Economic Relations between West Asia and Southeast Asia 9789814376907

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ECONOMIC RELATIONS BETWEEN WEST ASIA AND SOUTHEAST ASIA

Institute of Southeast Asian Studies The Institute of Southeast Asian Studies was established as an autonomous corporation in May 1968. lt is a regional research centre for scholars and other specialists concerned with modern Southeast Asia. The Institute's research interest is focused on the many-faceted problems of development and modernization, and political and social change in Southeast Asia. The Institute is governed by a twenty-four-member Board of Trustees on which are represented the University of Singapore and Nanyang University, appointees from the government, as well as representatives from a broad range of professional and civic organizations and groups. A ten-man Executive Committee oversees day-to-day operations; it is ex-officio chaired by the Director, the Institute's chief academic and administrative officer. The opinions expressed in this publication are the responsibility of the authors and not of the Institute.

ECONOMIC RELATIONS BETWEEN WEST ASIA AND SOUTHEAST ASIA

Papers and Proceedings of an International Conference organized by Institute of Southeast Asian Studies

14-16 November 1977 Singapore

Edited by

Lee Soo Ann

Institute of Southeast Asian Studies Singapore

Published in 1978 by Institute of Southeast Asian Studies Cluny Road Singapore 10 Institute of Southeast Asian Studies

Printed

111

SmKapore hr 1/untnnen Ojjset Printing Pte. Ltd.

CONTENTS Page FOREWORD OPENING ADDRESS

S. Rajaratnam

KEYNOTE ADDRESS

Manouchehr Agah

1

Lim Joo-Jock

10

FIRST SESSION: WEST ASIA AND SOUTHEAST ASIA The Arab World and Southeast Asia: Hussein Najadi Problems and Prospects

35

West Asia-Southeast Asia Relationship: A Southeast Asian Perspective

V. Kanapathy

43

West Asia and Southeast Asia: A Sketch

Prachoom Chomchai

48

West Asia and Southeast Asia: A Commentary

Fawzi Gharaibeh

57

BACKGROUND PAPER West Asia and Southeast Asia: Sharing Common Concerns

The Discussion

64

SECOND SESSION: THE INVESTMENT PATTERN AND PROBLEMS OF PETRODOLLARS Petrodollars: Myths and Realities Alejandro Melchor, Jr.

77

The Asian Dollar Market and its Role in Asian Development

S. Dhanabalan

90

Tony Tan Keng Yam

106

A Comment The Discussion

109

THIRD SESSION: PETROLEUM AND PETROLEUM-BASED INDUSTRIES Oil Supply and Cost and their Implications for Southeast Asian Development Sivavong Changkasiri 127

Scope for Oil-based Industries in Oil-Producing Regions

Ebado/lah Bahari

136

The Discussion

151

DINNER ADDRESS ASEAN Industrialization: Possibility for the Foreign Investor Cesar E.A. Vi rata

162

FOURTH SESSION: ASEAN SHIPPING AND TRADE AND INTERREGIONAL DEVELOPMENT The International Investor and A.R.Soehoed ASEAN Development

170

Oman's Resources and their Bearing on Greater Economic Co-operation Between West Asia and ASEAN Mohamed Abdul Rahman Faqeer

178

ASEAN and its Role in lnterregional Development

Amado A. Castro

183

lnterregional Development: Shipping and Trading Possibilities Between West Asia Abbas K. Gokal and Southeast Asia

188

Shipping and Trade Possibilities: A Southeast Asian Perspective

194

Koh Seow Tee

The Discussion

203

FIFTH SESSION: THE POTENTIAL FOR GREATER ECONOMIC CO-OPERATION BETWEEN WEST ASIA AND SOUTH EAST ASIA The Potential for Greater Economic Co-operation Between West Asia and Southeast Asia: A View from Southeast Asia Damrong Lathapipat 211

Investment Opportunities in Agro Industry in Indonesia

Ali Noor Luddin

219

A Comment

Goh Cheng Teik

225

Abbas Amirie

228

An Indian Ocean Economic Community Dariush Malekpour and Fereidun Fesharaki

241

The Discussion

267

CONCLUDING COMMENTARY The Development of Economic Relations Between West Asia and Southeast Asia Lee Soo Ann

284

Summary of Recommendations

292

List of Participants

293

Iran's Foreign Policy Posture Towards Asia

FOREWORD Established as a nonprofit autonomous organization in 1968, the Institute of Southeast Asian Studies is a regional research centre for scholars and other specialists concerned with the multifaceted problems of development and modernization, and political and social change in Southeast Asia. In addition to its various research and publication projects, the Institute, every two or three years, organizes a major conference focused on an issue of significant regional and international concern. Past conferences of such a nature have included "New Directions in the International Relations of Southeast Asia", "Questions of Stability and Security in Southeast Asia", and "The Economic and Political Growth Pattern of Asia-Pacific". Of late, our attention has been drawn to the relatively neglected but nevertheless vital subject of contacts between the countries of Western and Southeastern Asia, especially in terms of promoting a better understanding of their respective national and regional aspirations, economic and social problems, and developmental potential. For instance, what are some of the similarities in the national aspirations and needs of the two areas? Can some of their developmental plans and programmes be synchronized to greater mutual advantage? What would be some of the possibilities and prospects for greater co-operation between the Arab States and Iran on the one hand and Southeast Asia, especially ASEAN, on the other? lt was with such questions in mind that the Institute got together a select group of cabinet ministers and other governmental policy-makers, informed academics, and prominent businessmen from these two regions to exchange views on matters of common concern, particularly in the general area of more effective and meaningful economic relations. The conference on "Economic Relations Between West Asia and Southeast Asia" was held over two working days, and was generally well received. lt also stimulated considerable discussion. This discussion, together with the associated papers and reports, forms the basis of the volume that follows. As is usual with major conferences of this nature, we could not have managed this meeting without the generous support and encouragement of a number of individuals and private organizations. We are also particularly grateful to the Honourable Foreign Minister of Singapore, Mr. S. Rajaratnam, for delivering the

Opening Address and declaring the conference open. Last but no least, we would like to thank all the participants, observers, and the editor, for their respective and valuable contributions and comments. Whilst wishing them all the best, it is clearly understood that the responsibility for facts and opinions expressed in the proceedings that follow rest exclusively with the authors concerned.

15 April1978

Kernial S. Sandhu Director Institute of Southeast Asian Studies

OPENING ADDRESS BY THE HON. MRS. RAJARATNAM MINISTER FOR FOREIGN AFFAIRS, SINGAPORE I doubt very much whether a conference such as this one could have been successfully organized even five years ago. Five years ago, West Asia and the ASEAN states had minimal contact with one another. Our relations, and in particular our economic relations, were routed via London, N-ew York, Paris or The Hague. Our dealings with one another, such as they were, were by products of our relations with the Western industrial nations. This was not a matter of choice but the logical outcome of historical circumstances. Some five hundred years ago, world history was transformed into European history. The European actors were the stars and the rest of the world the two-bit players in a basically European drama. The European domination of world history has now come to an end. The Western powers still exert the greatest influence in world affairs, but they no longer hold the commanding position they once did. One reason for this is that the developing countries have over the past thirty years moved away from over dependence on the Western world and attempted to establish direct and independent links among themselves. The Association of South-East Asian Nations (ASEAN), founded ten years ago, is an effort by over 220 million people, through collective effort, to become more self-reliant economically and politically. lt is not the aim of ASEAN to become an autonomous, closed economy. Such a goal is neither desirable nor feasible. The interdependence of nations, even if a cliche, is an inevitable process of history. Interdependence requires that national economies come to terms with the imperatives of a global economy. Unfortunately at the moment most nations, including the rich industrial nations, are refusing to come to terms with this reality by a return to economic nationalism. The consequence is that both national economies and international economy are drifting into greater instability and endemic crisis. Therefore this Conference between West Asian countries and the ASEAN states is sound economic sense. Co-operation between West Asia and ASEAN could, if approached with imagination and

realism, make a significant contribution to the recovery of world economy. lt is a rational response to the growing interdependence of nations. I am not saying that it would be possible for the distinguished delegates gathered here to announce at the end of one conference an earth-shaking formula for West Asian-ASEAN economic co-operation. For one thing, the area of mutual ignorance is far too great for this to be cleared in one or two conferences. After all it has taken the ASEAN countries, geographically close to one another, some ten years of cautious association to discover that they have more to gain by seeking out and consolidating those things which unite them than stressing those matters which divide them. What this Conference can usefully do-and this is the second such conference to be held in Singapore this year-is to seek out a more enduring basis for co-operation between the two areas. I emphasise the need for a more sustained and permanent basis for co-operation than one merely prompted by the day-to-day vagaries of the international economy. If, for example, we in ASEAN define economic co-operation as no more than an exercise to relieve our West Asian partners of as much of their surplus petrodollars as they can tolerate, then not only are we being extremely short-sighted but we are also underestimating the business acumen of our partners. As this is a point of some importance, perhaps you will bear with me if I make a brief historical digression to put right an image we in ASEAN may have about much of West Asia. Preconceived images about other people play a greater part than we care to admit in the conduct of international relations-and more often than not with disastrous consequences. For many of us, West Asia conjures visions of very fierce gentlemen in flowing robes who spend their time riding camels and living in tents. Now that oil has brought them inconceivable wealth, we still see them as the same people who now spend their new found wealth on sunglasses and cadillacs. We may feel that they have more money than they know what to do with and that it is therefore our responsibility to relieve them of some of their surplus cash. If this is the image that influences ASEAN businessmen in their dealings with their West Asian partners they had better think again. lt may be worth the while of ASEAN businessmen to read a bit of the history of that part of the world. If they do they will come across a place with the very unlikely name of Dilmun. Most of you have not heard of this place but our Singapore Airlines (SIA) planes stop

there for refuelling. Today it goes by the name of Bahrain. Some 5,000 years ago Dilmun was one of the great trading centres of Asia. Like Singapore, it was then the clearinghouse for the goods of one of the wealthiest trading centres in the world of that time. The great Arab traders and navigators were centred in West Asia and it was one of these navigators who unwittingly changed the course of world history by piloting Vasco da Gama from the Horn of Africa to Goa in India. I wonder what would have happened to Asian and European history had our Arab navigator misdirected Vasco da Gama to one of the less salubrious islands in the Indian Ocean and convinced the Europeans through Vasco da Gama that Asia was even more poverty stricken than Europe. Fortunately or unfortunately, the Arab navigator did his job so well that West Asian prosperity went into decline and European history in Asia began. But the old trading skills of West Asians have not been completely lost as evidenced by the concerted way in which the oilproducing countries have exploited the only resource they had-oil-to their advantage. The lands of camels and desert dunes now flow with wealth and the power that goes with it. The old trading skills are being rapidly restored and ASEAN businessmen should bear this in mind when building bridges for cooperation between them and their counterparts in West Asia. The bridge must be sufficiently broad for a two-way traffic for a one-way bridge will sooner or later fall into disuse. If our image of West Asia needs to be revised, so too must the West Asian image of us. I suspect it is as distorted and inadequate as the one we have of West Asia and for precisely the same reason - centuries of indifference and isolation. I do not know exactly what image the people of West Asia have of us but the few West Asians who have come to our part of the world the first time have expressed surprise that we are far more developed and more worthy of note than they had thought we were. ASEAN lands are not all tropical jungles and sloe-eyed, sarong clad maidens swaying with the coconut palms. However I do not want to unduly disappoint our visitors. There are a few coconut palms still left in Singapore (for those of you who are really interested in botany) and most hotels can whip up sloeeyed, sarong clad maidens as nightclub entertainment, if you are interested in such things.

But the reality of ASEAN is something different altogether and if you search for it you will find that co-operation between it and West Asia can be as beneficial to both of us as it can be towards revitalising the international economy on whose soundness the fate of all national economies ultimately depends. One of the minor misfortunes of Southeast Asia is that it is a string of small states wedged between subcontinents with vast populations and great civilizations. There is India, there is China, there is Japan and there is Soviet Asia. For most people these make up Asia. In fact before the war Southeast Asia was indentified variously as Further India, the Indian Archipelago, the lndies and lndochina. However, economically and geopolitically Southeast Asia and, in particular ASEAN, is of great significance. In terms of land area ASEAN, for example, is not all that small. We are twice as large as the EEC. Our population is larger than that of the EEC and only slightly less than that of the U.S. But when it comes to economic relations what matters is not land area and size of population but resources and the level and quality of economic modernisation. For example, Japan fails the population and land area test but it is today an economic superpower and ASEAN's and West Asia's most important trading partner in Asia. In terms of national resources ASEAN is more than amply endowed and is an important producer of very crucial raw materials: rubbe·r, tin, timber, rice, palm oil and petroleum among other things. lt is not crippled by the kind of intense population pressures and paralysing poverty which unfortunately characterize many developing societies. For many years the ASEAN countries, despite occasional setbacks, have been experiencing dynamic growth. Their economic performance the past ten years has been well above average for developing countries and this is evidenced by ASEAN's high growth rates, stable currencies and healthy foreign reserves. According to one estimate, though ASEAN accounts for only 10% of Asia's population (excluding China) its gross domestic product has, on average, been one-fourth that of Asia's and has been responsible for about two-fifth of Asia's total trade. I apologise for inflicting these statistics but I think they are of great relevance to this Conference on economic co-operation between West and Southeast Asia. Perhaps one other very important point worth bearing in mind

during your deliberations is the fact of ASEAN itself. When five countries agree to mute their nationalism in favour of a regional approach to economic and other problems, you are dealing with an entity which has come to terms with the irreversible drift of the world towards interdependence. In dealing with ASEAN, you will be dealing with nations which have reached a level of sophistication and maturity beyond narrow nationalism. This brings me to the point I made earlier-that we must seek a more enduring basis on which to build co-operation between West Asia and ASEAN. ASEAN is going to be around for a long time. So will West Asian wealth by way of oil and the economic development that wealth makes possible. So fly-by-night economic deals are small-time deals. We should instead project co-operation between us in terms of decades rather than in terms of today's passing difficu Ities. I would like to sketch out briefly for your consideration a more inspiring backdrop for co-operation between West Asia and the ASEAN region. I would like to take you back to the days of Dilmun when the Indian Ocean, by the standards of that time, constituted a major trading community. I believe it could once again become an even more important trading area, not as a closed and exclusive zone, but as a vital component in the machinery of world trade and finance. lt need not, as in the recent past, be a mere extension of Western economy. The community fringing the Indian Ocean is potentially as rich as those skirting any other ocean. The whole of East Africa, West Asia, India, ASEAN, Australia and New Zealand are joined by this Ocean. Even the countries of the Far East regard the Indian Ocean as their highway to trade with Europe, Asia and Africa. The geopolitical importance of ASEAN lies in the fact that it straddles the Pacific and the Indian Oceans. Since the overwhelming bulk of international trade will, for the foreseeable future, be by sea, (because the sea is all highway given free by nature) the possibilities for developing an Indian Ocean trading community are there if those who live around it will only free themselves from the European concept that the Indian Ocean trade routes must lead only to Europe and nowhere else. I think it will be easier for ASEAN and West Asian states to cooperate to develop an Indian Ocean trading area. One reason is that our economies are by and large complementary. I do not propose to elaborate on this because most of your deliberations will be

concerned with exploring precisely this aspect of co-operation. I take it that the basic purpose of this Conference is to determine how the necessary interdependence of nations can be furthered without developing countries losing their independence in the process. The only practical way to do this is for each of us not to become too dependent on a few strong nations but to diversify our interdependence. Not all goods need come from the rich industrial nations; not all our money need to be banked or invested in Europe; not all our exports need be geared to Western markets and for that matter not all bright, new ideas and initiatives need come from the West. Admittedly we need the ideas, skills and markets of the rich countries but it is also about time the developing countries made the developed countries feel that they need us too. And they will if the Indian Ocean area can, through its own efforts, transform itself into a thriving and economically dynamic region of the world.

KEYNOTE ADDRESS BY H.E. DR. MANOUCHEHR AGAH MINISTER OF STATE FOR EXECUTIVE AFFAIRS, IRAN

Introduction

The economic and cultural relations between East and West Asia go back to ancient times. The renowned Silk Route, connecting East and West Asia, is an indication of the historical importance of international trade. Indeed, in the last few years, Chinese archaeologists have discovered a fairly large number of Iranian objects of the Sassanid period in China, indicating not only the close links between Iran and China around 226-642 A.D., but also attesting to Iran's role as an intermediary in the flourishing trade between China and the Byzantine Empire. lt is also common knowledge that Mohammed, the great Prophet of Islam, in his youth engaged in international trade between Arabia and the Byzantine Empire. The old Arabic saying "Seek knowledge even if in China" adds further credence to the links that existed in days of yore. There is, moreover, substantial evidence of multifaceted relations between Iran, for example, and China, Thailand, Malaysia and other Eastern countries of Asia in past centuries. Unity for a New International Economic Order

Fundamentally, what changed the situation were the gradual encroachment of Western colonialism and the malignant growth of its political domination of the Asian countries, particularly after the Industrial Revolution. Western interests dictated concessionary arrangements and attempted to eliminate competition, in order to obtain raw materials cheaply for their industries and to sell their manufactured goods dearly. The Asian countries were, in effect, prohibited from selling their products to customers from other nations and, at the same time, were also denied new technologies,

thus preventing them from setting up their own industries, with the exception of processing certain bulky raw materials which were otherwise uneconomic to transport. The colonizers even fought each other in order to increase their share of cheap and secure raw materials and gain access to markets for their exports. As a result, the industrial world prospered, while the Asian nations suffered from the high prices of industrial goods, and low incomes, savings and investment. In the case of Iran, Russia and Britain did everything in their power to prevent economic development, that is, the establishment of roads, railways, banks and industrial plants. lt is indicative of the times that, in a mood of desperation, Nasser-ed-Din Shah, who ruled Iran for fifty years in the nineteenth century, protested that no country was in a worse position than Iran: If we want to make some improvements that are to our own interest in the south, the Russian Government says that it is done for the British benefit-for example, the question of navigation on the Karun and construction of roads. If such improvements are to be introduced in the north, the west, and the east, then the British protest that we have regard for Russian interests. The projected Quchan road and the Caspian railway repeatedly met with such statements.

The Shah concluded: Our task has become a difficult one, and it is going to become more difficult every day. Why don't the Russians and the British overtly state that Iran is not an independent State, and that we must do whatever they say?

Even in the twentieth century, Western opposition to the setting up of a steel industry, machine-tool plants and the nationalization of oil in Iran is well known. A clear example of exploitation was the Western world's interest in building up its own prosperity at the expense of the oilproducing nations. Precious oil which could be turned into thousands of useful products to serve humanity at large was being wastefully burnt, at incredibly low prices, as fuel in industrialized nations, with the prospect of its total depletion around the turn of this century. lt is of interest to note that even a few years ago when the oil-producing

2

countries managed, through united action, to establish a price based on the substitution cost of oil, they were-implicitly or explicitly-threatened by military intervention and various forms of economic sanctions by the Western countries. Even today while the Western leaders talk of the coming jump in oil prices due to the depletion of the petroleum resources of the world, they nevertheless insist that while the price paid by the consumer should be increased so as to cause savings in the use of oil as well as to encourage development of new sources of energy, the producing nations-they suggest-should be content to receive low prices and consequently face economic disaster when their reserves run out! While in theory they express belief in the free interplay of supply and demand determining prices, in practice they reserve this for their own products, which they sell to developing countries at increasingly high prices, and believe that their economic philosophy should not apply when their own interests are involved. I may say that, despite all claims to the contrary, the current world price of oil is only about half of its substitution cost, which means economically it is very cheap. Western domination is not limited to bilateral relations. The international financial institutions are currently dominated in their management and policies by the industrial countries. The creation of the Special Drawing Rights (SDRs) permitted a deliberate increase in international liquidity, but the lion's share of the increase has been going to the industrial countries which have large quotas. These countries have consistently opposed a fairer distribution of international liquidity by proper adjustment in quotas and by linking aid to the creation of new SDRs. Even the new credit facilities of the International Monetary Fund (IMF) were set up outside the quota system, so that the more wealthy of the developing countries which were making financial contributions relatively larger than the richer industrial countries could not have a bigger voice in the management and policies of the IMF. The breakdown of the Bretton Woods system has worsened the situation. The industrial countries believe they can follow flexible domestic policies and let the exchange rate adjust to the situation. The result has been a high rate of inflation (which started before the adjustment in oil prices), domestic unemployment (amounting to over six million in the European Economic Community alone), a slowdown in rate of growth, sharp fluctuation in prices of raw

3

materials, and the transfer of inflation to hard-hit developing countries. The industrial countries initially opposed the creation of the regional development banks in Africa and Asia; they have also resisted the efforts to stabilize prices of raw materials, reduce trade barriers on manufactured exports of the developing countries, reduce their external debt burden, and ease the transfer of resources to these countries. The Sixth Session of the United Nations General Assembly unanimously approved the Declaration and Programme of Action tor a New International Economic Order, but the follow-up discussions in the Fourth United Nations Conference on Trade and Development (UNCTAD) in Nairobi and the recently concluded North-South Dialogue in Paris produced little result. In a revealing secret cable to the Dutch Foreign Ministry, published in the Times of 4 December 1976, the American State Department stated that in the view of the U.S., the Paris Conference had been organized to exert pressure on oil-exporting nations, especially through the oilimporting developing countries, against the adjustment of oil prices. In other words, the chief objective was to divide the developing countries and set the nonoil-producing against the oilproducing nations. Fortunately, this policy of "Divide and Rule" did not succeed, and the solidarity of the developing countries could not be destroyed. If anything, the success of the Organization of Petroleum Exporting Countries (OPEC) provided hope and strength tor other developing nations in their struggle to change the status quo in favour of establishing a more equitable economic order. The OPEC members not only managed to establish their sovereignty over their most important natural resource; they also called tor a systematic, and increased, transfer of resources to other developing countries. A specific proposal submitted to the Sixth Session of the United Nations envisaged annual assistance to developing countries to be made equally by the industrial and oilproducing countries, and managed on an equal basis by the developed countries, the oil-producing nations and other developing countries. As this did not materialize, due mainly to the lack of positive response from the industrialized countries, OPEC members took the initiative of setting up the OPEC Special Fund to give untied interest-free assistance to other developing countries, and the International Fund tor Agricultural Development. They have also pressed tor the establishment of the Common Fund tor commodities. In addition, the members of OPEC took individual 4

initiative in organizing extensive programmes of bilateral and multilateral assistance to other developing nations. During the period 1974-75, Iran alone committed itself to more than US$10 billion worth of assistance to other countries, despite its own increasing requirements and the fact that it had to resort to international borrowing. Saudi Arabia also has given a similar amount of aid to other countries. While the volume of foreign assistance by the developed countries has amounted to less than 1% of their gross national product, some of the OPEC members have contributed around 10% of their Gross National Product (GNP) as aid to other countries. The conclusion to be drawn from the above is that only by their united efforts can the developing countries exert sufficient pressure to bring about a more just economic order. The industrial countries, which benefit from the existing system, will not easily give way to a change. The developing countries must support each other in increasing their role in the management and policies of the international institutions and should not allow the developed countries to play them off-one against another. A small example of what was achieved by their unity in the Paris Dialogue was the declaration by Canada (followed later by Sweden, the Netherlands, and Finland) of the cancellation of debts owed to them by some of the developing countries. Economic Co-operation Between West Asia and Southeast Asia

Moving now to the narrower field of economic relations between West Asia and Southeast Asia, there is much that these countries could do specifically and beyond a united effort to bring about a fairer international economic system. These countries can promote closer economic co-operation, and they can learn from each other's experience in different fields. As far as trade is concerned, much can be done to expand relations between these Asian countries. In the past, international trade has been substantially dominated by the transnational companies (TNCs), supported by their home governments. This can be remedied only by more enterprise and marketing and a more active role played by the commercial representatives of the Asian countries. To promote such trade, the banking system could be directed to offer the necessary financial support in order that Asian traders could face competition from developed countries on an 5

equal footing. An example in this field is the creation of the Asian Clearing Union, based in Tehran, which aims at easing the foreign exchange problems of trade between member countries. Another measure is the establishment of preferential tariffs between Asian countries. Under the Regional Cooperation for Development, Iran, Turkey and Pakistan have a ten-year plan to implement this system gradually. The Bangkok Agreement, concluded in 1975, also called for similar arrangements between the contracting parties. This can be a beginning for the creation of an Asian Common Market in a later period. Another field for co-operation is investment. While increasing employment and income in the recipient country, investment can give a secure source of supply to the investing country. To reduce intergovernment frictions, these investments can often be on a tripartite basis-that is, each side holding minority shares, with a mutually acceptable financial institution holding the remaining third portion. In the case of Iran, we have begun co-operation in fields such as oil refineries (India and Korea), iron ore (India), fertilizers and aluminium (Indonesia), fisheries (Korea), and livestock and shipping (Australia). There is also considerable room for co-operation in the field of larger industries. Such industries have an optimum size which is often larger than the domestic market's. Based on their natural endowments, the Asian countries can develop a mutually beneficial form of specialization by setting up economically viable industries to supply each other. Petrochemicals, steel, shipbuilding, shipping and air-services are but a few examples for such co-operative efforts. Iran, Turkey and Pakistan, in the context of Regional Cooperation for Development, have taken a few steps in this direction. Asian countries can also co-operate in the banking, insurance, and contracting businesses. In recent years, some developing countries have made healthy inroads in these fields, which were previously a monopoly of companies from industrial countries. Special treaties to avoid double taxation could facilitate such cooperation. Despite the development in air and sea traffic, the road and rail connections between Asian countries are not conducive to facilitating the movement of goods and people between these countries. The Asian Highway was a significant step towards remedying the situation. In their domestic transport policies, the

6

countries of the region should give greater emphasis to facilitating land, sea and air communications with each other. Today, tourists from the Asian countries have, for the most part, been going to Europe and America. There is no reason they could not learn and appreciate more of each other's history, life and culture, and as a consequence create more prolific tourist industries generating capital in this region rather than in the West. In this field, the travel agencies which arrange organized tours could be encouraged to place greater emphasis on arranging tours to other Asian countries. 1t is no secret that, in their international contracts, the developing countries are often qualitatively cheated and substantially overcharged. The Asian countries can exchange experiences on the quality and price of goods and services purchased, and black-list flagrant offenders so that such exploitation is minimized. In the field of manpower, the countries of Asia can supplement each other's requirements. Efforts towards liberalizing visa and labour permits can facilitate the flow of manpower to where there is a greater demand and higher income. While this will lead to fairer distribution of incomes, it will at the same time reduce the inflationary pressure in one country and underemployment in the other. In this field, Iran in recent years has had useful experience with Korea, the Philippines, India, Pakistan, Sri Lanka and Afghanistan. Learning from Asian Experience

The countries of West and Southeast Asia can also learn much from each other's experience. lt is important to note that we cannot always copy Western technology. Indeed, it is much more preferable to develop and adopt such technology to locally suitable forms. This, however, necessitates investment, often considerable, in the research and development phases of adoption. The Asian countries can cooperate in exchanging their experience in these fields. The International Rice Research Institute in the Philippines and the Technonet in Singapore are examples of such co-operation. Another key element to be considered is that there can be no steady and balanced rate of growth without greater social justice. On the one hand, there must be sufficient incentives for people to

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show enterprise and bear risks, and to be rewarded for their courage and good judgement. On the other hand, a fairer distribution of income is required, not only to achieve greater social and political stability, but also to provide an expanding market for a growing economy. In this respect, it is important to select the type of measures which would contribute to greater equality without becoming a deterrent to economic growth. We should also bear in mind that the extension of welfare must be in line with the stage of growth. While, in the industrial world, the extension of social welfare services to larger sections of the population usually accompanied economic development, many developing countries in recent years have tried to adopt generous welfare standards before achieving the necessary institutional, technological and productive capabilities. This, I believe, has been a contributing factor towards social instability. Another lesson is the need for a clear demarcation between the size and scope of public and private sector activities. Irrespective of variations in national preferences, the borderline should be clear and relatively stable over time. This separation of powers and responsibilities of the two sectors is needed to give free enterprise and individual initiative the type of confidence and protection necessary for continued private savings and investments. lt is also needed to prevent the State from assuming new responsibilities without prior expansion of its technical and managerial capability. In the early stages of economic development, the State is usually required to take a lead in all fields of activity. As the process of development gathers momentum, things become increasingly more complicated, and it becomes essential to decentralizegeographically as well as administratively-the decision-making system, so that individual initiative and enterprise can be fully utilized for the benefit of society as a whole. The majority of decisions should be left to the individuals immediately involved. These are best informed and motivated to find proper solutions. In other words, central authority should increasingly be delegated to provincial and local levels and popular participation in public affairs should be encouraged through local councils. Perhaps the most important lesson we can learn from past experience is that the key to economic development lies not so much in abundant natural resource endowments as it does in advanced management, modern technology, and enterprising human endeavour. In different periods of history, Britain, Germany,

8

Japan, Taiwan, Korea and Singapore have proved this point. And my own country, Iran, reached the height of political power, scientific advancement and efficient public administration prior to the discovery of oil. In other words, the biggest challenge to the economic development of the Asian countries is the administrative and educational reform which would provide the needed environment for enterprise and initiative in development efforts. In a somewhat insecure world, there can be no steady rate of development without political stability and a sense of security. This means that the Asian countries can, through increased cooperation, achieve regional security. Thus the littoral States of the Persian Gulf and the Indian Ocean can co-operate to ensure the safety and freedom of navigation on these vital sea routes, free of Big Power rivalries, bases and nuclear weapons. If, for example, a peaceful settlement, based on the Resolutions of the U.N. and the rights of the Palestinian people, is achieved, substantial resources could be diverted from military to development purposes, providing for a higher standard of living as well as increased foreign assistance. Conclusion

I have been talking of the need for Asian countries to make a united effort towards achieving a new international economic order. I have indicated some fields for increased economic co-operation, and have suggested certain lessons which we can learn from past experience. A prerequisite of all these is greater political understanding and tolerance of other countries' problems and interests, and a recognition of the growing interdependence of the world community. In the final analysis, mankind must learn that equality, justice and adequate standards of living are sought by all-irrespective of national, regional or continental boundaries. I am moved to recall the words of the famous poet, Sa'di, who several hundred years ago wrote, "Human beings are members of one body; if one limb hurts, the other parts of the body cannot rest in peace." If our countries can pursue appropriate policies individually and increase their collective co-operation, we can move towards a better, more just and equitable world order. I am optimistic that we can achieve that

9

WEST ASIA AND SOUTHEAST ASIA Sharing Common Concerns

Lim Joo-Jock

Introduction

This paper will examine and discuss what are perceived to be the main similarities and differences in problems faced by the countries of West Asia and Southeast Asia. 1 The purpose here is not to give a detailed recounting of current events nor to present economic data, both of which can be more thoroughly pursued elsewhere. The aim instead is to attempt to outline wider comparative patterns and to draw broad but valid comparisons between the two regions, to point to the contrasts, and, within this wider framework, to suggest themes which could serve as springboards for further study and discussion. Generally, the attempt is to seek for, and weave into a coherent pattern, what are perceived to be the more enduring aspects of the comparative situations encountered in the two regions. These are divided into two categories: first, those of a political and social nature, forming a background to current economic affairs of the regions; and, second, those pertaining to the comparative economic situations in the two regions. Some Earlier Historical Aspects of the West Asia-Southeast Asia Relationship

In considering the historical relationships that have existed 1

West Asia is defined, for the purposes of this paper, as the area comprising the Arab States of Bahrain, Iraq, Jordan, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE), and Iran. These are primarily the littoral countries of the extension of the Indian Ocean which separates Iran from the Arabian peninsula. The region of Southeast Asia is defined as consisting of Brunei, Burma, Indonesia, Kampuchea, Laos, Malaysia, the Philippines, Singapore, Thailand and Vietnam. Within this region, however, the focus of attention will be the member countries of the Association of Southeast Asian Nations (ASEAN), namely, Indonesia, Malaysia, the Philippines, Singapore and Thailand.

between the various parts and cultures of West Asia and the peoples of Southeast Asia, cognizance should be given to some major factors that have coloured and given direction to the relationship through its various phases. These were, firstly, the historical trade patterns and the lines of exchanges with continental overland caravan routes stretching from Sian in China through the intervening parts of Central Asia to Persia, 2 the rest of West Asia and beyond to Europe. Second, there were the sea routes. lt was along these maritime trade routes that West Asian and Southeast Asian contacts were most discernible, with the traders of what is now the lndo-Pakistan-Bangladesh region playing a major, perhaps crucial, role in these contacts and in the mutually beneficial exchanges. The sea-faring peoples of what is now western Indonesia were also important in the East-West trade, characterized to a marked extent by transhipment, with each stage dominated by one ethnic group. The traders came from the Arab lands, the coastal regions of the present-day lndo-Pakistan region, Persia, 3 the peoples of the Malaysia-Indonesia archipelago and the Chinese. The fifth century saw the rise of western Indonesian trading and sea-faring efforts. 4 For a sustained period the Arabs were the navigators and sailors of the Indian Ocean. And, to this day, the coasts of Arabia and the Iranian coast are inhabited by sea-faring peoples. In this trading zone there were two main subtracts. These were the zone covered by the routes between Southeast Asia and present-day lndo-Pakistan, and that covering the regions between lndo-Pakistan and West Asia. Eastwards again there was the Southeast Asian trade with coastal Southeast China and westwards the trade between West Asia and the Mediterranean and beyond. In addition there was, of course, with various interruptions, the wellknown and previously mentioned inland silk route between North 2

In this paper, the term "Persia" is used to denote the country in historical times. In the modern context the name "Iran" is used.

3

G. Coedes cites the appearance of Arab and Persian traders in Chinese ports from the beginning of the T'ang Dynasty. The Making of Southeast Asia, translated by H.M. Wright (London: Routledge and Kegan Paul, 1966), p. 49. Arab and Persian merchants gave accounts of, and trade for, Southeast Asia between the sixth and thirteenth centuries, op.cit., pp. 71 and 113.

4

For a discussion of the role of Arabs, the inhabitants of the lndo-Pakistan region, Persians, Chinese, West Indonesians and Malays in this east-west trade, the goods they traded in and transhipped, see. O.W. Wolters, Early Indonesian Commerce: A Study of the Origins of Srivijaya (New York: Cornell University Press, 1977), chapters 9and 10, pp. 129-158.

