SOUTHEAST ASIA: A NEW LOOK AT INDUSTRIAL DEVELOPMENT STRATEGIES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84S00553R000100180003-7
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 19
• Document Creation Date: December 22, 2016
• Document Release Date: March 4, 2011
• Sequence Number: 3
• Publication Date: April 1, 1983
• Content Type: REPORT

Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84SO0553R000100180003-7
Confidential-
Directorate of
Intelligence 25X1
Southeast Asia:
A New Look at Industrial
Development Strategies
EA 83-10063
April 1983
Copy 2 9 5
Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84SO0553R000100180003-7
 Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84SO0553R000100180003-7
Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84SO0553R000100180003-7
 Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84SO0553R000100180003-7
Directorate of Confidential
Intelligence
Southeast Asia:
A New Look at Industrial
Development Strategies
Southeast Asia Division, OEA,
welcome and may be directed to the Chief,
This paper was prepared byl (Office
of East Asian Analysis. Comments and queries are
Intelligence Council
This paper was coordinated with the National
Confidential
EA 83-10063
April 1983
Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84SO0553R000100180003-7
 Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84SO0553R000100180003-7
Confidential
Southeast Asia:
A New Look at Industrial
Development Strategies
Summary Singapore and Malaysia, in our judgment, will during the 1980s remain
Information available the front-runners in industrial development among the five countries that
as of 18 March 1983 belong to the Association of Southeast Asian Nations (ASEAN). The three
was used in this report..
larger member countries-the Philippines, Thailand, and Indonesia-will
lag behind, partly because political elites control economic interests that
would be damaged by moves to open the economy to competition.
Singapore, already a newly industrializing country, is pushing its "second
industrial revolution" to move into knowledge-intensive and high-technol-
ogy manufacturing industries. Malaysia is developing heavy industries
based on indigenous resources and is improving capabilities to manufacture
and export labor-intensive products. Singapore and Malaysia will continue
to attract foreign investment and will, we believe, receive a disproportion-
ate share of the equity capital flowing into ASEAN countries. Both
countries are also investing heavily in human capital by strengthening
educational and technical training to meet the increasing demand for
skilled workers.
The Philippines will find it difficult to ease trade restrictions and foreign
investment regulations because of the political strength of industrialists
who have close connections with President Marcos. In addition:
? Recent natural gas production problems in Thailand have raised uncer-
tainty about the gas-based industrial development strategy.
? Indonesia's energy-based plans are being reviewed as the country's
financial position deteriorates, and its industrial development program
now seems likely to slow.
Although growth will probably be slower than in the 1970s, we believe the
ASEAN countries as a group should continue to outpace most other
developing countries. The region is well endowed with natural resources,
has a comparatively well-educated and rapidly growing labor force, and is
politically stable compared with other Third World areas.
iii Confidential
EA 83-10063
April 1983
Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84SO0553R000100180003-7
 Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84SO0553R000100180003-7
Confidennat
The ASEAN countries are not likely to compete against the United States
in a wide range of products in this decade, but we believe they will be suc-
cessful in exploiting market opportunities in specific products or services,
such as electronic components, that now originate in the United States and
other industrial countries. In any case, US firms will continue to find
Southeast Asia a relatively profitable investment location, and we believe
will increasingly move some production operations in high-technology
industries to the region to take advantage of low wages.
Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84SO0553R000100180003-7
 Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84SO0553R000100180003-7
. ufllluvflllaI
Moving Into the 1980s
Country Strategies
Singapore: High Tech's the Name of the Game
1
Malaysia: Looking Good and Looking East
2
Thailand: Potholes in the Development Road
5
The Philippines: Still at the Starting Gate
5
The Development Race: Front-Runners and Laggards
7
Implications for the United States
9
A.
Southeast Asia: Industrial Development in the 1970s
B.
Southeast Asia: Foreign Direct Investment
Tables
1.
Indonesia: Selected Industrial Projects
6
2.
