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3. The japanese economy and south-east Asia: the examples of the asahan aluminium and Kawasaki Steel Projects

3.1 The japanese miracle
3.2 Eyed of the miracle?
3.3 A new vision of economic: development
3.4 The vision in action: asahan
3.5 Japan's overseas steel industry
3.6 Kawasaki in mindanao: the export of pollution
3.7 Conclusion: the comprehensive security system - What price?
References

Yoko Kitazawa

3.1 The japanese miracle

POST-WAR overseas investment by Japanese corporations began in the mid-1960s, when Japan experienced a major sustained burst of rapid economic growth. Japanese textile, electrical appliance, and food-processing industries began production in Taiwan, South Korea, Hong Kong, and other Asian countries. In most instances, the manufacturing was undertaken by factories subcontracted to produce parts and components for parent companies in Japan. In the synthetic textile and auto industries, Japanese companies supplied raw materials or auto parts to their subsidiaries in the host countries, where finished goods were produced and sold in local markets. These operations were financed by Japanese 'export-substitution' investment, designed to replace the export of finished goods from Japan by local production. In every case, Japanese direct investment in manufacturing in these industries and countries was designed to exploit cheap Asian labour.

Japanese overseas investment in the mid-1960s featured small amounts of capital committed per project and a concentration in the light industries. Consequently, these Japanese manufacturing operations competed with already-developed local industries, driving them out of business. In particular, since a large part of Japanese direct investment overseas was located in Asia (Table 3.1), the Japanese presence in the region was strongly resented and attacked. Popular opposition to the penetration of Japanese corporations culminated in 1974 in the massive anti-Japanese uprisings which broke out in Indonesia, Malaysia, the Philippines, and Thailand.

TABELE 3.1 Trends in Japan's Direct Overseas Investment (US$ miliion)

That same year, at the United Nations, the developing countries of the 'South' demanded that the industrialized countries of the 'North' establish a 'new international economic order'. Translation al corporations reacted to this request by creating a 'new international division of labor'. In response to these criticisms of Japan from Asian countries and the emerging international consensus in favour of a new economic order, Japanese corporations launched an attempt to develop a Japanese version of the new international division of labour. This effort evolved into the Pacific Basin Economic Cooperation concept

The rapid economic growth of the 1960s was driven by expansion of energy-consuming industries based on lavish use of cheap Middle East oil. The leaders of this spurt in growth were the raw materialprocessing industries. Iron ore, copper ore, bauxite, and other minerals, as well as lumber and petroleum, were imported in huge volumes and processed in Japan. From 1963 to 1973,

TABLE 3.2 - Annual Growth Rate of Consumption of Natural Resources, 1963-1972 (per cent)

Source: World Energy Supplies Metal Statistics, FAO Production Yearbook (various issues).

Japan consumed much more raw materials than the Western economies. In that period, the consumption of oil, copper, aluminium, and nickel in Japan increased more rapidly than in the United States and West Germany, growing at double the pace of GNP (Table 3.2).

3.2 Eyed of the miracle?

With the oil crisis in the 1 970s, these industries became an economic shackle. Direct and indirect oil consumption for raw material-processing industriesÄpetrochemicals, cement, nonferrous metals, steel, paper and pulp, and synthetic textilesÄwas much higher than that in assembly industries like machinery and automobiles (Figure 3.1). TheJapanese industries were hard hit by the increase in the price of raw materials in the 19705. Japan relied almost exclusively on oil as its source of energy, and almost all of it had to be imported. Moreover, close to 70 per cent of the crude oil imported by Japan is converted into heavy oil, and heavy oil is supplied mainly to steel and other primary processing industries and to electric power utilities.

The Movement Overseas

Until the oil price hike, the strong competitiveness of Japanese goods was due to the supply of cheap energy from overseas, and the rapid growth of the Japanese economy was due to the expansion of energy- and raw material-intensive industries. The slump that plagued these industries was, therefore, structural. In the mid-1970s, these vulnerable industries began to be scrapped. By ordinance, the Japanese government subsidized companies, which then closed down factories to cut their losses. Other administrative measures were taken to encourage factory closures. Corporations involved in the vulnerable industries actively relocated their factorles overseas.

Aluminium manufacture was the most typical raw materialprocessing and energy-consuming industry. The aluminium industry obtained too per cent of the bauxite it needed from overseas sources, and the aluminium-smelting process consumed considerable amounts of electricity. Japan produced 2 million tons of aluminium ingots in 1972, making it the world's second largest aluminium producer, second only to the United States. By 1977 Japan's aluminium output had fallen to 1.2 million tons. Output dropped further, to 660,000 tons in 1981 and to 300,000 tons in 1983. Accordingly, Japan's aluminium imports rocketed. Japan invested heavily in the Asahan project in Indonesia and in the Amazon project in Brazil to import aluminium produced by its joint ventures. Japanese corporations also provided funds to US and European multinational corporations operating in Australia, securing agreements to import their products on a stable basis. This investment-import formula is called the 'developmeut import' scheme.

