TRADE POLICY FORMULATION IN SELECTED DEVELOPING COUNTRIES: UNDERLYING INFLUENCES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T01017R000101060001-2
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 70
• Document Creation Date: December 22, 2016
• Document Release Date: January 26, 2011
• Sequence Number: 1
• Publication Date: July 11, 1986
• Content Type: MEMO

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DATE
DOCNO OIR 3
P $ PD I
Central Intelligence Agency
Washington. D. C. 20505
DIPMMI ATE OF INTELLIGINCE
11 July 1986
Trade Policy Formulation in Selected Developing
Countries: Underlying Influences
Summary
According to results from an exhaustive study
fundamental economic, social, and political conditions in developing countries
exercise considerable influence on the shape of these countries' international
trade policies. Overall economic policy, geographic factors, ethnic and class
structure, and the political and governmental systems can, in many situations,
be Wore significant than the roles of individual officials or ministries
directly involved in the policy process. Large, populous countries such as
Brazil and Indonesia, for exarrlple, tend to be more inward looking and protec-
tionist than small countries like Singapore, while all LDCs' trade policy is
colored by the centrality of economic development to their policies. In Bost of
the Lis exanined, the chemistry of trade policy is changing, with increased
market orientations, a greater role for technocrats, and political liberali-
zation. This probably will increase the ability of the United States to further
its trade objectives, although political liberalization could give pore paper to
inward-looking groups in same instances. The body of this paper outlines some
of the general determinants of LDC trade policy formulation, and the annexes to
this typescript examine trade policy formulation in seven focus countries:
Brazil, Indonesia, Malaysia, the Philippines, Singapore, South Korea, and
This memorandum is derived from work
sponsored by the Office of Global Issues.
International Trade Branch
Conmen t s may
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Trade Policy Formulation in Selected Developing
Countries: Underlying Influences
Overview
As a new GATT multilateral trade round approaches, the importance of the
developing countries (LDCs) to the round's success is already clear. Since
the Tokyo round began in 1973, LDCs have become larger and more diverse
exporters and more important markets. Many more private and governmental ties
now exist between these countries and the United States, and interdependence
is a reality. Closer ties have also brought an increase in bilateral trade
disagreements, ranging from machine tools to services.
Our examination of trade policy formulation in selected LDCs, a focused
look at seven major LDC traders -- Brazil, Indonesia, Malaysia, the
Philippines, Singapore, South Korea, and Taiwan -- suggests that although
there may be much policy variation among LUCs, their trade policies are driven
to a great extent by basic economic, social, and political forces. No matter
who is in power as commerce, finance, or even prime minister, these pressures
will often lead to similar trade stances.
o All focus on economic development as a central national goal. As
such, trade policies are subordinate to and a part of developmental
programs.
o The size of a country is important. Generally, a country with
extensive resources -- Brazil or Indonesia -- and a large domestic
market has trade policies that are more internally focused than a
smaller country with few resources, such as Taiwan or South Korea.
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o In countries with internal security concerns caused by ethnic or
class divisions (Brazil, Indonesia, Malaysia, the Philippines, and
Singapore), economic and trade policy tends to be inward looking and
is used to attain social goals by distributing wealth. South Korea
and Taiwan, which are homogeneous states, have economic and trade
policies that are far less inwardly focused.
o In most LDCs, decisions tend to be pushed upward in the bureaucratic
hierarchy. Cabinet members often have much greater individual power
than is common in Western democracies. Policy formulation and
implementation are usually closed and opaque.
o The background of the leadership group plays a major role. Typically
the first generation of post-colonial leadership focused on the task
of nation-building. The second generation is emphasizing the
creation of national wealth, and has given governments a technocratic
cast. Today technocrats are, in some cases, being challenged by a
third generation which is calling for increased popular participation
in decision making.
These strong political, economic and social influences on trade policy
suggest that LDCs are not going to be easily induced to alter most of their
trade policies. Indeed, they will probably only do so when convinced that
such a move will further basic goals or respond to these basic political,
economic, and social pressures.
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Economic Opportunities and Constraints
Economic and trade policies may or may not take advantage of a country's
endownments, but they are conditioned by them. A country's size, resource
base, and level of development dictate to a great extent the opportunities and
constraints policy makers face in trying to achieve national economic
goals. The structure of domestic production, the size and organization of
firms, the economic role of goverrment, and patterns of domestic and
international finance all influence a country's trade, its foreign exchange
earnings, and the constituency for or against certain trade policies.
Moreover, constraints and opportunities created by changing world conditions
strongly affect the range of policy options.
Structural Characteristics and Trade Orientation
Generally, a country's degree of openness -- international trade focus--
is inversely related to its size. A country with extensive resources and a
large domestic market is almost always more internally focused than a country
with fewer resources and a smaller domestic market. Since a large country
tends to be less import dependent, it faces less pressure to be a highly
competitive exporter. Large countries also find it more difficult to resist
narrow domestic political interests, since it is easier to spread the costs of
protection among a larger population. A large country has long internal lines
of transportation and conmunication that insulate its producers. Moreover,
local production can achieve economies of large-scale operation in a wider
range of products.
The most inward-focused of the group, in terms of trade share of GDP, is
Brazil; it also is the most protectionist. Similarly, petroleum resources
give Indonesia large export earnings and import capacity, but it too has
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relatively little foreign trade for its size and natural resources. In
Indonesia, as well as the Philippines, the natural resource endowment has been
as much an excuse and prop for ill-designed policies as it has been a basis
for economic development. At the other extreme, Singapore is the smallest and
the most outward looking. South Korea, Taiwan, and Singapore have no or few
natural resources, and consequently have had to rely on the development of
human capital and the stimulation of human energies. In the other four
countries, natural resources have been the dominant source of export and
government revenues. Their economic development has been less rapid. The
role of government and its policy reactions to economic change also help
explain these differences.
Economic Policy
The focus countries all treat economic development as a central national
objective, and since the 1960's have explicitly linked economic development to
national security. There is widespread support for government intervention
even in economies that are broadly directed by market forces. Because
economic progress has become an aspect of these governments' legitimacy, the
need for strong government intervention in the economy is used to justify
relatively authoritarian political systems.
Focus country governments have, to varying degrees, followed policies
that distort price structure and other incentives, although not on the scale
of many other LDCs. The economies with the least price distortion tend to be
those which are least protected from world market forces, and whose
governments are quickest to adjust internal policies to changes in the
external economic situation. For example, the 1974 and 1979 oil shocks, the
subsequent recession and decline in primary product prices, and the sharp
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increase in real interest rates prompted major policy adjustments, expecially
in Singapore, South Korea, and Taiwan.
The focus countries have tended to use more market-oriented policies in
general, and have maintained less distorted incentive structures -- between
capital and labor prices, between production for export and for the domestic
market, among investment categories, or among broad industry areas. The
debate that has focused on export proration versus import substitution
policies has neglected to notice the fundamental market orientation of LDCs
like these where government policy has been market supporting and even market
guiding. In these countries the government role has included active export
promotion as well as policies that support "appropriate" exchange rates and
moderate inflation.
Social Structure
Economic and trade policy decisions are often affected by the need to
control domestic forces. In countries plagued by severe ethnic, religious,
and/or regional divisions the political leadership has had to concentrate on
creating a national identity. Indeed, managing conflicting domestic interests
is the predominant national security concern of most of the focus countries.
The greater the perceived threat of internal divisions the stronger is the
tendency to interpret all policy in terms of its distributional impacts.
Brazil, Indonesia, Malaysia, the Philippines, and Singapore have serious
social divisions; in turn, each has focused on maintaining internal
security. Indonesia and Malaysia are still in the nation-building process,
while Singapore has succeeded. Brazil and the Philippines, however, are
divided largely along social class and income lines, and have concentrated on
preserving elitist political and social structures. In contrast, South Korea
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and Taiwan are largely free of major internal social divisions. Ethnically
homogeneous, they lack major regional, religious, and cultural divisions.
They also face a serious external security threat. The ethnic homogeneity of
these two societies, the external threats, and their neo-Confucian cultures
have combined to create a strong domestic political consensus behind the
government's policies. Historical events -- Japanese occupation, World War
II, the Chinese revolution, or the Korean War -- have served to enhance this
consensus by further strengthening national identity and solidarity. 25X1
Other countries with similar social structures and equivalent external
threat, but without Taiwan and Korea's ideological commitment to economic
development, would not necessarily adopt similar market-based, outward-
oriented policies. The combination of forces at work in Taiwan and Korea were
unusually strong in supporting the policies that were followed. Efforts by
other LCCs to reproduce South Korean and Taiwanese successes are clearly at
risk if there is no broad-based social cormitment. 25X1
The Political Process
Trade policy formulation also reflects the characteristic national in
leadership, but in countries with a regularized succession process--or at
least a strongly institutionalized political system, such as Brazil--style
tends to be continuous. In this context, one trend of relevance to all of the
focus countries has been the rise of a generation of leaders which is more
technocratic in orientation and much less burdened by post-colonial political
ideology than its predecessors. Typically, the first generation of post-
colonial leadership -- for example, Sukarno in Indonesia or Rhee in South
Korea -- focused on the task of nation-building, primarily emphasizing
political values and nationalist ideology in an attempt to create national
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solidarity and identity . The second generation has emphasized economic
development and the creation of national wealth which has given an
increasingly technocratic cast to the government. Both approaches have,
however, supported the maintenance of authoritarian regimes which limit the
degree of autonanous political participation. Today, these technocrats are,
in some cases, beginning to be challenged by a third generation of leaders
which is calling for increased popular participation in the decisiormaking
process and political liberalization.
The personalistic governing styles in these relatively authoritarian
systems result in considerable power being given to sane executive
appointees. In all of the focus countries, some cabinet members have much
greater individual power than is characteristic of most Western democracies.
In sane countries, Indonesia and the Philippines, for example, ministers or
their equivalents are carefully selected to offset other ministers' power
bases and to prevent than fran becoming possible challengers. However, in
Brazil, appointees' roles are constrained by fairly clear institutional
boundaries. Decisions on trade policy tend to be pushed upward in the
bureaucratic hierarchy -- often to ministerial level, and not infrequently to
the chief executive. Another characteristic is the broad scope that is
generally reserved for executive discretion. Although a formal system of
rules and institutional procedures exists and does constrain discretionary
authority, the personalized approach to policy decisions has become part of
the institutional process.
The legislature does not play an effective lawnaking role in any of the
focus countries. The move to a civilian government in Brazil has raised the
importance of the legislature and it could evolve into an effective lawmaking
body. Similarly, the new government in the Philippines could revise the
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constitution in ways that return an important lawnaking role to the
legislature. In the other countries the the legislatures have evolved from
legitimizing rubber stamps to forums for debate, but they have no real
influence on trade decisions.
