

99

l. 22

Miscellaneous Transactions

137

1.12

346

3.35

347

4.66

503

6.22

Total

*

-

12, 195

100.0

10,310

Peninsular Malaysia only.

- =

nil or negligible

SOURCE:

Annual Trade Statistics of Malaysia, 1970, 1975, 1977, and 1979.

100.0

7,441

100.0

8,102

100.0

TABLE 15 Malaysia's Imports from Bangladesh, by Commodity Sections 1975 M$'000

0

1979*

1977

Description

Section

food

%

M$'000

%

M$'000

%

987

80.77

1,405

85.31

345

23.79

2

0.16

40

2.43

103

7.10

8

o. 55

Bever age/Tobacco Crude Material inedible

-

Mineral fuels 4

Animal/Vegetable Oil/fats

5

Chemicals

6

Manufactured Goods

42

3.44

9

0. 55

59

4.07

139

11.37

185

11.23

927

63.93

2

0.14

Machinery and Transport Equipment 8

9

Miscellaneous Manufactured Articles

Miscellaneous Transactions Total

*

52

4.26

8

0.48

6

0.42

1,222

100.00

1,647

100.00

1,450

100.00

Peninsular Malaysia only.

= nil or negligible SOURCE:

Annual Trade Statistics of Malaysia, 1975, 1977, and 1979.

TABLE 17 Malaysia's Imports from Nepal, by Commodity Sections 1975 Section

M$'000 0

1979*

1977

Description

Food

%

0.4

5.13

-

-

M$'000

%

17.3

40.14

10

21.20

M$'000

%

24

77.42

Beverage/Tobacco 2

Crude Material inedible

3

Mineral Fuels

4

Animal/Vegetable Oil/Fats

5

Chemicals

0.1

1. 28

6

Manufactured Goods

6.5

83.33

14

32.48

1

3.23

7

Machinery and Transport Equipment

0.5

6.41

-

-

5

16.12

1

3.23

1.5

3.48

8

Miscellaneous Manufactured Articles

9

Miscellaneous Transactions

0.3

3.85

0.3

o. 70

Total

7.8

100.00

43.1

100.00

* Peninsular Malaysia only. - = nil or negligible SOURCE:

Annual Trade Statistics of Malaysia, 1975, 1977, and 1979.

31.0

100.00

TABLE 18 Malaysia's Terms of Trade with India (1970 = lOO)

1970

1975

1977

Export Price Index (Px)

100

139

218

Import Price Index (Pm)

lOO

125

152

Export Value Index (Vx)

lOO

338

2038

Import Value Index (Vm)

lOO

175

220

Export Volume Index (Qx

Vx/Px)

lOO

243

935

Import Volume Index (Qm

= Vm/Pm)

100

140

145

Net Barter Terms of Trade (Px/Pm)

100

111

143

Income Terms of Trade (Px/Pm.Qx)

100

270

1341

1970

1975

1977

Export Price Index (Px)

100

127

193

Import Price Index (Pm)

lOO

155

247

Export Value Index (Vx)

lOO

740

844

Import Value Index (Vm)

lOO

85

61

Export Volume Index (Qx = Vx/Px)

lOO

583

437

Import Volume Index (Qm = Vm/Pm)

100

54

25

Net Barter Terms of Trade (Px/Pm)

lOO

82

78

Income Terms of Trade (Px/Pm.Qx)

100

477

341

TABLE 19 Malaysia's Terms of Trade with Pakistan (1970 = lOO)

85

Malaysia, as shown in Table 19. In the case of trade with Sri Lanka, the increase in the export price index was more than that of the import price index between 1970 and 1975, while the reverse was the case between 1975 and 1977. Consequently, the net barter terms of trade registered remarkable improvement in Malaysia's favour between 1970 and 1975 and a significant deterioration between 1975 and 1977. It is of significance to note that the income terms of trade of Malaysia vis-a-vis Sri Lanka had worsened during these years, as can be seen in Table 20. Growth rates per annum of Malaysia's export and import trade with India, Pakistan and Sri Lanka, in terms of both value and volume, are presented in Table 21. Exports to India registered the highest annual growth rates during 1970-77, at the rate of 54 per cent per annum in terms of value, and 38 per cent per year in terms of volume. Exports to Pakistan also grew at the impressively high rates of 36 per cent per year in value terms and 24 per cent per annum in volume terms during the same period. Exports to Sri Lanka suffered negative growth in terms of both value and volume, although the rate of fall was substantial in volume terms. Imports from India and Sri Lanka, in value terms, also grew at the annual rates of 12 and 11 per cent, respectively, and in volume terms, 6 and 9 per cent, respectively, during the same period. However, imports from Pakistan registered negative annual growth rates: 7 per cent and 18 per cent in terms of value and volume, respectively.

Trade Intensity Indices To gauge the intensity of import and export trade, trade intensity indices were calculated.2 The results are reported in Table 22 and 23, where it can be seen that the intensity indices exhibit considerable fluctuations. However, by and large, it is clear that there was a tendency for the export intensity of trade to increase and the import intensity to somewhat decline. There is no doubt that in 1980 India ranked at the top, relative to other South Asian counterparts, in terms of the export intensity of Malaysia's trade, followed by Bangladesh and Pakistan, Sri Lanka and Nepal, in that order. India also emerged unambiguously at the top in terms of the import intensity of Malaysia's trade, followed by Sri Lanka, Bangladesh, Pakistan and Nepal in that order. It is also clear that India, Pakistan and Bangladesh are over-represented in the export trade of Malaysia, while Pakistan, Bangladesh and Nepal are under-represented in the import trade of Malaysia.

The Grubel-Lloyd (G-L) Index

An attempt is also made here to estimate the importance of commodity exchange in differentiated rather than different products in Malaysia-South Asia trade flows. Since differentiated products refer to close substitutes which belong to the same product group, trade in differentiated products is referred to as intra-industry trade, whereas trade in different P-roducts represents inter-industry trade. Several empirical studies3 have revealed the importance of intra-industry trade among industrialized countries which have similar factor endowments and per capita income levels. This does not rule out intra-industry trade between countries having different per capita 86

TABLE 20 Malaysia's Terms of Trade with Sri Lanka (1970 = 100) 1970

1975

1977

Export Price Index (Px)

100

212

203

Import Price Index (Pm)

100

103

155

Export Value Index (Vx)

100

94

97

Import Value Index (Vm)

100

164

207

Export Volume Index (Qx

Vx/Px)

100

44

47

Import Volume Index (Qm

Vm/Pm)

100

142

134

Net Barter Terms of Trade (Px/Pm)

100

206

131

Income Terms of Trade (Px/Pm.Qx)

100

91

62

TABLE 21 Annual Growth Rates of Malaysia's Export to and Imports from Selected South Asian Countries (In per cent) 1970-75 Value of Exports to: India Pakistan Sri Lanka

28 49 -1

Volume of Exports to: India Pakistan Sri Lanka Value of Imports from: India Pakistan Sri Lanka Volume of Imports from: India Pakistan Sri Lanka

SOURCE:

Computed from Tables 18-20.

87

1970-77

54 36 -0.5

19 42 -15

38 24 -10

12 -3 8

12 -7

7 -12 7

6 -18 4

11

TABLE 22

Trade between Malaysia and South Asia:

Export-Intensity of Trade Indices

Country

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

India

0.527

0.786

1.53

1.63

0.942

0.934

0.794

4.31

4.95

2.94

3.26

Pakistan

0.591

0.572

1.32

0.755

3.07

3.52

1.62

2.66

3.12

1.94

2.38

Sri Lanka

1.08

0.732

1.08

0.248

0.543

0.91

0.632

o. 772

1.18

0.681

1.02

Bangladesh

n.a.

n.a.

n.a.

0.601

0.491

1.19

1.52

0.319

0.983

1.46

2.44

-

-

0.11

0.103

0.171

-

Nepal

n.a.

-

-

-

-

-

= not applicable

nil or negligible

SOURCE:

Computed from International Monetary Fund (IMF), Direction of Trade, various issues.

TABLE 23

-

Trade between Malaysia and South Asi8:

-

!•port-Intensity of Trade Indices

Country

1970

1971

1972

1973

19711

1975

1976

1977

1978

1979

1980

India

2.07

2.28

1.8

1.32

1. 71

2.98

1.81

2.01

2.23

2.00

1.91

Pakistan

2.22

1.89

2.54

2.29

2.111

0.90

0.80

0.55

0.56

0.37

0.58

Sri Lsnks

0.36

0.40

0.36

0.56

o.z9

0.55

0.60

0.50

0.29

0.20

1.31

Bangladesh

n.a.

n.a.

n.a.

0.2

o.o5

0.28

O.BO

0.33

0.43

0.29

o. 77

-

0.32

-

0.35

Nepal

n.a. = not applicable nil or negligible SOURCE:

Computed from IMF, Direction of Trade, various issues.

TABLE 24 Trade of Malaysia with India

Intra-Industry Trade Indices:

Code

001 051 062 072 221 223 292 332 422

431 551 581 621 629 631 633 666 681 682 692 693 714

717 724 725 729 732 734 862 891 895 896 911 931 941

951

Description

Live animals for food Fruits and nut, fresh Sugar confectionary and preparations Cocoa Oil-seeds, oil nuts, oil kernels Oil-seeds, for extend and other fixed veg. oil Crude vegetable materials, inedible Petroleum products Other fixed vegetable oils Other animal vegetable oils and fats Essential oils, perfume, flavour materials Plastic materials Rubber fabricated materials Rubber manufactured n.e.s. Wood simply shaped Cork manufactured Pottery Silver and platinum group metals Copper (including alloy) Metal containers for storage and transport Wire products (excluding electric, fencing grill) Office machines, except diet. machines Textile and leather machinery Telecommunications apparatus Domestic electricity equipment Other electric machinery, apparatus Road motor vehicles Aircraft Photographic, cinematographic supplies Musical instruments, gramophones Office and stationery supplies, n.e.s. Works of art and antiques Postal packages Special transactions Animals for zoos and pets Military weapons & ammunition

1970

1975

93 18 34

0

l3

37

1979*

0

0 2 0

1

24 23 0 45 4 77 0 0

2 0 2

0

24 1

21 66 63

10 82

0

26

0

5 0 25

Bl

0

7

63

95

5

0

35

0

43 70

73

0 1

0

43

15

0

2

2 0 0

56 40 26 0

1 0

0

10

89 19

17

58 14

30

2

1 11 0

2 0

70 17

36 10

42 0

1 0

0 54 77

40 17 12

7

* refers to Peninsula Malaysia 0

n.e.s.

SOURCE:

indicates no trade suggests inter-industry trade only not elsewhere specified Computed from Annual Trade Statistics of Malaysia, various issues (see the Overview to this volume for the formula).

90

income levels, as there is still room for the exchange of higher-grade products with those of a lower-grade. While empirical studies have shown that intra-industry trade largely revolves around manufactured goods, one must not overlook the possibility of agricultural products being a source of intra-industry trade, as pointed out by Balassa.4 One may therefore hypothesize that the extent of intra-industry trade between Malaysia and the South Asian countries would grow over time. Estimations of intra-industry trade between Malaysia and South Asian countries in this paper are based on the Grubel-Lloyd formula (see the Overview to this volume for the formula and its implications). In this formula, there is a problem connected with the definition of industry and the result of the exercise will depend largely on the definition adopted. The broader the definition or the more aggregated the product grouping, the greater the overestimation of the extent of intra-industry trade. Changes in the Standard International Trade Classification (SITC) during the seventies, however, have thwarted the attempt to compute the intra-industry trade indices at the highly disaggregated six-digit level. In this present study, three-digit level disaggregation is used. Consequently, there is a danger of overestimation. The results of the exercise are presented in Tables 24-28. It is found that in most of the industry groups, either there is no trade at all or there is only inter-industry trade. Nevertheless, it appears that intra-industry trade plays a relatively less unimportant role in Malaysia's trade relations with India than with other South Asian countries. There is hardly any intra-industry trade between Malaysia and Bangladesh or Nepal . Intra- i ndus try trade between Malaysia and India appears to be concentrated on rubber, wood and petroleum products, essential oils, perfume and flavour materials, wire products, canned fish, etc. Intra-industry trade between Malaysia and Pakistan centres mainly around oil seeds (including nuts and kernels), spices, crude vegetable materials (inedible), textiles, and printed matter. Malaysia's intra-industry trade with Sri Lanka consist mainly of the machinery categories, and printed matter. There is hardly any intra-industry trade between Malaysia and Bangladesh or Nepal. As noted earlier, there is scarcely any trade between Malaysia and Bhutan, let alone intra-industry trade.

Index of Trade Reciprocity An effort is also made here to gauge the extent of reciprocity in the trade relations of Malaysia with its South Asian trading partners. The formula adopted in this exercise is one developed by Wadhva (refer to the Overview to this volume for the formula and its implications). Treating Malaysia as part of the South Asian "group", the multilateral reciprocity index of "intra-regional" trade in 1980 was estimated to be 0.402. Bilateral reciprocity of trade between Malaysia and each of the South Asian countries is reflected in Table 29. Extreme lopsidedness is reflected in Malaysia's trade relations with Pakistan and Bangladesh, as shown by the very low values of the reciprocity index. Nepal exhibits the highest index in 1980, although Malaysia's trade with Nepal has never been significant. It is of greater importance to note that the degree of reciprocity of 91

TABLE 25 Intra-Industry Trade Indices:

Code

031 075 221 292 541 551 553 629 642 651 665 666 697 719 861 892 911

931

Trade of Malaysia with Pakistan

Description

Fish fresh or simply preserved Spices Oil-seeds, oil nuts, oil kernels Crude vegetable materials, inedible Medicinal and Pharmaceutical products Essential oils, perfume, flavour materials Perfumery, cosmetics, toilet preparation Rubber manufactured, n.e.s. Paper and paperboard articles Textile yarn and thread Glassware Pottery Household equipment Machines and parts, n.e.s. Scientific, medical, optical, photo apparatus Printed matter, manuscripts, typescripts Postage packages Special transactions

1979*

1970

1975

10

0 1

23

54

100

0 4

85

4

80 4

11 0

12 10

5 0

36 71

30 31 37

0 0 0

0

84

95 78 25

15 47

6

2

39

18

*

refers to Peninsular Malaysia indicates no trade 0 = suggests inter-industry trade only n.e.s. = not elsewhere specified

SOURCE:

7

22 34

Computed from Annual Trade Statistics of Malaysia, various issues (see the Overview to this volume for the formula).

31 0 0 0

40

TABLE 26 Intra-Industry Trade Indices:

Trade of Malaysia with Bangladesh

Description

Code

1975

1979*

2

64

Oil-seeds, oil nuts, oil kernels

37

0

276

Other non-metallic minerals

82

292

Crude vegetable materials, inedible

47

581

Plastic materials

72

892

Printed matter, manuscripts, typescripts

-

44

911

Postal packages

87

61

931

Special transactions

47

0

075

Spices

221

*

refers to Peninsular Malaysia indicates no trade 0 = suggests inter-industry trade only SOURCE:

Computed from Annual Trade Statistics of Malaysia, various issues (see the Overview to this volume for the formula).

1

TABLE 27 Intra-Industry Trade Indices:

Code

031 074 099 541 621 663 692 719 722

742 891 892 899 911

931

Trade of Mslsysis with Sri Lanka

Description

Fish, fresh or simply preserved Tea and mate Food preparations, n.e.s. Medicinal and pharmaceutical products Rubber fabricated materials Cork manufactures Metal containers for storage and transport Machinery and parts, n.e.s. Electric power machinery, switch gear Pumps for liquids and liquid elevators, parts Musical instruments, gramophones, etc. Printed master, manuscripts, typescripts Manufactured articles, n.e.s. Postage packages Special transactions

1970

1975

1979*

53

0.2 17

0 0

22 99

4

0

-

0 61 80

63 1

73 29 12 49 67

91 55 71

40

0 78 84

81

-

77

87 15

*

refers to Peninsular Malaysia indicates no trade 0 = suggests inter-industry trade only n.e.s. = not elsewhere specified

SOURCE:

Computed from Annual Trade Statistics of Malaysia, various issues (see the Overview to this volume for the formula).

TABLE 28 Intra-Industry Trade Indices:

Trade of Malaysia with Nepal

Description

Code

Printed matter Special transactions and commodities

892

931

1975

1979*

97

21 74

* refers to Peninsular Malaysia. indicates no trade

0

= suggests inter-industry trade only Computed from Annual Trade Statistics of Malaysia, various issues (see the Overview to this volume for the formula).

SOURCE:

TABLE 29 Index of Reciprocity:

Malaysia's Exports to South Asia

1972

1975

1980

*

0.059

0.170

India

0.861

0.871

0.501

Nepal

*

*

0.667

0.400

0.103

0.007

0

0.193

0.486

Bangladesh

Pakistan Sri Lanka * no trade

SOURCE:

Computed from IMF, Direction of Trade, various issues.

95

Malaysia-India trade fell between 1975 and 1980.

I I I.

while

that

of

Malaysia-Sri

Lanka

rose

INVESTMENT RELATIONS

South Asia keeps a low profile as a source of foreign investment in Malaysia. Of the South Asian countries, only India and Sri Lanka have investment interests in Malaysia. India accounted for 1.5 per cent of the total foreign investment in Malaysia while Sri Lanka's share was negligible as at the end of December 1979. Indian investments in Malaysia have taken the form of joint ventures with Malaysian and other foreign counterparts. As at 31 December 1979, there were 43 such joint ventures, with total investments from India amounting to M$39.6 million, the industrial allocation of which is shown in Table 30. More than half of the Indian investments in Malaysia have gone into food manufacturing, while textiles and transport equipment activities have absorbed more than a quarter of the Indian investments. The extent of equity participation by India ranges from 0.01 per cent in the case of paper, printing and publishing, to 69 per cent in fabricated metal products. Capital from India forms, on the average, more than one-third of the paid-up capital in the following Indo-Malaysian joint-venture activities: food manufacturing, textile and textile products, p-lastic products, fabricated metal products, electrical and electronic products and transport equipment. A striking feature of these Indo-Malaysian joint ventures is the extent of bumiputra participation in the ownership. On the average, the bumiputras account for 14.6 per cent of the total paid-up capital, while the corresponding share of Malaysian Indians is only 4.4 per cent. It is of interest to note that most of the Indian investments in Malaysia have received investment incentives of some sort. In fact, only 3.7 per cent of the capital from India can be classified as receiving no tax incentives at all. About 56 per cent of the Indian investments have flowed into ventures which enjoy investment tax credit,5 while the remaining 40 per cent of them have gone into ventures enjoying pioneer status,6 as shown in Table 31.7 About 91 per cent of the Indian capital enjoying investment tax credit is accounted for by food manufacturing (three joint-venture companies), while transport equipment (four joint-venture companies), chemical and chemical products (five joint-venture companies), and textile and textile products (three joint-venture companies) together accounted for about 60 per cent of the Indian investments with pioneer status. Of the 25 joint ventures enjoying pioneer status, 16 had a 1ready been issued with "pioneer cert ifi cate"8 at the end of 1979. Table 32 presents the breakdown of Indian investments by type of incentives and industrial grouping, to enable easy cross-reference with Table 33 which provides the number of Indo-Malaysian joint-venture companies in each industrial grouping by type of investment incentives.

96

TABLE 30 Equity Share of Indo-Ha1aysian Joint Ventures by Industry, as at 31 December 1979 (In thousand M$)

Industry

Food manufacturing Beverage and tobacco Textile & textile products Leather & leather products Paper, printing, publishing Chemical & chemical products Petroleum & coal Rubber products Plastic products Non-metallic mineral products Basic metal products Fabricated metal products Machinery manufacturing Electrical & electronic products Transport equipment Restaurant & hotel Total

*

No. of Firms

8 l 3 1 1 7 1 2 2 2 1 3 2 2 6 1

43

Foreign

Malaysia

Other

Sub-Total

Bumiputra

22,193

23,936

46,129

12,099

330

223

665

13,317

59,446

1,957 10,560 5,867 66,874

7,681 10,567 5,868 67,929

3,241 1,516 3,248 7,132

910 1,347 3,585 12,521

5,342 lOB 124 1,682

68 1,462 4,175 16,374

9,621 4,433 11,132 37,709

17,302 15,000 17,000 105,638

98

150 357 67J 47 138 209 876 5,701

-

14 312

349 418 2,700 34 1,423 350 1,333 5,217

175 2,492 45 34 175 1,079

-

474 532 3,756 268 636 1,200 2,019 7,858

823 950 6,456 302 2,059 1,550 3,352 13,075

110,420

149,998

35,387

26,744

92,955

242,953

*

5, 724 7 1

1,055

*

251 418 1,900 34 1,421 350 1,319 4, 905

*

800 2

Chinese

-

246 309

Indian

-

78

1 159 23 560

282 176 463 657 41 1,597

20, 051

10,773

-

* 39,578

Other

negligible

Note: SOURCE:

Grand Total

India

Indian investment in petroleum & coal, and beverage & tobacco joint ventures constitute less than 0.0001 per cent. Malaysian Industrial Development Authority (MIDA).

Sub-Total

TABLE 31

Investment froM India in Joint Ventures according to Type of Investment Incentive

Incentive

Paid-up Capital (M$'000)

%

Investment tax credit

22, 121

55.88

Pioneer status

16,009

40.44

Without tax incentive

1,454

3.68

Total

39,584

SOURCE:

MIDA.

lOO

TABLE 32 Investment from India in Joint Ventures in Malaysia, by Investment Incentive as at December 1979 (In thousand M$) Investment Tax Credit Industry

Food manufacturing Beverage & tobacco Textile & textile products Leather & leather products Paper, printing, publishing Chemical & chemical products Petroleum & coal Rubber products Plastic products Non-metallic mineral products Basic metal products Fabricated metal products Machinery manufacturing Electrical & electronic products Transport equipment Restaurant & hotels Total

*

negligible

SOURCE:

MIDA.

Paid-up Capital (M$'000) 20,110

569

%

90.91

2.57

Pioneer Status Paid-up Capital (M$'000)

Without Tax Incentive %

1,500

13.44

5, 724

51.28

198 3

251

0.21 0.03 2.25

1,442

22,121

6.52

100

16,009

%

583 3

40.10 0.21

7 288

0.48 0.07 19.81

418

28.75

-

-

-

-

-

1, 900

1,301 350 1,319 3,463

Paid-up Capital (M$'000)

11.65 3.14 11.42 6.58

lOO

34 120

1,454

2.34 8.24

lOO

TABLE 33 Nu.ber of Indo-Halaysian Joint Ventures in Industry, by Type of Investment Incentive as at 31 December 1979

Industry

Food manufacturing Beverage and tobacco Textile and textile products Leather and leather products Paper, printing, publishing Chemical and chemical products Petroleum and coal Rubber products Plastic products Non-metallic mineral products Basic metal products Fabricated metal products Machinery manufacturing Electrical and electronic product Transport equipment Restaurant and hotels Total

SOURCE:

HIDA.

Investment Tsx Credit 3

-

1

-

-

Pioneer Status

1

Without Tsx Incentive 4

-

1

-

1 1

3

5 1

2

-

1

-

2

2

-

2

1 1

-

2

-

4 1

-

6

25

12

2 2

Total

8 1 3 1

l 7 1

2 2 2

3 2

2 6 1 43

Indo-Malaysian joint-ventures provide employment for more than nine thousand workers, of whom bumiputras represent more than 47 per cent, Chinese about 18 per cent, and Malaysian Indians 33 per cent, while expatriates account for a little more than one per cent of the work-force, as shown in Table 34 which also gives an industrial breakdown of employment figures. An attempt is made in Table 35 to estimate the factor-intensity This is done by calculating the of Indo-Malaysian joint ventures. fixed capital per worker, which is found to range from a low of M$5,755 in the manufacturing of rubber products to a high of M$88,548 in chemical products manufacturing. The average size of fixed capital per worker in the Indo-Mal aysian joint ventures stands at M$26,581. The last column in Table 35 presents the index of fixed capital per worker in each industrial group, taking the overall average figure as the base (that is, 100), as a measure of variance. Table 36 illustrates bumiputra role in the equity and the employment structures of the Indo-Malaysian joint ventures. It can be seen that bumiputra equity share ranges from 6.7 per cent in the fabricated metal products group to 43.6 per cent in the transport equipment category. Bumiputra equity participation in Indo-Malaysian joint ventures exceeding 20 per cent is found in the manufacturing of food, plastic products, electrical and electronic products and It is also of significance to note that the transport equipment. employment participation rate in Indo-Malaysian joint bumiputra ventures averaged around a high figure of 47 per cent in 1979. The only other South Asian country which has investments in Malaysia is Sri Lanka, but the capital committed as at the end of 1979 was relatively small, in the order of M$61,000 in four joint ventures, food one in each of the following manufacturing activities: manufacturing, beverages and tobacco, non-metallic mineral products, and electrical and electronic products, as can be seen in Table 37. Sri Lankan capital accounts for roughly 3 per cent of the equity, while Malaysian Chinese and bumiputras dominate. The Sri Lankan-Malaysian joint ventures producing electrical and electronic products, and manufacturing food are granted pioneer status. Two other joint ventures of Sri Lanka in Malaysia do not have tax incentives, as shown in Table 38. It is significant to note that about 85 per cent of Sri Lankan investments in Malaysia enjoy investment incentives provided by the Malaysian Government. Sri Lankan-Malaysian joint ventures, as shown in Table 39, employed 369 workers at the end of 1979. Expatriates in these joint ventures numbered only three, which represented less than 1 per cent of the total number of employees. It is also significant to note that bumiputras formed more than two-thirds of the work-force. Fixed capital per worker in the Sri Lankan joint ventures in Malaysia averaged at M$5,505 (Table 40), which is substantially less see Table 35). than that of their Indian counterparts (M$26,581: Thus, the Sri Lankan joint ventures appear to be relatively more labour-intensive than the Indian joint ventures in Malaysia. Other interesting comparisons between Sri Lankan and Indian investments in Malaysia may be in order: Sri Lankan investment of M$61,000 in four joint ventures pales in comparison with the Indian investment of In terms of aver age bumi putra M$39. 6 million in 43 joint ventures. equity and employment participation rates, the Sri Lankan joint 101

TABLE 34 £~loyment

Composition in Indo-Halaysian Joint Ventures in Industry, by Race as at 31 December 1979 (NUMber of Workers)

Mslsysian Industry

food manufacturing Textile and textile products Leather and leather products Paper, printing, publishing Chemical and chemical products Rubber products Plastic products Non-metallic mineral products Basic metal products fabricated metal products Machinery manufacturing Electrical and electronic products Transport equipment Restaurant and hotel

Total

Total Percentage (%)

SOURCE:

MIDA.