11

and Northwestern China and Persia. Contact between West Asia and Southeast Asia was essentially sea-borne on an west-east orientation and along an oceanic axis using the seasonal and normally dependable oscillation of the monsoonal winds traversing the Arabian Sea and the Bay of Bengal. Historically, Arab interest in, and knowledge of, the region of Southeast Asia lying to their east was more extensive and more intimate than their interest and knowledge of the regions of Africa to their south. Climatically, too, Southeast Asia suited these early Arab sailors. Detailed, if not always correct, information on Southeast Asia, was compiled by Arab navigators describing sea-routes, islands, landmarks, and ports of call. 5 Madagascar to the south and its environs, by contrast, were not known in such detail as shown regarding Southeast Asia. In fact, the regions south of Madagascar were a kind of terra incognita to the Arabs of the pre-Portuguese era. Arab navigational opinions differed on Madagascar's position "because it only borders on the inhabited regions of the world, and the occupied climates of the world, hence there is an element of doubt about it." 6 To the south of Madagascar, the seas and the coasts were to the Arabs "the beginning of the Southern Dark regions." 7 The marked differences in physical environment between wellwatered and perennially humid Southeast Asia and an arid and largely semidesertic West Asia resulted in wide differences in the natural produce of the two regions and gave further impetus to the historical trade that was carried on. In the overall exchange, however, it was the flow of raw materials from Southeast Asia that formed a major part of this two-way movement. The two regions formed links in a wider trade pattern in which, among other things, textile from the lndic subcontinent was carried to Southeast Asia, and Chinese porcelain ware moved to Southeast Asia, West Asia

5

G.R. Tibbetts, Arab Navigation in the Indian Ocean Before the Coming of the Portuguese (London: The Royal Asiatic Society of Great Britain and Ireland, 1971), pp. 472-503, be being a translation of "Kitab ai-Fawa-'id fi usul al-bahr wa'l· qawa'id," of Ahmad ibn Majid ai-Najdi.

6

G.R. Tibbetts, op.cit., p. 218, quoting from "The Tenth Fa-ida: On Islands" of Ahmad ibn Majid.

7

Op.cit., p. 219.

12

and beyond. 8 Besides porcelain, West Asia also imported Chinese silk, paper, medicinal stuff, and skills such as those represented by Chinese engineers, agronomists and workers of marble. 9 A portion of this movement passed through Southeast Asia. Added to this difference in climatic environment was the later accretion of cultural and religious factors which dictated that certain items of food and certain products be used. Thus, as a minor example, Iraq is today the major supplier of the dried fruit of the date palm to Indonesia and Malaysia, with Singapore as the importing and distributing centre. These dates are an important food item during the Muslim tasting month of Ramadan. Islam and the Two Regions

The second factor in the pattern of linkages between the two regions was, and is, that of Islam. Islam spread along existing trade routes, and the new religion was carried to nearly all inhabited coastal tracts of insular Southeast Asia. Generally, mainland Southeast Asia was not affected, though there exist Islamic pockets of historically later conversion, such as those along the Arakan coast of Burma and the enclaves of the Chams of lndochina. The strong Arab and Islamic influence on insular Southeast Asia is well-known. West Asian influences did also reach up to the Buddhist kingdoms of ~ainland Southeast Asia though the effects there were far less consequential. The evangelistic tide of Islam did not convert Hinduistic Bali nor penetrate into the remoter parts of the Indonesian archipelago. Then, except for its far South, the Philippines is largely Christian, again another sea-borne religion travelling from Catholic Spain via Mexico and the trans-Pacific Acapulco galleons to reach Southeast Asia from the other direction. The Southern Philippines, and the Southernmost provinces of peninsular Thailand and East Java now

8

For goods trade in, and transhipped by, the ancient empire of Srivijaya in this China-Southeast Asia-South Asia-West Asia trade, see O.W. Waiters, op.cit.

9

The variety of goods imported into West Asia are indicated in a mid-ninth century list of imports into Iraq which appears in The Investigation of Commerce, a pamphlet attributed to Abu 'Uthrnan' Umar bin Bahr of Basrah, surnamed ai-Jahiz (who died in 869 A. D.). Quoted by George G. Thomson, "The Re-emergence of the Arab Countries in the Politics, Economics and Culture of the World," paper presented at a conference on The Arab World-Business Opportunities for Asian, Compa International, Singapore, June 1977.

13

form the furthest significant marches of Islam in the East, 10 11 and have been the basis of modern West Asian, chiefly Arab, interest in Southeast Asia. Besides Islam, another factor in the evaluation of West Asian and Southeast Asian contacts was that of an all-pervasive Western imperialism. The links between West Asia and Southeast Asia were much reduced, but never obliterated, by the epoch of Western imperialism. Western sea-borne intervention in the Indian Ocean and its environs coincided with a decline in the international fortunes of Islam. The process began in Southeast Asia with the Portuguese reduction of the Islamic religious, commercial and military stronghold of Malacca in 1511. lt eventually concluded with political and military hegemony by the British over much of West Asia itself. In the period of Western conquest, a largely Islamic Southeast Asia received help-cultural, moral and also physical, though infrequently-from Arabs and other Muslims, even during the high wave of Western military and political intervention. At the level of international relations, there is the example of Mataram. In the 1630s, the central Javanese state of Mataram reached out and developed ties with the Muslim powers of Arabia when it was under severe Dutch pressure. The Sultan of Sulu, a stubborn resister of Spanish encroachment, revised the Sulu code of laws and translated Arab texts, including parts of the Quran, into the Sulu language in the early eighteenth century. The resistance of Aceh against Dutch encroachment continued into the twentieth century and was to a large extent buttressed by the morale imbued by Islam and by limited Turkish contacts. lt should be noted also that the white adventurers under the first Rajah Brooke of Sarawak complained about the "Arab sherips" who were said to foment and give leadership to resistance in Sarawak which was portrayed mainly as acts of lawlessness and piracy. For Islamic Southeast Asia, religion was, and still is, a stiffener for cultural and nationalistic resistance to foreign intrusion and for cultural and political resistance to the encroachment of physically contiguous but culturally disparate majority and minority groups. 1o

For a cartographic presentation of the spread of Islam, see compiled by H.W. Hazard, Atlas of Islamic History (Princeton: the University Press, 1954).

11

Southeast of Bangkok, in Minbori district, there are ethnic Thais who observe the tenets of Islam. The Muslims of Thailand's far South are ethnically Malay.

14

In the period of quiescence under colonial rule, Islamic, and west Asian influence, over parts of converted Southeast Asia continued-albeit in modulated form-with a religious and cultural hearkening to the centres of Islam, whether it was manifested in the annual Haj to Mecca, or the training of young Malay and Javanese Muslim religious teachers in the Arab universities (including those outside our definition of West Asia, such as Egypt's AI-Azhar). In this case, the returning teachers were instrumental in the hardening of orthodox Islamic values and the weakening of pre-lslamic Hinduistic and animistic practices even in remote rural areas, such as the padi-lands of Perlis in the extreme northwest of Peninsular Malaysia. Currently, it is estimated that Malaysia alone has about 1,000 students studying at various levels in the "Middle East". 12 lt is to be noted that the resurgence of Arab nationalism and the recent rise of Islam as a factor in global affairs has coincided with increased Arab interest in the Islamic problems of Malaysia, Indonesia and the Philippines, and also in Thailand. Some Other Relationships

The colonial era for Southeast Asia can be said to have begun to disintegrate in 1941 with the Japanese invasion of Burma, Malaya, the Philippines and the Dutch East lndies consequent upon their earlier occupation of French lndochina. But a new period of West Asian-Southeast Asian relationship began only after 1973, when the major oil-exporting nations grouped under OPEC, the core of which lay geographically around the arm of the Indian Ocean between Iran and the Arabian peninsula, reversed the trend towards a near complete and apparently unassailable economic hegemony of the industrialized nations over the rest of the world. With the economic power brought about by a generally fourfold increase in oil prices in 1973 and the political confidence that went with it, Arabs and Iranians began to take a renewed political and economic interest in the affairs of Southeast Asia. Examples of this can be seen in the 1974 UAE offer to finance an educational system up to tertiary level for the Muslim South of Thailand, and Saudi Arabian, Iranian and Kuwaiti interest in economic and commercial projects, including shipping and shipbuilding in Singapore, and 12

For comments on Islam and politics, see Mohamed Natsir, "Some Observations Concerning the Role of Islam in National and International Affairs," Cornell University, Southeast Asia Programme, New York, 1954.

15

various large-scale projects in Malaysia. At a different level, there has been the general Arab interest in the problems of the Muslims in the Philippines. Although direct contacts, both commercial and political, between West Asia and Southeast Asia have increased markedly since 1974, the overall situation is such that the countries in both regions, with exceptions such as Vietnam and Iraq, still look separately to the West 13 for trade, development opportunities and general models around which they can fashion their own political, social and economic futures and aspirations. However, admiration and emulation have often been followed by disillusionment, rejection, and even hostility in some quarters. In the colonial era, the two regions, West Asia and Southeast Asia, to all practical effects and purposes turned their backs to one another. This kind of pattern was also discernible within each of the two regions. Before the Pacific War of 1941-45, Manila looked to the U.S., the Vietnamese elite to Paris, the small middle-classes of the territories that now comprise Burma, Malaysia and Singapore looked towards London and were, like many fellow Southeast Asians, often ignorant of or ignored in the main events taking place around them in the region. lt has been noted that the colonial powers, for imperial strategic reasons, discouraged overland intercourse between their colonies. The sea linked them to the metropolitan country instead. Within individual countries, for example, railways "focussed on, and fed into, the sea pattern ... like tap roots" to nourish the colonial ports. 14 In West Asia, Iran, Iraq, Saudi Arabia and the smaller coastal states tended to look more towards the hegemonic power centred in Whitehall than to regional centres during this period between the two World Wars. An observer says of Iran that it "had been shut off from Asia for nearly 150 years largely due to the European colonial presence. Up to 1970, Iran's diplomatic representation east of New Delhi was confined to Tokyo, Jakarta and Bangkok." 15 This tendency in West Asia to look 13

Defined here as the highly industrialized rich nations, including Japan.

14

George G. Thomson, Problems of Strategy in the Pacific and Indian Oceans (New York: National Strategy Information Centre, 1970).

15

Amir Taheri, "Policies of Iran in the Persian Gulf Region" (originally prepared as "The Persian Gulf-the non-Arab Littoral"), in Abbas Amirie (ed.), The Persian Gulf and the Indian Ocean in International Politics (Tehran: the Institute for Inter· national Political and Economic Studies, 1975), pp. 259-286.

16

outwards mainly to the West apparently still remains, reinforced as it is by the growing overseas trade of each country and with a pattern in which each country looks for external, almost wholly Western, sources of military hardware. Some observers will probably maintain that an overdependence on any one group of sources for a vital need may create a dependency syndrome and may need to be rectified to a certain extent perhaps by indigenous manufacture of the less complicated weapons and through the diversifying of arms sources. In order to examine more closely the general problems, the development and the aspirations within both West Asia and Southeast Asia, it would be useful to view these against the overall backdrop of the relationship between the developed world and the less developed world, and in the context of the continuing interaction, political and economic, between industrialized and rich on the one hand and less industrialized (or nonindustrialized) and poor on the other. Of the various facets of this relationship, that pertaining to colonial domination and subsequent withdrawal of imperialism forms a basic feature common to the development of both regions. lt would be worthwhile to outline briefly the geopolitical patterns emergent in the wake of colonial retreat. Although both regions experienced the colonial imposition, in Southeast Asia direct colonial rule was the pattern. Only Thailand retained its independence. In West Asia, the pattern differed in that the nations and sheikhdoms there were in most cases not formally occupied as colonies, but the imperialist influence, manifested both politically and economically, was strong. In Iraq and the small sheikhdoms, this imposition was reinforced by a firm British military presence. In Southeast Asia, four western colonial powers-the U.K., U.S., France and Holland-divided up the region between themselves. In West Asia, by contrast, Britain alone was the dominant external power though it had nevertheless to contend with French and Soviet interests encroaching on the northwestern and northern fringes of the region respectively. The power base for British influence in West Asia was undoubtedly the resources controlled by the British Raj in India. Thus for both West Asia and Southeast Asia, an understanding of their situations would be usefully supplemented by a knowledge of past and present events in the intervening lndo-Pakistan subcontinental region. Imperial influence played a crucial role in the internal stability

17

of the two regions. In West Asia, particularly, British influence was in fact manifested as a Pax Brittanica. Southeast Asia was then a zone of apparent political stability with the various colonial policing presences stilling historical, ethnic and religious animosities within the political arena. But, increasingly, evidence now points to the fact that much restiveness remained especially in rural areas. The retreat of imperial influence in both regions laid bare these old national, ethnic, cultural, and linguistic cleavages which have on occasion, since the colonial ebb and in the post-Vietnam War period, resulted in friction, tension and even isolated eruptions of outright hostilities. Colonial decay and imperial withdrawal were followed closely by assertions of national pride openly manifested in regional and national politics which had earlier been dampened or suppressed by the strong colonial military presence. Superpowers, The Sea and Geopolitical Concerns

Geopolitically, both regions face a real or imagined threat of a Drang Nach Suden from the two giant communist powers to their north. To Iranians and Arabs, historical interpretations point to a Soviet temptation to extend political and military influence southwards to the Indian Ocean. In the case of Iran, there has been actual, though temporary, military occupation of its fertile northern Caspian littoral lands, after the Second World War. Soviet military and political influence, and the alleged use by a Russian flotilla of naval facilities in Iraq, are not viewed with favour by either Saudi Arabia or Iran. All these seem to indicate a desire of the Russians to shift their influence, or even physical presence, southwards into the region. In this context, increasingly, militarily powerful Iran and Saudi Arabia may inherit the long held stance, of the old British Indian Raj, to keep the Russians well away from the warm waters of the Indian Ocean and its various bays and gulfs. However, Iran also relies diplomatically on co-operation in economic matters to achieve a smooth relationship with the USSR. Examples of this co-operation are the construction of dams as joint ventures in the border regions, and, imf)ortantly, the piping of Iranian gas to the Soviet Union, which in turn will market its own gas from fields nearer Europe to West Germany, France, Czechoslovakia and Austria. 16 However, 16

18

See Abbas Amirie, "Iran's Foreign Policy Posture Toward the Persian Gulf and the Indian Ocean," paper prepared for the Institute for International Political and Economic Studies in Tehran, May 1977.

incidents such as the alleged Soviet threat in 1976 to support insurgencies within Iran if a defecting Soviet aircraft used for agricultural purposes was not returned by Iran may have added fuel to fear of the power to the north. In Southeast Asia, a previously held fear of a Chinese move southwards coloured both colonial and independent governments' policies, and the policies of extraneous interested powers, notably the U.S. and Australia, for a considerable length of time after the formation of the People's Republic of China (PRC). Thailand's firmly anticommunist and anti-PRC stance during the period of its military government which lasted to just after the fall of South Vietnam, Malaysia's attitude under the leadership of Tunku Abdul Rahman and Suharto's Indonesia are examples of this kind of policy, buttressed by extraregional powers. Most countries of both regions are not in direct physical contact with the superpowers to the north. Iran has borders with the USSR and in fact acts as the buffer for the West Asia region. The countries of Southeast Asia are similarly buffered from China by a neutralist and mountainous Burma on the one hand, the mountains of Northern Laos and a communist Vietnam on the other. This is a Vietnam which, although not openly anti-PRC, has none the less repeatedly shown its independence of Chinese policies. Nevertheless, this phenomena of a Drang Nach Suden must always be borne in mind when examining the situations in West Asia and Southeast Asia. lt goes some way to explain a clinging, seldom if ever publicly acknowledged, reliance on U.S. power.,-notably naval power-despite what many Southeast Asian politicians might say. If Vietnam is itself assumed as having a possible urge to move south or to extend its political and economic influence to Laos and beyond, then the economic and any future political and military cooperation of ASEAN fall into the general pattern of behaviour exemplified by a concern with northern continental powers, postulated here. Iran's plans of a massive move, industrially and populationwise to its hot, less favoured southern coastal regions has considerable geopolitical significance in this context, for it means moving the centres of Iranian population and industry to a hitherto thinly populated south, mountainous and arid, but mineral-rich and with access to the sea and the world and thus less hemmed in by constraints imposed by the superpower to the north. lt is envisaged that the majority of Iran's estimated population of sixty millions at 19

the end of the century will be living in the country's southern halt. Reportedly massive port developments are underway, rail centres are moving south, and what are described as vast industrial undertakings including steel and petrochemical projects are planned, as well as new cities and the large scale tapping of underground water reserves. Illustrative of the modernization of the south, Iran has constructed two large nuclear power plants at Bushehr on the coast. Thus the port of Bandar Abbas, on the Straits of Hormuz, has had its population increased from below 12,000 in 1960 to approximately 200,000 in 1974.17 Seldom in history has a nation made a move on such a scale to shift its population and economic core areas to zones deemed as providing greater safety. it can be seen strategically also as a move from a landbound centricism to a seaward outlook. 1s Going hand-in-hand with a naval buildup, Iran's renewed interest in maritime affairs can best be summed up in the Shah of Iran's statement that the "sea knows no frontiers." 19 Seen in this context both regions tend to be seawardlooking-economically, politically, ideologically and strategically. They are generally not continentward-looking, or rather are continent-looking only in their concern about potential hostility, possible aggression or aid for insurgencies from that direction. Even Vietnam's closed political and social system looks across the seas to Western Europe and Japan for aid-fiscal and in materials-for its rehabilitation. While in Southeast Asia this outlook is underlain by a maritime security overseen by the U.S. navy, with no dominating indigenous naval force, in West Asia, Iran has begun energetically to take on the role of the leading regional, and even the Indian Ocean, naval power. Iranian loans to Pakistan and India and to Sri Lanka and beyond are a feature of Iranian diplomacy. This outward-reaching global fiscal diplomacy, countering to some extent the dominating 17

Amir Taheri, op.cit.

18

In Vietnam, population pressure on land resources in the North and relatively plentiful land and water resources in the Mekong Delta of the South, form the framework for a planned population relocation on a massive scale aimed to correct the imbalance. This emphasis towards the south brings Vietnam deeper into Southeast Asia at the same time moving some of its centres of industrial and population gravity away from the giant PRC to its north. For comments on population relocation and Vietnam's New Economic Zones, see Asiaweek, 22 April1977.

19

Abbas Amirie, op.cit.

20

economic relations with the West is also a feature of Saudi Arabian, Kuwaiti, and UAE foreign policies. Saudi Arabia has actively taken part, using the fiscal instrument in Arab world affairs. Currently Saudi Arabia is reported to be diluting its links to the West and looking with growing interest on the Afro-Asian world. 1t has announced US$1,000 million worth of aid to Africa. 20 All these reflect the extent of wealth accruing from the sea-borne exports of mineral oil. West Asia and the Arab world have been described as a "shatterbelt" with many diversities and with little likelihood of one regional power centre unifying and dominating the entire region. 21 Southeast Asia tends to be less positively involved in external issues, in this respect reflecting generally poorer economies. 'fet similar to the picture of a West Asian "shatterbelt", the Southeast Asian "island of stable peace" of the colonial era too showed signs of balkanization after the Second World War. ASEAN, however, has the potential to arrest this process. Finally, West Asia and Southeast Asia share a common concern for the sea, ever since the Portuguese seized the choke points of Hormuz and Malacca. Southeast Asia is maritime and the arm of the Indian Ocean between Iran and Arabia gives the littoral states there a stake in the Indian Ocean and access to trade and maritime independence. Whilst Southeast Asia is fragmented by the sea, rendering sea transport essential, West Asia is a land mass penetrated deeply by an arm of the Indian Ocean, along the shores of which states jostle for access to the seas and a sea frontage, however narrow. For both regions, it is vital that their oceanic approaches are not controlled by a hostile naval power. For both regions but especially Southeast Asia, the sea has meant trade, wealth, religion, and culturally uplifting forces. Significantly also for both regions, the sea has seldom afforded protection from foes. More often than not the sea has facilitated invasion and conquest. Some Aspects of Economic Interaction Between the Two Regions The differing regional environments and the reliance on oceanic transport for trade-vital to the existing economies of all countries concerned except possibly for Burma, Kampuchea and Laos-point 20

The Mirror, 11 April1977.

21

S.B. Cohen, Geography and Politics in a Divided World (London: Metheun, 1964), pp. 236-238.

21

to a considerable potential for Southeast Asian and West Asian cooperation. These opportunities for possible forms of trade arising from very different geographical environments is in a manner symbolized in an imaginative Malaysian plan to ship potable water from the abundant sweet-water rivers of its west coast to the watershort UAE and Saudi Arabia, using the heavy traffic of empty tankers returning to the oilfields from Japan via the Malacca Straits. Another framework within which the two separate regions can be usefully examined is that of the overall relationship between the developed world on the one hand and the developing and underdeveloped worlds on the other. lt has already been pointed out that countries in both regions, with a few exceptions, tend to look to the West for sources of knowledge and for the models of development. The trade of both regions is overwhelmingly with the West, with the U.S., Japan and the European Economic Community (EEC) countries taking the bulk of the exports of both West Asia and Southeast Asia as well as supplying the manufactures, much of which only they can supply, due to their high level of industrial sophistication. West Asia and the ASEAN states of Southeast Asia are tied crucially to the world trade system. Generally, despite its very large oil revenues, and high per capita incomes, much of West Asia, can be classified as a developing region, generally marked by a considerable need to uplift and broaden the base of educational facilities, solve rural poverty and the lack of industrial and professional skills. However, within the region, some differences occur. Saudi Arabia, Kuwait and the UAE are oil-rich with large surplus petrodollar accounts which cannot be absorbed by their present economies. Iran and Iraq also have large incomes from oil but their funds can to a large extent be used internally, their larger populations and economies generally being in a better position to absorb large and rapid investment inputs. The booming economies of the region provide a market for the skills available in other parts of Asia. Iran uses thousands of Pakistani and Indian medical doctors. South Korean skilled construction workers and Taiwan technicians are much sought after in Saudi Arabia. Singapore port technicians at all levels are employed to upgrade port-handling services in Saudi Arabia 22 whilst 22

22

As the world's fastest growth area, good traffic to and from West Asia continues to increase rapidly and port congestion is a serious problem. Business Times (Singapore), 6 April 1977.

Palestinian and Egyptian professionals, technologists and teachers are ubiquitous on the Arab littoral facing the Iranian shore. Here it is to be noted that some West Asian countries, notably Saudi Arabia, display a propensity to buy, or hire on contract, management skills. In banking and trade, ASEAN countries like Singapore may be able to supply the requisite skills. Parts of Southeast Asia, such as Laos, are underdeveloped whilst most of the remainder can be classified as developing. Singapore alone in Southeast Asia is singled out as a rapidly industrializing nation. 23 Generally, Southeast Asia, like West Asia as a whole, can be categorized as a developing region. lt is in this interaction between the rich developed West and the two regions (which we have categorized as developing), rich in natural resources which are in demand and which are even crucial to the continual well-being of the West, that much of the force behind West Asian and Southeast Asian attitudes and actions is derived. This interaction is further complemented by memories of imperialism and beliefs in the sinister designs and superior airs of former imperial white nations. However, the important distinction should be made between the assured global demand tor petroleum with presently no known large-scale effective substitute and many of the plantation exports of Southeast Asia for which industrial and chemical technology has found substitutes and the demand for which is not in the same category as that for oil. There is considerable resentment in both regions, voiced in both official and business circles, that goods bought from the West are at prices that are increasingly inflated. The developing nations as a whole, of which these two regions are part, feel that they have had to bear the burden of the high standards of living enjoyed in the West which are reflected in continually rising wage rates that are in turn passed on to the consumers in developing nations. Conversely, they have felt that the raw commodities that they produce do not receive what they deem to be fair prices in Western markets due, in their opinion, to manipulatory practices by the main buyers. Rubber in Southeast Asia and petroleum in West Asia have in 23

lt is worth noting that Singapore's housing achievements have impressed some visiting West Asian delegations who believe U.S. and West European construction firms are quoting inflated prices. The tendency is to turn to East Asia, including Singaporean, sources of constructional skill. Singapore workers, in this respect, already the highest paid in Southeast Asia can expect to get three times more if they work in West Asia. Bussiness Times (Singapore), 20 April 1977.

23

recent years been the focus of attention in this respect. Rubber marketing aimed at getting a better deal for producers has brought some degree of co-operation between Malaysia, Thailand, Singapore and Indonesia, but significantly with the tacit agreement of major buyers. Malaysia, Indonesia and Thailand account for nearly all of the world's production of natural rubber with Singapore retaining to some extent its traditional function as a rubbermarketing centre. The international marketing of tin-of which Malaysia, Indonesia and Thailand are major producers-has in the past afforded scope for regional co-operation in a wider international context. In fact, Malaysia, Indonesia and Thailand together produce about two-thirds of the world's tin. In mid-1977 it was announced that the three countries had agreed to establish cooperatively a tin research and development centre in lpoh, located in Malaysia's chief tin-producing districP4 There are also growing signs of an ASEAN joint stand against growing protectionism in the West. The West Asian countries form the core of OPEC and oil supply from West Asia has been an eco11omic instrument and now is a political weapon that has in one dramatic gesture overturned, for the time being at least, the previous relationship existing between the West and West Asia. This was a relationship approaching one of patron-client. The OPEC policies supported crucially by the nations of oil-producing West Asia is of historic significance in that the nonindustrialized raw commodity suppliers were able for the first time and without resort to arms to turn the table on the industrialized West, and to beat the West at its own economic game. 2s However, because of oil's unique position in the world economy, OPEC is itself unique. Other producer schemes have not worked as effectively as producers had hoped. Coffee schemes have failed. Tin and rubber have succeeded partially only because of the willingness of major consumers to co-operate. Finally, the pervasive factor of national pride, besides the desire for self-reliance, has been a significant factor in the growth of oil-based and other business enterprises in West Asia, 24

See, for example, New Nation, 3 May 1977.

25

Early 1977 saw some dissension within OPEC ranks over the issue of the percentage of oil price increases to be arbitrarily enforced. Iran stood for higher, Saudi Arabia for lower, increases. The group led by Saudi Arabia announced production increases at the same time.

24

particularly in Saudi Arabia and lran. 26 Industrialization in the two regions will be commented on in the next section. For the two regions, the lesson is one of the desirability of increased co-operation in various fields, both intraregionally and perhaps between the two regions also. The success of the oil policies of the suppliers cannot have passed unnoticed by some ASEAN planners. Further Economic Perspectives

Despite the fact that both regions are important oil producers, the comparative situation should be put in correct perspective. West Asia far outstrips Southeast Asia in oil production. The large revenues accruing from oil in West Asia benefit relatively small populations. Thus Saudi Arabia's revenues from an estimated eight to ten million barrels per day serve a population of eight million. Kuwait with an estimated production of four million barrels per day has onry 900,000 people to support. Iran's estimated six million barrels per day accrue to a population approximating thirty-three million. Indonesia, the largest oil producer in Southeast Asia, by contrast, has a daily production of 1.6 million barrels against a population of about 130 million. Only Brunei compares in this respect to the oil countries of West Asia. President Suharto has been reported as saying that, for Indonesia, oil revenues alone will not be sufficient for Indonesia's programme of economic and social developmenP? A similar pattern is recorded for proven oil reserves. Again, West Asia has far larger reserves than Southeast Asia. Thus, for example, Saudi Arabia has 165,000 million barrels of proven reserves, Kuwait 72,800 million barrels, Iran 66,000 million barrels and Iraq 35,000 million barrels. By contrast Indonesia has 15,000 26

The National Iranian Oil Company (NIOC) was founded in 1951 at a time when national oil companies were almost universally regarded in the West as ludicrous. However, this Third World pioneer firm has increased sales from US$500 million about twelve years ago to a current volume of US$22 billion annually. The Shah of Iran has said he sees no reason why the NIOC should not be the world's largest firm. lt is now already amongst the world's leaders, just behind the Royal Dutch Shell Group, but smaller than Exxon. See Asian Wall Street Journal, 10 May 1977. By the second half of 1977 there were indications that NIOC's profits would be amongst the largest of any corporation in the world.

27

Asi"aweek, 3 June 1977.

25

million barrels. 28 Given that reserve figures are subject to wide margins of error, the discrepancy between the two regions is still clear. Another aspect of the economic situation underlines what has been said earlier about each of the two regions being linked to the industrialized countries in the world economic pattern. In 1975, the total exports of the ASEAN countries amounted to close to US$30,000 million. Of this, 61% went to industrialized countries-in order of importance-Japan (26% ), then the U.S. (20% ), followed by the EEC (13%). By contrast, intra-ASEAN export trade totalled US$3,760 million (18%). Exports to the PRC came up to US$120 million (0.7%). Exports to all oil-exporting countries totalled only US$445 million, or a mere 2% of total ASEAN exports. 29 A similar pattern is noted for imports to ASEAN countries. Whilst oil is an important import, total imports from oil-exporting countries came to US$3,000 million or 13% of all ASEAN imports totalling US$23,000 million. By contrast, imports from Japan alone accounted for 25% of this trade. The U.S. and the EEC each took 16%, the PRC 3%. This pattern can partly be accounted for by the fact that both regions have, as their biggest item of their import bill, machinery, transport equipment and the more sophisticated manufactures supplied only by advanced industrial countries. Hence, the small share in each other's total trade. 30 The potential for increase in two-way trade is said to be considerable. There have been numerous reports of West Asian goodwill, that all-important intangible in business dealings, towards East and Southeast Asian goods and skills. At the same time, there have also been complaints that ASEAN traders lack the expertise and aggressiveness of their counterparts from Japan, Korea, Taiwan, the U.S. and Western Europe. Both regions show some high-growth economies, West Asia more so than Southeast Asia. The potential-particularly for 28

Data from Oil and Gas Journal, cited in The Middle East and North Africa 1975-1976 (London: Europa Publications, 1975), p. 88.

29

These and following figures are extracted from the IMF, Direction of Trade, Annual, New York, 1969-1975.

30

it should be noted however that for the nonoil-producing countries of Southeast Asia, import costs of petroleum products is heavy. For the Philippines, for example, about one-third of all import payments is for the purchase of petroleum products. In this sense Southeast Asia is heavily dependent on West Asia.

26

increased ASEAN exports of foodstuffs, simpler consumer goods, construction material and of ships and boats (from Singapore)-appears to be considerable. Demand for consumer goods and construction material is strong and growing in most West Asian countries. Demand for food and other agricultural produce is also increasing because of increased consumer spending power. Domestic production is hampered, as in Iran, due to the movement of farm labour to more lucrative urban occupations arising from the boom conditions obtaining in urban development. The following table summarizes the per capita income and growth rates of the two regions. Population, Per Capita GNP and Growth Rates: West Asia and Southeast Asia

Population (mid-1974 in millions) ---------

------- --

Bahrain (tentative estimate) Iran Iraq Kuwait Jordan Oman Saudi Arabia UAE Brunei (tentative estimate) Indonesia Malaysia Philippines Singapore Thailand

----

Per Capita GNP(1974) US$

Growth Rates (%)

(1965-74)

------ ----

0.25 33 10.5 0.9 2.66 0.75 8 0.5

2,350 1,250 1,110 10,030 430 1,660 2,830 11,060

0.15 128 11.5 41.5 2.2 40.5

6,630 170 680 330 2,240 310

-

--~

-

21.2 (1971-74) 7.7 4.8 -2.3 -2.5 19.2 9.2 10.4 5.7 4.1 3.8 2.7 10.0 4.3

SOURCE: World Bank Atlas, 1976.

A View of the Possibilities If some early 1977 financial setbacks 31 are viewed as only a temporary feature, it means that West Asia, under proper fiscal management, is a heavily capital-surplus area, with capital and oil to export, and food and machinery to import. lt has been estimated that Iran would be the second largest industrial market in Asia after 31

Straits Times, 17 January 1977.

27

Japan by 1980. 32 Hence there is a strategic need to keep its sea routes open, and to have options in investment opportunities overseas. There is also the feeling that "there is far too much money" in the region, far beyond what can be usefully utilized within its own borders. 33 These factors thus complement the situation in Southeast Asia which needs capital and produces at relatively low cost much of the edible vegetable fats besides having the potential, though not the present capacity to produce, rice and other foodstuffs for West Asia, besides lower technology consumer goods. 34 lt is important to add that a major problem facing West Asia in future is the prospect of lack of food supplles. 35 Even now West Asia is unable to feed itself. Arid but rich West Asia has already allocated funds for agricultural development in the Sudan, and as far away as South America. Southeast Asia also has some of the human resources which tends to be in short supply in West Asia, even though oil-rich Saudi Arabia and Kuwait, for example, can tap a considerable reservoir of tertiary-trained personnel from Egypt, the Lebanon and the Palestinians. Unlike Southeast Asia, the resource and endowment and utilization of which (despite the important contribution of extractive industries) is mainly agricultural and hence self-renewing if properly managed, that of West Asia is characterized by a pattern of constant depletion of available resources. At 1974 levels of production it has been estimated that Iran's proven oil reserves will be exhausted in thirty years; Saudi Arabia's may last for another fiftyfive years. 36 In this context, West Asian countries agriculturally poor could plan ahead for economic partners whose interests are not in long32

R.M. Burrell, "The Persian Gull and the Western Indian Ocean," in Economic and Political Development in Relation to Sea Power Along the Routes from the Indian Ocean, Conference Proceedings (London: New York University and National Strategic Center, 1972), p. 15.

33

Stefan Kemball, op.cit.

34

In mid-1977 it was announced that the ASEAN states planned a trade display centre in the port of Sharjah.

35

Stefan Kemball, op.cit.

36

Proven reserve figures vary widely and are subject to drastic alteration in the event of successful exploration. Data from Oil and Gas Journal cited in The Middle East and North Africa, 1975-1976 (London: Europa Publications, 1975), p.

88.