Even so, the increased importance of legislatures reflects a general
trend towards a gradual political liberalization which results, in part, from
the increase in economic welfare generated by successful development. Almost
all of the focus countries have begun to experience popular pressure for
increased participation in policy decisions. The most dramatic example is the
toppling of the Marcos government. Brazil has replaced its military
government with a civilian one in which a wide range of views are heard.
South Korea has slowly opened its system, but to a much lesser extent than
Brazil. Although there has been limited change in Taiwan and Singapore, both
countries are showing signs of permitting greater democratic expression. In
Malaysia, already more open due to its parliamentary organization, the
government coalition is being forced to deal with a greater diversity of
political pressures. Indonesia is the only country in the group that has not
responded in some way to democratizing pressures.
Governmental Interest Groups
Within these countries' governments, a variety of interest groups impinge
on the trade policy process. Technocrats are a relatively new elite. In most
of the focus countries, this group have still not emerged as a coherent, self-
identified pressure group. Rather, they have acquired political power on the
basis of their specific expertise, and exercise often considerable power only
in policy-specific areas. Technocrats also serve legitimizing roles for
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political decisions -- this has been particularly important in Indonesia and
the Philippines.
Singapore is unique in that technocrats run its government and
technocratic approaches dominate political decisiormaking. In Taiwan,
although a bureaucracy with strong technocratic training has emerged, it still
operates as a classic Chinese bureaucracy in which high-level decisions are
made on political or personal grounds. The technocrats are slowly being
promoted to senior bureaucratic positions, however, and this is slowly
changing the character of bureaucratic decisiormaking.
In light of the political roles of technocrats among the focus countries,
the general patterns of economic and trade decisiormaking can differ from
overall political decisionmaking. For example, macroeconomic policy in
Indonesia is typically more technocratic than overall governmental
decisionmaking which remains heavily personalistic, reflecting the patrimonial
character of the Suharto regime.
With the growing importance of technocrats have cane changes in
traditional bureaucracies in some of the focus countries. The greater the
policy role of technocrats, the more modern the bureaucracy's system of
implementing policy is likely to be and the more likely it is that policy will
be implemented in ways that correspond with the original policy initiative.
This does not mean that the policies are necessarily transparent -- only that
the system implements than in relatively consistent, rational ways. On the
other hand, the more traditional the bureaucracy, the more likely are layers
of fragmented and canplex paperwork processes, inconsistent interpretations,
arbitrary actions, and graft and corruption.
Bureaucracies always interpret policy while implementing it, but the
degree of discretion permitted varies greatly. In Korea, Taiwan, and to some
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degree in Malaysia, law is written so generally, with bureaucratic discretion
so wide, that implementation requires very broad interpretation, in some cases
broad enough to change the intent of the policy. In Brazil, the Philippines,
and to a lesser extent Indonesia, law is so complex and contains so many
inconsistencies resulting from an accumulation of executive decrees over time
that the bureaucracies have wide latitude in determining which rules are
enforced. All of the bureaucracies initiate policy ideas and proposals that
sometimes serve as the basis for debate and discussion at high political
levels. Indeed, bureaucrats in most ministries view their role as including
policy prescription.
State-owned enterprises (SOEs) also are important players in the trade
bureaucracies of all of the focus countries. Except in South Korea and
Singapore, state-owned enterprises are typically headed by politically
influential individuals. In Singapore and South Korea operating heads are
watched over by boards of directors that include politically important
individuals, but the SOEs themselves usually do not play a political role. In
the other countries, individual SOEs wield significant political power because
of their economic importance. Despite the authoritarian nature of all of the
focus countries, the direct political role of the military is extensive only
in Indonesia. Usually, the economic and trade biases of the military tend to
reflect the consensus.
Outside Interest Groups
Private business has much influence in all of the focus countries, but
does not always play an independent political role. The ability of private
business interests to form independent and politically significant
organizations varies widely. Chambers of commerce and similar, more
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specialized business associations exist in all countries and, to one degree or
another, these organizations attempt to coordinate mutual interests and thus
influence policy. In general such influence is restricted to specific
business regulation issues, and often is very limited even there. In
Indonesia and Singapore, business interests have little influence as indepen-
dent political groups. The Brazilian business community, however, has
achieved moderate to high influence on political decisions through independent
interest groups and participation of individuals in the decisiorrnaking
process. Brazilian business groups tend to be dominated by firms with a
strong domestic orientation and which are often dependent upon continuation of
import substitution.
There is also considerable difference among the focus countries in the
influence of landed interests. Large holder landed interests (generally
export oriented agriculture) are traditionally associated with anti-growth,
status quo forces. They are usually among the most negatively affected by
economic progress and the emergence of new industry-based elites and middle-
class urban interests. Landed interests frequently support more outward
looking trade policies out of their interest in purchasing manufactured goods
as cheaply as possible in return for agricultural export sales. Landed
interests ceased to be a force very early in Korea and Taiwan even though
rural interests (rural workers, tenant farmers, and small landholders) remain
important. In the other countries, except Singapore, landed interests have
retained some influence.
In all of the focus countries multinational corporations have a
substantial economic role but rarely have significant political influence.
All of the countries, with the exception of Singapore, impose substantial
limitations on the activities of multinationals. In Malaysia, Indonesia,
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Brazil and the Philippines the role of foreign investment is controversial.
Multinational corporations remain a symbol of colonialism and imperialism and
are a continuing political issue deeply tied to nationalism and pride.
Multilateral financial institutions have had highly variable, often
indirect, and usually limited political influence in the focus countries.
This influence is greatest in areas dominated by technocrats. For example, in
South Korea there is a high premium on good policymaking regarding debt
management, and consequently technocrats play a key role in this area and,
through than, IMF and World Bank influence on debt policy is considerable.
Both Indonesia and Malaysia seek and receive World Bank loans, and both tend
to have relatively positive relationships with the IMF. In Indonesia,
macroeconomic policy has largely been under the control of technocrats, with
whom most INF World Bank discussions take place. In Malaysia the IMF and
World Bank are viewed as good sources of advice on debt containment and
adjustment to commodity price changes, but have little direct policy
influence. In Brazil and the Philippines, IMF and World Bank influence has
been both direct and at a high level. Both are restructuring debt, seeking
new funds and facing down the international banking community. As a result,
discussions with the IMF/World Bank group must be managed at the highest
political decision-making level.
Trends and Implications
Changed political and social conditions, as well as economic
opportunities and constraints that have been altered by economic development,
all prompt policy shifts. Several such trends in trade policy formulation --
most with implications for US interests -- can be observed in most of the
focus countries.
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Market Orientation. The rise in real incomes and the increased
complexity of the focus country economies have broadened the base of support
for less centralized market-based economic policies. This has happened at the
same time that abstract theoretical models are being abandoned in favor of
lessons of experience. Relatively more open economies have weathered the
external shocks of recent years better than economies characterized by a great
deal of protectionism. Such economies have been able to make necessary
adjustments more quickly and with relatively less cost.
The trend toward both domestic economic and trade liberalization is
clearly visible in South Korea and Taiwan. Similar trends exist in Indonesia,
Malaysia, and Brazil, although together with targeted import substitution. In
Brazil there is also growing political resistance to liberalization and there
are debt service pressures to restrain imports and push exports.
Technocratic Policymaking. There is a tendency to modernize bureaucratic
processes -- to rely more on technocrats and less on political bureaucrats.
Because of their educational background in Western economics and the greater
weight they give to objective economic criteria, technocrats tend to favor
more liberal policies than do political bureaucrats. Technocrats also present
much more sophisticated and well-thought-out positions in economic
negotiations, and are able to play by the rules-of-the-game while still
finding unprohibited ways of promoting favored industries.
While greater technocratic orientation and competence may make
negotiations more difficult, these governments will also become more open to
solid technocratic evidence on the benefits of, for example, trade
liberalization or expanding foreign direct investment. It will probably
become more likely that LDC officials will at least comprehend US arguments
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that developed country international economic initiatives are in the mutual
interest of industrialized and developing nations.
Political Liberalization. Although extragoverrmental pressure groups
generally have relatively little influence, slow political liberalization in
most of the focus countries is broadening the range of potential influences on
trade policy to include both export-oriented groups, which desire trade
liberalization, and inward-looking industrial groups, which want protection
from imports. Because it is safer for opposition groups to express themselves
in the less politically-sensitive area of economic policy, trade policy has
sometimes become a political football. In sane countries, these trends have
resulted in an increase in protectionist pressure, notably in South Korea, but
also in Brazil, Taiwan, and Malaysia.
Implications for the United States
The United States may find that the increased ability of interest groups
in LDCs to influence their goverrrrments may create greater resistance to US
negotiating objectives at a time -- this year's start of a new GATT round --
when such a trend is particularly undesirable. On the other hand, the
increased receptivity to market-based development and the rise of technocrats
at the expense of traditional bureaucrats should make LSCs more receptive to
liberalized trade policies.
In most of the focus countries, constitutencies favoring trade
liberalization are weak, but outside action might strengthen than. Public
support from official and private US interests for the positions of specific
groups and individuals, or including those interests in special meetings or
events, could be appropriate, depending on the country, the interest involved,
and the timing. Sympathetic foreign interest groups could be promoted more
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subtly by designing negotiations that implicitly support their efforts or by
merely taking care to avoid unnecessarily weakening their positions as US
policies are crafted. Nevertheless, with the limited exceptions of Brazil and
Malaysia, trade policy in the focus countries can in most cases still be
significantly influenced only through contact with at least cabinet-level
officials.
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These annexes describe and assess the trade policy formulation process
and the factors that impinge upon it in each of the focus countries -- Br
Indonesia, Malaysia, the Philippines, Singapore, South Korea, and Taiwan.
Brazil
The increasing influence on policy being exercised by business interests
and by the legislature under the New Republic has reinforced Brazil's historic
tendency to favor dccnestic industrial development and protection over export
pranotion. There are no significant political groups with an external trade
orientation. Concern with trade pranotion ranains largely intermittent --
receiving attention only in response to external shocks and pressures
restricting domestic economic growth. Consequently, trade policy and export
pranotion are still largely ad hoc. This adds to the complexity and cost of
the trade regime.
Econanic Policy
Brazilian econanic policy has been very different fran the policies of
the other focus countries. In Brazil import protection and import
substitution have historically been treated not as temporary steps to groan
industries for international canpetition, but rather as a central part of the
economic development process, a process oriented predaninantly on the domestic
market.
Brazil, while achieving fairly rapid economic growth, has suffered from
massive recurring fiscal deficits, large periodic swings in the real exchange
rate, and an extraordinarily rapid rate of inflation, even by Latin American
standards. In recent years, however, adjustment to the debt problem has
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forced a severe decline in output and an even larger drop in per capita real
income. Although the economy is recovering, it has not yet regained pre-
crisis levels, and, despite rapidly rising exports, the debt burden remains
extremely high.