Indians

Bumiputras

Chinese

512 974 819 481 625

375 1,261 313 37 227 60 7 202 6 54 45 174 247 7

10 4 5

37 183 5 126 39 108 285 59

lOB 127 759 139 326 3 9 36 3 16 17 16 75 15

2

1,005 2,366 1, 896 657 1,179 137 53 422 14 196 102 298 607 83

4,325

1,649

3,015

26

9,015

72

47.32

18.04

32.99

Others

SubTotal

1 2

-

1

1

-

0.28

98.63

NonMalaysian

Grand Total

12 33 4 6 14 6 4 6

-

1,017 2,399 1, 900 663 1,193 143 57 428 14 204 103 306 630 83

125

9,140

-

8 1 8 23

1.37

100

TABLE 35 Size of Fixed Capital Per Worker in Indo-Halaysian Joint Ventures in Industry, as at 31 December 1979

Industry

Food manufacturing Textile and textile products Leather and leather products Paper, printing, publishing Chemical and chemical products Rubber products Plastic products Non-metallic mineral products Basic metal products Fabricated metal products Machinery manufacturing Electrical and electronic products Transport equipment Restaurant and hotel Total

* negligible SOURCE:

Tables 33 and 38.

Total Fixed Capital (K) (H$'000)

Total Number of Workers ( L)

Fixed Capital Per Worker (~) L (H$)

Index L (H$26,581 - lOO)

58,452 7,212 7,895 25,641 88,548 5,755 16,666 15,084 21,571 10,093 15,049 10,954 20,754

220 27 30 96 333 22 63 57

*

1,017 2,399 1,900 663 1,193 143 57 428 14 204 103 306 630 83

242,953

9,140

26,581

lOO

59,446 17,302 15,000 17,000 105,638 823 950 6,456 302 2,059 1,550 3,352 13,075

f

81

38 57 41 78

TABLE 36 Bumiputra Participation in Indo-Malaysian Joint Ventures by Industry as at 31 December 1978 (In per cent)

Industry

Food manufacturing Textile and textile products Leather and leather products Paper, printing, publishing Chemical and chemical products Rubber products Plastic products Non-metallic mineral products Basic metal products Fabricated metal products Machinery manufacturing Electrical and electronic products Transport equipment Restaurant and hotel Average

SOURCE:

Tables 33 and 38.

Equity

Employment

Bumiputra Share in Total Paid-up Capital

Bumiputra Share in Total Employment

20.4 18.7 10.1 19.1 6.8 18.2 37.6 10.4 15.6 6.7 13.5 26.1 43.6

50.3 40.6 43.1 72.5 52.4 50.3 64.9 42.8 35.7 61.8 37.9 35.3 45.2 71.1

14.6

47.3

TABLE 37 Equity Share of Sri Lankan-Malaysian Joint Ventures, by Industry as at 31 December 1979

Industry

No. of Firms

Malaysian

Foreign (M$'000) Sri Lanka

Other

Total

Bumiputra

Chinese

*

25

618

31

9

74

Food manufacturing

1

25

Beverage and tobacco

1

*

Non-metallic mineral products

1

9

Electrical and electronic products

1

27

292

319

11

912

4

61

292

353

703

943

Total

*

Indian

17

17

Other

Total

Grand Total

26

675

700

6

97

106

923

1,242

1,695

2,048

32

negligible

Note:

SOURCE:

Sri Lankan investment in the beverage and tobacco industry constituted less than 0.00001 per cent of the total paid-up capital for that joint venture firm. MIDA.

TABLE 38 Number of Sri Lankan-Halaysian Joint Ventures in Industry, by Type of Investment Incentive as at 31 December 1979

Pioneer Status Industry No. of Companies

Without Tax Incentive

Paid-Up Capital H$

Food manufacturing

1

Non-metallic mineral products

-

Electrical and electronic products

1

Beverages and tobacco

-

-

2

52,000

Total

*

negligible

SOURCE:

MIDA.

No. of Companies

Paid-Up Capital M$

25,000

-

1

9,000

27,000 1

2

* 9,000

TABLE 39 E~1oyment

Composition in Sri Lankan-Ma1aysian Joint Ventures, by Race as at 31 December 1979

Ma1aysians Industry

Bumiputra

Chinese

Indians

Others

SubTotal

NonMalaysian

Grand Total

144

24

-

168

168

Non-metallic mineral products

17

8

-

25

26

Electrical and electronic products

86

30

60

-

176

2

178

247

30

92

-

369

3

372

24.73

-

0.81

lOO

Food manufacturing

Total Total %

SOURCE:

MIOA.

66.40

8.06

99.19

TABLE 40 Size of fixed Capital Per Worker in Sri Lankan-Malaysian Joint Ventures as at 31 December 1979

Industry

Total fixed Capital (K) (M$'000)

Total Number of Workers (L)

fixed Capital Per Worker (.15.) (M$) L

.15. Index L (M$5,505 - lOO)

food manufacturing

700

168

4,167

76

Non-metallic mineral products

106

26

4,077

74

1,242

178

6,978

127

2,048

372

5,505

100

Electrical and electronic products Total SOURCE:

Tables 33 and 45.

ventures, as shown in Table 41, appear to be somewhat better. But this is misleading, since there are several Indian joint ventures with even better bumiputra participation rates, as was seen earlier. The present study of South Asian investments in Malaysia is crippled by the paucity of data. An attempt to collect primary data from these South As i an-Mal ays i an joint ventures in Malaysia through mail questionnaires was aborted due to poor response. Only a few of these companies cared to reply. It appears from these returns that the operations are labouror resource-intensive but not capital-intensive and that a great deal of technology transfer has been taking place from South Asia to Malaysia.

IV.

OTHER ECONOMIC RELATIONS

The main thrust of this paper, as seen above, centres around trade and investment relations. This makes sense for two main reasons: a) it is apparent that trade and investment dominate the Malaysia-South Asia economic relations, and b) they lend themselves to quantitative measurements. However, it will be inappropriate for us to ignore other commercial or financial relations simply because they are not easily quantifiable, or factual information on them are not readily available. In this section, a modest attempt is made to briefly discuss such other economic relations. As in the case of trade and investment relations, it is India which plays the dominant role in all other economic relations of Malaysia with South Asia. The cultural ties between India and Malaysia could explain the strong economic links between these two countries. The fact that Malaysians of Indian origin account for about 10 per cent of Malaysia's population suggests that the cultural links between Malaysia and India are a continuing phenomenon. The number of Malaysian tourists visiting India has been rising steadily, although statistical data are not readily available to support this observation. The number of tourists from India into Malaysia has also been growing, especially after India relaxed its tight foreign-exchange regulations. Nevertheless, there is no doubt that Indian tourists form only a small proportion of the foreign tourist flows into Malaysia. Tourist movements between Malaysia and Sri Lanka and between Malaysia and Pakistan appear to be largely a one-way flow from Malaysia to these countries. There is scarcely any tourist movement between Malaysia and Bangladesh, Nepal, or Bhutan. Financial flows in terms of unilateral transfers are also one-way from Malaysia to South Asia. India once again seems to emerge as the largest South Asian recipient of unilateral transfer payments from Malaysia, although statistics are not readily available to show the magnitude of this flow. These unilateral payments are essentially private transfers by Malaysians of Indian origin (presumably first and second generations). Some unilateral transfers also seem to trickle from Malaysia into Pakistan and Sri Lanka. Malaysia-South Asia economic relations are also extended to the field of banking and insurance. Three Indian banks, namely the Indian Overseas Bank, the Indian Bank, and the United Commercial Bank, which were operating in Malaysia until India nationalized its commercial 109

TABLE 41 Bumiputra Participation in Sri Lankan-Malaysian Joint Ventures, by Industry as at 31 December 1979 (In per cent) Equity

Employment

Bumiputra share in total paid-up capital

Bumiputra share in total employment

30.18

38.71

Non-metallic mineral products

3.61

4.57

Electrical and electronic products

0.54

23.12

34.33

66.40

Industry

Food manufacturing

Total

SOURCE:

Tables 33 and 45.

banks, merged together and formed a joint venture with Malaysia, giving birth to a new financial institution called the United Asian Bank. Likewise, the Pakistani Habib Bank has been converted into a joint venture, the Habib Perwira Banl. In the same manner, the Life Insurance Corporation of India, which was operating in Malaysia, was converted into a joint venture with Malaysian majority equity participation. In each of these joint ventures the foreign equity share amounts to one-third. In this regard it is of interest to note that foreign nationalized banks and insurance companies are not allowed to operate in Malaysia. Malaysia's political ties with the South Asian countries have always been strong and stable. It is of significance to note that Malaysia has signed Double Taxation Agreements with several South Asian countries for the avoidance of double taxation on profits, dividends, interest, royalties, and so forth. Malaysia signed such an agreement with Sri Lanka on 16 September 1972, followed by one with India on 25 October 1976. On 29 May 1982, Malaysia signed a similar agreement with Pakistan, and a double taxation agreement between Malaysia and Bangladesh is being negotiated.

V.

THE FUTURE OUTLOOK

Although South Asia presently accounts for only a very small proportion not only of Malaysia's external trade but also of foreign investment in Malaysia, it does not mean that this region is of little economic importance to Malaysia. The relative decline in the contribution of South Asia to the external trade of and foreign investment in Malaysia is not inconsistent with the absolute increase in its role. There is no doubt, however, that Malaysia's external 1 inks are very much stronger with the advanced industrialized countries, the relationship with which is complementary rather than competitive. The absence of extensive economic links between Malaysia and South Asia does not necessarily suggest the non-existence of complementarity between them. There are enough differences in factor endowments and in the level of technological development to generate profitable exchanges of goods and services. The fact nevertheless remains that the potential for strong economic relations between Malaysia and South Asia has remained unexploited. Be that as it may, the preceding analysis has borne out clearly that trade between Malaysia and South Asia, although small, has been largely favourable to Malaysia. It may be pertinent to summarize here some of the ear 1 i er observations. In recent years Ma1 ays i a has been registering persistent and substantial surpluses in the balance of trade especially with India and Pakistan. The net barter terms of trade and income terms of trade also appear to be moving strongly in favour of Malaysia. Much of the trade between Malaysia and South Asian countries is of the inter-industry variety and there has been very little intra-industry trade. The index of reciprocity of trade is small and appears to be falling. The extent of South Asian direct involvement in the development of the manufacturing sector of Malaysia through investment activities is also minimal. No attempt is made in this study to make any extrapolation, as it would be extremely unrealistic to assume that the trends of the seventies would continue into the eighties as well. 111

The 1980s is likely to witness major structural changes in the economies of Malaysia and the South Asian countries. Malaysia is rapidly losing its comparative advantage in labour-intensive industries. This may bring about some changes in the direction and composition of Malaysia's external trade. Footloose industries such as electronics are likely to move out of Malaysia into South Asian countries such as Sri Lanka and Bangladesh where wage levels are substantially lower. Malaysia's industrialization and trade strategy in the 1980s is likely to shift increasingly in favour of skill-intensive and resource-intensive activities. All these have far-reaching implications for Malaysia-South Asia economic relations. Both inter-industry and intra-industry trade flows between Malaysia and South Asian countries are likely to increase in the 1980s. Among the South Asian countries, India appears to be best geared to play the most active role in this regard. India's commercial and technological capabilities are such that it may well become an important partner of Malaysia's industrial development and economic restructuring. Being capital-deficient, the South Asian countries are unlikely to increase their investments substantially in Malaysia. Malaysia itself is likely to de-emphasize foreign equity participation, consistent with its New Economic Policy (NEP) objectives. There may well be a strong preference in Malaysia for foreign technology without foreign equity. Such "unbundling" would create new opportunities for India which has a lot of technology to offer but little capital to spare. Malaysia is keen to diversify the markets for its exports and the sources of its imports as this would help reduce its "over-dependence" on the industrialized market economies. Such a diversification would help not only stabilize the external sector but also improve the terms of trade and balance of payments of Malaysia. The expected reorientation of the Malaysian economy, however slight it might be, would provide new avenues for increased trade with South Asian countries. In this context, the prospects for state-trading in general and bilateral barter-trade in particular appears to be bright, as it would help overcome foreign-exchange constraints experienced by the South Asian countries. The idea of collective self-reliance among developing countries, which is being promoted by the UNCTAD (United Nations Conference on Trade and Development), is likely to gain stronger ground in the 1980s in the face of growing protectionism in the advanced countries. The proposed South Asian regional co-operation similar to ASEAN wou 1d a1so pave the way for inter-regional dialogues leading to reciprocal trade liberalization and increased commercial interactions between the two regional groups.9 Thus, all signs seem to indicate that economic relations between Malaysia and South Asia in general and India in particular should improve markedly during the 1980s. Indeed, as the Malaysian Minister of Trade and Industry, Tengku Ahmad Rithauddeen has remarked, Malaysia is India's "window to the world" to show the technological and management skills that India can export to other countries, by virtue of the fact that Malaysia is the country in which India has the most number of foreign joint ventures.10 However, it appears that an inordinate number of I ndo-Ma lays i an joint ventures are "floundering". According to the Minister, factors

112

contributing to the poor performance includes financial constraints, 1 ack of em ph as is on marketing approach, 1 ack of pre-feas i b i 1 ity and feasibility studies, and wrong choice of joint-venture partners. As the Minister had observed, it has become increasingly difficult for the Malaysian Industrial Development Authority (MIDA) to introduce Ma 1 ays i an investors to projects sponsored by Indian investors part 1y because of the fact that the former are unaware of what India can offer and partly because of "crisis of confidence" within the Malaysian private sector regarding partnership with Indian enterprises. There must be a great deal that both India and Malaysia can do together to make these ventures successful. In this respect it is encouraging to note that India is now permitting cash remittances in selective cases, such as the Indian financing for a transmission line job awarded by Malaysia's National Electricity Board in August 1982. However, it is obvious that India cannot do much to alleviate the financial constraints referred to earlier. It may be useful for the Indian and Malaysian partners to draw in a third party to contribute the cash or technology. In fact, this is being done and Unitata represents a successful trilateral venture of such a kind. The Indian joint ventures in Malaysia also appear to have 1 imited marketing knowledge. It is not appreciated by the Indian investors that the Malaysian market is highly internationalized, quite unlike the Indian market which is heavily sheltered. The products have to be competitive in terms of price, quality and after-sales services, if they are to make a dent in the Malaysian markets. Efforts must be taken by Malaysia and the South Asian countries to ensure that South Asian joint ventures in Malaysia do not flounder. For, it is not just the capital put in by the businessmen which is at stake; indeed, it is the whole concept of co-operation among developing countries which is on trial.

NOTES 1

The indices are computed using the Laspeyres' formula: X

100

where Pn and p0 refer to prices (unit values) respectively, while q0 refers to the base importance of the particular commodity; see, Statistics (New York: Schaum Publishing Co.,

in the given year and the base year, year value weight to indicate the M.R. Spiegel, Theory and Problems of 1972), p. 318.

2

The formula for these indices and their implications are provided in the Overview to this volume.

3

B. Balassa, "European Integration: American Economic Review 53 (1963):

Problems and Issues", Papers and Proceedings, 175-84.

8. Balassa, "Tariff Reductions and Trade in Manufactures Among the Industrial Countries", American Economic Review 56 (1966): 466-73.

113

H.G. Grubel, "Intra-Industry Specialization and the Pattern of Trade", Canadian Journal of Economics and Political Science 33 (1967): 374-84. H.G. Grubel and P.J. Uoyd, "The Empirical Measurement of Intra-Industry Trade", Economic Record 47 (1971): 494-517. H.G. Grubel and P.J. Lloyd, Intra-Industry Trade - the Theory and Measurement of International Trade in Differentiated Products (London & Basingstoke, 1975). A. Aquino "Intra-Industry Trade and Inter-Industry Specialization as Concurrent Sources of International Trade in Manufactures", Weltwirtschaft-liches Archiv 114 (1978): 275-95. 4

B. Balassa "Intra-Industry Trade and the Integration of Developing Countries in the World Economy", in On the Economics of Intra-Industry Trade, edited by H. Giersch (Tubingen, 1979), pp. 245-70.

5

Investment tax credit allows a company to deduct from its tax ab le income a sum equivalent to at least 25 per cent of the total expenditure incurred on fixed assets in addition to the normal initial and annual capital allowance. The tax credit is increased to a maximum of 40 per cent depending on a) location, b) product, and c) Malaysian content in the final product.

6

Pioneer status permits total exemptions for a company from the payment of income and development taxes (that is, tax holiday) for a period of two to eight years, depending on a) the size of the company's fixed capital investment, b) location, c) type of product produced, and d) extent of local raw material content. Pioneer status companies can begin to enjoy the tax holidays only after "pioneer certificates" are issued. These pioneer certificates are issued only after production levels have reached 25-30 per cent of the installed capacity.

7

It is of relevance to note that Malaysia incentives, which include the following:

offers

a

number

of other

fiscal

a)

labour utilization relief which provides tax exemption for Z-5 years depending on the number of full-time paid employees, with an additional three years of tax exemption for preferred location, priority product, and local content;

b)

locational incentive which provides tax relief of 5-10 years to projects located in certain designated areas based on the size of fixed capital, type of product and local content of the final output; and

c)

export incentives which consist of i) export allowance, ii) accelerated depreciation, iii) double deduction of overseas promotional expenses, and (d) export refinancing facility.

It may be pointed out that firms are not allowed to enjoy more than one fiscal

incentive for a given project at any one time. However, there is an exception: export incentives may also be extended to industrial projects which have been granted other fiscal incentives. 8

See note 6.

9

Since this was written,

10

New Straits Times (Kuala Lumpur), 9 September 1982.

a South Asia Regional Cooperation (SARC) group has been formally constituted. Its members are Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka.

114

Philippine-South Asia Economic Relations Ajit Singh Rye*

I.

INTRODUCTION

Trade contacts between the South Asian sub-continent and the The late Dr Otley Philippines date back to the pre-Christian era. Beyer, an eminent anthropologist and historian, believed that traders from South Asia reached the Philippines as far back as the second or The other view is that more lasting Indic third century BC. influences in Phi 1 i ppi ne thought, 1 iterature and 1 angu ages came with traders and religious missionaries through intervening cultures around These cultural and linguistic the tenth or eleventh century. influences have remained largely intact beneath the overlays of later Islamic, Christian, and Hispanic influences. During the Spanish regime (1521-1898), direct trade and cultural links between the Philippines and the rest of Asia were practically cut off except for interaction through the southern islands. However, the British East India Company, operating from its base in Madras, India, together with the English free merchants gradually developed and maintained maritime trade known as "country trade" with countries in the Indian Ocean and the South China Sea. The British merchant ships sailing regularly from Madras and Surat brought cargoes of Indian textiles -- "piece goods" -- and other products to Manila "The Manila trade" became an for onward shipment to Acapulco. important factor in the British maritime trade in Asia and it also strengthened the British position in Manila vis-a-vis the Chinese traders .1 During the American regime that supplanted the Spanish rule, the bi 1ateral free trade between the Phi 1 i ppines and the United States gradually diverted the Philippine foreign trade to the American market. However, trade with India continued to develop even though it remained insignificant in volume. Between 1905 and 1939, the principal commodities imported from India in order of value included piece goods, gunny bags, cotton twist and yarn, fodder, bran, cattle feed, and husked rice. The exports to The volume of trade India were raw hemp, tobacco, and cordage. remained rather low and the balance of trade was uniformly in favour of India. Total trade increased from Rs2.4 million in 1905 to Rs4.7 million in 1938.2 This paper, however, focuses on the more recent

*

The writer received valuable assistance in the preparation of this study from Professor Artemio D. Palongpalong, Ms Dolly Maria de la Cruz, and Mrs Azucena B. Flares. Ms de la Cruz prepared the statistical tables.

115

economic relations between the Philippines and the countries of South Asia.

II.

TRADE RELATIONS

The Philippines gained its political independence in 1946, followed by Soon after India and Pakistan in 1947, and later by Sri Lanka. gaining independence, these countries developed consular relations among themselves to promote trade and commerce. However, the first two decades were unremarkable as far as the growth of economic relations and trade between South Asia and the Philippines were concerned. It was in the late sixties that the volume of trade began to grow gradually. However, the share of South Asian countries in the total trade of the Philippines remained negligible, that is, much less than one per cent (see Tables 1 and 2). Among the South Asian countries, India is the largest trading partner of the Philippines, followed by Pakistan, Bangladesh, Sri Lanka, and Nepal. The balance of trade with South Asia as a whole from 1970 to 1980 was unfavourable to the Philippines except in 1972 and 1980, while the situation varied for bilateral trade (Table 3). India, for instance, had in the past enjoyed a favourable balance of trade with the Philippines except in 1980 when it was in favour of the Philippines. On the other hand, the trade balance with Bangladesh has been uniformly in favour of the Philippines, as Bangladesh exports to the Philippines are negligible. The Philippines had unfavourable balances with Pakistan during 1973-75 and again in 1980. With Sri Lanka, over a ten-year period (1970-80), the Philippines had favourable balances in 1970, 1974, 1975, and 1977-80. During the decade the Philippines had no imports from Nepal from 1970 to 1974 and again in 1976; there was also no export to Nepal in 1974 and 1976. The Philippines enjoyed favourable balance of trade with Nepal except in 1975, 1977, and 1978. The year 1980 appears to be a turning point in Philippine-South Philippine exports to South Asia increased nearly Asia trade. fivefold, from US$8 million in 1979 to US$38 million in 1980. Similarly, Philippine imports doubled in volume from US$414.7 million in 1979 to US$27.4 million in 1980 (see Tables 1 and 2). Between 1970 and 1980, Philippine trade with India, Pakistan, Bangladesh, Sri Lanka, and Nepal showed an upward trend. However, there were seemingly erratic fluctuations, as shown in Tables 4-12, in the composition of trade according to commodity sections. For instance, the Philippines' share of exports to India of beverages and tobacco (section 1), chemicals (section 5), and miscellaneous manufactured articles (section 8) increased in 1975 and The share of crude materials 1979 and then decreased in 1980. (section 2) alternately increased in 1975, decreased in 1979, and Miscellaneous transactions (section 9) increased again in 1980. declined twice successively before increasing in 1980, while export of manufactured goods continually increased. In 1980, it replaced the beverage/tobacco commodity section as the one with the biggest share in Philippine total exports to India. 116

TABLE 1 Philippine Exports to South Asia, Selected Years (In thousand US$)

Country or Region

1970

:~;*

1975

%*

1979

%*

1980

%*

India

860.5

60.0

4,836.6

39.0

4,118.9

50.0

16,204.5

43.0

Pakistan

543.5

37.0

888.6

7.0

2,419.8

29.0

3,519.6

9.0

Bangladesh

n.a.

n.a.

6,614.8

53.0

584.5

7.0

12,216.8

32.0

Sri Lanka

38.4

3.0

145.3

1.0

805.8

10.0

4,799.2

13.0

Nepal

-

0.0

4.2

0.0

354.1

4.0

1,287.1

3.0

100.0

12,489.5

100.0

8,283.1

100.0

38,027.3

100.0

South Asia

Total Exports of Philippines

Percentage

1,442.5

1,142,190.0

2,294,470.0

0.0

4,601,190.0

1.0

n.a. = not applicable nil or negligible as percentage of total Philippine exports to South Asia. SOURCE:

Foreign Trade Statistics of the Philippines, various years.

5,787, 790.0

0.0

1.0

TABLE 2 Philippine Imports from South Asia, Selected Years (In thousand US$)

%*

%*

%*

Country or Region

1970

%*

India

2,048.3

86.0

10,106.9

66.0

12,624.7

86.0

11,064.3

40.0

Pakistan

300.2

13.0

5,117.9

33.0

1, 764.3

12.0

12,685.2

46.0

Bangladesh

n.a.

1.0

90.8

1.0

156.1

1.0

3, 481.9

13.0

-

37.4

0.0

146.9

1.0

114.9

o.o

15,352.9

100.0

14,692.1

100.0

27,346.3

100.0

7, 726,910.0

100.0

Sri Lanka

21.3

Nepal

South Asia

Total Exports of Philippines

Percentage

n.a.

2,369.8

1975

100.0

1,159,300.0

6, 141,730.0

3,459,180.0

0.0

0.0

= not

applicable nil or negligible

as percentage of total Philippine exports to South Asia. SOURCE:

1979

Foreign Trade Statistics of the Philippines, various years.

0.0

1980

o.o

TABLE 3

Philippines' Trade Balances with South Asian Countries, Selected Years ( In million US$)

1970

Country

1975

1979

1980

India

- 1.187

- 5.27

- 8.505

+

Pakistan

+ 0.243

- 4.229

+ 0.655

- 9.165

n. a.

+ 6.614

+ 0.584

+ 12.216

Sri Lanka

+ 0.017

+ 0.054

+ 0.649

+ l. 317

Nepal

+ 0.054

- 0.033

- 0.207

+ 1.172

South Asia

- D. 927

- 2.863

- 6.409

+ 9.319

Bangladesh

SOURCE:

Tables 1 and 2.

5.140

TABLE 4 Philippine Exports to India by Commodity Sections, Selected Years (In thousand US$)

Description

Section

0

1970

%

1975

1980

%

%

1979

%

-

-

-

3.4

0.0

Food

-

-

Beverage/Tobacco

7.5

0.9

7.9

0.2

9.2

0.2

4.9

0.0

358.9

41.7

4,063.0

84.0

279.1

6.8

7, 777.2

48.0

-

-

-

12.6

0.1

-

2

Crude material inedible

3

Animal/vegetable oil/fats

-

-

4

Chemicals

-

-

97.5

2.0

479.5

11.6

330.2

2.0

5

Manufactured goods

474.0

-55.1

645.5

13.3

3,214.2

78.0

7, 822.5

48.3

6

Machinery/Transport equipment

-

-

6.8

0.1

13.6

0.3

74.0

0.5

7

Miscellaneous manufactures

0.4

0.0

0.8

0.0

21.9

0.5

11.4

0.1

B

Miscellaneous transactions

19.7

2.3

15.0

0.3

101.5

2.5

173.5

11.1

860.5

100.0

4,836.6

100.0

4, 118.9

100.0

16,204.5

100.0

Total

nil or negligible SOURCE:

Foreign Trade Statistics of the Philippines, various years.

-

TABLE 5 Philippine Exports to Pakistan by Commodity Sections, Selected Years (In thousand US$)

Section

Description

1975

1970

%

396.0

72.9

4.8

0.5

154.3

6.4

136.9

3.9

90.7

16.7

20.9

2.3

l7 .6

0.7

23.6

0.7

%

1979

%

1980

%

0

Food

1

Beverage/Tobacco

2

Crude material inedible

-

-

0.5

3

Mineral fuels

-

-

150.6

17.0

4

Chemicals

4.1

0.7

215.9

24.3

741.4

30.6

1,293.0

36.7

5

Manufactured goods

51.6

9.5

404.3

45.5

585.0

24.2

1,684.3

47.8

6

Machinery/Transport equipment

-

-

3.8

0.4

816.6

33.8

172.8

4.9

7

Miscellaneous manufactures

-

-

46.5

5.2

19.9

0.8

81.2

2.3

8

Miscellaneous transactions

1.1

0.2

41.3

4.6

85.0

3.5

127.7

3.6

543.5

100.0

888.6

100.0

2,419.8

100.0

3,519.6

100.0

Total

nil or negligible SOURCE:

foreign Trade Statistics of the Philippines, 1970, 1975, 1980.