28

term contradiction to theirs, and whose resources generally complement those of West Asia. The accumulated oil-derived surpluses of West Asia, now mostly invested in the West, but with increasing Saudi Arabian interest in Africa, could be more evenly spread out to include a Southeast Asia badly in need for capital injections for increased production: both agricultural and industrial. Indeed since 1973, Saudi Arabia has been less passive diplomatically and more outgoing in its financial outlook in terms of overseas investment and aid. Southeast Asia possesses sophisticated financial infrastructures derived from long association with international trading and investment interests. The banking facilities offered by Singapore and other Southeast Asia centres are potential investment outlets for the large petrodollar surpluses of West Asia. West Asian capital has already begun to flow to the Asian Dollar Market centred in Singapore. Surpluses of petrodollars, when cumulative totals become too big, will pose serious problems, if they are not reinvested in productive enterprises. The Southeast Asian, particularly, ASEAN, investment climate and opportunities have won praise from U.S. and other financial circles. With an Africa edging towards more frequent and violent outbursts of strife, a Latin America showing signs of internal turmoil and a South Asia largely closed to capitalistic foreign investment, the ASEAN countries deserve closer examination by Arabs and Iranians as an investment outlet for their petrodollars. A major problem is for ASEAN countries to persuade Saudi Arabia, Iran, the UAE and Kuwait that investment in New York and West European capitals may not be as profitable as investment in Southeast Asia. The presence of a global tanker route and the trade in petroleum have given rise to signs of competition between Southeast Asia and West Asia. The world's largest conglomerate of oilexporting outlets in West Asia form the terminus for this tanker route. Southeast Asia, besides exporting increasing quantities of oil, has this same route passing through its narrows. The development of this geographical pattern of production, trade and seaborne movement has coincided to a significant extent with the rise of postwar Japan as an economic near-superpower. Between the two regions, similarities in economic opportunities have in some cases spawned similar patterns of industrial development. In this framework, the most notable is the comparison between Bahrain, relatively poor in oil resources, and

29

Singapore, totally lacking in natural resources. Like Singapore, Bahrain is rapidly deveiQping into a regional financial centre but more importantly in the current state of supertanker and dockyard overcapacity, Bahrain may be competing directly with Singapore 37 which already has the largest shipbuilding and shiprepair facilities between Japan and the Mediterranean for large ships and tankers up to Very Large Crude Carrier (VLCC) size. 38 Alternatives tor cooperation, or at least for the dovetailing of each other's developmental efforts, should be examined. Geographical advantages, proximity to sea routes of the oil resources, financial abundance and long-term governmental policies are likely to put the petroleumrefining, petrochemical and the related fertilizer industries of the West Asian states in competition with existing plants and planned projects in Southeast Asia. Export orientation, it is to be noted, is the major aim of countries in both regions. Southeast Asia has the advantage of closer proximity to the Japanese and U.S. markets, and the potential market of China, but West Asia has by most counts larger oil resources and thus a much greater volume of production of the raw materials for the petrochemical and allied industries. Generally West Asia has amassed financial resources from its much more developed oil extraction industry. This has enabled the start up of capital-intensive industries such as aluminium smelting. Countries of both regions look to industrialization as a solution to economic and social problems. The trend may be for growing competition in some sectors between West Asia and Southeast Asia since many of the new industries contemplated in both regions are of a similar nature. lt would be particularly so with refining capacity and petrochemicals where Japanese investments in a new petrochemical plant in Singapore will assure its products access to the large Japanese market. 39 With increasing Malaysian oil and gas production and the 37

See Asia week, 1 April 19?7.

38

Despite construction of VLCC yards in Bahrain, Singapore and Bahrain have stated in mid-1977 that they plan economic co-operation in industrial and communications development.

39

Oil producers look upon increasing their own refining capacities as a first major step ro ·industrialization. Thus, it is to be noted that the NIOC deals mostly in sales of crude. Its weakness in refining capacity puts it in a poor bargaining position with oil buyers. This can be rectified by increasing its own refining capacity. See Asian Wall Street Journal, 10 May 1977.

30

importance of oil to Indonesia's export performance, it is likely that these countries would also venture into larger-scale refining and petrochemical industries. In West Asia, the first step to industrialization is logically the refining and hydrocarbon based industries. Thus Saudi Arabia, the biggest OPEC producer, emphasizes hydrocarbon based industries in its planned economic development. In this, success is more likely due to the factor of comparative advantage. 40 Economic competition may be made more severe if the West Asian industries based on hydrocarbons as a raw material branch out into the production of synthetic rubbers. There is a tendency thus tor some West Asian oil producers to push deeper downstream in refining and the marketing of finished products in countries outside their own. Iraq is reported to be thinking about establishing a refinery in Somalia. Iran has stakes in refineries in South Africa, South Korea and India, and is discussing closer working ties with Italy's state oil corporation. Qatar is negotiating with a French group and Kuwait plans a US$1.25 billion refinery and petrochemical complex in Rumania. Crude producers are thus able to assure themselves a share in the market tor refined products and a portion of the profits of marketing. Iran has even gone on to joint oil-search ventures in the North Sea and off Greenland.41 Only Saudi Arabia remains as yet, outside this movement to global and international operations by oil producers. The implications of this internationalization for Southeast Asia will have to be closely studied. Fields for co-operation do however exist. The abundant hydrocarbon resources of West Asia can be used for the development of fertilizer industries, the products of which are in demand in the food and cash crop growing economies of Southeast Asia. Indeed, it has been observed that the widespread and heavier use of fertilizer is essential for the Southeast Asian countries to increase their agricultural production to the extent that they will have a major and rapid impact on their economies. Looking further afield, a quadrilateral economic arrangement between West Asia (or a part of West Asia), Southeast Asia, Australia and Japan is a possibility which merits further attention. 40

41

Abdulrahman AI-Zamil, "Strategy of Development in Saudi Arabia," paper to a Conference on The Arab World-Business Opportunities for Asians, Singapore, June 1977. Asian Wall Street Journal, 26 July 1977.

31

Southeast Asia relies heavily on foreign capital. West Asia is a major exporter of capital. Both regions need Western technology and expertise. Wheat, rice, animal and vegetable fats, meat, and other agricultural products, timber, iron and steel, oil, petrochemicals and fertilizers besides capital, technological skills and large aggregate markets form a basis for an arrangement which is further cemented by an oceanic outward-looking disposition in all four components. In this common oceanic disposition lies a contradiction between crucial dependence on sea-borne trade and a relative nakedness in naval power, and a heavy reliance (except for Japan) on the merchant navies of other ship-owning nations. The rise of Japan as an oil-devouring economic power creating a new centre of gravity in the Western Pacific, couple with the relative decline of Western sea-power in the face of Soviet naval construction and technological innovation, emphasizes the common problems confronting nations concerned with the security of the high seas. The Shah of Iran in 1974 called for economic co-operation between the countries of the northern tier of the Indian Ocean with the addition of Australia and New Zealand. 42 An Indonesian leader has been reported to suggest a linking up of insular Southeast Asia, Australia and Japan. In all these visions, the common denominator is an overriding interest in increasing sea-borne trade (a major key to economic growth in turn viewed as an important instrument in stemming the tendency to increasing internal dissent and insurgencies in both regions}, stressing the linkage between technologically poor but resource-rich areas with high-technology industrialized consumers of raw materials, various forms of regional specialization, and in the envisioned markets mutually offered tor the specialized exports of each component country. In this wider grouping there exists in abundance, sectors of comparative advantage necessary to the growth of mutually satisfying trade exchanges. One view is that "successful economic growth is characterized by the opening up of small but swelling niches of comparative advantage from which is built up a large and complex network of exchange." 43 42

Amir Taheri, op.cit. See also Abbas Amirie, op.cit.

43

Theodore Morgan, "Regional Economic Co-operation in Southeast Asia-Problems and Prospects," Research Paper; University of Wisconsin, 1970,

p. 7.

32

There is a need for a consciousness regarding a unity of economic purpose and strategic interest amongst Asia's maritime rimlandS. 44 In this situation, the Indian Ocean, the Cape route, the seaways through Southeast Asia, the circumnavigatory route round Australia and navigation in the Western Pacific constitute an overall strategic web which gains added significance to rim-land states.

44

The term "rimland" was first used by N.J. Spykman to describe the tier of states which encircled the Asian heartland. N.J. Spykman, The Geography of the Peace, New York, 1944. Cited by Norman Pounds, Political Geography (New York: McGraw Hill, 1963), p. 402. Spykman's concepts can be regarded as offshoots of the well-known Heartland Theory, expounded by Halford J. Mackinder.

33

FIRST SESSION:

WEST ASIA AND SOUTH EAST ASIA

THE ARAB WORLD AND SOUTHEAST ASIA Problems and Prospects

Hussain Najadi

When I refer to the Middle East, I shall limit myself to the West Asian part of it and particularly the States of the Gulf, both called the Persian Gulf and the Arabian Gulf-depending on where you are travelling and to whom you are talking. In this address, I intend to touch briefly on some basic realities of the Middle East before moving on to the problems in trying to bring these two regions together, solutions which I can offer from my experience and the opportunities which I perceive in developing closer economic relations between the Middle East and the ASEAN regions. One of the fundamental realities of the Middle East is that Iran and Saudi Arabia are the twin pillars which provide stability in the Gulf. Security in that region hinges on the fact that no other minigovernments in the Gulf should become a threat to the regime currently ruling in Saudi Arabia or in Iran. The U.S. relies on these two pillars to sort out any local conflicts or tensions which might affect the security of the Gulf States. Another fundamental reality is that both these regional powers in the Middle East are committed to the Western sphere in every conceivable way. Let there be no illusion or fear that Saudi Arabia or Iran can in any way "strangle" the West as Henry Kissinger stated right after the oil crisis. If one should talk of "strangulation"-the opposite is true and very conceivable indeed. So many of our lifeblood options have been given away that true economic independence is not possible. Interdependence is the name of the game in today's international economic relations-and I imagine ourselves as a dinghy firmly towed to the Mothership called the United States. Cutting the rope is presently equivalent to the sinking of the dinghy. 35

The ASEAN region can take note or comfort of the fact that the economic pull of the U.S. on the Gulf correlates with the interest of the U.S. and other Organization for Economic Co-operation and Development (OECD) countries in ASEAN, and which also corresponds with the philosophy of the economic integration, prosperity and growth of this region. After the fall of Vietnam and the opening of dialogue with Peking, it is clear that the U.S. is more interested in regional self-stabi I ity, as indicated in the Guam doctrine. lt was America which exercised its economic power, political influence and moral persuasion to encourage and influence the creation of the EEC as we know it today. To complete this process of strong, self-reliant allies, ASEAN and the Gulf regional Powers (Iran, Saudi Arabia and other Arab Gulf States) have to be brought into this orbit of "global free-economic system"-not against any country or block but rather to solidify the global forces of free enterprise economies. The Atlantic co-operation between the U.S. and the EEC is now extended to the Middle East, to ASEAN, which in turn is linked to Japan and South Korea. ASEAN is therefore not really alone in this game of universal economic interdependence. The famous powerful (the U.S., EEC and Japan) Trilateral Commission should therefore transform itself to a Club of the Quinquelateral Commission. The immediate problem is how to foster closer links between the Middle East and ASEAN countries. I am convinced it cannot be done by ASEAN as a unit alone. The Middle East does not have the technology, machinery, and the know-how; ASEAN cannot compete with the West to draw directly substantial Arab funds. A possible route is a detour-through the EEC. Through the long night of colonialism, both these southern groups have shared common experiences and developed some cultural rapport with Europe. The U.S. and EEC both singularly and mutually are in a position to orchestrate as ASEAN-Middle East economic tangowhere we all become dancers par excellence. Now that I have given you an overview of the rationale for closer co-operation between the Middle East and ASEAN as part of a harmonious world, I intend to go on to the nitty gritty of the basic facts, problems, solutions and opportunities at the operational level. The search for a just Middle East peace and the creation of a Palestinian homeland with national identity dominates the politics

36

of the region. As long as there is tension in the Middle East, it is natural for Arab Governments to be preoccupied with the Western world rather than the developing world, for it is clear that the West can help resolve this issue if it sets its heart and mind to it. One consequence of this is that there will be trade-offs between Europe and the U.S. on the one hand and the Middle East on the other, namely political assistance for economic conveniences. The Arabs are very individualistic and this makes them free enterprise oriented and influences their social and economic behaviour. I might repeat the famous proverb: you cannot do the things without personal contacts-Love and Trade. Personal relationships count for a lot and those who would like to deal with them in the political, cultural and economic spheres would do well to make personal contacts in various cultural zones in the Middle East. The Gulf area is one such zone, where there is a similarity of shared experiences. I would advise political leaders in the ASEAN region not to assume that, once they have exchanged visits with one of these cultural zones, they are in close communication with the whole Middle East. Since the economic centre of gravity of the Middle East is in the Gulf region, and the political initiatives are made by those with economic power, it is this region of the Middle East that merits more attention, care and well respected and honourable diplomatic activity. On the demographic side, few realize that the Middle East contains a limited population in a vast area. Among the Arabian Peninsular countries with the huge current account surpluses, the population of Kuwait is less than a million, that of the UAE less than thr~e-quarters of a million and Qatar just about 180,000. Only Saudi Arabia has a more substantial population of 7 million. Though the purchasing power per capita is enormous, the total absorptive capacity for the basic necessities and a wide range of consumer goods in these countries are limited. There is more scope for luxury goods which change with every turn of fashion. The West has therefore an advantage here, reinforced by the brand consciousness which exists in many parts of the Middle East. Another fact to bear in mind is the large resident population which exists in much of the Middle East, particularly in the Gulf States. A significant number of dynamic Palestinians hold key advisory posts; Britons and Indians hold executive posts in the administrative service and the private sector firms and lately there 37

are the South Koreans who make up the manpower in the construction firms. In the case of the UAE, for example, 68% of the population are Arabs, 15% Iranians and 15% Indians and Pakistani. Of Saudi Arabia's 1.6 million labour force in 1975, 20% were constitute foreigners. By 1980, foreign workers would approximately 45% of the total labour force. The oil-exporting Middle East states are deeply conscious that their oil reserves will run out one day. Hence, they are anxiously trying to industrialize rapidly. Sad to say, many of the projects may turn out to be white elephants, because each of the states is vying with one another to put up prestige projects with hardly any thought given as to whether they are economically viable. Those areas, where there have been duplication of projects, are in oil-refining, petrochemicals, iron and steel industries, shiprepair and dock yards, and production of fertilizers. The October issue of International Affairs notes that the investment in refining and petrochemical sectors "will lead to the centre of gravity of these two industries being given a hefty wrench in the direction of the oilproducing world," and foresees that in the 1980s the oil producers may be forced to tie the export of crude oil to the acceptance of refined products and petrochemicals, which "would be very difficult to refuse." The scale of construction activities going on, together with congested ports which act as constraints on the inflow of manpower and goods, have helped to push inflation rates up. In Saudi Arabia it is currently at 30% while in Qatar prices have been rising in recent years at an estimated rate of 20-35% annually. These inflation rates, together with the effective depreciation of the U.S. dollar may force the Middle East states to continue to press for oil price increases in a not too distant future. There is no doubt that the Arabian Peninsular countries of Saudi Arabia, UAE, Qatar and Kuwait will have substantial current account surpluses in the next few years. Morgan Guaranty estimates that it will gradually decrease from about US$33.6 billion this year to US$15.8 billion in 1980. The First National Bank of Chicago has however forecast that it is likely to continue between US$29 billion and US$31 billion between now and 1981. Most of the foreign assets of the dollar-surplus countries have been invested in the West. Foreign assets mainly consist of deposits with foreign banks in terms of dollar deposits in the U.S. and Europe as well as the purchase of U.S. Government treasury 38

bills, bonds and notes. Though OPEC surpluses-the dominant part of which is from the four Arabian Peninsular countries mentioned above-have been characterized by their short maturity periods, the situation has been improving. The IMF has estimated that the percentage of these surpluses put into medium and long-term investments, aid to developing nations, loans to the IMF and the purchase of World Bank bonds rose from 32% in 1974 to 65% in 1975 and to around 73% in 1976. As Arabs gain in financial sophistication, their funds are obviously remaining for longer terms. Security of their funds is still a vital consideration. This is linked with the reality that they cannot afford to become hostile to the West. The financial flows to Asia do not correspond with the trade flows. More than a quarter of the volume exports of crude oil from the Organization of Arab Petroleum Exporting Countries (OAPEC) goes to Asia and the Far East. The bulk of it, 45%, goes to Western Europe while about 11% each goes to the U.S. and Latin America. Among the Arab Petroleum Exporting Countries the UAE and Kuwait send most of their oil to Asia and the Far East. lt is not surprising therefore to find that these two countries have been more partial to this region, the former in terms of imports and the latter in terms of investment. Nevertheless, the problem which sticks out in ASEAN relations with the Middle East is the huge trade deficits which the ASEAN nations of Singapore, Philippines, Thailand and even oil-rich Malaysia face. To make matters worse, they are not offset by direct investments and tourism to any substantial extent. Why has ASEAN not been able to make an impact on the Middle East? As an entrepreneur, dedicated to building bridges between and within these regions, I have been distressed to notice that all the high-minded ASEAN rhetoric appears to bear little relation to reality. ASEAN is just not moving. There is too much jealousy, too much distrust exists between those who matter in these five nations. Despite a barrage of public relations campaigns at the highest levels, ASEAN solidarity has not taken root. The self-interest of each nation becomes very evident and predominant in the minds of the ASEAN civil servants and technocrats. Each one seems to be acting out of fear that the other would take advantage of the ASEAN concept. Furthermore, this dilemma has not been exposed or discussed openly, in order to search for a remedy, assuming that there is the political will to do so. 39

When ASEAN does not even present a cohesive face to the Middle East how can you expect that it will have much of an impact there? The Middle Eastern public has heard about the EEC but not about ASEAN. In Arabic, ASEAN and "ASIAN" sound alike. ASEAN is recognizable as a separate regional entity only when it is spelt in full as the "Association of Southeast Asian Nations". Furthermore, it is also confused with the old Southeast Asia Treaty Organization (SEATO). Certain individual countries of ASEAN are now widely known: Malaysia, Singapore and Indonesia. These could spearhead the drive to get ASEAN better known so that substantially more trade and investments can be drawn to this region. An analysis of the characteristics or the availability of Arab investment funds should take into account the different features of Government and Private funds. Government sector funds go to the following regions: short term deposits of the largest Western banks and treasury bills of the industrialized countries, particularly the U.S.; the contributions to inter-Arab regional economic development funds; Government to Government aid, grants and subsidized loans to the developing world, both Arab and non-Arab; international organizations like the IMF, the Witteveen facility, the World Bank and the Islamic Development Bank. Very few Arab Governments have direct investments in industries outside those areas mentioned above. The only exceptions are, of course, Kuwait's minority interests in Mercedes and Libya's in Fiat. Moving on to the Arab private sector, the money does not filter fast enough from the hands of the government to the pockets of the private sector. lt only becomes available through government expenditure on current account as well as development programmes. However, the fall-out, after a time-lag, has been increasing rapidly as the days go by. The Arab private sector investor seeks both security and profitability to a greater extent than a comparable Western investor. For, unlike the latter, he does not profit from earnings derived at the outset of the project, from the export transfer of machinery and equipment, of technology in terms of royalty and other gains derived from the sale of capital goods, which normally are coupled with the investment of a Western firm in a developing country. My own calculation shows that often the equity capital of a Western investor in a new industrial project in a developing country is greatly covered by profits earned already at the commencement of such a venture. In addition, his extraterritorial facilities such as

40

the benefits of security in terms of bilateral investment guarantees between his country and the recipient country, double-taxation agreements and the powerful weapon of export credit guarantee schemes, all in all, complete the picture of an inherent desire to invest abroad. To top all of these, the product and technology of the western investor penetrates a fresh, untapped and broader market, thus building up prospects for continuous profit and growth. An Arab capitalist has none of these motives, incentives, tools or bonuses to count on, and therefore I reverse the question to my Asian audience. Why should an Arab private sector entrepreneur invest in the developing world of Asia? Why, then, do the Arabs invest in the West? In the first place, there has not been much productive private sector investment. I do not consider investments in sexy real estate-office or apartment blocks-as anywhere near productive as they do not generate new wealth. The attraction in the West, of course, lies in the luxury, the glamour, the fashion of Paris, London, New York-all the opulence of material wealth-the cultural links due to hundreds of years of continuous trade and political heritage and the fact that Western civilization has its birth place in Europe and later in dynamic America. All of this has had a mesmerizing influence on the Arabs and the Persians alike. What can be done to remedy the situation? Let me not venture to suggest a single formula as a solution for bridging the two regions. Rather the solution exists in multiple and various steps, some already known to you, and some already taken by you and your governments. But in order to conclude and round up this talk, allow me to suggest that the following set of steps that can be taken: First, a clear demonstration of sincerity among members of ASEAN themselves to their unshakeable faith in the ASEAN concept and an end to internal jealousies, mistrust and envy of each other. Secondly, integrated efforts should be made to publicize ASEAN as a dynamic region to the various mass communication media of the Middle East. Thirdly, ASEAN Governments should invite several Arab organizations to hold their meetings in ASEAN capitals in rotation even if ASEAN bodies per se have no particular dialogue or business to conduct in such gatherings. Fourthly, I propose that ASEAN institute a dialogue with OPEC, either in Vienna or one of the ASEAN capitals, preferably in Kuala Lumpur, to start with, due to that nation's closest link with the Arab

41

world. Finally, to examine, promote and accord receptiveness to an Arab investment body such as the one I proposed at the last Arab Gulf Finance Conference in Bahrain, namely the Arab Investment Guarantee Corporation (AIGC). Incidentally the suggestion I made there has generated some interest in the Arab oil-producing countries and with a few powerful industrial and financial institutions of the EEC. By promoting the AIGC concept I have no personal motives or gains to derive from its eventual creation except that it will assist my vision and dream of cementing the relationship between these two important Asian blocs and of fulfilling the ambitions, aspirations and needs of the ASEAN and Arab nations and indirectly therefore contribute to the ASEAN-OPEC-EEC link.

42

WEST ASIA-SOUTHEAST ASIA RELATIONSHIP A Southeast Asian Perspective

V. Kanapathy

Historically, the extent of trade, investment and other forms of economic relationship between West Asia and Southeast Asia has been a limited one. On the other hand, West Asia's links with the metropolitan powers of Europe, the U.S. and to a lesser extent, South Asia, have been more profound. Therefore, it is not surprising that, when the oil surpluses took place, West Asian money looked for investment in these countries with which they have had long historical connections. In general, West Asian Governments prefer long-term investments in their own respective countries, then in other Middle Eastern countries, and thirdly in diversified long-term investments in non-West Asian countries. In the last case, the real preference for the long-term equity investment has not been sufficiently realized, due to lack of quality opportunities, and therefore investments in medium-term debt have been utilized to buy time. In this note, an attempt will be made to survey the present involvement of West Asian money, explore possible ways to stimulate a further flow of funds to the Southeast Asian region and, in the process, help West Asian countries further diversify their investments. The challenges facing West Asian countries in the years to come are twofold: to invest the oil surpluses wisely and to bring about more regional involvement for West Asian money. Looking ahead, the real long-term answer appears to lie in direct investment. However, oil-producing countries are still very cautious about their investments. This explains the fact that West Asian investments abroad are still mostly short-term. Recent private placements, however, reflect their response to a new situation-their adaptation and growing sophistication. A significant portion of these surplus funds have moved cautiously to

the U.S., Canada, Europe, and lately to West Asia as well. Generally, oil producers want to ensure that their foreign investments must satisfy the criteria of safety (against inflation and currency depreciation), and income-earning. Unfortunately, a significant percentage of West Asian money in the developed countries is still as mentioned earlier, held as shortterm deposits for want of long-term lucrative opportunities. Uncertainties about the future pattern of world economic development along with the fact that the industrialized countries have not opened up enough, psychologically and legally, to accept injections of direct West Asian investments on the scale required can be attributed as the major causes. According to certain sources, West Asian money looking for long-term investments in the industrialized countries of Europe, the U.S. and Japan suffer from various psychological and legal obstacles which restrict the conduct of business operations free of restraint. Growing nationalism and the fear of engulfment have prevented West Asian money purchasing controlling interests in existing enterprises in the developed world. Consequently, it has been said that the regional flow of private equity financing put through existing and newly formed West Asian financial institutions has swollen rapidly. The funds of these financial institutions have moved into real estate, manufacturing and infrastructure development. The last two years, especially, have witnessed a turning point in both the level and the methods of private capital flow within the West Asian region, coupled with the beginning of a shift in emphasis by West Asian financial institutions and centres from international investment to regional and domestic investments. West Asian investment money has not been directed significantly to the less developed world though flow of funds in the form of aid has been quite substantial. The oil producers gave US$8 billion in aid in 1974, or 15% of their oil revenues, which compares with the total OECD aid of US$12 billion. But, real investments as such have not been very significant. The general consensus appears to be that West Asians have still not shown a real interest to invest in less developed countries (LOGs) other than making statements of intentions. The underlying apprehension appears to be that they are either not aware of the potentialities or are suspicious of, the political and economic future of this region. For the Southeast Asian region, another reason possibly lies in the failure of these countries, especially the member states of ASEAN, 44

to act in unison to attract West Asian investments. They have not made an aggressive attempt to tell West Asian countries that their investments here can be an insurance against inflation and against currency depreciation, and that the average rate of return on investment is in the region of 20%. They have not established the right sort of mechanism to market the region and its potentialities. ASEAN countries, individually or collectively, have not shown the aggressiveness and dynamism of countries such as South Korea and Japan. One can envisage the tremendous opportunities of a two-way flow of trade and investment, if some form of united effort on the part of ASEAN can be initiated. So far, narrow nationalist interests and the absence of a political will to come and work together have stood in the way to make this region look attractive to the West Asian investor. Even in the area of manpower we, in ASEAN, have the capacities and capabilities to provide basic technological knowhow and to supply lower and middle management skills which are badly needed in West Asian economic development. Today, West Asian countries are paying very high prices for skills obtained from developed countries which can be procured far more cheaply from our region without sacrificing quality and standards. Again, the fault lies in us for not making an organized attempt to take advantage of the various opportunities in the West Asian region. Another industry which can be developed in ASEAN and whose products can be exported to West Asia is the knowledge industry. We have, in this region, excellent universities and dons of high quality. Though universities are being rapidly established in West Asian countries, they yet require a large number of university teachers and they also require places for postgraduate studies. This is on the assumption that such facilities for West Asian students and research workers would also render other advantages and eliminate whatever doubt or scepticism that may be entertained about our character and capabilities. According to the World Bank, OPEC members' reserves will increase from US$170 billion to US$653 billion by 1980, with much of this held by a small group of West Asian countries. As indicated elsewhere, most monies held in developed countries are on a short term basis, and though the trend is for a basket of the more important currencies with no particular preferences for any one of them at this stage, the U.S. dollar is probably the most important. The fortunes of some of the major world currencies seem to be

45

moving with the verve and the veracity of a fiddler's elbow and the book loss of the monies held in U.S. banks must be running to the tune of many millions of dollars. With determined effort, especially on a collective basis, the advantages can be spelled out for consideration for investments in Southeast Asia. The major currencies in this region have maintained a remarkable stability even when compared with the reserve currencies, that is, the U.S. dollar and Sterling. To evolve a workable strategy, a joint body comprising intellectuals, businessmen and government officials, has to be established to look into the following: (1) to take stock of the immediate manpower requirements of West Asian countries and to explore ways and means to provide at least a portion of this requirement by ASEAN countries, (2) to examine ways and means to step-up export to the widening West Asian markets, (3) to identify areas of investment for West Asian investors in the ASEAN region, and (4) to generate a greater awareness in West Asian financiers and investors of the growing prospects of ASEAN emerging as an economic entity. Southeast Asia, with its vast natural and talented human resources, has been often said to be one of the growth centres in the twenty-first century. The region is the world's largest producer of rubber, palm oil, timber, tin and many other industrial raw materials. The national economic management of most countries is sound and the majority of them pursue a policy which have given ample, scope for the free enterprise system to operate. The political leadership is comparatively stable and strong. Culturally and socially, there are a lot of affinities between the peoples of West Asia and Southeast Asia. Therefore we should, through a body established for this purpose, try to create the type of environment conducive to the inflow of West Asian funds. West Asian countries certainly need food and therefore food and food-based industries constitute an important area to which West Asian funds could be attracted. In the area of manufacturing, regional projects can be determined and West Asian funds could be attracted. If necessary, "triangular" joint ventures, which include participants from the developed world, could be involved in developing the existing potential. A key word in the whole exercise should be viability of the project and ensuring

46

the West Asian investor that he can conduct the following operations free of restraints: (a} the purchase of a controlling interest in an existing company, (b) the sale of an interest in a company, (c) the transfer of capital into a country for direct investments such as those under restriction (a), (d) transfer of capital out of a country in case of disinvestments such as those under restriction (b), (e) transfer of loan capital in and out of the country in conjunction with direct investments, (f) transfer of profits, royalties or interest or service fees out of a country, (g) the right to exercise control through the appointment of nominees to the management of a company, irrespective of nationality of such nominees, or by other means, and (h) the issue of securities in the capital market in the country of investment. Most ASEAN countries provide foreign investors with some or most of the above concessions. Unfortunately, our fault lies in the fact that we have not sent out in large numbers ambassadors-atlarge to West Asian countries to tell them about the various opportunities that lie in this part of the world and the type of economic philosophies pursued. The twenty-first century, according to many authorities, augurs well for this region and this fact has to be brought to the attention of the West Asian investor. In the twenty-first century, rubber, timber, palm oil and other agrobased products will play a major role in world trade because of the fact that there will be a decline of oil-based synthetic industries and because of the growing strength of ecologists and environmentalists. World population is expanding and the demand for food will therefore also grow. We shall witness a growing international interdependence with substantial change in lifestyles. Wise investment of oil surpluses means also the taking of such factors into consideration.

47

WEST ASIA AND SOUTH EAST ASIA ASketch 1

Prachoom Chomchai

The relation between Southeast Asia and West Asia can crudely be characterized by the prominent trait of dependence. This is brought out very clearly in Table I where it is seen that the Middle East provides the bulk of Southeast Asia's requirements of crude petroleum imports, the figure for 1974 being 82%. lt is interesting to note that Southeast Asia is only next in importance to Western Europe as the Middle East's major crude oil outlets. However, dependence is not one-sided; the Middle East also relies on Southeast Asia for the scarce skilled manpower which it needs in the process of accelerated economic development. Table 11, giving detailed figures relating to Iran's manpower gaps, shows how important skilled manpower is to a typical growth-oriented country in the Middle East. Interdependence between the two subregions are not without problems. On the one hand, Southeast Asia will find it more difficult, as time goes by, to pay for the increasing requirements of crude oil imports from the Middle East, and some sort of financial arrangement seems to be very much in order. Fortunately, as things stand today, some oil-rich countries of the Middle East are moving in the direction of investing more in Southeast Asia, and thus the process of recycling petrodollars is partly solved. Such dependence of Southeast Asia on West Asia will probably increase with time, unless there are unexpected and abrupt changes in fuel technology. On the other hand, the dependence of West Asia on Southeast Asia for manpower supplies is probably not a long-term one; for, in the long run, manpower training programmes in West Asia are expected to solve the existing shortage of skilled manpower. This leaves us 1

This-is a working paper only.

Table 1 World Movemen ts of Crude Petroleum (1974)

(in million metric tons) EXPORTERS

Importers

World Africa North America Other America, developin g Caribbean America Middle East1 Far East West Europe Centrally planned Europe3 Oceania

Note: 1. 2. 3.

World

1,539.5 (100.0) 33.5 (2.2) 215.4 (14.0) 43.2 (2.8) 123.6 (8.0) 28.7 (1.8) 324.5 (21.1) 689.0 (44.8) 68.0 (4.4) 13.6 (0.9)

Africa

248.1 (16.1) 5.9 (0.4) 51.2 (3.3) 4.8 (0.3) 19.3 (1.3) 0.3 (-) 8.6 (0.6) 156.5 (10.2) 1.5 (0.1)

-

North America

Other America Developing

40.5 (2.6)

11.6 (0.9)

-

40.4 (2.6)

-0.1

(-)

-

-

-

-

Caribbean America

100.2 (6.5)

-

2.7 (0.2) 2.7 (0.2) 5.0 (0.3)

39.6 (2.6) 3.6 (0.2) 46.1 (3.0)

1.2 (0.2)

0.4 (-) 10.5 (0.7)

-

-

-

-

-

-

-

Middfe1 East

897.2 (64.1) 26.6 (1.7) 67.5 (4.4) 31.9 (2.1) 42.9 (2.8) 28.4 (1.8) 266.6 (17.3) 499.5 '32.4) 11.0 (0.7) 12.8 (0.9)

Centrally West Planned Europe Europe3

Far East

63.3 (4.1)

-

14.0 (0.9)

-

4.8 (0.3)

43.7 (2.9)

-

0.8 (-)

3.32 (0.2)

-

-

-

-

-

3.3 (0.2)

-

-

85.1 (5.5) 1.0 (0.1)

Oceania

0.2 (-)

0.2 (-) 5.4 (0.3)

5.0 (0.3) 18.0 (1.1) 55.5 (3.6)

Figures in brackets are percentage s in world total. Comprises Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, Syria, UAE. From Norway 2.0; U.K. 1.0; Spain 0.2; Belgium 0.1. Comprises Albania, Bulgaria, Czechoslov akia, German Democratic Republic, Hungary, Poland, Rumania and USSR. SOURCE: United Nations, World Energy Supplies 1950-74, 1976.

0.2 (-)

Table 2 Iran's Revised Fifth Plan Manpower Gap Engineers Medical Staff Teachers Technicians Skilled and semiskilled workers Ordinary workers Miscellaneous

16,000 23,000 57,000 42,000 560,000 10,000 13,000

Total

721,000

SOURCE: Waiter Elkan, "Employment, Education, Training and Skilled Labor in Iran," The Middle East Journal, Spring 1977.

with a situation where, in the long run, there will probably be only a one-sided dependence of Southeast Asia on the Middle East. lt is not difficult to see WRY the Middle East has come to depend on the outside world ~or skilled labour; in the newly independent, sparsely populated, oil-producing countries of the Arabian/Persian Gulf, skilled labour has a primary role to play in economic development.2 Due to a lack of an adequately-trained labour force and the consequential need to import thousands of foreign workers, an organic link has been forged between labour and citizenship in these societies. Most, if not all, foreign workers there are non-citizens whose presence is perceived by host countries as a temporary phenomenon. The accumulation of oil revenues in these Gulf economies in recent years and the intense desire to develop economically have therefore given rise to an unprecedented influx of expatriate labour from all corners of the world, including Southeast Asia. While in the immediate future, such an influx serves to satisfy a definite economic need and is perceived as a positive contributor to development, its long-term impact is fraught with disturbing social, economic and political consequences. For one thing, citizenship laws and requirements for naturalization in the Gulf countries have remained very rigid, and only an infinitesimal proportion of foreign nationals can hope to become naturalized citizens. At the same time, the rapid pact of modernization has deprived Gulf Govern2

Much of the following three paragraphs has been derived from "Labour Markets and Citizenship in Bahrayn and Qatar," by Emile A. Nakhleh in The Middle East Journal, Spring 1977.