Social Structure
The major social divisions in Brazil are along income distribution
lines. Although there is social unrest in areas of urban and rural poverty,
the poor have presented no organized challenge to the governing elites. The
main focus of policy has been to accommodate the interests of the elite, while
using growth to prevent popular unrest. In addition, the government is deeply
institutionalized and Brazil is well past the nation-building traumas that
many LDCs have gone through more recently.
Because of its size, Brazil has always been relatively inward looking.
In addition, rural and other outward-oriented interests have became too weak
politically to balance protectionist pressures. The economic restructuring
that occurred during the Great Depression and World War II shifted the power
base of the government away from the more export-oriented raw materials and
agricultural sectors to import substitution manufacturing. Policies designed
to protect that base after the war, including price controls on agricultural
products and protectionist trade policies, continued to weaken the more
outward-oriented sectors.
The rapid growth of manufactured exports since the mid-1.1160s and the debt
crisis have somewhat strengthened the liberal economic constituency. However,
it may be difficult for the government to move toward a more open economy,
even if it wants to, because of the increased voice that recent opening of the
political system will probably give to urban populations.
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Political System
Brazil remains an elitist country with large social and incame
disparities, as well as major regional inequalities. Democracy in Brazil is a
system of limited pluralism, intra-elite canpetition and consensus. The elite
groups have endorsed pragmatic policymaking, downplayed ideology, displayed a
propensity for campramise, and stressed highly personal or charismatic forms
of leadership while avoiding issue-oriented or class-based politics. They
have expanded political participation when necessary -- such as the current
incorporation of the middle-class and industrial interests into the New
Republic -- while still largely excluding the masses.
The recently increased openness of the policymaking process is partially
a result of the increased role of Congress. Under the military goverrrnent
Congress served as a rubber stamp, but under the new administration it has
true power. The goverrment must bring broad policy issues before Congress for
approval. Officials are determined, however, to avoid allowing Congress to
legislate on specific policy, partially because they view its members as
inexperienced.
Po Iicymaking
Reflecting the relatively closed nature of the political system,
Brazilian decisionmaking has traditionally been an intra-goverrmental
affair. Interest group representation has been largely corporatist, although
Brazil's "economic miracle" led to the formation of new autonanous interest
groups.
Under the New Republic, these extra-bureaucratic groups influence
Congress and have contacts with important ministers. Policymaking today is
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therefore more open and, to sane degree, more conflictual. Policy initiative
remains centered in the executive, but Congress is beginning to assume a
limited lawnaking role, and this role is likely to increase in the long run.
The Brazilian goverrment is based on an unstable coalition between two
rival centrist political parties -- the PMDB and the PFL. The President, Jose
Sarney, is a compranise figure without a strong political base. His lack of
political strength has made it difficult for him during most of his first year
to make the policy decisions necessary to deal with Brazil's problems,
although his recent anti-inflationary economic program has received wide
support.
Under Sarney the most influential individuals are members of the
President 's "kitchen cabinet." Key members are the President's daughter
Roseana Sarney Murad, her husband Jorge Murad, and the President's wife Marley
Sarney. Everything caning from or going to the President must first go
through them. Aluisio Alves, the Minister of Administration, and Jose
Aparecido de Oliveira serve Sarney as political advisors. Luis Paulo
Rosenberg, on Sarney's personal staff, is the single most influential figure
in econanic policymaking. He is a main force in negotiations with the IMF.
Another personal advisor who has had an important role in economic policy
debates is Celio Borja. Borja has taken a strong stance in favor of opening
up the Brazilian financiel market to foreign business.
Finance Minister Dilson Funaro is a successful businessman with close
connections to a group of development-minded entrepreneurs led by Antonio
Ermirio de Moraes. A personal friend of President Sarney, Funaro has became
probably the second most powerful economic policymaker. His two main aides
are Luiz Gonzaga de Mello Belluzzo and Joao Manuel Cardoso de Mello. Also a
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powerful figure in Brazilian economic policymaking is Minister-Chief of the
Planning Secretariat of the Presidency Joao Sayad. Although he lacks personal
ties with Sarney, he has close ties to the Federation of the Industries of the
State of Sao Paulo (FIESP), an important buisness group. Sayad is a srong
advocate of privatization, more growth-oriented strategies for dealing with
Brazil's economic problems, and negotiated interest relief. Other posts
important in trade policy formulation are the central bank governor, the
foreign minister, and the head of CACEX, the Foreign Trade Department of the
Bank of Brazil which administers the bulk of Brazil's import regulations and
export incentives. CACEX, in fact, has much to say in making trade policy
even though, on paper, it is an implementing organization.
Sayad's ties to FIESP point up the increased influence exercised today by
extra-governmental interest groups. Industrialists form the most important
extra-bureaucratic interest group. Landed interests are influential mainly on
regional and land-related issues. Foreign investors, influential under the
old Military Republic, have been largely eclipsed by domestic business
interests. Other important interests include the heads of the state-owned
enterprises (SOEs) who exercise influence individually, although they do not
constitute a true interest group, and the military. Beyond their economic and
political influence, SOEs have much influence on trade policy and its
implementation because many rules do not apply to them.
The military's position on trade issues is mixed. Before the shift to
civilian power, the military goverrment took a more internationalist stance
than other elites might have preferred. Nevertheless, the military espouses a
very strong national security interest in developing domestic high technology
and'capital intensive industries. The informatics policies that now are being
implemented, for example, reflect these military security concerns. To the
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extent that the military still participates in economic decisiormaking it is
largely through their influence on technology policy.
Unless a worsening economic situation plays into the hands of extremists
such as Janio Quadros and Leonel Brizola, the Constitution will probably be
rewritten after the November 1986 elections and a parliamentary system
establishd. Under such a system the role of the legislature in policy
formation will probably continue to expand. Interest groups will also play an
increasing role.
Trade Policy Implementation
There is a great deal of administrative discretion in the implementation
of policy. This fact, combined with the complexity of the procedures required
to export or import, the unequal treatment of different products, and a low
degree of automaticity, has created an extremely slow export regulatory
process which has resulted in a strong anti-trade bias in the administrative
structure.
The size of the Brazilian economy and the limited role of trade in
stimulating growth has accounted for the low priority traditionally given to
trade policy. Brazil has one of the more closed major economies in the world,
with exports representing only about eight percent of GDP. Exports have not
normally been an important source of growth. High debt payments and oil
import bills have both, at different times, forced Brazilian policymakers to
focus on the external sector and on export promotion. However, once the
crisis has passed, the tendency of policymakers has been to turn inward once
again.
The ad hoc character of trade policy has meant that no systematic efforts
have been made to reform the old import substitution structure and replace it
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with a rational system of export promotion. As a result, large export
incentives have been necessary to overcame the anti-export bias of the
protection structure as Brazil has tried since the mid 1960s to diversify its
industrial exports and trading partners. In recent years, the nation's
balance of payments difficulties have prompted the goverrment to impose a
variety of new controls on imports. Despite intermittent, half-hearted
attempts at liberalization, the focus has been on restricting imports in order
to reduce foreign exchange expenditures in the short-run. However, Finance
Minister Funaro has favored an increase in imports as part of his pro-growth
strategy.
The complexity of the export incentive system that was instituted to
compensate for protectionist policies has discriminated against smaller firms.
mall firms lack the resources to maintain special units to follow changes in
incentives, process applications for incentives, and fight through the
bureaucratic machinery. Consequently, most of Brazil's large exporters are
either NNCs or state-owned firms.
Outlook
Despite the increased openness of the policymaking process, the absence
of major domestic interest groups with an export orientation does not bode
well for any fundamental policy changes. Indeed, if anything, the increased
influence of domestic business interests has strengthened the existing
tendency to promote growth in favor of adjustment and to institute new
protectionist measures rather than to liberalize imports. As a result, a
consistent, trade-promoting policy is probably unlikely in the near future.
Ultimately, however, debt problems, high inflation, and unstabl.e growth will
force some improvements in the management of state enterprises and the system
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of industrial and trade regulation. Still, Brazil will remain inwardly
oriented. 25X1
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Indonesia
Indonesia's relatively large domestic market and the income it derives
from its oil exports have supported a highly protectionist trade policy.
Import substitution has became the primary means of stimulating
industrialization. This policy bias has been reinforced by the Indonesians'
long dirigisme tradition and distrust of the market. Although the decline in
the country's oil exports has recently forced sane policy reforms, the
resistance to liberalization remains strong. Major reforms are unlikely due
to a strong national ideology that is suspicious of international trade and
investment and because it would be opposed by important political interests in
the bureaucracy and the business community that benefit from the high level of
protection.
Economic Policy
Indonesia has trappings of a modern economy, financed largely by oil
exports, superimposed on a largely underdeveloped rural economy. Primitive
conditions and poor communications between the country's numerous islands, and
even within the major islands, have created extremely segmented internal
markets, on which local political and military authorities have great
influence. The large oil income has financed governmental functions,
infrastructure construction, and selective industrial development, including
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the creation of state enterprises. The Indonesian government has worked
slowly to improve the operation of domestic markets, to enhance human capital
and infrastructure, and to create at least some incentives for diversification
of the economy and of exports. In particular, it has avoided the policy
pitfalls that have been so prevalent in the large oil exporting countries --
namely, to allow the exchange rate to became grossly overvalued in relation to
any export product except petroleum in order to hold down import prices and
sustain urban real wages (the so-called Venezuelan, Mexican, or Nigerian
disease). Although there has sometimes been considerable inflation, Indonesia
has not allowed the exchange rate to appreciate seriously, so that it has not
destroyed its existing non-oil export industries, or made it virtually
impossible to develop new exports. Nbreover, it has restrained the growth of
debt to manageable levels.
Social Structure
Indonesia one of the most diverse societies in the world, but the fact
that Indonesia's social divisions crosscut rather than coincide mutes their
political impact. In addition to conflict between traditional Chinese
business interests and the rising Malay business class, which Indonesia shares
with Malaysia, important religious divisions exist between orthodox Muslems,
nominal Nbslans, and Christians. These differences cut across ethnic and
regional distinctions. The Javanese, for example, are the most numerous and
dominant ethnic group in Indonesia but are religiously divided. This is
fortunate for Indonesian since a unified Java would have created an even
sharper division between the inner and the outer islands that might have torn
the 'young country apart.
The government's response has been to maintain control over its highly
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divergent and widely scattered people and territory through a military
territorial structure, repression, and an attempt to impose a sectarian, non-
ethnic philosophy -- Pancasila -- intended to co-opt major interest groups.
The distribution of economic growth gains has been central to the co-option
and power balancing process. The government favors Malay business interests
( ribumi) and protects them from "unfair" canpetition fran imports, domestic
Chinese-owned firms, and foreign businesses. This has contributed -- along
with Indonesia's bureaucratic tradition, rampant corruption, and President
Suharto's tendency to issue personal decrees -- to gross overregulation of the
econany.
