1 9 6 3 ECONOMIC S U R V E Y

Economic Analysis
and Survey Branch
UNITED
NATIONS
ECONOMIC SU R VE Y
OF
A S IA
AND
THE
FAR EAST
1963
A lso is s u e d as Vol. XIV, No. 4 of th e
ECO NO M IC B U LLE TIN FOR A S IA A N D THE F A R E A S T
B angkok
1964
U N ITED NATIONS
ECONOMIC BULLETIN FOR ASIA A N D THE FAR EAST
Beginning with the ninth volume, for 1958/59, the Econom ic Bulletin for Asia and the Far East is issued quarterly, in June, September,
December and March (instead of May, August, November and February). T he March issue contains the annual Econom ic Survey of Asia and
the Ear East. T he June and September issues contain articles and notes on subjects related to the Asian economy. T he December issue features
special studies and reports relating to economic development and planning. All four issues include a compendium of Asian economic statistics.
The Bulletin is prepared by the secretariat of the Economic Commission for Asia and the Far East and is published entirely on the responsibility of the secretariat. T he designations employed and the presentation of the material in this publication do not imply the expression of any
opinion whatsoever on the part of the Secretariat of the United Nations concerning the legal status of any country or territory or of its authorities,
or concerning the delimitation of the frontiers of any country or territory.
Annual subscription (including the Survey) : US$4.00, sterling 2 8 /6 , or Swiss francs 17.00
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dollars.
Since the 1957 issue, the Economic Survey of A sia and the Far East has, in
addition to reviewing the current situation of the region, contained a study on some
major aspect, or problem, of Asian economy as below:
1957:
Postwar problems of economic development
1958: Review of postwar industrialization
1959:
Foreign trade of ECAFE primary exporting countries
1960: Public finance in the postwar period
1961: Economic growth of ECAFE countries
1962:
Asia’s trade with western Europe
1963:
Import substitution and export diversification
U N ITED NATIONS PUBLICATION
Sales Number:
Price:
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ii
PREFATORY NOTE
T h e present
Survey is th e seventeenth in a series o f re p o rts pre pared
a n n u a lly b y th e secretariat o f the E c o n o m ic C o m m is s io n fo r A s ia and the
F a r East.
A m a jo r ob je ct o f these
Surveys, and o f th e q u a rte rly Economic
Bulletins w h ic h s u p p le m e n t th e m , is the analysis o f recent econom ic
deve lop m en ts in , and a ffe c tin g , the co u n trie s o f A s ia and the F a r East in
so fa r as these developm ents are shaped by, and h e lp to d e te rm in e , th e ir
policies.
I t has been the established p ra ctice since 1957 to exam ine in the a n n u a l
ECAFE
Surveys a specific aspect o f th e econom ies o f the re g io n , in o rd e r
to stu d y lo n g -te rm tre n d s and th e ir im p lic a tio n s fo r n a tio n a l policies.
The
present re p o rt pro vid es in P a rt O ne a series o f fiv e chapters fo rm in g a study
on
im p o r t
s u b s titu tio n
and
e x p o rt
d iv e rs ific a tio n
in
ECAFE
co u n trie s,
fo llo w e d by P a rt T w o c o n s is tin g o f three chapters in w h ic h the e conom ic
developm ents in th e E C A F E re g io n in 1963 are re vie w e d o n the basis o f
in fo rm a tio n available to th e secretariat u p to th e tim e the
Survey was w r itte n
(J a n u a ry 1964).
A re s o lu tio n o f the E c o n o m ic and Social C o u n c il at its 32nd session
in 1961 extended the g e o g ra p h ic a l scope o f th e re g io n to in c lu d e M o n g o lia
and a n o th e r re s o lu tio n at its 36 th session in
1963 extended it to in c lu d e
A u s tra lia , N e w Z ealand and W e s te rn Samoa.
T h e present
Survey includes
these c o u n trie s to th e e xte n t th a t in fo rm a tio n is available.
The
Survey is p u b lis h e d solely o n th e re s p o n s ib ility o f the secretariat
a n d th e view s expressed in i t s h o u ld n o t be a ttrib u te d to the C o m m issio n
o r its m e m b e r g o ve rn m e n ts.
iii
EXPLANATORY NOTE
The term ECAFE region is used in the present issue of the Survey to include Afghanistan, Australia, Brunei, Burma, Cambodia, Ceylon, China
(T aiw an), H ong Kong, India, Indonesia, Iran, Japan, the Republic of Korea, Laos, Malaysia, N ew Zealand, Nepal, Pakistan, the Philippines,
Thailand, the Republic of Viet-Nam and Western Samoa. Unless otherwise specified or m ade clear from the text, it excludes m ainland China,
Mongolia, N orth Korea and N orth Viet-Nam, all centrally planned economies for which adequate information or comparable statistics are not
available. A resolution of the Economic and Social Council at its 36th session in 1963 extended the geographical area of the region to include
Australia, N ew Zealand and Western Samoa. Malaysia united, in September 1963, the Federation of Malaya, Singapore, Sabah (N orth Borneo)
and Sarawak, so that statistics relating to previous years often have to be given for these m em ber countries separately. T here are also cases
where national figures of previous years are combined to compare w ith those of late years. The term developing ECAFE region excludes
Australia, Japan and N ew Zealand.
Unless otherwise stated, all statistical tables are compiled by the ECAFE secretariat based on data published by governments and the United
Nations and its specialized agencies.
Reference to “ tons” indicates metric tons, and to “dollars”, United States dollars, unless otherwise stated.
T he term “ billion” signifies a thousand million.
Three dots ( . . . ) indicate that data are not available or are not separately reported.
A dash (— ) indicates that the am ount is nil or negligible.
A blank in a table indicates that the item is not applicable.
A hyphen ( - ) between dates representing years, e.g. 1950-1960, is used to signify the full period
beginning and end years.
A slash ( / ) indicates a crop year, fiscal year or plan year, e.g., 1961/62.
involved, including the
The crop years used by ECAFE countries in their agricultural statistics vary according
to their agricultural seasons. Except in the more
northern countries of the region, where calendar years are generally used, crop years are indicated by split years, ru nnin g most commonly
from the middle of one year to the m iddle of the following one.
T he plan years of the ECAFE countries coincide with their fiscal years as given in the table
where the plan year coincides with the calendar year.
below, except in the case of China (Taiwan),
In respect of information given, the countries listed below have generally been included, subject to limitation of data.
Country
Currency an d
abbreviation
Fiscal year
U nited States cents
per u n it o f currency
at end of December 1963
Viet-Nam, Republic of . .
Western S a m o a ......................
21 March to 20 March up to 1955/56; 21 March to 31
August, in 1956; September to August, from 1956/57
January to December
October to September
January to December
October to September
January to December
January to December, to 1953; January to June, 1954;
July to June from 1954/55
April to March
April to March
January to December
21 March to 20 March
April to March, to 1953/54; April to June, 1954/55; July
to June (extended to December), 1955/56; January to
December from 1957
July to June from 1957/58
January to December
January to December
July to June
April to March, to 1957/58; April to June 1958/59; July
to June from 1959/60
July to June
January to December, from 1941 to 1960; January to
September, 1961; October to September from 1961/62
January to December
April to March
Piastre (Pr)
Samoan pound (WS£ )
2.857i
278.09
A u s t r a l i a ....................................
Japan ...........................................
New Z e a l a n d ...............................
July-June
April to March
April to March
Australian pound ( A £ )
Yen ( ¥ )
N ew Zealand pound (NZ£ )
224.00
0.278
278.09
A f g h a n is ta n ............................
B r u n e i .....................................
B u r m a ....................................
C a m b o d ia ................................
C e y l o n ....................................
China: Mainlandb . . . .
Taiwanc ..................
Hong K o n g ...........................
I n d i a .........................................
I n d o n e s i a ................................
I r a n .........................................
Korea, Republic of . . .
.
L a o s .........................................
M a l a y s i a ................................
M o n g o l i a ...............................
N e p a l .....................................
P a k is ta n ...................................
P h i l i p p i n e s ...........................
T h a i l a n d ................................
a Par value starting 22 March 1963. Average free rate: 1.987 cents.
b The area under the Central People’s Governm ent of the People’s
Republic of China.
c The area under the Governm ent of the Republic of China.
d Since May 1963, the principal import rates were from 315 to 540
rupiah per US dollar; the principal export rates from 315 to 349
rupiah. For details, see International Financial Statistics.
e The rate of one “W on ” to 10 H w an was established on 10 June
1962. For details, see International Financial Statistics.
Afghani
Brunei dollar (B$)
Kyat (K )
Riel (Ri)
Rupee (Rs)
Yuan
N ew T aiw an dollar (N T $)
H ong Kong dollar (H K $)
Rupee (Rs)
Rupiah (Rp)
Rial
W on (10 H w an )
2 .2 2 2 a
32.67
21.00
2.857
21.00
50.00
2.498
17.50
21.00
d
1.320
0.769e
Kip (K p)
Malaysain dollar (M$)
Tugrek
Nepali Rupee (Rs)
Rupee (Rs)
21.00
Peso (P)
Baht
25.57g
4.807h
1.250
32.67
25.00
13.157f
f Source: T he Colombo Plan, T w elfth A n nual Report of the Consultative C om m ittee, Novem ber 1963.
g Free rate: Selling. Im port rate: 25.57 cents per peso; export rate:
28.49 cents. For details, see International Financial Statistics.
h Par value effective from 20 October 1963.
i Official rate. T he exchange system was modified on 1 January
1962, and a new effective rate of 1.667 cents per piastre was made
applicable to all trade transactions and certain invisibles. For
details, see International Financial Statistics.
iv
TABLE OF CONTENTS
I N T R O D U C T IO N ............................................................................................................................................................................
Part O n e .
1
Im port S u b stitu tio n a n d Export D iv e r sific a tio n
Chapter
I.
The Role of Import Substitution and Export Diversification
....................................................................
1. The general s e t t i n g ...............................................................................................................................................
2. Motives for import substitution
...................................................................................................................
3. Som e econom ic aspects of import substitution and export diversification
................................
4. Choice of industries, priorities and problems
......................................................................................
5
5
14
16
20
II.
Recent Trends in Developing C o u n tr ie s..................................................................................................................
1. The problem of m e a su r e m e n t.............................................................................................................................
2. The overall trend
................................................................................................................................................
3. Import substitution in m a n u f a c t u r i n g ..........................................................................................................
4. A study of selected manufacturing i n d u s t r i e s .......................................................................................
5.
Import substitution in a g r ic u ltu r e ..................................................................................................................
.......................................
.....................................................................
6.
Import substitution of services
28
28
29
40
54
63
67
III.
Policies of implementation
.....................................................................................................................................
......................
1. Policies for the selection and organization of i n d u s t r i e s ........................................
2. Policies for foreign investment
...................................................................................................................
3. Commercial p o l i c i e s ...............................................................................................................................................
4. Tax p o l i c y ..................................................................................................................................................................
5. Credit policy
.........................................................................................................................................................
6. Price policy
........................................................................................................................................................
7. Concluding o b s e r v a t io n s .....................................................................................................................................
69
69
71
73
78
80
81
82
IV.
The Experience of J a p a n ................................................................................................................................................
1. Experience during the early development s t a g e .........................................................................................
2.
More recent e x p e r i e n c e .....................................................................................................................................
84
84
96
V.
Regional Co-operation
.............................................................................................................................................
1. Co-operation for intra-regional t r a d e .........................................................................................................
2.
Concerted action on special commodity problems
...........................................................................
3.
Other measures for regional c o - o p e r a t io n ...............................................................................................
101
101
107
112
Part T w o.
VI.
T h e ECAFE R eg ion in 1 9 6 3
Agriculture
..................................................................................................................................................................
1.
Food and people
..............................................................................................................................................
2.
Land, water and fertilizer
...........................................................................................................................
3.
F i s h e r i e s .................................................................................................................................................................
4.
Export crops
.......................................................................................................................................................
5.
Farming industries in Japan, Australia and New Z e a l a n d ....................................................................
V
119
119
124
128
129
133
Page
Chapter
VII.
Industrial Production
...............................................................................................................................................
1. Export m e t a l s ..........................................................................................................................................................
2. Sources of p o w e r ................................................................................................................................................
3. M a n u fa c tu r in g .........................................................................................................................................................
4. Building and construction
.............................................................................................................................
135
135
138
143
152
VIII.
Trade and F i n a n c e ........................................................................................................................................................
1. Intra-regional t r a d e ...........................................................................................................
...............................
2. Exports and imports in 1963 .............................................................................................................................
3. State trading and bilateral a g r e e m e n t s ...............................
.....................................................................
4. Balances of payments
.......................................................................................................................................
5. Serious inflations
................................................................................................................................................
6. Financial conditions in other c o u n t r i e s ...........................................................................................................
154
154
157
162
165
168
173
vi
LIST OF TABLES
Part One.
Import Substitution and Export Diversification
Page
I. 1
Developing regions: unit value indexes and terms of trade for primary e x p o r t s ...............................
7
I. 2
Developing ECAFE region: quantum indexes, unit value indexes and commodity trade balance . .
7
I. 3
ECAFE countries: terms of trade and capacity to import, 1962
...........................................................
8
I. 4
ECAFE countries: source of financing for i m p o r t s .......................................................................................
12
I. 5
Developing ECAFE region: foreign capital inflow, 1951-1962
...........................................................
13
I. 6
Developing ECAFE countries: net capital inflow from OECD countries and Japan combined
and multilateral agencies, 1960-1962 ...........................................................................................................
14
Imports of agricultural products and of manufactured goods as a percentage of gross domestic
product in the respective sectors, 1953-1954 and 1961-1962 ...........................................................
30
Index numbers of production and import at constant prices for food, agriculture and manufacturing
....................................................................................................................................................................
30
II. 3
Import substitution of consumption g o o d s ..........................................................................................................
31
II. 4
Import content of gross domestic fixed capital formation
...................................................................
32
II. 5
Substitution of import of material for consumption goods, for import of consumption goods
(excluding food)
.................................................................................................................................................
II. 1
II. 2
33
II. 6
Substitution of import of capital goods for import of consumption goods (excluding food ) . .
34
II. 7
Substitution of import of material for capital goods, for import of capital g o o d s ......................
34
II. 8
Average annual rate of growth of gross national product, 1953-1954 to 1960-1961
.....................
35
II. 9
Percentage distribution of gross national product, 1953-1954 and 1960-1961
...............................
36
II.10
Percentage distribution of exports by major SITC sections, 1955 and 1961
...............................
37
II.11
Developing ECAFE region: import and export by SITC sections, 1955 and 1961
.....................
37
II.12
Developing ECAFE region: export by destination, 1953-1954 and 1961-1962
................................
39
II.13
Import duty, import substitution and export of selected manufactured commodities, 1955 and
1962 . . ....................................................................................................................................................................
41
Gross value of selected import substituting manufacturing output as a proportion of total gross
census manufacturing output, 1955 and 1961
..............................................................................
49
Indexes of import substituting manufacturing output and other economic indicators at constant
prices, 1961
...........................................................................................................................................................
49
Output of cotton textiles as percentages of total gross census manufacturing output. 1955 and
1 9 6 1 .............................................................................................................................................................................
50
II.17
Cost of domestic and imported components used in automobile chassis assembled in Australia . .
50
II.18
Ceylon: planned foreign exchange saving in a ten-year period for three industries, 1959-1968 . .
51
II.19
China (Taiwan) : foreign exchange saving in the industrial sector estimated in the third four-year
plan, 1961-1964
.................................................................................................................................................
52
II.20
Total exports and selected new manufactured exports in intra-regional t r a d e ........................................
53
II.21
Import substitution in cotton manufactures, sugar, paper, cement, fertilizer and steel
56
II.14
II.15
II.16
vii
..
..
Page
II.22
Import substitution in major agricultural commodities, 1950-1952 and 1960-1962
...................................65
II.23
Merchant fleets and tonnage of vessels c l e a r e d ............................................................................................................... 68
IV. 1
Japan’s major imports by commodity groups, five-year averages, 1871-1900
...............................
85
IV. 2
Japan’s major imports by commodities, five-year averages, 1871-1900 .................................................
86
IV. 3
Japan’s major external transactions, five-year averages, 1871-1900
..................................................