50

ments of the needed time to analyse rationally the delayed effects of the presence of thousands of foreign nationals. In fact, the influx of foreign nationals has already begun to have serious negative implications in one area, namely housing. The severe housing shortage and the resulting rise in rents and the price of real estate can be directly attributed to the intense demand generated by the expatriates. Consequently, skilled foreign workers who are brought in as employees of foreign companies usually reside, where possible, in the best available housing at exorbitantly high rents paid by the employers. 3 On the other hand, the indigenous unskilled workers live in abhorrent slums in the outskirts of the capital or in crowded urban boarding houses. The end result is that the indigenous population-especially those living on fixed incomes such as teachers and civil servants-find themselves unable to secure decent housing at reasonable rents. Even government-subsidized public housing has not been able to keep up with the demand. At any rate, in two countries-namely, Bahrain and Qatar-the presence of foreign labour and the resultant problems have also given rise to indigenous workers' demand for a more intensified government manpower development programme for nationals. Thus, "Bahrainization" and "Qatarization" of labour have become indigenous labour's rallying cries against expatriate labour. If the influx of foreign workers have created conditions not easily acceptable to indigenous labour in host countries, working conditions in these countries are equally unacceptable to foreign workers. The experience of Thai nationals working in the Middle East in the past two or three years has shown that their presence is beset with serious problems. First, host governments, quite apart from being rigid in granting citizenship, control the labour market quite severely. Because of preemployment expenses incurred by employers, foreign workers, once employed, are generally not allowed by law to change their employers. For instance, in Saudi Arabia, violators of contractual obligations are imprisoned and subsequently deported. In such an event, they could not return to work there before three years have elapsed. Secondly, despite governmental restrictions, the labour market in the Middle East is a free one, and workers are generally unable to practise collective 3

In Dubai, some Thai workers have lived in desert tents from some time.

51

bargaining 4 and have to accept the going wages which, in real terms, are not much higher than those prevailing in the home countries. Thirdly, with local temperatures being extremely high, workers find that housing available is not always suitable. Many have been accommodated in temporary camps set up on desert grounds. Faced with such problems, foreign workers either return home or become less productive. Host governments are aware of all such problems but seem to be unable to solve them at the moment, and consequently, the market mechanism is left to control the situation. On the other hand, home governments are making an effort to supervise contractual conditions before they are accepted by their nationals. The trend is to encourage fair dealings, and the Thai Government, for instance, has sent a mission to the Middle East to see what can be done to improve the working conditions of Thai nationals there. The natural attraction of working in the Middle East can clearly be seen in Table Ill: wages offered there are prima facie much higher than prevailing ones in the home countries, especially for occupations requiring managerial or supervisory skills. Table Ill also reflects the main categories of skilled manpower needed in the Middle East: labourers and construction workers as well as those needed in administration stand out. For the home countries to have workers migrating to the Middle East, there are distinct advantages. For one thing, the positive side of the balance of payments is an important consideration. For instance, in the last two or three years, remittances from Thai workers in the Middle East have amounted to no less than US$5 million per year. For another thing, availability of employment abroad helps to relieve severe unemployment problems, especially in certain localities. For instance, in the Northeast of Thailand, it is known that practically the whole work force in certain cities is getting ready to migrate to the Middle East because of better employment opportunities there. Of course, the home governments also gain by having workers undergo the experience of working abroad. On the other hand, the costs of such migration to the home governments must not be overlooked. Such workers, especially thqse in the higher echelons, represent a brain drain which costs the home governments a considerable amount of money in terms of 4 In Saudi Arabia, Thai workers have achieved rapport with employers by means of the threat to strike.

52

training costs and lost opportunities of production. A close look at Table Ill will reveal that the manpower requirements of Middle East countries are not different from those of developing countries in southeast Asia and to lose the required technical manpower is a cost which has to be incurred. From a global point of view, it therefore seems that both host and home governments stand to benefit by the exchange of labour, albeit one-way in nature. At the same time, both sides have to incur some social costs, and it seems appropriate to let them share the responsibility of collaborating in order to minimize them. Such costs include tension and conflict arising out of what could be an explosive situation in host countries as can be seen in Bahrain and Qatar and the disruption of development efforts in home countries for lack of the required manpower.

53

Table 3 Number of Thai Workers Authorized to Leave for the Middle East and Expected Wages, August 1975-September 1977 (Classified by Occupation1)

Bahrain

Saudi Arabia

--------

Occupation 1

Average Wage Rate Number US$2/hour

United Arab Emirates (Dubai)

-------- --------

Average Wage Rate Number US$2fhour

Average Wage Rate Number US$2fhour

Total --------

Average Wage Rate Number US$2/hour

-------------- ----------------------------------

Architects, engineers and related technicians Medical, dental, veterinary and related workers Managers Stenographers, typists and card and tape-punching machine operators Bookkeepers, cashiers and related workers Clerical and related workers not elsewhere classified Housekeeping and related service supervisors Cooks, waiters, bartenders and related workers Maids and related housekeeping service workers not elsewhere classified Building caretakers, charworkers, cleaners and related workers Launderers, dry-cleaners and pressers Protective service workers Production supervisors and general foremen, general

31

2.67

6

2.59

11

3.52

-

-

42

3.10

-

1 1

2.79 6.01

-

-

-

7 1

2.69 6.01

4

2.35

1

1.66

-

-

5

2.01

25

2.35

11

2.35

1

0.68

37

1.79

33

1.91

326

3.28

-

-

359

2.60

2

2.54

3

1.86

-

-

5

2.20

20

2.10

34

2.15

9

0.83

63

1.69

-

-

10

0.83

-

-

10

0.83

27

1.03

332

1.27

-

-

359

1.15

3 8

1.56 2.30

-

-

3 15

1.56 2.82

21

3.57

1

1.42

34

2.53

-

-

7

3.3

12

2.59

-

(Table 3 cont'd) Bahrain

Saudi Arabia --~

Occupation 1

metal processing manufacturing of machinery and metal products manufacturing and installation of electrical and electronic equipment food and beverage processing construction work production and distribution of electricity, gas and water others Miners, quarrymen, well drillers and related workers Chemical processers and related workers Blacksmiths, toolmakers and machine-tool operators Machinery fitters, machine assemblers and precision instrument makers (except electrical) Electrical fitters and related electrical and electronics workers Plumbers, welders, sheet metal and structural metal prepares and erectors Rubber and plastics product makers Painters

Average Wage Rate Number US$2Jhour

Number

-----

Average Wage Rate US$2Jhour

United Arab Emirates (Dubai)

Total

~-------~-

Average Wage Rate Number US$2Jhour

Average Wage Rate Number US$2Jhour

-

1

4.25

-

-

1

-----4.25

3

2.35

1

4.25

-

-

4

3.30

1 1 10

2.69 1.66 2.30

4 8 17

2.05 2.59 2.93

-

-

-

5

0.98

5 9 32

2.37 2.13 2.07

1

-

-

1

-

33

4.25 2.69

0.68

11

1.50

-

-

-

11

2.10

22

4.25 3.28

5

2.30

5

1.52

1

6

2.10

2

3.57

-

-

8

2.84

-

-

63

3.08

-

-

63

3.08

156

1.96

172

2.54

-

-

328

2.25

114

2.30

127

2.69

-

-

241

2.50

732

1.61

237

2.00

0.78

977

1.46

2 29

1.32 1.32

1 37

2.00 2.40

-

-

6

0.78

3 72

1.66 1.50

8

(Table 3 cont'd)

Bahrain

Occupation 1

Production and related workers not elsewhere classified Bricklayers, carpenters and other construction workers Stationary engine and related equipment operators Material-handling and related equipment operators, dockers and freight handlers Transport equipment operators Labourers not elsewhere classified Total

Saudi Arabia

Average Wage Rate Number US$2/hour Number

Average Wage Rate US$2/hour

United Arab Emirates (Dubai)

Total

Average Wage Rate Number US$2/hour

Average Wage Rate Number US$2/hour

5

2.74

-

-

457

1.76

337

1.96

119

8

2.59

17

2.98

-

70 62 526

2.05 1.81 1.22

82 205 325

2.54 2.64 1.27

-

2,365

2,426

-

3 83 236

-

5

2.74

0.88

913

1.53

-

25

2.79

-

152 270 934

2.30 1.71 1.04

0.68 0.64

5,027

Notes: 1 Based on International Labour Organization, International Standard Classification of Occupations, revised edition, 1968. 2 Exchange rate: US$1 "" 20.45 baht SOURCE: Employment Service Division, Department of Labour, Ministry of the Interior, Thailand.

WESTASIAANDSOUTHEASTASIA A Commentary

Fawzi Gharaibeh

The Arab world in general, and its oil-producing states in particular, have witnessed tremendous economic changes in the past few years. Since the 1973 quadrupling of oil prices, fabulous amounts of cash have flowed into the region and, for the first time, its countries have accumulated billions of dollars· in surplus. These surplus monies along with the resources of the nonoil-producing countries have been invested in various economic projects throughout the area. The oil-producing countries have devised comprehensive programmes for the hastening of the process of economic development by committing large amounts of oil revenues in capital projects in the infrastructural, agricultural, industrial and public administration sectors. Still, these projects have fallen far short of absorbing oil revenues, and the oil-producing Arab states have begun utilizing investment opportunities in the industrialized world. The Arab world has become a huge workshop, and a Mecca for businessmen looking for lucrative investment opportunities. Capitals in the region are full of foreign businessmen coming from almost all corners of the old and new worlds. And it is customary these days to have hotels in major cities of the area fully occupied all year round, and to see people in the streets, restaurants and shops speaking different languages but with a common denominater, namely, doing business. The Arab world is composed of more than twenty states-of which twelve are in West Asia-with common history, language, culture, and heritage. lt encompasses a vast area of about thirteen million square kilometres, 27% of which are Asiatic; most of it is however, arid. The Arab world's geographic location as a link between continents has given it a unique position of great

significance. Today, all air, sea and land routes from the Occident to the Orient or to Africa and the Far East traverse this territory. The total population of the Arab States was 143 millions in 1975, or 4% of world population, and about 29% (42 millions) of this population was in Asia. Iran, also a West Asian country, has an area of about 1.6 million square kilometres and an estimated population of 32 millions in 1974. The aggregate GNP of the Arab world was about US$145 billion in 1975, much of it coming from oil production West Asia's GNP amounted to more than US$120 billion in 1975, including Iran. Some countries of West Asia have the highest per capita income ever witnessed in the world. For example, the per capita income in Kuwait is estimated at US$11 ,500 in 1977, while it is US$10,480 in the UAE and US$8,320 in Qatar, contrasted with US$7,060 in the U.S. The Arab world and Iran are active partners in international trade. In 1974, they imported US$34 billion worth of capital and consumer goods, and exported commodities worth more than US$70 billion, most of it representing oil exports. As they are in the early stages of the development process, the economics of West Asia may be characterized by (1) the smallness of the industrial base, (2) the strained infrastructural facilities, (3) the deterioration of agriculture, and (4) the dependence upon the exportation of raw materials and the importation of manufactured goods. There are common grounds between the peoples of West and Southeast Asia upon which they can build a new foundation. Historically, the two regions were in close contact commercially and culturally. Ancient trade routes had prospered and connected the mediterranean region to as far eastward as China. Only in recent centuries has trade been redirected, out of necessity, to the Western world. At any rate, businessmen of various nationalities are prospecting for business opportunities in West Asia, and surplus money in this region is also looking for havens as well as business opportunities everywhere. The West Asian States have a strong sense of Asianism; they are proud of being Asian. Besides this uniting factor, there is the fact that both regions, West Asia and Southeast Asia, have ancient civilizations which are deep-rooted and have resisted foreign domination; they are enriched by the harmonious co-existence, side by side, of several ethnically different groups. To be sure, Southeast Asian entrepreneurs doing business 58

with their neighbours in the West still encounter various types of problems, namely, economic, institutional, legal and cultural ones. some of these problems arise because, when dealing with West Asia, the businessmen is not entering a one-block unified market; rather, he is penetrating several small and fragmented markets, each one having its different sets of rules, regulations and requirements. Other problems, however, are common to all states in the region. Though these problems may seem serious, most of them are of a passing nature, and with the amount of buildings, infrastructural construction, education and training currently carried out these problems will soon be phased out. These problems may be outlined in a cursory manner as follows: (1) Most countries of West Asia, and the oil-producing states in particular, suffer from an immediate shortage in manpower. Manpower in the region is either of inadequate skill and low productivity in the nonoil-producing countries, or insufficient in the total number of workers in the oil-producing countries. The manpower shortage, however, is more acute in the highly trained personnel, middle management, and qualified secretarial categories. The reasons for this shortage is that most people, until recently were employed in agriculture, services, and retail trade; the educational system in the region has not given early enough emphasis to preparing the right technical skills at all levels; and the academically qualified personnel have not yet acquired enough practical experience, due to the low level of technology in the region. (2) Almost all countries in the region suffer from a chronic housing shortage, whether of residential or office buildings. Generally, accommodation is expensive and hard to find. (3) The supply of services in the region has not caught up with demand. Water, for example, is scarce in many cities, and in some of them it is rationed. Telephones are difficult to get, though available by a third party at a very high cost. Once a telephone is installed there is no guarantee that it operates efficiently, for breakdowns are frequent; getting a connection may take a long time, and calling a neighbouring country is an agitating experience. Electric current is weak and power failure frequent. (4) Habour facilities and freight unloading equipment are in need of expansion and improvement. Airfields are inadequate to receive air cargo. One may have to wait a few days to fly to a major financial centre. Inter and intracountry roads are ill-prepared to

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move traffic efficiently and rapidly. (5) The cost of living is higher than in many areas in the world. This means that a foreign company working in the region must pay higher salaries to the personnel it provides than that paid at headquarters. (6) Some kinds of raw materials, such as cement, wood, other building materials, etc., may not be produced or available locally. (7) Some countries of the region, and most oil-producing states taken separately, have small populations which prevents the investment in undertakings where the most efficient scale of operations requires mass production. In this situation, only small capital investment projects can be operated at a level close to full capacity. (8) Competition among foreign investors is very intense, each trying to get as large a share as possible, which in turn increases the risks of failure. (9) In almost all countries of West Asia bureaucracy can be a problem. Documentation procedures are often complex and timeconsuming. (10) Most oil-producing governments in the region require that the exporter provide all the performance, advance payment and other bonds required under the contract. Many contracts contain a clause for penalties in the event of delays or failure to achieve designated levels of fulfilment. (11) Some oil-producing countries prefer to conclude government-to-government contracts whereby a government would be responsible for the performance of the exporter. (12) People in the region have their distinct beliefs, values, heritage, and mentality and are sensitive about them. Businessmen may unwittingly violate a taboo, whether cultural, religious or even political, especially when selling in the region. (13) Personal relations with influential people in the country are of vital importance. (14) Language poses a difficulty; therefore, knowledge of English is very essential. There is every reason to believe that bright investment opportunities in West Asia will continue in the future. First, most of the countries have set up development plans, though independently of each other, with investment horizons extending to 1980. These plans have allocated capital amounting to US$57 billion annually. Iran alone had committed a total plan expenditure of US$68 billion 60

over the period 1973-78. Second, many of the oil-producing countries will continue to have major surpluses in the years to come and their total reserves will be accumulating for a good many years. lt is estimated that surpluses by 1980 will not be less than US$40 billion by the most pessimistic estimates. Most of these accumulated surpluses will be invested in the region as well as abroad. Finally, over two-thirds of the oil reserves of the world are to be found in the region. Such reserves are expected to last, on the average, for not less than fifty years at the 1974 production levels. Translating this into figures will mean that the region has an estimated oil wealth of more than US$4 trillion, at 1976 price levels. In other words, oil-producing countries of the region will get annual revenues of about US$90 billion, the bulk of which can be put into capital investment. Countries of the region are aware of the inadequacy of their infrastructural facilities and smallness of industrial base. Therefore, heavy capital investments have been committed in the various sectors of the economy, though the balance is tilted towards construction. Buildings such as housing, office buildings, schools, universities, hospitals, as well as civil engineering work such as the building of roads, airports, harbours, electricity generation plants, desalination plants, wire and wireless communications systems, etc. have got the lion's share. Agricultural works, agriculturallybased industries, industrial projects such as liquid gas and manpower development were not at all neglected. Certainly, future generations in West Asia will enjoy the fruits of investments currently undertaken. These benefits will be reflected in higher per capita income, more purchasing power and, thus, more demand for goods and services in terms of quantity as 1 well as quality. lt is estimated that imports of goods and se rvices over the next five years alone will be on the average more than US$55 billion annually, and the trend is increasingly moving upwards. Emphasis in West Asia has been initially on the exploitation and development of natural resources, and it has just entered the second stage of economic development which involves the industrialization of these resources and the construction of a comprehensive network of infrastructural projects. The future will undoubtedly witness the introduction of industry into the area in its broader sense. 61

Therefore, opportunities for Southeast Asia entrepreneurs are limitless in the region in almost every field of enterprise. Those businessmen can contribute much towards the achievement of development goals by entering into a partnership with the public as well as the private sectors in the region, providing them, when possible, with modern and appropriate technology, managerial skills, and innovation. Apart from profit as a major motivating force, Southeast Asian companies may be induced into investment in the area by their concern for the mutual betterment of both peoples. The transfer of appropriate technology as well as the interaction of cultures may inject into the process of development an acceleration factor which may help both regions into rolling along the development path. The relationship between West and Southeast Asia would be visualized as a long term one built upon mutual benefits and armlength bargains. Southeast Asia can offer much of what West Asia needs such as trained low cost manpower, cheaper substitute manufactured goods, appropriate technology and ways to use it, foodstuff, tourist attractions, and experience in the housing area. West Asia can respond by providing for the financing of development projects in Southeast Asia, should the latter prepare the appropriate foreign investment climate, through either loans or the establishment of joint ventures in various economic endeavours. A prerequisite to this mode of co-operation is the bridging of the "ignorance gap". Peoples of both regions do not know much about each other; what is known is worse than not knowing at all, and is often wrapped with mystery and misconception. This state of affairs has accumulated through centuries of isolation, lack of communications and contacts. Remedial actions are called for by both regions to close this "gap" by the initiation of various channels of communications and links. The task of introducing to and educating each other about the capabilities and potentials lies upon the shoulders of both parties. These measures and actions may be translated into the following: opening up and expanding of direct air routes to facilitate the movement of people and goods between the two regions, establishing· direct telephone lines to speed up business contacts, opening up trade centres and occasional trade fairs in major cities of the regions where products can be introduced and

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exhibited, publishing business directories to identify business opportunities, forming regional business and economic communities and offering tax holidays and exemptions on the transactions between these communities, entering into bilateral and multilateral trade agreements between countries of both regions, encouraging tourism between the two regions, exchanging students and professors, carrying out joint research projects aimed at solving joint problems and exploring further avenues of co-operation. Finally, I wish to thank the organizers, the Institute of Southeast Asian Studies, for its foresight in organizing this Conference. I wish to indicate that such con'ferences are indeed the first step in which ideas can flourish.

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THE DISCUSSION Professor Kernial S. Sandhu

The purpose of this session is primarily to extablish the broader parameters of our discussion. We will go into specific issues as the meeting progresses. If you feel that you have got a point to make which, earlier on, was not touched upon, it is now the time to make it. H.E. Dr. Ebadollah Bahari

Most of the comments or speeches given lead to the fact that the desirability of interchange of trade and activity between these two regions has not come about, there being some restraining factors which impede this. To my mind, one of the essential points which His Excellency, your Foreign Minister, mentioned last night is that trade and industrial activity are routed mainly to the European industrialized countries. All the routes lead there and are from there redistributed to other regions. This is not purely by political force but sometimes by necessity. Take, for example, a country which has a surplus of a commodity, say, textiles. lt finds that perhaps the best market is the Western community which can absorb substantial amounts of this commodity. In turn the Western community can be exporters of this same material through its developed marketing system. The Western community would export the commodity there, despite the fact that it is faced with certain tariff restrictions and so on. Now, if any two countries in West Asia or Southeast Asia arrange some bilateral agreement to give preference to textiles in exchange for some other commodity which one country has not got, then they are faced with the sanctions of the major Western countries which consume the major exports of both these countries. In other words, the Western country concerned will say, if you give such a preference to Country X for its textiles, I am not going to give you the benefit of access to my market, and therefore, by indirect or direct means-whichever you call it-trade between the West Asian and Southeast Asian regions is completely impeded. What I feel should be done is to strengthen the developing or undeveloped countries' intertrade agreements collectively, so that one gets certain advantages in favour of regional development without being penalized by sanctions of the Western countries against one's exports or other

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earnings which are so much needed. Thank you. Professor Kernial S. Sandhu

Thank you, Dr. Bahari. Yes, Mr. Abdullah Aklhalid Alfadl. Mr. Abdullah Afkhalid A/fad/

1 would like to add to what was said today a word that I like to use always, and that is "need". I think the basis for any co-operation between nations is really the need for that co-operation. Once we have established the need-and here comes the concept of marketing-! think co-operation suddenly exists. I will here mention a country specifically; there are Koreans in Saudi Arabia where I come from. We had a need in road construction and the Koreans seized that opportunity; they came over, did the job well, and accordingly took more and more projects. Now, that is the basis where Eastern nations establish a need, they do not just sit back and say, "Why are all those dollars directed to the West, why do they go to the States and Europe?" I think East Asians should establish the needs in West Asia and come over there and work. Also, one of the points that was raised today, and this is a basic true fact, is that the oil will not last for a long time. Now, for Arabs as a whole, West Asians, there will come a time when we find that we have industries that will support us if the oil is no longer around. So, with this concept in mind, the East Asians should start thinking of establishing industries in West Asia which do not need an element of manpower, perhaps support industries. Take rice, for instance. We have American rice that some in different-sized packs to Saudi Arabia, Kuwait, and across the Arab world. Today I heard that there is a committee or a group of people who are making a study on rice to improve its quality. We had at one time long-grain rice which is as good as any other type of rice. We sell this in bulk to any of the West Asian areas, packing it there. Thus we have a support operation. lt is already an industry that generates wealth and employment. You have an area of wealth, a huge reservoir of manpower that we lack, and that is an area of cooperation where we can help each other. Thank you. Mr. Hussein Najadi

I just wanted to comment on the remark made by Dr. Prachoom Chomchai, not in any way to defend any Gulf countries for the

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problems you have raised, but to illustrate the fact that we admittedly require your labour. As you rightly said, this need is not going to be long-lasting. lt is a short term temporary phase we are going through. I am aware of some of these substandard conditions in the Gulf countries for these labourers; we have much more of a problem as our need came to us in such a rush after 1973. As my colleague mentioned, our need grew so fast that we do not have the infrastructure to facilitate the influx of the number of foreign workers which we need now. We cannot absorb them as permanent residents; we cannot grant them nationality, otherwise soon we will become a small minority in our own country. If any kind of democratic system is applied-any kind, even without a constitution-they will be the majority, we will be the minority, and the majority shall rule. We cannot be a South Africa, we cannot be Israel. We are human, we are Arabs. Secondly, the substandard accommodation conditions can be resolved in a so-called package contract. When you, as a contractor from the Philippines or Thailand, want to build in Bahrain or Saudi Arabia, you take into consideration your materials, your labour, proper human decent air-conditioning. As the Koreans said to their workers, you can have two meals a day, this is in Bahrain not in Saudi Arabia, and etc. etc. You can put this cost as the cost of the project, but don't try to make a killing, by saying "Ah ha, I price the project at $20 million, but I give my labourers the minimum, just enough for them to work there." I reverse the problem, it is not merely our problem, it is also your problem. lt is our problem. Professor Kernial S. Sandhu Any other comments? Yes, George? Professor George G. Thomson May I, as an observer, make a one-sentence contribution. Picking up what Dr. Kanapathy said, I think Geography is not a thing of maps, it is a thing of minds. This exchange of people, I think, is important. With a Visiting Professor in either the University in Singapore or in any ASEAN country for three months, you can have an appropriate education system: why should these students leave the Gulf states to go to Britain and America? If we are the lands of the future, wouldn't it be good if arrangements were made for an exchange of

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students? I am sorry it is six sentences instead of one. Professor Kernial S. Sandhu

we at the Institute, George, can take it up, and would welcome such a move. We would be prepared to initiate it if we have the necessary sustenance. In fact we are now thinking in terms of trying to get an academic from West Asia to spend two to three months at ihe Institute working on the types of problems that we have been touching upon. H.E. Dr. Ebadollah Bahari

Mr. Chairman, can I come back to that? Has your university the capacity to absorb undergraduates, Engineering ones and so on from West Asia? Professor Kernial S. Sandhu

I am afraid I am not in a position to answer that because I do not work in a university but we have ex-university deans here with us. We have a former dean of a faculty of economics in Dr. Prachoom Chomchai and also Dean Amado Castro; they may be able to shed some light on your question. Professor Am ado A. Castro

Speaking of the University of Philippines, I know that there are scholarship programmes for foreigners, especially Africans and West Asians. These programmes have been established by the University itself; they are somewhat limited in scope and I hope there could be other sources of finance to allow more scholarships for students from both of these regions. In specific departments of the university, there are active programmes to accept foreigners. I know that the College of Business Administration of the University of Philippines through the leadership of ex-dean Cesar Vi rata (he is an ex-dean too), has given fellowships to foreign students. In the School of Economics there are few foreign students at the undergraduate level but at the graduate level, between 20-25% of tl=le graduate students are foreign. The School has made it the policy to accept up to 25% of its graduate students from foreign countries. So, with regard to accepting students from West Asia, the picture varies from department to department. I would think that the big

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constraint is finance for scholarships rather than any shortage of capacity to accept foreign scholars. Thank you, Mr. Chairman. Professor Kernial S. Sandhu

Yes, Dr. Kanapathy? Dr. V. Kanapathy

I work in a bank and we have a correspondent banking relationship with Daiwa Bank of Japan. Daiwa Bank sends every year a fairly senior executive for their international department to Malaysia and we make arrangements to find for him a place in the University of Malaya. In this way, I think they have sent about six people during the six-year period, to familiarize themselves with the Malaysian economy. I would earnestly urge our friends in West Asia, particularly from banking institutions, financial institutions, who could easily afford to finance their staff members in this type of training programme, to take advantage of this type of facilities provided by most of the universities in this region, so that they gain a better insight, so that when they go back they could advise their traders and their clients about the various opportunities. Generally, oil producers want to ensure that their foreign investments must satisfy the criteria of safety (against inflation and currency depreciation) and income-earning. Arab bankers who are familiar with the conditions in our part of the world could impress on their fellow countrymen that their investments in our region can be an insurance against inflation and currency depreciation (average inflation rate is far lower than in Western countries and the currencies have enjoyed comparative stability), and that the average rate of return on investment is in the region, of 15-20%. According to the World Bank, OPEC members' reserves will increase from US$170 billion to US$653 billion by 1980, with much of it held by a small group of Arab countries. In the twenty-first century, rubber, timber, palm oil and other agro-based products will play a major role in world trade because of the fact that there could be a decline in oil-based synthetic industries and because of the growing strength of ecologists and environmentalists. World population is expanding and the demand for food will therefore also grow. From a long term investment point of view, such industries should be attractive. Arab Governments now seem to show a preference first for long term investments in their own countries, then in other Middle

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Eastern territories and, only thirdly, in diversified long term investments in non-Middle Eastern countries. In the last case, the real preference for the long term equity investment has not been sufficiently realized due to lack of quality opportunities, and theretore investments in medium term debt has been utilized to buy time. A key word in the whole exercise should therefore be the viability of the project and ensuring the Arat5 investor that he can conduct his joint venture operations free of restraints. The lack of appreciation of the opportunities in both regions can be effectively removed by banks, commercial houses and tourist agencies with the support of the authorities. They have to establish the right sort of mechanism to market the region and its opportunities. Professor George G. Thomson

If you have ASEAN or Colombo Plan Scholarships, I think the same principle could be extended within the context of this seminar. Professor Kernial S. Sandhu

I think the spirit of this discussion is the need to bridge the "ignorance" gap that Prof. Gharaibeh touched upon. Better knowledge is so vital, as even in countries that have so much in common, for instance, a shared British tradition, as that between Singapore and Australia, between Singapore and Malaysia, and between Malaysia and Australia and so on. We are finding that people know very little about one another's areas and their problems. In fact, one of the reasons this Institute was set up was primarily because we Southeast Asians know very little about our immediate neighbours. In my own country, Malaysia, we have a situation where we do not have a single professionally qualified university academic who, say, knows Thai and is working on Thailand. The situation in the other Southeast Asian countries is not much better. So, one of the aims of the Institute is to try and encourage Southeast Asians to know more about their immediate neighbours. At the moment we know more about our excolonial linkages, but not much about our immediate neighbours. So, this is one of our problems. The other one is, of course, as Southeast Asia is part of the larger world, how do we ensure that we have effective contacts with other world areas. In this connection, we have exchange arrangements with Australia and New Zealand, where Australians and New Zelanders come to the Institute and spend anything from three months to a year

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working here. We have similar arrangements with Americans and the Japanese and now we would like to do the same with the Canadians, Germans, French and the British as well as with the West Asians. Up to this Conference, we had nothing with the West Asians. And this was one of the reasons we pushed tor this Conference. Likewise, we would be only too glad to explore possibilities, for example, exchange arrangements, under which, for instance, an Iranian could spend a year at the Institute and a Southeast Asian in Iran. Similarly with the Arab states: with Bahrain, Saudi Arabia and so on. These are things we are quite prepared to explore, and I think it is important that we do. There are fundamental differences between an Arab and an Southeast Asian working together in our own home environments than meeting, say, in London or the U.S. Mr. Damrong Lathapipat

Thank you, Mr. Chairman. lt is quite interesting that we have two former academics here and that your invitation to Thailand to one of the participants is to a former minister: you have to prepare less, every time you finish a letter there is a change of government in Thailand. I am a lecturer of two universities in Bangkok. I am lecturing now only to Ph.D. candidates in Middle Eastern affairs. I think there is one more institution in Southeast Asia that could absorb graduates and undergraduates from West Asia, and that is the Asian Institute of Technology. lt is very important and prestigious; it has trained many scholars going into business, politics and economics in various countries of Asia. 1t used to be supported by and originated from SEATO. Now that SEATO has phased out it has turned into an institution that has its own endowment from various organizations, businesses and governments from all over the world, not only in Asia. I think this is one institution that is very excellent in its training. lt has the capacity and academic excellence to train any interested Western Asian student supported by the government. I do not think we have to worry very much about scholarships because certainly studying in Bangkok with the Asian Institute of Technology located in Bangkok, is probably 25% of the cost of supporting one student studying in the U.S., particularly in private institutions like Harvard, Yale, Cornell or Brooklyn. Brooklyn is a State University but a foreign student has to pay full tuition fees,

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which is US$3,200 a year tor graduate studies. So, I think this is one in's!itution that our West Asian friends should look into. And in tact we' advertise in international magazines like Asiaweek, Time magazine (sometimes the Asian version published in Tokyo). This is my suggestion to provide some information tor this question. Professor Kernial S. Sandhu

Thank you. The point on bridging the information gap, I think, is well taken. These are issues we will want to explore later. In the meantime, is there any other point of substance arising out of the presentations this morning? Unidentified Speaker

As it is about time tor lunch, I will make this very quick. I was just thinking about people like yourselves coming over to places like Saudi Arabia, Kuwait or Bahrain and spending a two or three-day session at the universities. Talking about East Asia, if you people are interested, I can put you to the right contacts to help you. I am sure this is going to be very beneficial as it can be published in the newspapers, to get to a wider audience to inform them what you are trying to do. lt is beneficial tor the country, but whatever we discuss should be carefully planned to be useful for the wider public and not just an academic public. Thank you. Dr. V. Kanapathy

Just one point, Mr. Chaiman. I suggested the formation of a forum-West Asia-Southeast Asia Forum-which, I feel, would bring about this type of dialogue and this type of participation in West Asiap countries. lt would bring about a greater awareness in our existence and the contributions we can make for happier relationships between both these regions. Mr. Hussein Najadi

I would like to inject again a view that we have spotted areas of cooperation, areas of knowing each other better especially in academic fields, but, Mr. Chairman, allow me to bring our attention back to reality. How much are Europeans close together institutionwise, in education, even joint industries, joint finance companies, even the same banks in Vienna, in Germany, in France, in Switzer71

land? A single important mistake, despite all the sea of intelligent scientists and technicians and professors, would change the reaction to disaster-financial disaster, economic disaster after that of World War 11. I do not want to sound pessimistic but my concern is that we should try to discuss how to possibly avoid such a disaster which could affect the lives of the West and the Southeast Asians. The crash of a bank in Vienna-some of you, I am sure, have known this-led to the chain reaction of the collapse of the banking industry in Europe. Similarly, too, with causes which led to depression in the very affluent capital market of the U.S.; I would like with your permission to come back to some of the very urgent things which could happen rightly or wrongly; if it happened wrongly, this would affect the life of all of us, not to mention the future of the generation born today. Mr. Eric Khoo

Mr. Chariman, may I as an observer make a small point. Comimg to this problem of the communication gap, we have an ASEAN Secretariat in Jakarta. I am just wondering to what extent this Secretariat is equipped in the future to undertake a PR exercise on behalf of ASEAN in the West Asian countries. Professor Kernial S. Sandhu

We do not have the Secretary General of ASEAN here; he was hoping to come, but was unable to do so. We do, however, have someone who is currently based in the ASEAN Secretariat with us. Perhaps we could get him to say something: Professor Amado Castro? Professor Amado A. Castro

Thank you, Mr. Chairman. But, as you point out, we are here in our individual capacities and it is true that when you first invited me to this meeting, you did not know that I was going to join the ASEAN Secretariat. Therefore, I take it that I was invited here as an academic, just like some of the other academics here. Nevertheless, I am in the ASEAN Secretariat and tomorrow I am going to speak on "ASEAN and Its Role in lnterregional Development"; I do have one paragraph about ASEAN Secretariat in my paper. The ASEAN Secretariat is small, it is so by design and I think it will

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remain small. But the question that has been raised, concerning the capacity of the ASEAN Secretariat to perform Public Relations functions, is a very important one. The role of the ASEAN secretariat is still undecided; there is still much debate, people in the various countries do not know just what exactly to make of the secretariat. While pointing out that the ASEAN Secretariat is small at the present time and has limited capacity both in terms of personnel and budget to perform public relations work, I do agree, especially in view of the discussions I have heard today, that public relations work is, and should be, a very important part of our work. Therefore, I appeal to all those present here to make it known to the decision-makers in ASEAN that the ASEAN Secretariat should be performing public relations functions. Thank you very much, Mr. Chairman. Professor Kernial S. Sandhu

Any other comment? Yes, Mr. Sivavong? Mr. Sivavong Changkasiri

Mr. Chairman, speaking of ASEAN, I fully agree with Hussein Najadi that, at the present time, we have not come to a concrete agreement on many issues. I think that our co-operation is based on the whims of a few politicans at present. Unfortunately, those few politicans do tend to compromise on certain issues and we have not as yet philosophized objectives and aims in our co-operation. I think we have to be frank on this. If we are going to use ASEAN as a mechanism to bring about closer relationships with West Asia, I think we have to do a lot more in trying to concretize our aims and objectives. And I think that we, at present, even before trying to bring about closer relationships with West Asia, have to bring about closer relationships among ASEAN member nations. And so, I am not so sure, even with the explanation that has been given by Professor Castro, we can really do a good PR job, when we cannot settle our problems at home. Thank you. Dr. Goh Cheng Teik

Mr. Chairman, when listening to the various observations made on bridging the ignorance gap, I got this uneasy feeling that it would seem to a lot of people in this room that the sort of relationship we are envisaging is that between strangers. lt would appear that Arabs

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and Iranians on one hand and Southeast Asians on the other are strangers to each other. Now, I would like to suggest that this is not so. Perhaps most, not all, of them in this room, belong to the Westernized elite in Southeast Asia. And perhaps, because of this, our view of the Arabs and the Iranians in somewhat different. But 1 think if you speak to the more traditional, the more religious-minded members of the Southeast Asian populations, particularly the Muslims, you will find that Arabia is not a strange land to them at all. Arabia is Tanah Suci, the Holy Land, and each year Muslim pilgrims go to Mecca. And the peasant-one of his life's longings is to save up enough to make the pilgrimage to Mecca. We have, from at least the nineteenth century onwards, Javanese, Malays and others not only studying in Mecca, but actually residing there, and we have definitely students from Southeast Asia in Al-laz Ha and other Arab universities. Now, I think on the other hand also, we have had the presence of overseas Arabs, many of whom have settled in these lands here in Southeast Asia constituting an integral part of the Southeast Asian national communities. So, I do not think that Arabs and Iranians on the one hand, and Southeast Asians on the other, are really strangers to each other. I think the problem is that only a segment of the Arab and Iranian communities have been meeting a segment of the Southeast Asian communities. So, the problem is how to build on this link, which is a very old, historical link, but nevertheless, a very tangible one, how to build on it, to broaden it and to bring in other elements of our societies. I would say that on a bilateral basis there has been a lot of contact with the Arab States through Islamic Conferences like the one held in Kuala Lumpur, the Islamic Development Bank, through a lot of mutual exchanges, but I think that as far as interregional relations between ASEAN and West Asia go, this is probably something new. Another point, Mr. Chairman, if you allow me one minute, is to respond to the observation made by Mr. Najadi, that the ASEAN nations are extremely divided, hopelessly divided. I would admit, as a member of an ASEAN Government, that there is certainly a fragmentation, a division of opinion on various matters, but I think if you look at it in the perspective of the last decade, there has been a tremendous step forward. ASEAN was formed against a background of intraregional conflicts, against a background of Confrontation between Malaysia and Indonesia, against a back-

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ground of confrontation of a milder sort between Philippines and Malaysia. But in the last decade we have been able to push these problems to the background and, as Mr. Rajaratnam mentioned, emphasized areas of agreement. We have been building on that, so much so that Heads of Government of ASEAN have been able to meet twice in the last one or two years. I think the rapport that now exists within ASEAN is so great that, at long last, the Japanese, the Americans and Europeans have taken us seriously. I would suggest that whilst there exists these differences that you mentioned-the jealousies, the petty quarrels at the bureaucratic level and so on-on the whole, the solidarity in ASEAN was never as great as it is now. H.E. Dr. Ebadollah Bahari 1 don't want to make any specific points. I enjoyed reading this background paper by Mr. Lim Joo-Jock. I sincerely recommend reading of this paper; I think it is an excellent expose of the areas in which we have had common ground in the past and we could have in the future. Professor Kernial S. Sandhu Yes, Professor Castro, you want to respond? Professor Amado A. Castro I was going to respond to my friend Mr. Sivavong's comments but Dr. Goh has already said something and I shall have some more to say tomorrow.

