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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. 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