The debt crisis that emerged in the early 1980s forced many countries to reconsider their development strategies. Many had embraced international borrowing as a way to boost investment levels, despite low rates of domestic savings. Some countries and regions in Asia, such as Korea and Taiwan Province of China, were extremely successful. Korea, in particular, raised huge amounts of international capital, which it invested in efficient operations and used to spur the growth of export-oriented industries. Latin American countries were far less successful. They succeeded in building large domestic industries but were unable to manage their debts. As a result, their indebtedness brought them exchange depreciation, inflation, and stagnation.

The debt crisis that emerged in the early 1980s forced many countries to reconsider their development strategies. Many had embraced international borrowing as a way to boost investment levels, despite low rates of domestic savings. Some countries and regions in Asia, such as Korea and Taiwan Province of China, were extremely successful. Korea, in particular, raised huge amounts of international capital, which it invested in efficient operations and used to spur the growth of export-oriented industries. Latin American countries were far less successful. They succeeded in building large domestic industries but were unable to manage their debts. As a result, their indebtedness brought them exchange depreciation, inflation, and stagnation.

The Asian example highlights the advantages of foreign borrowing; the Latin example points out its dangers. Taken together they show that foreign borrowing can be an effective means of overcoming low levels of domestic savings. It is not enough, however, to invest the new capital efficiently; the economy must also be able to generate the foreign exchange needed to carry the international borrowing. Heavy borrowing from international markets can rarely be sustained without a strong export program in a country's development strategy. This has been the lesson of the 1980s.


The Southeast Asian countries have been among the first to react to this lesson. From 1980 to 1985, the world economy expanded by only 2.4 percent a year; the industrial countries grew only 2.6 percent a year; but Malaysia, Indonesia, and Thailand all averaged rates above 4.0 percent—clearly above-average performances. For both Malaysia and Thailand, growth was accompanied by a strong expansion of exports during a period when world trade was actually contracting. Indonesian exports, however, dropped sharply as oil prices declined. The pattern of export and growth is already clear for both Malaysia and Thailand. In Table 1 the data identify more characteristics in the pattern and suggest that Indonesia and the Philippines are also pursuing the same path.

Table 1.

Gross Domestic Product Growth Rates

(In percent)

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Sources: International Monetary Fund, International Financial Statistics (IFS). and official country sources.Note: Growth rates were calculated from gross domestic product at constant prices. Growth rates for 1988 and forecast data for 1989 and 1990 were taken from Asian Economic Commentary (Merrill Lynch Capital Markets), March 1989.

The growth of manufacturing exports was one of the earliest signs of reorientation toward exports. This growth was both a result of declining commodity prices, such as, those for oil and copper, and of efforts to promote and diversify exports. Data suggest that the Philippines was the first to recognize the importance of developing an export manufacturing sector. In 1981, manufactured exports jumped from 40 percent to 47 percent of total exports, and by 1987, manufactured products accounted for 66 percent of exports.

In 1983, as exports began to crash, Indonesia also recognized the need to diversify. In that year, manufactures grew from 5.6 percent to 9.1 percent of exports and expanded to 20.4 percent by 1986. Table 2 shows that Thailand and Malaysia expanded manufacturing exports somewhat later, 1985 or 1986; however, both maintained strong gross nation product (GNP) growth rates during the first half of the 1980s. This gave them less incentive to restructure their exports.

Table 2.

Share of Manufacturing in Exports

(Percent of total exports)

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Sources: Asian Development Bank, Key Indicators of the Developing Member Countries of ADB (July 1988); and official country sources.Note: Manufactured exports were calculated as the sum of exports SITC 5 through 9. This value was then divided by total exports, fob. na = nonapplicable.

Expanding exports depends on improving the competitiveness of a country's products on the world markets. Table 3 shows that the currency of all four countries depreciated against the dollar. In several cases, major devaluations were followed by either an expansion of manufacturing exports or a large increase in total exports. Of the four countries, Malaysia is the only one that has not experienced a major devaluation since 1980.

Table 3.

Average Annual Exchange Rates

(Currerncy / U.S. dollar)

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Source: International Monetary Fund. International Financial Statistics (IFS).Note: Appreciation or depreciation from 1980 to 1988 was calculated by dividing the 1988 exchange rate by the 1980 rate and then subtracting 1 from the quotient. The same method was used for 1988 to 1990 Forecast data for 1989 and 1990 were taken from Asian Economic Commentary (Merrill Lynch Capital Markets). March 1989. na = nonapplicable.

Indonesia depreciated its currency by over 40 percent in 1983. Much of the depreciation occurred in the first quarter, and this stimulated growth in manufacturing exports. The following year, exports grew by 11 percent, after having dropped almost 20 percent over the previous two years (Table 4). Indonesia devalued again in the second half of 1986. In that year, the currency depreciated by almost 50 percent; manufacturing as a share of exports climbed from 14 percent to 20 percent, and the following year exports grew by almost 30 percent.

Table 4.

Growth Rates of Merchandise Exports

(In percent)

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Source: International Monetary Fund. International Financial Statistics (IFS).Note: Growth rates were calculated for merchandise exports as they appear in the balance of payments report of each country Growth rates for 1988 and forecast data for 1989 and 1990 were taken from Asian Economic Commentary (Merrill Lynch Capital Markets). March 1989.

In the Philippines, exports declined by almost 15 percent between 1980 and 1983. But after a depreciation of almost 100 percent between October 1983 and June 1984, exports recovered to grow by 7.7 percent for 1984. At the same time, manufactured exports rose from 58 percent to 62 percent of total exports. In 1985, exports again declined as political turbulence disrupted much of the economy. Since then, however, exports have taken off without any further help from major currency depreciations.