US Direct Investment in LDCs: A Comparison
9
1.
Association of Southeast Asian Nations (ASEAN)
2.
Malaysia: Selected Areas of Industrial Development
4.
Southeast Asia: Manufacturing as a Share of GDP
Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84SO0553R000100180003-7
 nitized Copy Approved for Release 2011/03/04: CIA-RDP84SO0553R000100180003-7
Confide...Sa.?.
Figure 1
Association of Southeast Asian Nations (ASEAN)
Boundary representation is
not necessarily authoritative.
Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84SO0553R000100180003-7
`ofac\ .. Brunei
11
25X1
 Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84SO0553R000100180003-7
Confidential
Southeast Asia:
A New Look at Industrial
Development Strategies
Moving Into the 1980s
The Philippines, Thailand, Indonesia, Singapore, and
Malaysia-the five countries that are members of the
Association of Southeast Asian Nations (ASEAN)-
for the most part have weathered the current world-
wide recession fairly well' (see appendix A). The
region's overall 4-percent growth last year was high
by international standards, although rates ranged
from Singapore's 6.3-percent growth to the Philip-
pines's 2.6 percent. Weak foreign demand cut manu-
factured exports, however, and even Singapore's well-
balanced economy, according to government data, did
not escape unscathed; output in the electronics sector
declined in 1982 and exports stagnated.
Although it probably has slowed some projects, the
recession has not forced revisions of the industrial
development strategies in any of the countries, in our
judgment. They continue both to emphasize resource-
based heavy industries and, at the same time, to
pursue policies to develop exports of light consumer
goods, electronics products, and other labor-intensive
products. Singapore is pressing ahead with its "second
industrial revolution" to move into knowledge-inten-
sive and high-technology manufacturing industries.
in the Philippines, Thailand, and Indonesia will hold
down wage rates, which will make their labor-inten-
sive exports more attractive on world markets.
Country Strategies
Singapore: High Tech's the Name of the Game.
According to government development plans, Singa-
pore recognizes that growth in the 1980s based on
labor-intensive production will be limited by its small
labor force and growing competition from China and
neighboring Asian countries. As a result, it is looking
to high-technology manufacturing and service-based
industries to maintain rapid export growth.' The
government is encouraging the establishment of man-
ufacturing facilities in areas such as industrial elec-
tronics, avionics, optics, and specialized oilfield equip-
ment. In addition, the city-state is intensifying efforts
to export existing product lines to nontraditional
markets. For example, Singapore recently broke into
the lucrative Soviet market for offshore oil rigs with a
To complement these manufacturing industries, the
city-state is pushing development of computer soft-
ware, engineering design, and financial and profes-
sional services. According to government planners,
Indeed, Southeast Asia's economic prospects remain
relatively bright compared with other LDCs. In our
judgment, the region's strongest asset is the favorable
mix of natural and human resources. Compared with
most other areas, the region's population is relatively
well educated and work oriented-especially in
Malaysia and Singapore. Political and economic con-
sequences notwithstanding, rapid labor force growth
' The corollary, of course, is how well the economies will absorb new
entrants to the labor force, when they already face underemploy-
ment and unemployment. For example, Indonesia, the world's fifth
most populous country, cannot adequately employ its labor force
now, and the need to create jobs will increase in the 1980s when the
25X1
25X1
25X1 I
25X1
Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84SO0553R000100180003-7
 Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84SO0553R000100180003-7
Confidential
Singapore also hopes to strengthen its position as a
major Asian financial market. The country is already
a center for Asian loans and is emerging as an
important loan syndication center in direct competi-
tion with Hong Kong. According to US Embassy
reporting, Singapore expects to gain from the uncer-
tainty over Hong Kong's future as the 1997 expiration
date of the United Kingdom's lease on the New
Territories draws closer.