.06

TABLE 6 Philippine Exports to Bangladesh, by Commodity Sections, Selected Years (In thousand US$)

Section

Description

1975

1980

1979

%

0.1

-

-

2.9

0.0

%

%

0

Food

9.5

1

Beverage/tobacco

-

-

36.1

6.2

7.9

0.1

2

Chemicals

-

-

7.8

1.3

220.1

1.8

3

Manufactured goods

99.8

540.2

92.4

10,016.8

82.0

4

Machinery/transport equipment

-

-

-

-

1,820.4

14.9

5

Miscellaneous manufactures

1.0

0.0

0.0

0.0

92.9

0.8

6

Miscellaneous transactions

2.7

0.0

0.0

0.0

55.8

0.5

6,614.8

100.0

584.5

100.0

12,216.8

100.0

Total

6, 601.7

nil or negligible SOURCE:

Foreign Trade Statistics of the Philippines, 1970, 1975, 1980.

TABLE 7 Philippine Exports to Sri Lanka, by Commodity Sections, Selected Years (In thousand US$)

Description

Section

D

Food Beverage/tobacco

2

Crude material inedible

3

Chemicals

4

Manufactured goods

5

Machinery/transport equipment

6

Miscellaneous manufactures

7

Miscellaneous transactions

Total

1970

%

-

-

4.3

11.1

-

-

1975

3.8

1979

%

1980

%

14.2

1.8

1.0

0.0

21.9

2.7

18.1

0.4

-

0.2

0.0

2.1

0.1

2.6

1.6

4.7

36.3

24.9

32.2

4.0

59.6

1.2

30.6

79.7

98.1

67.5

346.6

43.0

4, 173.6

86.9

-

-

4.8

3.3

364.3

45.2

452.1

9.5

1.7

4.5

2.1

1.5

6.0

0.7

33.5

0.7

0.2

0.5

0.3

0.2

20.5

2.6

57.2

1.2

38.4

100.0

145.3

100.0

805.8

100.0

4,799.2

100.0

nil or negligible SOURCE:

%

Foreign Trade Statistics of the Philippines, 1970, 1975, 1980.

TABLE 8 Philippine Exports to Nepal, by Commodity Sections, Selected Years (In thousand US$)

Section

Description

1975

%

4.2

100.0

1979

%

1980

%

1,214.4

94.3

--Beverage/tobacco

9.5

2.7

2

Manufactured goods

-

-

-

3

Miscellaneous manufactures

-

-

0.0

0.0

5.6

0.4

4

Miscellaneous transactions

-

-

344.6

97.3

67.1

5.2

354.1

100.0

1,287.1

100.0

Total

4.2

100.0

nil or negligible SOURCE:

Foreign Trade Statistics of the Philippines, 1970, 1975, 1980.

-

TABLE 9 Philippine Imports from India, by Commodity Sections, Selected Years (In thousand US$)

Description

Section

0

Food Crude material inedible

1970

%

1975

~

"'

1979

%

1980

%

0.0

0.0

752.9

7.4

2,607.0

20.6

2,239.0

20.2

162.4

7.9

1,459.1

14.4

547.8

4.3

564.9

5.1

20.6

1.0

2.0

0.0

8.9

0.1

9.5

0.1

1.9

0.1

2

Mineral fuels

3

Animal/vegetable oil/fats

4

Chemicals

481.3

23.5

705.9

7.0

1,668.4

13.2

1,730.1

15.6

5

Manufactured goods

612.5

29.9

4,863.0

48.1

5,646.5

44.7

4,159.8

37.6

6

Machinery/transport equipment

726.9

35.5

2,086.3

20.6

2,004.1

15.9

2,260.0

20.4

7

Miscellaneous manufactures

40.2

2.0

96.2

0.9

60.0

0.5

36.0

0.3

8

Miscellaneous transactions

2.2

0.1

141.5

1.4

82.4

0.6

64.8

0.1

2,048.3

100.0

10,106.9

100.0

12,624.7

100.0

11,064.3

100.0

Total

SOURCE:

Foreign Trade Statistics of the Philippines, 1970, 1975, 1980.

TABLE 10 Philippine Imports from Pakistan, by Commodity Sections, Selected Years (In thousand US$)

Description

Section

1970

%

1975

%

1979

64.0

21.3

4, 891.4

95.6

138.4

7.0

208.0

69.3

29.0

D.6

745.6

1980

%

42.3

1,888.7

14.9

%

0

Food

1

Crude material inedible

2

Mineral fuels

-

-

-

-

-

-

9, 822.4

77.4

3

Chemicals

-

-

-

-

-

-

33.3

0.3

4

Manufactured goods

1.5

0.5

-

-

1.8

0.1

0.2

0.0

5

Machinery/transport equipment

12.6

4.2

17.8

0.4

2.7

0.2

4.0

0.0

6

Miscellaneous manufactures

12.3

4.1

151.4

3.0

-

-

35.7

0.3

7

Miscellaneous transactions

1.8

0.6

28.3

0.6

836.7

47.4

900.9

7.1

300.2

100.0

5,117.9

100.0

1,764.3

100.0

12,685.2

100.0

Total

SOURCE:

Foreign Trade Statistics of the Philippines, 1970, 1975, 1980.

TABLE 11 Philippine Imports from Sri Lanka, by Commodity Sections, Selected Years (In thousand US$)

Description

Section

1980

1970

%

1975

%

1979

%

21.3

100.0

79.3

87.4

138.3

88.2

30.6

0.9

10.7

13.8

8.8

1.9

0.1

%

0

Food

1

Crude materials inedible

-

-

9.7

2

Mineral fuels

-

-

-

-

-

-

3,441.0

98.8

3

Manufactured goods

-

-

-

-

-

-

7.8

0.2

4

Machinery/transport equipment

-

-

-

-

3.9

2.5

5

Miscellaneous transactions

-

-

1.8

2.0

0.2

0.1

0.7

0.0

21.3

100.0

90.8

100.0

156.1

100.0

3, 481. 9

100.0

Total

SOURCE:

Foreign Trade Statistics of the Philippines, 1970, 1975, 1980.

TABLE 12 Philippine Imports from Nepal, by Commodity Sections, Selected Years (In thousand US$)

Section

Description

1970

%

1975

%

1979

%

1980

%

--7

Machinery/transport equipment

-

-

31.4

84.2

8

Miscellaneous manufactures

-

-

-

9

Miscellaneous transactions

-

-

5.9

Total

-

-

37.3

SOURCE:

Foreign Trade Statistics of the Philippines, 1970, 1975, 1980.

9.3

6.3

-

-

-

15.9

137.6

93.7

100.0

146.9

100.0

0.1

0.1

114.8

99.9

114.9

100.0

Similar fluctuations may be observed in the case of Philippine exports to Pakistan, though they are not as erratic. In the case of Sri Lanka, Nepal, and Bangladesh, changes were usually in the increase per share of commodities from 1970 to 1980.

Trade Intensity Indices The pattern of Philippine-South Asia trade is further examined through the application of trade intensity indices, the Grubel-Lloyd (G-Ll index and trade reciprocity index. The formulae for the above indices are provided in the Overview to this volume. The trade intensity indices are shown in Tables 13 The five South Asian countries have been largely and 14. under-represented in Philippine imports from 1970 to 1978, that is, the values computed were mostly less than 1 (Table 13). The indices do not show any unique trend upwards or downwards although Philippine imports from India indicate a decline from 1970 to 1972, and then a steady increase for the next five years before dropping to the under-represented value of 0.45 in 1978. Philippine import intensity with Nepal improved from to 3.18 in 1977, but dropped drastically to 0.37 in intensity of imports from Pakistan alternately increased while imports from Sri Lanka and Bangladesh were under-represented throughout the eight-year period.

0.09 in 1975 1978. The and declined increasingly

Similarly, the intensity of Philippine exports to these South Asian countries was characteristically under-represented, except in the case of Bangladesh where the over-representation was as high as 4.5 in 1975, as shown in Table 14.

Intra-Industry Trade To determine the extent of intra-industry specialization, the Grubel-Lloyd (G-L) index was computed using f.o.b. valuations for both exports and imports. The G-L index was computed at the four-digit SITC level (see Table 15). In most cases, there were exports but no imports or vice versa, so that the G-L index was zero. Thirteen (13) indices computed were below 25 per cent. This indicates that the majority of Philippine exports to and imports from these countries are not the same type of commodities. A high degree of intra-industry trade was evident in the Philippines' trade with Pakistan and India for books, pamphlets, maps and globes (83.96 per cent) in 1980; and for special transactions (75.9 per cent and 81.3 per cent) in 1970 and 1975, respectively, in the case of Pakistan. In the case of India, the index for special transactions was as high as 92.7 per cent in 1979 (Table 15). Thus, the general insignificance of the intra-industry trade between the Philippines and South Asia is evident from the data in Table 15. To the extent that this is a structural phenomenon, not 129

TABL£ 13 Trade between the Philippines and South Asis:

Import-Intensity of Trsde Indices

1970

1971

1972

1973

1974

1975

1976

1977

1978

Nepal

-

-

-

-

-

0.09

-

3.18

0.38

India

0.33

0.29

0.28

0.41

0.45

0.63

1.24

1.18

0.45

Sri Lanka

-

-

0.25

0.05

0.03

0.05

0.88

0.02

0.00

Bangladesh

-

-

-

-

0.05

-

-

0.19

0.01

1.05

0.09

0.10

0.73

0.60

1.14

0.07

0.05

1.34

Country

Pakistan

Note: SOURCE:

For the definition and an explanation of the index, see the Overview to this volume. Computed from data in Asian Development Bank (ADB), Key Indicators, various issues.

TABLE 14 Trade between the Philippines and South Asia:

Export-Intensity of Trade Indices

Country

1970

1971

1972

1973

1974

1975

1976

1977

Nepal

0.00

0.01

0.02

0.01

-

0.01

-

0.08

India

0.14

0.03

0.07

0.06

0.06

0.32

0.63

0.09

0.06

Sri Lanka

-

-

0.05

0.01

0.09

0.10

0.08

0.92

0.14

Bangladesh

n. a.

n. a.

n.a.

2. 91

3. 91

4.50

-

1.32

1.28

Pakistan

0.10

0.32

2.08

0.07

0.08

0.15

0.23

0.54

0.40

Note: SOURCE:

for the definition and an explanation of the index, see the Overview to this volume. Computed from data in Asian Development Bank, Key Indicators, various issues.

1978

TABLE 15 Intra-Industry Trade Indices: Trade of the Philippines with South Asia, Selected Years

1970

SITC Code

1975

1979

1980

0

1.55

Philippines-India 292.2

Crude vegetable materials, i.e. shellac, etc.

512.1

Hydrocarbons and their derivatives

0

0

22.2

671.5

Other ferro-alloys

0

0

0

69.9

711.5

Parts, n.e.s. of the internal combustion piston engines

0

1.0

27.3

22.7

33.1

0

56.1

92.7

54.5

6.8

84.0

81.3

24.9

18.5

0

33.1

0

30.4

1.5

0

37.8

718.2

Printing and bookbinding machinery

899.1

Articles and manufactures of carving or molding materials, n.e.s.

931.0

Special transactions, commodities not classified according to kind

0

19.7

41.8

0

22.9

0

Philippines-Pakistan 892.1

892.3

931.0

Books, pamphlets, maps and globes, printed Music printed or in manuscript, found or illustrated Special transactions, commodities not classified according to kind

0

75.9

Philippines-Bangladesh 931.0

Special transactions and commodities not classified according to kind Philippines-Sri Lanka

931.0

Special transactions and commodities not classified according to kind

0

2.7

Philippines-Nepal 931.0

Special transactions and commodities not classified according to kind

132

0

subject to rectification in the short run, trade opportunities may have to be sought from inter-industry trade.

Index of Trade Reciprocity The values of the trade reciprocity index are presented in Table 16. Since the values are substantially less than 1, the implication is that the Philippine-South Asia trade is far from balanced. Given the low absolute level of trade, however, this imbalance is unlikely to be an impediment to expansion of trade.

III.

INVESTMENT RELATIONS

Among the South Asian countries, primarily India has the technology and technical know-how which may be considered appropriate for some of the industrial needs of the Philippines. Yet, attempts made for wider bilateral investments by both private businesses and the two governments have been only partially successful. Joint ventures in the industrial section have been attempted in the manufacture of diesel pumps, lathe machines, textile yarns and coconut processing. Except in yarn manufacturing -- Indo-Phil (Birlas) -- and the assembly The of diesel pumps (kirloskars), the projects did not prosper. coconut processing plant set up by the Birlas was short-lived and the plans to set up a plant to manufacture electrical insulators have been shelved. Indian equity capital in the joint ventures is modest. Between 1968 and 1981, it amounted to only P34 million out of a total foreign However, the Board of Investment's investment of P23,187 million. figures for foreign investments cited above do not include the investments of Indian nationals residing in the Philippines. Even if they were included, India is unlikely to be a major investor in the Philippines.

IV.

OTHER ECONOMIC RELATIONS

There are only a few nationals from other South Asian countries besides India who are engaged in business in the Philippines. The strength of the Indian community in the Philippines is estimated to be Most of the Indian nationals are engaged in about seven thousand. small- and medium-scale trading and manufacturing activities. These economic activities are unrelated to Philippine-India economic and trade ties. Thus, the Indian community's role in the development of economic relations between the two countries is almost negligible.

Tourist Trade Tourist trade between the Philippines and South Asia is negligible. Most transient visitors, including businessmen, from South Asian countries often obtain tourist visas to the Philippines on arrival at 133

TABLE 16 Trade Reciprocity Index of the Philippines with South Asian Countries*

Year

Index

1975

0.396

1977

0.219

1978

0.350

1980

0.484

* For the definition, see the Overview to this volume.

TABLE 17 Amount of Investments Approved under PD 1789 and PD 218, by Country, 1968-81 (In thousand pesos)

Grand Total

GRAND TOTAL

Total, Local Total, Foreign TOTAL OF ASIA Burma China Hong Kong India Indonesia Japan Korea Malaysia Pakistan Singapore Taiwan Thailand

1968

1969

1970

1971

1974

1972

1973

1,001,979

==========

448,829

284,398

578,117

-------

530,249

-------

-------

-------

-------

=========

=========

13,893,678

371,095

308,204

188,501

381,771

269,594

463,865

1,128, 839

9,293,571

97,503

140,625

95,897

148,478

308,523

538,114

1,430,095

2,634,655

2,856

12,775

10,414

36,987

37,625

12ines

Singapore

Thailand

Description 1970

1977

1970

1977

1970

1977

1970

1977

1970

1977

231

Rubber, crude, natural & synthetic

0.00

o.oo

0.68

0.03

0.00

0.00

0.13

0.01

0.00

0.00

421

Fixed vegetable oil, soft

0.00

0.00

O.DO

5.52

0.00

o.oo

o.oo

0.00

0.00

0.00

422

Fixed vegetable oil, non-soft

0.00

0.00

0.03

1.96

0.00

o.oo

0.00

0.70

0.00

0.00

621

Materials of rubber

0.00

0.00

0.00

0.14

o.oo

0.00

0.00

11.49

0.00

0.00

629

Rubber articles, n.e.s.

0.00

0.00

0.00

5.22

0.00

0.00

0.00

0.61

0.00

0.02

631

Veneers, plywood, etc.

0.00

0.00

0.00

0.00

0.00

0.00

0.00

3.40

0.00

0.00

641

Paper & paper board

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.18

3.51

6.74

678

Iron & steel tubes, pipes, etc.

0.00

0.00

0.00

8.43

0.00

0.00

0.00

0.40

0.00

0.00

695

Tools

0.00

0.00

0.00

0.00

0.00

0.00

0.00

2.28

0.00

0.00

723

Road motor vehicles

0.00

0.00

0.46

14.13

0.00

0.00

0.16

1.64

0.00

0.00

SOURCE:

Computed from the United Nations data.

TABLE 21 Export Intensity of India's Trade with ASEAN Countries, at the Three-Digit SITC Level, 1970 and 1977

SITC Section

D74 231 263 332 421 422 621 629 631 632 641 652 677 678 691 695 732

SOURCE:

Indonesia

Malaysia

Philippines

Singapore

Thai land

Description

Tea & mats Rubber, crude, natural & synthetic Cot ton Petroleum products Fixed vegetable oil, soft Fixed vegetable oil, non-soft Materials of rubber Rubber articles, n.e.s. Veneers, plywood, etc. Wood manufactures, n.e.s. Paper & paper board Cotton fabrics, woven Iron & steel wire, excluding wire rod Iron & steel tubes, pipes, etc. Structures & parts, n.e.s. Tools Road motor vehicles

Computed from the United Nations data.

1970

1977

1970

1977

197D

1977

197D

1977

1970

1977

1.66 O.OD

0.74 0.00 O.DD D.DD D.DD D. DD D.DD D. 72 3.17 D.DD 0.00 D.OD O.DO D.3D 0,59 D.63 15.83

O.D2 33.07 D.02 D.D5 l.6D 0.11 24.69 l.6D 1.01 1D.84 5.59 2.43 l.D5 6.63 1.65 11.02 l. 22

O.OD 0.07 D.11 D.DD D.DD 2.2D D.44 l. 31 7.10 D.45 7.DO 2.38 D.75 0.9D 5.39 1.19 1D.l6

D.OO 0.00 D.DO D.DD D.DD D.D6 1.26 D. 86 D.DO 66.97 D.D3 D.D2 D. DD D.l7 3.Dl 2.61 1.41

D.025 O.DO O.DD D.DD D. DD D.DD D. DD D.2D 0.00 D. DD 2.45 D.DO 2.97 O.DO 22.44 0.79 1.77

O.Dl 0.00 D.DD 3.41 D.DD D.Dl 2.10 D.33 2.09 1.54 4.88 D.83 D.DD 2.38 D.68 1.77 5.63

D.01 1.94 D. DD D.DD D. DD D.01 1. 9D D.D2 0.61 D.29 7.84 1.07 D.D8 17.42 1.29 l. 55 1D.D7

O.DO 0.00 O.DD D.DD O.DD D.56 l. 88 D.l5 6.45 2.76 1.16 0.16 D.DD 1.21 3.92 3.11 0.66

D.02 O.OD D.DD D.DD D.DD D.D2 1.48 55.51 2. 83 D.DD 4.17 D.l9 1.42 2.92 19.42 2. 84 D.34

u.oo

D.DD D.DD D.DO D. DD D.56 D.DD 2.99 3.66 D.D2 D.DD 4.58 D.DD 3.98 3.80

TABLE 22 Grubel-lloyd (G-L) Index of India's Intra-Industry Trade with ASEAN Countries, for Selected Commodities (Six-Digit Level), 1970 and 1980 Indonesia

Malaysia

Philippines

Singapore

Thailand

Description 1970

1977

1970

1977

1970

1977

1970

1977

1970

1977

Rubber, crude, synthetic and natural

0.00

0.00

5.97

0.00

o.oo

0.00

0.00

0.00

0.00

0.00

fixed vegetable oils, non-soft

0.00

o.oo

4.43

0.00

0.00

0.00

0.00

0.00

0.00

o.oo

Materials of rubber

0.00

0.00

0.00

42.8B

0.00

0.00

2.52

26.36

0.00

o.oo

Rubber articles, n.e.s.

o. 97

0.00

o.oo

0.00

o.oo

0.00

1.09

0.00

0.00

0.00

Wood manufactures, n.e.s.

0.00

o.oo

0.00

0.00

0.00

0.00

12.50

0.00

0.00

0.00

Paper and paper board

o.oo

l. 9B

0.00

0.00

o.oo

0.00

0.00

B.lS

93. BB

0.02

Iron & steel tubes, pipes, etc.

0.00

0.00

o.oo

28.35

0.00

0.00

0.02

79.42

0.00

0.00

Tools

0.00

0.00

0.00

0.01

0.00

0.00

0.00

0.06

0.00

0.00

Road motor vehicles

0.00

-

7.63

0.00

0.00

0.00

l. 79

0.00

0.00

0.00

SOURCE:

Computed from the DGCI&S, Monthly Statistics of Foreign Trade of India, various issues.

(79.42); and "Materials of (42.88). The values of the were relatively low both in if we were to compute G-L 1971-79.

rubber" in the casr of Malaysia in 1930 G-L index for all other selected products 1970 anrl 1930. The picture could channe indices for these products in the years

Trade Reciprocity Index In Table 23 we have presented the computed values of the trade reciprocity index 8 (defined and elaborated in the Overview to this volume) between India on the one side and ASEAN as a oroupino on the other for the years 1965-80. The index has been high ~or mos~ of the years (above 0.6) and was near to its maximum value of 0.971 in 1969. As shown in Table 23, this index of trade reciprocity has shovm a somewhat neqative but statistically insiqnificant trend durino the This reflects the arowina imbalance of India's period 1965:80. balance of trade with the ASEAN groupino especially in the more recent years.

II.

INVESTMENT RELATIONS

Indian investments in the form of joint ventures in the ASEAN countries wh i eh have been approved by both the Government of India and the government of the concerned ASEAN country is a relatively recent Entrepreneurs from India phenomenon beginning in the late sixties. have undertaken joint ventures of both industrial and purely commercial nature (such as trading and providing services, includino consultancy) in various parts of the world, especially South and Southeast Asia and Africa. The focus of this section of the study is on joint industrial ventures. Larqe private-sector business houses from India such as the Birlas and Tatas (and also some of the more well-known business and industrial units from not-so-large business houses) have constituted the majority of the entrepreneurs from India who have set up manufacturing joint ventures abroad, mostly with local partners. These Indian units have an established name in their respective main It is remarkable that such entrepreneurs businesses within India. have set up joint industrial ventures abroad (especially in the ASEM countries) not only in the lines of products in vJhich they have successfully been operatinq in India for a lonq time but also in · diversified lines of products.

Motivating Factors for Indian Joint Ventures During a field trip to the ASEAN countries, the top managers of nearly 25 Indian joint venture units with manufacturing operations were They were asked about the factors intervie1ved in June-July 1982. which motivated them to set up joint ventures in these countries. Based on the interviews and other information, the following may be identified as the motivating factors:

304

TABLE 23 Computed Values of Index B for India's Export Trade with ASEAN as a Group: 1965-BD

Year

8

1965

D.885

1966

D.428

1967

D.84D

1968

D.946

1969

D. 971

197D

D.598

1971

D.638

1972

D.874

1973

D. 76D

1974

D.576

1975

D.84D

1976

D.588

1977

D. 779

1978

D.633

1979

0.748

198D

D.638

Note:

The estimated trend equation to above B values with respect to time (T) is as follows: Log B 2 R

SOURCE:

-0.272 - 0.007 (D.6)

= D.23

Based on data from the International Monetary Fund, Direction of Trade Statistics Yearbook, various issues.

305

1.

The desire to protect the export markets for their products which have been threatened by the measures of import substitution under the policy of industrialization of the host countries;

2.

The attractive packages of incentives offered by the host countries to foreign investors;

3.

The geographical proximity of the ASEAN countries to India;

4.

The relatively stable and favourable investment climate in the host countries;

5.

The search for more profitable avenues of business in the more prosperous and faster growing ASEAN markets;

6.

The prestige attached to going "international" as seen by the Indian consumers;

7.

Diversification markets;

8.

The restrictive policies of the Government of India towards the expansion of industrial business by large Indian business houses and foreign companies and companies with foreign collaboration operating in India under various Acts such as the Monopolies and Restrictive Trade Practices (MRTP) Act, and the Foreign Exchange Regulation Act (FERA);

9.

The prevalence of tight exchange control regimes in India in the late 1960s and 1970s, at least up to 1976 or so.

10.

The desire to maintain some control on foreign exchange; and

11.

Lastly, but not the least, the encouragement given by the Government of India to the Indian entrepreneurs to set up joint-ventures abroad (generally under minority equity participation) as a part of its export promotion policy by insisting that such participation should be in the form of exports of Indian machinery, components and materials; and recently, the government's liberalization of its policy towards Indian joint ventures abroad by allowing to some extent cash participation in the equity held abroad in deserving cases (linked generally to the prospects of increased Indian exports over time).1

to

counter

possible recession

in

Indian

There is a need to systematical1y study the motives and experiences of Indian joint ventures and compare them with the experiences of foreign investors from other countries. Undoubtedly, these are difficult areas for quantitative research. However, interviews with some of the top managers of the Indian joint ventures in the ASEAN countries have confirmed that all of the above-mentioned factors have contributed in varying degrees towards the setting up and growth of Indian joint industrial ventures in these countries. Table 24 presents the data on the Indian joint ventures in the ASEAN countries and the world and also gives their distribution according to i ndus try as on 31 December 1982. As may be seen from this table, a total of 86 joint ventures had obtained the approval of the Government of India to set up in the ASEAN region, out of a total 306

TABLE 24 Distribution of Indian Joint Ventures in ASEAN Region, by Industry (as at 31 December 1981)

Industry/Activity

Indonesia

Malaysia

Philippines

Singapore

Thailand

ASEAN

World

In Operation:

12. 13. 14. 15. 16.

Engineering & electrical Chemicals, including dyestuffs Textiles, including man-made synthetics Paper Oil refining, kernel processing fractionation, etc. Glass Plastics Pharmaceuticals Stationery Food products and soft drinks Hotels, restaurants and confectioneries Services* Others Total of above Under Implementation Grand Total

.

Services include:

l.

2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

SOURCE:

3

6

14

6

2

25

2

11

z

1

2

8

6

1 1

40 7 15 2 9

z

3

1 2 1

4

1

1

4

6

26

61

m

12 2

5

g 4

16

30

4 34

1 l

12 11 23

construction, consultancy, leasing, trading/marketing/shipping, banking, etc.

India Investment Centre, New Delhi.

2 1

5 5

10

25 86

97

222

of 222 such approved units throughout the world. Thus, approved joint ventures in the ASEAN countries alone constituted nearly 40 per cent of all such units in the world. Only 56 per cent of such units (125 out of 222) in the world were in production/operation, the remaining being under "implementation" in various stages (including the possibility of planning disinvestment). Sixty-one out of 125 such units (or only 49 per cent) were in production/operation in the ASEAN countries. This shows a large gap even if the fact is taken into account that several joint ventures in the ASEAN countries were approved after 1979. Out of these 61 operating joint-ventures, 56 (or 92 per cent) were industrial ventures, while the remaining 6 units were in the "services" sector (such as consultancy, trading, leasing, etc.). This compares with 99 out of 125 operating units (or 79 per cent) in industrial ventures at the global level. Of the 61 operating units in the ASEAN countries, 30 are located in Malaysia, 12 in Indonesia, 12 in Singapore, 5 in Thailand, and 2 in the Philippines. Indian joint-ventures in a variety of industries have been set up in the ASEAN countries as well as in the world. The distribution of such joint ventures in the ASEAN countries reflects a diversified structure, as can be seen from Table 24. The engineering and electrical industries encompass 25 out of 61 such operating units. As can be expected, out of 8 such units in the oil refining business in the ASEAN countries, 6 are located in Malaysia. Out of 11 operating units in the textiles and related products industries in the ASEAN grouping, 6 are located in Indonesia. Thus, there is a pattern of concentration of location in industries in accordance with either the local resource availability or nature of demand in the local market. Indian investments in Singapore are increasingly going towards relatively high technology areas. There are very few units which have been set up by the Indian entrepreneurs to tap the ASEAN market as a whole. This is partly because the ASEAN countries have not yet made much progress towards the harmonization of their industrial investment policies. In general, Indian joint ventures have been set up in ASEAN countries in areas specified by the host governments. Table 25 provides the details of the investment by each of the operating Indian industrial joint-ventures in ASEAN as at the end of 1981. As can be seen from this table, most of the Indian partners in the joint industrial ventures in the ASEAN countries own a minority share (49 per cent or less) in the equity of these organizations. The contribution in equity has been largely in the form of machinery, know-how and the bonus shares from equity held earlier. In a few cases, cash remittances have also been permitted by the Government of India for contribution towards equity in the ASEAN countries and elsewhere. Table 25 also reveals the pattern of earnings repatriated by each of the operating Indian industrial joint-ventures. In general, the earnings repatriated have been on the low side compared to the investment made by the Indian entrepreneurs during the last decade or more. The Indian joint-ventures have shown preference for retaining earnings in the ASEAN countries to be used for future expansion of these ventures. From the Indian Government's point of view, the major gains from the Indian joint i ndus trial ventures have been one-time exports of Indian machinery at the time of contribution (or again at the time of additional contribution) towards equity, additional exports of raw materials, spares and components from India over time, repatriation of 308

TABLE 25 Indian Industrial Joint Ventures in Production in the ASEAN Region (as at 31 December 1981)

Country of Location/Name of Indian promotor

I.

