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Tropical hardwood exports and economic development Roberts, David Hugh 1976

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TROPICAL HARDWOOD EXPORTS AND ECONOMIC DEVELOPMENT by DAVID HUGH ROBERTS B.Sc. (Hons.), University of Wales, 1974 A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF FORESTRY in the Faculty of Forestry We accept this thesis as conforming to the required standard THE "UNIVERSITY OF BRITISH COLUMBIA April,1976 @ David Hugh Roberts, 1976 In present ing t h i s t h e s i s in p a r t i a l f u l f i l m e n t o f the requirements f o r an advanced degree at the U n i v e r s i t y of B r i t i s h Columbia, I agree that the L i b r a r y sha l l make i t f r e e l y a v a i l a b l e f o r reference and study . I f u r t h e r agree t h a t permission f o r e x t e n s i v e copying o f t h i s t h e s i s f o r s c h o l a r l y purposes may be granted by the Head o f my Department o r by h is r e p r e s e n t a t i v e s . I t is understood that copying o r p u b l i c a t i o n o f t h i s t h e s i s f o r f i n a n c i a l gain sha l l not be al lowed without my w r i t t e n permiss ion . Department o f 1 The U n i v e r s i t y o f B r i t i s h Columbia Vancouver 8, Canada Date .-> - T ^ ? 7 — * r Three countries in Southeast Asia, Indonesia, Malaysia and the Philippines were chosen and the capacity of the forest sector to contribute to the process of indigenous growth and development was analysed. Direct action in the rural sector is vital to help alleviate poverty and unemployment in the Third World. Although there is a lack of a general, substantiated strategy for the rural sector, small scale, labour intensive industrialization would be a useful part of such a strategy. Export substitution has been successful in several Asian countries." Any role that the forest sector could have in promoting rural development would depend upon the capacityfof the forest industries to increase local retained income, local value added and employment opportunities. The nature of their production functions would be •'highly significant. Economies of scale and integration were recognised as common features. The extent to which industrial policy can influence labour intensive industrialization and technological innovation seemed crucial. Conventional views of the role of the forest industries in the development process were judged to be partial. Examination of the supply and demand relationship of the forest sector in each of the three countries showed that the rapid expansion of international trade in forest products and the growing proportion of tropical hardwood exports from Southeast Asian producers reflected the dominance of log exports from the countries studied. The importance of foreign exchange earnings as a proportion of each country's export bill was the prime consideration. In Indonesia, the forest sector's fortunes were found to be determined by the role of foreign investment. The picture was slightly different in Malaysia.In Peninsular Malaysia the forest sector has been integrated with agriculture through land-clearing schemes1 for agricultural development. The growth of processed forest products was noted. In Sabah, indigenisation measures have affected the control of the resource with the state government playing an active part. The mixed fortunes of the Philip-pines which has lost prominence as a log exporter and;is suffering-competition from the in-transit processors, reflected that, most of the growth in processed forest products was closely reliant upon import dependent industrialization policies. Log exports are especially dominant in the remoter areas of each country and heavy investment in infrastructure would be needed to establish forest industries. Measures taken to reduce or ban log exports have been applied to ensure a supply of logs to the existing industries in Peninsular Malaysia and the Philippines. The analysis of the forest sector in these countries used a framework which emphasised the importance of employment, local income and value added. Adopting the criteria of past national development objectives the sector has made a substantial contribution : the main criterion being that of foreign exchange earnings. It was contended that the expressed aims of achieving employment and social justice could not be met by a furtherance of the present pattern of resource exploitation or by the development of the forest sector for large scale,- export oriented operations. Instead, a subordination of this role was recommended and policies which would involve the multi-faceted nature of rural development should recognise the potential of the existing forest .industries. Policies ought to favour local entrepreneurs,local skills and indigenous forest industries; The country specific nature of the forest sector's contribution to economic development may only be realised where the needs of the rural sector taken to be paramount. TABLE OF CONTENTS ABSTRACT . i TABLE OF CONTENTS iv LIST OF TABLES . vii LIST OF ILLUSTRATIONS ix LIST OF MAPS x LIST OF APPENDICES xi ACKNOWLEDGMENT x i i i INTRODUCTION 1 CHAPTER ONE - THE IMPORTANCE OF RURAL DEVELOPMENT . . • 4 1.1 INTRODUCTION . . . . . . 4 1.2 LABOUR INTENSIVE MANUFACTURED EXPORTS . . 7 1.3 SMALL SCALE INDUSTRIES . . . . 11 1.4 CONCLUSION . 13 CHAPTER TWO - FOREST INDUSTRIES AND RURAL DEVELOPMENT . 15 2.1 INTRODUCTION 15 2.2 FOREST INDUSTRIES AND ECONOMIC DEVELOPMENT . 16 2.2.1 Logging 20 2.2.2 Sawmilling 21 2.2.3 Wood-based Panels 22 2.2.4 Pulp and Paper 22 2.2.5 Common Features . . . . . . 23 2.3 CONCLUSION 24 CHAPTER THREE - THE FOREST SECTOR IN INDONESIA, MALAYSIA  AND THE PHILIPPINES . . . 28 3.1 FOREST RESOURCES OF SOUTHEAST ASIA . . 28 3.1.1 Hardwood Exports . . . . . . 31 3.1.2 Japan's Forest Products Imports . . . 32 3.1.3 Future Developments . . . . . 38 3.1.4 Tariff Protection 41 3.2 THE FOREST RESOURCE OF INDONESIA . . . 43 3.2.1 Forest Development . . . . . 43 3.2.2 Forest Industries . . . . . . 46 3.2.3 Hardwood Exports . . . . . . 47 3.3 THE FOREST RESOURCE OF MALAYSIA  . . . 50 3.3.1 Peninsular Malaysia . . . . . 53 3.3.1.1 Forest Development . . . . . 53 3.3.1.2 Forest Industries . . . . . 54 3.3.1.3 Hardwood Exports . . . . . 56 3.3.2 Sabah 60 3.3.2.1 Forest Development . . . . . 60 3.3.2.2 Forest Industries . . . . . 61 3.3.2.3 Hardwood Exports 62 3.3.3 Sarawak . . . . . . . . 65 3.3.3.1 Forest Development . . . . . 65 3.3.3.2 Hardwood Exports . . . . . 66 3.4 THE FOREST RESOURCE OF THE PHILIPPINES . 68 3.4.1 Forest Development . . . . . 71 3.4.2 Forest Industries . . . . . . 73 3.4.3 Hardwood Exports . . . . . . 74 CHAPTER FOUR - TROPICAL HARD WOOD EXPORTS AND ECONOMIC DEVELOPMENT . . . . 77 4.1 THE INDONESIAN ECONOMY 77 4.1.1 Foreign Exchange Earnings . . . . 79 4.1.2 Regional Income . . . . . . 84 4.1.3 Foreign Investment . . . . . 85 4.1.4 Employment . . . . . . . 90 4.1.5 Discussion . . . . . . . 95 4.2 THE MALAYSIAN  ECONOMY . . . . . 98 4.2.1 Foreign Exchange Earnings . . . . 101 4.2.2 Regional Income . . . . . . 104 4.2.3 Foreign Investment . . . . . 105 4.2.4 Employment . . . . . . . 107 4.2.5 Discussion . . . . . . . 110 4.3 THE PHILIPPINE ECONOMY 112 4.3.1 Foreign Exchange Earnings . . . . 114 4.3.2 Regional Income . . . . . . 118 4.3.3 Foreign Investment . . . . • 118 4.3.4 Employment . . . . . . . 121 4.3.5 Discussion . . . . . . . 124 127 133 141 CHAPTER FIVE - CONCLUSIONS BIBLIOGRAPHY APPENDICES . . TABLE Page 1 Insular Southeast Asia: Estimated Land Use 1970 . 29 2 Forest Products Exports from Indonesia, Malaysia and the Philippines, 1962-1974 . . . . 33 3 Changes of Southsea Log Imports 1963-1974 . . 37 4 Indonesia: Distribution of Forest Land by Region . 45 5 Indonesia: Primary Mechanical Wood-Using Industries 47 6 Indonesia: Tropical Hardwood Log Exports 1962-1974. 48 7 Malaysia:. Tropical Hardwood Log Exports 1962-1974 . 57 8 Peninsular Malaysia: Tropical Hardwood Log Exports 1962-1974 58 9 Sabah: Tropical Hardwood Log Exports 1962-1974 . 63 10 Sarawak: Tropical Hardwood Log Exports 1962-1974 . 67 11 Philippines: Public Forest under Authorized Exploitation in 1970 . . . . . . 6 9 12 Philippines: Tropical Hardwood Log Exports 1962-1974 75 13 Indonesia: Tropical Hardwoods share of the Export Bill 1962-1974 81 14 Indonesia: Foreign Investment Projects Approved, 1962-1974 87 TABLE Page 15 Indonesia: Growth in Manufacturing Employment and Value-added 1961-1971 . . . . 92 16 Distribution of Skilled Labour by Type of Wood Processing in Various Asian Countries . . . 93 17 Indonesia: Structure of Small Scale Industry, 1972. 94 18 Indonesia: Investment Applications, 1968-1972 . 94 19 Malaysia: Exports of "Pioneer Industries" (Peninsular Malaysia only) . . . . . . 99 20 Malaysia: Tropical Hardwoods Share of the Export Bill 1962-1974 . . . . . . 102 21 Peninsular Malaysia: Employment in Forestry and Primary Forest Industries in 1970 . . . . 108 22 Philippines: Tropical Hardwoods share of the Export Bill, 1962-1974 . . . . . . 115 23 Philippines: Capital-Labour Ratios and Distribution of Direct Foreign Investment in Manufacturing, 1970 119 24 Philippines: Necessary Investment if Proposed Log Export Ban Occurs . . . . . . . 120 25 Philippines: Major Exports (Excluding Labour Intensive Exports) Ranked According to Export Earnings and Generated Employment . . . . 123 FIGURE 1 World Trade in Tropical Hardwood Logs by Volume, 1962-1973 2 Changes of FOB Prices of Southsea Logs . ' . 3 Peninsular Malaysia: Alternative Employment Opportunities in the Forest Industries, 1970-1990 MAP Page 1 Southeast Asia . . . . . . . 27 2 Indonesia . . . . . . . . 44 3 Malaysia . . . . . . . . . 51 4 Peninsular Malaysia . . . . . . 52 5 Philippines . . . . . . . . 70 APPENDIX 1 Table 1 World Trade in Forest Products, 1962-1973 . . . . . . 141 Table 2 The Southeast Asian Log Trade, 1962-1974 142 Table 3 Forest Products Exports from the In-Transit Processing Nations, 1962-1973 . 143 Table 4 Plywood Exports from Selected Countries in Asia, 1962-1973 . . . . . 1 4 4 Table 5 Selected Countries' Log Exports by Destination, 1972-1973 . . . . • 145 Table 6 Selected Countries' Plywood Exports: by Destination, 1972-1973 . . . 146 Table 7 Selected Countries Sawnwood Exports: by Destination, 1972-1973 . . . 147. APPENDIX 2 Table 1 Table 2 Table 3 Trade and Trade Prospects in. Tropical Broad Leaved Woods . . . . . Projected Demand for Tropical Hardwood, by Major Areas, up to 1985 Estimated Growth of Timber Exports from the Philippines, Malaysia, and Indonesia, 1968 and 1990 148 149 150 APPENDIX 3 Table 1 Tariffs . . . . . . . APPENDIX 4 Table 1 Table 2 Southsea Log Prices, 1974-1975 Plywood and Log Prices, 1963-1974 152 APPENDIX 4 Table 3 Table 4 Indonesia: Log Export Check Prices 1970-1974 Estimated Typical Costs of Logs for the Philippines and Indonesia . 154 155 APPENDIX 5 Table Table 1 Indonesia: The Recent Export Picture 2 Indonesia: Timber Exports by Regional Origin, 1970 Table 3 Indonesia: Timber Exports by Regional Origin, 1972 . . . . . . Table 4 Indonesia: Structure of Forest Taxes Table 5 Indonesia: Employment by Major Economic Sector, 1971 . . . . . . Table 6 Malaysia: The Recent Export Picture, 1972-1974 Table 7 Peninsular Malaysia: Processed Forest Products Exports 1962-1974 Table 8 Malaysia: Industrial Production: Survey of Manufacturing Industries, 1970 Table 9 Philippines: The Recent Export Picture, 1972-1974 Table 10 Philippines: Plywood and Veneer Table 11 Philippines: Sawnwood Exports, 1962-1974. 156 157 158 159 160 161. 162 163 164 165 166 ACKNOWLEDGMENT I would like to thank a number of people for their assistance and advice throughout my studies . In particular , Dr. D.Haley , my supervisor for his help and guidance within the Faculty of Forestry and for his hospitality outside of:-it. Dr. R.W.Wellwood  aided my search for material and his comments on the draft of this thesis greatly improved its organization and style of expression. The constructive criticism and advice of Dr. G.B.Hainsworth, Department of Economics, was most valuable in helping me to organize my thoughts to some degree. Neil Byron and Ephraim Enabor,-valued colleagues and friends, withstood a variety of questions and contributed to this thesis in no small way as a result . Financial assistance from the Faculty of Forestry, University of British Columbia, made it possible for me to undertake research and is gratefully acknowledged. "The teaching of Buddha, on the other hand, enjoins a reverent and non-violent attitude not only to all sentient beings but also, with great emphasis, to trees. Every follower of Buddha ought to plant a tree every few years and look after it until it is safely established, and the Buddhist economist can demonstrate without difficulty that the universal observation of this rule would result in a high rate of genuine economic development, independent of foreign aid. Much of the economic decay of Southeast Asia (as of many other parts of the world) is undoubtedly due to a heedless and shameful neglect of trees." (Schumacher,1974) "If we look back over two decades of effort in the forestry sector in the underdeveloped countries, then we must admit, if we are honest with ourselves, that although there has been some growth, it has been much less than we had hoped; and the contribution of forestry towards improving the lot of the common people has been negligible so far. It is a black and discouraging picture." (Westoby,1975) INTRODUCTION In the Third World, the forest resource can be a valuable rural asset, and an important form of land-use and its utilization is thus inextricably involved with the common features of underdevelopment; rural poverty and unemployment. Therefore it is not surprising that the capacity of the forest sector to aid the process of economic development has stimulated a certain amount of interest. With the renewed attention now being centred on the prospects of the agricultural sector to alleviate the poverty of much of the rural population, efforts to explain this potential need to be directed at individual countries and specific areas. The objective of this study is to analyze the contribution that the forest sector has to offer the process of indigenous economic growth and development. For this purpose three countries in Southeast Asia were chosen. Indonesia, Malaysia and the Philippines currently supply 80% of the world's tropical hardwood requirements; each country possesses a sizable forest resource. The relevance of the forest sector lies in its capacity to serve the needs of national development objectives and to this end its ability to serve a rural industrial base which could be a vehicle for employment creation and income generation is significant. How this is shaped and influenced by the prevailing condi-tions or underlying nature of the development process will clearly determine the extent to which it can be realised. Forest resource exploitation for the Southsea log trade is the dominant pattern of resource utilisation in Indonesia, Malaysia and the Philippines. It is the nature of this trade which will determine any propulsive impact that the forest sector has to offer to the regional economy. Whilst the volume of processed exports from these countries has increased, especially, in Malaysia and the Philippines, the growth of domestic forest industries has occurred in the log importing countries" rather than in the log producing nations. The type of industrialization that has taken place can be identified with large-scale, export-oriented operations. Given the importance of foreign exchange earnings and the high opportunity cost of log exports, the potential role of rural forest industries would be an important consideration in a rural development strategy. In the absence of such a clearly articulated and comprehensive strategy,' emphasis in this thesis will be placed on the creation of employment opportunities, the generation of local, retained income and value-added, as a framework within which to analyse this potential function. Thus, attention is focussed upon the constraints and issues of this form of industrial growth and on the capacity it may have to further national development objectives. This thesis is divided into five'chapters. Chapter one stresses the importance of rural development to the economy: In"chapter two the role of the forest industries, their technical and locational characteris-tics are examined, with special reference to primary processing in sawnwood. and plywood production. The following chapter illustrates the past trends and future prospects of international trade in tropical hardwoods, in the context of Indonesia, Malaysia and the Philippines. The main feature's of the forest sector in each country are illustrated. The next chapter analyses the contribution which tropical hardwood exports have made to the development process in the three countries and depicts the main constraints and issues surrounding the domestic processing of log exports. The summary and conclusion are presented in the final chapter. CHAPTER ONE THE IMPORTANCE OF RURAL DEVELOPMENT 1.1 INTRODUCTION The pervasive increase of poverty and unemployment throughout the Third World leads one to sharply question conventional and current assumptions concerning economic development. In recent years it has been recognised that modern industrial centres have failed to generate income and employment throughout the poor countries' economies. But acceptance of the implication that continuing reliance on conventional growth strategies will not necessarily spread benefits beyond the modern sector has only latterly reached the forefront of discussion. By far the greatest mass of the poor live in the rural sector and modern industrial expansion has often been held responsible, not only for rural neglect and stagnation, but also for "forcing large parts of the economy into decline rather than modernization and" growth". (Myrdal, 1968) Disenchantment with orthodox industrial expansion as a primum mobile of economic development, associated with a number of prominent authors including Baran (1957), Fei and Ranis (1964), and Lewis (1955), has gained increasing momentum.  