In addition, the Singapore Government continues to
try innovative approaches to spur development. The
government, for example, established a Trade Devel-
opment Board in January 1983 to promote exports
and negotiate international trade agreements. The
Board is modeled on the successful Economic Devel-
opment Board, the country's one-stop investment
agency, and will engage in commercial activities-
including the formation of companies, joint ventures,
and partnerships.
Singapore is also emphasizing education and technical
training to meet the increased need for skilled workers
in the high-technology industries. University enroll-
ment is being expanded, and a Skills Development
Fund is providing financial assistance to firms seeking
to upgrade employee skills. In cooperation with the
West German, French, and Japanese Governments,
technological training institutes aimed at a broad
range of advanced technical skills have been estab-
lished. The German-Singapore Institute, which began
operation last year with an enrollment of 400, will
train production engineering technicians in machinery
processes, tool and die making and design, and other
processes. The French program began operation this
year and is training technicians in microprocessor and
computer applications. The Japan-Singapore Insti-
tute, financed by the Japanese Government, is focus-
ing on computer applications-primarily professional
training in software technology
Malaysia: Looking Good and Looking East. Malay-
sia's industrial development plans envisage establish-
ing import-substituting heavy industries and encour-
aging export-oriented, labor-intensive manufacturing.
We believe plentiful energy reserves, largely offshore
natural gas, will support a proposed heavy industrial
center in East Malaysia, including projects in petro-
chemicals, steel, cement, and possibly zinc and copper
smelters.' In our judgment, Malaysia will have little
trouble financing this program because of an excellent
international credit rating and a proven ability to
attract foreign investment. According to government
plans, output from these plants will be used primarily
for import-substitution and to encourage development
of the relatively backward east coast of Peninsular
Malaysia as well as Sarawak and Sabah.
Malaysia is emphasizing its budding steel industry to
fill anticipated growing domestic requirements. A
$500 million iron and steel complex with a capacity of
600,000 tons per year is scheduled to open in 1985, as
is a cold rolling mill costing $250 million. The
government is also moving ahead with an aggressive
auto industry development policy. Tariffs have been
increased on imported motor vehicles, and Prime
Minister Mahathir has labeled the effort a "personal
project." We believe Kuala Lumpur recognizes that
the industry will be uncompetitive,
Kuala Lumpur is
prepared to accept this because the industry will be an
important source of demand for domestic steel, ma-
chinery, and tires. The Heavy Industry Corporation of
Malaysia and Mitsubishi Motors will collaborate on
production of parts and assembled vehicles with a goal
of 90,000 units per year for the domestic market.
Malaysia is also moving to strengthen its well-estab-
lished capabilities to manufacture and export labor-
intensive light manufactures. Electronic component
manufacturers, for example, are modernizing their
operations by using minicomputers and microproces-
sors to automate their production lines,
In addition, Malaysia is also actively
promoting its products on world markets. Kuala Lum-
pur plans to expand the number of trade offices
operating in large trading centers overseas to provide
information on export opportunities to Malaysian
' Gas reserves of 34 trillion cubic feet also allow Malaysia to export
gas. Liquefied natural gas shipments to Japan, amounting to
6 million metric tons per year over a 20-year contract period, began
25X1
25X1
25X1
25X1
25X1
25X1
25X1
2bAl
25X1
25X1
Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84SO0553R000100180003-7
 Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84S00553R000100180003-7
Confidential
Foreign investors continue to be attracted to South-
east Asia because of low wages, rich resources, and
relative political stability. Over $15 billion in foreign
direct investment flowed into ASEAN countries dur-
ing 1975-81 (see appendix B). Malaysia and Singa-
pore are pursuing policies to attract foreign invest-
ment, but in Thailand, Indonesia, and the
Philippines, we believe, strict regulations and nation-
alism have impeded foreign investment and will
continue to do so.