Indonesia

l.

2. 3. 4.

The Century Spg. & Mfg. Co. Ltd Bharat Commerce & Ind. Ltd. Shahibag Entrepreneurs P. Ltd. Raymond Woollen Mills Ltd.

Textile yarn Textile yarn Polyester blended yarn Engineer's steel files

3850 6911 14142 1063

5. 6. 7.

ASC Engineers & Allied Ind. Ltd. Ballarpur Industries Ltd. Kusum Products Ltd.

Wire rods, steel round bars, etc. Coated art paper Solvent, extraction, margarine, etc.

9320 HOOD 7710

8.

Sarabhai M. Chemicals

Pharmaceuticals

4727

9. 10.

Godrej & Boyce Mfg. Co. P. Ltd. Amar Dye-chem Ltd.

Steel furniture, etc. Dyestuffs

4840 1504

11. 12.

Gokak Patel Volkart Ltd. Bombay Dyeing & Mfg. Co. Ltd.

Textile mill Textile mill

Industry

Earnings repatriated (Rs'OOO)

Indian Mode of equity equity participation (Rs'OOO) (Rs'OOO)

Sr. No.

15632 14794

Machinery Machinery Machinery Machinery Knowhow Machinery Machinery Machinery Cash remittance Machinery Cash remittance Machinery Machinery Know-how Machinery Machinery

382 681

942 1574 11589 110 3118 2021

4855 2855 3934 793 1144 360

TABLE 25 (continued) Indian Industrial Joint Ventures in Production in the ASEAN Region (as at 31 December 1981) Indian equity (Rs'OOO)

Sr. No.

Country of Location/Name of Indian promotor

I I.

Malaysia

1.

2.

Godrej & Boyce Mfg. Co. P. Ltd. Gupta Machine Tools Ltd.

Steel furniture Precision tools

3.

Ajit Wire Industries P. Ltd.

Enamelled copper wire and aluminium wire

590

4.

Kirloskar Electric Co. Ltd.

Electric motors, pumps & diesel engines

3590

5.

Murujappa and Sons Birla Cotton Spg. Wvg. Mills Ltd.

Cycle & industrial chains Synthetic blended fabric

98 8330

B.

L.G. Balakrishna & Bros. Ltd. Berar Oil Industries

Chains for bicycle, etc. Fractionation of palm-oil

440 3880

9.

J.G. Glass Inds. Ltd.

Glass containers

5640

10.

Chemicals Construction lata Oil Mills Co. Ltd.

Fractionation of palm-oil Naturalized oil, palm-oil, etc.

6.

7.

11.

Industry

2889 740

1266 48136

Mode of equity participation (Rs'OOO)

Machinery Machinery Bonus shares Machinery Cash remittance Machinery Cash remittance Machinery Machinery Preliminary exp. Machinery Machinery Know-how Bonus shares Machinery Cash remittance Preliminary exp. Machinery Machinery Bonus shares

Earnings repatriated (Rs'OOO)

500 240 747 116 2850 740 7654 676 1762 250 1868 5024 212 404 5436 42700

740 201 31 6476

1012 16 2436

15258

TABLE 25 (continued) Indian Industrial Joint Ventures in Production in the ASEAN Region (as at 31 December 1981) Indian Mode of equity equity participation (Rs'OOO) (Rs'OOO)

Sr. No.

Country of Location/Name of Indian promotor

Industry

12.

Bombay Auto Ancillary & Inv. P. Ltd.

Tube valves

13. 14.

Hindustan Safety Glass Works Camlin P. Ltd.

Automobile glass Stationery products

372 2315

15. 16. 17. 18.

India Pistons Ltd. Excel Process P. Ltd. Electric Enterprises P. Ltd. A. Gaikwad Pvt. Ltd.

Pistons & cylinder liners Anodised aluminium prod. Automobile & elect. parts Metal flexible tubes

1899 410 109 385

19. 20.

N. Textile Associates Pvt. Ltd. Sarabhai M. Chemicals

Cotton yarn & blended Pharmaceutical products

2332 2870

21. 22. 23. 24. 25.

TELCO Ltd. Polyolefins Ind. Ltd. Universal Radiators Ltd. Liberty Chemical Works Overseas P. Ltd. Century Spg. & Mfg. Co. Ltd.

Assembly of commercial vehicles H.O. polyethylene pipes & fittings Radiators, heat exchangers Photographic and fine chemicals Palm-oil refining

5435 583 1689 420 3863

26.

Gajra Gears P. Ltd.

Automobile gears

735

11396

Machinery Cash remittance Machinery Machinery Preliminary exp. Machinery Machinery Machinery Machinery Know-how Machinery Machinery Cash remittance Machinery Machinery Machinery Machinery Machinery Cash remittance Machinery Know-how Cash remittance

Earnings repatriated (Rs'OOO) 613 122

631 603

2230 85 558

260 125

41 99 938

2700 170 1113 35 3659 204 3206 1894 6296

1326 167

TABLE 25 (continued) Indian Industrial Joint Ventures in Production in the ASEAN Region (as at 31 December 1981) Indian Mode of equity equity participation (Rs'DDO) (Rs'DDO)

Sr. No.

Country of Location/Name of Indian promotor

Industry

27.

Birla Eastern Ltd.

Palm-oil processing

4123

28.

Godrej Soaps Ltd.

Palm-oil refining

5040

Ill.

Philippines

1. 2.

Kirloskar Oil Engines Ltd. Eastern Spg. Mills Ltd.

Diesel engines Yarn

IV.

Singapore

1.

Teksons Ltd.

2.

3. 4.

5. 6.

Earnings repatriated (Rs'OOO)

Machinery Cash remittance Machinery Cash remittance

3891 232 3930 1110

658

1200 3298

Machinery Machinery Bonus shares

2640 658

192

Auto ancillaries

2075

TELCO Ltd.

High precision toolings

6388

Southern Indl. Corpn. Ltd. Parle (Exports) P. Ltd. Chemical Corpn. Co. P. Ltd. Godrej and Boyce Mfg. Co. P. Ltd.

Enamelled wires Concentrates for soft drinks Palm kernel processing Steel furniture

Machinery 1170 905 Cash remittance Machinery 709 866 Know-how Cash remittance 4813 Machinery Know-how Machinery Gifted by the joint venture in Malaysia

650 153 712 939

736

98

TABLE 25 (continued) Indian Industrial Joint Ventures in Production in the ASEAN Region (as at 31 December 1981)

Sr. No.

Country of Location/Name of Indian promotor

Industry

7.

Hindustan Computers Ltd.

Micro & mini computers

Indian Mode of equity equity participation (Rs'DDO) (Rs'OOO)

Earnings

repatriated (Rs'OOO)

Machinery

1400

600 400 400 10000 1200

Know-how

8.

Larsen & Toubro Ltd.

V.

Thailand

l.

Birla Brothers P. Ltd. The Gwalior Rayon Silk Mfg. Sacha Exporters & Invs. P. Ltd. Hada Steel Products Ltd. Gwalior Rayon Silk Mfg. Co. Ltd.

2. 3. 4. 5.

Grand Total

Bottle closures

Synthetic & cotton yarn Viscose staple fibre Steel-rolling mill Hacksaw blades Carbon black

Cash remittance Machinery Cash remittance

11200

750 4792 3060 1069 5706

Machinery Machinery Machinery Machinery

2042 9052 193 2636

Machinery

397595*

397595

118577

* Machinery Rs 262,626 ( '000); cash Rs 27, 972 ( '000); know-how Rs 23,655 ( '000); and others, Rs 83, 342 ( '000). Note:

l.

Earnings repatriated include dividends, technical know-how fees, engineering services fees, management fees, etc.,

repatriated into

India. 2.

Indian equity represents the paid-up portion of the Indian share capital in the joint ventures.

As the equity share capital of the

joint venture set up abroad has to be in terms of the local currency, the rupee equivalents given are approximations.

SOURCE:

Economic Times, 19 July 1982, p. 7.

and entrepreneurs Indian of employment earnings, corporate technicians, and repatriation of part of their earnings to India. Data are not available on the extent of "additional" exports generated for India by the Indian joint ventures in each of the ASEAN countries It is also not every year during the years of their operation. possible to calculate whether exports for India would have been higher in the concerned products if these ventures had not been set up. In the light of the above comments, a systematic and detailed research study needs to be conducted on the costs and benefits of Indian joint ventures in the ASEAN countries to India. Despite the low overall rate of earnings repatriated to India from such ventures, these ventures appear to have benefited India at least marginally. They certainly appear to have benefited the investing Indian entrepreneurs in some ways as otherwise they would not have continued to expand their ongoing businesses nor desired to set up new units in the ASEAN countries. The above tentative evaluation of the working of Indian joint industrial ventures in the ASEAN countries is not meant either to undermine the achievements or to underestimate the problem faced by the Indian joint ventures in operating their businesses in a totally different environment. Indeed, such units have generally faced a far more open and competitive environment than what they were used to in More their business in the relatively sheltered Indian economy. research needs to be undertaken to evaluate the performance of these units and to formulate an optimal policy towards the setting up of Indian joint ventures, taking into account the interests of the Indian nation, the Indian entrepreneurs, and the host nation. Besides the operating Indian joint ventures, 25 new ventures are under implementation in the ASEAN countries. As Table 24 shows, out of these 25 proposed units, 11 of them are in Singapore alone; 5 in Thailand; 4 each in Indonesia and Malaysia; and 1 in the Philippines. One of these units located in Thailand is sinqled out for special mention. This unit has been promoted by Ballarpur Industries of India The name of the Thai company is Phoenix Pulp and Paper Limited. Company. This venture was approved by the Government of India in June 1978 and, despite delays, was expected to be ready for commercial production before the end of 1982. The unique feature of this venture is the Indian contribution, through Indian research and development, in evo 1vi ng the most appropriate techno 1ogy to manufacture pu 1p (for producing paper) using the kanaf leaf available in abundance locally. This is also an import substitution project and will help to save It will also generate permanent foreign exchange for Thailand. employment for the Thais in the industrially backward district of Khon Kaen where the pulp plant is located. It needs to be pointed out that not all Indian industrial joint ventures have had a successful commercial run after starting operation. Some of the ventures have been abandoned or closed down by the entrepreneurs. Examples of the failures include such big names as the N.S. Gula (sugar) plant in Malaysia promoted by the Apte Group (Phalton Sugar Works, Bombay); and Kirloskar Industries (Philippines) Incorporated producing diesel engines -- although this plant has not been formally closed down. The most recent failure has been that of the Camlin's unit in Malaysia producing stationery and allied products. This is not the place to go into the reasons for these and other "failures". Here again, a detailed research study needs to be ~14

undertaken to fully understand and appreciate the abandoning or closing down the Indian joint ventures.

reasons

for

However, two general points can be made while analysing "failure" cases among the Indian joint ventures in the ASEAN countries. Firstly, the so-called "failures" are a normal feature of business. So long as the proportion of "failures" in total ventures is not large and the failures have occurred for reasons beyond the control of the The entrepreneurs, one need not be over-concerned about them.3 Government of India can and should extend all possible support to Indian entrepreneurs to revive their "sick" joint ventures abroad. However, there are clear limits to such assistance. Secondly, the few Indian "failures" in Malaysia (and elsewhere in the ASEAN countries) hav~ attracted far more attention from critics compared to the Indian success stories and the "failures" of the joint ventures promoted by The embassies of India can foreign investors from other countries. help in issuing clarifications to counter the biases shown by the local media and properly explain the Indian point of view. On the whole, the Indian industrial joint ventures in the ASEAN countries appear to have benefited the economy of the host countries in several ways, including: a) contributing to industrial development in general and also in some relatively industrially backward areas; b) transfer of "appropriate" technology; c) employment generation; d) training of local workers; e) letting the nationals retain majority ownership; f) saving of foreign exchange through import substitution; and g) earning of foreign exchange through some degree of export These units have been set up in the priority areas of orientation. industrial development as approved by the governments of these countries. Thus, they appear to have contributed towards meeting the developmental needs of these countries.

Possibilities of Investment in Settled in the ASEAN Countries

India

by Persons of

Indian Origin

The Government of India has recognized the relevance and importance of attracting remittances, savings and investments into India by persons of Indian origin settled abroad in order to accelerate the pace of The industrialization and economic development of the country. government has been offering several facilities/concessions for the last few years to attract such funds, especially for investment purposes. These include facilities such as the holding of deposits in foreign currency in non-resident (external) accounts, and investments by non-resident Indians in the equity shares of new companies to any Special extent desired by them and with repatriation privileges.:; treatment is given by the Government of India to all parties for setting up wholly export-oriented units. Efforts have also been made recently to streamline the procedures for the issue of industrial The most recent measure has been licences for non-resident Indians. the creation of a special cell in the Secretariat of Industrial Approvals in the Union Ministry of Industry for the speedy clearance licence applications of non-resident Indians, as of industrial announced on 13 January 1983.5 The Indian Investment Centre with its head office in New Delhi, and overseas offices at Abu Dhabi, Dusseldorf, London, New York and Tokyo, which has already been functioning as the focal point for attracting foreign investment into India for several years, has been designated as one of the agencies to facilitate the procedural work under this scheme. 315

Data are not available on the breakdown, according to region and individual countries, of the actual pattern of investments in India by non-resident Indians in recent years. However, it appears that the potential of the ASEAN countries in this respect has not been adequately recognized by the Government of India. One evidence of this statement is that the Indian Investment Centre has not yet set up an overseas office in the ASEAN region. There was also no evidence of publicity given to this scheme in all the ASEAN countries in 1982. Thus, it is necessary to vigorously "market" the idea of investment in India by non-resident Indians in all the ASEAN countries. It is not necessary to understand the difficulties and inhibiting factors experienced by those non-resident Indians from the ASEAN countries who have actually invested or have shown interest in investing in India by applying for industrial licences. A Madras Stock Exchange delegation which recently visited Bangkok, Kuala Lumpur, and Singapore three capitals out of the five ASEAN countries (and also Hong Kong) -- contacted non-resident Indians there to seek their views on the possibilities of further investment in India. This delegation is reported to have been told that "cumbersome procedures" and "high taxation rates" (compared to those prevailing in other countries such as Japan and West Germany) were the major irritants faced by the non-resident Indians in the Far East wanting to invest in India.6 These and other related problems need to be examined and remedial action taken by the Government of India to tap more effectively the potential of investment in India by non-resident Indians abroad in general and from the ASEAN countries in particular.

Ill.

OTHER ECONOMIC RELATIONS

The "other" economic relations between India and the ASEAN countries briefly studied here include the areas of a) tourism; b) shipping; and c) banking.

Tourism Table 26 presents statistics on the number of tourists from the ASEAN countries, from two neighbouring countries, Nepal and Sri Lanka, and from the world as a whole, for the years 1971-79. It can be seen from the table that despite a sizeable population from India or of Indian origin residing in most of the ASEAN countries, tourists from the ASEAN region constitute less than 10 per cent of annual tourist arrivals from the world. A disturbing feature that emerges from Table 26 relates to the steadily declining share of tourists from the ASEAN region in the total number of tourist arrivals into India, which fell from 10 per cent in 1971 to 6.6 per cent in 1979. Thus, India has not been able to reap the benefits of higher earnings from tourism from the ASEAN countries that exist potentially. Recognizing the above potential on a two-way basis, an apex body called the South Asia Tourism Association (SATA) has been formed recently with its Secretariat in Bombay (India) to promote intra-regional tourism.? The membership of S~TA will comprise national travel agents' associations, national hotel associations, international airlines, and government bodies involved in tourism. 316

TABLE 26 Number of Foreign Tourists to India from the World and the ASEAN Region, 1971 and 1974-79 Origin

1971

1974

1975

1976

1977

1978

1979

3,00,995

4, 23,161

4,65,275

5,33,951

6, 40,422

7,47,995

7,64, 781

l.

World

2.

Indonesia

1,228 (0.4)

1,397 (0.3)

l, 804 (0.4)

1,676 (0.3)

1,676 (0.3)

1,849 (0.2)

1,878 (0.2)

3.

Malaysia

l7. 752 (5.9)

18,413 (4.4)

17,966 (3.9)

18,774 (3.5)

23,333 (3.6)

21,982 (2.9)

23,877 (3.1)

4.

Philippines

l, 050 (0.3)

1,522 (0.4)

2,020 (0.4)

1,798 (0.3)

2,057 (0.3)

2,692 (0.4)

2,698 (0.4)

5.

Singapore

7,623 (2.5)

9,055 (2.1)

9,053 (1.9)

10, 446 (2.0)

11, 746 (l. 8)

12. 521 (l. 7)

14,222 (l. 9)

6.

Thailand

3, 477 ( l. 2)

4,108 (1.0)

4,239 (0.9)

6,097 (l.l)

6,995 (l.l)

7,071 (0.9)

8,106 (l.l)

7.

ASEAN (2 to 6)

31,130 (10. 3)

34,495 (8.2)

35,082 (7.5)

38, 911 (7.3)

45, 807 (7.2)

46,115 (6.2)

50,781 (6.6)

B.

Nepal

2,419 (0.8)

3,333 (0.8)

3, 784 (0.8)

3,874 (0.7)

4, 868 (0.8)

6,038 (0.8)

6, 744 (1.1)

9.

Sri Lanka

16,577 (5.5)

28,176 (6.7)

31,584 (6.8)

30, 963 (5.8)

32,843 (5.1)

66,370 (8.9)

61,263 (8.0)

Note: SOURCE:

Figures within parentheses indicate percentages of total. Government of India, Ministry of Tourism and Civil Aviation, Statistical Abstract, India (1979), Table 117.

The Travel Ag,~:·ts J'.:;c:o·:iation of India (TAAI) in Bombay will look after the working of the SATA Secretariat. The TAAI is already promoting tourism in Southeast Asia (including the ASEAN countries). It has planned its 32nd Annual Convention to be held in Singapore from 14 to 17 May 1983. The highlights of this Convention are a "Buyer-Seller meeting between Indian and ASEAN organizations, a tourism exhibition, and a poster exhibition".8 However, these efforts need to be supplemented by the efforts of the Government of India and its related offices to formulate and implement a more clear and liberal policy and procedures for promoting tourism between India and the ASEAN countries in order to increase net foreign exchange earnings and facilitate intra-regional economic co-operation.

Shipping Interviews with some of the exporters and importers in the ASEAN countries during June-July 1982 revealed that one of the obstacles in the way of expanding mutual trade between India and the ASEAN grouping is the inadequacy of shipping services. The Shipping Corporation of India has very few sailings and cannot meet the annual requirements of traders with cargo to be shipped between India and each of the ASEAN countries. The national airline, Air India, also does not provide adequate services to all the capitals of the ASEAN countries. However, the exporters and importers in India and each of the ASEAN countries do not appear to be facing as much problems in transporting goods by air as by sea.

Banking Personal interviews in June-July 1982 with some of the representatives of the Indian joint ventures as well as the representatives of Indian banks based in the ASEAN countries revealed that satisfactory banking services were available for channelling trade and investment among the countries concerned. According to some of the top managers of the Indian industrial joint ventures, the Indian banks in the ASEAN countries (including an Indian joint banking venture in Malaysia) have been extremely helpful in providing services for the promotion of Indian joint ventures in those countries. However, Indian banks in most of the ASEAN countries are not allowed to undertake all the operations of a full-fledged bank. Some of the large nationalized Indian banks (such as the State Bank of India and the Bank of India) have, therefore, been operating only regional representative offices in the ASEAN countries. Such offices exist in Indonesia, and the Philippines. Four Indian banks, however, are "full-licence" banks in Singapore and are thus able to offer all banking services. Some of the Indian banks also operate Offshore Banking Units in some of the ASEAN countries. The State Bank of India, for example, has been quite successful in running its offshore banking business in Singapore and Manila. There is, however, a great deal of scope for developing further business in offshore banking by the Indian banks in the ASEAN countries. This can increase India's exchange earnings from this category of "invisibles".

318

IV.

AVENUES FOR FUTURE CO-OPERATION

Our analysis of the state of current economic relations between India and the ASEAN countries in the 1970s has revealed the growing complementarities in trade, investment in joint industrial ventures, and services among these countries. We have supplemented the above analysis with the results of our interviews (conducted in June-July 1982) with the officials of the governments and other official agencies of the ASEAN countries, the officials of the Indian embassies, and some of the units actually engaged in trade and investment between India and the ASEAN countries. Based on the above analysis, we can indicate some of the broad areas in which mutual economic co-operation can be further strengthened. Admittedly, the suggested areas are on 1y i nd i cat i ve as they are not the results of a detailed research study. Further exploratory research needs to be undertaken before concrete action-oriented proposals can be drawn up for the consideration of the policy-makers. To begin with, in the field of trade, India can continue to look for markets for its exports (especially for its non-traditional products such as engineering and chemical goods) in the geographically close and faster growing ASEAN markets. On the side of imports, potential exists for negotiating mutually beneficial long-term procurement contracts/agreements particularly with Malaysia and Indonesia for the import of palm-oil and related products, rubber, tin and other metals, and with the Philippines for copra and cashew kernels. Preferential arrangements for the procurement, and tariffs supplemented by the minimum necessary supportive payments can help in promoting mutual trade expansion. The Export-Import Bank of India (established in 1982) can play a special role in helping the promotion of India's exports of capital goods and turnkey projects to the ASEAN countries by providing long- and medium-term credit, which would enable Indian exporting units to compete on fair commercial terms with suppliers from the developed countries, especially Japan. Greater scope for mutual economic co-operation between India and the ASEAN countries also exists through investments in joint ventures in the industrial and services sectors. The "appropriate technology" argument is still largely valid for the export of technology from India to a few selected areas, at least in Indonesia, Malaysia, and 7hailand. It should, however, be noted that the degree of appeal of the "appropriate technology" argument is gradually fading away on account of the comfortable balance of payments position usually enjoyed by most of the ASEAN countries. India and Singapore can invest in each other's market for producing goods in high technology areas. There is a need to carefully identify new areas for such investment, especially if they are of a trade-creating nature. The ASEAN policy-makers' preference for a relatively "open economy" by encouraging competition among foreign investors and for the "Look East" (towards Japan) direction for trading and investing partners in the ASEAN countries would place limits on the scope for new joint industrial ventures from India in these markets in the coming years. Indian entrepreneurs and technicians will increasingly find their comparative advantage shifting away from "turnkey projects", which are based largely on Indian machinery, equipment and materials, to providing consultancy services for projects using more and more of machinery, equipment and materials from Japan, Australia and other developed countries of Western Europe, and the United States and Canada. There will be greater scope for the export of other "services" from India to the ASEAN countries, such as management 319

services (for example, for reviving "sick" industrial units) and for offshore banking. India and the ASEAN countries can also mutually benefit by the expansion of tourism. India can benefit by attracting more investment in India from the ASEAN countries especially from persons of Indian origin. It can also learn the importance of providing efficient infrastructure which now exists in countries such as Singapore.

NOTES For details of the current policy of the Government of India for approving Indian joint ventures abroad, see Indian Investment Centre, Indian Joint Ventures Abroad: Status and Guidelines (New Delhi, 1982). A study by the Indian Investment Centre has shown that for the ll7 Indian joint ventures which were in production (or operation) as of August 1980, cash remittances constituted 10 per cent of the total equity contributed by these units, while export of capital equipment constituted 59 per cent of the total equity contributions. See Indian Investment Centre, Indian Joint Ventures Abroad: An Appraisal (New Delhi, 1981), p. 3. 2

There is also a further problem of defining "Indian" industrial ventures in the foreign (ASEAN) countries. Much of the investment in "Indian" ventures may not have originated from India et all. It eau ld have been largely (or totally) financed by Indians settled abroad, Indian companies registered in a foreign country, Indians (or their children and relatives) who have taken citizenship of the country of their residence, and so forth. In this study, however, only the Indian joint ventures approved by the Government of India are included.

3

According to the figures provided by the Indian Investment Centre (New Delhi), of the total of 126 Indian joint ventures approved by the Government of India for location in the ASEAN countries as of August 1980, only 7 such ventures (or 6 per cent of the total approved), which were taken up for implementation, were "abandoned" by the promoters (5 of them in Malaysia and 2 in the Philippines). In addition, 38 of these approved ventures (or 30 per cent) were "not implemented" at all as the entrepreneurs concerned revised their judgment on their feasibility during the time since their approval. See Indian Joint Ventures Abroad: An Appraisal, Annexure I.

4

For the latest details of the Special Scheme for Investment in India by non-resident Indians, refer to the relevant publications of the Indian Investment Centre (New Delhi). One such publication is entitled, Investing in India by non-resident Indians: Why and How".

5

For further details, see the Economic Times (Bombay), 13 January 1983, p. 1.

6

Economic Times (Bombay), 6 January 1983, p. 3.

7

Economic Times (Bombay),

8

Ibid., p. 12.

January 1983, p. 12.

320

Nepal-ASEAN Economic Relations* Charan D. Wadhva and Radhe S. Pradhan

I.

INTRODUCTION

Nepal 's economic relations with the members of the Association of Southeast Asian Nations (ASEAN), mainly through trade and in a very small way through investment in joint ventures, are of relatively recent origin. From time immemorial, Nepal's economic relations have been primarily confined to its large neighbour, India. This was so until the early 1970s. Thus, as late as in 1974/75, Nepal's exports to the group of five ASEAN countries (namely, Indonesia, Malaysia, Philippines, Singapore and Thailand) constituted only 2 per cent of its total exports to the world, whereas its exports to India constituted 84 per cent of its total exports (see Table 2). Similarly, Nepal's imports from all the ASEAN countries in the same year made up nearly 2 per cent of its total imports from the world whereas the corresponding proportion of imports from India was 81 per cent. This position can easily be explained by the land-locked nature of the country and the traditional open border and easier transportation links existing with India for centuries, and also by the similarities in cultural, social, and religious values between the two countries. Until the 1960s, Nepal had exclusively depended on India for providing transit facilities for its trade with the countries overseas. Transportation links with its other large neighbouring country, China, have traditionally been weaker due to high mountains and difficult terrain. It was only during the seventies that Nepal consciously started programmes of diversification of its economic relations with countries other than India, especially with the other countries of South Asia and the ASEAN grouping. This paper traces the changing profile of Nepal's economic relations with the ASEAN countries since 1974/75. The data base for Nepal 's economy is quite weak. However, to the extent that data are available, we will draw upon them from the national and international sources. While the primary focus of the study will be on trade relations (Section II), "other economic relations" (such as investment in joint ventures in industries) will also be touched upon (Section Ill). In Section IV, some general remarks on the scope for future economic co-operation between Nepal and the ASEAN countries will be made.