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SECOND SESSION:

THE INVESTMENT PATTERN AND PROBLEMS OF PETRODOLLARS

PETRODOLLARS Myths and Realities

A/ejandro Melchor, Jr.

From the time the OPEC imposed it$ embargo on oil supplies raising prices dramatically in 1973, there has always been speculation about the manner the oil revenues would be used by the oilproducing countries and the changes in the world's monetary systems and institutions that would be occasioned by these petrodollar flows. To date, however, the earlier much-feared unsettling effects of these flows have not materialized, and, to the credit of the Arab OPEC countries, the recycling mechanism seems to have performed reasonably well. This paper intends to review past developments and forecast new moves that might emerge in the future.

OPEC Revenues and Surpluses Will there be a decrease in demand for OPEC oil in the near future? With few exceptions, all concerned foresee increased-rather than decreased-demand for OPEC oil in the next few years ahead. The U.S. itself has increased its dependency on foreign crude sources from .36% to 42% of total supply. Consumption has risen and domestic production has declined. The U.S.'s requirements are estimated at 17.4 million barrels daily at which only 10.2 million barrels daily is supplied by domestic production. The piping in of oil from Alaska will provide some 1.2 to 2 million barrels a day but will not sufficiently increase supplies as to contain demand for foreign oil imports. Free world consumption in 1976 was at 47 million barrels daily while production capacity was at 50.5 million barrels daily. lt is estimated that. even with modest economic growth, demand will reach 58 million barrels daily by 1980 and 70 million barrels daily in 1985. Thus, unless OPEC producers, mainly Saudi

Arabia, increase their production rates, there may well be a new oil shortage. Greater exploration for oil and greater production has been spurred by rising prices. Alternative fuels are also being developed side by side with fuel conservation measures. But none of these efforts has been particularly successful so as to significantly stem the demand for Arab oil. While North Sea and Alaskan sources improve supply availability, crude from these sources is many times more costly than the 15-25 U.S. cent crude production costs in the Middle East countries. Recovery of the world economy now underway would further increase the demand for Middle East oil supplies. As such, it is unlikely that an oil glut would occur (which is what the U.S. hopes will happen) so as to force the Arab OPEC countries to cut back production to maintain prices and, in the process, foment quarrels in deciding who has to bear the brunt of cutbacks. A related question would be on the prices of oil. Since no slack in demand is foreseen, any cutbacks in production will be deliberate decisions on the part of the Arab countries, particularly Saudi Arabia, not so much for the purpose of maintaining or even increasing prices but more to conserve their depletable resources until the industrial economies they are building can stand on their own. In essence, OPEC's arguments for increased prices have partly been founded on the inflated prices the countries had to pay for the machinery and other development assets they had to acquire from the industrialized countries: these rose by 28-30% in recent years. To the extent, therefore, that the industrial countries can contain their inflation rate, to the extent that their bid prices for building huge industrial complexes fall to more reasonable figures, and to the extent that inefficiency in use and wastage of resources will be eliminated as soon as these economies overcome the ills associated with trying to do too much too soon, then only will the oil price increases be contained. The prices will remain Arabdetermined, not market-determined. What about increases in the capacity of OPEC nations to absorb imports? Countries like Indonesia, at one extreme, are poor and heavily indebted already. On the other hand, Saudi Arabia has the capacity and has embarked on large infrastructure and industrialization programmes. Additionally, all the OPEC countries are spending huge sums for armaments. As economic development progresses, OPEC imports will escalate. The oft-cited constraints to development arising from small populations with little industrial 78

expertise will perhaps not be a limiting factor to investment activity since even labour can be imported. Imports are therefore foreseen as rising in the period immediately ahead. With all the above, it is possible that the Arab oil surpluses may well decline to US$250 billion or so by 1980, helped along by their growing developmental expenditures. These latest estimates are considerably lower than the US$1,000 billion forecast in 1974. But it is extremely unlikely that surpluses would turn into deficits in 1980 or any other year, considering the Arabs' control pricing and the demand for oil is expected to remain high, even if Arab imports go up. Recycling the Petrodollar

Certainly much of the petrodollar flows have made a U-turn back to the industrial countries from which they came, in payment for construction and equipment of huge steel plants, ports, airports, housing, petrochemical complexes, refineries, electric power and for armaments. The bill for all this has been higher than it should have been: it is estimated that inflation and wastage have swallowed up at least 30% of OPEC's revenues since 1973 or about US$90 billion. Unproductive expenditure and wastage have been justified by one oil country minister as necessary to gain the required expertise in the fields being entered. While the petrodollars are pouring in, they are pouring out too so that the earlier myth that all the money in the world would one day rest in the Arab Middle East coffers can be safely laid to rest. The stated priority rankings in the use of oil revenues were as follows:

1. Development of their own economies. Industrialization is a major goal and almost all countries have embarked on infrastructural projects and socially oriented projects as schools, hospitals, telecommunications, transportation and other development projects that would raise incomes and living standards. As stated by one Middle East official, the OPEC is striving to be more than just a supplier of crude oil. These countries want to have a greater stake in the refining and petrochemical industriesindustries that are based on the raw material they possess in abundance: oil. While OPEC produces most of the world's oil, its countries collectively hold only a 3.2% share of the petrochemical industry. In fact, only 3% of OPEC oil is transported in tankers 79

owned by member states. Up to now, Western industrial states have managed to keep OPEC refined oil products out by tariffed quotas. Saudi Arabia is currently spending US$1 ,088 per capita or US$9 billion per annum while Libya has a five-year development plan which calls for a US$25 billion expenditure to reduce dependence on oil for income. Steel mills, petrochemical plants, refineries and a host of other manufacturing plants are being planned. 2. Assistance to developing countries, particularly the Arab and African ones. The funds are to be devoted to economic development projects. 3. Arms purchases. 4. Increasing reserves and foreign assets. A number of Arab institutions and funds have been set up to implant aid-giving to developing countries with well over US$5 billion reportedly placed in the capital of Third World development banks and these funds and institutions but there has been some slowness in getting operations off the ground for a number of these. What is a reality is that these institutions have found themselves short of expertise and have in fact turned to eo-financing of projects with the World Bank and the Asian Development Bank. That Arab Development Banks would dominate in the world's financial system has till the present remained more myth than reality. As long as the Middle East question remains unsolved and no formula to ensure lasting peace is found, arms purchases will remain high. Iran is reportedly selling more oil on buy-sell transaction arrangements (where ·the armament supplier or a third company has to buy the crude) to pay for US$3 billion worth of fighter planes it has ordered. A similar deal was concluded for a large seaport for the Iranian Navy. Many would decry the spending on armaments as claiming no gain with only waste results to the world from all that; one country buying planes, another buying missiles to knock out the planes and still another purchasing systems to knock out the missiles. Recent events do not raise hopes for any quick peaceful settlement in the Middle East and armaments purchases will continue, perhaps to the delight of the arms-merchanting countries. Recycling Channels and Actual Use of lnvestible Surpluses

The last objective of increasing reserves and foreign assets seems to be residual in nature, that is, what cannot be spent on the first

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three objectives find_s its way h~re. Nine channels ~ere identified tor the recycling of 011 producers current surpluses 1n early 1975 as follows: 1. The private international capital markets. 2 Bilateral credits from oil producers to industrialized countries like those of Iran to U.K. and France. 3. Bilateral aid commitments by oil producers to developing countries. 4. Multilateral commitments by oil producers to agencies like the World Bank and the U.N. Emergency Fund. 5. Balance of payments financing on a very much enlarged scale through the ordinary channels of the IMF. 6. Witteveen I, the_1974 pilot oil-financing facility. 7. Witteveen 11 or the enlarged oil facility. 8. The EEC borrowing facility. 9. Dr. Henry Kissinger's "safety net" proposals. Looking over the records, it is seen that Eurocurrency markets absorbed US$22.8 billion of the US$56.4 billion investible surplus in 1974. The next largest destination was the U.S. with US$11 billion of which US$10 billion was in banking and money market placements, followed by the U.K. with US$7.2 billion. International institutions absorbed a low US$3.5 billion and the residual ("all others") of US$11.9 billion was thought to include loans to the less developed countries. Other investments such as in real estate, equities, direct investments and direct borrowings by these two countries hardly reached US$3 billion. Thus, about two-thirds of the surplus went into liquid investments. Surplus for 1975 was lower at US$31.5 billion. The U.S. maintained its 19% share but the share of more permanent investments in the total rose severalfold indicating a shift from shorter to longer term investments. The portion going to Eurocurrency market likewise fell from 40% of the previous year to 29%, while credits to international lending institutions and loans to less developed countries rose in both absolute amounts and as percentage shares in the total, from 27% to 50%. Still 40% of the surplus was in short term investments. The shift to longer term investments continued in 1976 with much of this flowing to the U.S. where OPEC holdings of longerthan-one-year treasury notes and bonds reached more than US$4 billion in June 1976. The U.S. appears to be the chief beneficiary absorbing slightly less than half of OPEC's investible surplus. Net 81

purchases of U.S. corporate securities (stocks and bonds) declined from US$3.2 billion in 1975 to only US$2.3 billion for the first eight months of 1976. OPEC purchases of World Bank notes and bonds also fell from US$2 billion in 1975 to less than US$500 million in 1976. Direct investments in the nonoil-developing world were few and disappointing. So were investments in the corporate sector. Underwriting activities of Arab banks fell from an already unimpressive US$2.8 billion in 1975 to US$1.4 billion in the first half of 1976 and this trend seems to have continued through the second half. Some view this rather declining role as "an effort to preserve longestablished market order in placements" so that the investments were directed to the "traditional" channels and not through the local investment companies. In retrospect therefore, it can be seen that the private sector banks, and several varieties of international financial institutions handled the recycling "far more efficiently than the merchants of doom predicted." Already in 1975 (after heavy activities in 1974), fears were expressed that the Euromarkets were not prepared to take any additional recycling strains since banking prudence dictated that capital bases would have to be enlarged if gearing problems arising from additional inflows of short term deposits were to be avoided. Fortunately, the decline of short term interest rates in 1975 led to a fall in the share of funds channelled to the Eurocurrency markets. Bilateral credits from oil producers to industrialized countries have not gained much ground except for the U.S. Treasury notes and bonds purchases as mentioned earlier. Recycling of oil dollars to Japan was mainly in the form of payment of exports which as early as 1974 dramatically rose to some US$5 billion. A second channel involved capital inflows: direct loans, purchases of public and private bonds and subscriptions to Japanese Government and corporate bonds issued overseas. Some US$750 million worth of funds used this second channel. A third channel was made up of the London branches of Japanese commercial banks that accepted oil dollar deposits-and oil dollars recycled through American and European banks to Japanese banks. An estimate of the former was that a sum between US$1.5 billion to US$2.0 billion in deposits was outstanding in October 1974 while some US$8 billion was raised in nine months of 197 4 through secondary recycling. Bilateral aid commitments to developing countries was noted 82

t be a third of total aid extended by OPEC countries and this

~oportion appeared to be on the rise. In 1975 OPEC assistance rose fo US$9 billion from US$7 billion in 1974 (US$2.6 billion in 1975 being channelled to the IMF oil facility which was both used by developed and developing countries). This assistance came to about 5% of GNP and 9% of oil exports of OPEC countries in 1975. With expectation of a diminution of surpluses, it seems to be unrealistic to expect substantial rises in these figures in the coming years. Multilateral commitments to international institutions like the world Bank have increased. The other source of funding for the deficits of LDCs is the private sector, where earlier, serious questions were raised on how large a role might by played by the private banks with the instability of OPEC deposits and the advisability of lending for large balance of payments deficits. The volatility of OPEC deposits also proved to be a myth and, while some banks failed, the appraisal of credit risks was improved, lending terms were gradually tightened and in 1975, oil-importing LDCs were able to increase their borrowings substantially. The credit worthiness of LDCs also improved by enlarged official financing facilities. Lending on private banks to LDCs has continued strongly but the old questions on propriety are being resurrected. Concern has been expressed on the role of banks financing LDCs and the IMF has been prominently mentioned to provide some form of support for international bank lending to LDCs. However, the trend clearly seems to be for a greater IMF role in balance of payments financing. Under Witteveen 11, fourteen rich oilexporting and industrial countries have put up US$10 billion for the new facility. Nearly half the money will come from OPEC with US$2.5 billion contributed by Saudi Arabia alone and the OPEC countries are demanding that the money should be lent to developing countries while the rich industrial nations who have a strong voice in IMF decisions want to do more for some European countries, among these Denmark, Spain and Turkey. The EEC borrowing facility envisages borrowing by the EEC up to US$3 billion against the guarantee of all members for relending to individual EEC countries. Borrowing costs are expected to be just under market rates like Witteveen 11 but it was proposed that the EEC borrow from any source and not from oil producers alone. The Kissinger proposal envisaged recycling of up to US$25 83

billion between oil-consuming countries, not from oil exports to consumers. A condition to borrow would have required an undertaking to reduce oil consumption in line with the American policy of trying to force oil prices down. The antioil cartel bias of the proposal seems to have pruned down the number of possible adherents, no country being seriously willing to antagonize OPEC tor obvious reasons. Finally, the proposal tor payments financing through use of the IMF ordinary facilities would essentially rely on financing of the deficits by surplus countries rather than only the oil-exporting ones. This would call for a substantial increase in quotas, particularly those of the oil-exporting countries and would threaten to cut the U.S.'s 20% quota which allows it veto rights. Thus, this proposal would appear unfeasible. OPEC States Attitudes to Recycling and the U.S.

The three main policy areas that OPEC countries have delineated involve development of their own economies and making soft loans to deficit Arab and other developing countries. The former has been pursued with extraordinary vigour and the latter has had less success, more efforts being devoted to using the multilateral channels to aid the other developing countries. The recycling is mainly viewed by the OPEC states as a flow of capital from the OPEC countries with a surplus to the industrial countries to correct the temporary imbalances in international payments and fund the loss of liquidity of U.S., European and Japanese industry. In addition, much was made earlier of the "determination of OPEC countries to be masters of their own destiny" and the creation of several funds and institutions involved in international finance. Dialogue in 1975 between the European finance ministers and the U.S. executive appeared to indicate U.S. unwillingness to see OPEC states gain the initiative in the world financial community. At one point, the Arab states felt that the undesirable attitude being flaunted was that OPEC countries "owed a moral debt to the Western countries and to the world at large, and that consequently, recycling is the right of oil consumers and the obligation for the oil producers." The U.S. unwillingness to accept OPEC states as sovereign bodies or financial leaders was considered not only a serious barrier to order and confidence (what with the "war noises" and threats) but also made the OPEC states more likely to snun co-

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operation over recycling and even demand compensation for inflation and currency risks and increase oil revenues. The latest moves by the Carter Administration in the U.S. calling any projected increase in oil prices as "unjustifiable" at this time and laying full responsibility in the OPEC states for any new recessions and worsening of deficits of LDCs that may be triggered off is no longer taken seriously. What is more a reality is that oil prices will go up and the only hope of the developing world is that the magnitude of the increase is not as great as would require adjustment if the same magnitude as those in the earlier years. With the very creditable responsibility that the Arab oil states have demonstrated in the past in avoiding currency upheavals and volatile money flows and in the more than generous aid-giving demonstrating their concern for LDCs, it can be expected that the price rises will be held down as far as possible. Other Possibilities

Several other possibilities exist for more direct assistance by OPEC countries to the developing countries, particularly the nonoildeveloping countries in the Southeast Asian region. Being developing countries, their industries are not geared to produce the capital goods needed by the OPEC countries in building up their industrial capacity. But even now they have need for construction materials such as cement, wood, and plywood and they might perhaps give special preference to Asian developing countries when purchases are made. Another major avenue for recycling of petrodollars to developing countries is in the form of construction contract awards. lt is well known that Korean construction companies have been winning large contract awards. An example is Seoul's Hyundai Construction Corporation which has won a US$944 million contract to expand a port in Jubail. Other countries, including the Philippines, have similarly been beneficiaries: Pakistan National Construction Company won a US$166 million contract for a Saudi Arabian airport; Philippine Contractors have won housing and port construction/operation projects; fifteen Greek contractors have won some US$4 billion in contracts; Yugoslav construction compo.nies have won a contract to build a US$190 million dam in Iraq. Yet, the biggest contracts are still going to the Western nations although these could very well be handled by Asian contractors or even consortia of Asian contractors that

85

might be set up for the purpose. The award to Bechtel by Saudi Arabia of a US$9 billion contract for the construction of a huge industrial city at Jubail on the Arabian Gulf is an example. Going beyond the construction period, there will be quite a number of employment opportunities arising from the countless industries being set up, in petrochemicals, steel cement and other industries. lt has always been recognized that the richest OPEC countries, Saudi Arabia and Libya included, have small populations who have yet to gain industrial operations skills. Southeast Asia, on the other hand, is generously endowed with a highly qualified industrial labour force which can be tapped to provide the assistance to man these plants, at cheap enough costs, until such time as the Saudis and Libyans can themselves take over. The same could be done in the social services, for example, health care, education, administrative fields where ample Asian expertise exists. More along the lines of complementation there might be joint venture schemes with capacity set up in the developing countries. The petrochemical industry harbours a host of possibilities. Many Asian nations continue to think about setting up capacity in basic petrochemical operations, that is, in the production of the building blocks of the industry, in ethylene crackers and the like. With the tremendous investments now being made in petrochemical capacity in the OPEC countries, it would seem natural to expect that prices would be forced down when these new capacities come onstream in the next few years. lt can be expected that protectionist interests in the Western industrial countries, even as they are doing now, try to keep this production off their markets by tariffs and quotas or other devices. Thus, a lot of this production would be channelled to the developing countries to concentrate on raising capacity on the downstream side, in joint ventures with any interested OPEC country which could provide the capital and assure supplies of low cost petrochemical-building block raw materials. Yet other possibilities would involve projects where large tracts of land in the developing countries might be devoted to the growing of the OPEC's food requirements which, at the moment, is almost fully imported. The food produced might be swapped for oil, fertilizer or petrochemical products, alleviating the balance of p~y­ ments deficits of the Southeast Asian developing nations. While it would seem that these schemes would offer much better returns and be less inflation-eroded than investment in

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financial assets, lack of expertise of the Arab countries in project appraisal is perhaps limiting the take-up of these opportunities. This woutd certainly indicate that such multilateral institutions as the World Bank and the Asian Development Bank can contribute much by initiating more eo-financing or packaging schemes as would allow more joint venture arrangements. Greater success here would effectively lessen the magnitude of deficits of the LDCs and the necessity for their borrowing from the IMF or private sources to finance these deficits.

Summary The petrodollars generated by changes in oil prices since 1973 have not irreparably damaged the world economy or its financial system as earlier feared. lt is quite true that adjustments had to be made with a slowing down of world production as the higher prices and deficits led to moves for greater belt-tightening. Most industrial countries, however, found this only a temporary condition as orders for industrial plant, construction contracts and for other building and equipping activity from the OPEC states increased their exports to the OPEC countries. This was tempered, however, by lower domestic demand arising from the higher prices and moves by monetary authorities to clamp down on inflation. One estimate was that the cost to the U.S. of the adjustment to the higher oil prices was three million unemployed, US$60 billion in real GNP and more than US$80 billion in real personal income. They may be exaggerated estimates but, certainly, the albeit temporary recessionary tendencies generated in these industrial countries has added more difficulties to the lot of the developing countries whose exports were curtailed and whose imports, mainly oil, increased in value. No one can categorically say whether oil supplies will be fully exhausted by the turn of the century. Oil continues to be found in the Middle East and elsewhere in the world. But, despite these new finds, the reality is that present Arab oil is still much cheaper than alternative sources of energy. As long as OPEC oil is available, it can be assumed that petrodollar surpluses will continue to accumulate. The Arab OPEC countries have openly warned that oil will be priced to keep ahead of inflation. These countries also feel that it is to their interest to retain their oil resources as long as possible, judiciously utilizing it

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until the industrial economies they are building come into being. Thus, production cutbacks coupled with higher prices would seem likely for the years ahead. The continued upsurge of demand and the relative lack of significant success in energy-conserving measures add weight to these expectations. The surpluses will continue to be tempered by high imports of capital goods as the industrial base is being established. But sooner or later, perhaps sooner than later, the growth in industrial capacity will taper off, with new opportunities for investment declining, manpower constraints rearing up and, even perhaps, difficulties of selling industrial products to the present industrial countries. Expenditure on armaments will perhaps continue to be high, no Middle East peace formula having been devised which is acceptable to all. While greater use of Arab institutions is foreseen, domestic developments will be hampered by the lack of expertise in these for dispensing credits to developing countries for economic development projects. The assistance of the international lending agencies like the World Bank and the Asian Development Bank would seem to be a necessary ingredient here. The role of private institutions in the Euromarkets as channels for recycling petrodollars has perhaps been more efficient than was generally expected. Flows were handled in a very creditable manner, notwithstanding warnings on the need for prudence considering low capital bases. The expected volatility of oil money never materialized as to cause major disruptions in flows and uncertainties. In fact, banks have become more emboldened to embark on greater lending to cover deficits of the LDCs and again fears are being expressed on the soundness of such credits and the IMF is increasingly being mentioned as the possible arbiter or policeman for such credits, lending to be conditioned on its saying so and to the borrowing country's acceptance of its strictures. These belt-tightening meesures will make the IMF less popular. One can also detect an increasing trend towards multilateralizing rather than bilateralizing of credits from OPEC sources. There seems to be a greater tendency towards giving the IMF and the international lending institutions more funds rather than trying to dispense these through the Arab banks or directly lend these to developing countries. The Arab participation in the new IMF oil facility, in the International Fund for Agriculture Development (IF AD) and other multilateral credits indicates this trend. This will to some extent relieve the private banks from carrying the major

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burden of recycling the surplus petrodollars. Many of the channels originally conceived for handling the recycling of petrodollars have not been used for a variety of reasons. The greatest losers have been the nonoil-developing countries who have now accumulated staggering external debt burdens and whose prospects for repaying this seem much in doubt owing to sluggishness in demand for their exports due to the recessions that have characterized the markets of their industrial trading partners. lt should be to the alleviation of these countries that OPEC states can perhaps turn more of their attention in the future. More direct assistance can be immediately extended by giving Asian developing countries preference in the supply of construction materials, in the supply of labour and in the awarding of construction contracts. Similarly, preference can be given in the hiring of labour to man the industrial plants and the social services now being established in the OPEC states. The potential for more joint venture schemes are very good and can be enhanced by considering ventures that would take advantage of the natural complementation inherent in linking an agriculturally barren, labour deficient, but capital surplus Gulf State with a capital deficient, labour surplus, and agriculturally abundant Asian state. Aside from merely importing oil, the developing Asian country would undertake to import its fertilizer and petrochemical feedstock requirements in return for an assured market for its agricultural and industrial products. The last few years have clearly underscored the fact that our fate as developing nations is inextricably interrelated with the use that we make of the energy resources available to us. We have passed through a period of dependence and independence in our political life as a nation and are now in the transitional period of economic interdependence. I suggest that if we wish to realize our aspirations of a modern industrial society for our peoples and our countries, then the next period should find us locked in mutual embrace.

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THE ASIAN DOLLAR MARKET AND ITS ROLE IN ASIAN DEVELOPMENT

S. Dhanabalan

In the late 1960s, the idea of pooling together the U.S. dollar and other convertible currency holdings of residents in Asia along the lines of the Eurodollar market was conceived. In October 1968, the Asian Dollar market, centred in Singapore, was established as an offshoot of the European counterpart. Since its initiation by the Bank of America to fund the latter's corporate financing activities in this region, the Asian Dollar market has developed and expanded substantially. From a gross market size of US$30.5 million in 1968, the market had total assets amounting to US$18.9 billion at the end of August 1977. The number of units (known as Asian Currency Units) operating in the market has also increased significantly from nineteen in 1971 to seventyfive presently. In the initial years of its operations, the Asian Dollar market was essentially short term in nature. In 1970, for instance, about 99% of the market's total assets/liabilities were below a year in maturity. Since 1971, with the development of the Asian Dollar Bond market and loan syndication activities, longer term financing has increasingly been raised. The development of the Asian Dollar market into a full-fledged international capital market has enabled it to contribute and to continue contributing to the financial and economic development in Singapore and in other countries in this region. By virtue of its close proximity to Asian countries, the market has assumed a significant role in the development of the Asian region. Importance of the Asian Dollar Market in the Asian Context

Like the Eurodollar market, the Asian Dollar market has a specific

function to play in a world where international capital disequilibrium is rife. By providing a channel for surplus countries to lend their surpluses to deficit countries, the Asian Dollar market can contribute towards a more even international allocation of capital resources. In the Asian context, this redistributory role is further enhanced by a number of factors. The Asian region as a whole is regarded as one with high growth potential. This, in turn, necessitates large flows of funds both within and from outside the region. The availability of an international capital market within the region itself will facilitate the flow of funds from surplus sources to end-users within Asia. The need for such a market is further emphasized by the absence of sufficiently developed domestic capital markets of adequate depth and breadth in most Asian countries. The establishment and subsequent growth of the Asian Dollar market can also be considered timely in view of the present stage of development in most Asian countries. The process of diversifying and broadening their economic base through industrialization requires large capital investment which cannot be provided entirely by domestic sources. There is, in recent years, a slowdown in direct foreign investment which, in countries like Singapore, have played a catalytic role in mobilizing domestic entrepreneurs and promoting industrialization and economic development. Although the Eurodollar market is accessible to some developing Asian countries such as Malaysia, the Philippines, South Korea and Taiwan, in most cases the borrowers from even these countries are either the giant transnational concerns operating branches and subsidiaries in Asia or the governments of these Asian countries themselves. Asian businesses, on the other hand, are usually relatively unknown outside the region. In view of this, they stand to benefit from the existence and proximity of an alternative source of funds in the form of the Asian Dollar market. The establishment of the Asian Dollar market and the growth of offshore banking have also attracted many foreign banks to set up operations in this region. The presence of these banks, in turn, has contributed to upgrading the financial and managerial expertise of local businesses, thereby enhancing their accessibility to international capital markets. Besides, these foreign banks, by virtue of their presence here, are in a better position to assess the credit standing of local businesses. As such, they can be instrumental as market intermediaries for local private businesses tapping funds

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from foreign financial markets. Within Asia itself, the Asian Dollar market can also be instrumental in promoting greater financial integration am-ong the countries, in particular between the resource-rich but capitaldeficient countries of Southeast Asia and the cash-rich West Asian oil countries. The oil crisis and the explosion in petroleum prices have thus enhanced the importance of the Asian Dollar market. By providing a conduit for the recycling of oil money from West to East and Southeast Asia, the Asian Dollar market can contribute towards further economic integration and economic development among Asian countries. The existence of an international capital market within Asia itself is also significant from the foreign investors' point of view. In the economic development of most Asian countries, there is a heavy reliance on foreign capital investment. Although there has been some slowdown in foreign direct investments recently, Asian countries will have to continue to attract foreign investors who bring with them not only capital resources, but sophisticated technology and managerial know-how. The growth of the Asian Dollar market and of international banking in financial centres like Singapore and Hong Kong will contribute to generating the confidence that is necessary to encourage foreign investments. The Asian Dollar Market and Asian Development

Despite a short history of only nine years, the Asian Dollar market has made its impact on the financial and economic scene of many Asian countries. Singapore itself exemplifies the benefits that have emanated from the development of this market. The financial development of Singapore was spearheaded by the establishment of the Asian Dollar market in 1968. Since then, Singapore has grown in financial sophistication and acquired advanced financial techniques and expertise in international banking through the influx of foreign banks and the development of offshore banking. Today, Singapore has grown into an important financial centre, with which banks from other centres such as Tokyo, Hong Kong, Bahrain, Hamburg and London, deal. Commercial banks have thus moved into foreign exchange transactions in a big way besides performing the traditional exchange transactions for their clients. First started in 1971, merchant banks have intensified their activities in domestic and regional medium and long term corporate

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and development financing, underwriting, portfolio management and consultancy services. The concept of offshore banking was formalized in April 1973, and, since then, the number of offshore banks has increased to twenty-five. The growth of other financial institutions is summarized in Table 1. New financial techniques either introduced or developed further in the Singapore market include such specialized financial services as factciring, leasing, discounting, money-broking and export credit insurance. Table 1 Growth of Financial Institutions in Singapore

Commercial banks Local Foreign Full-licensed Restricted Offshore Representative offices of foreign banks Merchant banks Asian Currency Units Finance companies Discount houses International money brokers

1971

1976

As at September 1977

42 11 31 36 6

72 13 59 37 12 23 39 22 69 34* 4 5

75 13 62 37 13 25 42 23 75 34 4 5

19 2 19 36

* This number was reduced to thirty-four with the merger ot three finance companies in 1976.

The existence of the Asian Dollar market centre in Singapore has also produced some spin-off effects on other Asian cities, in particular Hong Kong and Manila. While Hong Kong is fairly well established as a major financial centre both internationally and in Asia, Manila has also entered into international finance with the commencement of offshore banking there recently. However, there is much scope for financial development in many of the other countries of East and Southeast Asia. In evaluating the extent to which the Asian Dollar market has contributed to economic development in Asian countries, one encounters difficulties in quantifying the actual size of the Asian Dollar market and the total volume of credit raised through the market for financing Asian development. In the absence of a central body such as the Bank for International Settlements 1 to compile 1

This organization monitors operations in the Eurodollar market based on returns of banks in the eight European reporting centres.