FIGURE 3.1 Rate of Oil Consumption (Direct and Indirect) by Different Industrial Sectors

The petrochemical industry was also a leading raw material processing industry promoting overseas investment. Japanese corporations have been constructing petrochemical complexes in oilproducing or oil-processing countries such as Iran, Saudi Arabia, South Korea, and Singapore, where large-seale refineries have sufficient capacity to provide feedstock. (A Japanese petrochemical project in Iran has been suspended because of the Iranian revolution and the subsequent Iran-lraq war, which interrupted construction just before the complex was to be completed.) Ethylene, an intermediate product of the petrochemical process, is then shipped to Japan. However, the steel industry, although experiencing a recession, is an exception. Of the five steel majors, Kawasaki Steel Corporation, Japan's third largest steel company, is the only one favouring overseas investment. Kawasaki is eager for overseas investment because-with the exception of mills in Chiba and Mizushima-it does not have modern steel mills at home. Kawasaki transferred its primaryprocessing sintering plant to Mindanao in the Philippines and is running the Tubarao project in Brazil. Nippon Steel CorporationJapan's top steel producer, with a monopolistic hold on the industryhas so far not invested overseas. Even in its two major steel-mill construction projects in Kaohsiung, Taiwan, and Pohan, South Korea, Nippon Steel has invested only in engineering in the form of government-funded technical co-operation.

The steel industry has not invested heavily overseas for several reasons. First, steel production is virtually monopolized by five major companies: Nippon Steel, Nippon Kokan, Kawasaki Steel, Sumitomo Metal, and Kobe Steel. This makes it possible for monopoly prices on steel products to be maintained. Furthermore, since the monopoly of the five giants is not limited to production but extends to distribution involving wholesalers and export import trading firms, the big producers can limit the import of cheap steel products from abroad (especially from South Korea, Taiwan, and Brazil) despite high prices in Japan. Thus the steel industry differs from the aluminium and petrochemical industries. Although the import of crude steel products from these countriesÄ which was less than 100.000 tons per year until 1977-grew to 1.34 million tons in 1981, 1.89 million tons in 1982, and 2.4 million tons in 1983, the 1982 amount represents only 3.8 per cent of all crude steel products consumed that year.

Second, the demand for steel products is concentrated in major automobile, shipbuilding, and electrical companies. Both the suppliers of the five steel majors and the buyers, the majors themselves, are in a position where monopolistic prices can be maintained external to market mechanisms. Moreover, since in this supply-demand relationship the suppliers are much stronger, high prices can be imposed. Nippon Steel, which generally has the biggest share of the five majors, holds the chairmanship of Japan's two major economic organizations which influence general business and political decisions.

Thus the strong economic and political power of the steel industry is a factor enabling it to maintain monopolistic high prices and delay overseas investment, despite the effects of recession and the large gap between lowered production capacity and demand. Actual crude steel production was 99.95 million tons in 1982-below the 100 million ton level that has served the industry as a yardstick. Other reasons for the special situation of the steel industry are that the coke ratio used by Japan's steel industry is lower than that of other advanced industrial countries; its international competitive position is stronger because of its high productivity per worker; and since the first oil crisis of 1973, the industry has promoted energy conservation. Its energy dependency is also lower than oil-and electricity-dependent industries, such as aluminium and petrochemicals.

Emerging as the alternative leaders of industrial growth in the 1970s were the machinery and automobile industries. They were followed in the 1980s by new knowledge-and teehnology-intensive processing industries based on high technology. These industries filled the vacuum left by the relocation abroad of the primaryprocessing industries. Industrial trends from the 1960s to the 1980s indicate that the new processing and assembling industries are recording higher productivity than the raw material processing industries. It is in these industries that Japanese products outperform West German and US commodities on the world market.

Where have all the scrapped industries gone? Japanese capital has been freed, and industrial relocation to the Third World countries has been encouraged by the government with generous subsidies. In September 1974, the Industrial Structure Council, an advisory body to the Ministry of International Trade and Industry, presented a policy recommendation entitled 'A Long Term Vision of Industrial Structure', covering the period 1976-85. This recommendation officially approved the trend already initiated by private business.

3.3 A new vision of economic: development

The 'Vision' characterized the world following the oil crisis as plagued by inflation coupled with an economic slump, which, it said, has caused trade deficits in a series of advanced industrial countries and produced large external debts in developing countries. The Vision also referred to the 1974 declaration of a new international economic order as resource nationalism, a new trend among developing countries. From this it was concluded that Japan, dependent on foreign sources for raw materials (Table 3.2), could no longer dream of rapid economic growth and should therefore pursue long-term 'stable growth' instead. The Vision recalled that growth in the 1960s had been dependent on the expansion of equipment investment by private firms at home, but warned that this pattern of growth would not work in the future. Instead, future growth would rely on the expansion of personal consumption and government spending, which would help private firms invest in new equipment. In other words, the government and the Japanese people were being asked to spend more to ensure the expansion of private business.