Thanks are due to Mr Devi Singh for the statistical assistance rendered by him.

321

II.

TRADE RELATIONS

Table 1 to 5 present the main features of the trade relations between Nepal and each of the ASEAN member countries and also contrasts them with Nepal's trade with other South Asian countries.

Export Trade Table 1 presents data on Nepal's exports to the ASEAN countries and to the South Asian countries for the period 1974/75 to 1980/81. It may be noted that Nepal's exports to all the ASEAN countries were at a low level of Nepali rupees (NRs) 18.49 million in 1974/75.1 As Table 2 shows, this accounted for 2 per cent of Nepal's total exports to the world. However, as a result of efforts to diversify its trade with countries other than India, Nepal's exports to all the ASEAN countries increased to its highest level of NRs 77.36 million in 1978/79, but declined by 57 per cent the very next year (1979/80). However, it rose again in 1980/81 to end with NRs 75.19 million. Thus, the average compound rate of growth of Nepal's exports to the ASEAN countries was about 27 per cent per annum during the period 1974/75 to 1980/81. In contrast to this, the comparable growth rate for exports of Nepal to the world was about 10.4 per cent, and to India about 4.9 per cent. Thus, Nepal's exports to ASEAN grew at a faster rate than to the world as a whole or to any other region during this period. This is due, however, to the low base levels and, therefore, too much should not be read into these rates. Looking at the data on the exports of Nepal in Table 1, one cannot fai 1 to notice that Nepal sti 11 has no export trade with Indonesia, and negligible export trade with the Philippines. Within the ASEAN markets, despite ups and downs in the year-to-year level of exports during 1974/75 to 1980/81, Nepal registered the highest (compound) rate of growth of its exports to Ma 1 ays i a (around 80 per cent per annum) and the lowest for Singapore (at 24 per cent per annum) and at the med i urn rate (of about 49 per cent per annum) for Thailand. Once again, this reflects low base levels. In absolute terms, Singapore dominates in the ASEAN market for Nepal's exports. As Table 1 shows, Singapore alone accounted for NRs 65.68 million of Nepal's exports in 1980/81, while all the other ASEAN markets accounted for a little less than NRs 10 million of Nepal's exports. Not much should be read into the growth rates of Nepal's exports to the ASEAN markets as the share of these markets in its exports to the world, though growing, is still quite small, as shown in Table 2. The share of all the countries in the ASEAN grouping in Nepal's exports to the war l d increased from 2 per cent in 197 4/75 to its highest at 5.97 per cent in 1978/79 but declined to 4.67 per cent in 1980/81. As shown earlier, most of Nepa 1 's exports to the ASEAN region were confined to Singapore. Singapore alone accounted for 2.03 per cent of Nepal's exports to the world in 1974/75 and this rose to 4.08 per cent in 1980/81. In the year 1978/79, the share of Malaysia in Nepal's exports to the world was at its highest, at 3.10 per cent. The shares of all the other ASEAN countries in the same period were lower than the ones highlighted above (the extreme case being Indonesia with zero per cent share).

322

TAB LE 1 Nepal's Exports to ASEAN and South Asian Countries (In million Nepali rupees)

1975/76

1976/77

1977/78

18.49

44.73

35.87

45.41

77.36

33.17

75.19

0.10

0.14 35.16 0.57

0.29 0.01 42.02 3.08

40.30 0.01 35.86 1.21

1.10

18.10 0.32

0.18 0.01 43.55 0.99

29.19 2.90

3.53 2.58 65.58 3.50

ASI~

750.64

893.70

779. 83

581.72

825.60

618. BD

1059.44

Bangladesh India Pakistan Sri Lanka

3.94 746. 70

0.01 893.69

74.06 489.02 9.65

122. 31 650.1 53.19

52.37 992.4 14.72

-

44.10 520.94 43.37 10.40

Total (Southeast Asia and South Asia)

769.13

902. 96

651. 96

1134.70

World

889.6

Country /Region

1974/75

1978/79

1979/80

1980/81

---

ASE AN* Malaysia Philippines Singapore Thailand SOUTH

*

938.43

1185.8

779.58 0.15 0.10

815.7

1164.7

627.13

1046.2

1296. 8

-

1150.5

1608.7

There were no exports to Indonesia during this period. nil

SOURCE:

Figures for India are taken from Nepal Rastra Bank (NRB), Quarterly Economic Bulletin, various issues; and the rest from Trade Promotion Centre, Overseas Trade Statistics, various issues.

TABLE 2 Share of Nepal's Total Exports to ASEAN and South Asian Countries (In per cent)

Country/Region

1974/75

1975/76

1976/77

1977/78

1978/79

1979/80

1980/81

3. 77

3.08

4.34

5.97

2.88

4.67

0.01

0.03

3.10

0.10

(.)

(.)

---

ASE AN*

2.08

Malaysia Philippines Singapore Thailand

-

0.02

2.03 0.04

3.67 0.08

3.02 0.05

4.02 0.29

2. 77 0.10

2.54 0.25

0.22 0.16 4.08 0.22

SOUTH ASIA

84.38

75.36

66.95

54.74

63.66

53.78

65.86

Bangladesh India Pakistan Sri Lanka

0.44 83.94

75.36

66.93 0.01

-

7.08 46.74 0.92

9.43 50.13 4.10

3.83 45.28 3. 77 0.90

3.26 61.69 0.92

World (including India)

-

100.0

nil (.) = negligible * There were no exports to Indonesia during the period. SOURCE:

Computed from Table 1.

(.)

-

(.)

100.0

100.0

-

100.0

100.0

-

100.0

100.0

TABLE 3 Nepal's Imports from ASEAN and South Asian Countries (In million Nepali rupees)

1974/75

1975/76

1976/77

1977/78

1978/79

1979/80

1980/81

33.47

65.93

30.68

39.23

124.01

136.44

264.60

-

-

0.7 11.94 20.83

0.43 l. 90 51.49 12.10

0.01 1.43 2.05 14.91 12.28

0.09 0.75 2.41 21.93 14.95

4.69 3.61 5.49 86.02 24.21

22.67 4.75 12.76 67.54 28.73

5.03 30.34 15.01 117.7 96.52

SOUTH ASIA

1475.92

1227.67

1345.24

1540.57

1588.47

1795.67

2199.01

Bangladesh India Pakistan Sri Lanka

1475.70 0.22

0.47 1227.12 0.01 0.06

1. 57 1345.54 0.02 0.11

1.47 1534.12 4.92 0.03

2.03 1581.70 4.64 0.10

8.47 1786.41 0.37 0.42

18.40 2179.0 0.54 1.07

Total (Southeast Asia & South Asia)

1509.39

1293.60

1375.91

1579.8

1712.48

1932.12

2463.60

World (including India)

1814.60

1981.70

2008.0

2469.6

2884.7

3480.1

4428.2

Country/Region

ASEAN Indonesia Malaysia Philippines Singapore Thailand

-

-

nil or negligible SOURCE:

Figures for India are taken from Nepal Rastra Bank (NRB), Quarterly Economic Bulletin, various issues; and the rest from Trade Promotion Centre, Overseas Trade Statistics, various issues.

TABLE 4 Share of Nepal's Total Imports from ASEAN and South Asian Countries (In per cent)

Country /Region

ASEAN

1974/75

1975/76

1976/77

1977/78

1978/79

1979/80

1980/81

l. 84

3.33

1.53

1.59

4. 30

3. 92

5.97

(.) (.)

0.65 0.14 0.37 l. 94 a. 83

0.11 0.69 0.34 2.66 2.18

-

Indonesia Malaysia Philippines Singapore Thailand

-

(.)

(.)

-

(.)

0.66 1.15

0.10 2.60 0.61

0.07 0.10 0.74 0.61

0.10 0.89 0.60

0.16 0.13 0.19 2.98 0.84

SOUTH ASIA

81.34

61.95

67.00

62.38

55.07

51.60

49.66

(.)

0.08 66.91

0.07 54.83 0.16

0.24 51.33

0.42 49.21

Bangladesh India Pakistan Sri Lanka

Total (Southeast Asia & South Asia)

World (including India)

--nil (.) = negligible SOURCE:

Computed from Table 3.

-

81.32

61.92

(.)

-

(.) (.)

(.)

0.06 62.12 0.20

(.)

(.)

(.)

(.)

(.)

(.)

(.)

83.18

65.28

68.52

63.97

59.36

55.52

55.63

100.00

100.00

100.00

100.00

100.00

100.00

100.00

TABLE 5 Nepal's Balance of Trade with ASEAN and South Asian Countries (In million Nepali rupees)

Country/Region

ASE AN Indonesia Malaysia Philippines Singapore Thailand

1974/75

1975/76

(14.9)

(21. 2)

5.2 (.)

(0.6)

(0.3) (1. 9) (7.9) (ll.l)

6.2 (20. 51)

1976/77

1977/78

1978/79

1979/80

1980/81

6.1

(46.7)

(103.4)

(189.4)

(1.3) (2.1) 20.3 (ll. 7)

(0.1) (0.5) (2.4) 20.1 (ll.O)

(4. 7) 36.7 (5.5) (50.2) (23.0)

(22.7) (3. 7) (12. 8) (38.4) (25.8)

(5.0) (26.8) (12.4) (52.1) (93.02)

SOUTH ASIA

(725.2)

(344.0)

(565.4)

(958.8)

(762.8)

(1262.9)

(1139.5)

Bangladesh India Pakistan Sri Lanka

4.0 (729.0) (0.2)

(0.5) (333.4)

72.6 (1036.1) 4. 7

(0.1)

(1.6) (563.9) 0.1 (0.1)

120.3 (931.6) 48.6 (0.1)

35.6 (1265.5) (43.0) 10.0

34.0 (1136.6) 14.2 (1.1)

(.)

(.)

Total (Southeast Asia & South Asia)

(740.1)

(355.2)

(560.2)

(952.7)

(809.5)

(1366. 3)

(1328. 9)

World (including India)

(925.0)

(795.9)

(843.3)

(1423.4)

(1587.9)

(2329.6)

(2819.5)

-

= nil (.) Negligible

Note: SOURCE:

Figures in parentheses indicate trade deficit. Nepal Rastra Bank, Quarterly Economic Bulletin; and Trade Promotion Centre, Overseas Trade Statistics, various 1ssues.

Import Trade The data on Nepal's imports from the ASEAN grouping and from other sources between 1974/75 and 1980/81 are presented in Table 3. Nepal's total imports from all the ASEAN countries increased from NRs 33.47 mill ion in 1974/75 to NRs 264.6 mill ion in 1980/81. There was a sudden drop in Nepal's imports from the ASEAN region in 1976/77 by 53.5 per cent over the year 1975/76. If we ignore this, the average annual compound rate of growth of Nepal's imports from the ASEAN region would be about 41 per cent per annum during the period 1974/75 to 1980/81. The comparable rate of growth of imports from the world ("all sources") was 16 per cent per annum and from India alone it was 6. 7 per cent per annum. Thus, Nepal has been expanding its import trade at a faster rate with the ASEAN region, compared with other regions (such as South Asia) and with the world as a whole. Consequently, the share of the ASEAN grouping in Nepal's total imports has risen from a mere 1.84 per cent in 1974/75 to nearly 6 per cent in 1980/81 (see Table 4). Table 3 also reveals that Nepal started importing from Indonesia for the first time in 1976/77. Its import trade with Indonesia suddenly increased from NRs 4.69 million in 1978/79 to NRs 22.67 million in 1979/80 but declined to NRs 5.03 million in 1980/81, the latest year for which data are available at present. Similarly, Nepal appears to have started importing from the Philippines only si nee 1975/76. In 1974/75, Thailand was the most important source of Nepal's imports, while Singapore was the next important source within ASEAN. But in 1980/81, this position was reversed; Singapore took the first position (with imports amounting to NRs 117.7 million) followed by Thailand (with imports amounting to NRs 96.52 million). Despite the growth in absolute value of imports from the ASEAN countries during 1974/75 to 1980/81, the share of these countries in Nepal's total imports is still small. This can be seen from the computed data on the shares in imports from different sources, given in Table 4. Even in l980/81, Singapore's share in Nepal's total imports was only 2.65 per cent and that of Thailand was 2.18 per cent, while all other ASEAN countries had shares which were well below 1 per cent.

Balance of Trade Nepal's balance of trade with the ASEAN countries, the South Asian countries and the world for the period 1974/75 to 1980/81 is presented in Table 5. Nepal, being one of the least developed countries, generally has been facing deficit in its balance of trade with the ASEAN grouping as well as with South Asia and with the world. The trade deficit with the ASEAN grouping in particular increased from NRs 46.7 million in 1978/79 to NRs 189.4 million in 1980/81. Nepal, in fact, had a small surplus balance of trade with the ASEAN grouping in 1976/77 as well as in 1977/78. Within ASEAN, for the year 1980/81, Nepal experienced its highest trade deficit with Thailand amounting to (NRs 93.02 million) and the second highest deficit with Singapore (amounting to NRs 52.1 million). Its largest trade deficit in 1980/81 was with India, amounting to NRs 1186.6 million. Its overall trade deficit in that year (with the world) was NRs 2819.5 million.

328

Composition of Exports and Imports Nepal's data base on its trade is relatively weak. No data on product quantities exported to or imported from the ASEAN countries, or "other" countries are available. Published data, however, are available in value terms at the SITC one-digit level and relate to the composition of foreign trade with countries other than India from 1974/75 to 1980/81. These are presented in Tables 6 and 7. It is assumed that the trends depicted in these tables are generally applicable to the pattern of Nepal's trade with the ASEAN countries.2

Composition of Exports Table 6 shows that Nepal's exports to all third countries (other than India) are concentrated mainly in the following broad categories: a) Food and live animals; b) Crude materials, inedible, except fuels; c) Manufactured goods classified chiefly by materials; and d) Miscellaneous manufactured articles. While the percentages of these categories in total exports have varied from year-to-year, their contribution taken together has ranged from 88.1 to 99.3 per cent of total exports. Nepal's major traditional export products are: a) jute; b) tea; c) minerals; and d) forest-based products, including herbs. Nepal's non-traditional products include: a) handicrafts; b) carpets; c) leather goods; d) ready-made garments; and e) sugar. In recent years, Nepal has been making efforts to diversify its export products and markets.

Composition of Imports Table 7 shows that Nepal's imports from all third countries (other than India) are concentrated mainly in the following broad categories: a) Mineral fuels and lubricants; b) Chemicals and drugs; c) Manufactured goods classified chiefly by materials; and d) Machinery and transport equipment. While there have been year- to- year fluctuations in their contribution during this period, the combined contribution of these four categories has ranged from 72.4 to 87.1 per cent. Undoubtedly, in the wake of the international oil crisis, the imports of Mineral fuel and lubricants have shown the fastest growth from NRs 2.8 million in 1974/75 to a staggering sum of NRs 531.9 million in 1980/81 (accounting for 23.6 per cent share in total imports). In that year (1980/81), Machinery and transport equipment accounted for 26.9 per cent share in Nepal's total imports.

Trade Intensity Indices In order to further analyse the trade between Nepal and the ASEAN countries during the period 1974/75 to 1980/81, we have computed the indices of export and import intensity, as explained in the Overview to this volume. The results of these computations are presented below.

329

TABLE 6 Composition of Nepal's foreign Trade (Exports), with Countries other than India, l974/75-l980/81 (In million Nepali rupees)

EXPORTS (f.o.b.) Food and live animals Tobacco and beverages Crude materials, inedible, except fuels Mineral fuel and lubricants Animal and vegetable oil and fats Chemicals and drugs Manufactured goods classified chiefly by materials Machinery and transport equipment Miscellaneous manufactured articles Commodity and transactions not classified by kind

1974/75

1975/76

1976/77

1977/78

1978/79

1979/80

1980/81

142.8"

292.1

385.2

548.1

646.7

629.6

616.1

8:.1. 5 0.5 90.1 0.6 0.4 3.6 90.2 2.2 19.9 2.0

58.8 10.8 170.7

183.1 11.0 189.7

247.0 12.7 129.4

123.7 1.0 174.5

0.1 0.2 116.7 1.3 25.5 0.9

0.2 0.5 114.5

104.5 15.0 117.4 0.4 0.3 3.8 235.3 0.5 138.1 0.8

24.2

38.6

0.5 17.3 1.9 45.8 6.5

-

48.7 0.3

- = nil or neglible " Includes one month's estimated figure. Note: SOURCE:

As the figures have been rounded off, the totals may not tally with their component units. Nepal Rastra Bank.

0.3 208.1 1.6 47.5

0.5 0.8 278.8 0.5 49.7

TABLE 7 Composition of Nepal's Foreign Trade (Imports), with Countries other than India, 1974/75-1980/81 (In million Nepali rupees)

1974/75

1975/76

1976/77

1977/78

1978/79

1979/80

1980/81

IMPORTS (c.i.f.)

338. 9*

754.6

664.5

935.6

1303.0

1693.7

2249.2

Food and live animals Tobacco and beverages Crude materials, inedible, except fuels Mineral fuel and lubricants Animal and vegetable oil and fats Chemicals and drugs Manufactured goods classified chiefly by materials Machinery and transport equipment Miscellaneous manufactured articles Commodity and transactions not classified by kind

9.0 2.3 17.2 2.8 0.3 44.8 84.4 113.5 53.2 8.0

32.9 10.4 57.6 116.6 1.9 75.2 136.4 255.3 63.0 5.3

20.9 1.3 1.5 132.7 0.9 82.8 160.9 201.9 53.4 8.3

37.6 15.1 10.3 159.1 6.5 85.5 268.9 273.9 76.3 2.3

30.2 4.1 20.0 211.7 4.0 103.3 468.3 318.0 139.4 4.1

68.6 3.5 27.8 374.4 10.9 165.8 487.2 426.9 122.1 6.6

127.6 0.9 46.5 531.9 68.7 253.9 604.1 403.3 208.2 4.2

* Includes one month's estimated figure. Note: SOURCE:

As the figures have been rounded off, the totals may not tally with their component units. Nepal Rastra Bank.

Export Intensity Index Table 8 presents the computed export intensity index for Nepal's exports to the ASEAN countries during the period 1974/75 to 1980/81. Except for Indonesia, the export intensity of Nepal has generally increased. The index has been above unity, showinq overrepresentation of the following ASEAN countries in its globa( pattern of exports in the following years: a) Malaysia: in 1978/79 (at 6.53); and b) Singapore (in all the years considered). This further confirms the earlier observation that Nepal has made conscious efforts during this period to expand its exports to the ASEAN markets, particularly to Singapore.

Import Intensity Index The computed intensity index of Nepal's import trade with the ASEAN countries during the period 1974/75 to 1980/81 are presented in Table 9. This index clearly indicates an increasing trend in import intensities over the period with each of the ASEAN countries. The index has been above unity (showing over-representation in Nepal's pattern of global imports) in the following cases for the years mentioned with the name of the country: a) Philippines: 1.22 (in 1979/80) and 1.09 (in 1980/81); b) Singapore (in all the years except 1974/75, with the highest value being 3.54 in 1978/79); c) Thailand (for all the years, with the highest value being 6.23 in 1980/81).

Intra-Industry Trade In order to analyse the intra-industry trade of Nepal with the ASEAN countries, we have computed the Grubel-Lloyd (G-L) index (as defined and elaborated in the Overview to this volume) of Nepal's trade with Singapore and Thailand during the period 1974/75 to 1980/81. There was no intra-industry trade with the other ASEAN countries. It may be noted that intra-industry trade in both cases is small in value (well below NRs 1 million in value terms). Nevertheless, the G-L index has been computed for the relevant cases (Table 10). As may be seen from Table 10, intra-industry trade in selected products is only an occasional and somewhat insignificant phenomenon in the case of Nepal. Considering such trade of Nepal with Singapore, it is seen that intra-industry trade is only in ready-made garments. Even for this item it is absent in all years being considered except 1974/75 and 1975/76. In 1975/76, the Grubel-Lloyd index of this trade with Singapore reached its maximum value of 100, showing that intra-industry trade in ready-made garments for the year was perfectly balanced, that is, exports equalled imports. Almost similar results were obtained in the case of Nepal's intra-industry trade with Thailand. The Grubel-L loyd index was nearly zero for most years in all the three products considered in Table 10. The highest value achieved by the Grubel-Lloyd index was only 22.22 in the case of carpets.

332

TABLE 8 Intensity of Nepal's Export Trade with the ASEAN Countries*

Country

1974/75

1975/76

1976/77

1977/78

1978/79

1979/80

1980/81

Malaysia

0.02

0.04

0.03

0.07

6.53

0.19

0.30

Philippines

0.00

0.00

0.00

0.00

0.00

0.00

0.37

Singapore

l. 91

3.67

3.07

4.12

2.64

2.23

3.29

Thailand

0.00

0.21

0.13

0.68

0.22

0.55

0.46

* There were no exports to Indonesia during this period. SOURCE:

Computed from data in Tables 1 and 3.

TABLE 9 Intensity of Nepal's Import Trade with the ASEAN Countries

1974/75

Country

1975/76

1976/77

1977/78

1978/79

1979/80

1980/81

Indonesia

D. DD

0.00

o.oo

0.00

0.17

0.64

0.10

Malaysia

0.07

0.04

0.12

0.05

0.20

0.19

0.99

Philippines

0.00

0.30

0.36

0.32

0.67

1. 22

1.09

Singapore

D. 87

3.44

1. 01

1.12

3.54

2.08

2.56

Thailand

3.61

1. 97

1. 85

1. 70

2.47

2.37

6.23

SOURCE:

Computed from data in Tables 1 and 3.

TABLE 10 Grubel-lloyd (G-L) Index of Nepal's Trade with the ASEAN Countries

1974/75

1975/76

1976/77

1977/78

1978/79

1979/80

1980/81

2.56

0.00

100.00

0.00

0.00

0.00

0.00

Carpets

0.00

0.00

0.00

-

22.22

9.09

0.00

leather goods

l. 80

0.00

0.00

0.00

-

0.00

Ready-made garments

1.01

0.64

0.13

0.00

0.00

0.00

Country/Items

SINGAPORE Read-made garments THAILAND

Note:

SOURCE:

0.05

1.

There is no intra-industry trade for Indonesia, Malaysia, Philippines, Pakistan, and Sri Lanka.

2.

- indicates absence of export as well as import.

3.

The zero value indicates the presence of either export or import only. Computed on the basis of data from Trade Promotion Centre (Kathmandu), Overseas Trade Statistics, various annual issues.

Trade Reciprocity Index The trade reciprocity index (defined and elaborated in the Overview to this volume) of Nepal with the countries of ASEAN has also been computed on a yearly basis from 1974 to 1980. These computations have been made from the exports (f.o.b.) data matrix of Nepal's exports to each of the ASEAN countries and vice versa. It may be seen from Table 11 that the trade reciprocity index (8) for Nepal-ASEAN trade is at moderate value (above 0.5 for most of the years), avoiding both the extreme values of zero (which would show total lack of trade reciprocity) and one (which would show the effect of perfectly balanced bilateral trade between all pairs of trading partners). There is no clear trend in the computed values of the trade reciprocity index over the period 1974/75 to 1980/81.

I I I.

INVESTMENT AND OTHER RELATIONS

The i ndus trial investment relations through joint ventures between The Nepal and the countries of the ASEAN grouping are very weak. records with respect to foreign investment in Nepal are not easily available. However, it is known that most of the investments in i ndu stria l joint ventures in Nepal have been made by investors from the private sector of India. Investors from the ASEAN countries have so far been involved in only two projects. One of them is the collaborative effort of Comcraft Asia (Pte) Ltd., of Singapore, with the Hulas Metal Crafts of Nepal to establish a mini-steel plant. The total equity (capital investment) for this project is equivalent to NRs 18 million of which 50 per cent will be contributed in foreign exchange by Comcraft Asia Pte Ltd., Singapore, and 50 per cent by the Nepalese Company, Hulas Metal Crafts, Nepal (the shareholders of which are Messrs G.C. Dugar, H.C. Golchha, D.K. Golchha and C.K. Go l chh a). The plant is under construction. The second such venture is named Nepal Electric and Electricals Pvt. Limited (based in Kathmandu). The local equity in this project is 2 per cent while the foreign equity is 98 per cent, contributed by a British citizen/resident of origin from the Indian sub-continent (32 per cent), an Indian citizen (2 per cent), and a Thai citizen/resident of Indian origin (64 per cent). Unfortunately, this venture has been found to be "not operating". No investment is reported to have been made by the Nepalese in the ASEAN countries. Foreign banks are not permitted under the present laws to operate in Nepal. Thus, there are no banks from the ASEAN countries in Nepal. No Nepalese bank has yet gone into "international banking" by opening offices in any ASEAN country.

Tourism Nepal, a mountainous and land-locked country, is a tourist paradise. It naturally attracts foreign tourists from all over the world, including each of the five ASEAN countries. Nepalese also visit foreign countries including those of ASEAN. Table 12 provides details of the monthly two-way tourist flows between Nepal and foreign countries (by major destinations) for the year 1981. 336

TABLE 11 Index of Trade Reciprocity (8) of Nepal's Export Trade with ASEAN

Year

8

1974 /1974-75

0.497

1975 /1975-76

0.590

1976 /1976-77

0.506

1977 /1977-7B

0.553

1978 /1978-79

0.522

1979 /1979-80

0.650

1980 /1980-81

0.512

SOURCE:

Computed from data from Nepal Rastra Bank, Quarterly Economic Bulletin, various issues; Trade Promotion Centre, Overseas Trade Statistics, various issues; and International Monetary Fund, Direction of Trade Yearbook, various issues.

TABLE 12 Tourist Arrivals from ASEAN and South Asian Countries, 1981

Country

Jan.

Feb.

Mar.

Indonesia Malaysia Philippines Singapore Thailand ASEAN

4 54 32 28 195 (935)

8 19 20 16 237 (318)

16 39 43 32 220 (567)

(502)

(503)

313

300

350

206

169

36 (23) 2384 (774)

35 (5) 1783 (336) 6 756

104 (30) 3610 (395) 16 660

86 (25) 3490 (933) 17 64

106 (1) 9459 (364) 22 46 (12) 9633

Sub-Total (ASEAN) Bangladesh India Pakistan Sri Lanka

10

178

Sub-Total (South Asia)

2608

2600

4390

Apr.

May

3 32 26 47

13 13 38 33

98

3657

72

June

July

14 5 20 30 30 (1536)

20 12 29 40 52 (1072)

29 9 25 47 (2511)

153

54 (12) 4797 (723) 12 21 (6) 4884

99

Aug.

Sept.

Oct.

Nov.