88
IV. 4
Japan’s major exports by commodities, five-year averages, 1871-1900
................................................
89
V. 1
ECAFE region: intra-regional trade as percentages of total trade, 1953-1954 and 1961-1962 . .
101
V. 2
ECAFE countries: share of intra-regional trade in total trade, average of 1961-1962 .....................
101
V. 3
ECAFE countries: rice production and trade, 1937-1939 and 1958-1960
103
V. 4
ECAFE region: trade in manufactures, 1 9 6 1 ..............................................................................................112
Part Two.
........................................
The ECAFE Region in 1 9 6 3
VI. 1
Developing ECAFE region: indexes of agricultural o u t p u t s ....................................................................122
VI. 2
ECAFE countries: net imports of cereals, 1962 and 1963
VI. 3
ECAFE countries: irrigated arable land, 1958-1966
VI. 4
ECAFE countries: production, imports, and usage of commercial fertilizers, 1 9 6 1 /6 2 and
1 9 6 6 /6 7 ...................................................................................................................................................................
...................................................................
124
............................................................................
125
VII. 1
ECAFE countries: consumption, present and planned capacity for petroleum
VII. 2
ECAFE countries: installed capacity of public electricity supply in 1961. and planned additions
to 1965 ...................................................................................................................................................................
VII. 3
ECAFE region: indexes of manufacturing outputs, 1958-1963
refining
..
127
..
140
142
..........................................................
144
VIII. 1
ECAFE region: intra-regional exports, imports and trade balances, 1955 and
1962 ............
VIII. 2
ECAFE region: quantities, prices and receipts for exports of primary commodities, 1962-1963
(first h a l v e s ) ..........................................................................................................................................................158
VIII. 3
Selected ECAFE countries: total exports and exports to centrally planned economies, 19581962 ............................................................................................................................................................................
164
VIII. 4
Selected ECAFE countries: balance of payments in financing form, 1958-1962
167
VIII. 5
Selected ECAFE countries: external public d e b t ................................................................................................ 168
VIII. 6
Laos: indicators of inflation, 1958-1963
VIII. 7
Indonesia: selected indicators of inflation, 1958-1963
VIII. 8
Korea, Republic of: selected indicators of inflation, 1958-1963
...............................
.........................................................................................................
viii
..............................................................................
...........................................................
155
169
171
172
LIST OF CHARTS
Part One.
Import Substitution and Export Diversification
Page
1.
2.
3.
4.
Developing ECAFE countries: indices of unit value, quantum and total value of 18 primary exports,
1950-1962 ......................................................................................................................................
..
..
..
..
9
Cumulative percentage share of the ten major export commodities in total exports, 1953-1954 and
1961-1962 ............................................................................................................................................................................
38
Relationship between initial degree of substitution in 1955, and changes in degree of substitution over
................................................................................................................................................
the period 1955-1962
48
Japan: production, import and export of cotton yarn, 1878-1897
91
Part Two.
...........................................................
The ECAFE Region in 1963
5.
Developing ECAFE countries: indices of population and f o o d ..............................................................................120
6.
ECAFE region: major agricultural exports, 1958-1963
7.
ECAFE region: production of major minerals and electricity, 1958-1963
8.
ECAFE
countries: major net intra-regional export flows, 1962
9.
ECAFE
countries: composition of exports, 1962
10.
ECAFE
countries: foreign trade, 1958-1963
11.
ECAFE
countries: government expenditures and current revenues, 1958-1963
12.
ECAFE
c o u n t r ie s : i n d i c e s o f w h o le s a le pr ice s, c o s t o f l i v i n g andw a g e
.......................................................................................
130
.................................................
136
....................................................................
156
...................................................................................................
157
..........................................................................................................
159
ix
........................................
174
r a te s ,1 9 5 8 - 1 9 6 3 ........................
1 76
INTRODUCTION
The prime concern of the developing ECAFE
countries is to raise the per capita incomes and
living standards of their peoples.
The successful
pursuit of this aim involves planning for the
efficient and co-ordinated development of the three
major sectors of the economy, primary, secondary and
tertiary, and this must be carried out within the
limitations of a socio-economic environment shaped
by habit and custom and by resource endowments,
both human and material. During the United Nations
Development Decade of the sixties, great changes will
undoubtedly take place in the economies of the developing ECAFE countries as they move towards the
realization of this common goal.
Industrialization is seen as a means towards this
end and so is economic diversification; when linked
with trade, they constitute a powerful triad of forces
for economic growth. Their role in raising income
and reducing dependence upon hard-hit traditional
lines of production and export, as well as in nurturing
new skills and techniques, is clearly recognized by
the developing countries in their growth strategies,
and the twin techniques of import substitution and
export diversification are being vigorously used to
assist in achieving these aims. Most of the developing countries are m oving inexorably in this direction
and have been doing so for some years, with varying
degrees of success. In respect of some individual
industries, the process is relatively advanced, in others,
it has barely begun.
However, the course of development has not
always been either smooth or easy. Its achievement
at a satisfactory rate has been inhibited by many
problems, chief among which have been the crucial
shortage of foodstuffs resulting from the lagging and
uncertain progress of the agricultural sector, and the
over-ambitious nature of certain capital-intensive programmes which has led to demands for large amounts
of foreign capital.
Together, these have created
severe and m ounting foreign exchange difficulties for
the developing countries. From this viewpoint, import
substitution and export diversification may be seen
as partners in the move towards removing, or at
least reducing, the external deficit.
The structural changes accompanying and resulting from such policies are being induced within the
general contexts of development plans and, indeed,
constitute an integral and important part of those
plans. Thus a study of the processes of import substitution and export diversification, as they unfold,
and of their implications and repercussions upon basic
economic aggregates such as employment, production,
trade and incomes, is essential.
During past years, this S urvey has contained
various studies of problems arising from industrialization, trade, finance and economic growth generally.
This year, the special purpose of the Survey is to
attempt to explore, from these and other viewpoints,
the general question of how far and with what degrees
of success the dual processes of import substitution
and export diversification have been carried out in
the countries of the region. It is, of course, impossible
to examine the matter thoroughly for many reasons,
not the least of which is a severe deficiency in satisfactory statistical information regarding the whole
spectrum of import substitution and export diversification in south-east Asia. However, there is now
sufficient evidence available in one form or another
for making some general and, it is hoped, useful
observations about their course over the period of
the last decade.
The first chapter presents the descriptive and
analytical background to the largely statistical analysis
which follows in chapter II. The historic background
to current ideas is briefly examined in its time perspective, wherein one may see how the present situation
has emerged. Some of the major current problems of
the ECAFE countries are discussed insofar as they
are relevant to the general theme of this study.
Motives are described and analysed and the economics
of import substitution and export diversification
examined.
The economic nexus between the Great Powers
of western Europe and the New World and the southeast Asian countries, which had grown up in the
nineteenth century and the first half of the twentieth
century, had had its advantages and drawbacks. By
the beginning of the United Nations Development
Decade, the links had been largely broken or at least
severely modified; but the developing countries’ overwhelming dependence upon primary product export,
which can be said to be in part a result of the earlier
trading arrangements, remained and continued to pose
for them a serious problem.
Despite quantity increases in exports, between
1953 and 1962, the trade deficit of the ECAFE region
trebled, and the position seems likely to continue
deteriorating for many years to come. The problem
is aggravated by the fact that reliance cannot now
be placed upon some of the methods of financing the
trade deficit which were used in the p ast; in particular,
the further liquidation of foreign assets cannot be
hoped for, since reserves are now very low and the
rate of foreign capital inflow has been falling since
1960. Nor is there ground for much optimism concerning the ability of the primary export sector to
achieve a rapid increase in its contribution of foreign
exchange earnings in the near future. In fact, even
in the absence of any further deterioration of the
terms of trade for primary products— in itself, an
optimistic assumption— it may prove difficult to
achieve any very helpful increases in primary export
2
earnings. There is a steady trend in the developed
countries towards a decreasing use of primary
materials in industrial production resulting from the
use of substitutes, and towards the restriction of
imports of primary products, particularly those of a
processed nature. Furthermore, the developed countries are expanding their own primary production.
Thus the developing countries face severe difficulties in attempting to redress their present foreign
exchange problems. It is within this framework that
they are endeavouring to push ahead with programmes
for import substitution and export diversification.
Of course, it is not only as techniques for helping
to overcome balance of payments problems that import
substitution and export diversification are employed.
They occur and develop not only as a result of official
policy decisions but also as a response of the private
sector to opportunities for profit and expansion. Thus
they form part of the wider process of industrialization and development and can have a stimulating
effect upon incentives and attitudes, and upon production and incomes.
The establishment of new industries whose products have a proven domestic market may lead to
increased external economies through the interindustry nexus and create a favourable environment
for the establishment of yet other new industries.
More important, such moves stimulate the minds of
workers and management alike to seek opportunities
for innovation within the new industries and within
already existing industries. If well nourished and
supported with adequate training facilities and infrastructure, the import-substituting industries will carry
the seeds of general economic growth. The accompanying increase in investment opportunities will also
help to promote additional savings, investment and
income.
Nevertheless, planning for import substitution
should be undertaken with extreme care, in order not
to waste scarce resources or lead to frustration and
disappointment and reduce the initiative and momentum for future growth. Especially for countries with
small domestic markets, the possibility of export at
an early stage in order to expand the market and
achieve internal and external economies should be
considered; in this respect, the problems of costs and
quality are particularly important since the new products will be subjected to the rigours of the international market.
The importance of the link between import
substitution and trade cannot be overstressed, and in
this context the export of newly introduced manufactured goods deserves close attention. Available
statistics show that, in these lines, the growth of
exports is more rapid than in the case of traditional
exports; hence they hold out brighter prospects for
Economic Survey of Asia and the Far East, 1963
the future. Apart from manufactured commodities,
the export of newly developed agricultural products,
though relatively small in amount, has been successful
in several countries of the region and more attention
should be given to these possibilities in the future.
The export potential of primary products and the
importance of the primary sector in supporting the
industrial sector’s manufacture of these products serve
to illustrate the danger of concentrating exclusively
on the latter sector.
Each country in the region has evolved its own
methods and approach to the problem of selecting
manufacturing industries for development. Hong
Kong and the Federation of Malaya, at one extreme,
leave the choices and decisions mainly to private
entrepreneurs who have tended to concentrate on
consumer goods industries; whereas mainland China
and India, at the other, depend primarily on government planning, placing emphasis on heavy industry.
The differences of background in the various countries
have naturally led to these divergent policies, and
each country must evolve methods appropriate to its
peculiar political, social and economic environment.
Policies for the selection of industries and the
establishment of development priorities which are
appropriate to countries with large domestic and
export markets, and with substantial and varied
resources, may not be always suitable for smaller
countries. Accordingly, the possibilities of developing manufacturing industries in clusters with intraregional division of labour may be seen as a partial
solution to the essential need for external economies
and decreased costs.
One of the main effects of import substitution
programmes, as countries in the region are acutely
aware, is that they usually result in an increased
demand for foreign exchange, at least in the initial
stages. When industries are being established, capital
requirements are often large and well beyond the
resources of the individual economy; and, when they
are in operation, their requirements for imported
materials may be substantial.
Apart from this,
initially higher domestic costs may mean that the
country as a whole is paying more for the privilege
of producing its own commodities than importing
them. These considerations emphasize the necessity
for close scrutiny of proposals for domestic production of imported goods; import substitution is not
invariably an unmixed blessing.
Thus import substitution and export diversification, as economic measures designed to contribute
in part to inducing satisfactory growth and decreasing payments deficits, cannot be regarded as easy to
execute or as certain in their effect. The pursuit of
these goals requires careful planning, constant supervision, and flexibility in the establishment of policy
and its implementation. Given these pre-requisites,
Introduction
import substitution and export diversification may,
when combined with intra-regional and international
trade, be powerful factors in promoting increased
incomes and higher living standards.
In chapter II, an attempt is made to describe,
within the limitations of the available statistics, the
extent to which import substitution has taken place
over the last decade in the developing countries of
the ECAFE region. A necessary adjunct to such a
study is, of course, an examination of trade patterns
and this is also undertaken in chapter II. Rather more
detailed statistical information of the type needed for
this study was available for the manufacturing sector
than for the primary or tertiary sectors; consequently,
the manufacturing segment of each country’s importsubstituting programme has received more attention.
Nevertheless, this study also presents a brief statistical
analysis and interpretation of the course of import
substitution and export diversification in the primary
and tertiary sectors.
During the period from 1953-54 to 1961-62,
import substitution, as measured by the increasing
share of domestic production in total supply (domestic
production plus im ports), was achieved in most of the
countries of the region in respect of consumption
goods. Additionally, in Ceylon and the Philippines,
import substitution through the expansion of domestic
foodstuffs production was successful.
The relative
decline in consumption goods imports as a result of
substitution programmes has, however, been counterbalanced by increasing imports of the materials and
capital goods upon which the success of those programmes has depended.
Accompanying this substitution, which has occurred mainly in the manufacturing sector, has been a decline in the percentage
of income originating from primary production and
a corresponding increase for manufacturing. Moreover, some diversion of export from materials to
manufactured products is evident.
Despite evidences of import substitution in food
and other consumption goods, the most marked
substitution activities have taken place in the field
of manufacturing. Statistics show that this covers a
wide range of commodities, including basic consumption goods, durable consumption goods, chemical
products, basic metals, other construction material
and machinery, and in many of these cases, not only
has domestic production been substituted for imports
but some of it has been exported.
A much larger proportion of newly manufactured
goods than of traditional exports is being traded
within the developing ECAFE region. This is not
surprising in view of the fact that the developed
countries have in the past imported the region’s
primary products and raw materials, at the same time
discouraging manufactured imports in order to protect
and develop their own secondary industries. Besides,
3
some of the new manufactures from the developing
countries have not yet reached the standard of similar
products traded by the developed countries, and these
more readily find a market in the region where
consumers are concerned less about quality than price.
Under these circumstances, it is to be expected that,
as industrialization proceeds in these countries and
particularly if some complementarity between the
different economies can be achieved, intra-regional
trade in these newly developed manufactures will
increase. This, of course, does not mean that measures
to expand trade in the traditional products should not
be intensified. Eastern Europe, Africa, the Middle
East and Japan have demonstrated their need for
these products and it may well be that a reorientation
of trade channels to take cognizance of the increasing
importance of these markets would prove of considerable assistance.
Chapter III examines government policies which
are directed, either implicitly or explicitly, towards
import substitution and export diversification in the
region. These statements of intention, often found in
official plans or in public or private, official or
unofficial announcements are, of course, highly relevant
to the anlysis which precedes them, and some of the
interpretation in chapter II could not have been made
without a knowledge of the policy issues and judgements involved.
The Japanese economy, which, as explained in
the text, differs in many ways from those of the
developing ECAFE countries, is given separate treatment in chapter IV.
Chapter V contains descriptions, suggestions,
exhortations, since it attempts to apply certain lessons
derivable from the previous analysis to the peculiar
problems of the region as a whole. The usefulness of
any study such as this will lie in the practical suggestions which may emerge for the economic betterment
of the peoples of south-east Asia, and indeed, the
peoples of the world. The solutions to some of the
problems raised may best be achieved by taking a
regional rather than a national view; this, in essence,
is the theme of the final chapter.
1963
was a year of mixed economic changes for
the ECAFE region; it was a satisfactory one only for
the comparatively advanced countries, Japan, Australia
and New Zealand.
For the developing countries,
agriculture will for many years remain the most
important economic sector; and, unfortunately, in
1963 agricultural outputs lagged further behind the
all too rapid growth of populations. Nowhere, in the
developing ECAFE region, has there been significant
progress in raising nutritional standards above
inadequate prewar levels.
This is the more disappointing and constitutes a greater challenge to make
bolder efforts at agricultural development in that
A sia’s potentials for food production are much beyond
4
present achievements. Accordingly, some attention is
paid in chapter VI to the three basic avenues to
greater food production; irrigation, fertilizers and
fisheries.
Industrial progress, however, continued. In the
developing countries, recent rates of industrial growth
were improved upon. Australia recovered during the
year from a previous recession, but in Japan the
growth rate in manufacturing, in the first half of
1963, was little more than 2 per cent. Particularly
notable, and important for the future, was the
development of chemicals, metals and machinery.