However, the concern is not directed specifically at industrialization as a development strategy; rather, it is focussed on the uneven or dualistic nature inherent in capitalist development or the 'trickle down' approach. Unemployment is one aspect of prevailing growth strategies which finds hostile critics. Industrial employment" has had hardly any effect on reducing unemployment levels at'all, because employment creation lags well behind production increases of' up'to '7or 8% at levels similar to population growth rates of 3% (Singer, 1971). Open unemployment, now affects 15-25% of the labour force in most LDCs, especially the 15-24 age group, with even larger groups suffering from underemployment (I.L.O., 1970). . Therefore, percentage gains in employment are not1 only less than the corresponding rates of growth in the urban work force but they also fall short of the absolute number of jobs required (Friedman and Sullivan, 1974). While unemployment in its various forms is readily accepted as a major area requiring attention, the structural causes of the phenomenon should first be dealt with. It is contended here that modern industrial centres, embodying large scale, capital intensive processing techniques are, in the main, the basis to'the unemployment' crisis. Lacking capital goods industries of their own, LDCs are forced to import these'inputs from advanced countries. This "technological dependence" means that imported technology is frequently "inappropriate", being developed under conditions very different from those in which it was applied (Merhav, 1969). Employment opportunities are often restricted to avsmall, highly-paid workforce, operating a plant requiring'a certain technologically acceptable minimum  scale, often established for a small, fragmented domestic market. The limited prospects for expansion and employment elasticities in the modern manufacturing sector also indicate that"this sector'is unlikely to accommodate the projected increase in the labour force in these countries (Chenery et al., 1974). This conclusion spotlights the necessity of finding alternative strategies especially for rural development. For it is due to the low priority accorded to this sector that the urban and rural 'informal' sectors' employment difficulties are multiplied. Instead of looking at growth and development with a crude agriculture-versus-industry model, emphasis should now lie with rural strategies which could directly involve the rural majority. Whereas the agricultural sector has in the past generally been seen as a service sector for the urban•centres, it has to be viewed in a new light as the sector on which to build a broader-based approach to development. It is now'generally accepted that urban employment and poverty will not be substantially reduced by current industrial strategies. Renewed reliance on the rural sector, therefore, appears to be the only feasible alternative. Once the necessity for urgent action in the rural sector is appreciated, the first question which arises is 'the need for a viable and proven strategy for agriculture. Lack of'any such strategy however, should temper any hasty belief in 'instant" solutions. One component, aimed at building a broader base for development, would be the establish-ment of rural industries. The demand is for rapid, cheap, and numerous opportunities in the rural sector, employing methods of production which are simple and directly accessible to the mass of the unskilled workforce. They should concentrate on using local materials with minimal demands on capital (Staley and Morse, 1965). Indeed this has been argued to be the only answer to "the twin evils of mass unemployment "and mass migration into towns1-1 (Schumacher, 1971).. 1.2 LABOUR INTENSIVE MANUFACTURED EXPORTS The concept of the open dual economy conjures up a country which is specialized in production, exports a small range of primary products, and imports a wide range of consumer goods and almost all its capital goods (Hicks and MacNicoll, 1971). The main exogenous stimulus to growth is thus external trade and without it, countries in this category could hardly exist in their present form and the prospects for further growth would be dim. Southeast Asian countries can be classified in this fashion: as economies with modern sectors which were enabled to grow rapidly because of a rising ability to import' capital goods but display little evidence of progress in reducing dependence on these imports, with Singapore as a possible exception. The foreign exchange necessary to finance capital goods imports is generated by the traditional export trade and by the resource;intensive extractive industries while manufactured goods play a relatively minor role. As the modern manufacturing sector cannot grow without additional capital goods imports, it is reliant upon the agricultural'and extractive sectors of the economy. Many non-extractive, traditional exports appear to face limited prospects as major sources of additional foreign exchange earnings. Export dependence on the extractive sector is heavy, therefore, because it provides the major source of output which is transformable into capital goods through trade. The importance of the export base in regional development theory has been examined by many writers, and'North '(1955) has argued that it has frequently been the critical factor in a region's rate of growth. Not only has the export base been responsible for raising the level of local income, and therefore the extent of secondary and service activities, but it also has the effect of widening the economic base of the region as it develops. Most significantly, this approach highlights the importance of the export industry's production function. The production function can be viewed in terms of whether it is labour intensive and increases local income with limited skill transfer, or whether a more capital intensive production"function will aid in training labour but will have little impact"upon local incomes and employment. This is a key feature because it illustrates the relationship of the production function to the domestic economy as:the*main determinant of the impact of trade on economic development. In this way, the role of the export' industry in a region of an economy can be analysed for the extent to' which its production function can evolve in a dynamic sense: continually pushing the production possibility frontier further outwards. The influence on'the region would be assessed by the effect of this external trade on regional economic growth as measured by i) increasing local retained income ii) increasing local value added iii) increasing employment opportunities. The interdependence of the two rural sectors, traditional agriculture and small scale industry, suggests that efforts to attain full employment will accelerate: the growth of income, but the reverse has not been experienced in Southeast Asia, (Oshima, 1971). In the vent for surplus model, discussed above, where resources are finite and the production function static, the limits to growth from the extractive sector soon become evident. The transition to modern economic growth in this type of economy can occur if the country moves from import substitution to export substitution, or from land or raw material intensive to a labour intensive manufacturing phase. However, the "switching point" is defined in terms of the timeworn role of agriculture whose potential is continually seen to be limited, in the sense that the land surplus will only remain an outlet for areas such as Malaysia and the outer islands of Indonesia. The possibility of creating a shift in comparative advantage to the manufacture of labour intensive goods for export, on the other hand, finds substantial support in the experience of South Korea and Taiwan. In the latter country, export earnings grew by 20% per annum in the 19601s with non-traditional products increasing their share from 5-69% of the export bill. For South Korea, where the original trade orientation was much less, there was a rapid move towards export substitution with the labour intensive sector supplying 77% of all exports by 1968 (Fei and Ranis, 1971). Prior to this, exports of labour intensive manufactures had been growing fast, about 13% annually, but they remained a small proportion of total exports (Lary, 1968). The high income elasticity, in world markets for manufactures (and services) relative to food and other primary products points to increasing resources in industry. However, the vital part of this argument hinges upon the. alleged contribution which trade has to offer the development process. Kravis1 review of the contribution of trade to economic progress concludes that, "...what the recent experience of the LDC's shows is not a failure of export demand but that internal problems of supply, inherent in underdevelopment, particularly when biased against trade by policy measures, cannot be automatically resolved by extra-ordinary favourable demand conditions"" (Kravis, 1970). This suggests that supply conditions have not received sufficient consideration in the literature relating international trade to economic growth. Trade, instead of being the 'engine of growth' is perhaps more realistically regarded as a 'handmaiden of growth' (Krayiis' term). The problems facing LDC's wishing to generate foreign exchange earnings (rather than simply to save them) can be seen as much the result of maladaptation of their industrial structures as they are the outcome of adversities presented by limited markets in the developed world. While revenues from the export of traditional goods can at best be expanded only slowly, there seem to be serious difficulties in developing new exports. Export industries in Southeast Asia face the same problems of inelastic foreign demand, resource exhaustion and the difficulties of raising agricultural production (Kojima et aL, 1971). The notable export substitution performance of selected Asian countries could be argued to indicate that external demand need not be as limiting a factor as some would argue. Efforts to promote export substitution are likely to find greater difficulties so long as existing priorities in favour of capital intensive industrialization remain. In turn, labour intensive industrialization for export substitution will face a much harder task in improving employment, local value added, and local retained income, quite aside from its prospects for maximization of these objectives. As Fei and Ranis (1971) comment, the labour intensive sector will have to be pushed even harder "to drag" the rest of the economy with it and they cite the growing use of export subsidies in South Korea as an example. 1.3 SMALL SCALE INDUSTRIES There is a growing awareness of the need for an integrated approach, to rural development involving technical and institutional reforms to promote fuller utilization of productive capacity, and thus to mobilise surplus manpower. Emphasis has been laid on measures to expand full-time and part-time, non-agricultural, employment opportunities. Examples are the establishment of rural industrial centres, rural infrastructure extensions and improvement, and a wider focus on rural employment as a whole. The causes of present non-utilization or under-utilization of productive capacity, and means for making fuller and more intensive use of it, in all sectors, also bear investigation. They possibly offer immediate prospects for increasing output and employment with little or no additional fixed capital investment. Existing small scale industrial sectors, whether measured by employment or output, are important in Asian countries. In the 1960's the small industries of the Philippines, Taiwan, Singapore and South Korea, defined as firms which engaged fewer than 50 people, employed approximately575%}oft&e people who worked in the private, non-agricultural sector. More surprisingly, Japan's small firms with less than 10 employees encompass 28% of total employment and half the working population is employed in' operations involving less than 50 people. In the Philippines, about 25% of the small industries are located in metropolitan areas and the largest proportion are found in small towns (Oshima, 1970). When the size of the small industry sector is considered, it ought to present scope for using the structure to fuller advantage. The idea of "progressive" technologies for poor countries was well-expressed by Marsden (1970). To be progressive, technological innovation has to be widely accessible to the rural majority; has to be an improvement on existing methods and has to be dynamic. The provisions for this technology have to be found in indigenous sources, using local materials, local capital funds and local levels of skill. These points are reinforced by those who argue that until poor countries have control over the pace and direction of technological change, industrial growth with significant labour absorption will be illusory (Schumacher, 1971, Sutcliffe, 1971). Lockwood (1954) concluded that the single most important lesson to be drawn from the Japanese development experience for the rest of Asia is the process of successive simple improvements in technology, "...which does not depart radically from tradition or require large units of new investment". The initiation of a domestic capital goods industry to facilitate this sort of technological innovation is not without difficulties (Pack and Todaro, 1969). The current dominance of the more developed countries in the Third World's industrial centres is indisputable, but the relevant question here is: to what extent has this militated against on-going, labour intensive technological innovation? Whether capital intensity is a function of technical and institutional considerations (such as internal economies, indivisibilities, and international company strategy drawn from the industrial nations), or whether it is in part the outcome of fiscal incentives (such as tax write-offs, profit repatriation, royalties and transfer payments) is a question of central importance. It has been argued, for example, that labour intensive technological innovation and, "... small scale production units are discouraged by special incentives to capital which make labour intensive production methods unprofitable; the very incentives which distort market prices in favour of the large, capital intensive industries discriminate against small scale production. It is not surprising that there is little adaptation and innovation." (Hughes, 1973). At the same time, technological determinism has been exaggerated, in that it ignores several aspects of industrial operations which do permit choice, namely, scale, product and process (Morawetz, 1974, Stewart, 1972). Some sectors, like some products, are labour intensive per se (Hughes, 1973, Kojima ejt aL, 1971, Morawetz, 1974). Agriculture, construction and forestry offer flexibility and scope for technical innovation. Within industry, goods for mass consumption and some processing of raw materials for export instead of luxury goods- and import substitution have greater labour absorption capacity. Location near the resource base would diversify the industrial base, geographically and economically. 