93

statistics for the Asian Dollar market on an Asia-wide basis, the only available official statistics on the Asian Dollar market are those published by the Monetary Authority of Singapore (MAS). These statistics, however, reflect only the operations of Asian Currency Units in Singapore. One alternative will be to look at the volume of loans syndicated through the Asian Dollar market and the type of projects financed. Here again, one is handicapped by the lack of comprehensive data on Asian dollar syndicated loans. An additional problem arises when one tries to draw the line between a loan syndicated through the Asian Dollar market and one raised through the Eurodollar market. To circumvent this ambiguity, specific loans will be cited and aggregate analysis will be kept to a minimum. The only area where comprehensive and up-to-date data is available is in the long term end of the market, that is, the Asian Dollar Bond market. The rapid and sustained expansion of the Asian Dollar market in Singapore is reflected in statistics on its gross market size in Table 2. Growth in this market is comparable to that of its European counterpart. The Eurodollar market reached an estimated net size of US$14.5 billion in 1966, nine years after its formation (see Table 3). Within the same time span, the market in Asia also achieved comparable expansion, with a gross market size of US$18.9 billion at the end of August 1977. 2 In the initial years of its operations, the bulk of funds collected in the Asian Dollar market found its way to the Eurodollar market. Since 1970, however, the pool of Asian dollars has been mainly utilized within the Asian region. In 1976, for instance, about 80% of the funds were utilized in Asia, in particular in the ASEAN countries, Hong Kong and Japan. On the other hand, more funds are being channelled from outside the Asian region. From a net supplier of funds to countries outside the region, the Asian Dollar market has, since 1973, been a net taker of funds from Europe, particularly from the London Eurodollar market, and to a lesser extent, from the U.S. At the end of 1976, only 20% of the market's funds were from Asian sources. Like the Eurodollar market, the Asian Dollar market continues to be predominantly interbank in nature. Since 1971, more funds have been mobilized and channelled to end-users. While loans to 2

At the end of 1976, the net size of the Asian Dollar market was US$14.4 billion, equi· valent to about 6% of the estimated net size of the Eurocurrency market.

94

Table 2 The Asian Dollar Market: Assets & Liabilities of Asian Currency Units (in US$ million) Liabilities

Assets Total Assets! Liabilities

End of Period lnterbank funds Loans to non banks

1968 1969 1970 1971 1972 1973 1974 1975 11976 Aug 1977

1.4 0.9 13.9 188.8 600.9 1,214.3 2,629.4 3,303.4 4,048.3 4,400.1

Total

29.0 120.5 370.2 850.8 2,331.1 4,961.9 7,528.0 9,098.5 12,951.4 14,095.9

Other Outside In Singapore Singapore• Assets

n.a. n.a. 13.1 38.5 99.4 261.6 223.0

n.a. n.a. 357.1 812.3 2,231.7 4,700.3 7,305.0

270.' 414.4 407.1

8,828.4 12,537.0

_l

0.1 1.6 5.7 23.2 44.1 101.0 199.9 195.5 354.4

30.5 123.0 389.8 1,062.8 2,976.1 6,277.2 10,357.3 12,597.4 17,354.1

J

~3,688.8 1426~ ~8,~22~6-

Deposits) of non banks

lnterbank funds Total

12.6 17.8 23.7 97.9 141.0 243.7 811.2 237.9 2,550.1 398.7 5,249.3 912.8 1,614.2 8,531.4 2,067.7 10,294.3 1,960.3 t5,067.2 1,977.6 16,574.4

Outside In Singapore Singapore•

n.a. n.a. 5.7 56.4 145.0 405.6 675.6 584.0 799.2 1,297.0

n.a. n.a. 135.3 754.8 2,405.1 4,843.7 7,855.8 9,710.3 14,268.0 15,277.4

Other Liabilities

0.1 1.4 5.1 13.7 27.3 115.1 211.7 235.4 326.6 370.6

'----------

Note: Asian Currency Unit (ACU) is a separate accounting unit of banks and other financial institutions given approval to transact in the Asian Dollar market. n.a. not available • includes inter-ACU tran5actions.

Table 3 Estimated Net Size of the Eurodollar Market Year

US$ billion

Annual Growth(%)

1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976

9.0 11.5 14.5 19.0 30.0 44.0 57.0 71.0 91.0 132.0 177.0 205.0 247.0

27.8 26.1 31.0 57.9 46.7 29.5 24.6 28.2 45.1 34.1 15.8 20.5

SOURCE: The Bank for International Settlements. Annual Report.

nonbank customers constituted only 3.6% of total assets in 1970, today they account for over 23%. lt is also interesting to note that, since 1972, borrowings by nonbank customers have exceeded deposits made by them. In the absence of more detailed statistics, it is not possible to identify the end-users of these funds. Nevertheless, the fact is that more funds are being utilized within Asia and more credit is being extended to end-users, whether for short term trade financing'or for longer term development financing. A look at some of the loans syndicated through the Asian Dollar market may provide some idea of the extent and range of Asian projects that have been or are being financed through the market. The first Asian dollar syndicated loan of US$10 million was issued on 6 December 1971 for a four-year period to the Private Investment Company of Asia whose main objective is in package deals in loans and equity investment in Asian developing countries. Since then, a number of Asian dollar consortium loans have been arranged from Singapore and from other Asian financial centres, particularly Hong Kong. In recent years, Singapore Asian Currency Units have been active in participating in loan syndications for governments and large corporations of countries like Indonesia, Philippines, Malaysia, Thailand, Korea, Taiwan and even Iran. The chief borrowers from the Asian dollar syndicated loan market are governments of the area which tap more than 70% of Asian dollar loans. The Government of Indonesia, for instance, has 96

borrowed heavily mainly to refinance the state oil company, pertamina. The Hong Kong Government has borrowed to finance the Colony's Mass Transit Railways project, while the Philippines have borrowed either to finance capital projects or to refinance balance of payment deficits. In 1976, a US$50 million loan was extended to the Singapore Government shipping line, Neptune Orient Lines (NOL) Limited. The Taiwanese Directorate General of Telecommunications has also been granted a seven-year US$24 million syndicated loan for purchasing telecommunications equipment from the U.S. in March this year. In January this year, the Asian dollar syndicated loan market was extended to countries in West Asia when a US$225 million six-year loan was raised to finance a massive aluminium-smelting project in the Emirate of Dubai. Besides public sector projects, a number of large private industrial corporations in Asian countries have been given mediumterm internationally syndicated credits from the Asian Dollar market. The second Asian dollar syndicated loan of US$27.5 million, for example, was arranged for Brunei LNG Limited in May 1972 for financing the construction of a natural gas liquefaction plant at Lumut in Brunei. In July 1973, a consortium of ten top banks extended a eight-year US$25 million Asian dollar loan to a giant Filipino newsprint plant, which is also the first newsprint plant in Southeast Asia, the Paper Industries Corporation of the Philippines. Examples of Asian dollar credit extended to Singapore companies include the six-year US$23 million loan for Poseidon Marine Transport for purchasing two bulk carriers in 1975, and the US$6 million syndicated loan for six years to Wistaria Shipping Company in 1976 for financing the purchase of two Freedom Class vessels. A number of Korean companies have also been granted Asian dollar consortium loans, such as the Pohang Iron and Steel Corporation which raised a seven-year US$20 million syndicated loan in September 1976 tor the development of South Korea's only integrated steel complex. In April this year, Hanyung Industrial Company Limited, a leading Korean manufacturer of heavy electrical equipment, was granted a seven-year US$25 million Asian dollar consortium loan for financing the construction of the modern heavy electrical plant at the Changwon industrial complex. With the setting up of more Korean bar.k representative offices in Singapore, more Korean companies are expected to tap the Asian Dollar market. The above examples are indicative of the range of project 97

rece1v1ng medium term financing from the Asian Dollar market. Longer term financing has been facilitated by the establishment of the Asian Dollar Bond market. Since the first Asian dollar bond issue of US$10 million by the Development Bank of Singapore (DBS) Limited in December 1971, a total of twenty-five issues have been floated in the Asian Dollar Bond market raising an aggregate amount of approximately US$679 million (see Table 4). Issuers of Table 4 Asian Dollar Bonds Amount Raised (US$m}

No of Issues

10 60 70

1 2

1971 1972 1973 1974 1975 1976 1977 (to date)

3

47 267 225

3 9 7

------

~---

679

25

Total

==---=

these bonds include the Singapore Government with three issues to its credits: Singapore Airlines; shipping companies such as Keppel Shipyard, Y.S. Lines (Cayman); banks, namely, the DBS, United Overseas Bank, Bank of Tokyo, Industrial Bank of Japan, the Korean Development Bank, the Long Term Credit Bank of Japan and Credit Lyonnais; and a couple of Japanese industries. Table 5 shows the distribution of these bond issues by original maturity. The average Table 5 Asian Dollar Bonds by Original Maturity Onginal Maturity (in years)

No of Issues

5 6 7 9 10 15

6 3 7 1 3 5

25

98

maturity is slightly over eight years with five issues of fifteen-year duration. Through the development of the medium and long term end of the Asian Dollar market, Asian dollar loans are being made for largescale capital investment in a wide range of industries including oil exploration, mass transit, shipping, mining, steel, chemicals, electricity and automobiles. These industries have direct contribution to Asian industrialization and economic development. The Asian Dollar market also provides a source of finance for the many large TNCs operating in Asia. These giant concerns, in turn, contribute to Asian development in terms of employment creation, technology transfer, export promotion and development of managerial know-how. 1t is interesting to examine the relative role of the Asian Dollar market and that of the Eurodollar market in financing Asian countries. Table 6 shows the annual increase in loans to nonbank customers in the Singapore-based Asian Dollar market compared to the amount of publicized offshore currency credits 3 extended to Asian countries from 1973 to the first quarter of 1977. Although the statistics on borrowings by nonbank customers in the Asian Dollar market are not complete (since they only cover Singapore), it is Table 6 Relative Size of Borrowings by Asian Countries in the Asian Dollar Market and the Eurodollar Market (in US$ million)

Period

1973 1974 1975 1976 1st quarter 1977

Loans extended to non bank customers in the Singapore Asian Dollar market

Publicized Offshore currency credits· to Asian countries

613.4 1,415.1 674.0 744.9

1,869.6 2,692.3 4,488.6 5.181.2

71.1

1,189.7

SOURCE: 1) MAS, Quarterly Bulletin, 1st Quarter 1977 2) World Bank. Borrowing in International Capital Markets. • The term used in the World Bank report is "Eurocurrency credits· . This refers to all offshore currency credits including Asian dollar syndicated loans. 3

The term used in the World Bank report is "Eurocurrency credits". This refers to all offshore currency credits including Asian dollar syndicated loans.

99

evident that Asian countries are still largely dependent on the Eurodollar market as a source of financing their development projects. The picture is the same when we look at the bond market. To date, the total amount of loans raised through the Asian Dollar Bond market is only US$679 million. This is a far cry from the credit raised annually through bond issues in the international capital markets for Asian countries as a whole (see Table 7). In the first quarter of 1977 alone, about US$653 million was raised through bond issues in the international capital markets for Asian countries. There is thus ample scope for the Asian Dollar market to play a more significant role in financing the development of Asian countries, although, of course, due consideration must be given to its short history of operation. There are several problems involved in financing the development of Asian countries or, for that matter, any developing country. The first pertains to the problem of distribution. Are the neediest countries receiving their share of financing? This problem is complicated by the fact that the neediest countries are, more often than not, also the least attractive from the lenders' viewpoint. The second question relates to the purpose to which loans raised in the international capital markets are applied. In many countries, loans have been made for purely export-financing purposes or for refinancing existing debts as in the case of Indonesia and the Philippines. While export or trade financing cannot be considered undesirable from the development point of view, for developing countries, it is important that loans be properly apportioned and utilized for more developmental purposes. With the extension of more credit through the international capital markets, the problem of debt service inevitably arises. While some countries have been deprived of their share of credit because of their poor financial standing, there are others such as the Philippines and South Korea which are borrowing more and more. These two countries are among the leading Asian borrowers in the international capital markets. Of the US$3.35 billion offshore credits made in 1976 to East and Southeast Asian countries, US$1.90 billion or 56.7% went to these two countries (see Table 7). Measures to improve the Potential of the Asian Dollar Market in Financing Asian Development

Over the past nine years, the Asian Dollar market has played a significant role in Asian development. Much more, however, can be 100

TABLE 7 Borrowings by Asian Countries in International Capital Markets1 (in US$ million) 1974

1975

Publicized

Bonds

East & Southeast Asia Indonesia Malaysia Philippines Singapore Thailand Hong Kong Japan South Korea Taiwan Pakistan Subtotal

17.2

offshore currency* credits

Total

Bonds

Publicized offshore currency •

367.5 140.0 883.0

367.5 140.0 900.2

9.7

97

81.1 327.9 299.5 205.0

131.1 576 4 318.5 225.0

17.5

1,6075 425.0 253.1

354.7

2,313.7

Bonds

5.0 533.4 350.8 325.7 142.7 75 3.650.7

557 9 1,976.6 325.7 142.7 7.5 5.330.5

2.668.4

245 0 500 0

250.1

22 5 64 1 63 837 9

245.0 500 0 245.3 27 3 64 1 63 1 088.0

1 929 9

4.488 6

6.418 5

24 5 1.625 8

1.679 8

offshore currency •

Publicized Total

Bonds

credits

1.625.0 425.0 253.1 12.0 5.0

-

1s1 Quarter 1977

Publicized

Total

cred1ts

12.0

50.0 248.5 19.0 20.0

1976

549.3 203.1 870.1

Total

cred1ts

100.0

549.3 213.3 1.237.3 175.1 100.0

2.000.1 59 1

85 0 292 8 1,034 5 214.5

85.0 2.292.9 1.093.6 214.5

546.5 25 0

2.611 7

3.349 3

5,961 0

622.9

30 0

1,431.9

1.461 9

30.0

10.2 367.2 175.1

offshore

currency·

31.6 19.8

62.3

100 0 250.1 19 8 82 3

8.0 16.0 200.9 254.0

8.0 562.5 225 9 254 0

100.0 218 5

859.7

1.482 6

West AsJa

Iran Iraq Israel Lebanon Oman UAE Subtotal Total As1a

114.5

114.5

99.1 14.0 151.0 378.6

559 7 99.1 14.0 151.0 938 3

559.7

559.7 914.4

2,692 3

3.606 7

245 3 48

-

257.7

330 0

360.0

257.7

287.7

400.0 1 831.9

400 0 2.119 6

30.0

2.899 4

5,181.2

8.080.6

652.9

330.0 1.189.7

360 0 1.842 6

The term used in the World Bank report is "Eurocurrency credits". This refers to all offshore currency credits including Asian dollar syndicated loans. Table shows the total amount of borrowings during each period. i.e .. during the year or quarter. SOURCE: World Bank, Borrowing in International Capital Markets.

achieved with greater international capital integration and institutional improvements. As a region with high growth potential, Asian countries with vast investment opportunities will continue to be in need of capital. The proposed five ASEAN projects and other national and largescale regional projects that may be planned in Asia with all require sizeable capital financing. To match the high demand for capital, there must be an increasing supply of funds from outside Asia and a greater mobilization of funds within Asia itself. In the case of the latter, I am referring specifically to the role of petrodollars. Since the oil crisis towards the end of 1973, the oil-exporting countries in West Asia have accumulated vast surpluses. Over the past three years, the bulk of these funds has flowed to the Western countries. According to the U.S. Treasury Department's estimates recently, OPEC countries have amassed financial surpluses of up to US$145 billion in four years. Out of this, about two-thirds have been channelled to the U.S., the Eurodollar market and other developed countries, and only US$16 billion or 11% have found their way to the LDCs. Certainly there is a greater need for funds in the capitaldeficient countries of Asia, not to mention the possibility of a higher return on capital. The added liquidity which comes from the direct placement of Arab funds in the Asian Dollar market will represent an additional source of financing for intra-Asian trade. Besides, the direct placement of Arab funds with banks in this region will demonstrate to the world the confidence that the oilexporting countries of West Asia have in their fellow counterparts in Asia. Co-operation in this field may have its beneficial effects on the richer countries of the West in terms of encouraging them to invest in the region. One added benefit of placing funds with banks here may be that these institutions will then go out actively to solicit for loans in the countries represented here which otherwise they may not. Countries in West Asia can also avail themselves of Asian dollar funds for financing infrastructural development as in the case of the syndicated loan extended to the Emirate of Dubai early this year. With the increased opportunities tor contract works in West Asian countries which have launched massive development programmes, there will be a need for financing along Export-Import Bank of the U.S. (Eximbank) lines for West Asian contracts undertaken by entrepreneurs in East Asia. Speaking at the Financial Times Conference on "Asian Business in 1976" in October 1975, Moustapha Sakkat, the Deputy

102

General Manager of the Union de Banque Arabes et Nippones (UBAN, Arab Japanese Finance Limited) estimated short term deposits made by Arab countries in Asia at US$400 million with around US$100 million on a roll-over basis. The bulk of these funds is in Singapore and Hong Kong. There are also indirect injections of funds by European, American and Japanese banks using deposits originating from the Middle East to finance projects in Asia. In addition, substantial funds flow into this region through direct government-to-government aid or through institutions like the OPEC Special Fund to aid the Third World, the Islamic Development Bank or the World Bank and the Asian Development Bank (ADB). Since the beginning of 1976, there has been a greater inflow of Arab funds into the Asian Dollar market. Substantial amounts have been offered for placement in Singapore. Nevertheless, a greater inflow of oil funds has still to be encouraged. In view of the short term nature of Arab funds so far, there is a need for longer period deposits and more direct placements with Asian financial institutions. To facilitate and promote the recycling of petrodollars within Asia, there is a need tor the development of more financial centres within the Middle East itself. The growth of Bahrain, Kuwait, and other West Asian cities as international financial centres is a step in this direction. International banks can also play their part by establishing more branches in West Asia to channel oil funds from West Asia to the Asian Dollar market. Daiwa Securities of Japan, tor example, established the international merchant bank, Union Bank S.A.L., in April 1974 with headquarters in Beirut. Recently, the DBS acquired an equity interest in the Arab consortium investment bank, Banque Arabe et lnternationale d'lnvestissement. The establishment of consortium banks between Arabs and financiers in East Asia can also be encouraged. An example of such a consortium bank is the UBAN which was formed in Hong Kong in August 1974 by ten Arab and five Japanese banks with the main aim of acting as a liaison between the Arab world with its growing potentialities and the financing of commercial and industrial activities in the Asian region. To date, there are very few Arab financial institutions represented in East Asian countries except for a handful in Hong Kong, one in Japan, one in Malaysia and one in South Korea. Besides the channelling of more funds from outside Asia and the greater mobilization of funds within the region, the introduction of new financial instruments such as the trade-related Bankers 103

Acceptances and Negotiable Certificates of Deposits (NCDs) in the Asian Dollar market itself will contribute to increasing the resources available in the market. The potential of the Asian Dollar market in financing Asian development can also be enhanced through the possibility of eofinancing with international development agencies such as the ADB, especially for needy countries which do not present themselves as good credit risks to private lenders. To facilitate the access of the LDCs to the Asian Dollar market, the ADB in joint financing with private lenders in the market can, perhaps, consider the possibility of granting these countries preferential terms on Asian dollar funds and guaranteeing bond issues floated by them. Alternatively, the Asian Dollar market can provide a source of funds for the ADB for on-lending to Asian countries for financing development projects. As early as April 1973, Mr. Hon Sui Sen, the Singapore Minister for Finance, offered the facilities of the Asian Dollar market in Singapore to enable the ADB to raise funds for its development financing activities. As an alternative to aid, Asian dollar funds made available in a semiofficial aid form either through eo-financing with international development agencies or on concessionary terms, may be more favourable from the developing countries' viewpoint. Besides its "untied" nature, this form of financing is simpler to administer and provides greater flexibility to the borrowers in view of the availability of different currencies in the market. In the final analysis, the extent to which the resources available in the Asian Dollar market can be drawn upon to promote Asian development depends, to a large degree, on Asian countries themselves. To enable themselves to make better use of Asian dollar funds, Asian countries must aim at promoting an environment of minimal constraints on the operations of the market and of offshore banking. The Singapore Government, for instance, has instituted various measures including exchange control liberalization and the granting of fiscal incentives to create a conducive environment for the growth of the Asian Dollar market and international banking in Singapore. Asian countries which are still operating under stringent exchange control regulations and rigorous institutional framework can perhaps consider policies that would enable them to better use Asian dollar funds in their economic development. The lack of expertise and knowledge of international financial laws also present a problem. Many Asian countries are handicapped in

104

sourcing funds from international capital markets because of inadequate local expe~tise in the legalities of loan syndication and bond issues. There is thus a need for Asian countries to promote the development of sufficient local expertise in the complexities of international financial laws. Conclusion

The Asian Dollar market is part of an international offshore currency market and little distinction can be made between different centres in so far as the pool of investible funds is concerned. However, the presence of offshore currency centres in Singapore and other cities in Asia enables more effective identification of borrowers and needs in Asia. The institutional framework that grows with the establishment of such centres forces the pace of development of a modern financial system in Asia which can fit easily into the international financial system. Thus, the flow of funds for the development of the region is greatly enhanced. The record established to date by the offshore currency market in Asia is promising and augurs well for the future.

105

A COMMENT

Tony Tan Keng Yam

In discussing this broad topic today, I shall merely sketch one or two main points and then pose questions which will, hopefully, lead to further discussion this afternoon. lt is quite clear that the OPEC countries have, since 1973, accumulated very large surpluses, which in theory they can switch from one currency to another, or from one investment medium to another. I do not think that it is possible to put a precise figure on the size of these surpluses but some estimates by the Bank of England place the total at around US$146 billion. Now, out of this US$146 billion, about 44% or US$64 billion were put into safe investments, such as bank deposits, money market placements, deposits in the U.S., in the U.K. and purchase of U.S. and U.K. Government Treasury Bills. Longer term investments accounted for about US$82 billion or 56%. These can be classified as special bilateral arrangements, loans to international agencies, U.S. and U.K. Government securities again, and other investments-property investments, equity investments, etc. The notable point is that at least US$50 billion have been invested in the international foreign currency market. And I myseif cannot see any sign of this trend being reversed. Indeed, the only switch that one can discern from the figures is that of U.S. dollars into sterling in the first half of this year. Now, the wealth of the OPEC countries gives rise to great possibilities but, to my mind, they also give rise to great responsibilities, not only by the OPEC Governments to their citizens but also to the world at large. After all, we live in an interdependent world, and as the OPEC countries build up their own domestic structures they will become increasingly interlinked with the international economic system, and therefore have a greater vested interest in maintaining stability.

one would feel that this pattern of the investment of OPEC surplus funds will continue in the future years. I think that the major part of these funds will continue to be invested in the major industrialized countries. The U.S. will probably receive a major portion. If one looks at the U.S. stock market today-it is standing at its low for a year in contrast to the other world's stock markets-! think that it is not surprising that the managers of OPEC surplus funds should seek investment possibilities in, after all, what is still the world's largest economy. Some of the funds may be placed in, or may be used for, the purchase of gold which, after all, is the classical store of value. I think that it would appear to be quite illogical to exchange petroleum in the ground for gold in vaults. But I am afraid we do not live in a very logical world. And the value of gold as an investment medium, I think, has stood the test of time. As Mr. Dhanabalan has mentioned, the Asian Dollar market is a part of the international foreign currency market and therefore one would see some of the OPEC surpluses coming into this market at some time in the future, if not directly, then perhaps by Europe. Such funds will initially tend to be placed in the interbank market first and then, perhaps, later, in easy negotiable instruments like NCDs. I would like to pose the question as to whether in the future there will be a change in the Asian Dollar market which at the present time is primarily a U.S. dollar market, and whether some of the West Asian currencies would begin to play a more prominent part. One would expect that such a development will occur first in the foreign exchange market before a term market for these funds can develop. Mr. Chairman, there is also one further question which has intrigued me and which deserves some attention. That is, why has so little of the OPEC surpluses been transmitted into long term equity investments in the ASEAN region? After all, the economic potential of ASEAN has been broadcast on many occasions and I shall not inflict on you all a further recital of well-known facts. But it is sufficient to note that the average growth rate of the ASEAN countries, over the last ten years, has been well above the normal mark, by one estimate, above 7%. The reasons for this lack of interest are obviously complex. But it may be that, underlying all of these, there is some uncertainty, fears, concerning the long term future of foreign investment in ASEAN. To dispel these fears, it may be necessary for the ASEAN

107

Governments to give a clear, unequivocal undertaking that the regulations concerning foreign investments will not only be fair but will not be changed without very careful consultation. it is the fusion of the wealth of the OPEC countries and the ASEAN market of over 250 million people that can create viable manufacturing enterprises with great potential benefits. Such a combination, to my mind, will be a irresistible magnet and can draw the best technology from the U.S., Europe and Japan. In addition to the profits from their investments, the OPEC countries may find that the products from these manufacturing enterprises can help in accelerating the development of their own domestic economies. But perhaps such a hope can or will be regarded by many people as being unrealistic and too utopian. I am looking forward to hearing other views on this subject. Thank you.

108

THE DISCUSSION Mr. Hussein Najadi

Mr. Chairman, Dr. Tan and Mr. Dhanabalan have brought up very interesting points which concern us in West Asia. I would like to get to some of the practical points, to what we can do to reach some of the dreams-some of the valid dreams-Or. Tan, which you have mentioned. 1 will first begin with Mr. Dhanabalan's point of view, which is, there is here an Asian Dollar market which is part and parcel of the Eurodollar market and soon you will be reading about an Arab Dollar market based in Bahrain. Does Singapore-like Bahrain which is now developing-provide the legal tax mechanism to allow the tundings of the borrowing to be carried out more and more in the Asian Dollar market in Singapore? Is there a parallel co-operation between the banking, monetary and industry sector and the taxation sector of Singapore? Or are there conflicts and contradictions? lt is no good to say, we will develop the market because of the interbank borrowing after that. From my readings, Singapore somehow does have a conflicting structure for effectively making loans out of Singapore. Can I have an answer from Mr. Dhanabalan or Dr. Tan? Mr. S. Dhanabalan

Of course there is close eo-relation between the idea of an offshore dollar market and the tax structure. In tact, the whole offshore dollar market started as a result of change in the tax structure whereby offshore dollar deposits are free of tax and interest offshore dollar deposits are not taxed. That is on the funding side. So, deposits can come to Singapore and depositors can receive an interest free of any withholding tax. Now, on the lending side, a number of changes have had to be introduced. The first one was in income tax again. The Singapore banks that lend offshore pay a tax of 10% on the income deriving from such offshore operations, whereas on the onshore operations they will pay the normal 40%. Of course 10% may be said to be high, it should be zero, that is something else. Then other changes have to be introduced relating also to various other forms of taxes-taxes on the loan agreements and so on and these have been waived tor offshore dollar operations. So, there is some coordination between the tax authorities and the monetary

109

authorities. But whether the co-ordination or the concessions should go to the extent of offshore dollar earnings being completely tax-free is another question. I think in some centres (if I am not mistaken, in Bahrain) all offshore dollar !endings do not attract any tax, or income derived from such !endings are not taxed at all. Mr. Hussein Najadi

If you do not mind our continuing this subject, this is to bring out the all-technical problem relating to the development of the Asian Dollar market in Singapore. Mr. Dhanabalan, correct me if I am wrong, you still charge stamp duty on loan agreements? Mr. S. Dhanabalan

Well, this is what I said. On the offshore dollar loans, stamp duties are waived. Mr. Hussein Najadi

The second this is, Dr. Tan, when you have famous loan prospectuses, we see curiously all of these coming out of London or Hong Kong. I was told that these whiz kids of the lawyers are all sitting in London and Hong Kong and they are the only people who can structure such loans. Now, why don't we have our own whiz kids in Singapore? Dr. Tony Tan Keng Yam

If I may add to Mr. Dhanabalan's comments on the taxation side, this is a subject tor which there is always a beginning but no ending. lt will always be a topic of continuing interest to bankers and to the tax people. But I can say that in Singapore we have a continuing dialogue with the Inland Revenue Department regarding not only tax, not only what the tax principle should be, but more importantly, how it should be implemented. I think this is where a lot of bankers feel a sense of unhappiness because the way in which the income tax people interpret the tax regulations is sometimes a little bit different from the way in which these bankers would like to interpret it. To overcome this problem, the bankers in Singapore are arranging next year with the Income Tax Department a series of lectures. We feel, from the banking side, that one of the reasons difficulties have arisen is because the Income Tax Depart-

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ment do not know well the very detailed underlying banking principles involving how loans are made and what expenses are incurred. Regarding the other point made by Hussein Najadi on the drafting of the prospectus and so on, the Association of Banks has in fact recommended to the government that we should be more liberal in allowing an international firm of lawyers to set up office here, so that our local firms will be able to develop expertise. I am told that our view is often not shared by the Law Society in Singapore but we feel that the only way we can upgrade legal expertise in Singapore, to the extent that we have people in Singa· pore who can draft offshore loan documents which are complex by nature, is to have a pool of experienced people. Also, we would like to see, perhaps, a further refinement of the infrastructure. For example, there must be facilities to enable such prospectuses to be printed quickly. These are the little points which we feel still need to be developed in Singapore. But I can promise you that one of the characteristics of our government is its extreme flexibility and I am sure all of these will be solved in due course. Mr. S. Dhanabalan

Can I just add another point here? There has already been quite a big of progress in the last three years, in terms of local expertise in the drafting of prospectuses or international loan bond issues. But one of the problems here is that we are running two groups of "closed shop" Western influence. One is that of the local lawyers, the other of the international lawyers. Each thinks that only they can do it. No doubt, expertise is involved but it is by no means at the level that cannot be learnt by the local lawyers. And if you compare the prospectuses drawn up for local issues with those drawn up for international issues, there is not that much difference. So, it can be done locally. But the other physical facilities that Dr. Tan has pointed out-fast printing of prospectuses and so on-have come to a stage where we can do these ourselves. In the past we did not have these facilities. Mr. Hussein Najadi

If you will allow me to continue with this Asian and Arab Dollar market, I am posing this question especially to Mr. Dhanabalan and Dr. Tan. Can we not structure loans for lenders and borrowers-be

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they government agencies or corporations-and co-operate between Asian financial institutions (whether Oversea-Chinese Banking Corporation [OCBC] Ltd., DBS and the banks operating in the Arab Dollar market) and try to tap for Asian borrowers instead of going on a long detour? We could tap these required funds from the Arab market directly to Singapore, the Philippines, for the benefit for the A~ian borrowers. That is the closest I can come to a quick area in implementing the dream you have mentioned, Dr. Tan. Professor Kerniaf S. Sandhu Well, maybe we will come back to this again unless both of you, Mr. Dhanabalan and Dr. Tan, want to respond to it now. Mr. Najadi's observation, I think, is linked to the point that Dr. Tan touched upon earlier, and that is, why is it that we have not had a greater flow of investment money from the Arab world into Southeast Asia? In some ways, this has been the crux of our discussion. The question is why? What are the inhibitions? What are the basic problems involved? Sometimes, when we talk with investors from abroad, the first thing discussed is not returns on investment which, as businessmen, one would think they should be talking about (that is, what would be the return on my investment, and so on). Instead, they talk about security, they talk about political stability. Recently when I was giving a public lecture in Germany, the questions put to me were basically linked with notions of political stability and security. Now, if a terrorist gets shot somewhere in Malaysia, or if somebody throws a grenade somewhere in Bangkok, or if something happens in the Philippines, all these make news in the Western papers: "proving" that Southeast Asia is "unstable". On the other hand, if something happens in, say, Rome, and a building gets blown up by terrorists or dissidents, it may go unnoticed, or is at least not associated with political instability in Italy. In other words, the popular images of the Third World countries are that they are unstable areas, politically unstable areas. In reality, however, when we begin to analyse the prevailing situations in many of the Third World countries, they are in many ways more stable than their industrialized counterpart, especially in terms of stable institutions and so on. But their strengths are generally ignored. lt is not what fits the popular images, especially the images that the international press tends to portray.

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If you look around, for example, in the ASEAN countries, governments may change but the power structure is fairly firm and continuous. lt does not matter whether those in power are operating from behind-the-scene or up in front. The important thing is that they are in firm control of their countries, and that their particular positions are in many ways much firmer than those of their counterparts in most of, say, the European countries. But yet, when we talk about Southeast Asia, we talk about instability. So, I think, we have to start asking ourselves the right types of questions. What is inhibiting us from asking such questions? How can we try and overcome prejudices and preconceptions? How are we going to break out of our colonial shackles and think in terms of moving into those areas where the opportunities are? If they are in Africa, I think that is where we should be. If they are in Antarctica, that is where we should be. Hard business sense should be the governing factor and not any emotional appeals like we are Asians, or West Asians and Southeast Asians, and should work together. This is fine, but a better approach would be that there are opportunities, good opportunities, which should be made use of. My guess is that one of the main problems is that we are not acquainting ourselves with the realities. I am sorry, and I did not mean to make such a long speech, but we need to understand the prevailing situation in which, in the Arab states there is an availability of funds for investments, and in the Southeast Asian countries there are the investment opportunities: yet why is not a marriage taking place? If not a marriage, then why not at least a love affair? Dr. V. Kanapathy

Another reason is that in the international permutations and combinations, we, individually, are small countries-Malaysia, Singapore, or, for that matter, even Thailand, Indonesia and the Philippines. We therefore have to find ways and means of strengthening ASEAN. Probably on that basis, we may be in a position to attract investments because of market factors, geographical factors. I think this may be a point tor discussion. Mr. S. Dhanabalan

I would like to add something. I think Mr. Hussein Najadi's question contains part of the answer to this problem. I am a firm believer that we should have practical solutions, however small, which can then

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add up to a total solution. The point that I made just now is about the Asian Dollar market, the advantage that Singapore and the region have had, as a result of the influx of international banks and institutions. If you extend that argument, really, total co-operation between West Asia and Southeast Asia will only come about when we have institutions of West Asia working together with financial institutions in Southeast Asia either in consortium in particular projects or as joint ventures or by having them present here in Southeast Asia as branches or representative offices. This is why I feel that it is very important that the indigenous financial institutions from West Asia should be represented in this part of the world. This would then lead to an erasure of the misconceptions about this part of the world. I think one of the reasons for Singapore having such a good record with foreign investment has been the presence of international financial institutions here who.are able to disseminate information about Singapore in their own domestic countries. So, I think this relationship and the presence of institutions from West Asia are very essential. Unidentified Speaker Mr. Chairman, I think this is a very important point that has just been touched on. We talk about security, that is, in West Asia as a whole. We would like to feel secure that the funds are well taken care of, etc. etc. Now, we have to distinguish between private investors and the government. A government investing its money could have political considerations. I do not want to get into these now. But the private investors, those at least I know, to them and other institutions with plenty of cash to invest, what sort of security would they have? When you have a bank talking to another bank, the dialogue is easy as Mr. Dhanabalan has pointed. But when you have a banking talking to a company, about which they do not know anything, they would be more reluctant to invest the cash. I think we should see more and more banks and financial institutions working together. lt makes the communication much easier. I feel this is a very important point. Professor Kernial S. Sandhu In other words, the greater presence of West Asian institutions, financial institutions, in Southeast Asia.