The general development of industry and transportation, moreover, has led to a particularly rapid growth
of petroleum refining and electricity generation, which
is also surveyed in some detail in chapter VII.
Export receipts rose for most major primary
products. Exports of manufactures also increased,
although restrictions placed on imports by the
United Kingdom and the United States again held
down shipments of cotton textiles.
Most developing countries, nevertheless, had to maintain fairly
stringent import controls and some were in difficulties
over balances of payments. The situation, of course,
is not new and some countries have sought relief
by state trading arrangements, especially with centrally
planned economies whose purchases from ECAFE
countries are rapidly growing. During 1963, moreover, notable further steps were taken to promote
intra-regional economic co-operation among ECAFE
countries. Accordingly, chapter VIII, besides continuing the structural analysis of ECAFE trade begun
in the previous two Surveys and now requiring
enlargement because of the recent broadening of the
region’s formal geographical scope to include A ustralia, New Zealand and Western Samoa, offers a brief
survey of recent developments in state trading.
It also makes a survey of balances of payments
for eleven developing countries that publish detailed
statistics about external transactions. The important
role of foreign loans is brought out, and also the
dangers of increasing payments for external debt
service in circumstances where the growth of exports
is inadequate. It is suggested that the problem needs
examination by both borrowing and lending countries
and that, failing good prospects for exports, which are
beyond any individual country’s power to realize
alone, greater consideration should be given to grants
or to loans not tied to particular projects. The point
is underlined by the repeated failure of manufacturing
industries in Indonesia and a few other countries to
work at anything like capacity because of acute
shortages of foreign exchange for imports of materials
and spare parts.
During the year there was serious inflation in the
Republic of Korea, Laos and Indonesia. In none of
Economic Survey of Asia and the Far East, 1963
them was the problem new, but it became very acute
for all three in 1963; hence chapter V III also
presents a brief analysis of their peculiar financial
difficulties. Other countries, which managed to avoid
inflation, also had financial difficulties connected
with rising expenditures on defence or with uncomfortable external reserves and payments situations. Some
countries which had relaxed financial conditions
during the year were also threatened with balance
of payments difficulties. All this strongly underlines
the urgent need for international measures to promote
or permit greater trade in primary products and the
simpler manufactures such as textiles. The economic
aspirations of Asia and hence, if only because of Asia's
vast size, the prosperity of the world itself, may well
depend upon the outcome of the two important conferences to be held in 1964; the GATT discussions
and the United Nations Conference on Trade and
Development.
Inevitably, the study of import substitution,
export diversification and general economic growth
has raised many questions which limitations of space
and time make it impossible to answer in detail.
What, for instance, should be the appropriate basis
for the choice of productive activities for import
substitution and export diversification, having due
regard to size of domestic market and resource endowment, and sequence and priorities for development?
In domestic markets of differing sizes and resource
availabilities, what are the main problems which arise
in the development of various types of industries
(e.g. basic consumption goods, durable consumer
goods, basic metals etc.) ? Should policies of protection, including import duties and quantitative restrictions and export incentives be regarded as temporary
measures only? What effects do such measures have
upon costs and quality? Should planning for export
be considered an integral part of planning for import
substitution, even at the early stages? To what extent
and in what ways will domestic inflationary pressure
militate against successful import substitution? What
technological research and personnel training programmes are needed at both the national and regional
levels?
In what ways can regional co-operation
assist in enlarging the market through the establishment of joint industrial ventures or through intraregional division of labour in the form of import
substitution on a regional basis, and to what extent
will these assist the smaller countries to achieve
internal and external economies? In what ways can
regional co-operation assist in improving the quality
of internationally traded goods, in financing industrial
development and trade, in stabilizing prices and in
expanding export?
The answers to these and other questions will
emerge in practical terms as the region develops. It
is hoped that this study may be useful in drawing
attention to some of the main issues involved.
Part One
IMPORT SUBSTITUTION AND EXPORT DIVERSIFICATION
Chapter
I
THE ROLE OF IMPORT SUBSTITUTION AND
EXPORT DIVERSIFICATION
1.
The General Setting
The need to diversify the economies of the
developing ECAFE countries1 in primary as well as
secondary industry is now generally recognized in
their growth strategies.
Two of the means for
achieving this— import substitution and export diversification— have been given considerable attention by
the governments of these countries and have received
explicit recognition in development plans and other
official documents. It is necessary, first of all, to see
why this need has arisen and then to examine the
economic im plications of the measures that are
proposed. To do this, one must look first at the
primary industry base of the developing ECAFE
economies.
It is upon a primary industry base (m ainly of
food and raw materials) that the economies of southeast Asia were built up in the past and the pattern
has persisted into the twentieth century, though with
some recent m odifications. These were precisely the
products that the food-hungry, industrializing countries
of Europe and the New World demanded; in exchange
they could offer manufactures. The exchange process
was self-reinforcing, since supplies of development
capital flowing towards south-east Asia were directed
mainly into primary industry by the lenders in order
to ensure continuity and expansion of production of
the com m odities most needed.
This arrangement
benefited both types of econom y to the extent that
they enjoyed a faster rate of growth than would
otherwise have been possible. But from this early
and continuing emphasis upon primary production
spring many of the problems now facing the Asian
countries.
This type of association between the two groups
of countries had begun to disintegrate long before the
second World War.2 It may, however, be more
1 T he Economic and Social Council at its 36th session extended the
geographical scope of the ECAFE region to include Australia, N ew
Zealand and W estern Samoa. T he developing ECAFE region is here
defined to exclude Australia, Japan and N ew Zealand. Conclusions
draw n from statistical analysis, however, are relevant only to those
countries for w hich statistics were available.
2 T he grow th of the cotton textile industry in India in the interw ar period is a good example of such a departure from prim ary pro duction. In the face of hostile commercial policies, the new m an u facturing industry grew rapidly and was able to find markets in
other developing Asian countries as well as in the industrial countries.
appropriate to regard the end of World War II as
the beginning of the wholesale move towards industrialization on the part of the developing countries.
It was from this time that manufacturing production
began to grow significantly, concomitant with moves
on the part of most Asian countries towards political
and economic independence and the achievement of
ultimate economic self-sufficiency through economic
development. The achievement of these goals was to
be assisted by— among other measures— import substitution and export diversification.
___ In spite of this, primary product exports still
constitute an overwhelming proportion of the region’s
trade. About four-fifths of the export income of the
developing ECAFE countries comes from food,
beverages, tobacco, crude materials, and mineral fuels.3
Thus the primary export sector is still strategically the
most important.
Within this sector there are, apart from the
fundamental difficulty of coping with uncertain
seasonal conditions which confronts all primary producers, three basic problems confronting the southeast Asian countries. The first is that of actually
increasing their export volume in the face of the
various forces which are increasingly at work to
depress primary export prospects. In this context, the
possibilities of expansion through diversification and
through better promotional techniques may offer
considerable hope and should not be lost sight of.
Som e facts and comments on the possibilities in this
direction are made below, in chapters II and V.
The second problem is how to prevent or somehow
compensate for the steady deterioration in the terms
of trade for primary exports which has continued
for some years now. It is cold consolation to the
countries of the region to know that in this respect they
have not fared as badly as developing countries in
other regions. The third problem, which meshes with
the other two, is how to remove or decrease the
inhibiting effects of severe year-to-year fluctuations in
international primary product prices. These points,
again, are taken up in chapter V.
3 See table II-11, chapter II.
Part One.
6
Combined, these factors have spelt out severe
balance of payments difficulties for the developing
ECAFE countries, since they have all restricted the
ability of these countries to increase much-needed
foreign exchange earnings in order to carry through
their development plans. It is not proposed here to
comment upon this situation in detail since it has
already received a great deal of attention in the many
studies which have appeared in recent years.4 An
appreciation of its existence and significance is, however, fundamental to an understanding of why and
how import substitution and export diversification
have assumed increasing importance as national
policies in the developing ECAFE countries during
the last decade. These and related issues will be
taken up in this and the following sections of this
chapter.
It has already been pointed out that the largest
source of finance for imports comes from the sale of
primary products. About 80 per cent of the value
of exports of developing ECAFE countries comprises
food, agricultural materials and minerals; in fact,
some 18 primary products account for over 50 per
cent of total exports from the developing ECAFE
region excluding Hong Kong.5 The heavy dependence
for export proceeds on a small number of commodities
places the developing ECAFE countries in a very
precarious position, as is demonstrated by the effects
which changing terms of trade have had in recent
years.
The terms of trade have become less and less
favourable to primary products as against manufactured goods.6 The developing ECAFE region,
taken as a whole, however, appears to have suffered
less in this respect than other developing regions,
primarily because it enjoys some advantages from
its semi-monopoly position in the export of products
such as tea, jute and rubber, whose prices declined
less than those of other primary products. This can
be seen from table I-1. If the abnormal increase of
price during the Korean war period is disregarded,
the post-Korean-war unit value of both food and
agricultural materials from ECAFE countries fell
less than those from other developing regions; so did
the general index for all primary products.
The
terms of trade too, did not deteriorate so much as
4 See, for example, FAO, Agricultural Commodities— Projections
for 1970, Rome, 1962; ECE, Economic Survey of Europe in 1960,
chapter V, Geneva, 1961; GA TT, International Trade 1961, Geneva,
September 1962; United Nations, Economic Survey o f Asia and the
Far Easst, 1962.
5 Including H ong Kong, 46 per cent.
6 T he deterioration in the terms of trade as shown in the statistics
is perhaps more apparent than real, as the quality of the imported
manufactured goods has improved m uch m ore than that of prim ary
products. T he unit value of imports and exports has not taken this
factor into account.
Import Substitution and Export Diversification
for other developing regions.7 Year-to-year fluctuations, however, of the unit value of exports and of the
terms of trade have been larger than in other developing regions.
Concomitant with an adverse movement in the
terms of trade, there was an adverse movement in the
relationship between the volumes of exports and
imports; the quantum increase for the former was
smaller than that for the latter. Table I-2 shows that,
from 1953 to 1962, while the import quantum
increased by 59 per cent, the export quantum for all
commodities increased by only 34 per cent. If the
trend is traced back to the prewar period, it will be
found that the import quantum doubled between 1938
and 1962, but that the export quantum increased by
only 5 per cent!
It is because of this stagnation
of the export quantum in a period of increased import
demand that the post-war balance of payments
difficulties of most countries have arisen. The net
export surplus for the region of $280 million in
1938 had turned into a net deficit of $980 million
by 1953, and rose to $2,700 m illion by 1962.
However, differences between countries cancel out
in studies based on regional aggregates. The apparent
lack of deterioration in the terms of trade for the
developing region taken as a whole was entirely due
to favourable terms of trade for three countries,
Ceylon, India and the Federation of M alaya;8 the
terms of trade for other countries deteriorated considerably. This can be seen from table I-3. It also
shows that in China (T aiw an ), the Philippines and
the Republic of Viet-Nam, the increases in the export
quanta between 1953 and 1962 were more than
sufficient to offset the loss of foreign exchange proceeds from the deterioration in the terms of trade;
they were thus able to increase their capacity to
import fast enough to match their requirements. Of
course, they still suffered losses from the changes in
the terms of trade. Australia and New Zealand, 80 to
95 per cent of whose exports were agricultural products, shared the same fate of deteriorating terms of
trade.9
Not all primary products behave in the same
way, and the experience of individual countries has
varied according to their specializations. The unit
value of a few commodities actually increased, sometimes quite sharply.
7 Because of the fact that colum n 11 of table I -1 includes the
ECAFE region, the figures will be even lower if the ECAFE region
is excluded.
8 Malaysia, comprising of the Federation of Malaya, Sabah (N orth
Borneo), Sarawak and Singapore, has been established since 16
September 1963. In this and the following chapters of the Survey,
references have to be m ade to the constituent territories in regard to
events that took place prior to that date.
9 For annual figures of terms of trade in individual countries, see
infra, the section on Asian Economic Statistics.
Chanter I.
The Role of Import Substitution and Export Diversification
Table I-1.
7
Developing R egions: Unit Value Indexes and Terms of Trade for Primary Exports
(in US dollars, 1953 = 100)
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
Source:
T erm s o f trade
Prim ary exports
Im p o rts
A ll
developing
regionsa
D eveloping
ECAFE
region
( 1)
( 2)
89
105
107
100
96
97
99
103
99
97
98
97
96
93
115
D eveloping ECAFE regionc
A ll developing regions
101
96
94
98
96
95
( 10)
89
94
100
100
105
95
90
90
93
90
89
91
94
127
189
129
100
96
118
110
109
99
125
130
109
101
103
111
M inerals
General
Food
(3 )
(4 )
(5 )
(6)
116
100
101
108
106
102
92
101
105
95
91
100
117
98
97
100
95
84
80
78
78
95
96
96
General
(9 )
Food
101
110
100
Minerals
( 7)
A gricultural
non-food
( 8)
A gricu ltura l
non-foodb
102
105
100
102
100
103
104
110
110
102
100
99
99
109
102
101
103
98
93
92
88
87
110
100
D eveloping
ECAFE
region
A ll
developing
regions
( 10) / ( 2 )
(6)/(l)
( 12 )
( 11)
120
127
106
100
104
111
105
92
102
113
109
103
101
112
147
117
98
100
113
105
102
100
94
99
99
107
101
101
103
104
96
92
92
91
92
98
107
107
99
96
100
99
96
94
91
91
Unless otherwise indicated, all tables are compiled by the ECAFE secretariat based on government or United Nations statistics.
For the present table, columns (1 ) to (6) and (11) are taken from from United Nations, M onthly Bulletin of Statistics; colum ns
(7) to (10) and (12) are compiled by the ECAFE Secretariat.
a Latin America, Africa excluding South Africa, Middle East and developing ECAFE region.
b Includes non-food products of forests and fisheries.
c For country coverage, see inf ra, Asian Economic Statistics, table 1.
Table I-2.
Developing ECAFE R egion:a
Quantum Indexes,
Unit Value Indexes and Commodity Trade Balance
(V alue in m illion US dollars; indexes: 1953 = 100)
1938b
1948
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
Source:
E x ports
Im p o rts
( 1)
(2)
128
81
106
107
98
80
75
88
104
106
100
100
103
110
117
119
112
120
121
127
134
100
110
125
136
123
189
149
149
159
Value
U nit value in d e x
Q u antum in d e x
Q ua ntum ratio
( 1 ) ÷ ( 2)
(3 )
160
108
120
103
92
100
103
100
94
88
91
84
84
85
84
E xport
Im p o rt
Balance
(5 )
T erm s o f trade
( 4 ) ÷ (5 )
(6)
(7)
( 8)
( 9)
42
117
93
115
110
83
90
109
122
104
2 ,370
6,020
5,650
8,300
100
100
101
2 ,650
5,210
6,440
9,050
6,800
6,040
5,980
6,840
6,910
7,070
6,410
7,210
7,650
7,500
7,730
E xports
Im p o rts
(4 )
35
105
101
140
114
100
96
102
97
97
93
99
104
97
94
95
96
96
101
96
94
98
96
95
106
101
96
97
105
106
101
99
8,100
7,020
6,670
7,370
8,370
9,480
8,240
8,420
9,830
10,020
10,430
+ 280
— 810
+ 790
+ 750
— 1,300
— 980
— 690
— 530
— 1,460
— 2,410
— 1,830
—
1,210
— 2,180
— 2,520
— 2,700
United Nations M onthly B ulletin o f Statistics, Statistical Yearbook and yearbook o f International Trade Statistics.
a Excluding Iran.
b Figures adjusted to approximate trade of present customs areas except trade between India and Pakistan. For details, see United Nations
yearbook o f International Trade Statistics.
8
P a r t One.
T able I -3.
E C A FE C ountries:
Im p o rt S u b stitu tio n a n d E x p o rt D iversification
T erm s of T ra d e a n d C apacity to Im p o rt, 1962
(in US dollars, 1953 = 100)
Q uantum index
C e y l o n ..........................................
China (T aiw an )a .......................
I n d i a ..............................................
Federation of Malaya . . . .
Pakistana ......................................
P h ilip p in e s .....................................
T h a i l a n d .........................................
Viet-Nam, Republic of . . . .
All developing countriesb
Excluding India
..................
Including I n d i a .......................