1.4 CONCLUSION Empbyment is closely related to income distribution and poverty. Small scale, rural industries are a suitable vehicle to help ameliorate each of them. Rural industrialization, particularly for export substitu-tion, is an attractive option. The open dual economy is heavily dependent upon the extractive sector. Processing of raw materials for export would aid the priority objective of most independent societies, which is to build up the manufacturing sector. A move away from import dependent, import substitution, in addition to diversifying the industrial base, has more promising long-term growth prospects through the generation of foreign exchange, employment, income, value added and linkage effects. The regional share of income accruing from the export sector is obviously the most important factor in measuring the sector1s total developmental impact. Income distribution within the region is also an essential element when assessing the legacy of the traditional export sector. Current priorities which discriminate to the advantage of capital intensive operations, located in urban centres, should recognise the scope which does exist within the small industry sector. A low level technology, such as that suggested by Marsden, could have greater back-ward linkage potential, both to the resource base and to a basic capital goods industry. It is these very priorities, which are liable to be the main influences on the direction of technological innovation in the poor countries. Although there is no general strategy for the rural sector, the contribution of rural industries can be assessed for their predicted effects on local income, local value added and employment. Policies which explicitly encourage the option of developing the 'informal' sector as a component of a rural development strategy appear more relevant to these objectives than existing priorities which have had little positive effect on unemployment and rural poverty. CHAPTER TWO FOREST INDUSTRIES AND.RURAL DEVELOPMENT 2.1 INTRODUCTION In Indonesia, Malaysia and the Philippines, exploitation of forest resources plays an important role in the economy. Foreign exchange earnings from an export trade dominated by logs are very substantial. Me&suafefssare currently being implemented to increase the proportion of processed forest products exports. To assess the role of the forest industries in these countries it is necessary to look briefly at the nature of the contribution of the forest sector to economic development, with special reference to SoutheasttAsia: 2.2 FOREST INDUSTRIES AND ECONOMIC DEVELOPMENT Forestry and forest industries may offer particular advantages to planners in that governments should be able to influence the pace and direction of forest development. Some of the domestic demand for wood products arises in the public sector and in Southeast Asia the resource is also often publicly owned. The customary method of assessing the forest resource and its relationship with the rest of the economy is to stress the sector's special features. For example, Sartorius and Henle (1968) suggest that, "...the existence of adequate forest resources means a weighty potential asset that has the further advantage of being naturally renewable their forest economies should therefore be given intersectoral priority in the rural development plan "." Much, if not all, of the literature on this subject owes a debt to Westoby's comprehensive study which analysed in some depth the characteristics of the forest industries and their connection with the forest resource and the international market for forest products. Westoby (1962) continually emphasised the scope for forestry in an integrated development plan. The forest industries' production functions were studied while the variation and flexibility amongst and between them at various stages were high-lighted. The wider and more integrated the sector becomes the easier it becomes to use different techniques at different levels of production. Production functions of poor countries and industrialised nations were contrasted and it was admitted that not enough thought had yetfbeen given to devising technologies more suitable to the differing conditions in LDC's. Logging appeared to be one forest operation particularly well geared to the developi'ngccountrybbyvvir.tueoofi'ites&seasonal nature" in that its labour requirements can usually be made complementary those of agriculture. Westoby suggested that production processes involving the manufacture of a versatile number of products suited for use in construc-tion, joinery, veneer, furniture, wood-based panel boards, pulp and paper products and general utility have a high degree of interdependence with other sectors. Each forest industry was followed in turn through the various stages of sophistication from logging to pulp and paper production and their special features illustrated. The capacity for integration amongst these industries was stressed. While it was recognised that backward linkages are generally weak, the propulsive nature of the forest industries was advocated as a major factor which "is liable to induce spontaneous investment in other branches of production" because of its strong forward linkages with other sectors. This case was reinforced by the further use of Hirschman's concept that a high degree of linkage endows a sector with favourable conditions for investment. At the same time investment opportunities are widened in the economy through multiplier effectsffr.omiinterTLirfdus.try demands. However Westoby cautioned against wholesale acceptance of the theory that untapped forest resources have intrinsic development potential and warned that this expectation had been the source of much disappointment (Westoby, 1962). Several years later a more critical appraisal found the function of the forest sector to be more significant within a regional perspective (Nautiyal, 1967). Nautiyal contended that there was probably ho one propulsive sector of unique importance in the less developed economy and suggested instead that forestry may have certain propulsive effects from a regional viewpoint which he summarised as: i) it can utilize rural resources easily ii) its main product, wood, is versatile iii) it is a supplier of raw material for paper which is a very important item in human investments in a developing country iv) it can save foreign exchange by import substitution and export promotion in many areas v) in some countries by providing cheap fuel it can release cow dung for use as manure in agriculture vi) it can play a substantial role in regional development where large forest areas exist. ,. There may be elements of truth in all these statements but the actual results of these claims have not been substantiated. The first two points are clear in that it would be an advantage to mobilise the resource in this way. Pulp and paper imports are by far the largest component of poor countries' forest products imports, closely aligned with educational expenditure and growth of G.N. P.. HfewfeVe'rgh ifet ijbs c&eSa*' that" import substitution for these products would prove to be any more successful than other ventures, and indeed Westoby found no evidence to support the case for import substitution in this industry. The foreign exchange constraint (which is often made the basis of many export programs) remains valid, as does the largest single purpose for which wood is used fuel demand. Nautiyal's final point constitutes the central part of this study. By implication, the rural or regional impact of the forest sector is of greater relevance than previous claims for its national impetus. This view was further elaborated by Steenberg (1972), who concluded that there were four different aspects of the forest sector which made it well-suited for aiding rural development. These were, i) the wide range of scales of operation that are possible in the forest industries ii) the varying intensities of capital and labour inputs that are required iii) the different degrees of skills that are demanded iv) the possibility of growth by stages in this sector These points summarize the generally held conception of the promising role of the forest sector in a poor country's economic development. General reviews of the subject are also to be found in the respective dissertations of Nautiyal (1967) and Warfvinge (1970). •.:'The assumptions underlying the claim that the forest industries have a 'propulsive' function rest most heavily on Hirschman's concept of backward and forward linkages and upon the factors which ensure that the positive effects of linkages are realised. Primary industries, by definition, have few backward linkages within an economy, especially where their capital goods requirements have to be largely imported. Their impetus is felt mostly through forward linkages leading into other industrial sectors and final demand. Forward linkages in the forest industries would be expected to lie chiefly in construction and general utility which are among the most important consumers of their products. Where the domestic market is small and fragmented the impact of these industries on other sectors will be accordingly reduced. The direct effects on employment and local income, plus any spillover effects, remain the chief benefits of this sort of industrial development. As a result, inter-industry dependence,  ((&cg,. with other manufacturing), for which the forest industries have been rated highly, is of lesser in importance. It seems likely that the most important consideration from the 'propulsive' viewpoint is, instead, the intra-industry dependence. One common theme running throughout the literature on the role of the forest industries in promoting economic development may be termed the 'growth by stages theory'. Operating or evolving from a simple processing base such as sawmilling or veneer production, it is suggested that there is a strong association providing an impetus for the growth of other forest industries. This theory finds its origins in Westoby (1962) where the 'propulsive' impact of the forest industries was defined by their strong forward linkages with other sectors and by their own intra-industry dependence. However, the growth by stages theory focusses on the surplus generated from one forest industry being channelled into another form of wood processing. This is commonly initiated from sawmilling "upwards" into pulp and., paper production (Nelson, 1972, Stacey, 1972). But, the reverse sequence of events can occur and may even be more favourable (Smith, 1972). It is useful to look separately at the main forest industries to see if the theory finds support. These can be distinguished as logging, sawmilling, wood-based panel boards (including veneer), and pulp and paper. 2.2.1 Logging The basic forest industry is, of course, logging. In Southeast Asia it is the largest of all the forest industries and exhibits the greatest employment absorption and variety of methods, as well as being seasonal and geographically diversified. Non-mechanized operations such as .eiephants; in Thailand and Burma, and the bandjir kap river loggers of Indonesia contrast with highly mechanized harvesting operations in parts of Kalimantan, the Philippines and Sabah. Very little is known about 3 the industry, yet in 1973 46 million m (73%) out of a total of 64 million 3 m were exported in roundwood form. One implication of the growing shortage of currently sought after species in the more accessible areas is that higher harvesting and transport costs are incurred for the remaining forest operations (Segerstrom, 1969). Tautologically, it is because of the fact that very few of the large number of species present in the forest are currently utilised that logging and transport costs make up such a high proportion of f.o.b. prices (Appendix 14/)).. As a corollary to this, processing near the forest base would enable many presently non-commercial species to be used for the domestic market or for export. Corestock for export and the domestic construction market are examples of this. It is often argued that only by pursuing integrated utilization of the raw material, and by increasing the number of species that can be successfully harvested, will major development in domestic forest industries occur (Richardson, 1970). Equally, it is notable that forest industries in Southeast Asia have so far been based on a relatively homogenous resource of high economic desirability. 2.2.2 Sawmilling The world's sawmilling industry uses more than half the total labour force employed, and approximately two-thirds of the raw material consumed by the primary forest industries (F.A.O., 1967, Plumptre, 1974). Page (1972) examined the tropical hardwood sawmilling industry in several countries and his data show that sawmills, in contrast to pulp and paper mills, do not achieve very significant economies of scale, especially after a certain minimum  scale of operations is reached. Page defines sawmilling to be most suitable for LDCss because of its technological flexibility, whereby it can be adapted to different local conditions. The industry is also envisaged as the basis for further forest industries development, particularly into large scale, integrated operations. Sawmilling offers the greatest choice of all the primary forest industries, for location, scale and product (Duerr, 1960). Malaysia and Singapore possess the largest sawnwood industries, for export markets, in Southeast Asia. 2.2.3 Wood-Eased Panels Production of wood-based panels in the region under study is dominated by plywood (and veneer) production. Plywood production is similar to sawmilling in that it uses a relatively expensive raw material with comparatively little value added. On the other hand, reconstituted wood-based panels embody a higher degree of value added and may require significant inputs such as resin and water. (This latter requirement is decreasing due to technological change). The plywood industry has stringent requirements for high quality logs. Economies of scale have become more pronounced and, in consequence, the need for larger volumes of suitable logs has increased (F.A.O., 1966). Plywood production, in our countries, is concentrated in Peninsular Malaysia and the Philippines. In transit processing nations such as Singapore, South Korea, Taiwan and Hong Kong have larger plywood mills, based on logs from the three log exporting nations. 2.2.4 Pulp and Paper The pulp and paper industry is the most capital intensive of the primary forest industries. It accounts for 75% of the total capital employed in these industries as compared with 17% for sawmilling (F.A.O., 1967). The relative factor requirements clearly differ widely; they can be presented as a spectrum, with capital intensive pulp and paper falling at one end and labour intensive sawmilling at the other. The remaining board industries fall in the middle. Economies of scale in pulp and paper production are substantial. Technical constraints such as the need for power and water are important influences on the siting of pulp and paper operations. Added to market size these have limited the number of countries in which the pulp and paper industry is internationally competitive. Smith (1972) contended that labour intensive industries inhibit continuing economic growth and submitted that, "capital intensive industries such as pulp and paper result in high productivity from labour and generate high spin-off of external economies which stimulate an expanding economy". He is convinced of the suitability of capital intensive industries and believes all efforts should be concentrated on the sophisticated techniques of highly mechanized processing industries in the LDC's. The three countries in this study produce less than 1% of the Asia and Far East region's pulp and paper total production (Stacey, 1972). 