Singapore is in the forefront of the NICs in encourag-
ing multinational firms to move into knowledge-
intensive industries, and Prime Minister Lee Kuan
Yew is determined to maintain the lead. The Eco-
nomic Development Board-the highly successful
government institution tasked with directing private
investment-has initiated tax incentives to encourage
investment in high-technology industries. Firms are
eligible for numerous financial incentives including:
? Accelerated depreciation on fixed investment.
? Tax holidays for five to 10 years.
? Tax exemptions on export profits.
Malaysia is encouraging foreign investment and joint
ventures and is exploring the possibility of encourag-
ing basic "smokestack" industries operating in devel-
oped countries-especially in Japan-to relocate in
Malaysia. Moreover, at a recent ASEAN economic
ministers' meeting, Malaysia announced that it will
not participate in government-sponsored ASEAN in-
dustrial projects, but instead would promote private
joint ventures within ASEAN. Malaysia's investment
incentives are designed to provide total or partial
relief from income taxes for companies investing in
new enterprises or expanding existing ones.
Kuala Lumpur's highly nationalistic New Economic
Policy (NEP) could pose a threat to foreign invest-
ment, however. The fundamental objective of the plan
is to put 30 percent of Malaysia's corporate wealth
into Malay hands by 1990. By 1980, after the NEP
had been in effect for 10 years, Malays owned only
12 percent, a considerable part via government trusts.
Should the government begin to strictly enforce the
NEP, we believe new foreign investment would slow.
For the time being, however, the Mahathir govern-
ment is stressing pragmatism and flexibility.
The Thai Government is attempting to encourage new
foreign investment, but complicated immigration and
residence procedures, legal prohibitions against for-
eign ownership of property, and red tape in general
inhibit foreign investors. Overall, we believe the gov-
ernment will find it difficult to liberalize foreign
investment regulations because Sino-Thai business-
men with close connections to the military-bureau-
cratic elite generally oppose any such reform. Never-
theless, Prime Minister Prem has led missions to the
United States, Australia, New Zealand, Japan, and
the EC to encourage investment in Thailand. Bang-
kok also hopes to capture capital moving out of Hong
Kong.
The Philippines has only recently agreed to restruc-
ture foreign investment regulations in return for
continued financial assistance from the World Bank
and the IMF. Complicated regulations, nationalistic
voices among the technocrats who frame economic
policy, and past decisions to borrow abroad have kept
foreign investors from playing a major role in the
Philippine economy. Moreover, we believe fundamen-
tal reform of foreign investment rules will be slow,
largely because of political considerations.
Indonesia probably has the most obstructive foreign
investment regulations and the least cooperative bu-
reaucracy in ASEAN. President Soeharto has not
hesitated to impose stringent conditions on foreign
investors to expand employment opportunities for
native Indonesians and to protect business interests of
influential groups in Indonesia's elite. He has issued
presidential directives limiting the employment of
expatriate employees and requiring foreign firms to
use Indonesian subcontractors, even at the cost of
discouraging some investment or increasing the cost
of some projects. Despite Indonesia's professed inter-
est in encouraging foreign investment, we believe
progress will be hard to come by.
Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84S00553R000100180003-7
 Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84SO0553R000100180003-7
Confidential
Figure 2
Malaysia: Selected Areas of Industrial Development
firms. The government is also providing financial
assistance in the form of tax deductions for export
sales. According to the government, large trading
corporations may be established to obtain new market
outlets by entering into joint ventures with multina-
tional corporations.
Like Singapore, Malaysia is emphasizing education
and training. Six new trade schools are being built
that will provide training in engineering and machine
tools. In addition, the Malaysian Ministry of Labor's
two industrial training institutes are currently being
expanded to meet the demand for skills in metal and
foundry works, tool and die making, electronics pro-
duction, and printing. The government also plans to
build another three institutes during the next five
years to provide training in heavy plant fittings and
maintenance, engineering, and automation.