A second countermeasure was also recommended; that is, the development of sophisticated high-technology industries and energy conservation. The steel, non-ferrous metals, petrochemicals, and paper and pulp industries were urged to relocate overseas; machinery, final processing, assembling, and other knowledge- and technologyintensive industries were encouraged to stay in the country. The Vision specifically recommended that the former industries relocate to Asian and other Third World countries with abundant cheap labour and rich natural resources. It was proposed that these industries should undertake primary processing of local raw materials to produce, for example, pig iron, aluminium ingots, ethylene, and plywood and chips. Intermediary products would either be imported to Japan for final processing or sold by Japanese firms on the world market. This strategy was called 'offshore production aimed at establishment of a new division of labor with resources-rich countries'. The policy recommended a rapid increase in Japan's overseas investments, increasing sevenfold from US$12,666 million in 1974 to US$80,700 million in 1985.

Because the primary processing of raw materials usually involves heavy pollution, the 'new international division of labor' means, first and foremost, the export of pollution. Most of the governments of the host countries in South-East Asia welcome foreign capital and do not tolerate open opposition to foreign investment. Thus criticism of the behaviour of foreign firms by the local press is prevented. This is an ideal environment for offending companies. Moreover, most of these countries are ruled by authoritarian governments that repress nongovernment labour movements. When the world market stagnates, Japanese companies operating in these countries can dismiss workers far more easily than would be possible in Japan. In this sence relocation also means the export of recession.

But the main aim of the international division of labour is to enable Japan to control the supply of the resources in the host countries. Iron ore, bauxite, lumber, and crude oil have been imported for some time (Table 3.3). The strategy of moving the industrial processing of these raw materials to the resource producing countries will forestall and circumvent the formation of cartel-like arrangements by raw-material producers. If Japan has at its disposal raw materials produced by Japanese factories in the rcsource-supplying countries, it can simply dump these products on the world market, driving down the price and eventually destroying any cartel arrangement.

Furthermore, the 'offshore-production' schemes are not integrated production systems. Final products are not made locallyÄ raw materials are processed only into intermediary goods, and the intermediary products are brought to Japan. To make such 'development-import' projects possible, host countries must spend enormous amounts for the building of necessary infrastructure. They have also to provide cheap labour, cheap land for factories, and cheap electric power. Primary processing generates much less value-added than final processing, which is done in Japan. Thus, the development-import scheme has little to do with genuine industrialization in the host countries. The host countries could consider nationalizing the Japanese plants at some point, but nationalization would have little meaning since the plants produce only intermediary goods, which in order to be useful and marketable must be made into final products in Japan.

TABLE 3.3 Japan's Imports of Primary Resources (US$ million)

The strategy of overseas relocation entails the vertical, pyramidal integration of the entire production process, from the provision of raw materials and primary processing to final processing, with Japan at the top of the pyramid. The division of labour recommended in the Vision is the diametric opposite of the new international economic order being demanded by the developing countries. It is thus a counterrevolutionary new international economic order.

By relocating stagnant industries to the Third World, Japan has been able to maintain the strong competitive/less of its products in the markets of other advanced industrial countries, and in the process, Japan's overseas investment grew 3.6 times between 1974 and 1981. Japan's overseas investments have a remarkable feature: Japan invests heavily in the developing countries, especially Asia, whereas the United States and Western Europe invest overwhelmingly in other advanced industrial countries. This preference for the Asian region became more pronounced as industrial relocation proceeded. The targets of Japanese private investment coincide with the recipients of Japanese official development aid (ODA).

A similar tendency is found in trade patterns. For some years after the Second World War, the Japanese government maintained that since Japan was a resource-poor country, it should live on trade. Under the banner of trade-oriented nation-building, export promotion became the priority task. The consequence has been that Japan imports almost 100 per cent of its raw materials and exports only industrial products. In the 19805, energy-related raw materials accounted for about 50 per cent of Japan's total imports, and the products of assembly and high-technology industries accounted for 65.2 per cent of its exports.

This pattern is distinct from that of the United States and Europe. For example, the United States is a major exporter of grain and an importer of industrial products. In Western Europe, European Economic Community (EEC) trade is high, and EEC members both import and export large amounts of industrial goods. Taking each of the Western European countries in turn, dependence on trade is much higher than in Japan, but only because they trade with each other within the EEC. This comparison shows that the trade relations between the United States and Western Europe are more or less complementary, whereas the Japanese trade relationship is totally one-sided. Japan increases without limit the exports of high-valueadded products of assembling and high-technology industries to all countries. This is why trade conflicts are bound to occur and why they cannot be mitigated.

The real contradictions in Japan's trade are with other Asian countries. There are many newly industrializing countries (NlCs) in East and South-East Asia. South Korea, Taiwan, Singapore, and E long Kong are the primary NlCs; Thailand, the Philippines, and Malaysia are the secondary NlCs. In the 1980s, the share of light industrial products in their exports has invariably increased as they have begun to export these products to advanced industrial countries. However, Japan does not buy their products in significant amounts and indeed recently has drastically reduced the import of industrial products from these countries. Consequently, Japan's share in their exports has become smaller than that of the United States and Europe. The serious economic crisis besetting the Philippines stems partly from this type of trade policy, in addition to the special vulnerability of the NlCs to world recession.

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