2.2.5 Common Features Although it is convenient to separate the main forest industries, their intra-dependence is the main topic under discussion. n tr-Na-turaijLyc^ integrated wood utilization has improved the feasibility of certain types of wood processing. The use of sawmill and plywood mill residues by the pulp and wood-based panel industries is one example. This, in turn, has drawn the industries closer together and along with transportation economies and other external economies has made them less dependent on their distance from the resource base. Wood is bulky, which not only makes it difficult to transport but also means its value relative to weight is often low. Moreover most of the forest industries have low material conversion rates. Consequently, simple location theory dictates that wood processing, wherever possible should be sited near the source of the raw material. In the industrialised countries the'.'.trend towards integrated forest companies is well advanced; with many sawmills and plywood mills supplying pulp mills and particle board mills with the residues from their conversion processes. The expansion of these industries, in fact, has been increasingly affected by their ability to find commercial outlets for the large amount of processing residues. However, in the LDC's these industries, if present at all, are only likely to be able to absorb a small amount of large, export-oriented sawmilling or veneer and plywood production residues (Pringle, 1969). Some large multinational forest companies are able to capture these economies of scale through several specific advantages. They can employ joint services and processing at certain stages, integrated utilization of residues, vertical product integration by combining several stages in conversion and finally, horizontal integration by producing a number of varieties of a basic product. The varying economies of scale associated with these forms of integration where several manufacturing processes may be located together and those economies obtained from marketing arrangements (where cooperation is reached through joint sales and the pooling of overseas shipments), are significant in any discussion of technological alternatives. 2.3. CONCLUSION The growth by stages theory can be examined, supported and criticised on a number of grounds. Firstly, it is implied that there is a causal relationship between one forest industry's expansion and that of another. The first industry's growth will provide the impetus for growth in the second / industry. As far as the forest industries in the LDCs are concerned their predominant behaviour has been for foreign companies to "cream" the resource to obtain a handful of traditionally approved species. Countries formerly established in their colonies, expatriate firms> , whose task was to extract the raw material but reserve its conversion to / industries in MDC's. Often where domestic processing occurs to a significant degree, it is being undertaken by international forest companies operating as extensions of the MDCSa economies. Dominance of the log export trade in Malaysia, Indonesia and the Philippines leads intuitively to the idea that the gains from the forest industries have been absorbed by .importing countries possessing the necessary conditions to facilitate the growth of these industries. A cursory look at Japan, Singapore, South Korea, Taiwan and Western Europe drives home this pronounced phenomenon. This growth, of course, supports the theory under discussion. What is open to question, however, is whether this growth resulted from access to a cheap source of raw material (that frequently can be a high proportion of total costs in the forest industries) or whether (and this seems more likely), in the face of strong world markets, these log importing nations had the capital, organizational skills, distribution channels and industrial policies to secure it? In the context of the forest industries and rural industrializa-tion, growth and development prospects will hinge strongly on the nature of these industries' production functions. The global trend of forest industries development is towards large scale, high-capacity, integrated complexes that become more labour saving. In the past, this industrial growth occurred in log importing nations, while in Southeast Asia foreign capital has been centred on the log export industry. Economies of scale and integration seem to have more than outweighed the extra cost of log transportation (as opposed to local processing) and the policies of in-transit processors naturally favoured the re-export of export products. For industries like .sawmilling^and:plywood production such technical constraints and economies appear to have less influence. Establishing forest industries in LDCs<~ would not necessarily require such large investments and organizational expertise as are needed for the larger operations. These operations require expensive, imported inputs, a higher proportion of skilled labour, and efficient distribution channels to realise their potential high-capacity. The difficulty in assessing the suitability of a particular industrial structure has to be balanced against the regional development objectives of increasing local income, local value added and employment. If the growth by stages theory is to be criticised then it must be for its mechanistic interpretation of industrial growth which is abstracted from local conditions. There seems to be a trade-off between the pressures of technological determinism - where the forest industries tend "inevitably" to become large integrated complexes because of technological forces and economies of scale - and the desirability of promoting a certain form of industrialization more suited to regional development objectives. It is too simplistic to see industrial develop-ment simply as a trade-off between technology and industrial policy, but until the latter can influence the former,, the prospects for vigorous change in industrial structure and the small industry sector would seem to be rather limited. CHAPTER THREE THE FOREST SECTOR IN INDONESIA, MALAYSIA  AND THE PHILIPPINES 3.1 FOREST RESOURCES OF SOUTHEAST ASIA The forest resources of Southeast Asia constitute a major form of land use in the region (Table 1). This area under study is classified as Insular Southeast Asia, (Map 1) and includes Brunei, Indonesia, Malaysia, the Philippines and Singapore (F.A.O., 1975a). In the absence of comprehensive inventories of the resource, with the exception of Peninsular Malaysia, the total area, standing volume and species composition are at best intelligent estimates. Different sources suggest wide variation in operable forest area and the estimates are based largely upon small samples or from concessions in individual countries. This is further complicated by the reduction of the forest land base through the widespread practice of shifting cultivation. One Table 1. Insular Southeast Asia: Estimated Land Use 1970 Area of Closed Agricultural Other Total Land Forest Land Land Area Million Per Capita Million Million Per Capita Ha Ha % Ha Ha Ha Ha Brunei 0.4 3.3 66.6 0.1 0.1 0.6 5.0 Indonesia 85 0.7 44.6 15.4 90 190.4 1.6 Malaysia 23.6 2.2 71.4 3.6 5.9 33.1 3.0 - Sabah 6.0 9.1 78.9 0.2 1.4 7.6 11.5 - Sarawak 9.2 9.4 74.2 0.7 2.5 12.4 12.6 - P.Malaysia 8.4 0.9 64.1 2.7 2.0 13.1 1.4 Philippines 11.7 0.3 39.4 12.2 5.8 29.7 0.8 Singapore 0 0 0 0 0.1 0.1 0.1 Total 120.7 0.7 47.6 31.3 253.9 253.9 1.6 Source: F.A.O . 1975a. estimate has suggested that in Indonesia alone, around two million hectare per year are cleared by slash and burn for purposes of temporary cultivation known as ladang. In spite of imprecision in the assessment of the forest resources, they have several important features or advantages in comparison to the other main tropical forest resources in West Africa and Latin America. From a commercial viewpoint, the forest resources of Insular Southeast Asia possess considerable potential and actual economic return. These forest areas consist, firstly, of homogenous stands of timber of desirable quality in large volumes per hectare, readily accessible by rivers, located fairly near ports and geographically well situated for the major markets of Japan and the U.S.A.. The dominant species in this region are medium and light weight dipterocarps of the genera Shorea, Parashorea and Pentacme which are known in the trade, collectively as lauan, meranti, Philippine mahogany or seraya depending upon the exporting country.^" The genera Dipterocarpus and Hopea, a commonly heavier and darker group of timbers, are next in commercial importance. These genera make up a large percentage of the commercial forests in Indonesia (especially Kalimantan), Malaysia (especially Sabah and Sarawak) and the Philippines (especially Mindanao). To a considerable extent this militates in their favour, in contrast to the growing shortage of currently commercial species from the traditional suppliers of West • Africa, and the enormous but very heterogenous stands of the Amazonian forests. The importance of the so-called Wallace Line cannot be over-stressed in this context. The dipterocarp area of Southeast Asia which includes Indochina, Malaysia, the Philippines and all of Indonesia except the Malukus, Lesser Sanva and Irian Jaya, is the preponderant -source of supply for tropical hardwood exports. Species composition exhibits a good deal of heterogeneity in Irian Jaya and Papua New Guinea which in turn reduces their resources' potential in relation to the rest of Insular Southeast Asia. Logging operations are more attractive where there is a greater proportion of commercially valuable species present and this, combined with earlier comments on accessibility, encourages a pattern of international trade based on a few species of historic 1 .... ^ i ~ ~ , . ; . Whilst tfrri Wrmiriology is £SFire'c'!t "it II', in faSfc', "more realistic to "u'se commercial' riainfes1 afsb£hese^ frequently1 cover'-mbre 'than one species at a time. importance. Thus, the simplicity in marketing these few timbers has been a vital factor in the spectacular increase in tropical hardwood exports from Southeast Asia in the past fifteen years, which contrasts sharply with the limited or poor performance of most primary products. 3.1.1 Hardwood Exports International trade in forest products has expanded rapidly during the past fifteen years. Between 1962 and31-973: global trade in all forest products grew, in current prices, by 11% per annum, from $6.1 2 billion to $21.7 billion. The performance of LDCs as a whole was an improvement on this with earnings increasing by 16.5% per year, although this growth rate was exaggerated by the commodity price boom of 1973, and for 1962-1972 registered 12% per year. This expansion was particularly notable in the chief tropical hardwood supply area of Southeast Asia. If the Far East region, less Japan, is considered as a whole, earnings from timber exports experienced an annual growth of 20% for the 1962-1973 period. At the same time Asia's share in the world log trade grew from 49% to 66% and Asian producing nations supplied 80% of the world's tropical hardwood log requirements by 1973. Furthermore, the region's share of the total world trade in forest products increased to 13% from 6% in the same period. (Appendix 1). In 1960 the Southsea log trade absorbed 18% of the region's total hardwood log production; by 1973 this had increased to 42% while log production itself grew at 6.4% per annum. Therefore log exports have grown a good deal faster than the export of processed forest products. This is only partially true when it is noted that the Asian region 'includes the in-transit processors, Singapore, South Korea and Taiwan as 2 Unless otherwise indicated all values are U.S. $, expressed in current prices. well as the log exporting nations of Malaysia, the Philippines and Indonesia. There is a marked differentiation in the composition of individual countries' forest products exports. Malaysia and the Philippines became sizable log exporters during the 1950's and are now taking measures to increase processing and export their logs in sawnwood and plywood form. In the late 1960's, or more precisely 1967, Indonesia entered the world log market in a significant fashion and is now the largest log exporter, regionally and globally. Each of these countries finds its major market in Japan, especially for log exports. They also supply the in-transit processors with raw material for their export "industries. (Appendix 1). At the same time, international trade in tropical hardwoods has tended to include a larger volume of processed wood products, such as veneer, plywood and lumber. This trend has emerged in Asia and is most apparent in the predominantly plywood producing countries, Taiwan and South Korea; in addition, Singapore is a growing lumber and veneer p r o d u c e r . r. :eas of devel^- ' region havThuse.thehmaindareasfofndevelopment  in the region have been the growth of Indonesia, surpassing Malaysia and the Philippines as Japan's chief hardwood supplier; the expansion of plywood exports concentrated in the re-exporting countries, and the general move towards increasing domestic processing in each of the producer countries. The past decade has seen marked rises in foreign exchange earnings for each of the exporting nations involved (Table 2). Figure 2 illustrates the corres-ponding growth in volume of log exports. 3.1.2 Japan's Forest Products Imports As the largest market for the three main hardwood exporters of Southeast Asia, Japan deserves special attention. Between 1965-1970 this Table 2. Forest Products. Exports From Indonesia,-Malaysia and the Philippines; 1962-74 - • - • • Indonesia Malaysia $ millions The Philippines 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1.4 1.9 2.1 3.0 4.1 8 . 