P
Sulu
Sea
Prime Minister Mahathir is trying to make his "look
East" policy an integral part of Malaysia's industrial
development program. Mahathir has proposed Japa-
nese and South Korean development as models for
industrialization. The Japanese work ethic and disci-
pline are particularly appealing to Mahathir, whose
controversial book published in 1970 criticized Ma-
laysians for not measuring up to other races such as
the aggressive Japanese and Chinese.' One goal of the
Prime Minister is to send students to Japan for
apprenticeships or practical training in manufacturing
industries. Malaysians currently studying abroad,
however, are concentrated in the West with 15,000
students in the United States and roughly 15,000 to
20,000 in the United Kingdom
Proposed industrial area
4 Oilfield
Gasfield
- Selected state boundary
0 490
25X1
ii
25X1
LJ/~ I
Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84SO0553R000100180003-7
 Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84SO0553R000100180003-7
Confidential
Despite Mahathir's efforts during the past year, the
policy has yet to catch on with the Malays or with
Kuala Lumpur's Western-oriented cabinet ministers
and bureaucracy. Mahathir attempted to give the
initiative new momentum during his trip to Japan in
January 1983. The $200 million Japanese credit he
obtained on the trip should quiet critics of the policy
for the time being, according to the US Embassy. F_
Thailand: Potholes in the Development Road. As part
of Thailand's overall development strategy, Bangkok
is attempting to improve the efficiency of labor-
intensive manufacturing activities under a five-year
program with the World Bank that began in 1982. In
return for $325 million in structural adjustment loans
from the Bank in 1982-83, Thailand has promised to:
? Lower tariff barriers.
? Promote exports through rebates and export credits.
? Extend export promotion incentives to small busi-
ness.
As in Malaysia, natural gas is at the heart of Thai
industrial development strategy. As originally
planned, natural gasfields in the Gulf of Thailand
were to support the development of a large industrial
manufacturing center in southern Thailand, including
a $3.5 billion LNG plant capable of generating $1
billion annually in export earnings. Natural gas would
provide both fuel and feedstock for a number of
industries ranging from petrochemicals and fertilizers
to metals and cement, according to the Thai Govern-
ment. According to initial government estimates, cu-
mulative investment in the gas-based industrial pro-
gram would have reached nearly $4 billion by 1990.
The once optimistic outlook for gas, however, is now
clouded, along with the industrial development plans.
Because of recent production problems, one of the US
oil companies developing the gasfields has lowered its
estimate of recoverable reserves in the Erawan field,
the largest in the Gulf of Thailand, by nearly two-
thirds to 480 billion cubic feet.
t is doubtful that sufficient gas will be
25X1
25X1
available when construction is completed to run the
separation plant at capacity. At present, Bangkok is
going ahead only with the $400 million first phase of
its petrochemical industry program-construction 025X1
an ethylene plant-while it reconsiders the size and
scope of the industry.
Because gas production can no longer be counted on
to finance the heavy industry program, we believe
foreign loans or investment will have to provide much
of the required capital. Although Thailand has a good
international credit rating, we believe the government
prefers a mix of both international borrowing and
foreign investment. In our opinion, however, cumber-
some foreign investment regulations and investor con-
cern over political stability will deter foreign investors
and in turn slow the pace of the industrial develop-
ment. 25X1
The Philippines: Still at the Starting Gate. The
Philippines has only recently embarked on an indus-
trial restructuring program aimed at putting its man-
ufactured export performance on a par with the other
ASEAN countries. In our judgment, the Philippines
missed out on most of the economic success Southeast
Asia enjoyed in the 1970s. Real wages in manufactur-
ing, for example, are no higher than they were in
1970, and per capita exports are among the lowest in
Southeast Asia.