J a p a n .............................................
Australiac ........................................
N ew Z e a l a n d ................................
Exports
Im p o rts
( 1)
(2)
. .
122
204
.
.
120
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
. .
R atio of
qu a n tu m
indices
( 1 ) ÷ ( 2)
U nit value in d e x
Exports
Im p o rts
(3)
(4)
(5)
121
134
66
82
53
135
88
176
93
84
107
149
82
159
154
167
101
152
182
183
156
118
175
95
89
98
94
84
135
137
134
177
156
132
154
159
199
168
140
89
84
89
93
95
112
111
86
91
65
92
94
90
75
92
T erm s
of
trade
( 4 ) ÷ (5 )
In d e x of
capacity
to im p o rt
(6 )X (1 )
(6)
(7)
105
128
175
137
199
67
124
139
110
101
90
95
95
93
86
114
133
82
78
90
73
110
96
99
96
68
104
88
Ratio o f im p o rt
capacity in d e x
to im p o rt
qu a n tu m in d e x
( 7 ) ÷ ( 2)
Ratio of
export to
im p o rt
(8)
(9)
121
127
115
75
109
43
105
80
128
109
77
63
107
54
94
84
21
132
133
170
107
116
85
84
85
64
83
79
76
87
104
106
a Quantum index derived from indexes of unit value and of total value in US dollars.
b Includes countries listed above as well as Afghanistan, Burma, Indonesia, Portuguese India, Tim or, Macao, West Irian and Ryukyu Island.
c Year ending June.
The m ost im p o rtan t export, tak in g the developing
region as a whole, is ru bb er. It contributes over 12
p er cent of the export proceeds of the region and
accounts fo r 47 p er cent of the exports of the F e d e ra tion of M alaya an d S ingapore, 41 p e r cent fo r
Indonesia, 22 per cent fo r T h ailand, and 16 per cent
fo r Ceylon.10 C hart I shows that, although there
was a serious d rop in p rice im m ediately after the
K orean W ar, prices from 1955 onw ard w ere still
favourable, and th a t the q uan tity exported increased.
E xports have earned very large am ounts of foreign
exchange, b u t prices have been subject to d istu rb in g
fluctuations.
In addition, regional p rod u cers face
increasing com petition from ru b b e r produced in other
regions; indeed, the reg io n ’s sh are of the w orld export
of ru b b e r has dropped from 96 p er cent in 1950-1952
to 93 p er cent in 1959-1961.
M oreover, n a tu ra l
r u b b e r faces very keen com petition fro m synthetic
r u b b e r.11
T he next im p o rtan t p rim a ry export fro m the
region is crude petroleum w hich accounts fo r over
eight p er cent of the p rim a ry exports, constitutin g 95
p er cent of total export proceeds in B runei, 57 p er
cent in Ira n a n d 15 p e r cent in Indonesia. The
export u n it value of cru d e petroleum fell by 27 p er
cent between 1950 an d 1962 (16 p er cent fro m 19561958 to 1 9 6 2 ), b u t d u rin g th a t p erio d th e export
q u an tity m ore th an trebled. T hus the potential loss
10 Percentages relate to averages of 1961-1962.
11 The competition from synthetic rubber can be seen from the
following figures in 1,000 long tons given by the International Rubber
Study Group.
fro m such a serious price decline was m ore than
offset b y the q u a n tu m increase, a n d fo reign exchange
proceeds fro m p etroleum in creased co n sid erab ly for
I r a n a n d Indonesia.
T h e th ir d item , tea, accounts fo r over six per
cent of th e re g io n ’s exports.
A gain, th e region
possesses a n e a r m onopoly of this item , alth o ug h its
im p o rtance is w aning, an d is su b ject to com petition
fro m com peting beverages. T h e re g io n 12 exported 96
p er cent of th e w o rld ’s tea in 1950-1952, b u t only
91 p e r cent in 1959-1961.
N evertheless, tea co n trib u te d 66 p e r cent of Ceylon’s e x p o rt proceeds, an d
19
p e r cent of In d ia ’s. As in th e case of ru b b e r, the
p ric e of tea h a s been fa v o u ra b le ; th e 1962 price
was 16 p e r cent above th a t of 1950 an d 20 p e r cent
h ig h e r th a n in 1953, alth o u g h a falling tre n d is
n oticeable afte r the h ig h p eak of 1954. T he q u an tu m
of exports also in creased steadily, b u t at a slower
r a te th a n p ro d u c tio n because of in creased dom estic
consu m ptio n in th e tea p ro d u c in g countries, w hich
m ay be one reaso n fo r its steady price.
Production
1951-1953 . . . .
1962
........................
C onsum ption
N atural
rubber
S yn th etic
rubber
Natural
rubber
Syn th etic
rubber
1,615
1,937
936
2,240
1,655
2,180
872
2,155
From 1953 to 1963, while consumption of natural rubber increased
by 22 per cent, consumption of synthetic rubber increased by 197 per
cent. Production of synthetic rubber surpassed that of natural rubber
in 1961, whereas consum ption of these two products was equal.
12 Including m ainland China.
Chapter I.
The Role of Import Substitution and Export Diversification
9
10
Part One.
The fourth primary export is rice, which constituted over four per cent of the region’s exports in
1961-1962, and almost all of which was sold within
the region itself. However, the price of rice, after
having increased at a much greater rate than that of
wheat immediately after the war, has been falling
since 1952. This decline may be seen as part of a
long-term adjustment in the relative prices of foodstuffs. The deterioration in the terms of trade has
been consequently significant for the rice-exporting
countries. Rice earns 65 per cent of export proceeds
for Burma, 36 per cent for Thailand, 33 per cent for
Cambodia and 19 per cent for the Republic of VietNam (1961-1962 averages). It may be noted, however, that the fall in price since 1953 has been partly
compensated by an increase of the export quantum.
Prices of other commodities vary. They have
been increasing for fish, hides and skins and jute,
but falling for oilseeds, spices, cotton and tin. It
may be noted that the short-term fluctuations of unit
value and export quantum of a number of com modities for which the region has a large share in the
world trade, such as rice, spices and jute, are often
opposite to each other, indicating that increase in
production may not improve export proceeds proportionally. Since the different primary products enter
into the export of countries of the region in various
magnitudes, they affect the terms of trade differently;
but, for the region as a whole, export proceeds are
increasing much more slowly than imports, as shown
in tables I-2 and I-3.
More than one half of the primary exports of
the region went to developed countries.13
The
relatively low income-elasticity of import demand for
these products in developed countries may be explained
in terms of (a) the increase in their own primary
production; (b) the pattern of their consumption,
which makes for a low propensity to consume such
products and goods produced from them; (c)
technological progress which has reduced the amount
of material used in manufacturing; (d) the growth
of synthetic substitutes; and (e) tariffs and other
restrictions imposed by industrial countries on some
primary products. All but the last of these factors
reflect the basic pattern of economic growth in
developed countries. Thus the potential benefit to the
primary exports from ECAFE countries from liberalization of imports is likely to be limited, with the
possible exception of tea.
Import Substitution and Export Diversification
export quantities of most primary products have been
aggravated by excessive fluctuations in both price and
quantity. These movements can be seen in Chart I.
When commodities subject to wide fluctuations in
price or quantity constitute a large proportion of the
export trade of a country, the effect is serious. Such
variations may inflict considerable damage on plans
for economic development, by discouraging cultivators
who face the possibility of frequent failures to achieve
production or export targets in agriculture, thereby
retarding the steady expansion of primary production
for export. They also cause large swings in export
receipts which upset import programmes for equipment, machinery and other requisites of growth. It
is such considerations as these that have prompted a
demand for stabilization and the introduction of
guaranteed price schemes for primary products
throughout the region.
Year-to-year fluctuations in export receipts have
been serious, although in some cases less serious than
before the second World War. Receipts from rubber,
in the Federation of Malaya and Singapore where
they accounted for 47 per cent of exports showed an
average annual fluctuation of 23 per cent between
1948 and 1961 as against one of 34 per cent between
1920 and 1939.
Post-war annual fluctuations for
cotton and jute, which together provide 53 per cent
of Pakistan’s export receipts, have averaged 29 per
cent for cotton and 19 per cent for jute, compared
with inter-war averages of 27 per cent and 19 per
cent. Rice, which is the most important export item
for Burma, Thailand, Cambodia and the Republic of
Viet-Nam, is the food export com modity which is
subject to the greatest changes. The average annual
post-war fluctuation has been 22 per cent for Thailand
and greater than it was in the inter-war period. Tea
is as important for Ceylon as rice is for Burma, but
its annual fluctuations have been more moderate,
narrowed from an inter-war average of 14 per cent
to a post-war average of 8 per cent. The Philippines
has not been so fortunate in regard to sugar, coconut
products and abaca, which together account for 56
per cent of its exports; annual fluctuations between
1948 and 1961 averaged 21 per cent for sugar, 15
per cent for coconut products and 20 per cent for
abaca.
The problems arising from the general fall in
export prices and the inadequate increases in the
As part of the process of industrialization and
in order to assist in reducing instability, governments
are anxious to encourage greater export of processed
raw materials. Unfortunately the potential gains from
this policy are not fully realized since the processed
products are subject to greater restrictions in the
importing countries than the raw materials themselves.14
13
The proportion would be larger if transit trade in prim ary
products could be eliminated.
14 See United Nations, Econom ic Survey of Asia and the Far East,
1962, Chapter II.
Chapter I.
The Role of Import Substitution and Export Diversification
Finally, in respect of primary production it may
be pointed out that there is still ample room for
increases in the region. When development plans
based upon the establishment and expansion of light
or heavy industry are formulated and implemented,
this aspect is usually not given adequate emphasis.
Besides producing the extra food needed for an
expanding industrial population, the agricultural sector
may itself be capable of earning additional export
income if proper attention is given to diversification
through the introduction of crops previously imported
or cash crops in popular demand overseas.15 Furthermore, closer attention could be given to the encouragement by precept and example of more scientific and
efficient production techniques and marketing techniques. These points will be further discussed later.
Nevertheless, it is clear that developing countries
cannot continue to rely m ainly on the production and
export of primary products, even in the simple processed forms; the development of their economies
requires a more comprehensive programme of industrialization. It is through the building up of the
industrial sector, supported by a complementary
increase in agricultural output, that employment and
average productivity in these countries may be
increased rapidly enough to guarantee economic
growth at the rate desired.
In fact, industrialization and economic diversification can do more than
merely increase incom e; they can provide varied
occupations and promote the skill and discipline of
the labour force and improve organization and
management. By sparking off new hopes, they can
broaden the horizons of the producers, increase incentives and encourage innovation. A word of caution
must be sounded here, however. Industrialization is
not the panacea for all ills, nor is it a simple and
easy process. Like any other economic process, it
needs careful planning and close scrutiny. An illfounded programme of industrialization can be just
as damaging to a country’s growth prospects as an
unwise programme of agricultural expansion.
Economic diversification has to be linked to
increased production for home and export markets.
The experience of developed countries emphasizes that
the first stages of industrialization are likely to be
based mainly on home markets. As industrialization
proceeds, possibilities will open up for export markets,
resulting in the exchange of manufactured goods with
15
T hailand for example, produced very little m aize before 1956,
but by 1962 had become the fifth largest exporter in the world
m arket, with an export value estimated at $24 m illion. In China
(T aiw an), production of French mushroom s in 1960 was negligible,
but in 1963 export of canned French mushroom s reached $15
million, and that country became the w orld’s largest exporter.
Although the value of the exports in each of these cases is not im pressive, it indicates that there is still a possibility of increasing export
proceeds by diversification of prim ary production in the right
direction
11
other countries. In the home market phase of diversification, import substitution plays the dominant role,
with the newly introduced or expanded products taking
the place of imported goods; a co-ordinated expansion
of agricultural and industrial production will be
needed to support the industries by providing expanding markets for their products as well as an increased
supply of foodstuffs for the growing population.
Industrialization requires capital goods which
often cannot be produced in developing countries
at the initial stage and where imports heavily strain
foreign exchange resources. A few figures may show
the magnitude of this problem. Imports of capital
goods and of materials chiefly for capital goods into
the developing ECAFE region constituted 31 per
cent of average imports in 1953 and 195416, but
increased to 41 per cent in 1961-1962. Such imports
absorbed 35 per cent of the developing region’s
export proceeds in 1953-1954 and, by 1961-1962, 61
per cent. In fact, in 1961-1962, imports of these
items absorbed all Pakistan’s export proceeds. For
the Republic of Korea, they were twice as great as
exports. For the whole region, they were three times
the net trade deficit in 1961-1962, and for the Federation of Malaya and Singapore, Indonesia, the Philippines, Sarawak and Thailand, such imports were more
than four times the trade deficits.17
These figures imply that imports of capital goods
have been rapidly increasing; in fact, the annual rate
of increase at constant prices during this period was
12 per cent for capital goods, and 6 per cent for
materials for manufacturing capital goods.
The
highest rate of increase in these two categories
occurred in China (T aiw an), where figures of 25 per
cent and 23 per cent were recorded.18 This strain
occasioned by capital goods imports to the balance of
payments will probably continue to increase for some
time to come.
Developing countries are devoting an increasing
proportion of their export proceeds to the import of
capital goods, but they also have a pressing need for
greater imports of foodstuffs.
Although the per
capita food production of the developing region
showed a total increase of 6 per cent from 1952/531 9 5 4 /5 5 to 1 9 5 9 /6 0 -1 9 6 1 /6 2 , it is still one per cent
below the pre-war level. The need for imports of
capital goods has forced countries to limit imports
of foodstuffs, at the cost of postponing improvement
to the people’s nutrition levels. With future increases
16 T he region’s trade being m uch affected by the Korean war, the
average for 1953-1954 is used as a base for comparison, whenever
possible.
17 For the statistics on im port of capital goods and total imports
and exports see infra, the section on Asian Economic Statistics.
18 See table II-7 in chapter II for the rate of increase of capital
goods imports of various countries.
12
Part One.
Because of the difficulty of increasing exports,
many countries have relied heavily on inflows of
foreign capital and external assistance or reduction
in their foreign assets as means of financing imports.
Table I-4 shows the sources of import finance. During
the period from 1957 to 1962, the Republic of Korea
and the Republic of Viet-Nam could finance only 30
and 36 per cent respectively of their imports from
export proceeds; more than 50 per cent was financed
by foreign aid.
In India, Pakistan and China
(T aiw an), export proceeds financed 63 to 69 per
cent of imports, with 28, 31 and 38 per cent
respectively being financed by capital inflow. The
proportions changed however to 30, 33 and 23 per
cent respectively in 1962. The percentage of imports
financed by exports has been declining and of those
financed by foreign capital inflow increasing in the
last decade in Burma, Ceylon, India, Indonesia,
Pakistan, and Thailand.
in population and income, the demand for food is
bound to increase more rapidly. A recent FAO report
estimated that “excluding Japan and mainland China,
probably one-fourth to one-fifth of the population in
the region suffer from hunger.”19 On the assumptions
made by FAO, it has been estimated that, while the
developing ECAFE region had a net export of foodstuffs (including tea) amounting to $200 million in
1960, net import requirements in 1980 will range
between $2,000 million and $5,300 m illion,20 and
the net deficit on current account, it is estimated, will
increase during the same period from $2,000 million
to $9,000 million.21
19 Food and Agriculture Organization of the United Nations,
Agricultural Comm odities — Projections for 1970. Food Com m odity
R eview , 1962, Special Supplement E /C N .1 3 /4 8 , p.I-24.
20 “Projections of Foreign Trade of the ECAFE Region up to
1980”, Economic bulletin for Asia and the Far East, Vol. XIV, No.3,
p.26.
21 Ibid., p. 30. These projections are necessarily preliminary; they
are used here only to indicate an approximate order of magnitude.
Table I-4.
Import Substitution and Export Diversification
ECAFE Countries: Source of Financing for Imports
(T otal im port of goods and services = 100)
E xp o rt of
g oods and services
Burma
1951-1956 .......................... . . . .
1957-1962 .......................... . . . .
Ceylon
1951-1956 .......................... . . . .
1957-1962 .......................... . . . .
China (Taiwan)
1951-1956 .......................... . . . .
1957-1962 .......................... . . . .
India
1951-1956 .......................... . . . .