Despite high oil earnings, and the resulting import capacity, Indonesians
remain highly suspicious of trade and foreign involvement in the econany.
Yet, the Suharto government's ability to restrain the centrifugal social
forces in Indonesian society has been based heavily on oil incane. The
econanic growth stimulated by the oil sector has provided the means to keep
the out-groups relatively appeased, while the government has pursued
inefficient industrialization policies that contain significant price
distortions. The drop in oil prices since the early 1980s, however, has
forced a variety of policy improvements.
Political System
The Indonesian political system has a daninant presidency, a politically
active military, a decisiormaking process centered on the president, and a
pattern of state-society relations that combines cooption and responsiveness
with repression. The pattern of state-society relations in Indonesia is
unusual in that the political parties -- including the government supported
Golkar -- play only a marginal role in social management. Instead, the
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overlapping regional administrative structures of the army and the Department
of Hare Affairs have assumed responsibility for social control. The parties
play only a legitimizing role.
The Indonesian military dominates political life. Military men hold all
security posts and most important political offices, as well as the majority
of the large state-owned enterprises that dominate the economy. Military
control over political, econanic, and security affairs is exercised under, and
justified by, the military's dual role (dwi fungsi) philosophy.
The key opposition to the Suharto government is in Indonesia's growing
orthodox Muslim (santri) carmunity. Government leadership and most of the
military are either nominal Muslims (abangan) or Christians. The government
is widely believed to be be hostile to the orthodox Muslim community, which it
suspects of wanting to transform Indonesia into a Muslim state. Recent
government policies limited peaceful Muslim political expression, driving the
Muslim opposition underground.
Since 1983 President Suharto has moved to centralize power and eliminate
all alternative or potential centers of power, bringing all political parties,
unions, social groups, and religious organizations under state control. One
of the motivations appears to be an expectation of difficult econanic times
due to the downturn in the oil market and the slump in other carmodities
markets. It is also thought that Suharto may be preparing for succession.
Although he has not groaned a successor and no likely candidate is apparent,
Suharto is promoting turnover in the officer corps and Golkar.
The Policymaking Process
Policymaking in Indonesia is a personalistic process. Suharto dominates,
serving as the fulcrum for the resolution and reconciliation of Indonesia's
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conflicting policy interests. Suharto has consistently resisted depending
exclusively on any one group or individual. Instead, he has manipulated the
individuals and interests that revolve around him, exploiting their personal
and political differences so that they remain in canpetition with each other
and dependent upon him for victory in policy disputes.
Traditionally, three types of power holders have existed in the "New
Order:" members of the "inner core" group of officers who enjoy close
personal, as well as working, relationships with Suharto; members of the
"core" group of officers around Suharto who enjoy good working relationships
with the President; and the military and technocratic leadership of the
government. There are no extra-governmental interest groups. Cronyism exists
through relationships between Chinese businesses (cukongs) and army
officers. Suharto has close ties to several cukongs. Cukongs have sane
policy influence, but its extent is difficult to measure.
There are three important elements in the econanic and trade policymaking
apparatus:
The State Secretariat (Sekneg), has primary responsibility for economic
regulation, overseeing government procurement, and monitoring foreign and
domestic investment. Sekneg is bureaucratic, nationalistic, protectionist,
and obstructionist. Sekeng is headed by State Secretary Sudharmono, whose
faction controls the organization. Important members of the Sudharmono
faction include: Ginandjar Kartasasmita, Junior Minister for Danestic Product
Production and head of the Capital Investment Coordinating Board (BKPM); Major
General Abdulrachman Ramp, the head of Pertamina, the state oil canpany; Lt.
General Ali Said, Chief Justice; and Ismail Saleh, Justice Minister.
"The Berkeley Mafia," a popular appellation applied to a group of
American educated technocrats (unofficially led by Prof. Dr. Ali Wardhana,
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Coordinating Minister for Economics, Finance, and Industry) who are in charge
of macroeconanic policy. These men believe that Indonesia's continued growth
in the long term depends on pranoting nontraditional exports and that danestic
industries must became more competitive in the international marketplace.
Consequently, they favor lowering trade barriers and allowing market forces
greater influence. In addition to Wardhana, the group includes Prof. Dr.
Johannes B. Sumarlin, Minister of State for National Development Planning and
Chairman of Bappenas (the state econanic planning agency); Prof. Dr. Emil
Salim, Minister of State for Population and Environment; and Prof. Dr.
Subroto, Minister for Mining and Energy. Two former cabinet officials who are
still influential, Widjojo Nitisastro, previously Coordinating Mininster for
Economics, Finance, and Industry, and Mohammad Sadli, formerly Minister of
Mining, are also part of the group. Their mentor, Sumitro Djojohadikusumo,
continues to serve as an unofficial economic advisor to Suharto.
The "Political Economists," based in the sectoral ministries, are the
rivals of the F3erkeley group. Responsible for microeconanic policy, this
group tends to employ a personalistic style of policymaking -- trading on
their personal influence with the President and making policy in an ad hoc
fashion. They favor insulating local industry from foreign canpetition.
Their goal is to boost employment by developing a balanced industrial capacity
producing mainly for the danestic market. The recent decline in export
earnings has strengthened their protectionist position. Faced with declining
economic growth, Indonesian officials have responded by putting more emphasis
on import substitution policies. The best known advocate of these policies
and Wardhana's chief rival is Minister of State for Research and Technology
B.J. Habibie who is a close friend of Suharto. Another important member of
this group is Minister of Industry Hartarto Sastrosienarto.
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Because Indonesian bureaucrats generally distrust the market and prefer
to rely on state intervention, the liberal trade and econanic policies
advocated by the "Berkeley" technocrats mark than out as "mavericks."
Typically, Sekne and sectoral ministries support each other against the
"Berkeley" technocrats, although Sekeng at times canes into conflict with the
"political econanists" because its obstructionist regulatory methods
frequently hinder their investment projects. The protectionist position is
also supported by the cukongs who benefit Fran eliminating foreign
canpetition.
Suharto, in his fashion of employing "creative tension" among his
advisors, manipulates these groups. Consequently, Indonesian econanic
policymaking shows a mix of policy styles and orientations. Although one or
more elements in the econanic policymaking elite may gain the advantage over
their rivals as a result of changing events, it will be a temporary
phenomenon. As long as Suharto rules, it is unlikely that any group will have
things all its own way.
Trade Policy Implementation
Industrialization has taken place behind high barriers and has
consequently produced inefficient and uncanpetitive industries. Regulation is
carried out through licensing of new enterprises, import restrictions, and
investment incentives.
Adninistrative discretion tends to be high, which -- combined with
complex adninistrative procedure, unequal treatment, high abuse, and low
autanaticity -- serves to create an extremely slow regulatory process and
results in a strong anti-trade bias in administrative behavior. The
regulatory system gives officials vast opportunity for graft at many stages of
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the approval process. Indonesia's bureaucratic approach is carried over into
its economic planning, which includes explicit performance targets for both
government entities and private firms. Indonesia is the only focus country to
employ such detailed planning.
Indonesia has promoted non-oil exports with measures ranging from
countertrade to financial and fiscal incentives. The most important element
in Indonesia's efforts to expand its non-oil exports, however, has been its
exchange rate policy. In general, Indonesia's exchange rate policies have
been managed successfully by Suharto's macroeconomic policy team to provide
fairly stable trade incentives. Despite Indonesia's recent efforts to pranote
non-oil exports, the overall trade regime remains strongly biased against both
exports and imports. Perhaps the sole exception to Indonesia's largely
isolationist economic orientation is its membership in ASEAN, but ASEAN's
importance to Indonesia is more political than economic.
Outlook
Suharto has ruled Indonesia for twenty years. His critical role in the
government and the low level of institutionalizaton of the regime make a
stable succession questionable. Although he remains reluctant to establish a
successor, since 1983 Suharto has stepped up the process of
institutionalization in order to make his regime outlast him. As Suharto
further institutionalizes his regime, policymaking will certainly became
increasingly technocratic and bureaucratic with decreasing personalistic
elements.
In the short-term, economic pressures are more likely to be handled
through "band-aid" responses rather than through structural and policy
reform. Continued economic growth, however, will require significant reforms
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to increase the efficiency and international canpetitiveness of Indonesian
industry. For major reforms to occur, the political influence of interests
benefitting fran protection and the power of the state bureaucracy will have
to be reduced. However, we believe such a major change is unlikely. Efforts
fran outside to encourage reform would probably meet with little success
and could damage
the position of danestic reformers.
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Malaysia
Trade policy in Malaysia is subject to many, often conflicting
influences. Minimizing tensions among the Malay, Chinese, and Indian
populations is Malaysia's dominant national imperative. However, the
government also favors the Malay community in economic development, and this
has led to import protection for selected industries. The economy is large
enough for sane domestically-oriented industry, but is too small to avoid a
predominant orientation toward exports. The decline in oil, tin, and other
cammodity prices combined with protectionism in the industrial countries have
presented Malaysia with major economic challenges, both in terms of overall
development and achieving the distributional goals of the New Economic Policy
(NEP). These challenges have intensified pressures to diversify export
products and markets, and also have strengthened some interests seeking
increased protection.
Economic Policy
The Malaysian economy, although larger and less open than Singapore's,
has also been one of the least distorted among LDCs. The government has kept
the exchange rate tied to the major world currencies, held inflation far below
world standards, placed few restrictions on imports, and interfered little
with business decisions. The terms of trade changes in the 1970s favored
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Malaysia. Policies introduced in the early 1970s to raise the economic level
of the Malay carmunity and the decline of earnings from oil and other primary
product exports in the past two years have resulted in selected import
substitution in manufacturing, but on a relatively small scale. The growth of
debt has been a concern, but Malaysia is not a problem debtor.
Social Structure
In Malaysia the government tries to balance the divergent ethnic and
religious interests through a process of political compromise rather than
through repression and corruption but like Indonesia, the
government favors the Malays. The major objective is to achieve sufficient
economic growth to rapidly improve the well-being of the Malays without
reducing that of the Chinese and Indians. The landed Malay aristocracy and
other rural Malays form key elements of the power base for the ruling party,
and export-oriented agriculture is a key economic sector. This political base
has been a major source of Malaysia's conservative and outwardly oriented
development strategy.
The Political System
Trade policy is formulated within a highly centralized and bureaucratic
political system, although Malaysia's parliamentary structure provides for
wider participation than in the other focus countries. Nevertheless, the
prime minister and the cabinet hold decisionmaking authority within the
government. The interests of different groups are weighed within this
centralized format. The most important party in the dominate National Front
coalition is the United Malays National Organization (UNI'TO). Its power has
grown since the early 1970s relative to its major partners, the Malaysian
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Chinese Association and the Malaysian Indian Congress. Parties or interst
groups not represented in the National Front have few channels through which
to influence decisions.