Over the next five years the Philippine strategy is to
shift from import-substituting industries to labor-
intensive, export-competitive manufacturing opera-
tions, according to Philippine planning officials. Exist-
ing import-substitution industries will be modernized
and expanded, and the government will try to spur
development of capital-intensive intermediate-goods
industries, such as steel and machinery, which, in our
judgment, the domestic Philippine economy is capable
of supporting. The key objectives of the 1983-87
development plan are to generate jobs for the rapidly
growing labor force (projected to increase 3.7 percent
The uncertainty over gas reserves is already causing
cutbacks in some sectors. Bangkok has shelved plans
for the LNG export facility, and completion of a $300
million gas separation plant to produce feedstocks has
Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84SO0553R000100180003-7
 Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84SO0553R000100180003-7
Confidential
annually by the mid-1980s), reduce dependence on
exports of primary agricultural and mineral commod-
ities, and generate foreign exchange savings for in-
vestment.'
To improve the international competitiveness of its
manufacturing sector, the government is liberalizing
tariffs and trade policy and has promised to stream-
line foreign investment regulations. The moves have
been required by the International Monetary Fund
(IMF) and the World Bank in exchange for continued
balance-of-payments assistance while restructuring of
the economy moves ahead. Over the past few months
Manila completed negotiations for credits totaling
some $550 million from the IMF and resumed negoti-
ations on a $300 million structural adjustment loan
from the World Bank. Although the government's
record in implementing specific reforms mandated by
the IMF and the World Bank so far is good, how fast
and how far Manila proceeds with the new program,
we believe, will determine the success or failure of the
strategy.
The key to heavy industry development is the govern-
ment's proposed 11 major industrial projects-includ-
ing a copper smelter, fertilizer plant, diesel engine
plant, integrated steel mill, aluminum smelter, and
petrochemical complex. According to government
planners, these plants will provide links with existing
extractive and light-manufacturing industries. De-
spite some criticism from the private sector and from
several technocrats within the government, seven of
the projects are under way and Manila claims they
will provide the foundation for future industrial
growth.
The original price tag was projected at $6 billion, but
major modifications have brought the cost down to
around $4 billion. The current poor state of the
Philippine economy, financial strains, and potential
debt repayment problems will force further cutbacks
6 The plan has been criticized by official creditors and even the
Philippine National Assembly for, among other things, ignoring the
Table 1
Indonesia: Selected
Industrial Projects
Krakatau Steel Mill expansion
2,700
Asahan aluminum plant expansion
2,000
Arun LNG plant expansion
850
Badak LNG plant expansion
995
Dumai Refinery hydrocracker
1,450
Balikpapan Refinery expansion
1,480
Cilacap Refinery expansion
1,160
Aceh olefins complex
2,850
Aceh urea plant
400
Pladju aromatics center
1,500
Badak urea and ammonia plant
210
Six other pulp and paper plants
1,100
Suralaya electric powerplant
800
Musi Oil Refinery
1,020
or construction delays, in our judgment.' Moreover,
we do not believe these projects will generate large
foreign exchange savings for many years because the
technology and equipment will have to be imported
and several of the projects will require imported raw
Indonesia: End of the Oil Boom? The 1979-80 oil
boom encouraged Indonesian technocrats-with the
support of President Soeharto-to press ahead with
an ambitious industrialization program. In 1981-82
alone, the government signed contracts for projects
valued at $9.5 billion, bringing the value of industrial
plants under way or in advanced planning stages to
more than $15 billion.
The current phase of the industrialization strategy
emphasizes resource-based heavy industry which is
intended to provide a competitive edge that would
Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84SO0553R000100180003-7
 Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84SO0553R000100180003-7
Confidential
enable Indonesia to expand exports and reduce im-
ports of industrial goods. Work'under way in North
Sumatra and East Kalimantan, for example, will
double the capacity of LNG plants to 15 million
metric tons per year. Expansion of three petroleum
refineries will double the country's refining capacity
to more than 800,000 b/d by the mid-1980s and .
eliminate the need to ship crude oil to Singapore for
processing into refined products for Indonesia's do-
mestic market. According to the government, the
petrochemical and fertilizer plants under construction
in Sumatra and Kalimantan will use Indonesia's
abundant natural gas or naphtha as feedstock to
supply both domestic and foreign markets.