1957-1962 .......................... . . . .
Indonesia
1951-1956 .......................... . . . .
1957-1962 .......................... . . . .
Iran
1951-1956 .......................... . . . .
1957-1962 .......................... . . . .
Korea, Republic of
1951-1956 .......................... . . . .
1957-1962 .............................. . . . .
Pakistan
1951-1956 .............................. . . . .
1957-1962 .............................. . . . .
Philippines
1951-1956 .............................. . . .
1957-1962 .............................. . . .
Thailand
1951-1956 .............................. . . .
1957-1962 .............................. . . .
Viet-Nam, Republic of
1956
............................... . . .
1957-1962 .............................. . . .
Japan
1951-1956 ............................... . . .
1957-1962 .............................. . . .
Capital inflow
Private
Official
- 3.6
0.8
1.1
12.7
6.0
2.6
3.6
107.3
91.5
-
105.7
92.5
-
-
T o ta l
Reduction
- o f foreign
assetsa
N et
errors &
om issions
11.9
- 4 .4
- 2 .9
-0 .4
- 0 .5
1.0
3.7
- 4.9
1.0
- 1.3
6.4
0.1
-
2 .6
0.6
57.8
63.7
32.8
27.6
43.2
37.8
- 1 .4
- 1.7
0.5
10.2
89.6
66.4
3.0
5.9
3.9
21.7
6.9
27.5
5.3
7.6
- 1.8
-1 .5
0.2
0.3
1.2
17.3
1.1
17.6
5.6
2.1
-0 .9
- 1.7
77.9
90.0
2.6
3.6
13.5
4.1
16.0
7.6
3.3
2.8
0.8
28.2
29.5
3.3
6.5
68.1
66.8
71.4
73.3
-
88.4
69.2
0.2
12.0
12.2
-
1.9
28.9
30.8
0.3
87.9
82.7
9.0
12.5
2.7
5.0
11.8
3.8
17.5
2.8
94.9
90.4
- 0.5
6.4
4.2
6.6
3.6
13.0
19.2
36.4
4.9
4.8
76.7
62.0
81.6
66.8
- 2 .9
- 3 .0
-
101.3
98.3
2. 1
1.4
- 1.7
3.5
0.2
- 4 .4
1.3
- 0 .4
0.5
94.2
82.0
-
1.6
Source: International Monetary Fund, Balance o f Paym ents Yearbook .
a Minus signs indicate increase of foreign assets.
-
0.2
1.6
- 0 .4
-
2.6
-
0.1
0.8
0.2
- 0 .5
- 0 .3
-3 .5
- 3 .0
1.6
3.0
2.5
- 5 .9
2.1
0.2
Chapter I.
The Role of Import Substitution and Export Diversification
The fact that a growing proportion of imports
is financed by capital inflow is, of course, not
necessarily an unwelcome feature. It may mean that
countries are fortunate enough to attract sufficient
external capital to permit imports of additional capital
goods, materials and consumption goods.
The
question is how long such capital inflow will continue, and on what scale. With the exception of
grants and donations there is also the question of
payment of interest and dividends and repayment of
capital. These factors may give rise to future difficulties unless the foreign capital is invested in right
directions and helps, directly or indirectly, to increase
future exports.
Table I-5.
Developing ECAFE Region:a
Foreign Capital Inflow, 1951-1962
(m illion US dollars)
Total
Year
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Total . . . .
Per cent . . . .
293
467
510
397.
722
1,226
1,518
1,778
1,753
2,043
1,836
1,800
14,343
100
Private
10
Official
56
59
155
330
300
340
297
530
419
326
283
447
454
338
567
896
1,218
1,438
1,456
1,513
1,417
1,474
2,842
19.8
11,501
80.2
20
International Monetary Fund, Balance o f Payments
Yearbook.
a Ten developing countries listed in table I-4 except the Republic of
Viet-Nam, for which figures for 1951-1955 are not available.
Source:
Table I-5 shows that, during the twelve years
from 1951 to 1962, net capital inflow to ten developing countries amounted to $14,342 million. Of this
$4,856 million went to India, $2,954 million to the
Republic of Korea, and roughly between $1,000 and
$1,500 million each to Pakistan, China (T aiw an),
the Philippines and Indonesia.22 Of this total,
80 per cent was governmental capital, and 20
per cent private capital. Both official and private
capital inflow to all countries except Pakistan have
either levelled or fallen off since 1958. Net private
capital inflow was small for Indonesia and Pakistan,
and there was even a net outflow for Burma and
Ceylon.
In Ceylon, net private capital outflows
exceeded official capital inflows so that, in spite of a
favourable trade balance, there was a net reduction
of foreign assets.
22 A rranged in descending order.
13
Table I-6 shows additional details of capital
inflow from OECD countries and Japan to developing ECAFE countries for the three-year period from
1960 to 1962. Of the official capital inflow, 43 per
cent comprised net grants; 28 per cent, transfer of
resources (mainly agricultural surplus commodities,
under United States Public Law 480) ; 10 per cent,
loans repayable in recipient’s currencies; and 19 per
cent, net lending. It may be seen that net grants
and transfers have fallen, yielding to loans. Guaranteed
private export credit, though small, has been increasing.
To hasten economic development, a number of
countries have also utilized holdings of foreign assets
to pay for additional imports. The total foreign
assets of five countries, Ceylon, India, Indonesia,
Pakistan and the Philippines, were reduced by $2,177
million during the twelve-year period from the end
of 1950 to 1962, and this reduced their total holdings by over 60 per cent. On the other hand, the
Federation of Malaya and Thailand, as well as few
other countries whose initial exchange holdings were
small, succeeded in increasing them.
At present,
with the exception of Malaysia and Thailand, the
exchange holdings of most countries are so small
that import restrictions are necessary to husband
dangerously low reserves.
In short, the developing ECAFE countries have
been experiencing balance of payments difficulties,
as a result of difficulties in the export of primary
products arising from adverse terms of trade, virtually
stationary export volumes and fluctuating prices.
These have been aggravated by the need for ever
increasing imports to sustain ambitious development
programmes. Accordingly the countries have turned
to import substitution and export diversification,
especially in the manufacturing sector, in an attempt
to alleviate the problem.
The first phase of industrialization is usually
based on the home market in the form of import
substitution. With a ready market, a small degree of
protection will provide incentives to develop these
industries, and their domestic production will conserve
foreign exchange for imports of capital equipment
and other essential products which cannot immediately
be produced. Some of the import substitute com m odities may be exported to earn additional foreign
exchange if they are developed successfully.
However, industrialization and import substitution require increased imports of capital equipment,
and perhaps also increased imports of foodstuffs.
There seems no prospect of expanding traditional
primary exports to meet these increasing import
requirements, and many developing countries have
been relying on inflows of foreign capital, and reduc-
Part One.
14
Table I-6.
Developing ECAFE Countries:
Import Substitution and Export Diversification
Net Capital Inflow from OECD Countries and
Japan Combined and Multilateral Agencies, 1960-1962
(m illion US dollars)
N et
grants
A fg h a n is ta n .............................................
Brunei, Sabah, S a r a w a k .......................
B u r m a .....................................................
Cambodac .................................................
C e y l o n ......................................................
China ( T a i w a n ) ....................................
Federation of M a l a y a ...........................
H ong K o n g .............................................
I n d i a ..........................................................
In d o n e s ia ..................................................
I r a n ...........................................................
Korea, Republic o f ................................
Laosc ...........................................................
N e p a l .........................................................
P a k i s t a n ..................................................
P h i l i p p i n e s .............................................
Singapore .................................................
T h a i l a n d .................................................
Viet-Nam, Republic ofc .......................
All developing countries
T o t a l ............................................
1960 .............................................
196
1 ......................................
1962 .............................................
61.16
14.91
66.92
67.53
25.33
145.15
20.32
12.59
178.25d
111.32
92.71
522.71
114.92
26.69
374.24d
76.93
1.64
68.73
459.62
2,441.67
855.56
858.90
727.21
Transfer
of
resourcesa
Loans
repayable
in recipient
currencies
2.00
6.00
9.00
4.00
6.00
115.00
47.00
805.00
104.00
283.00
18.00
N et
lendingb
6.66
64.48
15.33
82.05
71.54
35.60
314.17
33.65
12.50
2,040.98
272.18
207.80
715.71
114.92
26.69
873.28
123.59
- 0.15
112.32
534.28
1,050.06
270.51
361.31
418.24
5,650.92
1,885.07
1,845.40
1,920.45
1.32
0.42
0.13
0.01
2.00
22.00
173.00
6.00
251.19
36.00
173.00
5.00
65.00
24.00
3.00
1,590.19
608.00
466.19
516.00
569.00
151.00
159.00
259.00
2.27
7.02
13.33
- 0.09
774.73
38.86
93.09
14.00
74.85
5.66
- 1.79
19.59
G uaranteed
private
exports
credits
T otal
official
-
2.05
3.14
0.41
0.79
8.51
3.97
9.90
-198 .5 0
64.65
1.05
17.58
- 0.05
-
M ultilateral
agencies
4.20
1.37
9.43
2.88
28.87
26.23
2.98
32.34
13.72
10.99
- 13.55
12.23
0.09
150.09
8.51
23.56
0.36
1.18
1.54
36.35
6.39
0.58
34.21
0.61
11.44
3.43
8.96
5.91
291.02
72.71
86.61
131.70
Source: Organisation for Economic Co-operation and Development (OECD).
a Net transfer of resources through sales for recipients’ currencies.
b Including consolidations credits.
c For 1961 and 1962, country details do not include French grants to Cambodia, Laos and Viet-Nam.
d For 1962, including contributions of Canada and the United K ingdom for the Indus Waters Scheme.
tions of their foreign assets, to finance imports.
Foreign assets in most countries, however, have
already been reduced to a minimum level and have
to be protected by strict import and exchange controls. Inflows of official foreign capital have been
levelling off since 1958 and, in a number of countries,
have actually begun to decline. Private capital inflows
2.
have not increased since 1956, and the amount is
relatively small. Countries, accordingly, are striving
to diversify their exports, turning to products for
which there is a larger elasticity of demand in order
to improve their terms of trade, to increase export
receipts and to reduce annual fluctuations in these
receipts.
Motives for Import Substitution
Import substitution and export diversification in
developing economies appear primarily as phenomena
accompanying economic development, and are so
regarded in plans and policy discussions of countries
seeking to achieve development of their economies.
The problems of import substitution differ
between countries and over time. There are several
contexts in which import substitution has occurred,
and is occurring; any assessment of the performance
of an economy in this particular respect must take
account of the ends which import substitution is
meant to pursue.
Newly developing domestic production may be
used to substitute for imports or add to exports merely
as a result of general profit seeking ventures. This
is a well-known line of economic advance in industrialized countries. It seems to describe roughly what
Chapter I.
The Role of Import Substitution and Export Diversification
happens in a few developing Asian countries today,
for example, in Hong Kong and Thailand, but more
generally what has happened in the past.
Many
countries of the region offer examples of this kind
of development. Indian industrialization before the
second World War belongs to this type. Import substitution and export diversification may thus be the
outcome primarily of decisions of producers bent on
maximizing expected profits. Government assistance
in the form of protective tariffs or export incentives
may be applied. In Thailand, for example, protective
tariffs on many commodities, e.g. textiles and pharmaceuticals, were imposed after the industries had been
established.
Import substitution and export diversification
may be the result of government policy for promoting economic development, without aiming at com plete replacement of imports. In the Federation of
Malaya, for example, there has been no shortage of
foreign exchange; but, to promote economic development, the Pioneer Industries Act provides protection
and other facilities to indutries as a result of applications by private enterprise. In other countries, governments may select industries to be developed, raise
import duties, provide other facilities and see that
investment follows.23
Import substitution may aim at economic independence and self-sufficiency. Industries developed in
hinterland China under the Japanese blockade during
the war were designed to meet immediate requirements. After the war, political independence in many
countries prompted them to aim at economic
independence, not only in basic consumption goods,
such as food and clothing, but also in capital goods.
In these cases, cost may be a secondary consideration, and plans go ahead in spite of the shortage
of domestic saving and foreign exchange.
When foreign exchange is the scarce factor, as
in the post-war years for the region, a separate
element is added to other criteria considered by
governments with regard to the selection of alternative
projects.
The stronger the foreign exchange constraint relatively to other scarcities, the greater is the
weight that must be given to a project promising
to reduce future calls on foreign exchange or to
increase its availabilities. The plans of the regional
countries offer many examples of this type of
23
The first two aspects form the context of im port substitution as
discussed, for example, in the United Nations M anual on Economic
D evelopm ent Projects, p.7, where it is stated that im port substitution
normally constitutes one of the greatest possibilities for developing
domestic production and where it is recommended that im port statistics should be examined to provide the basis for selecting possible
projects, considering, in a first approxim ation, the volume of specific
imports in relation to the m inim um economic scale for producing
them.
15
situation.24 These constraints have a time shape so
that, crudely speaking, the expectation of an uncovered
balance of payments deficit ten years hence may lead
to the selection of projects that would have been
rejected if the deficit had been expected five years
hence.
Import substitution may be an incidental result
of import restrictions or equivalent policies adopted
as stop-gap measures to limit an acute short-term
balance of payments deficit. It may result from a
revenue tariff or import restriction imposed to reduce
consumption for the sake of austerity, tobacco,
alcoholic beverages and carbonated beverages being
the most common examples. It may also apply to
other semi-luxury items such as cosmetics, toys, coffee,
electric fans, radios, household refrigerators and airconditioners. Even if the government does not intend
to promote domestic production, the import restriction,
or the increase of import cost, may provide enough
profit incentive to produce the restricted articles at
home. This calls for separate policies to meet the
distinct purposes of maintaining order in the execution
of long-range plans, since ad hoc measures, if uncoordinated, may cut across long-term plans.25
Although, theoretically, import substitution may
arise in these different contexts, in fact motives and
policies are often inextricably entwined in shaping
actual import substituting activities. In its several
aspects, import substitution is a frequent object of
national policy in the developing countries of Asia.
Since this is not undertaken for its own sake, it must
serve wider ends and may be implemented by a variety
of policies. Import substitution policies must be seen
and examined as part of a set or hierarchy of policies.
Whether the results satisfy the objectives of particular
policy-makers cannot be told without an analysis of
the objectives themselves.
Generally, import substitution in any plan does
not aim at a reduction of total imports, but at a
saving of foreign exchange in order to allow for
imports of capital goods or certain basic consumption
goods which cannot be adequately produced at home
in the near future. In these circumstances, if total
foreign exchange expenditure falls short of what was
planned, the plan may not be realized.
Certain
24 “T he purpose m ust be to invest in those industries which save
the largest am ount of foreign exchange in relation to the cost of the
investment. A n investment which saves an am ount of foreign exchange annually equal to 50 per cent of the investment should clearly
be given priority over an investment which only saves in foreign
exchange 10 per cent of its cost each year. Resources are scarce and
m ust be employed in those activities where the return will be
highest.” G overnm ent of Pakistan, First Five-Year Plan, p.216,
para.6.
25 See also section 3 of this chapter for further discussions.
16
Part One.
investment objectives may be under-fulfilled and
certain others over-fulfilled. In the case of a single
commodity, import substitution will not necessarily
have failed just because imports have failed to decline
3.
Import Substitution and Export Diversification
while domestic output of the competing product is
rapidly increasing. What may have failed, in this
instance, may be public control over private expenditure.
Some Economic Aspects of Import Substitution and Export Diversification
It has been pointed out that industrialization and
economic diversification through import substitution
do more than increase income and foreign exchange
saving.
The establishment of certain industries,
through the inter-industry nexus, adds to existing
external economies and paves the way for many new
lines of productive activities. These industries increase
the demand for material and equipment and may
furnish by-products for further processing.
They
promote the growth of technical skills among the
workers and encourage improved organization
and
management among the enterpreneurs. More important, they help to activate the minds of workers and
management alike so that they seek new opportunities
for innovation. If well nourished and supported with
adequate training facilities and an infra-structure,
these import-substituting and export industries may
carry the seeds for general economic growth. It is
in this dynamic context that import substitution
and export diversification may have their greatest
justification.