Policymaking
Determining trade policy depends more on personal influence than on
institutional authority. A all clique dominates the major political
parties, cabinet appointments, and boards of di-rectors of public
corporations. This concentration of power further increases the ability of
particular individuals to influence trade policy. Malaysia's economic and
trade policy process, however, is more open and visible than that of any of
the other focus countries, except Brazil.
Prime Minister Mahathir, in consultation with his closest advisors
(including cabinet officials, the U4 hierarchy, and several informal
advisors), initiates trade policy. Within the cabinet, the Ministry of Trade
and Industry (".u) and the Ministry of Finance wield the most influence on
economic and trade policy. MTI is responsible for licensing and regulating
domestic and foreign firms and for ensuring that they conform to NEP
employment and equity guidelines. Mahathir headed the ministry before 1981
and left a strong bias in favor of capital-intensive heavy industry. The
Ministry has been headed by Razaleigh Hamzah since 1984. Although he acts
more independently from Mahathir than his predecessor, Ahmad Rithaudeen,
Razaleigh tends to support greater government involvement in direction of the
economy, and can be expected to follow Mahathir's lead in the use of selective
import substitution policies to promote the nascent heavy industries
program.
The Ministry of Finance (NDF), headed by Daim Zainuddin, has tax and
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tariff setting responsibilities. Specific policy actions are implemented in
its annual budget. Authority for granting specific protection is shared with
MrI. NOF and Mn, Iwith others, have recently drafted an "Industrial
Masterplan," which seeks to revise the entire system of taxes, tariffs, and
financial incentives. With his highly successful business background, Daim
appears to support free trade in most areas. However, he supports Mahathir's
pranotion of heavy industries.
Other ministries, statutory bodies, and public corporations participate
in trade policy formation through their influence on cabinet members and the
Prime Minister's office. These other organizations, ranging fran the
generally pro-trade Foreign Ministry to the usually highly protectionist large
public corporations that have been formed to pranote Malay interests,
intervene mainly on specific issues that fall within their areas of
responsibilities.
An array of special interests interact in this process, primarily through
links with established political parties. The emergence of new political
leaders in U'NO is creating pressure to open up the policymaking process to
influence from new sources, and is also increasing dissension within the party
over econanic and trade policy. The major differences have been between new
Malay businessmen, who have benefited from protectionist policies under the
NEP, and the traditional Malay aristocracy, which prefers a more outwardly
oriented trade policy. Sane of the more sucessful businessmen, however, are
beginning to support a more open trade regime.
The Malaysian Chinese Association (NCA), the second party in the
coalition, acts as a conduit for Chinese opinion and cooperation and has
served as the primary source of influence for Chinese businessmen, who prefer
a liberal trade regime. Howevr, the NCA's support within the Chinese
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camnunity and its ability to influence the policies adopted by the National
Front have gradually eroded under the NEP.
Trade Policy Implementation
Because legislation tends to be very general, its impact is largely
determined by implementation. Implenentors -- bureaucrats, state and local
officials, and public corporations -- have fairly broad discretion to
interpret new economic and trade laws. Administrative procedures are
moderately complex. The system is rather sluggish, if relatively visible, but
does not suffer from serious abuses.
Although the decision-snaking style of the government allows substantial
administrative discretion, a commitment to economic planning has systematized
economic policymaking. The planning agencies are dominated by the Prime
Minister's office, but take into consideration the opinions of other
ministries in an extensive process of negotiation and campranise that is used
to build support for economic policy.
Malaysia, however, does not prepare an overall trade plan. Instead, the
needs of each industry for protection are determined on a case-by-case
basis. The Tariff Advisory Carmittee of the MIEA oversees tariffs. The
carmittee usually is willing to grant tariff protection and import
restrictions to new companies. Currently the tariff structure favors large
firms at the expense of the small-scale industries. An incentive system
favors industries that produce for export, even if they operate merely as
assemblers and add little to the value of the products or to the skill of the
labor force. Malaysia has developed a dualistic manufacturing system with a
highly competitive export sector, located in the free trade zone, and a less
efficient domestic sector, producing in a protected environment for the
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domestic market. Malaysian policymakers are implementing plans to simplify
tariffs and incentives and make them conform more fully to the country's
development goals.
Nevertheless, Malaysia is also beginning a new round of selective import
substitution. The new measures are designed to reduce the amount of foreign
exchange spent on consumer durables, intermediate inputs, and capital goods.
Since intermediate inputs into manufacturing are a large proportion of
Malaysia's imports, the government hopes to begin domestic production of some
of these products. Industries targeted for protection include household
appliance components, sound equipment, telecormunication equipment, coastal
ships, and automobiles.
Malaysia is trying to diversify its export markets for manufactures. The
Ministry of Trade and Industry has assumed responsibility for formulating new
plans to improve exports. Malaysian diplomatic missions have been instructed
to pay closer attention to Malaysian business interests in foreign
countries. The government has also encouraged the establishment of large
trading conglamerates as part of its "Look East" policy, which attempts to
copy aspects of successful South Korean and Japanese economic development.
Outlook
Prospects are good for greater competition within UNNO as new political
leaders try to open the policymaking process and dissatisfaction with the
National Front increases as economic growth rates slow. However, the National
Front will continue to dominate the political system.
The economic outlook is somewhat troubled, with the collapse of oil and
other commodity prices sharply reversing the beneficial terms of trade changes
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of the 1970s. Although manufacturing now accounts for nearly 40 percent of
Malaysia's exports, major export industries have suffered fran over
-production (semi-conductors) and growing protectionism (textiles).
The outlook for trade policy is mixed. The recently released "Industrial
Master Plan" proposes reducing tariffs, taxes, and regulations to promote
exports. Sane measures to liberalize the economy have already been
introduced: strict regulation of foreign equity ownership has been relaxed
for certain industries; a few of the public corporations established since
1971 have been sold to private investors; personal and corporate tax rates and
sane import tariffs have been lowered. At the same time, pranotion of heavy
indusrial development involves increased selective government targeting,
utilizing quotas, tariffs, and other forms of protection. However, the
country is too small, and the need to grow rapidly too great for the
government to be likely to embrace a broad import substitution program.
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The Philippines
Although the Philippines is in a state of transition, there are
indicators of possible directions of policy change, but time will be required
to identify the economic and trade policy biases of the new government. The
Philippines has been an inwardly oriented country, with this bias supported by
the structure of trade policy. Even though import policy was explicitly
liberalized, and selective export promotion adopted after the early 1970s, the
structure and implementation of trade policy retained a strong import
substitution bias.
Economic Policy
In the Philippines the role of government in the economy is far less
pervasive than in Korea and Taiwan, but is also less coherent. The government
has not provided much leadership for economic development, but has mainly
responded to events. Until the later part of the Marcos administration, the
government had little role in exports of agricultural and wood products, the
mainstay of Philippine exports, but the policy mix tended to bias against both
domestic and export agriculture. At the same time, industrialization has been
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dominated by incentives for import substitution since the 1950s. The degree
of distortion caused by the policy bias was limited by a shift away fran
direct controls towards a more market-based policy approach, especially after
the late 1960s. In consequence, the price structure in the Philippines was
not subject to severe distortions, at least until recently.
Periodically, large fiscal deficits have developed in the Philippines,
resulting in higher inflation, an overvalued exchange rate, a growing black
market in foreign exchange, and ultimately a devaluation. The trade regime
continued to be characterized by high and variable tariffs, nontariff
barriers, and foreign exchange controls. Export pranotion was piecemeal and
highly canplex. The result of all this was average econanic performance for
an LDC.
There was a clear shift in the late 1970s to liberalized trade, pranotion
of basic industries, and restructuring of a number of key industries, but the
quality of economic policy deteriorated severely during the last few years of
the Marcos regime, as cronyism became rampant, government expenditures rose,
and the exchange rate became increasingly overvalued. The decline in export
earnings was largely covered by foreign borrowing, resulting in a severe debt
problem. Steps to cut imports and reestablish export incentives were not
taken until 1934, and the economy has since been in severe recession at a time
when most of the other major LDC debtors were into recoveries.
Social Structure
Ethnic, religious, and regional divisions are relatively minor. The main
social divisions are income-based and are assoicated with a severe rural/urban
split. Although the Philippines is beyond the nation-building stage of its
political development, it faces a serious internal threat in an armed
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carmunist insurgency. Fran the late 1970s, there was a rapid growth of the
armed insurgency, and a fracturing of political support for and control of the
Marcos machine. Without sustained econanic progress, at least partially
distributed back to the rural areas, Marcos was unable to consolidate and
enhance the substantial national support given to him personally and to his
early "new society" policies. The result was his sudden descent fran power as
the nation coalesced behind Corazon Aquino.
The Church, the military, much of the business carmunity, and the urban
population support Aquino. However, large parts of the rural population have
been neutral or opposed. In part, this reflects the strength of regional
warlords, Marcos supporters, and the carmunist New People's Army, but it is
primarily a result of the terrible state of the rural econany. Among the many
challenges facing Aquino, perhaps the most pressing is achieving an econanic
recovery that extends to rural areas and to the urban unemployed. The need
for rapid economic gains may create conflicting pressures on trade policy.
Long-term success will require a more open econany. However, responding to
calls for special import protection may produce short-term gains but could
also slow econanic progress in the long-run.
Political System
Even before Marcos, the Philippines government was a centralized
patrimonial democracy. Strong leaders with large personal followings tended
to form loose coalitions behind more-or-less stable party designations, but
without strong party carmitments. Indeed, individuals frequently shifted from
party to party with their followers. The office of the president conferred
national power, and that had to be won in the canpetitive political arena.
The various presidents ruled in a strong personalistic style, although they
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were constrained by the legislature, the courts, and the next election. The
institutions that offered countervailing power to the office of the president
were greatly eroded under martial law and the strong, traditional Filippino
patrimonial style became even more deeply entrenched in the bureaucracy than
before.
With Marcos' departure, the authoritarian style of government will
probably became more democratic, and power will became more
institutinalized. Nevertheless, given the nature of Filippino politics and
its social structure, the system's style will probably remain strongly
patrimonial. Although it has pranised a new constitution and elections, the
Aquino regime has dissolved parliament and is governing by decree. Tension
between the flexibility these moves give to policymaking and the new
president's apparently strong carmitment to ethical, democratic institutions
will probably characterize intra-cabinet debate for months.
Policymaking
Under Marcos, economic decisionmaking was daninated by the president's
authoritarian, personalistic style. Decreenaking powers were used extensively
and on an ad hoc basis. Nevertheless, the various econanic ministries were
organized along modern bureaucratic and technocratic lines. Although the
ministries were packed with Marcos supporters, the problems caused by the high
debt burden and mismanaged firms made it necessary to appoint highly qualified
technocrats to some senior positions, if only for legitimizing purposes.