In the metals industries, government planners envis-
age the Krakatau Steel Mill and the Asahan Alumi-
num Plant (on the islands of Java and Sumatra,
respectively) acting as magnets for private investment
in ancillary machinery and metalworking industries.
Although the Indonesian market is certainly capable
of supporting a domestic steel and aluminum industry,
we believe foreign investment in ancillary industries
may be slower than anticipated by the government
because of Indonesia's restrictive foreign investment
regulations and competition from other ASEAN na-
tions for the same types of investment
On the basis of World Bank projections of Indonesia's
export prospects, we believe the technocrats in early
1982 had counted on several more years of balance-
of-payments surpluses to finance the industrial devel-
opment program. By then, the new industries would
help to reduce import requirements or supplement
industrial exports. The sharp reversal in Indonesia's
export performance since 1980 and the recent reduc-
tion in international oil prices, however, are forcing
the government to review its development policy
options, and we believe construction of several proj-
ects, such as the steel and aluminum plants and new
petrochemical plants, will be slowed to avoid a finan-
cial crisis.'
The Development Race: Front-Runners and Laggards
We believe Malaysia and Singapore will come closest
to reaching their goals and will remain the front-
runners in Southeast Asia's industrial development
during the 1980s.~ 25X1
the labor rorces in Ningapore and 25X1
Malaysia are the most disciplined and industrious in
the region, and both countries seem well on the way to
producing steady streams of highly trained workers.
They view advanced technical training as the key to
overcoming the problem of relatively small pools of
skilled labor, which could slow the move toward more
advanced methods of manufacturing. Both countries
are expanding investment in human capital with
greater emphasis on science, engineering, and techni-
cal training.
In addition, both countries are open to foreign trade
and investment; they have received nearly 80 percent
of the foreign direct investment in the region since
1979. Singapore already leads the region in attracting
multinational firms that will, we believe, aid efforts to
improve the technical capabilities of the labor force.
In our judgment, Malaysia's considerable and diverse
resources will help make it a strong competitor in
resource-based manufacturing industries. For both
countries, the English-language abilities of the labor
force enhance efforts to attract foreign investment.
Observers of Southeast Asia often cite language as a
barrier to the development of advanced industries in
other-Asian countries.
The Philippines, Thailand, and Indonesia will, in our
judgment, be ASEAN's laggards in industrialization
during the 1980s and will remain heavily dependent
on primary products. The problems are similar in all
three countries; politically powerful elites control eco-
nomic interests that would be damaged by opening
the economy to competition. In the Philippines, for
example, many business leaders who are opposed to
economic reforms exert influence because of their
close association with President Marcos. They control
25X1
25X1
Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84SO0553R000100180003-7
 Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84SO0553R000100180003-7
Confidential
Figure 3
Indonesia: Selected Industrial Projects
Makasse/
Strait
Jak'&ta r
7.Java
Project
1. Krakatau steel mill
2. Asahan aluminum plant
3. Arun liquefied natural gas (LNG) plant
4. Badak LNG plant
5. Dumai refinery
6. Balikpapan refinery
7. Cilicap refinery
8. Aceh olefins complex
9. Aceh urea plant
10. Pladju aromatics center
11. Badak urea plant
12. Leces newsprint plant
13. Suralaya power plant
14. Musi refinery
Location
Cilegon, western Java
Asahan, northern Sumatra
northern Sumatra
Bontang, eastern Kalimantan
central Sumatra
Balikpapan, eastern Kalimantan
Cilicap, southern Java
northern Sumatra
northern Sumatra
Pladju, southern Sumatra
Muara Badak, eastern Kalimantan
Probolinggo, eastern Java
western Java
Palembang, southern Sumatra
Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84SO0553R000100180003-7
 Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84SO0553R000100180003-7
major sectors of the economy, particularly in agro-
processing industries, and benefit from special legisla-
tion or selective enforcement of government regula-
tions. Tariff reform and import licensing will press
Marcos's allies by exposing their interests to more
efficient-and previously excluded-foreign competi-
tion. In Thailand, businessmen with close ties to the
political, military, and bureaucratic elite oppose both
tariff and foreign investment regulation reform.