1 30.1 49.0 111.5 196.4 254.3 633.2 750.0 67.7 89.9 99.6 117.8 156.8 196.2 218.8 269.1 302.6 342.3 382.6 642.0 598.0 123.9 165.0 153.4 164.9 173.9 187.5 270.0 287.0 290.5 271.2 240.3 405.6 264.2 Source: F.E.E.R. 1975a, F.A.O. 1975d, and Philippines, Bureau of Forest Development, 1975 •jJ3vs i.fJiOivantf 1575. market grew by 7.8% per year arising out of a change in the pattern of wood use in construction, during a period of rapid economic growth. The Japanese government added a further stimulant by the initiation of a housing development programme which contributed to the 11.7% growth of demand between 1966-1967. Domestic supply sources failed to:-meet the demand and grew by only 1.7% during that year. Thus the import volume of Figure 1. World Trade in Tropical Hardwood Logs, by Volume, 1962- 1973 forest products grew by 32% with some 6 million m of this increase being logs (World Wood, 1967). Japanese timber consumption in the second half of this decade showed an impressive growth rate of 7.8% per-year, part of which can again be attributed to a move away from traditional building practices. The importance of this end-use was underlined during the mild recession of 1971 and in the resurgence of demand in the following year. Housing construction, amid the economic recovery, accounted for the greater part of timber consumption and brought about the unprecedented price levels for forest products which were reinforced by the similar construc-tion boom in the United States and the growing wood fibre deficit in 3 Western Europe. Total demand in 1972 reached 106.5 million m , up 5% on the previous year,-with logs accounting for 60%, pulpwood 25%, plywood 13% and others 2% of this upswing. Domestic consumption of ply-22 wood reached 1,470 million square metres ;j"(iru ) and imports from South Korea and Taiwan increased by 90% causing the demand for peeler logs to grow by 7.3%. In the same year domestic supplies of timber actually declined by 4.4% in comparison to 1971. The proportion of imported timber stood at 59% of total supply as compared to 54% in 1967 (World Wood, 1974). Consequently the import volumes grew by 13% reaching a 3 3 total of 62.56 million m . Of this, logs comprised 47.7 million m and sawnwood some 15%, indicating a marked increase. A breakdown by origin of the log imports shows that 44% was derived from the Southsea log trade, 15% came from Siberia, 31% from North America and 4% from New Zealand. Log imports from the Philippines comprised the major portion of tropical hardwood imports until 1969, now superceded by the rapidly gained importance of Indonesia, the largest supplier of all to Japan. -- 36 -The primary cause of all the problems encountered by the South-east Asian producing countries in the period since the 1973 commodity price boom, was the heavy drop in demand from Japan. For the first time since the Second World War Japan1s demand for logs fell in 1974, to the extent of 12.8%. The country's log imports, which account for over half the world trade in tropical hardwoods, fell even more sharply in the latter part of 1974, with an estimated drop of 30% in her imports from Southeast Asia (F.A.O., 1975b). High prices in the early months of that year tend to obscure the decline in export unit values felt in later months (Appendix 3). The aggregate future demand for wood fibre, based on the average 3 of 1969-1971, was expected to grow to 134 million m by 1981 at an annual increase of 2.8%. Recent reassessment of this projection has raised the 3 figure, and estimates now suggest a total demand of 147.3 million m by 1991. This will have to be met largely by overseas suppliers: it appears unlikely that the gradual growth of domestic supply will reach 50 million 3 3 m by 1981 and 59 million m by 1991. As a result there will be a widening gap between aggregate demand and domestic supply and, in fact, the latter declined by 7.8% in 1974 (World Wood, 1974). Logs produced from Japanese domestic sources account for only about one-third of the logs sawn in Japanese sawmills. Since 1965 imports have supplied increasing quantities to offset the shortfall resulting from the diversion of domestic logs to the pulp industry and the increased demand for Lumber. (Table 3). Apart from the expected future shortage due to producer country legislation phasing out log exports from Southeast Asia, other log suppliers do not offer promising prospects for the next ten years. It is foreseen that U.S. log exports will not rise above the level of 1973 and may decline; Russian log exports are expected to grow in line Table 3. Changes of Southsea Log Imports 1963-1974. (1,000 m3) 1974 1973 1972 1971 1970 1969 1968 1963 GRAND TOTAL 24,288 26,625 21,725 20,257 20,237 17,190 12,752 8,125 Loading Area: Philippines^ 4,072 5,877 5,136 5,701 7,542 7,855 7,062 5,443 Malaysia 106 8,605 6,874 5,750 6,019 6,153 4,698 2,552 Sabah 6,993 7,298 5,409 4,130 3,960 4,042 2,989 2,296 Sarawak 950 1,213 1,377 1,472 1,872 1,911 1,606 371 Indonesia 12,167 11,158 8,977 8,181 6,090 2,814 787 8 ^Kalimantan n.a 8,124 6,158 5,916 4,931 2,294 489 8 Others n.a. 3,034 2,819 2,265 1,159 520 298 -Solomons n.a. 237 232 222 202 195 146 -P. New Guinea n.a. 461 383 405 339 104 2 55 S. Vietnam n.a. 219 123 - - - - -Others n.a. 68 - - 45 69 56 59 Source: J.L.J. Sou.rcG • J 7 j" . , 1975b. ' lJ7 5b -with recent years at 10%, but other exporting areas, namely Alaska and New Zealand, are unlikely to expand their present commitments.  Therefore the supply of logs in the future will not keep pace with the forecasted increase in demand (Angus et aL, 1975). The issue as to whether the present building regulations will be adapted to accommodate modern techniques, and the growth of a world trade in wood chips, will influence the composition of final demand. Lumber, of which 20% is currently made up of hardwood, is expected to become a main item in future import bills, although this has been a fairly static component until the trends of the past few years (J.L.J., 1975a). In conclusion, the Japanese market will be a vital one for future Southeast Asian suppliers, particularly if some measure of trade liberalization occurs. Characterised by a growing domestic imbalance of supply, increasing domestic consumption, and well-established as a large consumer of hardwoods, Japan's influence will remain paramount. It will have to rely on the international market for considerable quantities of Jits future supplies. Recent developments in the producer nations of Southeast Asia arising from efforts to increase domestic processing indicate that the previous pattern of forest products is likely to change in the near future. 3.1.3 Future Developments This section will deal briefly with the most important features of external demand likely to affect the Asian exporters. Past trends are commonly taken as suitable indicators for future projections where trade"is under examination. However in the case of the future demand for tropical hardwoods caution should be exercised. As Towler comments, in a review of several forecasts, there is a need to be aware, firstly, of inaccuracies in available data which can be greater than future changes in demand and, secondly, conclusions arrived at from f an analysis of factors which affect consumption may well be exposed to exogenous influences which most certainly have limited the validity of, say, predictions made in 1971 for 1975. Towler concludes that, "it may well be true to say that the only thing we can say about long range predictions is that they have all been wrong", (Towler,- 1974). With this J in mind it is not possible to deny the picture drawn up of a growing scarcity in temperate regions of suitable raw material for plywood manufac-turing, and the ever expanding wood supply deficit in general, in some parts of the developed world (Pringle, 1973). The reason to suppose that future supply requirements'will continue to increase,^especially in the form of tropical hardwoods is that rapid growth in demand in the industrialised countries has outstripped their domestic supply capacity which is also facing continual demands to meet non-wood fibre requirements and environmental pressures. For Southeast Asia, the U.S.A. and Japan, which provide the largest markets and receive most of their tropical hardwood imports from Indonesia, Malaysia, the Philippines, South Korea and Taiwan, will be the future markets of greatest significance. Projec-tions made in 1974 suggest the situation shown below. The Future Hardwood Log Supply and Demand Capacity of Indonesia, Malaysia and the Philippines. Export Capacity of Indonesia, the Philippines and Malaysia: Projected Total Import Requirements of Japan and the U.S.A. Potential Import Demand by Japan and the U.S.A. for Tropical Hardwood Produced by the Philippines, Malaysia and Indonesia, if the present shares of these suppliers in these markets were maintained. Source: Takeuchi, 1974. It is expected that the demand of other countries is likely to be 4 million 3 m (r) in 1975 and substantially larger in 1985. Thus the projected needs of Japan and the U.S.A. will have to be met from other sources than South-3 Million m (r) 1975 1985 40.7 43.0 39.0 63.0 36.0 52.2 east^Asian countries after 1975. This set of projections is modified by Pringle, whose figures are considerably more conservative in terms of the Japanese import demand. He predicts that Japanese demand will have only reached 30 3 million m (r) by 1989 compared with the previous estimate of 37.5 3 million m (r); in fact, this figure will not be reached before 1990 (Pringle, 1973). As a general conclusion to be made from these projections, the demand for tropical hardwoods will continue to grow fairly rapidly in the next ten years, particularly in Japan and the U.S.A., which will account for almost 75% of the developed world's consumption. The world import demand has been estimatedto: grow 5at76.-7.6.5% .per. annum for this decade, and earnings could increase by 10-12% per annum, which compares favourably with the 4% growth in earnings for agricultural products (Takeuchi, 1974). Difficulties in estimating: thei>.exact-cconsump:tion -figures are multiplied by the lack of current data. One of the most important issues surrounds the composition of final demand. It has been argued that the strongest influence on the Asian wood products industry in recent years has been the increase in domestic processing by the log exporting nations. This can be expected to have immediate effect on the very large Japanese industry which will always be heavily dependent on imported raw material. The impact will be felt in a different way by the U.S.A. which imports an increasing proportion of veneer and plywood and a correspondingly smaller amount of logs. Tropical hardwood plywood has steadily increased its share of hardwood plywood imports to 96% in 1973 and this market segment is expected to provide the main source of future growth, expanding at a rate of 10% per year (Rola, 1974). In the Philippines, log exports have been gradually phased out and were due to halt completely in January 1976. Peninsular Malaysia banned the export of selected woods in 1972 and Indonesia has attempted to increase domestic processing via controls in concession agreements. Each of these countries' policies must ultimately change the nature of tropical hardwood exports from Southeast Asia. 3.1.4 Tariff Protection The importance of market access for processed primary products, is frequently stressed. Where the fortunes of tropical hardwood exports are closely linked to their composition and degree of processing, barriers to trade could be critical. Tariff escalation on the part of the developed nations illustrates the distinction between products which go to a market for final use and those which undergo further processing. The distinction is an important one as it related to problems of access to foreign markets for manufactured goods and to competition in the marketing of these goods. A necessary prerequisite for successful forest industries in the producing countries would be the accessibility of markets in the industrialized nations. Kerdipibule (1974) has shown that A.S.E.A.N. countries are likely to find that the supply of exportable labour-3 intensive manufactured goods will grow faster than the demand. He believed that the present level of demand is inhibiting and pointed out that unless new demand is created or existing demand expanded through trade policies, industrial growth of these countries could be adversely affected. Yet, more optimistically, it,may be dangerous to generalise in this fashion across all manufactured goods while, "there are few The Association"of ""Southeast Asian Nations, A.S.E.A.N., consists of Indonesia, Malaysia, the Philippines, Thailand and Singapore. prospects for substantial exports of manufactured exports (but) processing of minerals, foodstuffs and timber can be pursued profitably". (Kojima et aL, 1971). Clearly the success of the in-transit forest industries of South Korea and Taiwan, leaving aside the current ban on Taiwanese plywood imports into the U.S.A., gives some encouragement to countries promoting local processing. Although a comparison of shipping costs from most producing areas is very difficult because of the varying rate structures it has been shown that it is nearly 50% more expensive to ship logs than to ship the same volume of veneer (Evensen, 1975). There is no duty on logs imported into Japan but there is a 10% duty on Dipteroearp sawnwood, a 15% duty on veneer sheets of tropical origin, a 20% duty on hardwood plywood and a 15-20% duty on varieties of reconstituted wood (Appendix 3). The effective protection on imported plywood is at least double the nominal tariff rate because imported logs account for 50-60% of plywood manufacturing costs in Japan. The U.S.A.'s tariff structure is similarly fixed at 20% for plywood from all countries although the Philippines received preferential treatment until the Laurel-4 Langley agreement expired in 1974. The protection effect of internal, tional transport costs relative to tariffs, both on a nominal and effec-tive basis, indicates that excluding transport costs from consideration underestimates the level of protection (Waters,-1970). Ultimately, LDCs reach a recursive dilemma when their efforts to stimulate domestic processing of raw materials are frustrated because the importing nations restrict their importation in a more finished form. 4 The Kennedy round reductions have meant that G.A.T.T. members reduced tariffs-on-certain timbers7 to~7.5-10%. The perplexing facet of this frustration is the success of the in-transit processors who import logs, manufacture wood products and then re-export them. At the same time these countries, Singapore, Taiwan and South Korea and to a lesser extent Japan, are totally reliant upon the log exporting nations for their necessary raw material requirements. 3.2 THE FOREST RESOURCE OF INDONESIA Although the total forested area of Indonesia is assumed to be 120 million hectares, of this, 35 million hectares can be withdrawn as land not consisting of forest cover with commercial potential. This would include the relatively high proportion of the resource found in the mountainous regions of Kalimantan, Sumatra and Irian Jaya (F.A.O., 1975a) (Map 2). As it stands the resource dominates the Insular South-east Asia forested area. In the absence of national inventories, the 3 available data on standing volumes are 100-185 m per hectare, increasing 3 to a maximum  of 200 m per hectare in some areas (U.N.E.S.C.O., 1974). Due to the lack of information it has been estimated that the large growing stock in Kalimantan iS 'TGomprise'dicabout 6'6.%ic6f.ssp'eci-es of Shorea and therego»v.errimenfe hasnarbi.triariiky^ ^^  and .yields on which to base annual allowable cut calculations. In the outer islands 3 an average gross,standing volume of 100 m per hectare, or 6-8 trees, is assumed. Of this, 50% is presently assumed merchantable volume. The mainssources of information, the companies involved in forest exploitation, 3 indicate volumes of between 45-160 m for all merchantable timbers and 3 30-130 m per hectare for Shorea (I.B.R.D., 1972) (Table 4). 3.2.1 Forest'DevfeLopmenfent • In 1962 a State Forest Enterprise, Perhutani, was set up and made responsible to the Director General of Forestry. Its activities •XT BsassBsamaseBa South China Sea ....... • Sulu ..'MINDANAO ', - •.., . Sea f;<'"  ....•) A/>. - . Moro. -' •('" . "Ou// ^  ; I PACIFIC  OCEAN BRUNEI :';4SAOAH •rf';.  / ' Celebes Sea v • ^ S I N G A P O R E * A ^ • - ^ . 1 i • f-fpeaJL  - C K " ^ . ' - ? * \ !.0' .>• / J \ CeramSea- : / JAKARTA i ' J a v a s „ . •' M a k o s a , ™ > ' '•'• fjores  Sea INDIAN OCEAN . TIMOR Timor Sot if* Indonesia Map 2 Table 4. Indonesia: Distribution Of Forest Land By Region. Total Land Total Forest % Of Total Area Area Land Area .,1 • Million -TJa ... Kalimantan 54 41 76 Sumatra 47 28 60 Sulawesi 19 10 53 Java & Madura 13 3 23 Maluku 8 6 75 Nusa Tenggara 7 2 29 Irian Jaya 42 30 71 Total 190 120 63 Source: I.B.R.D. 1972. Sources 7. " R. D. 19"'.?o were to be chiefly concerned with the management and utilization of the teak forest in Java. Perhutani was also made responsible for the stimulation, production and marketing of forest products in selected / areas in the outer islands. At that time, as now, exploitation of the forest resource was carried out by private entrepreneurs under the supervision of the regional forest officer in the form of concessions or cutting permits of which there were three types: a) Cutting Permits - comprised areas up to 200 hectares for a period of not more than two years. b) Small concessions - comprised areas not greater than 10,000 hectares for a:period of not more than two years. c) Large concessions - comprised areas of more than 10,000 hectares. The last classification was not extended by the local governments but, instead, was dealt with by the Director General of Forestry in order that foreign operations would be encouraged at a national level to speed up the development of the forest resource in Indonesia. Forest develop-ment received a substantial boost in 1967-1968, when two foreign invest-ment laws were introduced which incorporated several attractive incentives to encourage foreign investors. These and the effects of foreign investment are discussed in'Chapter Four. This impetus had the intended catalytic effect on the forest sector. By January 1972, 15 wholly-owned and 40 joint enterprises and foreign projects had been approved by the government with an expected total investment of $380 millions. 