The Thai case is less dramatic than that of either the Philippines or Indonesia. From October to December of 1984, the baht underwent a modest 18 percent devaluation. It had been pegged at B23 to the dollar since 1981, and during that time exports had dropped by 8 percent. The next year, manufacturing jumped from 38 percent to 43 percent of total exports, and in 1986, exports began to grow at rates well above 25 percent a year.

By 1987, all four countries were experiencing a rapid growth in exports, and compared with 1980, manufacturing had increased its share of total exports by an average of 15 percentage points. During this period, the average growth rates for exports were above world averages; however, they were erratic. By contrast, the establishment of strong export growth rates since 1986–87 has brought with it gross domestic product (GDP) growth rates in the 5 percent to 8 percent range, and growth rates are expected to persist at this level through 1990.

As Malaysia has shown, exchange depreciation is not a prerequisite for export growth, and the Philippine experience in 1985 has shown that depreciation does not necessarily lead to an increase in exports. Devaluation is an important tool in stimulating and restructuring exports, but it is not a guaranteed recipe for growth. By the same token, exports are not a guarantee for economic growth. They are a powerful force in stimulating growth but the internal economic structure must also be able to support and finance the growth.


Though there has been a large expansion and diversification of exports in Southeast Asia, internal adjustments have progressed more slowly. For the four countries in Table 5, the industrial sector has generally expanded slightly, and in some the service sector has grown dramatically. As for the agricultural sector, although it has accounted for a smaller portion of the employed labor force in all four countries, surprisingly Thailand has been the only country to show a marked decline in the agricultural sector's share of gross production. The net structural change for these four countries has been small, but individual countries have achieved sharp changes in certain areas.

Table 5.

Structure of Production: Industry and Manufacturing

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Source: Asian Development Bank, Key Indicators of the Developing Member Countries of ADB (July 1988).Note: All data were calculated from the series for GDP by industrial origin at market prices. Agriculture was taken directly, without any additional sectors. Industry was calculated as the sum of mining, manufacturing, construction, and electricity, gas, and water. Service was calculated as the sum of all other sectors not included in either industry or agriculture. na = nonapplicable.

Both Malaysia and Thailand have expanded their industrial sectors. For both countries, the share of the industrial sector as a percentage of GDP has increased by approximately 2 percentage points since 1980. In contrast, the Philippines and Indonesia stand out for the marked decline in the share of industrial production. These declines can be explained, however, by exogenous factors that have served to cover up positive trends within each country's industrial sector.

In Indonesia, declines in the share of industry are largely due to falling oil prices. This has affected both the country's petroleum industry and its construction sector: movements in the construction sector are closely associated with changes in the Government's oil revenues and level of development expenditure. Despite these problems, Indonesia's manufacturing industries have been expanding significantly, rising from 10.8 percent of GDP in 1981 to 14.4 percent in 1986. This trend parallels the expansion in manufacturing exports noted earlier and represents a positive restructuring of the industrial sector, although the effect has largely been overshadowed by the adverse effect of oil price declines on the world market.

For the Philippines, the reduction in the share of industry has been far smaller than for Indonesia. The 4-point drop was directly related to the sharp recession and political turmoil from 1983 through 1986. The data for 1987, however, indicate a slight recovery in GDP share, and final figures for 1988 should show further recovery owing to a very active construction sector as well as capacity expansions and generally robust growth. Of particular note is the fact that the share of manufacturing showed little change during the period. And, at 24.5 percent of GDP, the Philippine manufacturing sector as a percentage of GDP is the largest of any of the four countries.

Table 6 sumarizes the performance of the service sector in each country from 1980 to 1987. Here, Malaysia and the Philippines have only showed slight changes, as the share of the service sector remained in the low 40 percent range. Indonesia, on the other hand, showed a steady growth in services as the share in GDP rose from 33.7 percent in 1981 to 42.3 percent in 1986. For Thailand, services were at a high of 52.4 percent in 1985, up more than 6 percentage points from 1980. At that time, the four countries split easily into three groups. Thailand had the largest share of the services sector—more than 5 points larger than either Malaysia or the Philippines—and Indonesia had by far the smallest. By the middle of the decade, Thailand had further expanded its services sector, while the other three countries appeared to settle into a temporary equilibrium where services accounted for 40 percent to 43 percent of GDP.

Table 6.

Structure of Production: Service and Agriculture

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Source: Asian Development Bank, Key Indicators of the Developing Member Countries of ADB (July 1988).Note: All data were calculated from the series for GDP by industrial origin at market prices. Agriculture was taken directly, without any additional sectors. Industry was calculated as the sum of mining, manufacturing, construction, and electricity, gas, and water. Service was calculated as the sum of all other sectors not included in either industry or agriculture. na = nonapplicable.

For Thailand, the rapid expansion of its services sector was marked by an even more rapid decline in agriculture. From 1980 to 1986, agriculture dropped almost 10 points falling from 25.4 percent of GDP to just 16.2 percent. Table 6 shows that in 1980, each country had an agricultural sector that was about 23 percent to 25 percent of GDP. Except in Thailand, these levels persisted throughout most of the 1980s. In the Philippines, the share of agriculture rose slightly after 1983, but since 1986, it appears to be returning to its earlier levels. Malaysia, on the other hand, showed a slight decline in agricultural share. These adjustments, however, were not large in either case.

A slightly different pattern emerges when we look at employment patterns (Table 7). In all four countries, agriculture accounted for a smaller share of employment in 1986 than it did in 1980. For the Philippines and Indonesia, the adjustments in employment were quite small—one or two share points. Between 1980 and 1986, however, Malaysia shifted 5 percent of its employed work force out of agriculture, and Thailand shifted more than 4 percent. Despite the shifts in agricultural employment, the table shows that no clear corresponding increase occurred in employment by the manufacturing sector. This suggests that much of the labor adjustment was funneling into the services sector.