Nevertheless, this does not justify
indiscriminative promotion of industries. A major
failure at the beginning may, in addition to slackening
income increase, produce frustration and disappointment, and reduce entrepreneurial initiative and
momentum for future growth. In planning for
economic development in low-income countries, therefore, extreme care must be exercised to assure the
best allocation of resources with the objective of
achieving the highest rate of growth, taking into consideration both the immediate and future needs of
the people.
In fact, under certain circumstances the net
advantage of such substitution in a particular industry
may be negative or, at best, give much smaller net
gains than were originally anticipated.
This is
because industrial production in the developing countries gives rise, in some instances, to more pressing
problems than in the developed economies whose
products the substitution process is aimed at. It is
worth while to consider some of these problems in
more detail.
First, there is the problem of quality. It may
be found that, initially, the domestic manufacture
of certain items results in an inferior product. In
some countries, for example, electric bulbs produced
domestically have been much below standard quality,
so that electricity consumption is high, light output
low and the life span of the bulbs short. Such import
substitution may involve a considerable waste of
resources which will tend to offset the advantages
derived from savings of foreign exchange. There may
be wider and more serious implications for certain
lines, such as pharmaceutical products, which have
a bearing upon health, and for machinery and capital
equipment, which have a relatively long life span
and will continuously affect productivity. One would
expect that the quality of many import substitutes
in developing countries, at least in the initial stages,
will be below the standard of similar imports; but
the differences should not be too great and there
should be improvement in quality within a short
period. The inferior quality of goods is also one
major obstacle in the way of exporting, and may
even reduce the confidence of foreign importers in the
quality of other goods exported from the same country.
However, production for domestic consumption of
coarser textiles and less expertly tailored clothing,
at a lower cost, for example, is better suited to the
lower domestic income levels and would be acceptable
in cases where export is not aimed at.26
Secondly, there is the problem of production
costs. Here the infant industry argument applies,
since the newly introduced domestic products are
usually not competitive on a cost basis with imports
of the same quality; they may require protective
tariffs or import controls, and also export incentives
or substantial subsidies if exported. In countries with
unemployed resources, the introduction or expansion
of these productive activities may increase employment and income. To the extent that the increase of
national income is larger than either the excess of
domestic over import cost, or the export subsidy if
the product is exported, total income is increased;
to the extent that it falls short of this, a direct real
loss is sustained.27
There is also the important problem of efficiency
in allocating resources. In most developing ECAFE
countries, the scarce resources are capital and land;
26 A n interesting example of substituting domestically produced
“inferior goods” for imported goods is the substitution of filled milk
in the Philippines for the im port of whole m ilk. T hough less popular
w ith the consumers, it has helped to increase total consumption and
thereby bridge the gap until the domestic supply of whole m ilk is
adequately increased.
27 Indirect gains are neglected in this argument.
Chapter I.
The Role of Import Substitution and Export Diversification
labour, generally, is not in short supply except for
certain technical skills. The requirements of capital
and land for import substituting activities, and the
returns to them, as compared with those in alternative
investment opportunities, must therefore be taken into
consideration. To the extent that the protective tariff
m ay be considered a subsidy on the return to capital,28
it may be inferred that the capital engaged in the
protected industries is, at least in the short run, not
employed in the most productive ways and that some
alternative investment may result in a larger immediate
increases of income.29 With capital as the scarce
factor, employment per unit of capital and output per
unit of capital should be compared for alternative uses
o f capital.30 Here lies a possible difference between
the developed countries and countries with scarce
capital. The multiplier effect, which usually exists in
countries with abundant capital and unemployed
labour and with mobility of resources, may not equally
apply to developing countries. In addition, the higher
cost of import substitutes themselves under protection
or import restriction also has repercussions on other
commodities, through inter-industry relations, and
reduces their comparative advantage. This applies to
both producer goods and consumption goods.31 It is
for these reasons that protected infant industries
should gradually increase their productivity in order
to reduce costs and improve the product quality, so
that the protection or subsidy may be reduced in
successive stages.32 Policy-makers in countries where
capital is scarce should keep in mind all these factors
when deciding on import subsitution through protection.33
28 As the wage rate for new industries does not usually differ
m uch from the prevailing m arket wage, the protective tariff may be
considered as a subsidy to bring up the return to capital to the level
obtainable from alternative investments. Although such a subsidy
makes possible employm ent in the protected industries, the capital
released from these industries, if not protected, may also be used in
other directions to create employment.
29 A simple example may be cited here. In one country, it was
found after the pharmaceutical industry had been established that
the cost of repacking imported material was extremely high, so that
an im port duty of 50-80 per cent has to be imposed on certain final
products to protect the industry.
30 Parallel reasoning m ay be applied to countries where land is a
scarce factor.
31 A typical example is to be found in the Indian Tariff Commission’s justification for a continuance of protection to the bicycle industry in 1960-61. “T h e Commission took note of (i) the basic
handicap of the industry, namely, its dependence on imports for
essential raw materials like steel, (ii) the need to bring dow n costs
by a gradual re-adjustm ent of the present structure of the industry
by way of large scale production of components by ancillary industry
as in foreign countries." See Governm ent of India, T ariff Com mission, N in th A nnual Report for the Year 1960-61, (Bombay, 1961),
p .3 4 .
32 T he T ariff Commission of the Philippines recommended that
the protective tariff should be lowered gradually but the proposal
was not accepted by the Congress.
33 For goods w ith high transportation cost, im port substitution
may be profitable even if domestic production cost is higher than
foreign production cost. An example on fertilizers is given in chapter
II, section 4.
17
In most developing countries, because of the lack
of investment opportunities, income is wasted on
conspicuous consumption. Under these circumstances,
protection for import substitutes by making domestic
investment for their production more attractive may
help to mobilize additional saving for investment,
especially when there is already a domestic market
for the products. Similar reasoning applies to subsidies for exports.
The employment and income
created by using the additional capital thus mobilized
are net additions generated by the new industries.
It may be noted, however, that at least part of the
capital for the protected industries must be drawn
from savings which would otherwise be employed in
financing alternative productive activities, and questions of opportunity cost then arise in choosing
between these alternatives.
The problem of finding sufficient foreign exchange
to carry through development programmes is a constant source of worry to governments of developing
countries; more so than that of mobilizing and
channelling domestic savings, though it may be noted
that the latter may yet prove eventually to be one
of the most fruitful avenues of expansion. For this
reason, all governments place great emphasis on the
saving of foreign exchange through import substitution
in determining the type of productive activities to be
developed.
The disadvantage of higher domestic
costs, as compared with imports, may thus be offset
by the advantage of saving or earning foreign
exchange. But these advantages and disadvantages
are not easily amenable to objective measurement, and
the value assigned to foreign exchange varies from
country to country and from time to time, depending
on availability and needs, not only for economic, but
also for defence purposes.
Policy-makers should,
therefore, appreciate all the other costs a country
has to pay in order to save or earn foreign exchange.
Needless to say, foreign exchange saving or earning
has to be calculated on a net basis, taking into
account the cost of imported equipment and material
needed in domestic production, the reduction in the
export of raw material, and the time lag between
expenditure of foreign exchange on imported equipment and the saving of foreign exchange from the
final products.
In utilizing foreign exchange, the
comparative advantage of alternative investment with
respect to foreign exchange saving and earning, both
in the short and in the long term, should be taken
into consideration. To ease the immediate pressure
on foreign exchange, productive activities with smaller
initial foreign exchange requirements in relation to
foreign exchange turnover may claim higher priorities.
It has been mentioned in section 2 of this chapter
that import substitution m ay be an incidental result
of import restriction introduced either as a stop-gap
measure to ease balance of payments difficulties, as
18
Part One.
a means to raise revenue from import duties or else
as an austerity measure to restrict consumption. Such
import substitution may defeat the austerity purpose
for it is always easier to raise the barrier at the
national frontier than to check the consumption of
goods produced at home.34 It may also partly or
even completely defeat the purpose of foreign exchange
saving to the extent that material and spare parts are
imported.
In general, foreign exchange rationing is less
severe for producer goods than for consumption
goods.35 If consumption is stimulated by domestic
production, foreign exchange expenditure may even
be increased. Partly to offset the encouragement of
domestic production, a revenue tariff on tobacco and
alcoholic beverages, for example, is usually accompanied by a corresponding domestic tax on the same
articles, although domestic taxes are usually lower
than tariff rates. In many countries, a commodity
tax is also levied on semi-luxuries produced at home,
although the rates are usually not prohibitively high.
In this connexion, the previous argument about
increasing investment opportunities to help mobilize
additional savings may be re-examined. The problem
is whether additional saving should be invested in
producing semi-luxuries instead of more basic productive facilities.
Re-channelling investment into the
desired directions may be advantageous, if the policies
adopted are effective. Many basic industries, however,
are not profitable enough to attract private capital,
and there is always a problem of re-channelling savings
by government efforts. If investment in gold and
jewelry, for example, is diverted to investment in the
manufacture of electric fans, it helps to promote
growth through external economies and inter-industry
relations.36 Some governments require that producers
of semi-luxuries with imported material must export
a given portion of their output.
Imports may be restrained either by quantitative restrictions or by tariffs. When there is a large
pressure on the balance of payments, quantitative
34 “Furthermore, it was politically easier to protect an expanding
capital goods sector from consumption pressures at home than it
would be to protect an expanding consumer goods sector. In fact,
the former makes the attainment of a high marginal rate of saving
far more practicable.” General Agreement on Tariffs and Trade,
G A T T Programme for Expansion of International Trade, Trade of
Less-Developed Countries; Development Plans: Study of the Second
Five-Year Plan of Pakistan, (Geneva, 1962), p.31. See also A.R.
Khan, “Im port Substitution, Export Expansion and Consumption
Liberalization” , T he Pakistan D evelopm ent R eview (Institute of
Development Economics, Karachi), Vol. III, No.2, Sum m er 1963.
35 See chapter III.
36 In fact, the least desirable articles protected under high import
duties or im port restriction in all countries are tobacco and alcoholic
beverages. Although they serve to increase governm ent revenue
through excise tax or monopoly, the impact on the grow th of other
sectors of the economy is less than that of electric fans if most parts
of the fans are domestically produced, as is done in several developing ECAFE countries.
Import Substitution and Export Diversification
restriction is a surer way of coping with an urgent
situation.
This is the reason why most Asian
countries introduced exchange and import restrictions
after the second World War. Although many countries may have initially considered them as a stopgap measure to meet a balance of payments emergency,
the need for economic development afterwards exerted
even greater, and increasing, pressure on the balance
of payments. In addition, countries with inflationary
pressures and inadequate adjustment of the exchange
rates always find their domestic products becoming
less competitive with imported goods and, because
of the usual need for legislative procedures, generally
cannot raise import duties frequently enough.37 The
import tariff of many countries, in fact, is not
adequate to offset currency over-valuation, so that
the tariff, even after adjustment for unrealistic
exchange rates, gives imported goods a price advantage
over domestic products. Quantitative import restriction, therefore, becomes an important measure for
controlling imports and protecting domestic industries.
There is some difference, however, between protection provided by quantitative import restriction and
that provided by import duties. An import restriction
reserves a part or whole of the market for domestic
substitutes by excluding foreign competition. The
limit to the price is set by the state of domestic
demand. On the other hand, import duties allow
unlimited competition from imports once the domestic
price is raised to a given level. Even before the
domestic price reaches the import price plus duties,
competition from imports manifests itself through
product differentiation and the expression of consumers’ preferences. In this respect, import restriction provides a larger incentive for establishing
import substitute industries at home. But experience
shows that some industries established this way by
developing countries have very low efficiency, and
would face serious difficulties of readjustment under
decontrol.38 In addition, import restriction, being
imposed by administrative decree, may easily be
revised from time to time, or even completely
abolished if the balance of payments position improves
sufficiently. Unless these measures are accompanied
by government policy statements protecting certain
industries, they may give less assurance to domestic
producers for investment, except in industries where
capital turnover is large. In practice, before decontrol, governments usually raise import duties on
most products which are being newly produced at
home as a result of import restrictions.
37 N ot all countries require legislative measures for revising the
tariff rates. In T hailand where this is not necessary, the Government
has a more flexible instrum ent for varying the degree of protection
of different industries and does not rely on im port restrictions.
38 Even in Japan, m any industries have difficulty of readjustment
in decontrol. An example of increasing im port duties to offset the
effects of decontrol in the Philippines has been given in chapter II,
section 3.
Chapter I.
The Role of Import Substitution and Export Diversification
Industries developed primarily or initially for
the purpose of import substitution may succeed, after
a trial period, in achieving standards both of quality
and cost which are comparable with those for
international products, and exports can then be
considered.
But import substitution, even without
protection, requires only equating domestic cost with
c.i.f. import cost, while export, assuming uniform
freight charges, requires equating f.o.b. export cost
with f.o.b. export costs of other countries. The gap
is often bridged by various export incentive schemes.39
To achieve the needed economies of scale, especially
in countries with a small domestic market, producers
may charge domestic prices at average cost, behind
the protective tariff, and export prices at marginal
cost. In fact, in countries where the exchange rates
over-value the currencies, export prices may be lower
than domestic prices unless the commodities have a
semi-monopoly position on the world market; it is
this difference that some export incentive schemes try
partly to offset.
In developing import substituting industries,
especially in countries where the domestic market is
limited, export possibilities must be examined from
the very outset, not only in industries requiring operation on a large scale, or with indivisibility of units,
but also in industries for which external economies
may rapidly build up and lead to multiplication of
firms in an industrial complex. Textiles and certain
light engineering products and electrical appliances in
China (Taiwan) and India are good examples of such
cases. Development of these industries soon outgrows
domestic demand and an adequate export market is
required to maintain sufficient demand for full capacity
operation. Needless to say, the key factors of success
are comparability of the domestic with foreign products in regard to cost and quality, a good export
marketing service and the absence of product discrimination abroad.
Quality of manufactured goods is especially
important in export markets.
Up to the second
World War, Japanese engineering products were
generally considered inferior to German, British and
American goods and suffered considerably from the
consequent prejudice of consumers. After the war,
Japan’s great success, first in producing cameras and
then transistor radios, rapidly undermined this prejudice and provided a break-through, not only for
these articles, but also for other engineering products
the quality of which had in the mean time improved.
If developing countries cannot, like Japan, attain a
generally accepted quality which breaks through consumers’ prejudices, then their manufactured exports
39 See chapter III for details.
19
will have to be sold at considerably lower prices in
a much restricted market.
Although foreign exchange saving is one
immediate objective for a policy of import substitution
and export diversification in a number of countries,
the process of import substitution and export diversification initially requires more foreign exchange for
importing capital equipment and technical know-how.
Import substitution and export diversification, therefore, may not reduce, but increase, total imports in
the initial stage.
When industries are developed and incomes
increased, consumers’ demand will expand, and
perhaps sufficiently to improve external economies
for other industries. Any saving of foreign exchange
may then be employed to import additional capital
equipment and technical know-how for further substitution and diversification, and so accelerate the
general rate of economic development. As seen in
chapter II,40 the rate of increase in the import of
capital goods in Japan has been more rapid than
that of any developing country in the region except
Cambodia41 and China (T a iw a n ). In addition, with
a larger variety of products for trading, and larger
income or purchasing power, total trade will also
expand more rapidly. It is incorrect to believe that
import substitution will reduce the volume of trade.
Import substitution should be considered not as
a “once for all” procedure but as a continuous
process. Not only should import substitution proceed
from one commodity to another, but the improvement
in the quality of the product should continue to
keep pace with the changing technology and demand
in the rest of the world. In this respect, unless foreign
exchange or domestic resources are so scarce that
strict allocation is necessary, it is good policy to
prevent import restriction from completely shutting
imports out of the domestic market, even after the
domestic industry can meet home demands. Some
competition from imports may help improve the
judgement of consumers with regard to the quality of
products, and provide a constant challenge to producers to improve quality, increase efficiency, reduce
cost, and gradually raise the standard of domestic
industries to internationally competitive levels so that
exports become possible. Hong Kong is the only
territory in the region with completely free trade,
yet its industries flourish and most locally produced
industrial products are exported.
40 Table II-8.
41 Rate of increase was high in Cambodia because it started from
a smal base.
20
Part One.
In small domestic markets, and in cases where
the need to achieve economies of scale demands large
production units, fine adjustments of domestic productive capacity to variations in domestic demand become
impossible.