12 18 28 33 105 (2416)

10 33 21 39 215 (1665)

7 140 42 59 319 (1057)

20 llO 24 68 148 (987)

136 504 332 450 1738 (14074)

ll9

315

318

567

370

3160

69 (6) 3220 (1108) 32 64 (19)

57 (6) 2574 (1477) 6 113

102 (8) 3806 (814) 18 61 (9)

98 (5) 6819 (1002) 5 41 (17)

70 (7) 3469 (637) 24 151 (10)

81 (23) 4191 (898) 14 106

918 (151) 49602 (9461) 182 2261 (137)

3385

2750

3987

6963

3714

4392

9

(57)

-Note:

l.

2. SOURCE:

Figures in parentheses indicate Nepali nationals going abroad. Nepali nationals visiting India include only those visiting Delhi, Calcutta, Benaras, and Patna by air. Department of Tourism, Annual Statistical Report 1981.

Dec.

(7)

Total

52963

As may be seen from the table, the ASEAN countries visited Nepal. of all foreign tourists who visited the number of tourists from Nepal larger (about 14,074). The largest single foreign country is naturally

IV.

in 1981, about 3,160 tourists from This constituted about 7 per cent Nepal in 1981. Compared to this, to the ASEAN countries was much flow of tourists into Nepal from a from neighbouring India.

PROSPECTS FOR FUTURE ECONOMIC CO-OPERATION

Nepal can look forward to economic co-operation in several areas in trade with the ASEAN countries in the years to come. In the area of export promotion, the ASEAN countries with their high growth rates (as documented in the Overview to this volume) can provide an additional market for Nepal's traditional as well as non-traditional products, especially tea, jute, minerals, handicrafts, carpets, and leather goods. Nepal has been planning diversification of its export products and markets but it has so far not paid adequate attention to promoting its exports to the ASEAN markets. A consciously planned strategy needs to be formulated to develop its exports to the Indonesian market to which Nepal does not export at present. In addition, Nepal should make special efforts to attract investment from ASEAN sources for export-oriented joint ventures. In the field of imports too, Nepal can further intensify its efforts to reduce its dependence on imports from India by looking for selected import products (including some consumer products) with lower costs and assured supplies from some of the ASEAN countries. This can, of course, be done only within limits as Nepal and India trade with each other with free convert ability of each other's currency, requiring no foreign exchange for financing transactions. Nepal has started on programmes for industrialization of its economy only recently. Foreign investment can play a very useful supplementary role in financing the investment requirements of several industrial projects. These have already been identified by the planning authorities in Nepal. They include such areas as power plants, pump sets, match making, mini iron and steel plants, textiles, leather and leather products, fruit processing, and so forth. Nepal is already actively exploring the possibilities of further joint i ndu stria l ventures in these and other areas with its relatively more industrialized neighbour, namely, India. It should also supplement these efforts by formulating special plans to attract foreign investment from the ASEAN countries through joint industrial ventures in the above-mentioned fields which are relevant to its national needs. The Act Relatinq to Foreign Investment and Technology of 1982 is quite liberal. If necessary, this Act can be further liberalized and streamlined so that it can be made more effective in attracting investment from the ASEAN countries. A very special effort needs to be made to promote export-oriented joint ventures in Nepal with the participation of investors from the ASEAN countries. Nepal at present has liberal facilities for its exports to several developed countries under the Generalised System of Preferences scheme. It also at present faces no quotas on its exports of textiles (especially garments) to the developed member countries of the Multi-Fibre Arrangement. Nepal can have comparative advantage in developing the exports of several labour-intensive products such as 339

garments and leather products. It can also plan investments in selected higher value-added electronic products (especially components) as the necessary manpower is available, and its quality can easily be upgraded through investments in training programmes. Such ventures will mainly require co-operation with the multinational companies (MNCs) from the developed countries. A special effort needs to be made to identify such MNCs who may be planning to shift the location of their manufacturing facilities away from some of the ASEAN countries due to shortages of labour and/or increasing wage rates in these countries. It may also be possible to identify entrepreneurs from the ASEAN countries who are looking for investment opportunities abroad in the export-oriented 1 ines desired by Nepal. Entrepreneurs from Singapore are recently reported to have shown interest in investing in the garments industry in the exclusive export processing zone in Sri Lanka. Similar possibilities may exist for attracting 9Uch investments into Nepal which need to be further explored through special studies. Last, but not the least, is the area of "services". Nepal can mount special efforts to attract much 1arger numbers of tourists from the ASEAN countries and thus increase its foreign exchange earnings. With growing incomes, the citizens of the ASEAN countries would be expected to spend more on leisure through tourism. Nepal, known for being a tourist paradise, is likely to have special appeal because of its geographical proximity to these countries and rich cultural heritage. An appropriate marketing strategy, thet·efore, needs to be formulated and implemented to tap this potential.

NOTES 1

The official exchange rate of Nepali rupees for U.S. dollar has been as follows: Nepali Rupees per U.S.$ 10.55 12.50 12.00

1974/75 and 1975/76 1976/77 and 1977/78 1978/79 until 1980/81 SOURCE:

Nepal

Rastra

Bank,

Quarterly

Economic

Bulletin

(Kathmandu),

various

issues.

2

This, of course, is a highly simplified and somewhat unrealistic assumption since a significant part of such trade of Nepal is with the EEC countries, which would depict a different pattern from Nepal's trade with the ASEAN countries. However, we have been constrained by the availability of data to make the above assumption.

340

Sri Lanka-ASEAN Economic Relations* Sureshwaran

I.

INTRODUCTION

The ongoing discussions within the Group of 77 and at the United Nations Conference on Trade and Development (UNCTAD) on economic co-operation among the developing countries (ECDC) has created considerable interest in promoting economic relations between South Asia and the Association of Southeast Asian Nations (ASEAN), formed in 1967 and consisting of Indonesia, Malaysia, Philippines, Singapore, and Thailand. More recently, the interest in Sri Lanka-ASEAN economic relations was regenerated by the application of Sri Lanka to join ASEAN. However, Sri Lanka's application was rejected by ASEAN. The objective of this paper is to assess the benefits of closer economic co-operation between Sri Lanka and the ASEAN countries and to identify possible schemes to further strengthen economic relations between them. In this context, it is necessary to assess -- within the context of the historical background, especially since about 1970 -- the state of economic relations between Sri Lanka and the ASEAN countries and also the present policy perceptions of the Sri Lanka Government which could have an impact on future economic co-operation among these countries. The following section attempts to assess the present state of trade between Sri Lanka and the ASEAN countries by exami~ing the trade balance and commodity flows and by calculating export intensity, import intensity, reciprocity and intra-industry trade indices. The third section reviews the state of investments and joint ventures in Sri Lanka which originate from the ASEAN countries, and the reverse flow of investment, if any. The fourth section describes the infrastructural and service links between Sri Lanka and the ASEAN countries. The final section attempts to identify the schemes to strengthen economic relations between the two si des, in the light of the preceding discussion. Sri Lanka, traditionally dependent primarily on the export of three commodities, namely, tea, rubber, and coconuts, for its foreign exchange earnings, was forced to impose restrictions on imports and on international trade in general in the late 1950s, due to persistent balance of payment crises. Sri Lanka's international trade was thereafter conducted mainly through bilateral agreements and through

*

The views expressed in this study are those of the author and not necessarily of the Marga Institute to which he belongs.

341

state trading organizations. During this period, Sri Lanka also signed many barter-like bilateral agreements with the socialist countries, including one with China which was concluded as early as 1952. Trade was distorted by over-valuation of the Sri Lankan rupee and by strict import and exchange control regulations. The industrial structure consisted mostly of import-substitution industries, with very little foreign collaboration. Most of the industries produced well below their potential capacity and an important reason for such inefficiency was strict exchange control regulations regarding the import of raw materials. It was during this time, that is, in 1967, that Sri Lanka was invited to join ASEAN, but declined to do so. After the change of government in 1977, there was a radical change in the political and economic policies of Sri Lanka. Restrictive controls were dismantled and there was a reorientation of policy in the direction of liberalization of external trade. Imports were liberalized, controls were relaxed, and the Sri Lanka rupee was effectively devalued. The government also adopted various export promotion measures to increase Sri Lanka's exports, and provided more attractive incentives to draw foreign investment into Sri Lanka. Industrial development was reactivated in Sri Lanka by the liberalization of the imports of raw materials. The ratio for the consumption of local and foreign raw materials, which was about 2:7 before 1977, increased to 2:11 by 1980, as local raw materials which were not completely suitable were replaced by (more) efficient imported ones. This ratio increased mainly in the category of textiles and garments, wood and wood products, chemicals, petroleum, plastic products, basic metal products, and machinery. Since the change, any shortfalls in local production of investment goods were also imported. Examples of such goods are cement and asbestos products. Following the liberalization programmes for the domestic economy and attempts to integrate Sri Lanka's economy more firmly into the world of free enterprise and free markets, the Sri Lanka Government has closely aligned itself with the market economies. This change in the foreign economic policy has been in keeping with the promise made by Mr J.B. Jayawardene, the President of Sri Lanka, durinq the 1977 election campaign ... "to plant a little of Sinqapore here": Singapore has also provided assistance to the present government in Sri Lanka, especially in the establishment of investment promotion zones, and the new national airline known as Air Lanka, in drafting new labour legislation to enhance political stability, in attracting foreign investment, and in improving communications. The first official intimation of Sri Lanka's intention to seek membership of ASEAN was provided by the Prime Minister Mr Premadasa, during his visit to four of the ASEAN countries, besides Singapore, in April-May 1981. There was a mixed reaction to the Prime Minister's statement even within these four countries. Furthermore, the Foreign Minister of Singapore was reported to have said that geographically, Sri Lanka, being in South Asia, did not qualify to belong to ASEAN. Sri Lanka's profound intention to joint ASEAN caused misgivings among the South Asian countries especially because Sri Lanka had hosted the inaugural conference of South Asian Foreign Secretaries on Regional 342

Co-operation in South Asia, early in April 1981 and had agreed on a framework for collaboration. The policy-makers in Sri Lanka have very often expressed the need for an Asian or a sub-regional common market in the ESCAP region. Our i ng the 1978 Sydney Summit of Commonwealth Heads, Sri Lank a's Foreign Minister, Mr A.C.S. Hameed, stressed the need for an Asian Common Market. President Jayawardene who admires the development strategies adopted in Singapore has very often categorically stated that Sri Lanka belongs to both the South Asian and the ASEAN regions. As the recent presidential elections in Sri Lanka resulted in a second term of office for the President, policy-makers in Sri Lanka look to a bright future for increasing economic relations between Sri Lanka and the ASEAN countries. Radical changes have taken place since 1977 in Sri Lanka and some caution should be exercised in analysing and forecasting based on information relating to the period before 1977. As it is too early to forecast a trend on the basis of information available only for the years 1978-81, we have attempted to indicate possible future trends on the basis of the combined 1970-77 and 1978-81 periods, which are likely to be more realistic.

II.

TRADE RELATIONS

Table 1 presents statistics relating to Sri Lanka's exports, imports and trade balance with the ASEAN countries and the world for the years 1971-80. As indicated in the table, Sri Lanka's exports and imports from the ASEAN countries have shown an inconsistent trend. This fl uctu at ion eau l d be due to exchange rate fl uctu at ions and other problems in the aggregation of data as published by the International Monetary Fund (IMF) in its Direction of Trade. It could also be due to other reasons such as shortfalls in local production in some years which could have affected exports and imports alike, such as rice imports from Thailand, and the impact of new exports and re-exports after the liberalization of trade in the late 1970s, such as exports of residual fuel oils and gramaphone records. A more detailed discussion on the changes in the commodity composition of trade is provided in the next section. Although Sri Lanka has increased its trade with the ASEAN countries, it is still at a comparatively low level. Sri Lanka's exports to the ASEAN countries as a share of the country's total exports increased only marginally during the years 1974-80, that is, from 1.5 per cent in 1974 to 1.9 per cent in 1980. Sri Lanka's imports from the ASEAN countries as a share of the country's total imports increased from 4.1 per cent in 1974 to 6.4 per cent in 1980. In 1975, when Sri Lanka's share of imports from the ASEAN countries accounted for 8.9 per cent of its total imports, a significantly large share of this increase in trade consisted of rice imports from Thailand. It is also relevant to note that the increase in the value of imports after 1977, which has taken place at a rapid rate, was not due to any increase in the import of rice, but largely to imports of investment goods such as machinery and equipment. Sri Lanka had trade deficits with the ASEAN countries in all the years covered by this study. Since 1977, the trade deficits have increased substantially. This is mainly due to the increase in

343

TABLE 1 Sri Lanka's Trade in Merchandise and Trade Balance with the ASEAN Countries and the World, 1971-80 (In million US$) 1971

1972

1973

1974

1975

1976

1977

197B

1979

19BO

Exports Indonesia Malaysia Philippines Singapore Thai land Total ASEAN The World

o. 55 0. 5 l. 27 0. 5 2. 27 343.6

0. 27 6.B O.lB 7 B (1. 5) 527.02 0

336.6

409.7

0. 75 o. 32 o. 7 7 .lB 0.17 B.95 (1.6) 565. BB

o. 75 0. 39 2. 21 16.94 0.33 20.14 (3.5) 569.54

0.9B o. 31 0.05 10.77 l. 61 13.72 (l.B) 753.47

0. 5 1.2 o. 3 17 B 2. 2 22.0 (2.6) 844.9 0

o. 3 0.4 0.3 10.1 0. 2 11.3 (1.2) 9Bl.3

0.3 4. 5 3. 3 11.B 0.1 20.0 (1.9) 1,039.1

3. 4 9.0 O.B B7 3 10.7 111.2 (7.7) 1,450.B

9.0 11.9 7. 5 91.3 9.9 129.6 (6.4) 2,035.0

Imports Indonesia Malaysia Philippines Singapore Thailand Total ASEAN The World

1.46 2.13 5. 90 9.49 353. B

0.02 2. 23 0.01 19.73 7 73 29.72 (4.1) 720.00 0

366.4

429.4

0.02 2. 21 0. 21 14.73 50.44 67.61 (B.9) 753 23 0

0.13 l. 96 o. 2B 9.34 20.32 32.03 (5.5) 57 B. 59

0.04 3.17 O.OB 13.74 31.31 4B.34 (6.9) 695 71 0

o. B 4.B 1.2 26.0 3.1 35.9 (3.B) 966.4

0

Trade Balance Indonesia Malaysia Philippines Singapore Thai land Total ASEAN The World

NOTE:

SOURCE:

-1.41

0.53 -1.96

-O.B6 -5.85 -7 22 -10.2

-12.93 -7.55 -21. 9Z -193.0

0

-29. B

-19.7

+0. 73 -1. B9 -0.14 -7.6 -50 27 -5B.66 -1B7 35 0

0

0.14 -1.57 l. 93 -2.97 -19.99 -11. B9 -9.05

Figures within parentheses are percentages of total exports and imports. was not available.

- = data

International Monetary Fund (IMF), Direction of Trade.

0.14 -2.86 -0.02 -B. 2 -29.7 -34.62 57 76 0

-0.3 -3.6 -0.9 -B.2 -0.9 -13.9 -121.5

-3.1 -B.6 -0.5 -77 2 -10.5 -99.9 -469.0 0

-B. 7 -7.4 -4.2 -79.5 -9.B -109 6 -995.9 0

imports from Singapore without a proportionate increase in exports. While the trade deficit with Singapore was of the magnitude of US$79.5 million in 1980, the trade deficit with the rest of the ASEAN countries was only US$30 million. In 1979, Singapore absorbed more than 85 per cent of Sri Lanka's exports to the ASEAN countries, while more than 75 per cent of the imports from the group was procured from Singapore. In the following year, however, the share of exports to and imports from Singapore dropped to 58.7 per cent and 71.31 per cent respectively, despite an increase in the absolute values of exports and imports. Improved trade relations with the Philippines followed the signing of a trade agreement in 1980.

Commodity Composition of Trade Table 2 shows the commodity composition of Sri Lanka's imports from and exports to ASEAN for three periods: 197 3 (before the liberalization of trade in Sri Lanka), 1977 (the year of the liberalization) and 1980 (after the liberalization). It may be noted that the principal commodities traded in each year have changed. Furthermore, there was no "basket of commodities" which would account for at least 50 per cent of the bilateral trade during each of the three years for any of the five countries. With these changes in the commodity composition of trade, calculation of bilateral terms of trade indices would not have been useful. Sri Lanka's major exports to Singapore were tea in bulk, sesame seeds, crustaceans and molluscs, napthalene, ceramic products, coffee, and precious and semi-precious stones. It is also worth noting that Singapore was the major market for Sri Lanka's exports of shark fins and beche-de-mer. Sri Lanka's major imports from Singapore were petroleum oils, structures and parts of iron or steel, woven fabrics of cotton, plywood containers, primary cells and batteries, and condensed milk. The major exports from Sri Lanka to Thailand were synthetic woven fabrics and natural graphite. The principal imports from Thailand were condensed milk, preserved fish, and fishing nets. Rice, which was a major import from Thailand in the early 1970s, has declined in importance in recent years. The imports from Thailand have also diversified in recent years into manufactured goods such as machinery, tyres and tyre cases, and man-made fibres. One of the proposals discussed in connection with the Sri Lanka-Philippines trade agreement was the establishment of a Joint Committee to identify new areas of trade. The commodities identified by the Sri Lankan authorities were tea, gems, and spices. Sri Lanka's major exports to the Philippines in 1980 were cocoa, residual fuel oils, and tea. Sri Lanka also exported a small quantity of natural graphite. In turn, Sri Lanka procured Portland cement, rolled glass, structures and parts of iron or steel, aluminium wire, cables and twine cordage ropes from the Philippines in 1980. In comparing the commodity composition of trade during the years 1977-80, it is clear that trade has been diversified. The 130 per cent increase in Sri Lanka's exports was mainly due to the increase in price of the old commodities and the import of the new export commodity, residual fuel oils, wh i eh accounted for 96 per cent of the export trade in 1980. 345

TABLE 2 Major Exports and Imports of Sri Lanka to the ASEAN Countries, 1973, 1977 and 1980 Principal Commodities Country

Year Exports

Indonesia

Malaysia

Imports

1973

Residual fuel oils, mechanical appliances

Canes and rattans, plans and drawings

1977

Mechanical appliances, machinery

Canes and rattans, paraffin wax, medicaments

1980

Machinery, vulcanised rubber, precious and semi-precious stones

Medicaments, asbestos sheets, primary cells and batteries, cement and articles of cement, dried fish and Maldive fish

1973

Articles of iron and steel, tea, cocoa beans, oil seeds

Sugar, dried fish, machinery, palm oil

1977

Tea, cocoa powder, machinery, cocoa butter, tableware and articles, coir fibre, cashew nuts

Palm oil, cotton and synthetic yarn, plywood, blackboard

1980

Residual fuel oils, sesame seeds, music records, weed killers, rubber and wall tiles

Primary cells and batteries, plywood, blackwood, woven fabrics, wood, asbestos, machinery, yarn, petroleum oils, disinfectants, articles of cement, fish, steel and aluminium, food preparations, dried fish, television sets.

TABLE 2 (continued) Major Exports and Imports of Sri Lanka to the ASEAN Countries, 1973, 1977 and 1980 Principal Commodities Country

Year Exports

Philippines

Singapore

Imports

1973

Cocoa beans, natural graphite, limestone, tea

Agricultural machinery, optical glasses, excavating and levelling machinery, shelled seeds, rice

1977

Natural graphite, tea, articles of copper and jewellery, tableware and other articles

Twine cordage, insecticides, medicaments, paper and paper board

1980

Tea, cocoa beans, residual fuel oils

Twine cordage, cement, structures and parts of iron and steel, and aluminium

1973

Sesame seeds, tea, woven fabrics of cotton, precious and semi-precious stones, crustaceans and molluscs, spices, cocoa beans, textiles

Cereal flours, containers, petroleum products

1977

Sesame seeds, tea, precious and semi-precious stones, sharks' fins or fish maws, spices, residual fuel oils, wall tiles, coffee

Cereal flours, petroleum products, woven fabrics, yarn of man-made fibres, medicaments, articles of iron or steel

1978

Sesame seeds, tea, precious and semi-precious stones, sharks' fins or fish maws, beche-de-mer, wall tiles, coffee

Petroleum products, articles of iron or steel, cotton fabrics and yarn, machinery, cement, vehicles and parts, phosphate

TABLE 2 (continued) Major Exports and Imports of Sri Lanka to the ASEAN Countries, 1973, 1977 and 1980 Principal Commodities Year

Country

Exports Thailand

The World (Commodities have been arranged according to their relative shares in exports and imports for each year)

SOURCE:

Imports

1973

Tea, natural graphite, coir fibre bristle and mattress, cotton fabrics, precious and semiprecious stones

Sugar, maize, beans

1977

Tea, natural graphite, precious and semi-precious stones, residual fuel oils

Sugar, rice, milk and cream, synthetic and cotton fibres and yarn

1980

Natural graphite, bristle fibre

Milk and cream, man-made fibres, machinery and mechanical appliances, jute bags, cotton, tyre and tyre cases

Tea, rubber, coconuts, precious and semi-precious

Flour, sugar, petroleum products, rice, machinery and equipment, transport equipment

1973

stones, other agricultural products, petroleum products 1977

Tea, rubber, petroleum products, coconut, minor agricultural crops, and gems

Petroleum, rice, flour, sugar, textiles, machinery and equipment, transport equipment, wheat, chemical elements and compounds, building materials

1980

Tea, petroleum products, rubber, textile garments, coconut, minor agricultural crops

Petroleum, machinery and equipment, transport equipment, textiles, milk and milk products, flour, rice

Various Marga studies.

Consequently, the importance of tea has declined although the value of total exports has increased fivefold during the years 1977-80. The new imports, namely, Portland cement, structures and parts of iron or steel, rolled glass, and structures and parts of aluminium accounted for approximately 90 per cent of Sri Lanka's imports from the Philippines in 1980. Sri Lanka's major exports to Indonesia were machinery, vulcanized rubber, and precious and semi-precious stones. Sri Lanka's imports from Indonesia have diversified substantially since 1977. The new imports such as asbestos and its products, batteries and cells, cement and dried fish, accounted for approximately 90 per cent of Sri Lanka's imports from Indonesia in 1980. Substantial diversification of trade with Malaysia has also taken place. The new exports were residual fuel oils, sesame seed, gramaphone and other sound recordings, and weed killers. The major commodity imports from Malaysia were plywood, blackboard, woven fabrics, wrought bars, rods, etc., wood sawn lengthwise, and asbestos sheets. Analysis of Sri Lanka's exports to the world in 1973, 1977 and 1980, suggests that there has been a rapid increase in the value of exports of petroleum products, and textiles and garments. While there has been some increase in exports of petroleum products to the ASEAN countries, the large and rapidly growing market for the Sri Lankan export of textiles and garments is in the Western countries. As regards Sri Lanka's total imports, the share of petroleum products continued to increase after the world price increase in 1973/74. A large share of Sri Lank a's imports of petroleum products is from the Middle East. The accelerated development projects which have been undertaken after 1977, such as the Housing and Urban Development Programme, the Mahaweli Diversion Scheme, and the Investment Promotion Zones, have given rise to an increase in the import of heavy investment goods, which are mostly financed by foreign assistance provided by the developed countries which are outside the ASEAN region. Based on the projections made by planning authorities, it could reasonably be expected that the above pattern of commodities traded with the world would continue during the next few years. In comparing Sri Lanka's exports to the ASEAN countries during the years 1973, 1977 and 1980, it seems that in general the exports have been diversified. There has also been an increase in the value-added components of Sri Lanka's primary exports, for example, from cocoa to cocoa powder. The most significant change is in imports, of which investment goods of the type such as asbestos products, "light" machinery, structures and parts of iron, steel or a l umi n i urn, cement and petroleum products, are supplied by the ASE AN countries. The more developed countries continued to finance and supply most of the heavy investment goods needed by Sri Lanka. It would be useful to assess the potential of the ASEAN countries to continue to supply these and even more sophisticated goods. But such an assessment is beyond the scope of the study. What is important, however, is that in spite of the fl uctu at ions in trade between Sri Lanka and the ASEAN countries, imports have diversified and increased.

349

Trade Intensity Indices To have a quantitative measure of the intensity of trade between Sri Lanka and the individual ASEAN countries, the intensity indices were calculated for the years 1971-80. The definition and the purpose for calculating these indices are presented in the Overview to the volume. The results of the computations are presented in Table 3. The export intensity indices for Sri Lanka's exports to the ASEAN countries fluctuated during the years 1971-80. Sri Lanka's exports were over-represented during the years 1974-78 with Singapore, and during 1974-79 with Thailand. As shown in Table 4, the trend for the period 1971-80 was positive and statistically significant (at the 5 per cent level) in the case of Sri Lanka's exports to Malaysia and Phi 1 i pp i nes, and at the 10 per cent 1eve 1 for Singapore. The trend was negative but statistically significant at the 10 per cent level with Indonesia. In the case of Thailand, there was no statistically significant trend for Sri Lanka's exports during the years 1971-80. By extrapolation, we could predict that Sri Lanka could expand its exports to all these countries, except Indonesia and Thailand, in the short-run under the same conditions. Regarding the import intensity indices, there has been over-representation with Singapore and Thailand in 1971 and from The trend for the period 1971-80 was positive and 1974-80. statistically significant (at the 5 per cent level) in the case of Sri Lanka's imports from Indonesia, Philippines and Singapore, and at the 10 per cent level for Malaysia (Table 4). No trend was evident for Sri Lanka's imports from Thailand. We have also calculated the trade intensity indices for the above countries, at the disaggregated level of one-digit SITC classification (Tables 5 to 7) and also at the three-digit SITC level (Tables 8 and 9) for the years 1969, 1974, and 1978. The most disturbing feature that emerges from the analysis is that Sri Lanka's exports and imports are under-represented with most of the ASEAN countries, the possible exception being Singapore. It is also relevant to note that there has been a significant increase in the imports of manufactured goods, that is, SITC Sections 5 to 8, from the ASEAN countries in 1978. Regarding the intensity indices for selected commodities -- at the export of the three-digit level of SITC classification essential oils and wood manufactures to Singapore was over-represented in all the three years. Wh i 1e the export intensity indices show an inconsistent trend, there was no other commodity wh i eh was over-represented for any of the ASEAN countries in all the three years. The analysis of the intensity indices indicates that Singapore and Thailand were the major producers and consumers of Sri Lanka's Although Sri Lanka's trade with the ASEAN imports and exports. countries has been under-represented in most of the commodities, there is wide scope for expansion of trade, at least in selected products. The number of commodities from Sri Lanka for which the ASEAN countries have become important consumers have increased since 1978. Similarly, Sri Lanka has become an important purchaser of ASEAN exports.