Table 7.

Employment and Productivity

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Source: Asian Development Bank, Key Indicators of the Developing Member Countries of ADB (July 1988).Note: Distribution of employment was calculated from the data on sectoral employment and total employment. The productivity ratios were calculated by first calculating productivity in the manufacturing and agricultural sectors. Productivity was calculated as the sector's contribution of GDP at constant prices divided by employment in that sector. na = nonapplicable.

In Thailand, labor shifts from agriculture to services are certainly understandable given the large expansion in the services sector and the corresponding decline in agriculture as a percentage of GDP. What is surprising is that the sector accounted for such a large share of the existing jobs, 67 percent, while the sector produced only 16 percent of 1986 GDP. In fact, compared with other countries, Thailand had a far larger portion of its labor force employed in agriculture, even though agriculture as a percentage of GDP was far lower in Thailand than in the other countries. This suggests that in 1986 Thailand had a large amount of surplus labor in the agricultural sector. In contrast, Malaysia's agriculture accounts for only 32 percent of the available jobs.

Productivity measures also provide an interesting insight into the changes and structural differences between the countries. Table 7 provides the data for the agricultural and manufacturing sectors. Over time, we expect the measures for the two sectors to become more equal. Productivity in manufacturing is likely to be larger than in the agricultural sector, but large differences are likely to induce resource shifts. If we recognize this, the productivity ratios become particularly interesting. First, Malaysia has the lowest ratio, which has remained a stable 2:1 throughout the 1980s. This suggests a well-developed agricultural sector and little pressure for structural changes either in terms of resource allocation or relative production levels of the sector.

In the Philippines, the ratio has been between 4:1 and 5:1. This gap is more than twice as big as for Malaysia, but it has been narrowing since 1987. A pessimist might suggest that this is due to a stagnant manufacturing sector. The data, however, refute such a hypothesis—the manufacturing sector has constantly held a 24 percent to 25 percent share of GDP. The answer is an improving agricultural sector that expanded its output, while 2 percent of the employed work force shifted out of agriculture. Thailand and Indonesia tell a different story. In Thailand the ratio has fluctuated around 8:1, while in Indonesia the productivity gap has been expanding. This pattern is indicative of the strengths of the manufacturing sectors in these countries. In essence, the growth rates of manufacturing have been so consistently high that the resource adjustments have not been able to keep pace.

Of the four countries, Thailand appears to have undergone the most internal restructuring. It has greatly expanded the services sector and sharply reduced the size of its agricultural sector relative to GDP. These adjustments seem to have been very successful, as the country has posted a compounded growth rate of 5.7 percent since 1980. Future development may be hindered, however: the agricultural sector still accounts for a massive 67 percent of all jobs, although it only produces 17 percent of GDP. The challenge for Thailand will be to improve the productivity of agricultural workers and to absorb more of the workers into other sectors with higher productivity.

The 1980s have also brought change to the Philippines. From 1983 to 1986, this was in the form of a severe economic recession. During that time, real output declined more than 10 percent, agriculture expanded its share in GDP, and the services sector swelled, as it absorbed many of the unemployed and destitute in marginal activities. Since 1986, however, many adjustments appear to be under way. The share of agriculture has begun to decline in both GDP and, more important, in employment. Furthermore, the stability of the country's productivity ratio suggests that growth has been well balanced between agriculture and industry—an important consideration for a country where almost 50 percent of employment is still in the agricultural sector.

For Indonesia and Malaysia, adjustments have been quite moderate. Malaysia has steadily shifted employment out of the agricultural sector and slowly increased the share of industry in GDP. Indonesia has worked to build its manufacturing sector, and productivity in manufacturing has grown almost twice as fast as in agriculture. Unfortunately, manufacturing still accounts for only a small part of the country's economy.


The growth of exports and the adjustments in employment, production, and productivity have been important factors enabling Southeast Asia to be one of the fastest growing regions in the world. One crucial factor has not been discussed, however. Long-term growth will not succeed without capital accumulation (i.e., investment). Investment is used to offset depreciation and increase a country's stock of productive assets. Table 8 shows that the investment levels for all four countries have been in the 20 percent to 30 percent range. Though high, these rates are still significantly below the 30 percent to 40 percent level of the newly industrializing economies during their growth in the 1970s.

Table 8.

Gross Investment

(In percent of GDP)

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Source: International Monetary Fund, International Financial Statistics (IFS).Note: Gross investment was calculated as the sum of gross fixed capital formation and the net increase in stocks.

One reason for this is financing. Though higher investment levels could stimulate more production, countries may be unable or unwilling to finance the higher levels. The primary source of funding for gross investment is domestic savings. Many countries that are trying to grow rapidly find that domestic saving, however, is not large enough to fully finance the level of capital accumulation that they desire. This difference between investment and saving is referred to as the domestic resource gap. Note the use of the word “domestic.” Countries faced with a resource gap have two basic choices. They can reduce the level of investment or they can use foreign savings to fill the gap. The foreign savings may come in the form of loans, grants, or even direct investment.