Major decisions were made by the president, but the ministries were permitted
to make some decisions based on technocratic criteria.
The Aquino government owes debts to a wide range of political forces,
including its military supporters. Private business interests played an
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important supporting role, as did the elite "landed" interests that had been
suppressed since the beginning of martial law. The trade policy biases of
these groups are mixed, but all seem inclined to move towards a more stable
and level playing field.
The new constitution, whatever its form, will return an important
lawmaking role to the legislature. The Aquino regime has retained many of
Marcos' ministers and economic technocrats. Given the enormous problems of
establishing the new government, gaining control of the countryside, and
resuming economic development, the technocrats are likely to increase their
political influence substantially.
During caning months the President and her cabinet will make all of the
key decisions, but Finance Minister Jaime Ongpin and Trade and Industry
Minister Jose Concepcion will be particularly important in economic and trade
policy. Both were company presidents before taking office. Both men have a
strong private sector bias, especially the Harvard trained Ongpin, who was an
active and vocal critic of Marcos' economic policy for several years. Both
men were active merbers of the Makati Business Club, a private business think
tank that concentrated on economic and business policy. Their economic agenda
is probably mixed in terms of import protection, import liberaliization, and
export promotion, mainly due to its heavy domestic policy focus. Just sorting
out the domestic problems, however, will sharply reduce the anti-trade bias of
the system.
The major short-run challenge to the market-based economic reforms of
Ongpin and Concepcion will be the traditional Filipino politicians, most
notably Vice President and Foreign Minister Salvador Laurel and Defence
Minister Juan Ponce Enrile, who want to set up patrimonial patronage systems
as quickly as possible. Economic reforms that limit the formation of such
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patronage networks will likely be strongly opposed by these men. Aquino will
determine how these differences will be resolved. Initially, she has
supported Ongpin and Concepcion, though not without adding a populist, social
welfare twist that reflects her personal biases and the influence of the
church, expecially Cardinal Sin.
The most controversial interests to be taken account of in econanic
policymaking are the foreign interests. Danestic political debate
characterizes multinational corporations as a symbol of US colonialism, the US
military presence, and US support of the Marcos regime. Whether or not the
new regime will follow policies that reflec this anti-US multinational view is
uncertain, but a large number of Aquino supporters have expressed such
views. There is no question that US multinationals have an important econanic
presence in the Philippines, but, in fact, they have not had much influence on
government decisiomiaking despite the rhetoric. Indeed, sane US businesses
actively supported moderate political change in the Philippines in association
with local business groups. The political rhetoric is deeply ingrained and
the new government would find it difficult to show any support for foreign
multinationals.
Similarly the role of the IAVF/World Bank group will remain
controversial. The Philippines still must restructure debt, seek new funds,
and face the international banking carmunity. As a result, discussions with
the IMF/World Bank will have to be managed at the highest political
decisionmaking levels.
Trade Policy Implementation
The concentration of decisionmaking power in Marcos' hands resulted in a
canplex array of often inconsistent laws. This widened the range for
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administrative discretion, since the administering agency could determine how
and when to apply which rules. This situation is almost certain to improve
under the new government. Public statements suggest a strong effort to clean
up graft and corruption and a cannitment to an improved, stable business
climate.
Outlook
Regardless of what the new constitution will look like, econanic and
trade policymaking will certainly remain under strong executive control -- in
the short-term it is nearly absolute. Econanic policy will be more market-
oriented and subject to greater evaluation on technocratic terms than in the
past. The econanic rules of the game are, therefore, likely to stabilize and
improve. Policy inconsistencies will be reduced, implementation will became
less discretionary, and the international trade and investment climate will
improve.
Strong interests have emerged to eliminate the array of specific
protections for crony firms, but other interests and many jobs depend on their
continued operation. Given severe financial constraints, the political
interests built up around import substitution activities, and the political
pressures for fast economic results, a dramatic drop in protectionist barriers
is not in the cards. Part of the constituency behind President Aquino has a
strong anti-multinational corporation, anti-United States, and anti-IIVJF/World
Bank bias. This will create continuing tensions. However, conditions are
sufficiently fluid that interests favoring a mroe outward orientation could,
in time, shift policymaking towards the creation of more efficient markets and
significantly reduce the country's anti-trade bias, especially if the United
States, IIVIF/World Bank, and neighboring countries help.
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Singapore
The vital importance of trade in Singapore's economy has meant that trade
policymaking has been inseparable fran the process of general econanic policy
formation -- each has been set by the same limited number of individuals and
in the same fashion. Concern about the vulnerability of the economy has
induced the leadership to establish a technocratic decision-making system in
which policy is based on the technocrats' assessment of international econanic
trends and Singapore's changing canparative advantage.
Economic Policy
Singapore not only provides little import protection, but also adjusts
its economy almost immediately to external econanic changes. With an exchange
rate tied to a basket of currencies of its major trading partners and highly
conservative monetary and fiscal policy, Singapore keeps its danestic
inflation rate well below the rate of global inflation and generally promotes
a rapid reallocation of danestic factors of production in response to shifts
in relative world prices. The government concentrates on facilitating private
response to world market opportunities. It tries to foster development of a
well-trained work force, good physical infrastructure, moderate and
predictable regulations, and price and financial stability. Singapore's
foreign debt is low. Sanetimes Singapore pushes the economy too hard -- for
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example, by raising wages to encourage a shift to less labor intensive
production, a step that will require substantial adjustment.
Social Structure
Under the leadership of Prime Mininster Lee and the PAP (People's Action
Party), a strong national identity has been created among a sharply divided
population by building the richest (in per capita terms) country in the region
out of a highly vulnerable city state. Unlike Indonesia and Malaysia,
Singapore has not used ethnic or social group as a criterion of incane
distribution. Instead, it has created opportunities through work and
education in a growing economy, ccrrbined with social welfare policies to
benefit the disadvantaged. The leadership's relentless pursuit of economic
growth largely reflects the challenges it faced in the early years when
Singapore was molded into a viable multi-ethnic society.
Political System
Although Singapore is ostensibly a parliamentary democracy, the
technocratic values it professes clearly distinguish it fran the pluralistic
Western model. It is, in fact, a "technocratic democracy." Authority is
centered on the cabinet under the direction of a strong Prime Minister. The
authority of the government, although subject to periodic electoral review, is
based fundamentally on a claim to superior knowledge and wisdom.
The political base for the People's Action Party's (PAP) technocratic
policy style is a virtual one-party system in which dissent is minimized and
organized opposition stifled. The instruments of control are a combination of
political repression and social welfare policies implemented through a
pervasive grass-roots organization. The strong political base the PAP has
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developed has enabled its leaders to insulate themselves from direct political
pressures, whether mass-based or special interest groups.
Po Iicymaking
Policy issues are treated as an in-house matter, rather than as subjects
for public debate. Reflecting the government's ideological aversion to
particularism (part of its "multi-ethnic" policy) special interest groups are
generally not considered to be legitimate participants in the policy formation
process. The technocratic structure clearly is sensitive, however, to the
concerns of these interests, even though they are not consulted during the
decisiormaking process. Their econanic importance makes it impossible for the
government to canpletely ignore them.
In general, econanic decisiormaking -- and, political decisionmaking as
well -- is highly centralized. Actual policy is set by just a few
individuals, usually of ministerial rank. These men are typically highly
skilled generalists with multiple job responsibilities. They are
troubleshooters who exchange posts readily as the situation requires, rather
than bureaucratic specialists. Singapore's top leadership can be separated
into two groups -- the "old guard" and the "young guard." The "old guard"
includes the men who have led Singapore since the late fifties. The "young
guard" are their personally chosen successors.
The "old guard" is led by Prime Minister Lee Kuan Yew, the daninant force
in politics and policymaking. His closest associate over the years has been
Dr. Goh Keng Swee, former first deputy prime minister and the architect of
Singapore's "economic miracle." The other, still active, members of the "old
guard" are Sinnathamby Rajaratman long-time Minister of Foreign Affairs, now
Senior Minister in the Prime Minister's office and E.W. Barker, Minister of
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Law. 25X1
Goh Chok Tong, Ong Teng Cheong, and Tony Tan are daninant figures among
the ssecond generation leaders. Goh Chong Tong, First Deputy Prime Minister,
has emerged as Lee's chosen successor. Although Goh is considered highly
capable, he lacks popular appeal. Both Tan and Ong are considered better vote
getters. Ong is Second Deputy Prime Minister and chairman of the PAP. Tan,
both Trade and Industry Minister and Minister of Education, is the most
popular and outspoken, and is believed to be the new cabinet's "peacemaker" --
filling the role played for many years by Rajaratnam and Barker. Another
rising star is Lee's son Lee Hsien Loong. Well liked by the other ministers,
the younger Lee is considered to be capable and intelligent, and possesses
grassroots support. Although a succession mechanism exists and a successor
has been groaned, the Prime Minister Lee's unique stature and his long tenure
may make succession difficult.
A final figure of considerable importance, but who belongs to neither the
"old nor the "young" guard, is Richard Hu Tsu Tau, Goh's replacement as
Monetary Authority of Singapore (MAS) chairman. A former businessman, Hu's
appointment was partially a move to placate the international financial
camrunity, which distrusted Goh, but looks favorably on Hu. Hu's rise also
reflects Lee's concern that a future government might draw down Singapore's
reserves to finance politically popular policies. Accordingly, Lee has
deliberately excluded the young guard fran the key government financial
posts. Hu, older, new to politics, and with a corporate background, serves
the role of guardian.
Trade Policy Implementation
Because the leadership considers it essential to maintain its
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inernational competitiveness, policy formulation and implementation typically
have been very responsive to world market forces. The technocrats in the
cabinet generally have based their policies upon rational calculations of
Singapore's changing comparative advantage within the context of long-run
international economic trends. In those cases where market forces have been
disregarded or misinterpreted, policy has had to be revised. An example of
such an error is the recent reversal of the "high wage" policy implemented in
the late 1970s to promote the diversification of the economy into the
production of high technology exports.
Although decisiormaking is highly centralized, implementation is more
decentralized. It is carried out through a plethora of ministries, statutory
boards, and state-owned enterprises (SOEs) in accordance with the development
priorities of the cabinet. The most important ministry is the Finance
Ministry, which controls the Econanic Development Board (EDB), as well as the
MAS, and many other important statutory boards. Other important economic
ministries include the National Development Ministry and the Ministry of Trade
and Industry. Below the level of the ministries are the statutory boards,
through which the government directly regulates or participates in the
economy. The most important sttutory board is the EDB, currently headed by
P.Y. Hwang. The EDB, acting under the authority of the Minister of Finance,
serves as the overall agency for economic development. The MAS serves as
Singapore's de facto central bank and regulates all financial enterprises.