Widespread corruption in the Indonesian bureaucra-
cy, extending to the highest levels of government, with
resulting inefficiencies in business, will be nearly
impossible to control without a major overhaul of the
Soeharto regime. In our view, this is unlikely, largely
because the military has well-entrenched and lucra-
tive business interests, and it is with the military's
backing that Soeharto remains in power. Equally
important, all three countries will face increased
competition in world markets for labor-intensive man-
ufactured products from both China and other Asian
countries.
Implications for the United States
If the Southeast Asian countries continue along their
current industrial development paths, they will pro-
vide both competition and opportunities for the Unit-
ed States. We believe Singapore, for example, is likely
to capture a larger share of some service markets now
dominated by US and other foreign firms.' In oil-
related activities, Singapore will expand its role as a
testing and analysis center performing laboratory
functions now concentrated in petroleum centers such
as Houston. In Indonesia, oil industry policies call for
increasing domestic participation in all phases of the
industry-primarily affecting US oil firms, which
produce over 80 percent of the country's oil and gas.10
10 Despite the soft world oil market, Indonesia is continuing to push
nationalist policies that would increase domestic participation. In
its latest move, Jakarta recently ordered foreign oil companies to
replace expatriates with native Indonesians in certain skilled drill-
Table 2
US Direct Investment in LDCs:
A Comparison a
Tota 1
49,543
ASE AN
4,770
Indonesia
1,314
Malaysia
632
Philippines
1,259
Singapore
1,204
Thailand
361
n America
38,882
Afri ca
3,778
dle East
2,113
51,469
6,346
1,861
849
1,294
1,791
551
38,883
4,282
1,958
None of the Southeast Asian countries, however, will
compete against the United States in a broad range of
products, in our view. Heavy industrial products, such
as steel and aluminum, will not pose a threat to US
markets because they will serve as import substitutes.
Rather, we believe Southeast Asian countries will
search out market niches to exploit, such as special-
ized services in Singapore's case, or small electronic
components such as Thailand already supplies to the
US space shuttle program. In addition, many US
industry analysts believe, as we do, that high-technol-
ogy industries in the developed countries will increas-
ingly move some production operations-and jobs-to
Asian countries, including Southeast Asia, to take
advantage of low wage costs. The recent announce-
ment by a US manufacturer of home computers and
video games that it plans to transfer some production
25X1
25X1
operations to Hong Kong and Taiwan underscores this 25X1
trend. Additional US firms producing similar prod-
ucts are eyeing Malaysia, where US electronics man-
ufacturers are already strongly represented, and the
Philippines,
Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84SO0553R000100180003-7
25X1
25X1
LORI
 Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84S00553R000100180003-7
Confidential
On the positive side, US firms should continue to find
Southeast Asian countries profitable and relatively
stable investment locations, as well as lucrative mar-
Figure 4
Southeast Asia: Manufacturing as a Share of
Gross Domestic Product
Percent
(Note change in scales)
Singapore
Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84S00553R000100180003-7
 Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84SO0553R000100180003-7
%,ontiaennai
Appendix B
Indonesia
476
344
235
279
226
184
152
Malaysia
350
381
406
500
574
876
1,317
Philippines
98
132
226
194
199
260
475
Singapore
611
651
335
739
941
1,669
1,797
Thailand
86
80
106
51
50
186
291
a Data are annual flows reported by IMF Balance of Payments Yearbook.
Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84SO0553R000100180003-7
 Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84SO0553R000100180003-7
Conf....,^l" at
Confidential
Sanitized Copy Approved for Release 2011/03/04: CIA-RDP84SO0553R000100180003-7