From the late 1970s through the early 1980s, all four countries maintained investment levels near or above 30 percent of GDP. These high investment levels created a resource gap that averaged 7.2 percent of GDP in 1981 and 7.9 percent in 1982. This represented a substantial use of foreign savings. In 1984, in an effort to reduce their dependency on foreign savings, Indonesia, Malaysia, and the Philippines all began to reduce their investment levels. (Thailand had already reduced its levels during 1980 and 1981). This action substantially narrowed the resource gap for all four countries (Table 9). Thailand and the Philippines, however, also had to contend with falling levels of domestic saving. In the Philippines, investment levels fell more than saving, resulting in a resource surplus by 1986. In Thailand, investment levels remained stable, while saving declined from 1982 until 1985. Thus in 1985, the gap peaked at a high of 6.9 percent of GDP. In 1986 and 1987, the gap was reduced as saving climbed and investment fell.

Table 9.

Domestic Resource Gap

(In percent of GDP)

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Source: International Monetary Fund, International Financial Statistics (IFS).Note: The resource gap was calculated as gross investment less gross domestic savings. In turn, gross domestic savings was calculated as GDP less private consumption less government consumption plus net factor payments from abroad.

The efforts to shrink the resource gap grew out of the emerging debt crisis. The most common source of foreign savings had been foreign loans. But countries tried to evade the debt trap by reducing the resource gap and pursuing other forms of foreign savings. Thailand was the most successful of the four countries. Just as it started to narrow its resource gap in 1980/81, it also began to cut back on its use of foreign savings. In 1980, long-term financing was equivalent to 20 percent of gross investment, but by 1987 it was less than 1 percent (Table 10).

Table 10.

Borrowing as Percentage of Gross Investment

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Source: International Monetary Fund. International Financial Statistics (IFS).Note: Borrowing was calculated from balance of payments data as the sum of other long-term capital and exceptional financing. This value was then converted to national currencies using the average exchange rate for the year (see Table 3).

Malaysia and Indonesia both reacted later. Between 1982 and 1983, both countries increased their dependency on foreign borrowings largely in expectation of a recovery in oil prices. In Indonesia, long-run financing climbed to 19 percent of investment, while in Malaysia it rose to 11.8 percent. In both countries, these levels were substantially higher than their pre-1982 levels. By 1985, Malaysia had begun to cut back on its borrowing, and by 1986 it measured less than 1 percent of gross investment. Indonesia had a harder time reducing its dependency on foreign savings. In 1985, long-term financing was equivalent to only 7 percent of investment, but the following year, borrowing rebounded to just over 12 percent.

It is interesting to note the timing between the efforts to reduce foreign borrowing and the efforts to lower the levels of gross investment. In Thailand, investment levels began to fall in 1981 and long-term borrowing as a percentage of gross investment began to decline in the same year. The same pattern holds true for Malaysia, thus suggesting a systematic effort to reduce each country's debt exposure. The two exceptions to this pattern are Indonesia and the Philippines. In the Philippines, a significant narrowing of the resource gap after 1988 was not followed by reduction in foreign borrowing. This was largely due to the fact that the borrowing was in response to balance of payments issues and political pump-priming. They did not represent funding used for investment. By 1988, however, borrowing had fallen to only 4.8 percent of gross investment.

The Indonesia case is more interesting in that it highlights the ability of the other countries to find attractive sources of foreign savings. Between 1981 and 1987, Indonesia managed to cut back its level of investment, producing a resource gap that averaged only 2.9 percent of GDP for the years 1985 to 1987. Nevertheless, it was unable to significantly reduce its borrowing as measured against gross investment. Moreover, the borrowing rose when measured against the size of the resource gap. A key difference between Indonesia and the other countries, which helps to explain the anomaly, is that they were able to identify alternative sources of funds—transfer payments, bilateral aid, and direct investment. For Indonesia these alternative sources were all negligible.

In Thailand, and particularly in the Philippines, transfers have been growing as a percentage of gross investment. These funds include bilateral and multilateral aid, as well as private donations to programs in agriculture, education, health, and other areas. These projects may not all contribute to gross investment, but to the extent that they free domestic resources they contribute indirectly. In the Philippines, these funds have grown from 4 percent of investment in 1980 to 11 percent in 1987, and in Thailand it has fluctuated around 2 percent of investment. In both countries, the subcomponent grants to the central government have grown steadily; however, for grants, the level in Thailand was almost twice as high as in the Philippines.

The other major alternative source of foreign savings has been direct investment. It is particularly appealing as there is no net interest or guaranteed repayments for this form of foreign savings. Repayment and interest, or profits, are purely dependent on the investments' viability. Direct investment avoids the “white elephants” that have plagued government projects and government-owned corporations. Two other advantages are that investments are usually long term and the profits are often plowed back as reinvestment.

Of the four countries, Malaysia has made the most use of direct investment, particularly in the early 1980s. This helps to explain how it was able to maintain investment levels in the mid-30 percent range despite a resource gap of 10 percent to 14 percent of GDP. Though direct investment has since fallen off, it still accounted for 7.5 percent of gross investment in 1987 and averaged 10.3 percent between 1986 and 1987 (Table 11). In the early 1980s, Thailand also appeared to take advantage of direct investment. From less than 1 percent of gross investment before 1980, direct investment rose to account for 4 percent by 1984. Since then it has fallen back to between 2 percent and 3 percent of investment.

Table 11.

Alternative Sources of Foreign Savings

(Percent of gross investment)

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Source: International Monetary Fund. International Financial Statistics (IFS).Note: Direct investment is calculated as the sum of direct investment and portfolio investment—both taken from the balance of payments. International transfers was also taken from the balance of payments Government grants was taken as grants received, in which item is provided in the government finance section of IFS. Again, all totals were converted to national currency using the average exchange rate for the year (see Table 3).