3.2.2 Forest Industries Indonesia's forest industries are characterised by a small number of conversion units operating at low levels of output (Table 5). A large number of non-mechanized, pit-sawing operations exist. The industry is currently unable to meet the domestic demand for forest products. More recently, concessionaires have been required to invest in fully integrated forest industries unless they can show that it would not be economically feasible to do so in their concession. In 1971, wood consumption in the pulp and paper industry was judged to be about 3 20,000 m (r)/utilised in the production of approximately 15% of the nation's total paper needs. At this time it was also suggested that the seven small pulp and paper mills were operating under technical and Table 5. Indonesia: Primary Mechanical Wood-Using Industries. Estimated Estimated Average Operation 1. 2. 3. 4. 5. Source: I.B.R.D., 1972. Source t s JJ D • • "975, fifinahcialoconstraintsaresultingiiin aereductionfofrpfoductive^capacity to 40% (I.B.R.D., 1972). 3.2.3 Hardwood Exports Between 1967-1971 some 12 million hectares of forest land were allocated to various concessionaires. This resulted in the spectacular growth of log exports and foreign exchange earnings on behalf of the provincial and national governments. In 1967, log exports were 0.5 million 3 3 m , valued at $6 million. By 1970 these had become 7.8 million m , valued 3 at $86.1 million and, in 1973, exports of 18.6 million m earned $574 million in foreign exchange (F.A.O., 1975d) (Table 6) Discrepancies recorded between sources for these figures can be explained by the use of 'check prices' to estimate the recorded export TYP e Sawmills with power equipment other (pitsawyers, etc) Plywood mills: Java Sumatra Sulawesi Matches Pencils: Java Wood boxes Annual Annual Capacity Unit Number Production Prod/Unit % m 3(r) m cases gross m r(r) 412 3,600 2 2 1 11 1 27 '900,000 2,200 50 very small 18,000 not in prod-uction. 50,000 12,000 37,000 operating occasionally 9,000 5,000 12,000 1,370 60 50 40 60 Table 6> Indonesia: Tropical Hardwood Log Exports, 1962-74. 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 Production " ' 0 0 0 4023 4023 4100 4150 4300 4800 5500 7000 10,700 13,705 16,84 25,197 n.a. Exports % Production Exported Value m 77.7 114.5 135 150 295 531 1,333 3,685 7,834 10,822 13,891 18,447 18,600 2 3 3 4 7 11 24 53 73 79 83 73 n.a. $ '000 672 1103* 1488 1618 2840 6079 10340 28337 86181 163560 220915„ 574000 750,000 xx * Unofficial Figures. F. F.A.O. Estimate X X This Value is for all of Indonesia's Forest Products Exports. Source: Compiled from: F.E.E.R. 1975a, F.A.O. 1975c and F.A.O. 1975d. value for logs. Check prices are floor prices determined by the Minister of Trade for the purpose of levying export taxes. Since 1969 they have been increased substantially every year. Along with the large volume increases this has contributed to the dramatic growth in log export earnings. With the wide variation experienced in f.o.b. prices this measure of log export value becomes very influential although there are difficulties when the variety of species and log quality from different regions are considered. In the early years of the timber boom check prices were set far below the actual f.o.b. prices and so unit values were underestimated. The check prices employed by Indonesia imply - - ' 3 different unit values when compared to F.A.O. sources: $7.23 per m 3 versus $30.9 per m in 1969, but this disparity has been reduced by the increases in floor prices since then (Appendix 4). Japanese capital in one form or other dominates the forest sector and Indonesia's exports have been very definitely oriented towards the Japanese market. Japan took 57% of Indonesia's timber exports in 1973 and the growth of Japanese demand has been a key factor in the growth of these exports. The country's leading position as the world's largest log exporter has also been stimulated by the activities of her competitors. As a result of the log export ban from Peninsular Malaysia, Sabah fulfilled the previous commitment  to Singapore and, similarly, the efforts to increases domestic processing in the Philippines have made Japanese buyers look elsewhere. Despite increases in the production of sawnwood and wood—based panels, they constitute a very small part of total log production. Along with Burma and Thailand, Indonesia has been an important supplier of teak (Tectona grandis L.f.) which has unrivalled status in world markets. Indonesia is the only supplying country which has shown steady growth in world markets from 7 to 16 % between 1967-1970, but present exports account for less than 10% of total production and much of the teak is used for fuelwood (I.B.R.D., 1972). Projections of future trends for Indonesia's tropical hardwood exports are frequently conflicting and hinge on the extent to which a domestic processing industry is established in the next few years. One of the attractions to investors in Indonesia has been the unregulated nature of the resource development relative to the neighbouring supply countries and so the future will be similarly affected by the implementa-tion of policies to encourage or enforce a degree of domestic processing. 3.3 THE FOREST RESOURCE OF MALAYSIA Malaysia's forest resource can be divided into two distinct geographical areas: Peninsular Malaysia and the two eastern states, Sabah and Sarawak which are administered by two separate Forest Departments (Maps 3 and 4). About 70% of Malaysia's land use is categorised as forest land although there are some differences in estimates of the nature of the resource. Disparities amongst information are apparent in Peninsular Malaysia where an inventory has just been completed. The 3 average growing stock is estimated to consist of 150 m per hectare of which some 43% is of Dipterocarp composition and another 26% consists of currently commercial species. In contrast, reliable figures for Sabah and Sarawak are considerably more difficult to obtain. Although the actual species composition seems to resemble that of the Philippines, 3 standing volume may be 100 m in both states with 50% of this being Dipterocarp in Sarawak and a corresponding 80% in Sabah (F.A.O., 1975a). Map 3 iKangar THAILAND P. LANGKAWl\  . Alor Setar \ KEDAH j / SUMATRA I N D O N E S I A Map 4 Alternatively, another set of estimates postulate an average of 226 m 3 per hectare of which 135 m is commercially usable timber (U.N.E.S.C.O., 1974). This unusually high figure may be the result of limited data at the time of calculation for it finds no other support. In Sarawak the species composition of comparable volumes other than ramin (Gonystylus bancanus Baill) for which the state was renowned is made up of three species groups: red meranti (Shorea spp.), Kapur. (Dryobalanops spp.), and Keruing (Dipterocarpus spp.). It has been reported that the Sarawak hill Dipterocarp forest reserves have good commercial potential, with these species making up 60% of the net commercial volume (Towler, 1974). Agricultural develop-ment through land-clearing will reduce Peninsular Malaysia's forest land base and little is known about the hill Dipterocarp forest which will become the bulk of the future forest resource. 3.3.1 Peninsular Malaysia 3.3.1.1 Forest Development The total area of permanent forest is expected to decline over the next 15 years by about 30%, to one of 5.8 million hectares. Although large areas have been classified as potential agricultural land and are being, or will be, cleared for this purpose the forest resource will remain an important revenue earner. As land is a state matter in Malaysia the administration of all forest reserves comes under the control of the individual states so that differences are to be found amongst the states. Pahang is the largest timber producing state. It has accounted for approximately two-thirds of the growth in total log production over the past ten years. A large part of this increase has come from land clearing projects for agricultural development. Until it is shown that forestry provides national benefits commensurate with agriculture, it appears that priority will continue to be given to the rapid liquidation of the forest resource and conversion of land to agriculture. Much of the lowland forest will be cleared in the near future. This has been criticised due to the lack of time and attention spent on the transfer of land use, resulting in revenue losses from incomplete harvesting prior to clearing (Mohammed,  1972). 3.3.1.2 Forest Industries Forest industries in Peninsular Malaysia originated with small, hand-sawing operations, all of which had been replaced by mechanized sawmills by the end of the 1930's. In 1931 there were 16 sawmills in what is now Peninsular Malaysia which contrasts with the present 485 sawmills and 33 plywood mills. There also exists a growing number of operations such as wood preservation, blockboard, particle board and moulding mills as well as one wood chip mill. It was estimated in 1971 that within two to three years log- consumption-by the wood based 3 industries would equal the total domestic log production of 9 million m (I.B.R.D., 1973a). A few long term timber cutting licenses have been issued and it is only in the past few years that these have been made available to forest companies as a means of obtaining a continuous wood supply. The majority of timber cutting licenses were held by logging contractors who sold logs to the various companies. The sawmilling industry, a growing consumer, has developed around small, family operations with limited capital investment. These were the basis for the sawnwood export trade which grew rapidly in the 1960's. Thus the structure of the industry is one of many sawmills, of limited capacity due to constraints such as poor machinery, lack of power, restricted mill layout and little managerial talent (Haji, 1974). However, the bulk of the sawnwood production now comes from the larger mills which are more modern and often geared to the export market. The smaller units serve the useful function of processing lower grade timbers to be sold on the domestic market. Only 104 sawmills have 3 a log intake capacity in excess of 71 m per eight hour shift. In fact, 49% of all sawmills produce 80% of total lumber production which is virtually all for export, and the remaining 51%, mills that are not affected by global economic conditions, are small and serve the rural areas and small towns. Veneer and plywood mills have been the most rapidly expanding forest industry in Peninsular Malaysia. The first mill, 2 built in 1948 produced 4-5 million ft ; by the end of 1968 there were 2 15 mills producing 200 million ft and by 1972 total output was 480 2 million ft . The primary processing of quality logs has been concentrated in sawmills found scattered throughout the country, especially in the comparatively more developed west coast states of Selangor, Perak, Jahore and Negari Sembilan. Industrial expansion in this sector of the economy has undergone distinct locational and structural changes. New sawmills in Pahang, Perak, Jahore and Trengganu have accompanied modernization and have been aided by the plentiful supply of logs resulting from large-scale land clearing schemes. The new growth of integrated complexes such as the Jengka Triangle project in Pahang is one example of this trend (Map 4). Emphasis is now being placed on location with respect to the major log producing areas: whereas the sawmilling industry was much smaller thar* in Jahore and the west coast states, most of the recent pro-ductive capacity has been installed in the east coast states, particularly in Pahang. A scarcity of logs resulting from overcapacity in the west encouraged an inter-state log trade which is now expected to diminish. The integrated complex in Pahang includes a sawmill, veneer and plywood mill, wood preservation plant, dry kilns and moulding plant.^ Several smaller operations of this type are planned for concession areas elsewhere on the east coast and will involve the participation of the state government, a local group and a foreign partner. Interest in these ventures has been stimulated by the Federal Industries Development Authority which has pushed for the establishment of new industries to upgrade the quality of output. For example, kiln-dried, planed lumber as opposed to air-dried, rough sawn lumber can be processed by additional equipment and existing sawmills and is the first major target. Primary processing industries in Peninsular Malaysia commonly produce unsophisticated products of low unit value in the form of rough sawnwood and urea-bonded plywood. Secondary industries that have emerged over the past few years have been based on an abundance of industrial residues to be reprocessed and have benefited from the growth of local and overseas demand (Wah, 1972). 3.3.1.3 Hardwood Exports The growing world demand for tropical hardwoods coincided with the initiation of large-scale land clearing in Peninsular Malaysia and with national pressure to maximize foreign exchange earnings. In the period 1962-1973 export earnings for this commodity rose by an average of 21.5% per year, from a small base to reach $168 million. Processed forest products have increased their share in the export bill (Tables 7 & 8). 5 This has not been in operation since 1973, for other than short periods. See Wellwood (1976) for details. Table 7. Malaysia: Tropical Hardwood Log Exports, 1962-74. Production Export '000 * irf % Production Value $ 1,000 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 6852 8283 8982 1024F 1254F 14404 16227 16943 18699 18458 20713 27490 n.a. 3169 3941 5139 6046 8190 9035 10575 11355 11352 11147 11594 12881 n.a. 46 48 57 59 65 63 65 67 61 60 56 47 n.a. 46,880 56,816 66,766 85,829 125,241 155,122 160,922 196,835 210,208 209,339 233,458 399,558 356,000 Source: Compiled from, F.A.O. 1975c, F.A.O. 1975d and Letourneau, 1975. Table 8. Peninsular Malaysia: Tropical Hardwood Log Exports 1962-74. Log Production Log Exports % Production Exported Value 3 000 m $'000 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 2700 3130 3570 3780 4360 5130 6100 6430 7420 7600 9040 10163 F n.a. 5. 6 0 . 6 889 1036 1406 1471 1730 1862 2075 2041 1888 843 F n.a. 2 25 27 32 34 28 29 28 27 21 8 n.a. 63 940 8743 10469 14112 19211 24850 2-7698 32418 32993 32215 18000 22420 Source: Compiled from F.A.O. 1975c, F.A.O. 1975d, and Letourneau, 1975. In the late 1960's an export tax of 10% was imposed on logs because of a rough balance between domestic log production and industrial capacity. As the sawmills were not working at full capacity, a domestic supply constraint was envisaged at the national level, yet in 1968, 28% of total log production was exported in that form. F.A.O. (1970) gave three reasons for this, with reference to the Singapore market, and suggests that the latter's industry is prepared to pay premium prices which the domestic industry cannot meet because of: a) government incentives through low interest loans and subsidised industrial estates as well as a strong internal market for reject export grades, b) excellent harbour facilities and Singapore's position on the international trade routes result in lower costs, c) existence of organised log brokerage which allows purchases of mixed logs with redistribution as required. These are all factors which leave the domestic industry at a disadvantage. By 1973 only 12% of total log production was being exported unprocessed and in the interim log production had increased by 8.8% (Table 8). The export duty on round logs from Peninsular Malaysia was increased early in 1972 to stimulate more domestic processing. The local veneer and plywood mills still found it difficult to obtain suitable raw material in sufficient quantity, so that a 'temporary' log ban of the ten main commercial species was imposed late in that year to ensure adequate supply for the domestic industry. For Malaysia as a whole, the 3 volume of sawnwood exports increased by 20.7% to 2.2. million m in 1973. Export earnings rose much more significantly (by 94.5%) on account of steep increases in export prices. Exports of lumber from Peninsular Malaysia rose by 28% to 1.9 million m 3 to account for nearly 88% of the total volume of sawnwood exported from Malaysia. Unlike the markets for logs, markets for sawnwood are more diversified. The E.E.C. and Singapore continued to be the leading markets for Malaysian sawnwood: raising their demand to absorb 42% and 28%, respectively, of total sawn-wood exports during 1973. Exports to the U.S.A. declined due to a slowdown in residential construction in the latter part of the year (Appendix 1). 