Import and export can then be seen
as fulfilling an important function as a balancing
mechanism at the margin. In the same way import
can be used to compensate for disruptions to domestic
production caused by unforeseen circumstances such
as power breakdowns, strikes etc., and export to
dispose of unexpected surpluses. Import may also
be used as a device for achieving internal price
stability.
In China (Taiwan) when the price of
domestic products not exposed to foreign competition
was felt to be too high the Government permitted
imports in order to force prices down. Statistical
evidence of the simultaneous import and export of
newly developed products will be found in table II-13
in chapter II.
4.
Import Substitution and Export Diversification
Limited importation of a large variety of com m odities, including some items which are generally
considered not absolutely essential, may also help to
test a market and determine the needs of consumers,
so that entrepreneurs have a guide in selecting new
fields for investment.
In China (T aiw an), for
example, investment opportunities are so limited that,
when one industry has proved successful, competition
from new producers often spoils the market, not only
within the country, but also abroad. The shortage
of investment opportunities in Taiwan is one reason
for its low rate of saving, and in such cases a wider
range of investment opportunity is needed. The final
objective of economic development is, after all, the
expansion of consumption, not only quantitatively but
also for a wider selection of products.
Actual
experience shows that many new non-essential articles
produced in developing ECAFE countries can be
exported.
Choice of Industries, Priorities and Problems42
This section will not deal with the theory of
choosing industries or determining priorities, nor will
any attempt be made to give a systematic summary
of policies or relevant facts in ECAFE countries. The
purpose is to illustrate, from the experience of selected
ECAFE countries, some aspects of development policies
and problems as they relate to general questions of
choice and priority.
Choice of the type of industry to be developed,
and the more basic question as to who makes the
choice, depend upon the circumstances in which each
country finds itself. Two governments, Hong Kong
and the Federation of Malaya, leave this choice to
the judgement of private entrepreneurs. In both areas,
the peculiar characteristics of the economy are such
that the official attitude to development policies is
quite different from what it is in the remaining developing countries of the ECAFE region. These two
economies will be considered first.
In Hong Kong, despite a dearth of domestic
industrial material and the limited domestic market
of only three million people, industries developed
remarkably within the very short period of a single
decade, and the city is now one of the leading industrial centres in the developing ECAFE region, exporting industrial products to various parts of the world.
Industrial production, construction, exports of domestic produce, and income are all increasing at a rapid
42 For some of the other problems in the choice of industries not
covered in this section, see United Nations, W orld Economic Survey
1961, Sales No. 62.II.C.1, pp.51-58.
rate.43 Since the attention of many ECAFE countries
has been drawn to the rapid industrialization in Hong
Kong, the conditions leading to such development
deserve special attention.
After the war, there was a large influx from
mainland China of experienced entrepreneurs, capital,
and both skilled and unskilled labour. There was
also an inflow of capital from other Asian countries.
Hong Kong, being a free port, has a large volume
of entrepot trade which brings entrepreneurs into
direct contact with foreign exporters and importers,
and the speculative talent which these Chinese entrepreneurs developed during twelve years’ inflation in
China had given them a readiness to take risks.
There were also available a large number of jobseeking workers, who possessed aptitudes for receiving training in a wide variety of industrial skills and
disciplines. These elements have combined to give
Hong Kong an industrial environment conducive to
rapid growth in certain types of industry.
First,
textile owners and makers of enamelware, electric
torches, dry cells, vacuum flasks and other articles
established factories to use this emigrant skilled
labour. Other entrepreneurs then began to produce
imitations of a large variety of foreign products; the
large entrepot and tourist trade gave businessmen the
necessary familiarity with a great variety of foreignmade consumer goods.
This domestic production, because of Hong
Kong’s entrepot status, substitutes for only a small
part of imports in the domestic market. But, owing
43 The growth of per capita income, however, has been held down
somewhat by the continuous influx of population from the mainland.
Chapter I.
The Role of Import Substitution and Export Diversification
to H ong K ong’s highly developed links with foreign
markets, there is no difficulty about exporting them.
The higher quality products are sold in North America
and western Europe, and the lower quality products
in Africa, the Middle East and some south-east Asian
countries. Exports of domestic products have become
increasingly diversified, ranging from a large variety
of consumer goods, including textiles, garments, footwear, household utensils, plastic articles, transistor
radios and other electrical appliances, to cement, iron
and steel bars and machinery. Industrial efficiency
increased so much that factory wage of manual workers
rose by 30 per cent from 1959 to 1961.44
In the absence of any guidance from Government,
H ong K ong’s choice of industries depends completely
on the judgement of entrepreneurs about opportunities
for profit. They do not make the choice according
to the availability of domestic materials and the state
of the domestic market, both of which are very small,
but according to their own particular background and
experience, the possibility of acquiring technical knowhow from abroad, the availability of labour and its
potential for training to the level of skill required, the
source and cost of such imported material and spare
parts as cannot be made domestically, and the availability of a combined domestic and export market.
N o human foresight can be perfect, and there must
be many cases of trial and error. Although wasteful
for industries requiring large capital investment, such
experiment is often practised in other private-enterprise economies, especially for industries requiring
a small initial capital.
Loss from failure of the
smaller units is relatively unimportant and in the
community as a whole such loss may be offset by
gains from successful cases, and social gains are
derived from the repercussion of these upon other
industries.
Hong Kong has excise taxes on only five articles,
including tobacco and liquor, and the Government does
not have a development plan and does not lay down
any priorities. Except for the very small resettlement
workshops occupying about 200 to 400 square feet
of floor space (and no more than 2,000 square feet),
for which it builds multi-storey buildings for rent
at cost, the Government has not adopted any specific
measures to develop industry, not even the granting
or guaranteeing of loans. It does, however, provide
an environment and a climate well suited to commercial and industrial development.
Education, though not compulsory, is widespread.
In addition to the university and independent colleges,
a technical school was established in 1957 to train
intermediate technical personnel as well as to provide
technical services to industries. Government policy
is consistent, thus full assurance is given to entrepreneurs. In a territory with an extreme shortage of
44 Rough estimate by the G overnm ent of H o ng Kong.
21
usable land, the Government also levels hills and sells
the land to industries. The internal transportation
system and facilities for international trade are both
good. Electricity supply is adequate and priority is
given to industries for the use of water. Obviously
without the special conditions mentioned previously,
such policy could not be applied to other countries.
But, the entrepreneurial spirit, the desire to learn the
latest techniques and the way that enterprises have
trained skilled workers and supervised their work
have also contributed to Hong K ong’s industrial
growth. Keen competition on a narrow margin of
profit has also helped to improve efficiency. The
significant fact is that this industrial growth has
taken place without protective measures or other
devices which have now come to be accepted by many
countries as a necessary part of a programme of
industrialization.
Most of the advantages which Hong Kong
possesses do not exist in the Federation of Malaya.
Nevertheless, the gross national product of the Federation of Malaya in 1960 was U S$266 per capita, which
was much higher than that of other developing ECAFE
countries. In addition, there had been a continuously
favourable balance of trade since 1955, and foreign
assets increased by 160 per cent from 1955 to 1962;
in 1963 they exceeded $1,000 million, being almost
twice as much as the Indian level. Although wages
in the Federation are higher than in Hong Kong,
interest rates are much lower. Realizing the shortage
of entrepreneurs and technical personnel, the Government gives very favourable conditions to foreign direct
investment.
Public investment itself is concentrated in agriculture, electricity, transport and communications, and
the Government does not itself initiate the choice of
industries for protection. The Pioneer Industries Act
allows private businessmen to apply for any industry
to be considered as a pioneer industry. Approval
will be granted if no objection is raised within a given
period, and all preferential treatment under the Act
will be applied.45 Here the choice of industries is
still left in private hands, but the Government grants
special favours provided for by the Act once the
industries have been chosen. Government assistance
is necessary in the Federation of Malaya. Although
development got off to a late start and was hindered
by a shortage of local entrepreneurs and skilled
labour, it has been helped by stability of the currency
and exchange rate, by a liberal inducement to invest
and by consistent economic policies. Diversified
economic development is proceeding on a healthy
basis.
From 1955-1956 to 1960-1961, the gross
national product at constant prices increased at 3.2
per cent per annum and income from the industrial
sector at 5.9 per cent.
45 See chapter III.
22
Part One.
Conditions in other countries are less favourable.
Most of them face problems of low income and
saving, and shortage of foreign exchange. Worse
still, they have heavy population pressure due to high
densities and high rates of increase, which can be
solved only by accelerating their growth in production. In these countries, governments take a more
active and direct part in promoting economic development. In addition to providing basic facilities such
as irrigation, transport and power, many governments
have a policy of self-sufficiency in food and certain
basic consumption goods in order to improve the
level of living, induce stability and create employment. Self-sufficiency in food is a national policy
in such food-deficit countries as Ceylon, India,
Indonesia, Pakistan and the Philippines.46 In contrast, the Federation of Malaya, a food-deficit country,
recognizes its comparative advantage in cash crops,
and does not strive for self-sufficiency in food, although
the Government hopes that imports of food will not
increase in the future.47 In most countries, there
is a priority list of industries to be developed.
In both mainland China and India, where natural
resources are abundant, development needs large, and
the export surplus small in relation to the import
requirements of development, the governments, besides
promoting self-sufficiency in basic consumption goods,
give top priority to heavy industries. India’s second
five-year plan states, “if industrialization is to be rapid
enough, the country must aim at developing basic
industries and industries which make machines to
make the machines for further development.”48 In
contrast to Hong Kong’s emphasis upon consumption
goods, special attention has been given to import substitution of the means of production, especially iron
and steel. It is believed that once iron, steel and
machine industries are developed, they will serve the
needs of other industries so that all productive activities may grow together at a very rapid pace. This
is true especially in countries of the size of India and
mainland China, which have extensive resources and
a large domestic market. However, the establishment
of a series of basic industries requires large capital
resources and the process takes a considerable time
to “ripen” to the stage of final consumption goods.
Although neither of these countries neglects the
development of agriculture and of consumer goods
industries, the commitment of large resources49 to
early stage intermediate goods has left inadequate
resources for the production of final consumption
goods including foodstuffs.
46 Although the term self-sufficient m ay not appear in the developm ent plans of some of these countries, self-sufficiency is implied in
the production targets.
47 For a discussion on production and trade of rice, see chapter V.
48 Governm ent of India, Planning Commission, Second Five-Year
Plan, 1956, p.25.
49 Financial resources in India and both financial and hum an
resources in m ainland China.
Import Substitution and Export Diversification
In India, during the period 1953-1954 to 19611962, the import of capital goods increased by 14
per cent per annum, national income at constant
prices by 3.4 per cent, the industrial production index
by 8 per cent50 and the production of metal products
and capital goods by 11 per cent. There is now a
much better industrial base than a decade ago, and
a number of engineering products and certain types
of machinery have not only succeeded in replacing
imports but are also being exported.51
Per capita food production, however, has not
increased during this period,52 and imports of foodstuffs into India have increased by almost 5 per cent
per annum.
In the current third five-year plan,
accordingly, India has shifted emphasis and paid more
attention than the second five-year plan to the production of consumption goods, especially food.
In mainland China it was reported that, from
1952 to 1959, outputs of agriculture, light industry
and heavy industry increased by 82, 228 and 803
per cent respectively. Because of the rapid rate of
industrial expansion, a substantial quantity of consumption goods, including food, had to be exported
in exchange for producer goods (mostly machinery)
which constituted over 90 per cent of total imports.
This imposed additional restrictions upon domestic
consumption. It was officially announced that, in the
capital goods sector, the country’s “ level of selfsufficiency in steel products climbed from about 75
per cent in the first five-year plan period to around
90 per cent in the second five-year plan period”,
and that “ during the first five-year plan period China
could make about 55 per cent of the machinery and
equipment she needed” but “ during the second fiveyear plan (1 9 5 8 -1 9 6 2 ), this was raised to about 85
per cent.”53 However, progress in agriculture was
not so successful. Although in the 1950’s mainland
China had a net export of food-grains, adverse
climatic conditions thereafter led to imports of foodgrain of 5.6 million tons in 1961, and 4.7 million
tons in 1962, and possibly more than that in 1963.
There appears also to be a shortage of textile products. All this happened in spite of the fact that
increasing efforts have been made to develop agricultural and light industries since 1958.
50 Income from industrial sector by 3.5 per cent.
51 See chapter II, section 3.
52 Based on FAO index, see infra, the section on Asian Economic
Statistics.
53 Po I-po, “T he Socialist Industrialization of C hina”, Peking
R eview , No. 41, 11 October 1963. Previous reports indicated that
the self-sufficiency rate in steel products was 86 per cent in 1957 and
80 per cent in 1958. (State Statistical Bureau, “ C om m unique on the
Fulfilm ent of the First Five-Year Plan for Developm ent of the
National Economy, 1953-1957”, in P eking R eview , 13 April 1959;
Fan Mu-han, “ Splendid G row th of C hina’s Industry”, in Ten Years
o f the People’s Repubic o f China, 1949-1959, Vol. I (Chi W en Press,
H ong Kong, 1959). This rate depends of course not only on the
domestic production but also on the tempo of development.
Chapter I.
The Role of Import Substitution and Export Diversification
Many other countries have also laid emphasis,
at an early stage in their economic development,
upon the production of iron, steel and other intermediate goods requiring advanced techniques and
large capital or requiring optimum scales much larger
than present domestic demand.
In Thailand, for
example, the Promotion of Industrial Investment Act
of 1962 gave the highest priority (category “A ” )
to steel making, tractor producing, and the manufacture of engines, machine tools, acids, alkalies,
chemical fertilizers, plastic powder etc., and low
priority (category “C” ) to textile spinning, weaving
and bleaching, ceramics, tanning, wheat flour and
fish processing. Steel plants have been or are being
established also in Burma, Ceylon, China (T aiw an),
Hong Kong, Indonesia, the Republic of Korea,
Pakistan, the Philippines and Singapore, mostly with
capacities below the minimum optimum scale.54
The sequence of development deserves further
examination. It has been pointed out that, in lowincome countries, starting from import substitution
at the early stage for intermediate goods, the process
will require patient waiting by consumers for an
improvement in their level of living, although once
the waiting period is over all productive activities
will grow quickly.
But in low-income countries,
because of the demonstration effect resulting from
increased contact with the western world after the
war, the willingness of consumers to wait is waning.
In small countries, the domestic market for many
of the intermediate goods will still be very limited
for some time to come, so that many industries may
not be able to reach their minimum optimum capacity,
or derive maximum external economies.55 In addition,
because the level of technique demanded in these
industries is high, it is possible that the quality
of some domestically produced machinery and equipment may adversely affect future productivity and
income.56 Alternatively, if the smaller countries place
more emphasis on the quick-yielding productive activities requiring simpler techniques and higher outputcapital ratios, they may gain an immediate increase
of income, which, if accompanied by a systematic
policy to promote savings and to channel them into
productive investment, could also lead to a sustained
rapid growth of income.
In this way, increased
income and domestic demand, and acquired experience
in industrial techniques and management, may give
better opportunities for establishing the early stage
54 The steel mills in H ong Kong, though on a small scale, are profitable ow ing to shipbreaking, and protection is not necessary.
55 Certain types of m achine tools, for example, may not need a
very large capacity per establishment, but external economies are
required.
56 Cement is one of the exceptions am ong the interm ediate goods
industries. Its transportation cost is high, the local m aterial is
abundant in m any countries, and the m anufacturing technique is
relatively simple.
23
capital goods industries at optimum scales, with higher
efficiency and quality of product, yet without the
sacrifice of waiting.
There are difficulties in this approach. One is
the assumption that marginal saving is large, and that
a significant part of the increased income from the
expansion of consumption goods industries can therefore be saved and channelled to the desired type of
investment.
This is not automatically true and
requires good systems of taxation, good financial
organization and a strong incentive to invest. All
are lacking in many developing countries. The second
is the implied assumption that increases in the production of consumption goods may be exported in
exchange for capital goods. But the cost and quality
of the newly introduced manufactured goods in
developing countries are usually not competitive with
those of developed countries and, even if they are
competitive, there is generally some prejudice on the
part of consumers against the quality of the industrial
products manufactured by such countries. They face,
too, import and other restrictions of various kinds.