From a broad perspective, all four countries have worked to reduce their foreign borrowing requirements. They cut back gross investment so that domestic saving would meet more of their financing needs, and to varying degrees, they also increased their use of alternative sources of foreign savings. Thailand was the first country to move in this direction. As early as 1980/81, Thailand began to reduce public investment, increase direct investment, and entice more transfer payments. Malaysia followed the same pattern in 1984 and 1985, though transfer payments to Malaysia have been inconsequential. Indonesia has successfully shrunk its resource gap but has yet to reduce its borrowing requirements. Finally, the Philippines, recovering from the Marcos years, is now striving hard to further reduce its borrowing requirements, while raising investment over 20 percent.

A challenge for all four countries will be to maintain or increase their levels of gross investment, as this should stimulate further economic growth. Levels for 1987 were well below peak levels for the decade, but none of the countries wants to embrace debt financing. The only alternatives are increasing the levels of domestic investment, which is a long-term proposition, and utilizing alternative sources of foreign savings. So far, direct investment has not accounted for a large portion of gross investment, except in the case of Malaysia. With the maturation of the newly industrializing economies, however, this is likely to change, and there will be more competition among these four countries as they try to capture the benefits of direct investment.


Economic growth and the focus of investors in Asia have been centered on the newly industrializing economies, or “Tiger Economies,” of Asia (i.e., Hong Kong, Korea, Singapore, and Taiwan Province of China). This is beginning to change, however, as these economies lose some of their competitive advantage. They are likely to have continued economic success, but their poorer neighbors of the Association of South East Asian Nations (ASEAN) are beginning to show signs of following the same path and investors are beginning to take notice.

In 1988, Thailand posted an 11 percent growth in GDP. Much of this growth was fueled by a large influx of Japanese investors driven out of Japan by the increasing labor costs and the yen's appreciation. Similar competitive adjustments are also beginning to be felt in Taiwan Province of China and South Korea. Both countries have already felt the pressures of exchange appreciation and their currencies should further appreciate by 10 percent to 25 percent by the end of 1990. Furthermore, Korean manufacturers are under fierce pressure to increase wages, thus providing additional incentives for labor-intensive manufacturing to move offshore. Labor unrest in both Korea and Taiwan Province of China is becoming a serious threat, especially to foreign investors.

Another critical factor that is shifting the focus of Asian investors is the loss of tariff-free status in the Generalized System of Preferences (GSP) in the U.S. market. As of January 1989, Hong Kong, Korea, Singapore, and Taiwan Province of China no longer qualify for preferential access to the export markets in North America and Europe. This is a sharp blow for many export manufacturers, particularly for those in industries such as garments, semiconductors, and electronic equipment.

Together, three factors, exchange appreciation, loss of GSP, and rising wages, represent a loss of competitive advantage for the newly industrializing economies. For some industries this is not critical, but others will be forced to set up new offshore production facilities. The question for most investors is where?

The neighboring ASEAN countries, Indonesia, Malaysia, Philippines, and Thailand, are obvious candidates. These countries still retain their GSP status, their exchange rates are either stable or depreciating slowly, and their wage structures are significantly below those of the new industrializing economies or Japan. This would more than offset the loss of competitive advantage for manufacturers in the newly industrializing economies. Many investors, however, are concerned about the economic conditions in these four countries.


The economic indicators show that these countries have made strides in terms of their development and structural adjustment for growth. They have not attained the level achieved by the newly industrializing economies, but they are striding forward along the same path.

Over the decade of the 1980s, Thailand and Malaysia have posted on average the strongest growth performances, 6.3 percent and 5.4 percent, in the region. Indonesia by comparison has averaged only 4.3 percent since 1980. These growth rates are being fueled by investment levels that are regularly in excess of 20 percent of GDP. As for the Philippines, its average was by far the worst of the four countries (1.7 percent). This was due to the political and economic crises that the Marcos government faced from 1982 to 1986. These troubles are behind the country now as indicated by the strong growth rates of 1987 and 1988.

The export performances of these four countries also indicate strong, growing economies. Accepting the lessons of the newly industrializing economies, all four countries have worked to increase and diversify their exports. They are also becoming more open to outside investors. Investors in turn should be able to find more opportunities. Export growth was quite erratic during the first part of the 1980s, and Indonesia was hit hard when oil prices fell during 1985 and 1986. Only in the last two years have all four countries shown significant export growth. Both Malaysia and the Philippines averaged more than 20 percent a year, and Thailand boosted exports by over 30 percent each year.

Though the export growth rates of Indonesia were not as high as the other countries, the statistic hides the fact that Indonesia has been able to restructure the composition of its exports, in particular its reliance on oil, which in 1981 accounted for 82 percent of exports but by 1986 accounted for only 56 percent. This went hand in hand with a steady increase in the share of manufactured exports from 4 percent to 20 percent.

In other countries, the share of manufactured exports has also risen. Both Thailand and Malaysia have managed to push up manufactured exports to over 40 percent of the total. For Malaysia, this represents far more of an adjustment, as in 1980 manufacturing accounted for 28 percent of exports, while for Thailand, they already represented 40 percent of all exports. The performance of both these countries, however, is overshadowed by the achievements of the Philippines. In 1980, manufactured exports accounted for 40 percent of all exports. But by 1987, the share of manufactured exports had been pushed up to 66 percent.

Despite the high growth rates in exports noted above, both the Philippines and Thailand have a persistent trade deficit. For both countries, the deficit has averaged 20 percent or more of merchandise exports. Forecasts suggest that this pattern will persist as imports, particularly of machinery and capital goods, continue to grow. This imbalance puts pressure on the countries' exchange rates and sources of foreign currency, but the problem can be offset by inflows from direct investment, foreign aid, and willing lenders.