Singapore does not maintain a formal planning process.
The goverrment's direction of the economy extends beyond the statutory
boards through the large number of state corporations. Even Singapore's SOE's
operate largely on economic and business management criteria. Singapore's
SOEs are run through three investment holding companies. The oldest and best-
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known is Temasek Holdings, a Ministry of Finance organization for goverrment
investments in manufacturing and related service industries. Most of
Ternasek's investments were undertaken due to a lack of private sector
interest. IVND Hoblings has spawned companies that provide construction
materials and introduce new building technology. Sheng-Le Holding, the most
heavily capitalized, is run by the Defense Ministry and was originally
designed to provide support systems for the military. It has since became a
center for entrepreneurial ventures.
Despite decentralized implementation, the degree of discretion exercised
by the bureaucracy in implementing policy is low. Policy control is retained
at higher levels. This fact, combined with simple administrative procedures,
equal treatment of different products, a high degree of automaticity, an
insignificant incidence of abuse, and, of course, Singapore's extremely low
level of import protection, have ensured that the time and effort necessary to
effect international transactions has remained low -- an important fact given
Singapore's dependence on international trade for its economic livelihood.
Outlook
Singapore's economy will continue to experience some difficulty as the
goverrment moves the reverse previous policy errors and deal effectively with
the current challenges facing the trade sector (the expected slowdown in US
import growth, a relative decline in entrepot trade, increasing regional
competition in high-tech and information industries, and withdrawal of GSP
priviledges) and the financial sector (increasing competition and regulatory
difficulties). The actions currently being taken to deal with these problems
(e.g., the willingness to reassess the entire economic diversification
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strategy pursued since the late 1970s, the reversal of the government's high
wage policy, and the changes in financial regulation) should place the
economy, which remains basically sound, back on track.
The popular pressures being felt in Singapore for a more open political
system have had little effect on eonamic policymaking. Popular debate has
centered on social and political rather than econanic policies. Trade policy
will likely remain the preserve of a fairly limited number of highly trained
technocrats. In the long run, however, the increasing popular pressure for a
more political policy process will probably lead to greater popular influence
on policymaking -- even trade policymaking. However, the vital importance of
trade in Singapore's econany makes it highly unlikely that this will lead to a
major change in the main characteristics of trade policy.
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South Korea
The perceived interrelationship among legitimacy, security, and economic
development has been consistently used by successive South Korean leaders to
justify the maintenance of authoritarian government. Authoritarian rule has
reinforced the emphasis placed on hierarchy and deference in Korean
governmental affairs, and resulted in a highly centralized, bureaucratic
decisiortnaking process that allows little extra-bureaucratic input. Trade
policy is an especially important canponent of overall econanic policy and has
usually been made within the Blue House and a few government ministries,
subject to limited popular influence.
Econanic Policy
The South Korean econany has surprisingly few distortions, given the
prevalence of selective and general government intervention and the drive to
succeed whatever the obstacles. Imports are controlled more tightly than in
Taiwan. Sane sectors, including rice production, steel, motor vehicles and
sane types of machinery, are heavily protected. The government also
intervenes to pranote new industries and exports, not only by providing
inducements, but also through direct allocations of credit, establishment of
state enterprises, and political influence. A willingness to take risks
characterized Korea's attempt to ride through the impact of the 1973 oil shock
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by increasing bank borrowing rather than by cutting danestic expenditures.
While Korea has succeeded in sustaining rapid econanic growth, with the
exception of a sharp recession during 1980-81, it has also accumulated a large
foreign debt and its inflation rate has been much higher than Taiwan's (nearly
20 percent a year). Korea has been among those countries that have suffered
the largest negative external shocks since the early 1970s -- fran export
market slowdown, terms of trade declines, and high real interest rates.
The Political System
South Korea is a bureaucratic-authoritarian state in which authority is
based largely on official position and exercised according to bureaucratic
norms and procedures, although personal factions and support networks are
often critical in gaining office and holding it. There are limited democratic
components, including an increasingly viable legislature, but the system
remains fundamentally authoritarian.
The military is the backbone of the South Korean ruling structure.
Although military input into the administrative branch in terms of personnel
and influence has been fairly limited under the Chun regime, the military's
substantial representation in the Blue House and on Legislative Council staffs
puts it in control of the government. The Democratic Justice Party (DJP), the
legislative arm of the ruling coalition, is also controlled by the military.
For all of its capabilities in the field, the Korean military is not as
professional an organization as it might first appear. The military chain of
can-nand is often disregarded and factionalism is rampant. Both of these
characteristics result Fran the military's participation in politics. Its
divisions together with its lack of a coherent political ideology probably
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weaken the military's ability to hold on to power in the long-run.
Today the military is facing increasing opposition fran important
elements in Korean society, including the Church and university students.
Widespread dissatisfaction with the political restraints imposed by the
government has led to a new opposition political party -- the New Korea
Democratic Party (NKDP) -- gaining significant representation in the
Assembly. Liberalizing forces have had an important impact on the policy
process.
Policymaking
Korean political culture emphasizes hierarchy and deference to
authority. Loyalty to the leader, consensus, and harmony are extolled.
Reflecting these values, Korean leaders perceive their role to be one of
active camrand rather than coalition building. Decisiomnaking authority is
therefore highly centralized. The President and his followers -- usually
generals and higher civil servants -- constitute the ruling elite. They share
responsibility for day-to-day decisiorrmaking, but the President is the final
authority on all political matters, including trade policy.
Although there appears to be a slightly wider sharing of power among the
various government organs under Chun Doo Hwan than was true under former
President Park, the decisiormaking system has changed little. In fact, many
of Chun's advisors are carryovers fran the Park regime. The key ministries
continue to exercise considerable latitude in the development and
implementation of policy. As a result, despite the centralization of
authority, there is considerable flexibility in policymaking.
The primary ministries responsible for trade formulation are the Ministry
of Trade and Industry (MTI), the Ministry of Finance (NU), the Econanic
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Planning Board (EPB), the recently established International Econcmic Planning
Council (IEPC) associated with the EPB, and, ultimately, the Blue House and
the President. As in other countries, however, various ministries get
involved in trade policy when specific issues arise that are under their
jurisdiction.
In general, the Blue House both leads and pushes on economic policy. The
most influential economic advisor at the Blue House is Sakong IL, who has been
senior secretary for econanics in the Presidnetial Secretariat since 1983.
The American-educated Sakong is a skilled econanist and technocrat with
reformist policy views. The Blue House is reportedly carmitted to import
liberalization and a revitalized market system. It is an objective that is
not uniformly shared in the ministries or outside the government.
Within the government there is a division between the different
Ministries over trade policy. Typically, the EPB, the Ministry of Finance,
and KDI, a government think tank tied to the EPB, argue in favor of more
liberal trade policies. They are opposed by the Ministry of Trade and
Industry (MTI) and KIEL, a think-tank tied to MfI.
The EPB is the daninant institution in econanic policymaking in Korea.
Headed by Deputy Prime Minister Kim Mahn Je, it coordinates economic policy
throughout the government and chairs meetings at all administrative levels.
The fact that the head of the EPB is always concurrently Deputy Prime
Minister, together with the budgetary control the Board exercises over the
ministries, has provided the Board with the necessary institutional power to
carry out its wide-ranging responsibilities.
The Ministry of Finance, currently headed by Chong In Yong, is
responsible for both tax and monetary policies, as well as tariff policy. The
Ministry's Monetary Board also controls the central bank. The Ministry of
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Trade and Industry, headed by Kum Jin Ho, has responsibility for monitoring
developments in most industrial sectors and overall Korean trade patterns.
The Ministry also is principally responsible for managing quantitative trade
restrictions. In general, MI'I has opposed trade liberalization.
Besides the ministries and their research institutes, political parties
have recently assumed a role in trade policy formulation. The success of the
NKDP in the recent elections has provided the opposition with a real voice.
The NKDP has cane out strongly against market liberalization and has strongly
criticized US protectionism -- both popular issues in South Korea -- although
it has no coherent econanic policy. While it lacks the seats in the Assembly
necessary to push through legislation, the NKDP has the authority to call up
and question ministers on legislation. Econanic issues are frequently the
vehicle by which opposition groups voice dissatisfaction. The popular
pressure created by the NKDP's stance on the liberalization issue has recently
forced the DJP to reverse its stance and officially take a position against
liberalization.
Business groups also effect policy. The most important are the Korean
Chamber of Ccnmerce and Industry, the Federation of Korean Industries (FKI),
and the Korean Traders Association (KTA). The FKI mainly serves large-scale
businesses -- the chaebol. The President of the FKI is H uy ndai chairman Chung
Ju Yung. The leading chaebol include: Hyundai, Samsung (Lee Byung Chull) and
Daewoo (Kim Woo Choong). Leaders of big business affect policy through
personal ties to the political leadership and donations to the ruling party.
all businessmen depend upon the Korean Association of Small Business for
representation.
The procedures followed in short-term econanic management. and those
involved in the formulation of longer-term policy are different. Short-term
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policy formulation -- aggregate demand management, tax, exchange rate, and
monetary policy -- is usually limited to a relatively small number of
government officials. Long-term econanic policymaking -- formulation of five-
year plans -- involves many more participants. The main institution
responsible for development planning in Korea is the Econanic Planning Board
(EPB). The Ministries, the DJP, and non-governmental institutions such as
financial institutions, business associations, the press, major universities,
and research institutes all are involved.
Despite the formal consultation procedures employed in planning, the most
serious weakness of the Korean economic policymaking process is the lack of
true consensus-building procedures. Public debate and the number of
participants in the process are kept to a minimum. Rapid decisions are,
therefore, possible; but frequently the policy settled upon lacks much public
support, which, at times, forces policymakers to reconsider policy. Although
the Korean system is flexible enough to allow for the rapid reversal of policy
decisions, frequent reversals can undermine economic and political
stability.
Trade Policy Implemtation
In the early 1960s Korean industrialization strategy switched fran one of
import substitution to export-promotion. This transition occurred because:
(1) rapid growth through easy import substitution of nondurable goods and
their necessary intermediate goods had been exhausted; (2) the danestic market
was too small to support the growth of the industries supported by import
substitution especially with the large capital requirements necessary for such
ventures; (3) the natural resource endowment was too poor to adopt a
development strategy based on use of danestic resources; (4) there was a
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shortage of foreign exchange due primarily to a reduction in US foreign aid;
and (5) Korea's low-wage, well-motivated, and well-educated labor force
provided a comparative advantage in the production of labor-intensive goods
for export; and (6) the political leadership under Park Chung Hee was
determined to attain a high rate of growth.