3.3.2 Sabah (Map 3) 3.3.2.1 Forest Development Timber exploitation in Sabah is•directed towards the log export market centred in Japan, Hong Kong, South Korea and Taiwan. The forest resource base is perhaps the most valuable in terms of commercially desirable timbers in all of the Malaysian states. It has been estimated that some 3.1 million hectares of the Dipterocarp forest are exploitable under present operating conditions, most of this being located in the eastern part of the state. The areas of shifting cultivation and land development which provided a considerable spur to log exports lie in the western part of the state. Large areas of forested state land and alienated land were cleared for purposes of agrieu'Muralidevelopment. The timber assets realised from this were used, inipart, to finance land development schemes (Udarbe, 1972). Most of the commercial forest harvesting takes place on the east coast where logs are hauled up to 60 miles to the nearest rivers or salt water. These are towed as far as 160 miles downriver to ports along the coast. As a consequence, up to 500-600 miles of logging roads are built in Sabah each year (Canada: D.I.T.C., 1973). 3.3.2.2 Forest Industries The forest industries in Sabah are a classic representation of colonial ties and their legacy. Initial forest development was undertaken by the British Borneo Timber Company (now the Sabah Timber Company) which held a monopoly over timber extraction in the state until 1952. In the period immediately following, long-term concession agreements were obtained from the colonial government. After federation, Sabah retained autonomy to a substantial degree. As in Sarawak, the forest resource is administered by a state forest department which is not responsible to the national Forest Department. Thus, in 1969, the state government indicated to concessionaires operating under 21-year felling agreements that these would not be extended beyond their expiry in the years 1978-1984. The government decreed the newly formed Sabah Foundation would take over about 1 million hectares of forest land that was previously held by concessionai'resaaridhho'ld. ituurideraannew"1 QiOQyyearcconcession agreement. With the process of indigenisation underway, the remainder of the land withdrawn from foreign operators was to be held and redistributed to Sabahan entrepreneurs-.CoiConeessionairesrwereeithemseilives permitted to operate timber harvesting operations on an annual permit basis. The extent and nature of the domestic processing industries is very different from that in Peninsular Malaysia. During the 1950's concession agreements contained a clause which required logging companies to convert 30% of their total log output into sawnwood. All of the large operators set up sawmills and by 1960 there were 59 small and medium-sized  mills producing for the local market. Further dominance of the trade in logs occurred in the early part of the 1960's when this clause was successfully omitted during renegotiation of concessions. The domestic processing industry is minimal in relation to annual log production: in 1973 less than 1% of total production was processed.6 Some 150 sawmills, spread throughout the state, are small-scaled activities with inadequate' equipment. For..example, 132 have no powered resaws which makes sawing for export quality difficult and, out of this total, 10 mills produce 75% of the total output (World Wood, 1975). Those mills on the west coast manufacture sawnwood for the local market and obtain their raw material from farmers and small, indigenous logging contractors. The majority of the mills are located on the east coast around SandekanaandT-Tawau. On the other hand, the small veneer and plywood industry exports 100% of its output from a handful of mills. The Federal Industrial Development Authority has recommended that further domestic industries should be set up to process 50% of log production by 1980. These should include 9 plywood mills, 2 veneer plants and 9 saw-mills of varying capacity and ought to be the basis for secondary industry development on the lines of wood-based panel boards, furniture and prefabricated housing units. 3.3.2.3 Hardwood Exports Sabah is a well-established log exporting "country" and during the 1960's became the world's largest log exporter until surpassed by Indonesia. Between 1962-1973, annual foreign exchange earnings increased by 19.4%. In the timber boom years of 1972-1973 earnings almost doubled for a volume increase of 28%. Log exports from Sabah as illustrated in Table 9, constituted 59% of the combined forest products trade bill for Malaysia in 1973, or $330.7 million. In the same year Sabah accounted for The figures in Table .9^ , for 1973, seem erroneous. Table 9. Sabah: Tropical Hardwood Log; Exports. ,! I 1962-74. Production. Export 0 0 0 _m3 % Production Exported Value $ 000 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 2783 3447 3562 4153 5,200 5,674 5,892 6,189 6,546 6,941 8,496 14,072 n.a. 2468 3000 3384 3796 4855 4321 5796 6187 6150 6558 7708 10,144 n.a. 89 87 95 92 93 90 98 100 94 94 91 72 n.a. 39216 48922 48149 59999 84282 103335 109135 122324 129310 136888 171616 330,791* 328.0* F.: FAO Estimate. * : Includes Sarawak Source: Compiled from F.A.O. 1975c, F.A.O. 1975d, and Letourneau, 1975. 81.8% by value and 78.8% by volume of Malaysian log exports. Of this total volume, 70% was exported to Japan, with the balance being imported by South Korea. This was an absolute increase of 38% on the 5.6 3 million m exported in 1972. The lack of growth in processed wood products from Sabah suggests that log exports will continue to dominate the export trade for some time to come. The timber industry, such as it is, is geared towards the log export trade and takes advantage of the strong, if cyclical demand for its product. Foreign exchange earnings have been substantial from log exports. The profit of this trade has militated against the extra investment and risk involved in installing sawmills to enter the relatively limited market for sawnwood through traditional outlets. Sawmill recovery rates of 40-50% mean that the large logging companies can obtain a higher return through the export of high quality logs and, as a result, the industry only receives the lower grade logs which further reduces the attraction of producing for export. Around 700 ships are loaded with logs each year from the east coast of Sabah. Since 70% of the logs go to Japan, and Japanese trading companies prefer to handle their own shipping arrangements, the trade network is fairly well closed. As in Indonesia, marketing contracts are drawn up between concessionaires and the large trading firms, to handle the distribution of logs and plywood. These firms also are connected to logging contractors from whom they receive all their log production, on a long-term basis, in return for a large stake in the financing of these operations. It is understood that a policy of insist-ing on processing facilities as a condition for obtaining a special license or concession agreement is to be enforced (Canada: D.I.T.C., 1973). 3.3.3 Sarawak (Map 3) 3.3.3j1 Forest Development Sarawak's forest resource is quite similar to the rest of Malaysia in most, but not all, respects. One important difference is the size and relative significance of the lowland peat swamp forest as opposed to the other forest types. The resource base, covering 9.4 million hectares, takes up 77% of the total land area. Of the remainder, 18% is estimated to be under one form of cultivation or another. Although agricultural land use is expected to grow, due to the small population of one million, large inroads on the resource base are not foreseen Initially, the forest economy in Sarawak was based on the availability from the peat swamp forest of the light weight species, ramin which provided the forest industry with a large part of its raw material and remains the principal timber in the state. Local processing by approximately 125 sawmills has been concentrated in the Sibu and Kuching areas. Production of sawn..timber has been static in the last few years and accounted for 20% of total log production in 1973. Until this period local processing centred on the conversion of ramin logs had increased steadily, coinciding with the very favourable position enjoyed by this timber on the international market. Virtually total reliance on this timber for manufactured exports is now causing the industry to diversify its production. The hill forests in the-^east of the state are judged to be the main future source of supply. Location of the industry around the towns of Sibu and Kuching reflects the utilization of the peat swamp forests which have now yielded most of their potential. Processing efficiency has been encouraged in the established mills by allowing them preference in granting cutting licenses and permits. Also, mill modernization has been used as a condition for license renewal. As the government, through the auspices of the Sarawak Forest Industries Developing Corporation, is seeking to reduce the dependency upon the diminishing supply of ramin, concession applications have been halted. Negotiations were underway in 1974 to develop six ,3 joint ventures using 283,000 m per year from the hill forest resource. Each of these was planned to comprise of a sawmill, a plywood mill and additional production. As in Sabah it has been suggested by the F.A.O. that the state should expand its industry to the point where it will process 50% of its log production by 1980 (F.A.O., 1974a). 3.3.3.2 Hardwood Exports As shown in Table 10, log production grew 13.5% annually during the 1960's but since 1970 has been static or declining. Local consumption is very small thus the export orientation is pronounced. Log export earnings have continually increased by 17% annually in the same period. In 1973 total log exports continued to decline as a result of the fall in production but of course enjoyed the high prices of that year. Ramin mouldings and boards, as well as other sawnwood, has performed well and earned $20 million in 1973. Export earnings from a Japanese owned mangrove chip mill project, operating under a long-term license, are presently unavailable. To a very great extent, future prospects for forest products depend on how well the industry can cope with a larger number of commercial species and whether it will expand to increase the proportion of sawn products exported. The conversion of the existing:1 industry will not entail the sort of structural changes underway in Peninsular Malaysia as the hill forests lie adjacent to present sources of supply. An F.A.O. project is investigating various transportation alternatives based on the network of rivers on the east side of the state. - 67 -Table lot),. Sarawak: Tropical Hardwood Log Exports, 1962-74 Production Exports 000 m~ % Production Exported Value $ '000 1962 1963 1964 1965 1966 1967 1968 1969 1970 171 1972 1973 1974 1364 1706 1850 2314 2987 3600 4235 4333 4693 3917 3177 3255 n.a. 696 880 866 1224 1933 2243 2989 3063 3127 2548 1998 1894 n.a. 51 52 47 52 65 62 71 71 67 65 63 58 n.a 7601 9955 9874 15361 26847 32576 45279 46813 48480 39458 29627 50767 40000* * Author's Estimate from Combined Sabah and Sarawak Figures. Source: Compiled from, F.A.O. 1975c, F.A.O. 1975d, and Letourneau, 1975. 3.4 THE FOREST RESOURCE OF THE PHILIPPINES The volume and growth of forest products exports from the Philippines, coupled with a high population growth rate of 3% during the 1960's and the widespread practice of kaingin or shifting cultivation, exerted strong pressures on the forest resource base. The total forested area covers approximately 16 million hectares but not all of this has been C'las si f-iedi asefore store s erve s.^ i(Tab le S6meo96% of the million- hec-tarestsoocategorisedvisecoveredDwith-.Dipterocarpcforest.-Mindanao possesses the largest commercial forest area and has the largest proportion of the high quality Dipterocarp forest with Luzon accounting for over half the balance. Commercially recoverable volumes per hectare of desirable species markedtthe<rmainceonc.er-n^a-ridcoverfcearing  sa-d^antage jof the Philippine forest resource. This has been estimated as shown below. (Map 5) Philippines: Vdlume of Commercially Desirable Species rb.il ip-o.nesj Volume of (m per ha) Desirable £ -Luzon 81 Palawan 15 Visayas 57 Mindanao 124 Philippines Average 89 Source: I.B.R.D., 1972. The importance of Mindanao's resource is reflected by its majority share of total log production which stands at 74%. Between 1952--.a"n'd* 19.6-3 fin-Mindana'd.uth'e-forest-area diminished from 7.3 to 6.3 million hectares, or an average annual decline of 92,000 Table 11. ."Philippines Public Forest Under Authorized Exploitation in 1970. Region Productive Forest Ordinary Timber 1,000 Hectares License Total Forest Agreement Reserves Ilocos 1178 Cagayan Valley 1140 Central Luzon 460 Southern Tagalog 1933 Bicol 332 Western Visayas 279 Eastern Visayas 1156 Northern Mindanao 1955 South Western Mindanao 2687 26 756 256 726 225 104 856 1211 1301 134 337 391 134 143 1119 1175 160 1093 257 1117 225 238 999 2330 2476 Philippines 11120 5462 3431 8893 Source: Philippines: The Philippine Association For Permanent Forests (Permafor), 1972. The Republic of  the Philippines Map 5 hectares (a standing volume of 20.1 million m 3) of which -24% (or 4.8 million m^ ) was a consequence of authorised logging (Hicks and MacNicoll, 1971). The largest part of this area was in fact removed from the forest base by illegal logging or by kaigineros. Apparently the extent to which the forest is destroyed through shifting cultivation is an active guessing game. The results vary from 30,000 hectares to over 500.000 hectares per year or, more dramatically one hectare every minute (Serna, 1972). However, the clearing of forests is only illegal if it occurs within the public forest zone. It is a legal right for landless Filipinos to settle on public land suitable for farming and register an area not exceeding 24 hectares in their name. That this happens quite commonly is clear, but the scale on which it takes place is speculative and so it is difficult to declare the permanent forest base as such. In recent years concern has been expressed about environ-mental degradation in logged over areas which has adversely affected the progress of irrigation, hydro-electric schemes and, in certain areas, threatened agricultural productivity. The relative uniformity of the forest's species composition, and the high proportion of timbers that are grouped between the lauans and keruing, has contributed to the growth of the domestic forest industry with much of this being based in Mindanao. Although less than 50% of the annual allowable cut was harvested in 1974, future growth of log supplies is forecast to be almost entirely from logs currently exported (Philippines: P.L.P.M.A., 1974). 3.4.1 Forest Development There are over 700 firms engaged in harvesting and processing timber in the Philippines of which about half hold timber licenses in three forms, each a. function of mill size: a) License agreement: a long-term license for 10-25 years, particularly aimed at supplying large wood industries. b) Ordinary timber license: 4-10 years and offered to small or medium-sized logging operations. c) Special timber license: almost redundant and tied to specific volumes of timber rather than to any one area. In 1971 about 75% of the commercial forest area was under license (I.B.R.D., 1973b). Of the three countries under study, the Philippines has had the longest and most substantial role as an exporter of forest products. The Republic has also been trying to decrease the proportion of log production that is currently exported. Originally, license agreements on concessions greater than 20,000 hectares stated that firms had to set up a wood processing plant. This resulted in a large number of producing plants, many of which were set up as a front for compliance with forestry regulations in order that the concessionaire could continue with log exports. Since 1968 there have been policies to phase out"log exports and the most recent one, announced in 1973, planned a progressive phase-out under a programme calling for a total ban by 1976. The Marcos administration had intended to reduce the volume of logs exported by 20% per year until January 1, 1976. In the light of a weak market this deadline has been postponed and currently firms are permitted to export 25% of their log production. 