It is indeed partly because of difficulties in
obtaining enough foreign exchange that many countries have attempted to establish their own capital
goods industries. To obtain the best results, they
may co-operate to achieve optimum capacity for intermediate goods requiring large-scale production, even
in the initial stage, and achieve external economies
in related fields, through joint ventures to establish
regional industries in clusters or complexes that meet
their several needs jointly. They may also co-operate
in developing methods for adapting the proven production techniques of developed countries to the
special endowments of the region, with smaller production units. In addition, all efforts should be made
to facilitate the export of manufactured goods, and
here intra-regional co-operation may also be helpful.
(All three points will be further discussed in section
3, chapter V, on possible measures for regional
co-operation.)
Besides the general principle of achieving selfsufficiency in food and other basic consumption goods
in order to improve real incomes, provide stability
and establish capital goods industries to foster growth,
most countries emphasize the importance, for proper
choice of industries, of availability to materials and
markets. The rapid development of cotton and jute
manufacturing industries in Pakistan is based on such
advantages. On the other hand, India, with a large
domestic market and a climate suitable to jute production, has also increased the production of raw jute
to help its own textile industry. Most other countries
have established cotton textile industries using
imported cotton because, with the existence of
established domestic markets for textiles and of
24
Part One.
relatively simple techniques for producing them, they
find textiles one of the few industries suitable for
development, although protection is still necessary in
most countries. While the textile-deficit countries art
thus expanding their production, other developing
countries have difficulty in selling their export surpluses.
Market-oriented industries have also been
successful for a number of other consumer goods,
such as footwear, plastic articles, household utensils
and certain durable consumption goods, and for some
producer goods such as construction material. Countries are also developing new uses for agricultural
materials. However, the pharmaceutical industries in
some countries do little more than repack imported
materials. A more detailed study of the importsubstitute activities will be given in chapter II.
ECAFE countries, with ample availability of
labour, also emphasize the development of labourintensive production, including intensive farming and
cottage industries.
Both involve training a large
number of conservative people among whom the
effective propagation of new techniques requires a
good system and organization. Intensive cultivation,
moreover, usually requires a good irrigation system
which takes time to construct. Handicrafts, unless
exported, do not contribute much to economic growth,
and can be exported only if the designs are good
enough to suit tastes of foreign consumers and if
there are also good marketing facilities. Development, accordingly, has been either relatively slow
or the impact on the economy small.57
It may be noted in this context that development
of infra-structures such as transportation and power,
as well as organization and training, is a pre-requisite
both for large-scale import substitution and for industrialization. Although most countries’ plans provide
for such development, progress has been relatively
slow, and inadequate infra-structures have impeded
import substitution and general economic development.
Besides the choice of projects and of the sequence
of development whether beginning from consumption
goods or from the early stage producer goods, there is
the problem as to whether or not initial development
should centre on a few key activities, around which
further development may be built through the creation
of external economies and such inter-industry relations
as will have a cumulative effect on economic growth.
57
Although absolute figures of handicraft exports are relatively
small, the rate of increase in a num ber of countries is substantial.
T rade statistics do not allow identification of all handicraft exports,
but available statistics indicate the magnitudes involved. In India,
for example exports of handicrafts between 1956/57 and 1961/62
increased by 140 per cent to a total of $24 million in 1961/62. In
China (T aiw an) the increase from 1956 to 1961 was 260 per cent,
to a total of $9 million in 1961, and in the Republic of Korea an
increase by 680 per cent from 1960 to 1963 was recorded. In 1963
the value was $1.4 million. T h e increase in most countries seems still
continuing.
Import Substitution and Export Diversification
It was for this reason that mainland China and India
emphasized heavy industry.
However, the term
“balanced development” has sometimes been erroneously applied to the simultaneous development of
industries of different categories, so that the scarce
resources are thinly distributed over a large variety
of unrelated industries without much gain in external
economies.
While this random development may
increase employment and income, provide experience
and help to promote other industries, it may not be
as efficient or produce as much impact as the development of industries by clusters.58
One example of economic development by clusters
may be found in China (T aiw an ). There economic
development started from agriculture and the processing of food and agricultural material. From 1948 to
1961 agricultural yield per unit land area increased by
4 per cent per annum, with two, three, four, or even
five crops a year on the same plot of land.59 At
present, gross agricultural output per hectare is the
third highest in the world.60 Many new agricultural
products which had never been produced in the island
were introduced.
From 1953-1954 to 1961-1962,
agricultural output increased by 4.5 per cent per
annum.61 This is faster than in any other ECAFE
country including Japan. Such a rate of growth was
made possible by the reform of 1953 which, by
redistributing land to tillers, gave them incentives to
improve productivity. In addition, the Government
undertakes various agricultural research and experiments, propagating the results to farmers through the
Farmers’ Association which was re-organized in 19531954 to undertake this expanding activity.
The
establishment of fertilizer and insecticide industries
followed, replacing imports to serve the needs of
agriculture.
On the other hand, realizing that the sugar
refining industry was at a comparative disadvantage
because of an unfavourable climate, the Taiwan Sugar
Company has reduced the area under sugarcane
while extending the industry’s activities both vertically
and horizontally. It undertakes successful research
to increase the yield of sugarcane and to shorten
58 Here is a difference between a spontaneous development of
various industries by private entrepreneurs based on the profit motive
and planned development at different spots not based on the profit
motive.
59 T he five-crop pattern is usually two rice crops with two cash
crops (or one cash crop and one green m anu re) in between. To
fight for time, cash crops are planted between rows immediately after
the paddy fields are drained off but before the rice is harvested. The
fifth crop is added by cultivating the fast grow ing fish in the rice
field, which will be caught before the water is drained. T h e area
planted with four or five crops, though increasing, is however not
very large.
60 FAO, T h e State o f Food and Agriculture, 1963, p. 110.
61 Based on FAO production index. Income at constant price
originated from agriculture increased at 5 per cent per an num during
the same period.
Chapter I.
The Role of Import Substitution and Export Diversification
the crop-growing period. It requires or encourages
sugarcane farmers to raise pigs, making use of the
waste of sugarcane for feed and the manure of pigs
for fertilizers. It has set about improving the breed
o f pigs, and has established animal feed plant as
well as workshops to process the ham and other
products for export. Yeast, alcohol and mono-sodium
glutamate are made from sugar molasses while bagasse
boards and particle boards for construction and furniture are produced from sugarcane fibre, both for
import substitution and for export.
The Taiwan
Sugar Company also manufactures insecticides and
agricultural pesticides. As an ingredient in animal
feed aureomycin is being produced from molasses.
Research on by-products such as cane wax is also
conducted by the Taiwan Sugar Experimentation
Station. In addition, because of its interest in the
development of Taiwan’s east coast and in the utilization of available labour during the off-season for sugarcane milling, the company has chosen pineapple as
a supplementary crop, promoted pineapple planting
and established a pineapple cannery for export.
Throughout the province, about one-tenth of the
population obtain their livelihood either entirely or
partially from the activities of the government-operated
Taiwan Sugar Company.
Thus the most successful phases of economic
development in China (Taiwan) have come from two
groups of activities, agricultural production and the
sugar cluster, both depending on research, experiment
and organization to apply research to production.
Broad types of other industries were also developed for
export and import substitution and their relative
importance in the economy has steadily increased in
recent years, yet, m easured b y unit of capital
em ployed, their impacts on the economy are not
comparable to those of the two clusters. Taking the
econom y as a whole, the annual compound rate of
growth of national income at constant prices was 6.3
per cent from 1953-54 to 1960-61, income originating
from manufacturing 7.5 per cent and per capita
income almost 3 per cent.
As already indicated, development based on consumer goods may encounter the difficulty of increasing
saving and investment, as happened in China (Taiwan)
where net domestic saving was only 5 per cent of
national income in 1957. A s income increased and
monetary stability improved, the propensity to save
also improved and the rate of net domestic saving was
gradually raised to 9 per cent in 1961 (the rate of
gross domestic saving was 14.3 per cent) in spite
o f the inadequacy of the financial institutions for
rechannelling savings. This rate of saving is, however, still too low to sustain a rapid growth, and the
25
utmost effort should be made to raise it. In contrast,
the rate of net domestic saving in Japan was 35 per
cent in 1961 and of gross domestic saving 43 per
cent.
There are further limitations to development
through agriculture and the food processing industries,
especially in the very densely populated areas where
intensive cultivation has long been employed. While
these activities help to accelerate an early stage of
growth, they soon reach saturation, so that further
growth has to depend upon some other impetus. The
textile group, initially developed for import substitution, has become overgrown with excess capacity.
Although providing considerable employment, and
developing vertically from spinning to dyeing, weaving and garments, it has difficulty in exporting its
products and does not give much stimulus to the
growth of other sectors. But, in China (Taiwan) in
the late 1950’s a beginning was made in chemical
industries including acids, alkalis, a petroleum
refinery, petro-chemicals, fertilizers, plastic material,
synthetic fibre, etc., and these have once been considered a possible cluster for starting a new wave
of development. In these industries, value added is
large in relation to the cost of material, and they
should be suitable for countries lacking adequate
natural resources. Key factors required are techniques
and initial capital, including foreign exchange. At
present, many chemical industries are still at the
infant stage, where they encounter technical problems
and high production costs. Another possible cluster
of industries which the Government is considering,
with help from the United Nations Special Fund and
the International Labour Organisation in training the
technical personnel, is a whole line of mechanical
engineering industries which could make a strong
impact on the economy.
The type of industry which may serve as the
nucleus of an industrial complex varies from country
to country depending on many subordinate factors.
For example, although the petroleum industry
generally can serve as the nucleus of a large industrial complex, including machinery and petrochemical industries and transport and distribution,
it has failed to benefit Asian countries as much as
might have been hoped for. Originally operated with
foreign capital, foreign management, foreign technicians and imported equipment, and aiming primarily
at foreign markets, the industry usually became an
island or enclave within the country in which it was
established. The equipment and spare parts were so
specialized, and the number of units required so
small, that they were imported; in some cases, even
the consumption requirements of employees were
P a r t One.
26
im ported.62 T ra in in g local lab o u r fo r low er level
positions has no t helped other industries, an d the
local people have no t gained m uch experience of
entrepreneurship or hig her techniques. T he c o n trib u tion to the econom y has been lim ited principally to
the income from oil-concessions a n d the wages of
local employees.
In Iran , when the oil indu stry was nationalized
in 1951, the C onsortium m em bers agreed to m inim ize
employment of foreign personnel an d to p re p a re a
p ro g ra m m e of general education, and technical an d
adm inistrative tra in in g for Iran ian s, w ith the aim of
replacing foreign personnel as soon as possible.
A rrangem ents were also m ade for the m axim um
quantity of m aterials req u ire d for operations to be
obtained w ithin Ira n and for as m uch em ploym ent
as possible to be given to Iran ians. T he m a n a g e ment of the Consortium is thus p u rsu in g the policy
o f m aking the industry a m ore integral p a rt of the
Iran ian economy, a development w hich involves
im port substitution of both skilled personnel and
m aterial supplies. The tra in in g of technical personnel
especially will have a far-reaching effect, as the
industry provides a stan d ard level th at all technical
personnel should reach.
There are, however, at least at the present stage,
problems for Ira n in developing other industries centered around the petroleum industry, except as regards
supplying them w ith their requirem ents of com pany
personnel and with some very m in o r requisites of
production. As technical levels in the cou ntry are low
and an industrial base lacking, it is not enough to
produce m achinery and spare p arts at cost an d of
sufficiently high quality.
T he same thin g applies
to petro-chemical industries which, besides suffering
from a limited domestic dem and, m ust produce on
a large enough scale to achieve economies th at b rin g
62 This point may be further amplified by the following quotation
on Iran.
“Before nationalization, unfortunately, the oil industry stood
in virtual isolation from the rest of the Iranian economy. It
imported all its material inputs and specialized skill requirements, and it provided for all the consumption needs of its
employees from abroad. It owned and operated a wide range
of the ancillary services used in its technical operations as well
as in the community at large. Its only links with the country’s
economy were confined to payments of royalties and taxes to
the Government, wages and salaries to its Iranian employees,
and provision for a limited program of technical training of
Iranians. This dependence on foreign sources for skills and
materials not only constituted an economic loss to Iran, but
also served to accentuate the “alienness” of the oil industry in
the minds of the Iranians — a factor at least partially responsible for the public attitudes which led to nationalization of
the industry in 1951.” Khedadad Farm anfarm aian, “ The
Oil Industry and Native Enterprise in Iran ”, M iddle Eastern
Affairs, October 1957, pp.335-336.
Im p o rt S u b stitu tio n a n d E x p o rt D iversification
q uality a n d cost to in te rn a tio n a l level in o rd e r to
exp o rt th eir p ro d u c ts successfully. A t present, th ere
is a small petro-chem ical in d u stry p ro d u c in g fertilizers,
bu t the scale is fa r below the optim u m level. It is
plann ed to expand this in d u stry , b u t econom ic planners
still place m o re em phasis on in fra stru c tu re , agriculture
an d m o re balan ced developm ent.
S im ilar problem s arise fo r o th er m a jo r exports
of the region, in clu d in g ru b b e r, coconuts, sugar
(except from C hina ( T a i w a n ) ) , tin etc. so that,
a lthough av ailability of m a te ria l m ay be a criterion
fo r developing a p a rtic u la r in d u stry , it does not
necessarily follow th a t the in d u stry will provide the
same k in d of diffuse stim ulus to ancillary industries
th a t it has achieved in developed countries.
It
m ay be noted, how ever, th a t some items of team ak in g m achin ery have fo r years been m ade in
Ceylon, and oil and ru b b e r processing equipm ent in
some other countries.
W hatever a p p ro a c h a n d sequence a country may
follow to develop its econom y, the m ost im portant
factors in in d u strializatio n are consistent policies,
organization, e n tre p re n e u rsh ip ,63 technical know-how
a n d w ork ers’ discipline— all h u m a n elements. The
exam ple of H o ng K o n g shows th at, w ith such
elements, m an y in d u stries m ay flourish even without
local m aterials or w ide dom estic m a rk e ts,64 provided
th a t the quality a n d cost of the p ro du cts com pare
fav ou rab ly w ith those fro m the in d u stria l countries.
Im p ro v in g these factors re q u ire s tim e ; an d it is for
this reason th a t the ra te of grow th in m ost countries
has been so slow. These factors, m oreover, do not
d isap pear w ith im p o rt co ntro l or protection.
In the rem ote fu ture, given the p resent w orld distrib u tio n of resources a n d pop ulation , a n d the rate
of popu lation grow th, A sian cou n tries will have to
depend m ore a n d m o re on th e ir m a n u fa c tu rin g industries. If these cou n tries aim to reach the income
level of the developed countries, they will have to
ex po rt m a n u fa c tu re d goods in o rd e r to im p o rt agricultu ra l m aterials a n d foodstuffs.65 T his does n ot mean
th a t a g ric u ltu ra l developm ent should be neglected and,
in fact, developm ent of m a n u fa c tu rin g should help
agriculture.
63 Entrepreneurship is used here to m ean that for both private
and public enterprises.
64 Many articles produced in H ong Kong are solely for export
and not seen in the domestic m arket. Ready-made woollen suits for
the United States and certain brands of transistor radio for the
United K ingdom are examples.
65 See also “Population Trends and Related Problems of Economic
Development in ECAFE Countries” , Econom ic Bulletin f or Asia and
the Far East, Vol.X, No. 1, June 1959, p .45.
Chapter I.
The Role of Import Substitution and Export Diversification
It seems almost like a dream to suppose that
present developing countries may, in the future, export
manufactured goods in exchange for primary products; but its fulfilment will depend largely on the
efforts made. Although the population pressure and
shortage of natural resources and capital are serious
lim iting factors, they should not be allowed to inhibit
vigorous action. For example, there is still a wide
spectrum of manufacturing industries where labour
m ay be an effective substitute for capital. The watch
27
industry in Switzerland and the camera industry in
Japan are more labour-intensive than those in the
United States, but the quality of products is superior
and the cost lower. What are needed are entrepreneurship, research into advanced techniques and
skilled and disciplined labour. The key to success
is to convert the present surplus unskilled manpower
into trained personnel. The more rapid the conversion, the greater will be the future rate of growth.