Despite the policy shift, imports remained heavily controlled by the
government and tightly restricted fran 1968 to 1982. Manufactured goods and
consumer goods were most protected. The method of controlling imports changed
over time. Non-tariff barriers grew in significance relative to tariffs, and
by 1982 they were the most important method of restriction. The Chun regime
is now making a serious effort to liberalize imports to strengthen
competitiveness. The current economic plan, 1982-1986, calls for less direct
government intervention and more reliance on market forces. However, Koreans
are resisting liberalization and progress in this direction will probably be
slow.
Outlook
There are strong and growing pressures on the Korean government to more
fully democratize the political system and popular demands for constitutional
reform have reached new levels. In this environment it is unlikely that
econanic policy can be fully sheltered from popular pressures. Already import
liberalization has became a major political issue, despite having support from
the Blue House. In this new policy environment, presidential support no
longer guarantees success for a particular policy. Policymakers will have to
pay greater attention to building a consensus for their policy initiatives
prior to their announcement of them.
In a more open system, popular resistance to imports, created by years of
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goverment propaganda, will probably make trade liberalization more
difficult. Already, popular pressure has aggravated differences between the
EPB/MJR technocrats and those in the MI'I. Due to these tensions, the
International Econanic Policy Council, which handled trade negotiations and
favored relatively rapid liberalization, has been dissolved.
South Korean econanic progress will still depend on vigorous export
growth, and policy makers will continue to emphasize international econanic
cooperation. Seoul will also probably continue to use bilateral negotiations
with the United States to capitalize on what they view as a special
relationship between the two countries. Consequently, the outlook for limited
and gradual trade liberalization remains good. However, public efforts to
pressure Korea into trade liberalizaation could lead to further attacks on
pro-liberalization elements in the goverment.
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Taiwan
Because Taiwan is not politically recognized by many nations, econanic
success has been a cornerstone of the regime's legitimacy. At have the
government can point to the differences in living standards between Taiwan and
the mainland. Abroad, even with little recognition, Taiwan's econanic
strength makes canmercial relations with Taiwan desirable for most
countries. Because of the importance of econanic success, economic and trade
policy are dealt with at the highest levels.
Econanic Policy
Taiwan shares Singapore and Malaysia's conservative approach to fiscal
and monetary policy. The government is extremely sensitive to inflation,
partly because it considers runaway inflation on the mainland in the 1940s to
have been a major cause of the ccnmunist victory. Its inflation rate is
generally near or below global inflation. Taiwan has adjusted very fast to
external shocks -- for example, by tightening monetary policy in reaction to
both oil shocks, ?P and real wages fell sharply but briefly, a dangerous
accumulation of external debt was avoided, and the econany soon resumed a
strong upward trend. While avoiding major distortions and following
conservative monetary and fiscal policies, Taiwan tightly regulates imports to
avoid disruptive effects on danestic producers and to nurture pranising infant
industries. It also actively pranotes exports.
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The Political System
Although Taiwan's econany has developed rapidly since 1949, politicl
change has been much slower. For over fifty years Chiang Kai-shek or his son,
Chiang Ching-kuo, have dominated Nationalist politics through the Kuomintang
(KMT), Taiwan's dominant political party. The political climate under both
Chiangs has been predictable and constant, contributing significantly to the
growth process.
The KMT thoroughly daninates Taiwan's political life. All important
goverrrnent posts must be filled by men who, if not party members themselves,
are amenable to the party leadership. It is certain that whoever he is,
Chiang's successor will be a long-time and successful party loyalist.
Taiwan's political system has many rigidities and impediments to
change. This is largely due to three mutually supporting factors:
predaninance of the KMI', cronyism within the KMT old guard, and the long
tenures of KM1.' officials in the bureaucracy. Any moves towards liberalization
or devolution of authority will certainly came in small and slow steps.
However, there is recognizable, if modest, opposition to KMT dominance
and system regidities. An increasing number of native Taiwanese are slowly
gaining influence in the party and the goverrment. This trend has been met
with considerable resistance fran established KW leaders, and, in reality,
relatively few native Taiwanese hold top posts in either the party or the
government. Many of the KNIT old guard fear that the younger Taiwanese
politicians would take a more pragmatic position on the issue of improving
relations -- or at least economic relations -- with the PBC. Sane of the
biggest native Taiwanese gains have cane through Legislative Yuan elections.
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Policymaking
Nearly all trade policy questions are determined within the Executive
Yuan (branch). While the Legislative Yuan can voice approval or opposition to
Executive Yuan decisons, it has little authority and acts only as a rubber
stamp for legislation, all of which is drafted by the executvie branch or
senior Kff officials.
The policymaking process is authoritarian -- run by the president, part
of his cabinet, and a few KMr old guard cronies. However, while policymaking
is still relatively centralized, it has became increasingly canplex, with
inputs from an increasing number and variety of interests and groups. Most of
this decentralization is intragoverrmental -- extragoverrmental interests
remain largely excluded from active participation, although in economic and
trade matters the various ministries have increasingly sought advice from the
private sector during policy formulation.
Decentralization pressures have had the greatest influence in the
economic policy area. Intragoverrmental participation has extended to
technocrats and bureaucrats well below ministerial level in the main economic
ministries (Finance, Economic Affairs, and the Council for Economic Planning
and Development). Despite these trends, economic policymaking in Taiwan is
still relatively centralized among a handful of top-level bureaucrats. Among
these men, there is broad agreement on the direction that Taiwan's economy
should take. Essentially this is towards a more liberalized, privatized, and
higher-technology economy. Although there may be significant disagreement
over more detailed aspects of policy, these debates are not aired in public.
It should also be noted that top officials in Taiwan have broad governmental
experience, a result of frequent lateral shifts from one ministry or council
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to another. Many also share similar educational backgrounds. These and other
carmonalities contribute to what appears to be an uncommon amount of
camarderie and professional cooperation among Taiwan's top officials.
The major actors that shape Taiwanese trade policy include President
Chaing Ching-kuo and senior KVfl1 officials. The Executive Yuan, headed by
Premier Yu Kuo-kwa, who heads the Executive Yuan, is closely allied with the
old guard on economic policy, and has a go-slow attitude towards
liberalization. The Finance Ministry (MY), and Finance Minister Chien Chun,
are viewed as supportive of economic and tade liberalization. The Ministry of
Economic Affairs (11DEA), headed by Lee Ta-hai, is more protectionist than the
MX. The Board of Foreign Trade, headed by Vincent Siew, often serves as the
spokesman for the Executive Yuan on trade policy, while the Industrial
Development Bureau, headed by H.S. Yu, is viewed as more protectionist than
the Board of Foreign Trade. Also involved in trade policy are members of the
Standing Carmittee of the KMI' and a few Ministers without portfolio who have
particular interests in trade policies. The Council for Economic Planning and
Development has, under Chao Yao-ting, became a more active player, and has
tended to support more rapid liberalization. There are also a number of
private businessmen both Chinese and foreign who, because of the relative
importance of their businesses to Taiwan's economy, often have input on trade
matters.
Trade Policy Implementation
Taiwan's government operates as a classic Chinese bureaucracy, which
relies on technocrats only in policy-specific areas. Technocrats are slowly
being promoted to senior bureaucratic positions, and this is gradually
changing the character of bureaucratic decisiormaking, especially in economic
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and trade areas. However, the decisionmaking system remains quite opaque.
The government has a large role in econanic activity. Reflecting the
personalistic element of Taiwan's policymaking style, decisionmaking in the
bureaucracy has a large discretionary element. Laws and regulations are
written so generally that considerable administrative discretion is
possible. However, discretion is usually exercised at fairly high levels
within ministries.
In contrast to South Korea, Taiwan tends to use incentives rather than
direct controls to guide behavior. There is less direct intervention or
pranotion of specific projects than in South Korea. However, economic plans
are an important integrating element for broadly guiding policy and
constructing incentive programs.
Trade policy in Taiwan has been a function of broader econanic goals and
is usually linked with specific industrial policies. It was not until
Taiwan's econany began to meet basic domestic market needs, and the inflation
rate and the balance-of-payments were brought under control, that Taiwan
moved away from import substitution policies and embarded on the aggressive
export promotion strategy that continues to characterize tis foreign trade
policy. Today, while import barriers remain substantial, they are generally
less restrictive than in South Korea.
In the 1060's Taiwan began to aggressively promote exports. Actions
included the establishment of export processing zones and offering low
interest loans for exporters. Trade policy initiatives also included the
targeting of major industries, such as automobiles, for intensified growth.
Targeting entails a wide variety of policy instruments, including easy access
to low interest credit and tax rebates on imported inputs.
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Like many other LDCs, Taiwan has been subjected to growing restrictions
on some of its principal exports, notably textiles. It is unlikely, however,
that those restrictions have done much damage to Taiwan's economy. Taiwan was
able to upgrade its textile exports, raising their value for a given
quantitative limit. Nbre important, Taiwan began, before other LDCs, to
diversify away from textiles, into consumer electronics and other unrestricted
product areas.
Outlook
The K F remains strongly in control, but the succession is a concern.
Nevertheless, it is unlikely that the KIWI' will lose its firm grip. However,
its control could became more diffuse without the strong leadership and
prestige of Chiang. This could lead to further decentralization of power and
policymaking. Over the next five years, even allowing for considerable gains
by non-IM politicians, the Legislative Yuan will probably continue to lack
the authority to play a real role in policymaking. The Legislative Yuan,
however, is increasingly making its views felt through public discussion and
debate. The Executive Yuan is being forced to at least listen and respond to
a more diverse set of ideas and interests.
Technocratic influence over policymaking will continue to increase.
Technocrats are a constituency for liberalization, while their preference for
incentives over controls makes than susceptible to market-based economic
arguments. However, a widespread consensus among policymakers and the public
on trade policy assures little change. Trade policy will continue to follow
an irregular but persistent course of liberalization.
25X1
25X6
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SMELT: Trade Policy Fomulation in Selected Developing Countries:
Underlying Influences
031 /BrD/T~
14 July 66~
Distribution:
1 - Joseph Dennin, Qimnerce
1 - H.P. (bldfiald, Oam erce
1 - Henry Misiseo, Qsmarce
1 - Peter Field, Oomnereo
1 - Anger Severance, Qsaneree
1 - Eric Melby, State
1 - Ann Hollick, State
1 - William Barreda, Treasury
1 - Michael Driggs, 1bite House
I - Stephen Danzansky, NSC
1 - (leza Feketekuty, (FIR
1 - Jon Rosenbaum, QTR
1 - Peter Allgeier, (FIR
1 - Harvey Bale, (FIR
1 - SA/I C1
1 - ExDir
1 - WI
1 - DDl/PFS
1 - NIO/RXt4
1 - W/001, D/OGI
1 - CPAS/18S
6 - CPAs/DC/M
1 - 0131 /Ph/C?:
$ - OGI /E164/PG
1 - C./BM
1 - C/BM/T
3 - Bm/T
CMI17'NTIAL
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