The strong export growth figures and the steady expansion of manufactured exports indicate economies undergoing important adjustments and realigning themselves on export-oriented development strategies. The success of this adjustment can already be seen in the improved growth rates, particularly those of Malaysia, the Philippines, and Thailand. In comparison, Indonesia's efforts have yet to have an impact on its growth rate. Because of these improvements, all four countries are becoming increasingly attractive to investors prospecting in the Asia Pacific region.

Four Countries in the ASEAN

Recently, the country of choice for investors has been Thailand. They have been attracted by the incentives, stable economic environment, and low-cost labor. Unfortunately, wages are beginning to rise rapidly and the labor market is tightening. The Government is no longer providing incentives for certain types of labor-intensive manufacturers. And, worst of all, the pace of growth is beginning to be hampered by poor infrastructure, particularly in the area of transport. For some investors, particularly those involved in capital goods manufacturing, these problems may be offset by additional government incentives and the high productivity of Thai labor.

With probably the best infrastructure of the four countries, Malaysia is certainly attractive to investors. The exchange rate is expected to depreciate by not more than 10 percent or 12 percent over the next two years, and inflation has generally been extremely low. On the other hand, wages are higher in Malaysia than in any of the other countries, and investors will have to navigate the system of regulation and ownership restrictions. It is not surprising then that Malaysia's government expenditure at 35 percent of GDP is by far the highest of any of the four countries.

As a potential location for new manufacturing, Indonesia should not be neglected. Though it has the lowest growth rates for GDP and is the least developed of the four countries, it does have several advantages. Wage rates are certainly the lowest here, though the ability of labor to adapt to new technology is probably not as good as in the other countries. Also by far the largest of the four countries, Indonesia would be particularly attractive to those able to tap the large domestic market and thus establish economies of scale. However, like Thailand and the Philippines, the country also has woefully inadequate infrastructures.

Remembered for its crisis years in the early 1980s, the Philippine economy is now taking off and it must be considered as a candidate for offshore manufacturing. GDP and export growth rates are both rising sharply, and the manufacturing sector is becoming increasingly important. Despite these signs of good economic health, investors are still nervous about several factors. At the top of their list is the inadequate infrastructure, particularly electricity and transportation. To address this problem, the Government is developing several export-processing zones that would have all the necessary infrastructure linkages, with financing coming in from a multilateral aid initiative. Other issues, such as political stability and labor unrest, are beginning to disappear or be offset by other advantages the Philippines offers. Chief among these are the Filipinos who are generally well educated and who are familiar with English. This insures that Filipino labor can easily adapt to new technologies and manufacturing processes. This advantage, when added to those of a large labor pool and low wage rates, makes the Philippines an attractive location for offshore investments.

Clearly, each of the four countries has its own set of advantages. Thailand is attractive for its productive and adaptable labor force. Unfortunately, it is becoming overcrowded, the labor market is tightening, and the infrastructure systems are becoming clogged. Malaysia has the best infrastructure, but it is a small country with comparatively higher wages and a complex government and regulatory structure. Indonesia has the advantage of a large domestic market and a pool of extremely cheap though unskilled labor. Unfortunately, its infrastructure is poor. In the case of the Philippines, the country's economic stability and its talented and low-cost pool of labor are major attractions, but infrastructure is still a problem—this may be solved by the Government's investment in several export-processing zones. In the end, investors will have to weigh the tradeoffs offered by each country and consider what are the needs of their particular projects. One certainty is that each of the four countries will reap some benefit from the eroding competitive advantage of the newly industrializing economies.

The Example of Singapore

Singapore is one of the best examples of a country that has successfully pursued a strategy of export-led growth. With a population of only 2.5 million, it was forced to look toward external markets if it were to achieve even minimum economies of scale. Over the last twenty years, Singapore has built itself into a major manufacturing and trading center for Southeast Asia.

Since 1980, merchandise exports have averaged more than 30 percent of GDP. This reflects the strong trading and re-export nature of the Singaporean economy. The export composition also indicates Singapore's emphasis on manufacturing. Since 1980, manufactured goods have accounted for an average of 59 percent of exports, and this ratio increases to over 80 percent if petroleum products from the country's refining industry are included.

This export strategy has clearly been successful for Singapore. After Japan, Australia, and Brunei, Singapore has the highest per capita income in Asia. Since 1980, its average compound growth rate has been 6.5 percent, and inflation has averaged an extremely low 2.1 percent a year.

Singapore is now facing new challenges. It has lost its GSP status, it has an extremely tight labor market, and it is facing a slump in one of its major industries, disk-drive manufacturing. To meet these challenges, Singapore is emphasizing more capital-intensive manufacturing. This should help to boost productivity growth and ease the pressures in its labor market. It is also building a strong services sector based on tourism, transportation, and technical services. Singapore already has the second largest container port in the world. Singapore Airlines is planning to expand and the Singapore airport is known as one of the most efficient in Asia.

These developments make Singapore an extremely attractive base for consulting and other service industries wanting to serve the Southeast Asian market. Its excellent infrastructure in both transportation and communications will also be attractive for manufacturers not deterred by the countries high wage scales.

The Singapore example is an excellent case study for other countries pursuing export-led growth. In particular, it demonstrates the importance of being able to recognize transition periods and adapt strategies accordingly. Labor-intensive manufacturing can only be a temporary strategy during a period of low wages and excess labor. Eventually the country should graduate to more capital-intensive or service-oriented industries.

This is what is happening in Singapore and in the other newly industrializing economies. As a result, the more labor-intensive industries must migrate to other Southeast Asian countries. This process, in turn, should set the stage for more investment and faster growth in Indonesia, Malaysia, the Philippines, and Thailand.



In his paper, Dr. Villegas focused on the following six observations regarding economic adjustment, financing, and growth for the four larger ASEAN countries, Indonesia, the Philippines, Malaysia, and Thailand.