350

TABLE 3 Intensity of Sri Lanka's Trade with the ASEAN Countries, 1971-80

1971

Countries

1972

1973

1975

1976

1977

1978

1979

1980

0.2 0.12 0.02 1. 20 1.00

0.66 0.15 0.75 3.22 1.25

0.2 0.1 0.01 1. 55 4.0

0.10 0.25 0.07 2.00 0.50

0.07 0.08 0.07 0.90 0.05

0.03 0.80 0.75 0.92 0.22

0.00 0.50 0.10 3.17 83.75

0.00 0.60 0.25 2.42 52.85

0.02

0.08 0.67 0.05 3.25 1.00

0.2 0. 86 0.17 6.66 2.33

1974

Exports Indonesia Malaysia Philippines Singapore Thai land

0.02

0.38 0.33

-

-

-

0.22 0.08

-

1.2 1.0 Imports

Indonesia Malaysia Philippines Singapore Thailand

0. BD

-

1.20 24.3

-

-

0.00 0.60 0.00 3.8 10.00

o. 80 0.03 2.50 58.75

- denotes insignificant or no trade with those countries during those years. SOURCE:

Computations based on the data from IMF, Direction of Trade, various issues.

0.33

o. 71

1.00 4.40 1. 33

TABLE 4 Time Trend Equations for Sri Lanka's Trade Intensities with the ASEAN Countries, 1971-80

EXPORTS Indonesia

xij

0.087 ... 0. 005T R2 (1.95)**

0.32

Malaysia

xij

0.135 ... 0.054T R2 (2.67)*

0.47

Philippines

Log xij

0.649 ... 0.071 Log T R2 (13.09)*

0.95

Singapore

Log xij

0.052 ... 0.021 Log (2.15)**

R2

0.37

IMPORTS Indonesia

Mij

0.964 ... 0.029T R2 (3.52)*

0.61

Malaysia

Mij

0.245 ... 0.056T R2 (1.84)**

0.3

Philippines

Mij

0.225 ... 0.078T R2 (3.07)*

0.54

Singapore

Log Mij

* **

0.031 ... 0.077T R2 (4.15)*

0.68

denotes t ratio is significant at the 5 per cent level denotes t ratio is significant at the 10 per cent level

Note:

SOURCE:

We have reported here only the linear or semi-log trend as per significance ratios at the 5 per cent and 10 per cent level. For Thailand there was no significant trend for the movement of indices Xij and Mij over the period 1971-80. Based on the data in Table 3.

352

TABLE 5 Intensity of Sri Lanka's Trade with the ASEAN Countries, at the one-digit SITC level, 1969

SITC Classification Section 0

Section 1

Section 2

Section 3

Section 4

~ort

Indonesia Philippines Singapore Thailand

0.1 0.5 0.444 0.100

0.00 0.00 0.166 0.00

0.033 0.008 0.029 0.20

o.oo o.oo

o.oo

0.00 0.00

Note: SOURCE:

0.266 0.00 0.20 2.454

D. DD 0.20 0.50 0.00

o.oo 0.00 0.45 0.111

0.064

Section 6

Section 7

Section 8

0.142 0.00 2.4 0.00

o.oo o.oo 8.75 0.00

15.33 17.571 0.00 0.00

0.00 0.00 30.71 0.333

0.625 1.50 1.00 0.00

0.00 0.30 12.50 0.30

0.00 0.00 1.00 0.00

0.00 0.00 2.33 1.00

Intensities

D. OD 0.00 0.00 Im~ort

Indonesia Philippines Singapore Thailand

Section 5

Intensities D. OD

o.oo

o.oo

0.021 0.027

0.00 0.00

Computations for Malaysia's trade with Sri Lanka could not be undertaken as the data were not available for this year. United Nations Economic and Social Commission for Asia and the Pacific (U.N. ESCAP), Foreign Trade Statistics for Asia and the Pacific, various issues.

TABLE 6 Intensity of Sri Lanka's Trade with the ASEAN Countries, at the one-digit SITC level, 1974

SITC Classification Section 1

Section 2

Section 3

Section 4

Section 5

Ex~ort

Indonesia Malaysia Philippines Singapore Thailand

0.00 0.087 0.002 1.142 0.10

0.00 0.134 0.00 20.50 0.00

0.00 0.012 0.00 1. 222 0.20

0.00 0.00 0.00 0.00 0.00

SOURCE:

0.008 0.518

o.oo

11.50 1.411

0.00 0.00 0.00 2.5 0.00

0.031 0.016 0.00 0.647 0.00

0.00 0.011 0.00 0.021 0.00

Section 7

Section 8

Section 9

0.00 0.05 0.00 17.25 0.008

0.00 0.22 0.00 3.1 0.50

54.375 4.00 0.00 5.23 1. 833

0.20 0.047 0.00 1.10 0.2

0.04 0.007 0.00 1.333 0.00

0.00 3.00 0.10 16.00 o. 25

0.00 1.125 o. 50 0.666 0.00

0.00 0.281 0.00 3.0 2.00

Intensities 0.00 0.00 0.00 0.00 0.00

Im~ort

Indonesia Malaysia Philippines Singapore Thailand

Section 6

Intensities 0.00 4.068 0.00 0.09 0.00

U.N. ESCAP, Foreign Trade Statistics of Asia and the Pacific, various issues.

TABLE 7 Intensity of Sri Lanka's Trade with the ASEAN Countries, at the one-digit SITC level, 1978

SITC Classification Section 0

Section 1

Section 2

Section 3

Section 4

Ex~ort

Indonesia Malaysia Philippines Singapore Thailand

0.00 0.12 0.25 1.00 0.08

0.00 0.07 0.00 0.80 0.00

0.00 0.16 0.01 l. 31 0.25

o.oo o.oo

o.oo

0.00 6.64 7.60

SOURCE:

0.00 0.67 0.00 o. 80 0.31

0.00 0.60 2.50 8.33 0.00

0.00 0.28 0.06 0.70 0.38

0.00 0.22 0.00 l. 78 2.00

Section 6

Section 7

Section 8

0.02 0.07 0.011 52.51 0.01

0.40 l. 50 0.03 5.78 0.00

44.86 0.10 0.00 2.64 0.12

o.os

15.00 11.25 0.17 8.25 1.00

0.01 3.60 6.00 16.75 2.00

0.00 1.00 9.00 4.00 2.53

6.67 0.50 0.03 8.43 1.00

Intensities 0.00 0.00 0.01 0.00

~ort

Indonesia Malaysia Philippines Singapore Thailand

Section 5

8.50 0.10 0.50 0.02

Intensities

o.oo 0.00 0.65 38.74

o.oo

U.N. ESCAP, Foreign Trade Statistics for Aaia and the Pacific, various issues.

TABLE 8 Export Intensity of Sri Lanka with ASEAN Countries in Selected Commodities, at the three-digit SITC level 1969, 1974 and 1978 Indonesia

SITC Section

074 332 422 551 629 632 641 652 661 678 732

Note:

SOURCE:

Malaysia

Singapore

Philippines

Thailand

Description

Tea and mate Petroleum products Fixed vegetable oils Essential oils Rubber articles, new Woad manufactures, n.e.s. Paper and paper board Cotton fabrics, woven Cement etc., building products Iron steel tubes, pipes, etc. Road motor vehicles

1. 2.

1969

1974

1978

1969

1974

1978

15.0 0.0 0.0 0.0 0.0 0.0

0.07 0.0 0.0 0.0 6.0 0.0 25.0 0.0 0.0 0.0 0.0

0.013 0.0

2.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

0.05 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

3.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

o.o

0.0 0.0 0.0 0.0

o.o

0.25 0.0 0.888 0.0 0.0 0.0 0.0 0.0

There was no trade in these commodities with Indonesia in 1974 and 1978. No data were available for trade with Malaysia in these commodities in 1969. U.N. ESCAP, Foreign Trade Statistics of Asia and the Pacific, various issues.

1969

1974

0.33 1.0 0.0 0.0 0.0 0.0 3.0 2.14 0.0 0.0 38.66 52.5 0.0 100.0 0.0 10.94 0.0 0.0 0.0 5.43 0.0 0.0

1978

1969

1974

1978

1.0 10.33 0.01 1.88 0.0 11.5 0.0 0.152 9.12 68.82 63.66

0.07 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

0.09 0.0 0.0 0.0 0.0 12.0 0.0 0.0 0.0 0.0 0.0

0.07 5.43 0.0 0.0 0.0 4.0 0.0 0.0 0.0 0.0 0.0

TABLE 9 I•port Intensity of Sri Lanka with ASEAN Countries in Selected Commodities at the three-digit SITC level 1969, 1974 and 1978

SITC Section

263 332 422 551 621 629 631 632 641 652 661 678 691 695 732 851

Note:

SOURCE:

Indonesia

Malaysia

Philippines

Singapore

Thailand

Description

Cotton Petroleum products Fixed vegetable oils Essential oils, perfumes Materials of rubber Rubber articles, n.e.s. Veneers, plywood, etc. Wood manufactures, n.e.s Paper and paper board Cotton fabrics, woven Cement, etc., building products Iron, steel, tubes, pipes, etc. Structures and parts, n.e.s. Tools Road motor vehicles Footwear

1969

1974

1978

1974

1978

0.0 1.07 0.0 0.0 0.0 0.0 0.0

0.0 0.0 0.0 0.35 0.0 0.0

0.0 0.01 0.0 0.0 0.0 0.0

0.0 0.0 0.0 0.0 0.0 0.0

0.0 0.0

0.0 1.5 3.68 0.0 0.0 3.0 3.39 0.0 260.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

0.0 13.0 0.0 0.0 0.2 13.5 3.09 0.07 0.0 0.17 2.0 1.0 14.0 5.0 14.29 8.5

o.o

0.0

o.o

0.0

o.o o.o o.o o.o 0.0

o.o

o.o

0.0 0.0

o.o

o.o

0.0 0.0 0.0 0.0 0.0 0.0

1978 0.0

o.o 0.0 0.0 0.0 1.42 0.0 0.0 0.0 0.0 45.12 0.0 0.0 4.0 0.0 0.35

1969

1974

1978

1969

1978

0.0 0.4 0.0 0.0 1.0 0.07 0.0 0.0 0.0 3.71 0.67 16.0 0.0 1.0 0.16 0.0

0.0 0.40 0.0 0.0 0.0 0.15 2.63 0.0 1.0 0.33 0.0 2.5 0.5 0.17 0.5 0.0

0.016 4.42 0.19 0.0 8.0 4.67 3.91 3.0 0.0 11.0 24.43 1.13 16.4 2.5 13.0 8.5

0.0 0.06 0.0 0.0 0.0 120.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

0.0 7.0 0.0 0.0 0.0 7.0 0.25 0.0 0.0 0.6 0.0 0.0 0.0 6.0 0.25 951.66

1. There was no trade in these commodities with the Philippines in 1969 and 1974, and with Thailand in 1974. 2. Data were not available for trade in these commodities with Malaysia in 1969. n.e.s. = not elsewhere specified. Computation based on U.N. ESCAP, Statistical Yearbook for Asia and the Pacific, various issues.

o.o

0.0

o.o

Intra-Industry Trade Indices With optimistic indications of strengthening trade between Sri Lanka and the ASEAN countries, it has now become necessary to identify For this purpose the industries in which trade could be expanded. Grubel-Lloyd (G-U intra-industry trade index has been calculated for Sri Lanka's trade with the ASEAN countries in the selected commodities during the years 1969, 1974, and 1978 (Table 10). (The definition of the G-L index is given in the Overview to this volume). In Table 9, most of the cells for 1969, 1974 and some for 1978 have dashes indicating that there was no trade in those commodities among the countries. The number of cells with zeros increased in 1974 and again in 1978, indicating that the countries involved had complete specialization in trade in those products, namely, petroleum products, veneers, plywood, crude minerals, rubber articles, structures, and The Grube 1-L l oyd index reaches higher values for parts and tools. some of the commodities traded with Singapore in 1978 -- for example, petroleum products, fixed vegetable oils, and crude vegetable While this might indicate increasing competitiveness in materials. these commodities traded with Singapore, the picture could change if we were to compute Grubel-Lloyd indices at a more disaggregated level But the -- for example, at the six-digit SITC classification. necessary data were not available to undertake such computations. When we disaggregated some of these commodities traded with Singapore, we found that a high level of specialization had in fact been For example, achieved, as the commodities traded were different. under petroleum products, Sri Lanka exported residual fuel oils and imported lubricating oil, petroleum bitumen and bituminous mixture from Singapore. Index of Trade Reciprocity It is useful to measure reciprocity, especially in co-operation among partners Lanka with ASEAN) balance of the index used to measure the Overview to this volume). years 1971-80 are provided in

the degree of bilateral/multilateral the context of schemes for regional who are facing (as in the case of Sri trade difficulties. (The definition of degree of reciprocity is provided in the The results of the computation for the Table 11.

The index has been on the low side for Sri Lanka's bilateral trade with most of the ASEAN countries. The index was also low for trade among the ASEAN countries, but when we i ne l uded Sri Lank a the As the indices showed an position deteriorated still further. inconsistent trend during the years 1971-80 a trend analysis was The trend was positive and statistically significant (at conducted. the 5 per cent level) in the case of Sri Lanka's trade with Malaysia and the Philippines, while it was negative and statistically significant in the case of Sri Lanka's trade with Singapore and Indonesia. No trend was evident for Sri Lanka's trade with Thailand or with the ASEAN grouping. The analysis of the index of trade reciprocity indices indicates that the primary concern in formulating any scheme to expand trade among these countries should be the existing trade imbalance in favour The trend analysis has indicated an of the ASEAN countries. optimistic picture for expanding Sri Lanka's trade with Malaysia and the Philippines. 358

TABLE 10 Intra-Industry Trade Index for Sri Lanka's Trade in Selected Commodities with the ASEAN Countries at the three-digit SITC level, 1969, 1974, and 1978* Indonesia

SITC No

074 422 551 629 632 641 652 661 678 732 851 276 292 521 651 719

Malaysia

Philippines

Singapore

Thailand

Description 1974 Petroleum products Fixed vegetable oils, non-soft Essential oils Rubber articles, n.e.s Wood manufactures, n.e.s. Paper and paper board Cotton fabrics, woven Cement, etc. Iron, steel tubes, pipes Road motor vehicles Footwear Crude minerals (other) Crude vegetable materials Coal, petroleum, etc. Textile yarn and thread Machines, n.e.s., non-electric

0

-

-

-

0

-

1978

1969

1974

1978

0

-

0 0

-

-

-

-

-

-

-

-

0 0 0.2

-

-

-

-

53.33

-

0.82

-

-

0 18.16

l. 56

70.59

0 0 0 100.0 0 0 0 0 0 100.0 0 47.0

-

0 2.4

1969

-

-

-

-

-

-

1974

1978

1969

-

-

-

-

-

-

-

-

0

0

0 0 100.0

-

-

1974

1978

1969

1974

1978

0

0

-

10.75

-

92.74 90.9 0 0 6.4 0 0.2 35.5 5.5 1.9 0 11.1 83.7 0.2 0 0.3

0

-

-

-

0 0 0

0 0 0 0

0 ll.O

0

* Calculated only for those items for which there is two-way trade in that item. SOURCE:

Computed from data in U.N. ESCAP, Foreign Trade Statistics for Asia and the Pacific, various issues.

4.65 0 0 40.0 47.06 77.77 15.38

0 96.38

1.46 23.07

0

0

-

-

0

-

2.2 0

-

0 0 1.9 3.1

-

-

0 50.0

-

0

TABLE ll Trade Reciprocity Index for Exports between Sri Lanka and the ASEAN Grouping, 1971-80

for bilateral exports of Sri Lanka and Indonesia Malaysia Philippines Singapore Thailand

1971 1972 1973 1974 1975 1976 1977 1978 1979 1980

Note:

0.08

0. 24 0.81 0. 56 0.14 0.065

0. 23 0. 2 0. 28 0. 29 0. 33 0.11 0.487

0. 82 0.09 0.07 0.67 0. 55 0. 81

0. 331

0.012

0.46 0.48 0. 96 0.49 0.36 0.14 0.139

0.05 0.01 0.02 0.09 0.42 0.04 0.02

For the exports of ASEAN Countries

For the exports of the extended ASEAN countries including Sri Lanka

0.609 0. 516 0.490 0.480 0.534 0.603 0.>90 0.648 0. 551 0.561

0. 537 0. 471 0.431 0.435 0.498 0.596 0. 547 0.575 0. 575 0.47

For the bilateral exports of Sri Lanka and the ASEAN Grouping

0.158

0. 39 0. 22 0.6 0. 32 0. 37 0. 37 0.185

The estimated trend equation to the above with respect to time ( T) is as follows:

Malaysia

Singapore

Philippines

B = 0.011 + 0.037 T (3.01)* LogS = 0.012 + 0.068 T (2.43)* 8

= 0. 209 + 0.031 T

2 R = 0.53 2 R = 0. 43 2 R = 0. 5

(2. 82)* Indonesia

LogB = 0.262 + 0.102 T (2. 89)*

2 R = 0.51

We have reported here only the better of the linear or semi-log trend as per t ratios significant at the 5 per cent level. countries, and country groupings the linear or the semi-log trend was not significant.

SOURCE:

Based on data from IMF, Direction of Trade, various annual issues.

For the other

In fact, following the Sri Lankan Prime Minister's visit to the ASEAN countries, some of the proposals made to overcome the trade imbalances were: 1.

Enter into trade and payments agreements;

2.

Examine the possibility of developina trade on the basis of "barter" with saving credit facilities (especially with the Philippines);

3.

To establish joint committees to expand trade; and

4.

To explore possibilities of establishing joint ventures.

To complete the analysis of existing trade patterns and future prospects between Sri Lank a and the ASEAN countries, it is necessary to briefly discuss Sri Lanka's tariff structure, the role of state trading organizations, and the multilateral trade co-operative arrangements.

Tariffs and Other Policies in Sri Lanka After the liberalization of trade, the tariff structure in Sri Lanka consisted of five bands, that is, nominal, concessional, structural, protective, and prohibitive, within the range of 0 to 100 per cent. The basic rate was 0 to 5 per cent (nominal) for capital goods, industrial raw materials in primary form, and essential consumer products not produced in Sri Lanka. Protective rates were 50 to lOO per cent. But due to the adverse effects of the liberal import pal icy for local industries and production, the tariff rates were revised in 1981 from 5 per cent to prohibitive rates of up to 500 per cent. In addition to the existing import duty structure, a turnover tax was imposed in 1981 on all imports other than infant milk food, fertilizers, crude oil and materials imported for manufacture and export. The objective of this new policy as stated by the Central Bank of Ceylon was to ensure that the customs duty payable at the point of import will represent essentially the level of protection afforded to the locally produced article. The Special Import Notification No. 1 of 1977 explains the new import policy which was adopted after the liberalization of trade. The list of commodities which require licensing and the group of people who are allowed to import these items are listed in three schedules in this document. It is relevant to note for our study that under the Open General Licence System, only those investment goods exceeding Rs 700,000 c. i.f. would require prior approval. About 90 per cent of industrial raw materials have also been freed from licence control.

The Role of State Trading Organizations Before 1977, a large share of Sri Lanka's external trade was conducted through state trading organizations. Since 1977, these organizations

361

have expanded their activities to include prov1s1on of after sales services and mark et research to promote Sri Lank an exports. Even after 1977, the foreign component of capital equipment and raw materials for state development projects continued to be handled by these organizations. One of these organizations has a foreign collaboration in the Middle East for marketing Sri Lankan tea and spices. Another state trading organization executed its first ever export order by importing and selling television sets to the Maldives. Most of these organizations have also entered into long-term contracts with leading manufacturers to procure commodities and provide the public with after-sales facilities. Although the liberalization measures of 1977 have increased the role of the private sector in Sri Lanka's external trade, there could be more public sector co-operation in the field of procurement, the promotion of sales, the conducting of trade through long-term contracts and the identification of new areas for trade expansion. Such co-operation could be promoted through the state trading organizations.

Multilateral Co-operative Trade Arrangements The most important scheme to encourage intra-regional trade among five of the six countries relevant to this study, is the Preferential Trading Arrangements among the ASEAN countries. Other than this multilateral framework to which Sri Lanka does not belong, there are other regional organizations and groups such as the ESCAP trade co-operation group, the subgroup for Network of Trade Promotion Centres, the subgroup for Trade Creating Joint Ventures, and the subgroup for harmonization of trade statics, through which the ASEAN countries and Sri Lanka have co-operated in the past to promote economic relations among their countries. Sri Lanka is also a signatory to the Bangkok Agreement which was originally signed by seven countries including the Philippines and Thailand in 1975, but which was not ratified by them as they had joined the Preferential Trading Arrangements within ASEAN. The main features of the Bangkok Agreement are: 1.

The gradual relaxation of quantitative and other non-tariff restrictions on trade, and

2.

Industrial co-operation and joint ventures.

The Bangkok Agreement provides for smaller regional groupings within it, and the ASEAN countries were assured, on inquiry by the Philippines and Thailand, that they could be treated as such an "economic grouping". The ASEAN countries have yet to take advantage of this discussion in ESCAP, but the tariff reducing process among them is reported to have proceeded to such a degree that any concessions that they would have to grant if they join the Bangkok Agreement could be easily accommodated by them within the existing framework. Sri Lanka's economic relations with the ASEAN countries would surely expand if the latter were to join the Bangkok Agreement. If Sri Lanka were to be given ASEAN membership as well, there is the likelihood of still greater prospects for co-operation.

362

Ill. INVESTMENT RELATIONS Table 12, Section A, presents foreign investments in Sri Lanka originating from the ASEAN countries during the period 1935-72. The only investment collaboration that appears to be from the ASEAN countries during this period was from Malaysia for the production of rubber bud wood. Foreign investments from other eau ntr i es in the world were also insufficient to make any notable impact on the industrial development of Sri Lanka during this period. A White Paper on foreign investment, which was the policy statement of the Government of Sri Lanka, was published in 1972 to attract foreign investment. In spite of this publication, foreign investors were reluctant to invest in Sri Lanka because of a lack of security of investment. Thus, the Foreign Investment Authority Bill of 1976 was designed to provide legal guarantees against expropriation. The total foreign investments during this period in about 24 new projects was of the order of Rs 29,931 million, but a breakdown of such investment on the basis of the country of origin is not available. It is relevant to note that among the ASEAN countries, there was only investment from Singapore and that, too, only in the production of ready-made garments for export. The rest of the foreion investments were from Hong Kong, Japan, the United States, Germany, Sweden, Holland, Dubai, and Saudi Arabia. Some foreign ventures established prior to 1977 have made use of the incentives granted after 1977 and have, therefore, been included in Table 12, Section B. To implement the new investment policy changes initiated in 1977, two new institutional frameworks were formulated. The Greater Colombo Economic Commission (GCEC) is an autonomous statutory body set up under the GCEC Law No. 4 of 1978. This Act and its amendment empowered the Commission to establish three Investment Promotion Zones ( IPZs) in Sri Lanka. Sri Lanka's first IPZ known as the Katunayake Investment Promotion Zone (KIPZ) came into being in 1978. The wide range of incentives offered by the GCEC to the investors operating in the IPZs include: 1.

Tax holidays up to a maximum of ten years and a further concessionary period, if necessary;

2.

Duty-free imports; and

3.

Exemption from taxes on royalties, on all dividends paid to non-resident shareholders, and on emoluments paid to non-residents.

The government has accorded priority for foreign investment in specified industries within the IPZs. These include the production of e 1ectron i c components and the processing of rubber, graphite, minerals, phosphate, and coir. Foreign investment outside the area of authority of the GCEC, which comes under the purview of the Foreign Investment Advisory Committee (FIAC), is encouraged particularly in export-oriented industries, or where significant technology gaps exist in the domestic economy. Foreign investment is also protected from nationalization by Section 157 of the new Constitution (1978). According to this section, any agreement or treaty with a foreign state "its nationals or corporations, companies and other associations" that have been passed by Parliament with a two-thirds majority as "being essential 363

TABLE lZ Foreign Investment Collaboration in Sri Lanka from the ASEAN Countries

(A)

Foreign Investment Collaboration in Sri Lanka, from the ASEAN Countries during 1935-72

1. (B)

(C)

Nane of Enterprise

Product

Source of Collaboration

Harrisons and Crosfield Ltd. (1959)

Rubber bud wood

Malaysia

Investment Approvals within Greater Colombo Economic Commission, from ASEAN Countries, as at 25 August 1981 Name of Enterprise

Product

Source of Collaboration

1. 2. J. 4. 5, 6. 7. 8.

Shore Base Exports Ltd. Jewelarts Exports Ltd. S. Pritam Singh Co., Ltd. Tung Mung Textiles Ltd. Senthosa Development Co., Ltd. Air Lanka Catering Services Ltd. Mid as Jewellery International Ltd. Formosa Ind. Co. Ltd.

Singapore Singapore Singapore Singapore Singapore Thailand Thailand and Saudi Arabia Taiwan and Singapore

9.

Fantasia Socks and Stockings Ltd.

Processing of shrimps Jewellery Carbon film resistors Garments Expatriate housing Catering for international air lines High fashion jewellery Polypropy lene and polyethy lene stretch yarn woven socks Socks and stockings

Singapore and West Africa

Distribution by Industry of ASEAN Joint Ventures within the FIAC in Sri Lanka, as on 30 June 1981 l.

Singapore

2

4

6

in in in in in in in

Fishing gear, fishing boats, and fishery Agriculture, food and beverages Textiles and garments Machinery, equipment and electrical appliances Civil engineering construction, and other related activities other manufacturing industries other service industries

2.

Singapore and Thailand

l

in Gems, jewellery and other precious stones

3.

Malaysia

l

in other manufacturing industries

SOURCE:

Government FJAC and GCEC publications; and Marga studies.

for the development of the national economy" has the force of law in Sri Lank a. Investors under the GCEC and F IAC are protected against expropriation under this provision. The new Constitution has brought changes an executive presidential system and proportional representation -- which are aimed at ensuring long-term political stability to attract foreign investment. Industrial labour relations laws have also been drafted with similar objectives. The government has also cone l uded Double Tax Relief Agreements with a number of countries, including two countries in ASEAN, namely, Malaysia and Singapore. Investment Promotion Agreements have also been signed with eight countries to date, which include only Singapore from ASEAN. The growing number of projects approved for establishment both within and outside the IPZs is indicative of the favourable response to Sri Lanka's liberal economic policies. From its inception in May 1978 to December 1981, the GCEC had approved 154 projects with an estimated total investment of Rs 5,377 million. During this period, 83 agreements were signed, while 43 enterprises with an estimated investment of Rs 76.1 mill ion were in commercial production. The Free Trade Zone has generated slightly more imports than exports, cumulatively, through December 1981; however, much of that is due to the one-time cost of importing capital equipment, and indications are that the zone will be a net exporter in 1982 and beyond. The IPZs have created employment for 19,921 persons, as at the end of December 1981. Minimum wages have also been recently raised within the GCEC Authority. Of the 98 projects that received approval as at 25 August 1981, there were 7 from Singapore and 2 from Thailand. Among these nine enterprises, three enterprises were in collaboration with third countries, namely, Saudi Arabia, Taiwan, and West Africa. None of these enterprises have showed any apparent preference for investment in any particular sector. There are two each in jewellery and garments, and one each in housing, catering, food processing and others (Table 13, Section 8). Within the FIAC there were 28 ventures from the ASEAN countries, as at 30 June 1981. Among these ventures, twenty-seven were from Singapore and one from Malaysia, while one of the Singaporean enterprises in the manufacture of gems, jewellery and other precious stones --was in collaboration with Thailand. The industrial sectors in which the ASEAN joint ventures have been established are presented in Table 12, Section C. It indicates that there was no particular preference for any industrial sector by the private investors from the ASEAN countries. From the available information mentioned above, it was not possible to identify the factors responsible for the arowth of ASEAN ventures in Sri Lanka. The few ventures from the ASEAN countries which are in existence in Sri Lanka are mainly from Singapore, and they did not show a preference for investment in any particular sector. The rapid growth of joint ventures from Singapore after 1977 could have been due to the policies of the present government in Sri Lanka, and these have been discussed in detail in this section. The fact that Sri Lanka was copying the initial development strategies of Singapore and the latter's desire to move from lab our-intensive to capital-intens ive industrial development are also relevant as reasons for the rapid growth of joint ventures from Singapore. 365

With a view to evaluating the existing state of industrial collaborations and to identify the factors that promote or impede foreign investment collaborations in Sri Lanka, seventeen case studies were conducted. The survey covered a broad spectrum of industries engaged in the manufacture of various commodities, such as textiles and garments, chemicals, rubber products and construction, and the collaborations were also with different countries in the world. The main conclusions were: 1.