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Dr. Tony Tan Keng Yam

Mr. Chairman, can I just comment on the points which Mr. Hussein Najadi and you have brought up because, to my mind, they are both different aspects of the same problem? In considering the topic today, I ask myself, if I were a West Asian with funds, will I put my money in London or in Europe and get, say, 6-7%, or would I put my money in one of the Southeast Asia countries, in Singapore, and get 1/2%, maybe 1% more? If I were a prudent West Asian manager of funds, I would put my money in the U.S. or London. The 1% difference is not sufficient to overcome this historical image mentioned by Dr. Kanapathy. I think one must make a distinction between West Asians lending money in Southeast Asia and West Asians investing money in Southeast Asia. And, to my mind, while the Southeast Asian countries have to grasp the nettle by the thorn-that is, to induce a greater flow of West Asian funds to this part of the world -we must not only be prepared to allow the West Asians the interest that is earned on loans but to allow them to have a direct share in manufacturing or other enterprises here. Because when we have that, then the rewards for putting money here will be commensurate with the risk. If they lend money to Southeast Asia, what they will get will be, as compared to lending money in Europe or London, only the 1-2% difference more. If they invest money in a manufacturing enterprise, in a financial institution here, if it succeeds what they will get will be returned not in the order of 1, 2 or 3% but returns of the order of 30, 40, 50%. Unless the West Asians are given a stake in the future prosperity of Southeast Asia, not only from the point of view of lenders but from the point of view of participants in the economic success of ASEAN, the scales would tend to be tipped in favour of Europe or the U.S. Unidentified Speaker

I think, perhaps, it is not just a matter of security alone; the value of money and inflationary factors existing in one country are also important. But the points raised are of great importance for this reexamination. I wonder if two things can take place to promote this: one, a sort of guarantee to investors for payment whether it is through the government or a union of banks or consortium with a solid backing and, second, the repayment of the investment to be guaranteed in an international currency, such as, the U.S. dollar, mark, franc, or sterling.

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Professor Fawzi Gharaibeh

I think central to the basis problem of choosing between equity investment and liquid or quickly liquidated securities and investments is that the oil-producing countries are less developed countries. The source of income is all that matters when we measure development or underdevelopment. At least, they were not, as a matter of fact, very scared in investing in equity. So, the process of development is very important in the oil-producing countries in order for them to come and appreciate investment in equity. At that time probably, they would very much appreciate the higher returns in terms of profit or in terms of interest, and at that time probably, they would come to take a rational decision by favouring equity investment to I iquid investment or deposits. Mr. Hussein Najadi

I would like to come back to Dr. Tan's suggestion of direct investment in ASEAN projects. I do not think Mr. Dhanabalan and I tried to create an instant success of co-operation between Arab and Southeast Asian financial institutions. I think you have a valid point: why are we not investing in ASEAN projects or in projects in ASEAN countries? lt is very difficult for us to come to an equity for a major industry when we know that we do not have, as our colleague from Iran mentioned, an investment guarantee equity. We do not have double taxation because we pay no tax; you pay all the tax, therefore we cannot have it by taxation. We do not have the benefit of the exporting machinery, technology and know-how while we make investments in Singapore. Let us talk about the Singapore petrochemical complex. Now, you are putting 50% of the equity and, as I was enlightened today by Mr. Dhanabalan, there will be some loans by the shareholders but when I think of the immediate return to the industrial country, Japan, or maybe some others, in terms of S$1 billion or S$800,000 million worth of machinery coming out to this country, that would make an investment by a Japanese, a German, a French, much more attractive than investment by an Arab or an Iranian. Because when we invest, we invest in the cash, and wait for the returns. But when Mitsubishi or Sumitomo invests, suddenly you see the tentacles of the whole Mitsubishi zaibatsu wrapped around Singapore benefiting from a S$1 billion investment. And this is where it is difficult without the creation of-1 would 116

take the suggestion from our colleague from !ran-certain ArabASEAN guarantee corporations to say to Arab investors, do not be worried, you can come to ASEAN, you are protected. I think the west, Japan and the OECD share an interest in this risk. Because they are the direct, immediate beneficiary of any major investment in ASEAN, before the recipient country, before Singapore, before the Philippines, before Malaysia and before the Arab investor or the Iranian investor, which will be five to ten years later. 1 give you one precise example. Our bank is managing a S$1.3 billion investment for an LNG project in Malaysia which will be finalized, hopefully, by the end of this or next year. We know that all of our lending would come from the Arab market and go directly to the pockets of the Japanese. And the lending which is prepared, which is going to come from the Asian Dollar market by us, by Morgan Guaranty, by others in terms of S$1.3 billion, 90% of it will go straight to the Japanese. And I ask, how much percentage do they make on this plant, machinery, engineering, know-how and so on by putting the S$1.3 billion? And when I take the equity side, which is Mitsubishi, I come up to a fantastic amount of profitability. Does that answer your question? Dr. Tony Tan Keng Yam

Precisely. I think the problem is difficult. I think both the Arab countries and Southeast Asia have to realize that it is not something which can be solved in a matter of months or years. But ultimately, I cannot see the Arab countries being content merely to play the role of lenders and, as Mr. Najadi says, essentially funding funds through Southeast Asia into the pockets of the Japanese. Now, there are no instant solutions but there could be ways of building bridges between ASEAN and West Asia. One suggestion may be that, without ASEAN itself, there are after all, a number of very successful industrial companies. lt may be that some governments will be brave enough to take the lead and offer part of the equity, part of this interest, to the Arab countries, not so much expecting that there will be any direct benefit but, by this means, ensuring a continuing interest in this part of the world and thereby facilitating a further flow of funds which will be required for ASEAN development. This, again, is something which, I am sure, will not be accepted immediately. But steps like these have to be taken before we can see any substantial flow of funds from West Asia to this part 117

of the world. Otherwise, we will continue to have this arrangement whereby the funds of West Asia will flow first to London or to New York and from there back to this part of the world. Professor Kernial S. Sandhu

I think Dr. Tan's point perhaps needs to be further elaborated, in the sense that there are already facilities within our countries. These may not necessarily be up to so-called international standards, but they, nevertheless, can begin to be utilized. Just now, a point was being made about differences in the cost of hiring international and local lawyers. But we ourselves are not prepared to trust our own people because we have not got to that stage. And here, shouldn't we ask ourselves a business question: that is, if we can get the same thing done at one-tenth the cost by locals, why are we paying ten times more to foreigners tor the same job, other things being equal? I think we are paying more because we cannot get rid of our colonial hang-ups. We are not utilizing our own expertise fully. A beginning has to be made. Dr. V. Kanapathy

Mr. Chairman, I would like to make a proposal which may be long term in character. Up to the present, we are heavily dependent tor capital equipment on Japan, Europe or the U.S. I wonder whether ASEAN and West Asian countries could evolve a programme to standardize purchases. Let us take, for instance, heavy electrical equipment. lt would have certain standards and specifications which could be commonly used by ASEAN countries and other Asian countries as well. This will facilitate the establishment of such industries in our countries and thereby reduce the dependence on such capital equipment from traditional sources like Japan, Europe and the U.S. I am making this point because this was actually put forward by the Chief of the International Trade Division of the Economic and Social Commission tor Asia and the Pacific (ESCAP) and I feel this proposal merits consideration. If we do not attempt to standardize such machinery, we will not have an opportunity to manufacture them in our part of the world as these call tor scale economies. No country in this region is large enough to establish an economically viable industry just to meet its own requirements. Neither is any country in this region able to export such products to the developed countries because of obvious

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reasons. Further, protectionists tendencies are too strong for such a step. Mr. Hussein Najadi

1have been listening intently to these questions on petrodollars and so on. 1really think that one essential element is to be able to attract some of the Western nation's financial institutions. Unless ASEAN is the spearhead in understanding the various economies of the world, 1think it would be difficult to fulfil! our own potentialities and the prospects in the area. Of course, we can also probably do some sort of educational issues, research, and we can still go through the middle path of issuing bonds, notes, etc. in London, New York and in some other places. The problem is not that there are not enough participants but that some of them do not operate in our respective countries. Usually they are not afraid of taxation because there are many ways of avoiding it. But sometimes they are afraid of being caught as a nonregistered company doing business in a particular country and usually the penalties in the respective countries is fine or imprisonment. So they would usually like to observe the laws of the country where they operate and this requires the advice of the lawyers of that particular country; on the other hand, they have to know also the laws of the borrower country or need the advice of local counsel and that is why they charge twice for the legal fees in every syndication. I suppose that if all of the lenders are, say, located in Singapore, probably they would agree to the laws of Singapore as the prevailing law. The other question of taxes, I think, anywhere one goes, countries will have to tax profits, whether here in Asia (generally around 40% income tax), or much higher in the developed countries. So, I think West Asian investments would do much better here from the tax viewpoint because our tax rates are much lower. On the question of security, which was raised, I think we can denominate it in terms of international currencies. There are very few transactions that are denominated in normal currencies. I think the borrowers and users of funds in the area are securely denominated whether it is in OM, the yen, or SDR, or whatever it may be in order to have this complete marketability. The case of security, I think, is a question of appreciation. I really believe that our countries have respectively become stronger as we became independent. I think there is a growing unity among us which was

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not present before and each one is trying to keep a record of being responsible. I think the leaders of ASEAN are very conscious of this. That is why I have the general feeling that we are as secure as any other place; people are trainable; we have renewable resources. I do not know whether some of our existing institutions would be better known if they branch out in West Asia. Mr. Alejandro Me/char, Jr.

Thank you, Mr. Chairman. I just wanted to pursue the point you made earlier and ask Dr. Tony Tan, as a commercial banker, to analyse tor the benefit of our West Asian friends here, the performance of the Singapore dollar or the ASEAN currency vis-a-vis the US$ and, say, the British £. In terms of assessing political and economic stability, there are various indicators; the currencies of these countries are one such indicator. But they not only reflect what we are trying to do in our respective countries to promote economic and political stability but also the perceptions of other people, in terms of the particular countries concerned. I think it would be very useful if Dr. Tan could say something on it. Dr. Tony Tan Keng Yam

Thank you. I think that if we were to gauge the security or the image of security from the performance of the various currencies, then I think that the ASEAN countries would have, I would say, 98 marks out of 100, whereas the U.S. would have about 50. Because, in so tar as my own country is concerned, I know that one of the difficult problems facing our government has always been to avoid letting the Singapore dollar appreciate too much vis-a-vis the U.S. dollar and thereby hurting our trade position. The stability of the Singapore dollar anq the other ASEAN currencies are, of course, first of all, due to the favourable economic performance which I have mentioned before. And that must be one of the factors which have to be taken account of. However, to be quite honest, one has to realize that because of the nature of the international currency system whereby the U.S. dollar is at present the only reserve currency left in the world, it is perhaps not fair to try and equate the level of security with the level of the dollar. Because, fundamentally, we have so much more U.S. dollars compared with the Singapore currency under issue. And when you have a lot of one thing and a little of another, quite reasonably, by the law of supply 120

and demand there will be a natural tendency for the one which is scarce in supply to rise. Of course, this is an oversimplified picture as the weakness of the U.S. dollar is due to quite a number of factors. But, if anyone, for example, from West Asia, had put a fixed deposit in Singapore currency versus a fixed deposit in U.S. dollar one year ago, he would have gained very much more by having it in Singapore currency. Unidentified Speaker

We all know that the flight of investment capital from England, both on the part of the Europeans as well as the Arabs, was because we noticed the weakness of the sterling pound which more or less was the reflection of the performance of the British economy. We saw that way back in 1964 when I was in Kuwait. We decided that the time was right to get out of the sterling and establish a diversified port-folio of U.S. dollars and Euro currencies. I want to come back to Dr. Tan's point. We cannot invest in Singapore dollars, we cannot deposit in Singapore dollars because you do not allow us to do so. Because of the withholding tax and because of the foreign exchange, etc. Dr. Goh Cheng Teik

Mr. Chairman, I think we are coming closer to identifying what appears to be a very major constraint on Arab and Iranian investment in Southeast Asia, that is, perceived political instability in this region. Could I ask Dr. Bahari and Mr. Najadi whether they could confirm this because they mentioned the question of investment guarantees several times today? H.E. Dr. Ebado/lah Bahari

First of all, Mr. Chairman, I speak on my own behalf and not for the Iranian Government or anyone else. I want to say that, in the first instance, Iran has not got any surplus money to invest anywhere. We are in fact a net borrower and we are going to borrow because of the programmes of industrialization and other plans we have in Iran. So the question of whether we wish to invest in Southeast Asia does not arise as such. My comment came from what I have heard, and my personal feeling is, as it was mentioned, it is not a question of one, two, five 121

or ten years' performance of one's country. The currency strength of a country is in terms of, I would say, at least twenty years, fifty years and it is geared to the magnitude of that country. You may have a small company or a small bank giving you a 100% return on investment and at the same time you have a large corporation. You are sure it is going to give you 5%, and many people will opt for that certain sum of 5% rather than that the 100% from the small company. This was my feeling. Now, this is no reflection of my comment on the strength of a currency or the economic performance in this region. That, I am sure, from what I have seen and heard, is excellent. Traditions die hard and long traditions die much harder. The long tradition has been that the investors, especially in West Asia, have always looked to the Americans and Western countries. So it is really up to you to make this an attractive ground not only for capital, but mutual investment. I will come to that in my own paper this afternoon. Professor Kernial S. Sandhu I think the crux of Dr. Goh's question was slightly different. What he was concerned with is the perception of Southeast Asia in West Asia, in that is Southeast Asia perceived as being politically unstable, relatively unstable to put your money into? How is Southeast Asia, in a political sense, perceived in your part of the world? Do West Asians regard this area as politically unstable? H.E. Dr. Ebadol/ah Bahari Really I cannot answer that in actual truth because of the fact that not enough is known about this region. But, generally, probably just after Vietnam, the feeling would be to some extent that it is not as stable as the Western countries. Mr. Hussein Najadi My feeling in this respect is that it is a question of expertise. I think the people of the West have not tried the East Asian input-management-wise. We do not know how East Asians are going to handle the cash or how soon they are going to market it. lt is not just a question of stability. Can they really do well in the long term? Can they really weather storms when it comes because every business has occasional storms? The West has been working a

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long time in this respect and many companies, especially wellestablished ones, have been able to get over problems, such as the recession, and so on. My personal feeling is that this is the issue more than anything else. Mr. Damrong Lathapipat

Thank you, Mr. Chairman. We have been trying to find an answer to a question posed succinctly by Mr. Najadi and Dr. Tan. This question is why does the money not flow from West Asia to Southeast Asia? We have been trying to identify problems. Many of them are complex. But I think the role of consulting firms should not be underestimated. Our friend from Saudi Arabia just talked about the management problems which concern the investor from West Asia. We have touched on the lack of appropriate legal advisers and other facilities. Mr. Najadi himself has shown a very good example to us here. He represents a group of some thirty companies in the Middle East. Maybe Mr. Najadi can enlighten us on the consultant's role which focuses not only on financial facilities or legal capabilities but also, to a certain extent, technological capacity. Professor George G. Thomson

Mr. Chairman, could I also pose a question to Mr. Najadi? I got the impression from his statement this morning that the control of the wealth of West Asia is in the hands of London and Wall Street. Now, what I would really like to ask bluntly is who is it that decides where that money will go? Is it a decision around the Gulf or have they handed that responsibility over to London and America where their investments have gone? lt is because it is a parallel question to this that I intervened. Thank you. Mr. Hussein Najadi

Mr. Chairman, I have three questions to answer: one from Dr. Goh, one from Professor Thomson and one from our colleague from Thailand. According to the order or priority, I will answer Dr. Goh's first-the question of security. As an Arab, I am proud to say that when Vietnam was falling-Laos, Cambodia, Vietnam-we got together in a consortium in the Gulf called Arab Investments for Asia, Kuwait, with one principal purpose: to invest directly in Southeast Asia. I was confronted by one of the Ministers who told me to 123

look at the newspaper headline "Southeast Asia dominoes ... " My response was that, in the spirit of Arabs investing in Asia, we should go there when they need us most, not when they need us least. What do we gain by investing in London and New York? You can see that their support for the Israelis is never mentioned. They put a knife in our backs the minute we go back. That was my response and that is the Arabic Samurai spirit not the Japanese Samurai spirit. The second answer is to my friend and colleague from Thailand. Yes, we do have, unfortunately, a one-sided view of Asia in terms of Asian management technical capability. What Professor Sandhu has mentioned is a very good case. I have just to tell you one piece of news. Two weeks ago, I was in Rome discussing with a major European company that it joins the Arabs to invest in ASEAN. This is one of the largest European corporations with about US$50 billion at stake. And I said, if you do not come, I am going back to what I said, Dr. Tan, why do you want Arabs to go alone? Is it because you are the direct beneficiary? And then he said, "Hussein, who is going to tell us whether we can invest in Singapore, the Philippines or Indonesia?" I said, "The Asians themselves. Because the Asians know their country, they know their policies, they have enough background to know what is happening in their country. You can have one of your bold experts to contact them." lt is common to have Asian consultants telling a major European company what to do with investments in ASEAN. There, I agree with you, we lack perception of the Asian capability. The third question is Professor Thomson's. As I was mentioning in this morning's paper about decisions on long term funds or funds made in New York, I mentioned the world's fat cats in Wall Street. Unfortunately, when we got economic independence out of the oil, we got the oil out into control, we do not have enough Arab bankers to realize that our oil equals petrodollars. A sheer 100% ownership of an oil company is not enough to control the West. And until the day when I see that more of my Arab brothers can play the same game as the Western bankers-in the Western as well as wealthy Arab banking institutions in Bahrain, hopefully in Singapore, in Kuala Lumpur, in the Philippines-then we can see we are making the decisions by ourselves. For example, we were advised in Kuwait not to lend to a certain ASEAN country. I would like to withhold its name. I contrarily said we will lend in Arab currency, in U.S. dollars, in deutschemarks, to this particular

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ASEAN country because this is the time when we should come. And this ASEAN country has now a large borrowing, similar borrowings of multicurrencies out of their bag. The question is, we have less decision-makers on the money sector from the Arab side. Professor Kemial S. Sandhu In closing this session, let me recapitulate a few suggestions that we may want to see pursued further. First, the need to rationalize, say, laws, investment terms, and investment opportunities in not only the individual countries of ASEAN, but perhaps ASEAN collectively as well. Secondly, the notion that there may need be some form of guarantee for foreign industries and investments. Thirdly, there was the urgently felt need for the movement of West Asian financial and other institutions into this part of the world, so that they could study the situation here at first hand. They could then meet their opposite numbers in person and see for themselves what possibilities there are rather than having to rely on second, third, or fourth-hand reports, all probably coloured by the respective reporters' hang-ups. lt would seem obvious that there is nothing like being able to get down to the grass-roots level yourself. The movement of West Asian institutions-financial and others-to Southeast Asia is imperative, if we are not to continue to rely on third or fourth parties, whether they be in Paris, or in London, or elsewhere.

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THIRD SESSION:

PETROLEUM AND PETROL EUM-BA SED INDUSTRIES

OIL SUPPLY AND COST AND THEIR IMPLICATIONS FOR SOUTHEAST ASIA DEVELOPMENT

Sivavong Changkasiri

Oil Cost and Supply

All of us present here, I am sure, have been closely following the development of "oil supply and cost" with great interest. Since the beginning of the seventies, the "controlling power" in oil supply and cost has been shifting from the international majors to the producing countries. Oil supply and cost, once regulated by the international majors, have now come under the authority of the producing countries. If one were to look back and trace the oil price, one will find that, on 14 February 1971, a meeting between OPEC and twenty-two oil companies raised the posted price of a marker crude, Arabian Light, from US$1.80 to US$2.18 per barrel. That was the beginning of an end to the unilateral determination of posted prices by the oil companies. On 16 October 1973, the market crude Arabian Light was posted at US$5.12 per barrel. Effective on 1 January 1974, the price on the marker crude was raised to US$11.65 per barrel. However, after the Ministers' Conference at Quito, Equador in June 1974, the royalty payments were to be computed at 14.5% of posted prices instead of at the original royalty rate of 12.5%. Again in September 1974, OPEC decided to hike Aramco's total payments to the Saudi's by the 3.5% formula adopted at Vienna, including the further royalty boost to 162/3%. Adding to the abovementioned confusion, Saudi Arabia, Abu Dhabi and Qatar jointly set the new pricing formula around 11 November which was effective retroactively to 1 November 1974 for nine months through July 1975, consisting of four key elements: {1) Crude oil posted price was cut 40 U.S. cents a barrel across the board; {2) Income tax rates were hiked to 85% from the basic 65.75% level that became effective on 1 October 1974;

(3) Royalty rates were raised to 20% from the 16 2/3% that took effect on 1 October 1974; and (4) Buy-back oil sold to the concessionary companies was to be priced at 94.85% (instead of 93%) of the new lower posted prices. As a result of the new pricing formula, the cost of some 95% of the Saudi Arabian oil had been raised by a striking 56 U.S. cents a barrel. Again, effective on 1 October 1975, OPEC decided to increase the price of the Arab Light marker crude by 10%. The new posting for calculating the companies' income tax and royalty payment obligations was US$12.38 per barrel, although the market price (93% of the posted price) amounted to US$11.51 per barrel. it was also agreed that this new crude price would be frozen until 30 June 1976 when another review would be made. To make the picture of the increase in crude prices complete, OPEC Ministers met again to review the crude prices in Bali in midMay 1976. At the conference, top experts of the Economic Commission Board of OPEC estimated the inflation in OPEC countries' import prices at 15% for the period beginning October 1975 and ending June 1976 during which the oil price was frozen. Credit must be given to the Oil Minister of Saudi Arabia who insisted at the Bali Conference that the price freeze should continue. The crude price was not brought up until the next meeting slated for 15 December 1976 in Doha, Qatar. The final communique of the Doha Conference spelled out the split between two groups of OPEC member countries. Eleven countries decided to increase the price of the marker crude from US$11.51 per barrel to US$12.70 per barrel as of 1 January 1977 and to US$13.30 as of 1 July 1977. Saudi Arabia and the UAE decided to raise their price by 5% only. For Saudi Arabia, the increase brought the market crude price to US$12.086 per barrel. To say the least, the two-tier price system has given headaches to international oil firms, oil-importing as well as producing countries. This split price made oil exchange deals difficult to structure, created mass confusion on the spot market, generally disrupted the normal world oil supply pattern and made it extremely difficult for oil-importing countries to fix the exrefineries prices for finished oil products. Finally, OPEC's unity and solidarity on crude oil prices were demonstrated once again when all the eleven members of OPEC's 128

higher price group had agreed to forgo th~. addition~! 5%. price increase originally scheduled for July. In add1t1on, Saudi Arabia and the UAE raised their prices 5% effective on 1 July 1977 before OPEC's 12 July Stockholm meeting. These prices would remain frozen until 23 December 1977. From the increase in crude prices during this period, it is clearly demonstrated that the member countries of OPEC have obtained the pricing power from the international majors. Consequences and Development

With higher oil prices, interesting consequences and developments, both positive and negative, have been observed. Among others, they are: The establishment of national (state) oil companies. During and after the oil crises, some ASEAN countries have looked into the possibility of establishing national oil companies. In Malaysia on 1 October 1974, the Petroleum Development Act came into force and, as a result, the new national petroleum company, Petroliam Nasional Berhad, or in short form, PETRONAS, has been established in Malaysia. This Act extends PETRONAS's powers of supervision into the marketing and distribution of petroleum and its products, and requires all companies in the petroleum industry to issue management shares up to at least 1% of the issued capital and to transfer them to PETRONAS at market prices. But each share will have 500 times the voting power of ordinary shares, so that PETRONAS can effectively establish control over companies by buying only 1% of the shares. This has resulted in temporarily stopping a few oil companies from their exploration activities. Later on, the Malaysian Government clearly stated that the management share will not now be applied to the companies, as at least some agreement has been made over the last few months about the level of royalty payments and on the possibility of government purchase of oil company ordinary shares at reasonable prices. However, the rule remains on the statute book. In the Philippines, Presidential Decree 334 established the Philippines National Oil Company (PNOC) on 9 November 1973 in swift response to the dramatic developments of October 1973, with the following objectives: (a) to provide and maintain an adequate supply of oil and petroleum products for the domestic requirement;

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(b) to promote the exploration, exploitation and development of local oil and petroleum sources; and (c) to foster oil or petroleum operation conditions that shall be conducive to a balanced and sustainable growth of the economy. On 21 December 1973, PNOC acquired ownership of Esso Philippines Inc. (then the third biggest marketer of petroleum products) and a major interest in the Bataan Refining Corporation. PNOC was further expanded in 1975. The Philippines National Bank's foreign borrowing of US$100 million will be used to finance PNOC purchase of machinery and equipment for bulk distribution of petroleum products. In Thailand, both the Seni Pramoj and the Tanin Kraivixien Governments had given special importance to the establishment of a national oil company to supervise the refining, marketing and distribution of petroleum products as well as to invest jointly with the private sector in expanding refinery operations in Thailand, in order to cope with increasing demands for petroleum products. Unfortunately, the period both governments were in power was not long enough for the introduction of a bill to Parliament for the establishment of the Thai National Petroleum Company. The diversification of oil purchase. This is another phenomenon which occurred right after the oil price increase and the famous oil embargo during the latter part of 1973 and the beginning of 1974. The oil-importing countries of ASEAN, in particular, the Philippines and Thailand, did look for an alternative source of oil supply. Supported by President Marcos, PNOC initiated government-to-government negotiations for crude supplies. During 1974, the Philippines was successful in negotiating two purchase contracts with Kuwait and one contract with the PRC. In 1975, the Philippines concluded the second crude oil supply contract with PRC on 25 March, a contract for the purchase of Kasim blend crude with Indonesia on 19 February and a oil supply contract with Iraq in July. In all, the PRC provided two and six million barrels of crude oil in 1974 and 1975 respectively to the Philippines. This supply constituted around 9% of the Philippine demand for crude oil in 1975. Indonesia was responsible for supplying nearly twelve million barrels of crude to the Philippines. In the case of Thailand, the PRC also sold a total of 125,000 tons of high speed diesel oil at friend· ship prices to Thailand during the years 1974 and 1975. Moreover, a barter agreement for the sale of 200,000 tons of rice and the 130

purchase of 312,000 tons of crude oi I and 251,000 tons of high speed diesel oil between the two countries was concluded around the latter part of 1975. Negotiations between Indonesia and Thailand concerning the sale and purchase of crude oil and oil products have been on and oft since the end of 1974. Up to now, Thailand has not been able to purchase any crude oil and/or petroleum products from Indonesia, due to the frequent change of government. Vulnerability of the economy of Southeast Asian countries to oil cost. This has been observed. If one were to use two economic indicators to measure impact of oil cost to our economy, one can look at the following: Trade balance. Among ASEAN countries, the oil-importing countries such as the Philippines, Singapore and Thailand have been faced with trade deficits since 1974. Despite a trade surplus of US$14.7 million in 1973, the Philippines encountered a trade deficit in 1974 amounting to US$764.6 million and in 1975 amounting to 11,880 million pesos. In the case of Thailand, the trade deficit picture has become worse and worse. In 1975, the biggest ever trade deficit was recorded at 21,808 million baht whereas the trade deficit in 1976 was only 12,950 million baht. On the other hand, the oil-exporting countries such as Indonesia and Malaysia have accumulated a substantial trade surplus. For example, Indonesia has been able to increase its exports figure, mainly due to the high price of crude oil from US$1, 778 million in 1972 to US$7,426 million and US$7,102 million in 1974 and 1975 respectively, thereby increasing its trade surplus from US$216 million in 1972 to US$3,584 million in 1974. Hence, the oil price has given a substantial increase in export revenue to oil-producing countries and, at the same time, has increased the burden on oil-importing countries in Southeast Asia. Consumer prices rose very rapidly in all ASEAN member countries right after the initial increase in oil prices in 1973 and 1974. For instance, consumer prices in Manila rose 35% in 1974 whereas in Thailand the rate of inflation was 24% in the same year. Although inflation has always been a problem in Indonesia, it reached alarming levels in March 1974 when prices had risen by 47% over the previous thirteen months. 131

The increase in oil-prospecting and investment activities in Southeast Asian countries. This has been noted since the oil crisis. Higher crude prices have brought oil companies flocking to the continental shelves and coastal plains of Southeast Asian countries. lt was estimated that American companies alone invested some US$566 million in Indonesia in 1975, an increase from US$319 million in 1974. In Malaysia, exploration and other investment costs of oil companies during 1975 totalled US$300 million, an increase of "27% in 1974. In the Philippines, total expenditure on oil exploration in 1976 was officially estimated at US$30-40 million, around the same level as in 1975 but well up the annual average of near US$25 million in 1973-75. The government of the Philippines tlas released 30 million pesos to the PNOC for the first onshore exploration programme. PNOC is also involved in a petroleum support base project costing 500 million pesos at TawiTawi in Cagayan for oil companies operating in the Sulu and Palawan marine areas. PNOC has also approved an export refinery to be located at Lanao in Mindanao. Saudi Arabia is to supply 200,000 barrels per day of feedstock and will take 15% equity in the plant's 1.34 billion pesos capital whereas Showa Oil of Tokyo will take 25% equity and the remainder will be held by Philippine interests with 25% offered to the public. Price control on petroleum products. This has been imposed by most Southeast Asian Governments. With the frequent changes of crude oil price during 1974 and 1975, practically all ASEAN Governments have imposed price control on petroleum products with a view to holding down the consumer prices in their respective countries. In some countries, such as Malaysia and Thailand, this antiinflationary measure will, in the long term, restrict the expansion of the refining and marketing facilities, because the margin of increase allowed normally would only cover the increase in crude price, giving no attention whatsoever to the increase in working capital required due to the higher price of finished oil products. In Thailand, pricing of petroleum products was the responsibility of a Ministerial Committee on Oil Policy, normally chaired by the Deputy Prime Minister. This Committee consisted of various ministers concerned with economic activities in the country. Hence, the political implications of petroleum product prices were given special importance. With the frequent change of government in Thailand, prices of oil products had not been

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changed after the OPEC announcement of crude price increase in October 1975. The government subsidy which lasted for one year had been sought in stabilizing oil product prices. Only after another increase in crude prices effective on 1 January 1977, were oil prices adjusted by the Tanin Kraivixien Government, taking into account both increases in crude prices. This exercise of subsidizing oil product prices deprived the Thai Government of the budget for the amount of 1,200 million baht per annum. However, such an exercise has a direct impact on stabilizing consumer prices in Thailand. lt should be noted that during 1976, the consumer price index in Thailand rose only 4.2%. Co-operation among Southeast Asian nations in the field of petroleum. Following the oil crisis in 1973, with the initiative of Indonesia, in particular PERTAMINA, a Director of PERTAMINA was sent around July 1975 to ASEAN countries to meet with the management of national oil companies and government authorities concerned with petroleum, in order to convince them of the necessity of promoting collaboration and mutual assistance in the development of ASEAN petroleum resources. As a result, an ASEAN Council on Petroleum (ASCOPE) has been formed following a meeting in Manila in .September 1975. The aims and purposes of the Council are:

(a) To promote active collaboration and mutual assistance in the development of petroleum resources in the region through joint endeavours in the spirit of equality and partnership; (b) To collaborate in the efficient utilization of petroleum; (c) To provide assistance to each other in the form of training, the use of research facilities and services in all phases of the petroleum industry; (d) To facilitate the exchange of information which will promote methodologies leading to successful achievements in the petroleum industry which may help in formulating policies within the industry. (e) To conduct petroleum conferences on a periodic basis; and (f) To maintain close and beneficial co-operation with existing international and regional organizations with similar aims and purposes. In order to carry out these aims and purposes, the following machineries have been established, namely, 133

(1} An annual meeting of Heads of State (National} Oil Companies and a duly designated representative from each member country; (2} A National Committee in each member country under the Chairmanship of a person appointed by the respective Heads of State Oil Companies or designated representatives of member countries to implement decisions made by the Annual Meeting and to carry out the work of the Council in between Annual Meetings on behalf of the respective member countries; and (3} Ad Hoc Committees and Permanent Committees of Specialists and Officials on specific subjects. Since the establishment of ASCOPE in October 1975, National Committees, which are the most important working machinery of ASCOPE, met five times. The fifth meeting of the National Committees was held in Manila on 26-27 October 1977, followed by the ASCOPE Council meeting on 28-30 October. One of the most important items on the agenda of the last Council meeting was the refinement of the Petroleum Emergency Sharing Formula. The following are a few important areas of technical and economic cooperation which have been given special attention: the standardization of policies, regulations, contracts and facilities; conservation of energy; possible utilization of waste; ASCOPE-CCOP (Committee for the Co-ordination of Joint Prospecting for Mineral Resources in Asian Offshore Areas} co-operation in ASEAN Offshore Areas; cooperation in crude marketing/supply; and co-operation in product marketing. Conclusion

From the above consequences and development, one can conclude that oil supply and cost have profound effects on the Southeast Asian countries. As Southeast Asian economies are largely agricultural-based, agriculture will continue to provide the main source of livelihood and contribute about 40% of gross domestic product in these countries. The rate of growth of the economy of the Southeast Asian countries has averaged around 6% annually over the past decade. Modernization and industrialization have been one of the goals of the countries in the region. In order to accelerate the pace of industrialization, the energy sector must grow at a higher rate than GNP targets. Unfortunately, at present, most Southeast Asian countries depend on oil as their main source of energy 134

supply; hydroelectric power and other sources of energy constitute only a minor portion of the total energy supply. Hence, our aspiration for growth can be easily hampered by oil supply and cost. My economist friends often tell me that the oil crisis in 1973 is a blessing in disguise, because there are many lessons which we in southeast Asia have learnt as a result of it. To summarize, these are: (1) The need to draw up a true energy policy in relation to growth objectives; (2) The need for an active government role in energy exploration, development, production and supply; (3) The need for a mechanism for regional and interregional cooperation, especially in the field of petroleum; (4) The need to maximize development of indigenous resources; and (5) The need to ensure security of supply of oil and to minimize the cost of such supply, in the short run. If all Southeast Asian nations can learn lessons from the 1973 oil crisis, it is my conviction that future development policy and programmes in these countries can be channelled to meet the needs and objectives mentioned.