• The importance of having an export orientation, especially in export of manufactures, to propel economies to faster-than-normal growth.

• The importance of depreciation in pushing exports.

• In spite of rapid growth in exports, international industrial structural change has been quite slow, except in Thailand.

• The services sectors in Thailand and Indonesia have grown at the expense of agriculture and mining.

• The productivity gap between agriculture and manufacturing is widening in Thailand and is stable in the Philippines and Malaysia. In the Philippines, it is probably due to a long history of industrialization, while in Malaysia a sophisticated agricultural sector exists.

• To cover the domestic resource gap, ASEAN countries have been able to switch from external borrowing to direct foreign investment.

The observations focus almost entirely on the supply side of the economy without any analysis of the international economic environment or the pattern of domestic demand. Before discussing the observations, it would be useful to take stock of these two aspects of economic adjustment.

In the 1980s, Southeast Asian economies generally came under pressure to adjust. The need for adjustment came from both external and internal factors. If one believes official writeups, the greatest pressure to adjust came from external factors, namely, an unfavorable world economic environment. In reality, during this period, the economies of the industrial world grew at an average rate of 2.6 percent. At first glance, this growth rate appears modest. Yet for countries with about a 2.5 percent rate of growth in population, it is equivalent to a 5 percent economic growth rate. Since a 5 percent growth rate is respectable, what really prompted officials to attribute a large part of their problem to the external world?

Throughout most of the 1980s, commodity prices have generally been to the disadvantage of the commodity-dependent Southeast Asian nations, causing grave economic and financial pressures. It is relevant, indeed imperative, to ask why did commodity prices decline if the growth rate in the industrial world was satisfactory? The answer lies in the materials revolution that has been occurring. Technological innovations have led to declining consumption or switching of raw materials. However, the buoyant commodity prices of the 1970s led to substantial investment and expansion in the capacity of commodities production. In other words, the growth in the supply of commodities has outpaced demand and lead to soft prices.

Looking ahead to the 1990s, there is no reason to believe that there will not be continued savings in the use of raw materials, and with it, continued downward pressure on commodity prices as a general trend. Of course, short-term disruption in supply may push up prices temporarily. In such an environemnt, macroeconomic and microeconomic planning must assume low commodity prices and evolve plans to deal with them. Commodity-producing countries must be more efficient at production, develop new uses, and diversify into manufacturing and services to adjust to the changing world economic environment. In cases when commodity prices shoot up, as occurred in the 1970s, they should be regarded as a windfall gain and saved rather than consumed.

Quite apart from the external factor of unfavorable commodity prices, internal factors played an even more important role in putting the ASEAN economies under stress in the early to mid-1980s. The four bigger ASEAN countries were all living well beyond their means (probably caused by treating the windfall gains of the 1970s as recurring gain). A comparison of the consumption and investment expenditure of these countries with their GNP is revealing (see Tables 8 and 12). It is surprising that Villegas has largely ignored the issue of excessive domestic demand. Thailand had excess demand from 1980 to 1985. With a domestic resource gap of 5 percent or more in all but one of the six years, it had to, and did, undertake to adjust its economy. By the same token, Indonesia's resource gap in 1981–83 was more than 21 percent of GDP; for the Philippines it was 26 percent of GDP, and for Thailand, 31 percent in 1980–85. In contrast, Singapore had a far bigger domestic resource gap in 1980–82 amounting to 28 percent of GDP and Malaysia, in 1981–84 of more than 41 percent of GDP. Both, however, quickly narrowed the resource gap. The cost of it for both countries was a serious recession. Thailand has been able to slow and steadily narrow its resource gap without excessive cost to its economy. In contrast, Indonesia and the Philippines, especially, have suffered severely and over longer periods in order to adjust to the resource gap. A discussion of economic adjustment of the 1980s for ASEAN countries must address the greater ability of Malaysia and Singapore to withstand excessive demand in their economies compared with the Philippines and Indonesia.

Table 12.

Inflation Rate

(In percent)

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Source: International Monetary Fund. International Financial Statistics (IFS).Note: Calculated from the consumer price index. Forecast data for 1989 and 1990 were taken from Asian Economic Commentary (Merrill Lynch Capital Markets), March 1989.

The methods used to finance the resource gaps have also been equally varied (Tables 8 and 9). While Malaysia relied on both foreign investment and foreign borrowing to temporarily bridge the gap, Singapore was entirely dependent on foreign investment. The other three ASEAN countries, in particular the Philippines, relied heavily on foreign borrowings. Even though investment in the Philippines dropped to 14 percent of GDP in 1985 and 13 percent in 1986, its borrowings hit 42.5 percent of gross investment in 1985 (Table 9). This divergent trend of financing resource gaps points to the possible hypothesis that foreign direct investment is a better way of financing a resource gap.

From a conceptual point of view, borrowing has a fixed obligation to repay regardless of economic performance and ability to repay. In contrast, outflow of earnings occurs only when the venture is successful in the case of foreign investment. This leads to the logical question of why have Singapore, Malaysia, and, of late, Thailand been more able to attract foreign investment? How much of this is due to the realignment of the world economy in the aftermath of the appreciation of the yen, New Zealand dollar, and won and how much of it to the inherent attraction of these economies. It also raises the question of how to balance the inflow of direct foreign investment with sufficient indigenous capital formation. Can the bigger ASEAN countries afford to be overly reliant on foreign investment? Certainly for Japan, Korea, and Taiwan Province of China, the rise of local entrepreneurs has been crucial to their sustained growth and development.