In the export industries, the Sri Lank an entrepreneurs were seeking collaborations in the form of transfer of technology, access to markets, and well-known trade marks. They preferred collaborations in the fields for which raw materials were readily available in Sri Lanka;

2.

Some of the public sector industries which were running at a loss were seeking collaborations in the form of management contracts;

3.

Some of the foreign collaborations which were manufacturing commodities within the tariff barriers prior to 1977 were unable to face competition after the liberalization of trade policies;

4.

There was also a need for foreign collaboration in sectors which had experienced rapid growth since the liberalization of 1977, that is, in construction and activities related to tourism; and

5.

The foreign ventures generally paid higher wages, especially those in which the foreign partner was a reputed industrial establishment. They did not show a particular preference for different management styles or for the foreign collaborators' participation as a member of the board of directors. Very few such ventures employed foreign personnel for a long period of time. Under the Open General Licence System which exists in Sri Lanka (since 1977), machinery and raw materials are generally purchased from the cheapest sources unless specified in the contract.

It is also relevant to note here that there does not appear to have been any failures of joint ventures between Sri Lank an and ASEAN entrepreneurs. Further tariff reductions to accommodate increasing economic co-operation between Sri Lank a and the ASEAN countries (or any other countries) should not adversely affect the local industrial structure in Sri Lanka.

There are only a few Sri Lankan joint ventures operating in the ASEAN countries and their share of equity participation is also low. This could be due to such constraints as high domestic taxation and tight exchange control regulations in force from the 1950s to the late 1970s, which were suspected to have resulted in "informal" transfers and investments abroad. No information is available on such transfers. It appears from the available information, that Sri Lankan investment in the ASEAN countries is concentrated only in Malaysia and Singapore. The largest investment appears to be in Singapore in a manufacturing concern producing chocolates. This establishment has been successful for a decade or more. The other three or four

366

ventures which operate in Malaysia are relatively small. As exchange control regulations have been liberalized in Sri Lanka, an increasing amount of Sri Lankan investment in the ASEAN countries can be foreseen. Besides bilateral joint ventures such as those discussed above, there are also multinational corporations (MNCs) which have subsidiaries both in Sri Lanka and in the ASEAN countries. While a discussion of the economic relations between these subsidiaries is beyond the scope of our study, another area of co-operation between Sri Lanka and the ASEAN countries could be to harmonize incentives and evolve a common framework for negotiating with these MNCs, as is done in the Andean pact.

Ill.

OTHER ECONOMIC RELATIONS

Relations in other areas matter of this section. areas, such as transport the development of trade

of major economic importance The expansion of activities and banking, is an essential and investment between ASEAN

form the subject in some of these prerequisite for and Sri Lanka.

Transport and Communications Shipping The Ceylon Shipping Corporation Ltd., which was established as a limited liability company in February 1969, became a statutory corporation fully owned by the government that is, Shipping Corporation -- in June 1971. By 1982, the national fleet consisted of 15 vessels, of which 13 were owned by the public sector and 2 by the private sector. The two private sector vessels operate only in the Red Sea-Sri Lanka trade. The market share of the vessels owned by the Ceylon Shipping Corporation in the seaborne exports of Sri Lanka increased from 0.8 per cent in 1971 to 34.3 per cent in 1980. The market share of the national fleet in the seaborne imports of Sri Lanka increased from 5 per cent in 1972 to 35 per cent in 1976, but declined to 20 per cent by 1980. In Sri Lanka, the shippinq agency system was replaced by a statutory body known as the Central Freight Bureau. While the Bureau aggregates and a 11 ocates cargo to ships so that each vesse 1 gets an economical load, it also ensures that sufficient sailings are available to carry Sri Lanka's exports. Total sailings and liftings to the different regions of the wor 1d hand 1ed by the Centra 1 Freight Bureau for the years 1977-79 are shown in Table 13. It is discouraging to note that the total number of sailings and liftings to the Southeast Asian countries (ASEAN) have decreased during the years 1977-79. The number of sailings to and from Southeast Asia could be increased to accommodate any expansion in the vo 1ume and movement of cargoes. Colombo became a container-handling port, and by 1980, 25 per cent of Sri Lanka's exports had been containerized. Further developments in the port of Colombo have enabled it to become an ideal 367

TABLE 13 Total Sailings and Total Liftings from Sri Lanka, 1977-79 Total Sailings Countries

North America Central America/Mexico and Caribbean South America Western Europe Africa and Mauritius Middle East South Asia Southeast Asia Far East Australia and New Zealand Total SOURCE:

Sri Lanka Freight Bureau.

Total Liftings (freight tons)

1977

1978

1979

1977

1978

1979

108 31 10 25 34 97 173 14 90 47

llO 21 18 25 31 140 182 13 128 55

ll2 2S 25 25 39 133 221 11 65 62

89' 068 8,524 6,094 38,789 28,336 189,384 llO, 831 70,192 76,315 45,541

90, llO 9,015 7,310 45,070 21,892 233,140 90,900 63,750 85, 135 38,519

113,305 9, 807 9,381 49,987 24,331 234,510 104,711 55,388 85' 715 38,058

838

935

917

1,043,500

1,108,213

1,151,570

transhipment base and feeder centre in the Indian Ocean. Regional co-operation could increase the utilization of the facilities available at Colombo. Sri Lanka does not have shipping agreements with any of the ASEAN countries. However, Pacific International Line Ltd. (PIL), Singapore, has obtained approval for a joint project with the Ceylon Shipping Corporation to operate a feeder shipping service from neighbouring countries for onward transfer to carriers on major shipping routes. Airlines Singapore and Thailand have provided assistance to develop Sri Lanka's national carrier, Air Lanka, which replaced the now defunct Air Ceylon. While Singapore provided managerial and technical assistance, Thailand invested in a catering project within the Investment Promotion Zone of Sri Lanka to supply not only the new national airline but also other airlines operating through Colombo. Future co-operation between Sri Lank a and the ASEAN countries could be in increasing the number of scheduled flights between these countries and in air-freight forwarding. Communication The improvement of communication linkages is an essential prerequisite for the dissemination of knowledge regarding markets and investment opportunities for expanding trade within the region. The Overseas Telecommunication Service (OTS) of Sri Lanka is a member of the 105-member International Telecommunication Satellite Organization (INTELSAT) and operates 103 international circuits of the INTELSAT system via the INTELSAT IVA Satellite. This system consists of 51 circuits to countries in the East, through which Sri Lanka is connected to Singapore and other countries in Southeast Asia. The Indian Ocean Commonwealth Cable Project proposes to route one telephone line in its initial phase through the Indo-Sri Lanka microwave link and the Malaysian Earth Station, to Malaysia, Singapore and four other countries. Indonesia, Singapore, and Sri Lanka, along with five other countries signed the Memorandum of Understanding of the Southeast Asia-Middle East-Western Europe Submarine Cable System in August 1982. Further co-operation between Sri Lanka and the ASEAN countries is needed to improve communications. At present Sri Lanka does not have direct communication linkages with many of the Southeast Asian countries.

Banking

The four indigenous banks of Sri Lanka -- the Bank of Ceylon, the People's Bank, the Hatton National Bank Ltd., and the Commercial Bank of Ceylon, Ltd.-- do not have any branches in the ASEAN countries. The ASEAN countries also do not appear to have any branches of their banks operating in Sri Lanka. It is relevant to note that the picture has not improved in spite of an important policy decision taken by the Government of Sri Lanka in 1978, that is, lifting the moratorium and providing incentives to attract foreign banks to open branches in Sri Lank a. 369

Money-Brokering The entry of foreign money-broker i ng firms marks another deve 1opment in Sri Lanka's short-term money market. Among the five firms whi eh have entered the money-brokering business to date, there is only one collaborative enterprise between Sri Lanka and an ASEAN country. This is between John Keels Ltd. of Sri Lanka and Degani, Tullott and Riley (S) Pte. Ltd., of Singapore.

Remittances Foreign inward remittances or private transfer of money from abroad have begun to occupy an increasingly significant place in Sri Lanka's economic relations with other countries. This trend is attributed to the rapid increase in private inward remittances by Sri Lankan nationals employed abroad. Among the ASEAN countries, only remittances from Singapore accounted for a significant share, amounting toRs 48.3 million, or nearly 2 per cent of the total foreign inward remittances into Sri Lanka in 1980.

Tourism Since the 1970s, the tourist industry has emerged as an important source of foreign exchange and employment creation in Sri Lanka. The total number of tourist arrivals increased nearly tenfold during the period 1971-80. The number of tourist arrivals by region and country of nationality for the years 1971, 1977, and 1980 is presented in Table 14. The majority of the arrivals were from Western Europe; for example, 67 per cent of the total number were from countries such as West Germany, France, United Kingdom, and Switzerland. The second leading market was the Asian region, but the majority of the tourists were from India and Japan. Among the ASEAN countries, in order of magnitude, Malaysia, Singapore and Thailand were the leading markets. The share of tourist arrivals from the Philippines and Indonesia were insignificant in 1977 and 1980. The main purpose of travel to Sri Lanka was pleasure. But 6.8 per cent of all tourists were visitors on business trips to Sri Lanka. The rapid development of the tourist industry has also created collaborative enterprises in hotels and other recreational facilities in Sri Lanka. The Thai Sear Group of Thailand, which is in the process of constructing a five-star hotel in collaboration with a Sri Lank an partner, is the only apparent ASEAN venture in this sector in Sri Lanka.

IV.

FUTURE PROSPECTS

As mentioned in the introduction, the objective of this study was to assess the current state of economic relations between Sri Lanka and the ASEAN countries in order to evaluate the potential for closer economic co-operation between Sri Lanka and the ASEAN countries and to identify possible schemes for further strengthening economic relations 370

TABLE 14 Tourist Arrivals by Region and Nationality, 1971, 1977 and 1980

North America USA

1971

1977

1980

3,936

10' 137

15,408

3,336

8,342

12' 194

127

371

676

Latin America and the Caribbean Western Europe

23,326

n.a.

n. a.

3, 618 5,888 4,865 1,310 2,024

104,726 17,555 29,722 12,428 8,921

215,650 34, 170 75,380 31,014 15,454

Eastern Europe

569

4,552

4,938

Middle East

253

1,077

1,986

Africa

295

1,237

2, 380

10,130

26,158

72,022

6,097 1,036 1, 768 74 48 82

8,647 9,076 2, BOO

36,234 11' 526 7,376

1,091

6,852

1,081

5,407

8, 720

39,654

153,665

321,780

France Germany F.R. United Kingdom Italy Switzerland

Asia India Japan Malaysia/Singapore Indonesia Philippines Thailand Australia Total

- denotes insignificant arrivals of tourists for which data are not available. Note:

The main motivation for travel to Sri Lanka in 1960 was as follows: a) 90 per cent of the tourists came for pleasure. b) 6.8 per cent of the tourists came for business (including 10,056 Asians) c) 2.5 per cent came for common interest purposes such as visiting friends and relatives, or religious and cultural purposes (68.6 per cent were Asians).

SOURCE:

Ceylon Tourist Board, various annual statistical reports.

371

between them. The main conclusions arising from the section on Sri Lanka-ASEAN trade relations are: 1.

Sri Lanka's trade with the ASEAN countries has been at a low level . Its main trading partner among the ASEAN countries is Singapore. Sri Lanka has also been having adverse trade balances with all these countries. This would necessitate some form of payments clearing arrangements if trade is to be expanded.

2.

Sri Lanka's commodity composition of trade with the ASEAN countries has been changing continuously, while the value-added component of Sri Lanka's limited number of exports, that is, cocoa, tea, rubber, spices, and coconut has been increasing. Residual fuel oil has also become an important export of Sri Lanka. It has also increased its manufactured imports of machinery, cement, and mechanical appliances from the ASEAN countries.

3.

Trade reciprocity indices and trade intensity indices confirm the above observations by providing quantitative indices on the trend of growing trade imbalances and increasing dependence on Singapore as the major trading partner. Trade intensity indices also identified commodities which have been over-represented in bilateral trade, such as petroleum products and wood manufactures to Singapore, and other commodities in which trade can be intensified, such as tea, essential oils, rubber, and articles of rubber.

4.

Comparison of the intra-industry trade indices for the years 1969, 1974, and 1978 indicate that some specialization in trade had taken place by 1978, especially in crude minerals, tools, building products, etc. Another interesting example was petroleum products in Sri Lanka's trade with Singapore in 1978. Even though there was a high intra-industry trade index, as explained earlier, there was a high level of specialization in this commodity between Sri Lanka and Singapore, when the analysis was made at the six-digit SITC level.

5.

A description of the present tariff structure and the role of state trading organizations in Sri Lanka were provided to indicate areas in which there could be future co-operation. The vast experience of the state trading organizations in Sri Lanka cannot be ignored when devising schemes for joint procurement, marketing, and also conducting and expanding trade with the ASEAN countries.

6.

An assessment of the existing multilateral framework which promotes or impedes expansion of trade relations between Sri Lanka and the ASEAN countries is also necessary to complete the analysis of the trade patterns between these countries. The Bangkok Agreement and ASEAN provide ideal frameworks within which not only trade but also investment expansion schemes could be formulated.

The section on investment relations between Sri Lanka and the ASEAN countries began with an introduction to changes of po 1 i ci es within Sri Lanka which are conducive to attracting foreign investment. It is relevant to emphasize again in this study that the foreign investment policies which have been adopted in Sri Lanka since 1977 were on the lines of those policies adopted in Singapore two decades

372

or so ago.

The main conclusions arising from this section are that:

1.

Inspite of the adoption of liberal policies regarding foreign investment in Sri Lanka, there has been a reluctance on the part of the entrepreneurs from the ASEAN countries to invest in Sri Lank a;

2.

There has been a rapid growth of joint ventures only between The other joint Singaporean and Sri Lankan entrepreneurs. ventures were between Thai, Malaysian and Sri Lankan entrepreneurs.

3.

There have been three joint ventures in which entrepreneurs from one of the ASEAN countries together with entrepreneurs from a third country, such as Saudi Arabia, Taiwan, and West Africa, have invested in Sri Lanka. This creates an interesting possibility of the OPEC (Organization of Petroleum Exporting Countries) countries investing their capital along with ASEAN technology in Sri Lanka. Further studies to identify possible areas for such call aboration between Sri Lanka and the ASEAN region are needed to tap the potential in this field.

4.

It was not possible to identify the factors responsible for the ASEAN countries to invest in Sri Lanka.

5.

The potential areas in which Sri Lanka entrepreneurs have been seeking collaboration have been identified as those in which: a)

there could be turnkey contracts for the ASEAN entrepreneurs to provide the plant, technology and trained personnel for a few years. This would enable Sri Lankan entrepreneurs to make a start;

b)

There could be management contacts for the ASEAN entrepreneurs to provide managerial know-how to those Sri Lankan public-sector enterprises seeking such assistance;

c)

ASEAN entrepreneurs can invest in commodities and manufacturing with buy-back arrangements; or in commodities in which they could use their well established sales outlets to sell in third countries. In keeping with the new policies in Singapore, it could also divert its labour intensive industries to Sri Lanka; and

d)

There could be foreign collaborations in Sri Lanka in sectors such as construction, and tourism-related activities.

6)

Investments by Sri Lankan entrepreneurs in the ASEAN countries is at an insignificant level. This can be encouraged by the Sri Lankan Government as it has withdrawn the strict exchanqe control regulations previously in force. It was one of the- proposals made after the Sri Lank an Prime Minister's visit to the ASEAN countries.

7)

Sri Lanka and the ASEAN countries could harmonize the concessions offered to the multinationals of the developed countries, so that they could reap more benefit according to their comparative advantage in the different sectors. The section on "Other Economic Relations" discussed channels for 373

the flow of capital (banking, money braking), the flow of labour (remittances and tourism), and the flow of commodities (transport). The development of these economic relations is an essential prerequisite for the expansion of trade and investment between Sri Lanka and the ASEAN countris. This study also did not iqnore the importance of political will to expand economic relations between Sri Lanka and the ASEAN countries which was considered in the first section. While the results of this study indicate an optimistic future for the expansion of economic relations, it should be emphasized that the prime objective of any expansion of economic relations between Sri Lanka and the ASEAN countries should be to improve the welfare of the citizens of these countries.

Postscript

Since this manuscript was completed around the middle of 1983, there have been several developments which have increased the urqency for enhancing economic relations between the countries of ASEAN and South Asia. It has beco~e increasingly clear that the industrial countries in general, and the United States and Japan in particular, will continue with their mercantilistic and self-centred economic policies for some time to come. Therefore, neither ASEAN, in terms of access to markets and technology transfer, nor South Asia, in terms of access to markets and to concessional development finance, can expect much satisfaction from the industrial countries. This development, in conjunction with the continuing balance of trade, payments, and budget deficits in many of the ASEAN and the South Asian countries, has increased the urgency for these countries to expand their economic relations. Such relations can take the form of not only conventional trade but also barter trade, investment, technology transfer, and technical co-operation. Slower growth rates expected in the ASEAN region in the next decade, and the desire to expand agriculture and small-scale industry in several ASEAN countries, such as Indonesia, the Philippines, and to some extent Malaysia, provide new opportunities for technical co-operation with some of the South Asian countries, such as Pakistan and India. The Malaysian Prime Minister Datuk Sri Mahathir Mohamad's visit to Pakistan in March 1984, and the recent signing of the trade agreement between India and Thailand may be regarded as recognizing the need to expand economic relations. Malaysia has also increased its contacts with Bangladesh as a part of its effort to strengthen trade and investment links with the Islamic countries. Since the completion of the manuscript, contacts among the South Asian Regional Co-operation (SARC) grouping have become more intensified, with the first summit of the heads of member countries scheduled to be held towards the end of 1985. The SARC countries appear to have rea 1 i zed that co-operative rather than confl i et i ve relations among themselves are a precondition for improving their economic performance. These economies, especially India, have also become more aware that measures must be taken to make at least the important sectors of their economy internationally competitive. The resulting 1 iberal ization drives provide significant trade and other opportunities to the ASEAN countries, especially Malaysia and Singapore. With the formation of the SARC, institutional links between it and ASEAN may also become possible. It should, however, be stressed that various problems indicated in the Overview to this volume are not likely to be resolved in the short term. Moreover, 375

even if political will is exhibited in favour of expanding relations, the nature and structure of the economies of the two groupings would continue to be an important constraint. Therefore, for the foreseeable future, only relatively modest improvement in economic relations between the two regions may be expected, compared with their relations with the industrialized countries. Thus, while the enhancing of economic relations between the two sides should not be regarded as a panacea, neither should such efforts be regarded as of minor importance. It is only through conscious nurturing by both sides that the full potential of the economic relations between ASEAN and South Asia can be realized.

Appendix

SITC CLASSIFICATION AT ONE-, TWO-, AND THREE-DIGIT LEVELS, BY SECTIONS, DIVISIONS AND GROUPS Section Code No. 0

2 3 4 5 6 7

8 9

Description Food and live animals chiefly for food Beverages and tobacco Crude materials, inedible, except fuels Mineral fuels, lubricants and related materials Animal and vegetable oils, fats and waxes Chemicals and related products, n.e.s. Manufactured goods classified chiefly by material Machinery and transport equipment Miscellaneous manufactured articles Commodities and transactions not classified according to kind

Division Code No. DO 01 02 03

04 05 06 07

08 09 11

12 21 22 23 24 25 26 27 28

29 32 33

Live animals chiefly for food Meat and meat preparations Dairy products and birds' eggs Fish, crustaceans and molluscs, and preparations thereof Cereals and cereal preparations Vegetables and fruits Sugar, sugar preparations, and honey Coffee, tea, cocoa, spices, and manufactures thereof Feeding stuff for animals (not including unmilled cereals) Miscellaneous edible products and preparations Beverages Tobacco and tobacco manufactures Hides, skins and furskins, undressed Oil seeds and oleaginous fruit Crude rubber (including synthetic and reclaimed) Cork and wood Pulp and waste paper Textile fibres_ (other than wool tops) and their wastes (not manufactured into yarn or fabric) Crude fertilizers and crude minerals (excluding coal, petroleum and precious stones) Metalliferous ores and metal scrap Crude animal and vegetable materials, n.e.s. Coal, coke and briquettes Petroleum, petroleum products and related materials

377

Division Code No. 34 35

41 42 43

51 52 53 54 55 56 57 58 59

61 62 63 64 65 66 67

68 69 7l 72

73 74

Description Gas, natural and manufactured Electric current Animal oils and fats, unprocessed Fixed vegetable oils and fats, unprocessed Animal and vegetable oils and fats, processed, and waxes of animal or vegetable origin Organic chemicals Inorganic chemicals Dyeing, tanning, and colouring materials Medicinal and pharmaceutical products Essential oils and perfume materials; toilet, polishing and cleansing preparations Fertilizers, manufactured Explosives and pyrotechnic products Plastic materials, and regenerated and artificial resins Chemical materials and products, n.e.s. Leather, leather manufactures, n.e.s. and dressed furskins Rubber manufactures, n.e.s. Cork and wood manufactures (excluding furniture) Paper, paperboard, and articles of paper pulp, of paper or of paperboard Textile yarn, fabrics, made up articles, n.e.s. and related products Non-metallic mineral manufactures, n.e.s. Iron and steel Non-ferrous metals Manufactures of metal, n.e.s. Power generating machinery and equipment Machinery specialized for particular industries Metalworking machinery General industrial machinery and equipment, n.e.s. and machine parts, n.e.s.

75 76

77 78 79

81 82 83 84 85 87 88 89

91 93 94 95 96 97

Office machines and automatic data processing equipment Telecommunications and sound recording and reproducing apparatus and equipment Electrical machinery, apparatus and appliances, n.e.s., and electrical parts thereof Road vehicles (including air cushion vehicles) Other transport equipment Sanitary, plumbing, heating and lighting fixtures and fittings, n.e.s. Furniture and parts thereof Travel goods, handbags and similar containers Articles of apparel and clothing accessories Footwear Professional, scientific and controlling instruments and apparatus, n.e.s. Photographic apparatus, equipment and supplies and optical goods, n.e.s., watches and clocks Miscellaneous manufactured articles, n.e.s. Postal packages Special transactions Live animals not commonly used for food Military weapons and ammunition Coin (other than gold coin), not being legal tender Gold, non-monetary (excluding gold ores and concentrates)

378

Group Code No. 001 011 012 014 022 023 024 025 034 035 036 037 041 042 043 044 045 046 047 048 054

056 057 058 061 062 071 072 073 074 075 081 091 098 lll

112 121 122 211 212 222 223

232 233 244 245

Description Live animals chiefly for food Meat and edible meat offals, fresh, chilled or frozen Meat and edible meat offals (except poultry liver), salted, in brine, dried or smoked Meat and edible meat offals, prepared or preserved, n.e.s.; fish extracts Milk and cream Butter Cheese and curd Birds' eggs and egg yolks, fresh, dried or otherwise preserved, sweetened or not Fish, fresh (live or dead), chilled or frozen Fish, smoked, dried, salted or in brine Crustaceans and molluscs, whether in shell or not, fresh (live or dead), chilled, frozen, salted, in brine or dried Fish, crustaceans and molluscs, prepared or preserved, n.e.s. Wheat (including spelt) and meslin, unmilled Rice Barley, unmilled Maize (corn), unmilled Cereals, unmilled (other than wheat, rice, barley, and maize) Meal and flour of wheat and flour of meslin Other cereal meals and flours Cereal preparations and preparations of flour or starch of fruits or vegetables Vegetables, fresh, chilled, frozen or simply preserved (including dried leguminous vegetables); roots, tubers and other edible vegetable products, n.e.s., fresh or dried Vegetables, roots and tubers, prepared or preserved, n.e.s. Fruit and nuts (not including oil nuts), fresh or dried Fruit, preserved, and fruit preparations Sugar and honey Sugar confectionery (except chocolate confectionery) and other sugar preparations Coffee and coffee substitutes Cocoa Chocolate and other food preparations containing cocoa, n.e.s. Tea and mate Spices Feeding stuff for animals (not including unmilled cereals) Margarine and shortening Edible products and preparations, n.e.s. Non-alcoholic beverages, n.e.s. Alcoholic beverages Tobacco, unmanufactured Tobacco, manufactured Hides and skins (except furskins), undressed Furskins, undressed Oil seeds and oleaginous fruit, whole or broken, of a kind used for the extraction of 'soft' fixed vegetable oils (excluding flours and meals) Oil seeds and oleaginous fruit, whole or broken, of a kind used for the extraction of other fixed vegetable oils (including non-defatted flours and meals of oil seeds and oleaginous fruit) Natural rubber latex; natural rubber and similar natural gums Synthetic rubber latex; synthetic rubber and reclaimed rubber; waste and scrap of unhardened rubber Cork, natural, raw and waste Fuel wood (excluding wood waste) and wood charcoal

379

Group Code No.

246 247 248 251 261 263 264 265 266 267 268 269 271 273 274 277 278 281 282 286 287 288 289 291 292 322 323 333 334 335 341 351 411 423 424 431 511 512 513 514 515 516 522 523 524 531 532 533 541 551 553

Description Pulpwood (including chips and wood waste) Other wood in the rough or roughly squared Wood, simply worked, and railway sleepers of wood Pulp and waste paper Silk Cotton Jute Vegetable textile fibres (other than cotton and jute) and waste Synthetic fibres Other man-made fibres and waste Wool and other animal hair (excluding wool tops) Old clothing and other old textile articles (including rags) Fertilizers, crude Stone, sand and gravel Sulphur and unroasted iron pyrites Natural abrasives, n.e.s. (including industrial diamonds) Other crude minerals Iron ore and concentrates Iron and steel waste and scrap Ores and concentrates and uranium and thorium Ores and concentrates of base metals, n.e.s. Non-ferrous base metal waste and scrap, n.e.s. Ores and concentrates of precious metals; waste, scrap and sweepings of precious metals (other than gold) Crude animal materials, n.e.s. Crude vegetable materials, n.e.s. Coal, lignite and peat Briquettes; coke and semi-coke of coal, lignite or peat; reto