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SCOPE FOR OIL·BASED INDUSTRIES IN OIL PRODUCING REGIONS The West Asian Experience

H.E. Dr. Ebadol/ah Bahari

A consideration of the scope for oil-based industries in any one oilproducing country of the region will not be complete without looking into the more important effect of co-operation in this field among the countries of the region as well as between them and their geographic markets, in this case the Southeast Asian countries. This co-operation will enhance the scope of activity to the greater benefit of all the countries involved in the two regions. I have interpreted the oil-based industries to include refineries, petrochemicals including fertilizers, and energy intensive industries. Oil Refineries

The earliest oil-based industries in the region have been the oil refineries. Today, most of the oil-producing countries in the region have refineries of varying size and complexity. The largest and one of the oldest is the Abadan Refinery in Iran with a capacity of around thirty million tons per year, producing a fairly wide range of products most of which are exported. Quite a number of the other refineries in the region also depend on export of some of their products. Most of the earlier established refineries were put up by foreign oil companies operating in the country concerned. Before the Second World War, construction of refineries in oil-producing countries were more favourably considered, due to the fact that the economy of scale did not permit building of refineries in many of the consuming countries of Europe, Asia and Africa which did not have sufficient consumption. Moreover, in those days when refinery technology had not been sufficiently developed, it was not possible

to tailor a refinery to suit the product pattern demand of a single country. So it was that a refinery like Abadan was expanded to become the largest in the world. After the war with the growth in consumption and the development of more sophisticated technology, it was found that to build refineries in the major consuming countries was economical. The role of the refineries in the West Asian oil-producing countries gradually became one of balancing product pattern demand as well as supplying countries without a refinery of their own. This is an important role, but the major oil companies who control the greater part of the market are becoming reluctant to lift the products of these refineries since they lost the ownership and control of these refineries. However, greater co-operation among the countries of the regions represented at this Conference could ensure utilization of these refineries to the greater benefit of all concerned. What may be needed is a clearing-house which will balance the supplydemand pattern in the region and advise on planning for future refineries with this in mind. Petrochemicals

Nitrogenous fertilizers are included under this heading, since alternative ways of making these from coal or fixation of atmospheric nitrogen is not considered economically attractive. The most important teedstocks tor petrochemical production are natural gas-tor its major component of methane as well as tor the heavier components of ethane, propane and some butane which can be separated and condensed and is known as natural gas liquid (NGL)-Iiquetied petroleum gases (LPG}, naphtha, and aromatic rich fraction from some refineries. Natural gas as methane is the most suitable and economical teedstock tor the production of ammonia and methanol. Plants based on this teedstock are not only simpler and cheaper to build but are also more economical in operation. Bearing in mind this greater intrinsic value of natural gas and taking into account the very high cost of handling and transportation of this gas tor any substantial distance by means of pipelines or as refrigerated liquid (LNG) it will become apparent that, in areas where there is surplus gas tor export, it will be much more economical to convert this to the more cheaply transportable products as tar as the world demand for such products permits. To demonstrate this, the alternative 137

costs of capital, operation, and production cost of ammonia/urea production based on natural gas available in surplus, imported naphtha or fuel oil and indigenous coal are given in the table below. The cost data in this study are based on those prevailing in early 1976. With the increase in the prices of plants and oil, the difference in favour of natural gas becomes more apparent today. lt can be shown that the cost of ammonia produced from surplus exportable gas in an oil-producing country can be almost half of that produced from other feedstocks at prevailing world prices. Fortunately the amount of natural gas available in the Middle East oil-producing countries, both in current production and in reserves, is more than sufficient to meet all future expansion of the world demand for ammonia/urea. Apart from ammonia/urea, which in terms of tonnage constitute the largest amount of petrochemicals produced in the world, olefins and aromatics are the most important petrochemicals forming the basic raw materials for the production of a great variety of products including various plastics, synthetic fibres, solvents, etc. But while the demand and consumption of fertilizers are such that economically sized ammonia/urea units can be built in many countries, there are few countries in the world which can consume the full production from the large scale olefin and aromatics plants which are today's most economically scaled units. For the production of ethylene, which is the basic raw material for most of the plastics produced in the world, the NGL available in oil-producing countries can be utilized to good advantage. Since the handling and transportation of NGL for export can be very costly, this makes it a more attractive feedstock for olefins (ethylene, propylene) manufactured at the point of its production. lt enjoys somewhat the same favourable factors of low price in production location and permitting cheaper plants for production of ethylene as does natural gas for production of ammonia. Although the quantity of NGL available is a low percentage of oil and gas production, nevertheless several of the oil-producing countries in the region can produce sufficient amounts for large economically sized olefin units. Production of methanol from natural gas can be economically undertaken in the oil-producing countries of the region in the same way as that explained for ammonia production. However, the demand for chemical grade methanol is not so high and therefore 138

there is only room for a limited amount of production. At one time, before the 1973 oil price rise, intensive consideration was being given to the production of fuel methanol from natural gas in large scale plants located in the oil-producing countries which were then flaring most of their natural gas to waste. However, with the rise in the price of oil, and consequently gas, it was found that the energy losses suffered in reconversion of methanol to fuel were too high to make it attractive. Some of the Middle East oil-producing countries with fairly large refining capacities have sufficient naphtha and other product streams available to enable the production of the full rl%f1ge of olefins and aromatics. However, the intrinsic advantages in this case are not as good as for those of utilizing natural gas and NGL. Energy Intensive Industries

Because of the fairly large quantities of cheap natural gas available in most of the oil-producing countries of the region which can be used as fuel or for generation of electricity and also because of generally low domestic price of petroleum products, these countries are in a good position for the promotion of energy intensive industries. Good examples of such industries are aluminium-smelting and electrolysis of salt for the production of chlorine and caustic soda. The chlorine can be used in the production of ethylene dichloride and then polyvinyl chloride (PVC) in conjunction with an olefin plant, while the caustic soda can be usefully consumed in the production of aluminium. Factors Influencing Development of these Industries

lt will be useful to outline the elements which are a prerequisite tor the promotion of oil-based industries as well as the factors influencing the success of their construction and operation. These are described below, bearing in mind the experience of the West Asian oil-producing countries. Infrastructure, personnel and marketing. Obviously, apart from cheap raw materials or energy, there are many other important requirements for the successful development of industry in any country, such as: Infrastructure; including availability of sufficient communication facilities, ports, water, power. etc. 139

Skilled personnel and labour Capital Sufficiently assured domestic and/or international markets tor the products to ensure an economically sized unit Developed facilities for domestic and export markets. The importance of infrastructure cannot be overstressed as inadequacy of any of the facilities listed above can greatly jeopardize the success of any industry. This has been dramatically demonstrated in recent years where in many of the oil-exporting countries in the region a sudden stepping-up of industrial and construction activity has put great pressure on the intrastructural facilities. Ships have had to wait a long time before offloading; road transportation limitations have meant a great pileup of imported goods at ports. Power shortages have meant interruption of operations which is-particularly damaging to machinery and plants as well as causes loss of production. Perhaps more important than infrastructure is the training and availability of skilled personnel and labour in all aspects of petroleum-based industries. In many cases the difference between a successful profitable operation or a failure and loss hinges on whether a plant can produce more than 75% of the capacity. This almost totally depends on the skill and capability of the personnel operating and maintaining the plant. In this age of sophisticated machinery and complicated plants, particularly in the petrochemical industry, one cannot compromise in the skill needed to operate them. I think this fact will be accepted from the experience of all the countries operating such plants in the region. There have been cases of plants operating at less than half the annual capacity, purely due to poor operational and maintenance skills. Quite a number of countries have resorted to employment of foreign nationals not only tor the more specialized supervisory work but also tor many of the skilled labour jobs. While this is a good short or medium term solution to the problem, it cannot be considered a long term remedy as, for the industry to develop and operate efficiently, the continuity of operating skill and the passing down of experiences are essential. This cannot be fully attained with expatriate personnel who normally take on a job on a short term basis. Therefore the education and training of suitable people for these industries is of paramount importance. This requires advance planning and perseverance as one cannot expect to achieve satisfactory results tor any programme of less than five years' dura-

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ron. This should be borne in mind, therefore, well in advance of 1 utting up any petrochemical or similar plants. p The size and scale of operation of plants is also very important in the economy of production. The tact is that today such plants are developed and designed by the more industrialized countries, particularly the U.S., where intense competition and high demand tor the products have pushed the size and refinement in design of plants to a stage where at any given time there are only a handful of processes and designs which can stand up to the competition. some of the special machinery and equipment needed for these plants are also developed by manufacturers in conjunction with the designers of the plant in order to achieve the optimum in cost and efficiency. lt will therefore be very hard for anyone to break away from these proven developed plants and opt tor a new similar sized unit or even an old outdated smaller plant. This will create difficulties in obtaining reliable equipment and machinery, and later the spares required in operation. But apart from this, the cost of production will not be competitive with those of up-to-date large scale units. Therefore, the outlet for the products and marketing are of significant importance. In most of the advanced countries, the domestic market provides the base for the sale of most of the products with exports earning the cream from marginal production at low cost. To rely totally on exports without an assured market requires very high marketing ability and can be economically very risky. In the petrochemical field-which is an integrated industry from the hydrocarbon raw material to the final product, be it a domestic plastic utensil or a garment-it only requires a small excess of supply over demand in any of the stages of production to slump the prices for those without a tied market. This has been very well demonstrated in recent years and at present holds true for a number of products such as fertilizers. To rely on a potential market, particularly the potential domestic market in a developing country, would not be sufficient without fully developing these markets in time to absorb the products. This will mean promotion of downstream industries utilizing product and consumer education.

Technology. As mentioned earlier, there is continuing development in technology which gi•Jes rise to a rapid rate of obsolescence in designs. For the region under consideration while it is important to select up-to-date technology in the industry concerned, one must avoid those processes and designs which are not fully developed.

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One should never build a prototype plant in a developing country. The problems (normally considerable even in well developed industrialized countries) encountered with such plants can be crippling in a developing country far from the sources of technology and manufacturers of the equipment. So it is recommended that a well-proven design be chosen which has had all its teething troubles already overcome with which has been in worldwide operation for, say, at least four years. The reliability of the operation is more important than the little extra economy expected from a new design as it can easily be shown that the extra production time of, say, twenty days from a reliable plant normally more than outweighs the extra efficiency in production or a little cost saving in construction as claimed for a new design. In addition to buying a process licence or technology, it is important to include the training of key personnel in one of the operational plants of the licensor as part of the agreement. Furthermore, one must ensure that the data and designs provided are complete in every detail. As it often happens, the withholding of information, no matter how insignificant it may appear, can harm the successful building and operation of a plant. lt is also advisable to include a clause in the licence agreement to entitle both parties to the benefit of future improvement in design and operation of the process plant. lt must be pointed out, however, that the only sure way of achieving technological progress in any country is to promote research and development in order to initiate new designs or improve on the existing ones. This requires a carefully laid foundation from the educational system to industrial research. Execution of projects. Due to the pressure in the limited supervisory and skilled manpower resources of the region under consideration, many of them rely heavily on foreign consultants or contractors to look after their interest in the design and construction of plants. Some try to ensure success by incorporating some stringent clauses in the contracts with penalties and liabilities attached. But in practice, there are always many ways for a contractor to evade its liabilities, if he is so inclined, by making some excuses related to "abnormal" conditions prevailing in the country concerned or giving other reasons which are more often than not due to the contractor's own neglect or incompetence. One can therefore confidentially say that a contractor is as good as the

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supervision he receives. However, there are certain well-tried ways which help in achieving a good result in the building of plants. The first is the selection of a suitable process and capacity to suit the requirement. Then the complete data on the process and related technology should be incorporated in a complete and detailed bid book which clearly sets out the exact requirements of the client, the full scope of the work and the parties' responsibilities. The standard of design and workmanship required should be spelled out as far as possible, with the issue of guarantees and the examination of liabilities. lt is also advisable for developing countries to include two years of operating spares to be provided with the supply of the plant. Then, an international invitation to bid should be issued and a short list of no more than six contractors should be selected from among those accepting to bid. Next, it must be ensured that all bidders stick to the conditions outlined in the bid book, and if, for a valid reason, one contractor proposes a change in the specification or bid condition, the same choice should be given to other bidders as far as it is practicable. Upon receipt of tenders, it is advisable to only not consider the technical and financial aspect of each proposal but also the manner of execution and the project organization proposed. lt would be highly advisable to interview the key project personnel proposed and, as far as possible, make the assignment of the more desirable ones to the project as part of the contract. The quality of the personnel involved on the job and the continuity of their service during the execution of the project is of paramount importance. Due to difficulties and disputes in the execution of projects in the developing countries, some international bodies (such as UNIDO) have recently been working on the preparation of model contracts and an insurance scheme to protect the parties.

Operation and maintenance. Before taking over the plant from the contractor, the owner must make sure that the job is complete in every aspect and full detailed operating instructions for the plant and equipment are made available from the process licensors and the manufacturers. As explained earlier, by this time the operating personnel, particularly the supervisors and key personnel, should have been fully trained on similar units. There is nothing more dangerous than a half-trained operator who thinks he knows the

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whole job. There will not be much point in telling him about his deficiency when he has ruined a sensitive and valuable part of the plant, due to his maloperation. Operators should be disciplined not to takE: chances or risks. The fail safe principle must be followed. Furtllt.H nore, the enthusiasm of managers or operators on the plant should not be allowed to strain the plant and machinery in order to "squeeze" more production out of it. Regular maintenance and, particularly, preventive maintenance, is all important in the locations under discussion. With manufacturers of plant and machinery a long way away, it is not always easy to get the parts one needs if this has not been foreseen and planned in advance. Financing. This is normally the first consideration in the planning and execution of a project and, coming as it does at this late stage of this paper, does not mean that this is the actual sequence observed. For some of the countries under consideration, this will not create any problem and can be met from internal resources. Others would need external financing. In public sector industries, there are various ways of financing, such as (i) Government to government loans. These are limited to specific cases and normally are of long term nature with low interest rates. Recipients of these loans are usually poor countries who get the loans to finance projects of general public interest, such as the building of roads, railways or ports. (ii) Suppliers' credit. This is provided by the countries selling plants and is mostly tied to the purchase of equipment from that country. The financing itself could be provided by banks or similar lending institutions with repayment guaranteed by their government. Experience. The actual number of fertilizer and petrochemical plants operating in the region is small at present. However, there are some impressive future programmes. The existing and future programmed plants up to the year 1985 are shown in Table 2. There have been some remarks by various sources about the future share of this region in petrochemical production of the world which varies from a 25% share for the whole of OPEC countries to a much lower estimate. There is no doubt about the importance of the

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region as regards hydrocarbon raw materials' availability. However, a great deal of intrastructural and manpower development are needed to make investment in the petrochemical industry attractive. What has been said in the previous section about infrastructure, technology, mode of execution of projects, financing, operation and maintenance of the plants reflects the experience of the region in this field. Co-operation. lt will be relevant to discuss co-operation between the West Asian oil-producing states themselves as well as between this group and Southeast Asia. Although it must be admitted that it will be difficult to achieve the co-operation needed, ultimate benefits tor the region are such that they make it worthwhile to attempt to do so. There are various aspects to the co-operation between the West Asian countries. These include (i) Co-ordination of plans and production in order to maintain a balanced supply-demand position and a stable market. Also, instead of several countries building similar plants of small uneconomic size, a sort of allocation could be worked out such that each country concentrates on the plant it is most suited to build. A scheme could also be worked out for exchange of products needed for domestic markets within the region. Difficult as it may appear, if this sort of co-operation is not achieved there are risks of oversupply with a consequent slump in prices and reduction of production to the economic detriment of the regional producers, in particular those without a sizeable internal market. This is very much apparent today in fertilizer production which forms the gre~test part of petrochemical activity in the region. Another useful form of co-operation would be some kind of mutual backing of production shipment tor export between the cou11tries of the region producing the same product so that customers do not suffer due to the sudden failure of production which is not unlikely in the region. (ii) With difficulties experienced in the region in maintenance and spare units, useful co-operation could be established in this area also. A common maintenance organization (or company) or at least an understanding to help each other with emergency maintenance work would be valuable to all concerned. Due to their great distance from the manufacturers of 145

machinery and spare parts, these countries have to carry a great deal of spare parts. Even so, production can be severely curtailed due to some failure in those parts of the plant or machinery which have been considered unlikely to break down. Maintenance of a common pool of spares or at least an understanding to help each other in such emergencies would be of immense value. There are several factors which should help the development of co-operation between the West Asian oil-producing countries and Southeast Asia. The former have the financial capability and abundant hydrocarbon raw materials for production of petroleum, petrochemical and certain other products which are in demand in most of the Southeast Asian countries. The Southeast Asian countries, in turn, possess certain basic materials such as agricultural or manufactured products required in the West Asian region. Bearing in mind the desire of oil-producing countries to assist the developing countries, there are some favourable elements for the development of co-operation between the regions. One good way could be in the setting up of a sort of common market with reciprocal tariff preferences. Whichever route we take for co-operation, it is indeed high time tor developing countries of the regions to help each other to bring back prosperity to these once rich countries of the world.

146

TABLE 1 Capital and Production Costs of Ammonia-Urea Plants in Developing Countries Feed stock Feedstock price($)'> Output: ammonia tons/day urea tons/day urea '000 tons/yearb Capital costs ($m): ammoniac ureac

Natural Gas

Fuel Oil

Naphtha

0.5/1 ,OOOscf 1,000 600 1,720 1,030 516 310

140/ton 1,000 600 1,720 1,030 310 516

Coal

80/ton 1,000 600 1,720 1,030 516 310

12.5/ton 5 600 1,000 1,030 1,720 483 290

103 67

72 47

115 67

80 47

140 67

98 47

195 67

130 47

Total fixed capital Working capital

170 9

119 5

182 17

127 10

207 14

145 8

262 12

177 7

Total

179

124

199

137

221

153

274

184

Total: $/ton/H/yr.

754

871

839

962

931

1,075

1,234

1,381

($/ton urea): Feed stock and fueld Other operating costse

13.7 25.9

13.7 30.0

73.0 27.2

73.0 31.8

52.4 29.5

52.4 34.4

26.3 36.5

26.3 44.1

Depreciation (81/3%)1

39.6 27.5

43.7 32.0

100.2 29.5

104.8 34.2

81.9 33.4

87.8 39.0

52.8 45.4

70.4 50.9

Profit (10%)9

67.1 34.7

75.7 40.0

129.7 38.7

139.0 44.2

115.3 42.8

126.8 49.4

104.9 56.7

121.3 63.4

168

183

158

176

162

185

Production costs

Total

102

116

cont'd.

SOURCE: The data are extracted from the United Nations Industrial Development Organization (UNIDO) document number UNIDO/ICIS. 22/Rev. 1 dated 28 December 1976 under the title of "Draft World-Wide Study of the Fertilizer Industry: 1975-2000". This study was prepared for consideration by the First Consultation Meeting on the Fertilizer Industry of UN IDO convened in 17-21 January 1977 in Vienna in which the writer participated. a The assumptions underlying the feedstock prices are that naphtha and fuel oil are imported: natural gas is in surplus; and the coal-based plant is located near the coalfield. b The annual outputs are calculated assuming 300 days a year at full production for natural gas, naphtha and fuel oil, and 280 days for coal. c The division between ammonia and urea is somewhat arbitrary since the two plants use a common site and facilities. The ammonia plant costs include a 10-15 megawatt power station to make the plants independent of external power supplies. The capital costs: ( i) are based on December 1975 prices; (ii) make no allowance for inflation or for interest charges during plant construction; (i i i) exclude road and rail connections to the site, water supply and effluent disposal outside the site boundary, as well as housing and amenities for employees; (iv) include a 10% contingency allowance and preoperating expenses at 2.5% of fixed capital; (v) refer to plants in developing countries on a "green field" site; (vi) include one month's storage capacity for feedstock/fuel; and for the large plants, storage capacity for 4,000 tons ammonia, 75,000 tons bulk urea and 10,000 tons bagged urea. d Includes feedstock for ammonia production and fuel for steam and power generation. Where natural gas is available as a feedstock, it is also used as fuel; in the other plants, coal is used as fuel. Where coal is used as feed stock, a relatively low-grade material (a calorific value of 5,500 cal/kg) is assumed. The same material is used as fuel in the naphtha and fuel oil-based plants, but at a cost of US$17.5 a ton to allow for higher transport costs. e Includes bags (50 kg. polythene) at US$6.9 a ton, taxes and insurance at 0.5% of fixed capital, selling expenses at US$1.6 a ton for the larger plant and US$2.0 a ton for the smaller plant, and maintenance. Maintenance is taken as 2.5% of capital for natural gas and naphtha ammonia plants; 2.75% for fuel oil ammonia plants; 3% for coal ammonia plants; and 3.5% for urea plants. t This gives complete depreciation over twelve years. g This is an arbitrary figure and is low for any normal commercial organization.

TABLE 2 Present and Future Hydrocarbon-based Industries in Some West Asian Countries (Figures in 1,000 MTA) Countries Products

A- Refinery: Present capacity 1,000 bbl/d Future expansion 1,000 bbl/d B- Fertilizer & phosphate rock (Ammonia (Urea Present (Ammonium Capacities (sulphate (1977) (Rock phosphate (Ph os., acid (DAPITSP (NPK C- Polymers & aromatics & chemicals (PVC (DDB (Caustic soda Present (Carbon black Capacities (DOP (1977) (Soda ash (Sodium bicarbonate (Sulphur (STPP (Ethylene (LOPE (HDEP (PVC lEG

Iran

Abu Dhabi

Saudi Arabia

-

15 100

537 295

-

-

-

200 300

-

-

-

-

n.a. n.a.

1,350 420 200

Iraq

Kuwait

960 450

177 300

685 100

-

700 500

670 1,000

660 790

140

130

-

-

-

-

130 250 50 60 12 30 16 40 53 10 740 30 750 100 60 150 200

Oman

Jordan

21 48

-

Bahrain

Qatar

250 -

7 15

-

290 330

-

300 140

2,300

13

430 60 30 60

325 n.a. n.a.

-

130

-

-

n.a.

-

-

460

-

-

Table 2 (cont'd} Countries Products

Future Projects(STYRENE (Benzene (0. xylene (P. xylene (LAB (Soda ash (Carbon black (Caustic soda (STPP (DMT (Caprolactam

1980-85

n.a.- not available

Iran

Iraq

300 280 60 84

360 50 470 50 120 26

310 100 70 50

Kuwait

45

Oman

Abu Dhabi

Saudi Arabia

700

Jordan

Bahrain

Qatar

THE DISCUSSION Mr. Abbas K. Gokal

Dr. Bahari, on petroleum products, is there similar understanding within OPEC on prices? H.E. Dr. Ebadollah Bahari

In petrochemical products, there is no understanding. There is a completely free pricing. Mr. Abbas K. Goka/

So, the OPEC members are on their own. H.E. Dr. Ebadollah Bahari

Yes. Mr. Abbas K. Gokal

Don't you think a lot of purpose would be served if there was some kind of an understanding within the OPEC members, since they are the main producers? H.E. Dr. Ebadollah Bahari

You know, in Europe when they were in control of all this sort of products there had been this kind of co-ordination of pricing and projects, which though not publicized nevertheless have been in existence. This is, to some extent, inevitable in any industry which wants to develop any sector. I think some sort of co-ordination of pro.duction and demand has got to come because, unless you do this, you get the severe fluctuations in supply and demand, as in the past, which will not do any good in the end. I am not advocating or ganging up on pricing against anybody, but just co-ordinating the supply and demand situation. Mr. Abbas K. Gokal

Well, if you remember the experience of two-three years ago, when the fertilizer price went up by 300-400%, many countries, which could not afford the prices and had to pay, cut their supplies

151

tremendously. I think it would serve these countries if there were some kind of rationale on pricing. Mr. Hussein Najadi

I would like to inject a note of realism. Are we on a co-operation track or a collision course? lt seems there are two interests here very difficult to link with co-operation. As a Middle Eastern, if I put on my hat, we would like to control the price and not operate in a free enterprise economic system under which supply and demand rules the price for our oil, petrochemical products, and fertilizers. Whenever we run into an economic project, let us protect it. If I put my ASEAN hat on, I really come to a different picture. The cheaper the fertilizer is, the more abundant is the supply of petrochemical. The 230 million people of ASEAN will have a better chance of growth; the farmers would live better; the products which they produce, which they farm, will become more available and cheap. I am also saying, we are on a collision course, when I look at lndonesia-a country of 130 million people, an enormous problem. The problems of Indonesia are of a magnitude unlike any other Asian country's. They are on the course of setting up a petrochemical industry themselves. They are on the course of putting up fertilizer industries; there are three fertilizer plants. And all this to obtain for the farmers, the mass population, a better price for all these commodities. Look at Singapore. Singapore is promoting what is called a chemical-based industry. A chemical-based industry based on its own petrochemicals which has not been announced as a S$1 billion project to start with in Singapore. I am just wondering, Mr. Chairman, are we talking about collision of interests or co-operation of interests. Professor Fawzi Gharaibeh

I suspect, taking the prevailing circumstances in the Middle East, that host countries are constructing projects in relation to other countries. What I am afraid of is that they will end up probably trying to sell to each other. So what will happen, probably, is that the competition will be so intense between the countries of that area that ASEAN technology, in the final analysis, would prevail. You have many efficiencies due to long experience and so on. And, in the final analysis, the petrochemical industry in that area might also 152

fail because of this intensive competition. So, this is what I am afraid of. Mr. Sivavong Changkasiri

Mr. Chairman, may I venture to answer Mr. Najadi's question? I think-in the field of fertilizer, especially urea, with the coming projects of ASEAN industrial projects (one belonging to Indonesia, and one belonging to Malaysia)-the nitrogenous fertilizer industry in Indonesia and Malaysia will be self-sufficient for this ASEAN region, I would say, up to 1985 at least. I am afraid that with ASEAN economic co-operation there will not be enough opportunities of supply from outside because of the commitment by various member countries of ASEAN. So far as petrochemicals are concerned, since Thailand does not have this prestigious project I am afraid that we will be free to import, from say, West Asian countries, because we have no commitment whatsoever to the project in Singapore, or the one in Indonesia, and I have heard that there is going to be one in the Philippines also. His Excellency, the Secretary of Finance, may be able to indicate that. But it looks that, even among West Asian countries themselves, there is competition in setting up petrochemicals and also oil refineries. What I am afraid is that, ten years from now, we may have to buy crude oil with the provision of buying finished oil products, not only just crude oil. And so, I am afraid that in certain areas, there will be a course of collision and in some areas we can avoid that. But with co-operation, if we could bring in investment from West Asian countries into the expansion of our oil refineries as well as petrochemicals, some collision can be avoided. Thank you. H.E. Dr. Ebadol/ah Bahari

Mr. Chairman, I think perhaps I have to make a little more explanation because what I said is completely misunderstood, particularly by Mr. Najadi. I am looking at the long term. lt is no good if you depress the price of any commodity just for the sake of the consumer. As soon as the price goes below cost, there will be a further hampering of investment. And when you have less investment you cannot grow in that field. And let us face it-right now petrochemical consumption in developing countries is only at best something like 10% of what it is in the Western industrialized countries. We want to catch up with them and, therefore, there is 153

large ground tor this sort of consumption. If we start by not promoting the development of these industries within ourselves, by what I explained in joint co-operation, we are going to rely more and more on the industrialized Western countries. I do not mean that in co-operation one should only tie up a plant like a finished nylon shirt. Now, as the Foreign Minister mentioned last night, let not everybody try and do everything at a small scale just because of nationalistic, or other reasons. Let us look at it in a broader sense. Let us apportion industries to various countries in line with what they are best suited to make, and with how we can share this in a sort of exchange manner. If one country is producing, say, ammonia/urea because it is best suited to doing this and can produce it cheaper and give it to the second country, let him take it and exchange certain things which can as tar as possible balance that. And I think the two regions between themselves can easily do this. For example, the import of the foodstuffs by the West Asian regions, if you work it out today, is probably far higher in value than the fertilizer which they can export outside. And this can, in itself, balance the trade. But if you leave to develop in a sort of haphazard way, everybody makes the same product, and industries in areas which they are best suited for are not promoted, consequently we will not develop something for the benefit of all concerned. And let me just say one thing. A lot has been said about oil and the oil crisis; oil, just like rain, is a natural resource. You give us your rainfall and we will give you all the oil you need: Iran is importing something like US$2 billion worth of food products, just because we do not get enough rain. lt may be the land area is more than sufficient tor a country's production. I could give you some more examples. Let every country concentrate on areas best suited to it and then exchange. The Hon. Mr. Cesar E.A. Virata

I was just going to reply to a question with reference to this petrochemical project in the Philippines. Well, we have been having studies of this project for many years already. We commissioned a French company to review it again and we have just received the report from this French company. The basis for this examination is that, in the ASEAN countries, about 40% of the petrochemical products is bought by the Philippines. So we would like to find out whether there is a basis tor producing petrochemicals and we are interested as well in dealing with the other industries that will be

154

associated with it because it is labour intensive. This project will, of course, have to be studied in relation with our other projects because the financial requirements are quite high, as we have under consideration also a steel project. Because our demand for steel is already very high but at the same time we are so highly dependent on Japan and Australia for supply, our steel industries are not really efficient. And we have energy projects and so on. So, we have to decide as to which one comes first because we cannot undertake many of these projects at the same time. Dr. Goh Cheng Teik

Mr. Chairman, just now in his presentation, Mr. Sivavong Changkasiri made a passing reference to the petroleum situation in Malaysia, in particular, to PETRONAS. I would just like to make a short intervention to amplify the remarks that he made. I must qualify this by saying that I do not speak for PETRONAS; I am in the unhappy position of being responsible for power generation in Malaysia. The sore point is that we import the oil we consume from the Gulf States and an even sorer point is that we have to pay taxes and duties for the oil to be used at our stations. But just very generally, I should like to explain so that there is no misconception that the creation of PETRONAS was intended to ensure that we are able to implement a conservationist policy as regards our oil and gas resources. Now, of course, prior to the existence of PETRONAS and the Petroleum Amendment Act, things were, if I might put it a little loosely, a bit laissez faire. Well, as has been shown by the experience of the Saudi Arabs themselves, we had to learn the hard way. And we are now in the happy position of being a net exporter of oil; the present offshore production in East Malaysia, Sabah and Sarawak is about 200,000 barrels per day and next year the production off Trengganu will commence. We also have struck gas deposits off Sarawak and off Trengganu. We have firm plans as to what to do with the gas of Sarawak and Trengganu which are also quite substantial. it is under study at the moment. And we have, as you know, a consulting group. Japanese consultants are advising us how to use our petroleum resources. Although we are in the happy position of being a net exporter because we consume about 200,000 barrels per day, it is the conviction of our government that, in view of the limited resources we have, the best possible use should be made of it. That is why we have put the resources under

155

the control of PETRONAS, directly under the control of the Prime Minister, not that we want to be negative about our relationship with the oil companies but that we want to be very conservationist in our approach to it. But as I said, among other things, this is our hope, that we would also be able to put our finger in the pie. Thank you. Mr. Hussein Najadi

I would just like to make one point to my friend in Tehran, Iran, Dr. Bahari. lt is that I was not trying to say that no co-operation is possible. I was just raising a question on this ASEAN collision and co-operation course. When Singapore signed a joint venture agreement with Sumitomo, about one month or two months ago, there was an uproar in Saudi Arabian diplomatic circles. Why? Because Saudi Arabia and Mitsubishi have been romancing for the past three-four years to build a similar plant in the eastern part of Saudi Arabia. And Mitsubishi was saying, because they are soon having a so-called Japanese national petrochemical plant committed to Singapore, could we delay the Saudi Arabia plant? And Saudi Arabia replied, "You are taking our oil, you had better also have our petrochemical." And this was said, you will notice, to the disappointment of the Singapore petrochemical plant. Two weeks later, the Japanese finally gave the go-ahead to Mitsubishi to have a plant as big as Singapore's to be built in Saudi Arabia despite their knowledge that there was no market for it. That is why I am coming back to this, that sometimes between the consumers and the producers in one industry called oil and petrochemicals, we are on a collision course. And if the offshore gas from Thailand could be used cheaply for your fertilizers or petrochemicals, you might end up having in Thailand, another petrochemical or fertilizer plant. Mr. Sivavong Changkasiri

Mr. Chairman, just to add to the point made by Mr. Najadi concerning the utilization of natural gas in the Gulf of Thailand. I think that, at the present time, we are not even sure how that gas will be used because Union Oil of California demands US$1.55 for one thousand cubic feet or one million b.t.u. at the well-head. If one were to compare this with the price of natural gas at the gate of the ASEAN industrial project, it is only 65 USt and that price would not be escalated over the life of the project. So, I am sure that a person in his right mind will not use the natural gas in Thailand for the 156

manufacture of fertilizer. There is a use for it, in electricity generation. Assuming the rising price of oil continues, so far we have not been able to find alternative sources of energy at a comparable price. So, I am sure that the fuel oil price will go up in the same manner as the crude price. Then there might be some possibility of using natural gas in the Gulf of Thailand for electricity generation. Thank you. The Hon. Cesar E.A. Vi rata

1 was just going to give an example, not of collision, but of accommodation. In the Philippines, we have also been planning for a fertilizer project since we import about 70% of our nitrogen requirements. And we thought that that was indeed a very high dependence on imported fertilizer. We suffered a great deal, during the period of very high fertilizer prices, we had to subsidize fertilizer in order to be able to produce food at reasonable prices. But with the selection of two fertilizer plants in the ASEAN Ministerial Conference, one for Indonesia and the other one for Malaysia, we have, I think in effect, put our fertilizer project into the freezer. In the meantime, we are not going into an indigenous fertilizer plant in the Philippines; we are sure that the ASEAN fertilizer projects will be realized. Mr. Hussein Najadi

You are thinking of petrochemicals? The Hon. Cesar E.A. Virata

Well, yes. Again, there are some problems. W.e do not have the raw material; on the other hand, we have the market. And many people tell us that it is more important to have the market in this particular industry because of the general availability of the raw material, crude oil. And since we can support an economic sized project, largely even for internal requirements, as Dr. Bahari said, it is very dangerous to have a petrochemical plant which is so exportoriented; this is the reason we have been considering this project. In the fin