The reason for excess demand should also be examined. Did it come from consumption, subsidy, or excessive investment? Even when funds are chaneled into investments, as occurred in Malaysia in the early 1980s, substantial waste is likely to exist. Macroeconomic evidence for this is not easy to come by; however, a high incremental capital output ratio is plausible indication of the prevalence of inefficient investment. On the other hand, research based on microeconomic study can establish the observation more readily. In other words, the efficiency of investment is an issue that should also be examined.

In sum, the reluctance of government and populace alike to address the question of living beyond one's means may have led to heavy and excessive foreign borrowing to finance the resource gap in the 1980s. Singapore did not need to adjust as its resource gap was financed by direct foreign investment. By the same token, the economy could not have had excessive consumption or subsidy. Thus, the root of Singapore's problem in 1985/86 must have been elsewhere and not the same as its neighbors. Thailand and Malaysia made serious attempts to adjust their economy and the impressive results reflected their effort. While one can argue that the Philippines was in political turmoil, which led to its recession, the lack of political will to adjust the economy in prior years must have helped to trigger subsequent political difficulties.

On the first observation, export has always been an important focus for some of the ASEAN countries, especially Singapore, Malaysia, and, to a lesser extent, Indonesia (using export/GNP exceeding 20 percent as a criteria). The push for export of manufactures in Singapore and Malaysia started in the 1960s and 1970s, respectively, and both have been reasonably successful. Therefore, this push into exports cannot possibly explain Malaysia and Singapore's problems in the mid-1980s nor their subsequent recovery after 1987.

Among the ASEAN countries, the Philippines was the first to industrialize (manufacturing as a share of GDP reached 20 percent in the 1960s, well ahead of all its neighbors). But then that process came to a standstill in the late 1970s and in the 1980s. So, once again, the drive into manufacturing did not come only in the 1980s and cannot explain either the Philippines' economic difficulties of the 1980s or its present indication at resurrection. The only thing that differs in the Philippine industrial policy is its earlier focus on import substitution and its present interest in export promotion.

Of all the ASEAN countries, Indonesia is probably the most difficult to manage. First, it is huge. Second, it has been essentially a one-commodity exporting country. The dependence on oil is so great that it will take a huge effort and be a long time before the development of other industries can begin to have an impact on balancing the decline in oil prices. Precisely because it is difficult to deal with a big country dependent on one highly volatile commodity export, it is important to develop early warning signals and preventive policies. Some of the issues on development policies in resource rich countries are dealt with in several multinational research projects.

On the issue of the impact of depreciation on exports, it is useful to make a distinction between the impact of depreciation on exports of commodities and exports of manufactures and of services. The ASEAN countries tend to dominate the world market in exports of commodities that have an inelastic supply, except oil. Thus, depreciation is not likely to cause buyers to switch suppliers; that is, price changes will not alter the supply, and suppliers will have to absorb price declines in a downturn. Depreciation will probably not mean an increase in receipts. On the other hand, for exports of manufactures and services, the ASEAN countries account for a small part of the world market. Depreciation would, therefore, make ASEAN exports of manufactures and services far more attractive and buoyant. In other words, a substantial gain from both quantity and value can be expected through depreciation. Villegas's statement that depreciation in iself is not a guaranteed recipe for growth is merely a basic understanding of economics. The Philippine depreciation in 1985 did not stimulate growth or exports because its economy could not produce for the world market sandwiched as it was between low investment and high consumption and political turmoil.

While exports tend to respond to policy changes quite fast, the internal economic structure cannot change as fast. This is because within existing production facilities, one can choose between producing more for domestic use or more for export and squeeze out a limited additional supply. New activities, however, have a long time lag between the feasibility study in response to policy and factor price changes to implementation and full production. From a businessman's point of view, a major investment decision, such as relocating or building new investment facilities, takes at least three years, if not longer, to bring to full production. Since ASEAN economic adjustments occurred mainly in the mid-1980s, macroeconomic data up to 1987 are hardly able to capture the impact of response to changes. At any rate, changes in the internal economic structure are the result of policy and the economic response to policies. It is not an interesting tool for analyzing and understanding the structural adjustment problems and how to propel and finance growth.

Looking at the productivity ratio of manufacturing to agriculture is also not interesting. Malaysia has a well-developed commercial farming sector. It is also a small country with a mobile work force. As such, the productivity ratio would tend to equalize. Moreover, it has a long-standing program of upgrading technology, even at the smallholder level. This is part of the reason why investment and subsidies at the farm-gate level have remained high. In contrast, Indonesia, the Philippines, and Thailand are all large countries where commercial farming is small and subsistence farming prevails. In such a situation, a large agricultural labor force producing a small percentage of GDP via the agriculture sector illustrates the problems faced by such countries. When industrial development in Indonesia, the Philippines, and Thailand is focused in a few key industrial areas, the productivitiy ratio cannot move, as industrial development hardly changes the subsistence farming in the vast rural areas. Only a long period of sustained growth and widespread industrialization can change the internal industrial structure in a big country. An eight-year survey through a period of difficult adjustment will show hardly any difference.

To sum up, Villegas's paper would be far more interesting if it began by tracing the roots of the need for adjustment in the ASEAN countries. Second, the results should then be compared with those in Korea and Taiwan Province of China. The big share of domestic savings and investment in GNP in both economies would be a marked difference from those of the three bigger ASEAN countries. Singapore and Malaysia, who have both performed relatively better than their ASEAN neighbors in the 1970s, also have relatively high saving and investment. The moral of the story is clear: if a company wants to grow fast, it should have a small dividend so that earnings can be reinvested. For a country, saving and investment must also be high to sustain high growth rate. It is not possible to consume plenty and grow rapidly. It is even worse if there are waste and leakage of funds.