3 This amounts to roughly 4 million m (J.L.J., 1976). Much of future development is therefore focussed on how the industry will meet the demand placed on it by the projected local processing of several million logs still being exported. As log production has declined over the past few years (Table 12) the export ban will provide the additional source of supply for the industry. 3.4.2 Forest Industries In the last two decades the Philippine forest industries have shown a clear preference for short-term gains through the export of logs. Due to the demand conditions for logs and the apparent unprofita-bility of wood processing, this is to be expected. The structure of the industry, however, does not parallel that of a log export oriented forest industry. In part this is a heritage of the policy which dictated industrial growth by size of forest concession and not necessarily by any locational advantage or economies of scale. For example, it is argued that export markets are inaccessible to some of the small plywood mills because of their inability to capture economies of scale (Sanvictores, 1975). At the present time there are 421 processing plants with a 3 capacity of 11.5 million m or two-thirds of the total allowable cut. This includes the lumber industry consisting of 370 sawmills, 18 veneer plants and 31 plywood mills. All of these industries have a history of disappointing performance. Studies of the Philippine forest industries based on different sizes and rated capacities between 1964-1966 show the following: Sawmilling: losses of 32rr33%ling: losses of 32-33% Veneer and Plywood: 196T4eaveragedpr6fitodl4.7%964 average p^ .-i , t 1965 average loss 1% 1966 average loss 8.7% (Stadelman, 1969, Sanvictores, 1975) "•reSf 1975) . In 1973 sawm In 1973 sawmills were operating at about 25% of rated capacity, veneer plants at 84% and plywood plants at 59% (Stadelman, 1969, Sanvictores, 1975). By way of contrast, logging offers a much wider margin for profit. Taking 1972 figures for the Philippines, average harvesting and transporta-3 tion costs varied from $13-$17.90 per m , depending on the scale of operations. These costs include all expenses incurred from felling to loading on ship at a time when the average f.o.b. price was $30-35 per 3 m (I.B.R.D., 1973b). Of the 18 veneer and 31 plywood-mills operating, 10 are in Luzon, 1 in Visayas and 38 are in Mindanao. Due to the lack of Philippine bottoms it is cheaper to transport logs from Indonesia to Mindanao, where most of the processing capacity is installed, than to ship the logs from Luzon or Visayas. 3.4.3 Hardwood Exports Forest products exports from the Philippines experienced an annual growth rate of 10.3% between 1962-1973 and this figure was boosted when the 1973 export bill grew by 30% over the previous year. Despite a well established domestic processing industry and growing internal market, the Philippines has consistently exported a high propor-tion of its log production. Throughout the 1960's when log exports were growing at 9% annually, the proportion exported remained fairly constant but reached a peak of 83% in 1974 (Table 12) (a year of much reduced volumes). In 1967, before Indonesia began to make serious inroads on the Southsea log trade, the Philippines supplied 64% of Japan's imported hardwood log requirements. Similarly, South Korea received 80% of her total needs from the Philippines. More recently, in 1974, 81% of all log exports went to Japan, once again emphasizing that country's dominance in the Southsea log trade. Paradoxically, the fastest growth rates exhibited by forest products exports have been plywood and sawnwood. In the period 1962-1973, plywood and veneer exports grew by 12.7% per annum, admittedly from a Table 12. Philippines: .Tropical Hardwood Log, Exports, 1962 - 1974. Production Exports 3 m % Production Exported Value $1,000 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 19731 1974 7,115 9,415 9,130 lo,015 8,105 8,975 11,950 13,020 13,015 10,950 10,940 11,425 6,238 4,794 6,520 6,140* 6,700* 6,800p 7,200f 8,790 9,421 9,606 8,443 6,858p 7,752 5,151 67 69 67 67 84 80 74 72 74 77 63 68 83 101,719 136,906 122,800 134,000* 138,971 155,341 219,640 235,701 244,489 223,617 173,253F 303,426 237,500 * Unofficial Figures;;. F r. F.A.O. Estimate Source: Compiled From F.A.O. 1975d, Philippines: Philippine Lumber and Plywood Manufacturers' Association, 1974. small base (Appendix 5). The expanded veneer and plywood industry which has developed in the Philippines, based on the lauans and located in Mindanao, is directed chiefly towards the U.S. market with almost 90% of plywood exports going to this market in 1973. Traditionally, the lumber industry was oriented predominantly toward the domestic market but in the past ten years the volume of sawnwood exported has grown to 30% cf total production. The Philippines has experienced steady growth in her forest products exports while processed exports have also been responsible for a fair share of the export bill. In each of the Republic's markets, other countries such as Indonesia in the log trade and South Korea in the plywood market, have proven to be strong competitors and, as a result, the country's share in world markets has declined. CHAPTER FOUR TROPICAL HARDWOOD EXPORTS AND ECONOMIC DEVELOPMENT 4.1 THE INDONESIAN ECONOMY Indonesia is endowed with many of the conditions generally considered desirable for promoting economic growth. The country has an abundant supply of labour with a population of 130 million; a wealth of natural resources including some of the most fertile soil in Asia; and i rich mineral resources such as tin and oil. In fact for several years now the economy has maintained a high growth rate: gross national product has more than doubled between 1973-1975 while over the same period per capita income has risen from $163 to $190. Much of this growth has been from the oil price upsurge but, due to the large popula-tion, the oil bonanza increased per capita income by only $6, after the effects of inflation are taken into account. As a measure of the govern-merit's efforts to canvass foreign investors, $4,000 million were invested between 1967-1975 (F.E.E.R., 1975d). The terms 'reconstruction' and 'rehabilitation' were often used to describe Indonesia's progress after the 1964 coup d'etat, during the years when the government's central objective was the growth of aggregate output. However, 'imbalance' is now most frequently applied to the state of the nation. This takes a number of forms: social, economic, demographic and political: a) between the increasingly monopolistic role of foreign aid and investment vis a vis the loss of Indonesian sovereignty; b) between development on Java, with 70% of the population and 7% of the land area, and the outer islands; c) between consumer goods and the pattern of foreign investment; d) between the deteriorating position of indigenous entrepreneurs (the pribumi), and foreign competition; and e) between the skewed distribution of income in favour of Java, especially Jakarta, and the conspicuous consumption of the ruling elite (Arndt, 1972, Soemardjan, 1972, Wallace, 1974). Public criticism, most vehemently expressed by the Tanaka riots in early 1974, was levelled at the unsatisfactory performance of the First Development Plan, Pelita 1, as far as poverty, inequality and unemployed are concerned. The Second Five Year Development Plan, Repilita 11, was launched in 1974 with the expressed aims of ensuring: a) the supply of food and clothing within the purchasing power of the people; b) the supply of materials for housing and other facilities for the people; c) social welfare; d) expanded employment opportunities; and e) improved infrastructure, accompanied by a substantial increase in defence and security expenditure (Wallace, 1974). Industrial development would be directed towards exploitation of raw materials from agriculture and mining: plywood and sawnwood from logs, aluminium from bauxite and flint gas from natural gas. So, Repilita 11 endorsed a redirection of the Indonesian economy to incorporate some measure of social justice with economic growth. 4.1.1 Foreign Exchange Earnings Tropical hardwood exports from Indonesia now provide the second largest source of foreign exchange earnings, superceded only by oil exports. Indeed the 'timber boom' has brought many benefits to the economy at a time when its suffered from serious foreign exchange shortages and while the aggregate value of the traditional agricultural exports hardly grew at all. Government revenue has been increased through royalties from timber development and employment seems substantial in the large producing areas, particularly those of Kalimantan which has supplied over 70% of timber exports since the early part of this decade. The export performance of oil and timber became increasingly prominent only in the last ten years with their combined share in total exports growing from 24% to 54% between 1966-1971. Whilst the self-evident dominance of oil has been more dramatic than that of timber in the past three years, the most recent figures show that the two now account for over four-fifths of the export bill. Growth of petroleum gross earnings between 1972-1974 has been little short of staggering: from $913 million to over $5 billion. Over the same three years, exports of forest products have tripled in value (Table 6). Although forecasts of the increase in export earnings from forest products explicitly assume that rapid progress will be made immediately to ensure processed products obtain a growing share of the bill, the predicted earnings have been achieved much earlier than these would indicate, inflation notwith-standing (Appendix 2). Apart from petroleum exports, timber exports have been the mainstay of trade growth during the past decade. When this trend is examined more closely, the picture becomes considerably less attractive than the figures portend (Table 13). Whereas the income from oil has been invaluable in swelling Indonesia's foreign exchange reserves, it has been far from a panacea for her many other ills. Despite the cushion provided by high oil prices, Indonesia is by no means insulated from such problems as high costs for imported materials, especially capital goods and fertiliser, and the deteriorating international market for her traditional exports. Part of the explanation for this is emphasized by what has been termed "the frustrating dualism" of the Indonesian economy (Booth and Glassburner, 1975). Most of Indonesia's traditional exports, tin, palm oil, and palm kernel suffer from adverse trends in world markets notably substitution, competition from synthetics, tariff escalation and low income elasticities of demand. Thus the benefits from foreign exchange earnings, at least in the case of oil, are offset by the serious problems facing other exports. The outstanding collective performance of oil and timber exports has thus not been the source of optimism that might be expected. This is not only due to the concentration of exports around oil and timber, but also is related to their convergence in a single market. Japan's share of Indonesia's export bill is currently 40%, and whereas some diversifica-tion of commodity exports is underway, the role of Japan as a market is Table 1'3. Indonesia: Tropical Hardwoods' Share Of The Export Bill,1962-74. Total Export Earnings Total Exports Tropical Hardwood $ Millions Less oil Share % 1962 681.7 1963 696.9 1964 724.2 1965 707.7 395.3 (1)* 1966 678.5 463.6 1 (1) 1967 665.4 422.7 1 (2) 1968 750.8 451.2 4 (7) 1969 848.8 465.9 6 (11) 1970 1,121.1 674.1 10 (17) 1971 1,252.2 774.3 16 (25) 1972 1,764.5 851.4 14 (30) 1973 3,154.1 1,555.4 20 (41) 1974 7,093.5 2,054.9 11 (36) *Share Of Export Bill Excluding Oil Source: Compiled From: F.A.O., 1975d, and I.M.F., 1975. likely to increase in the future. This market is also the best prospect for some of the new exports such as minerals, coarse grains, and fishery products. The advanced concentration; of Indonesian exports on 'two commodities and one country' has introduced an obvious danger of dependence both'on international market conditions for these two commodi-ties and on the economy of the importing nation (Booth and Glassburner, 1975). To some extent, good prospects for oil and timber and the mutual reliance of the exporter and importer on these commodities may mitigate this susceptibility. One other important factor which shows how the two commodities are not at all dissociated in this context is that the predominance of these exports and their success may induce complacency about stagnation and decline of the traditional ones. Although earnings from the forest sector's exports have increased every year since 1962, price instability is a marked feature of the log export trade, as illustrated in Figure 2-, Figure *2,« Changes of F.O.B. prices of Southsea Logs •Source: J.L.J., ,1975c. This instability can have a double-edged effect on the economy and on the manner of resource exploitation. Indonesian policy towards the concessionaires has been to encourage domestic processing by imposing a log export tax of 10% and to include an 'establish when feasible' clause in the concession agreement. The small amount of empirical work available has shown that the logging industry is considerably more profitable than processing activities such as sawmilling or plywood manufacturing (Hicks and MacNicoll, 1971, Koehler, 1972, Manning, 1971). Yet the 'establish when feasible' clause means that processing industries will only be attractive from a private viewpoint, when the market is strong for all forest products. At the same time this will be the most lucrative market for log exports. A comparison between the 1973 earnings of $574 million and $750 million in 1974 clearly does not reflect the slump in that year (Table 6). In January 1974, Indonesia's best month, log exports were 3 3 over 2 million m at prices around $69-65 per m , f.o.b. / by November 3 these had dropped to $25 per m . By this time inventories in Japan stood 3 3 at 7 million m and an estimated 2.5 million m of logs lay in Indonesian por-t's^candwlogging ccamps. • survey.;:b'f:. 9Syrlogging •'companies- illustrated. sqme-tofclt'he limpa-ct jefehite Ihadlnom+Easit Kalimantan: 30 companies kept producing at full capacity 16 slackened production more than 50% 29 turned to building infrastructure to retain skilled crews 20 stopped altogether. Those communities entirely reliant upon the logging industries were the first victims of the reduced employment and income (F.E.E.R., 1975). Indonesian and Japanese shippers have monopoly power from a cartel formed in 1975. Only an approved list of ships can carry logs to Japan and the c.i.f. rate has increased from $8 to $15 per m since that year. As the Tokyo c.i.f. price has remained static during this period, Indonesian producers have been coerced into accepting a lower f.o.b. price for their logs. This effect has not gone unnoticed in the Philippines and Malaysia, who supply 16% and 32% of Southsea logs, respectively, and has undercut the strong position of Indonesia, supplying 46% of these exports (F.E.E.R., 1975d). In this sense, the dependence of Indonesian log exports upon the Southsea trade attains some measure of significance. The timber boom has been based almost in its entirety on the export of logs to Japan which is in direct proportion to the vulnerability of these regions whose existence was initiated by forest development for log exports. Macbean has argued that, "the adverse influence of short-term instability of export earnings on the prospects for growth in the underdeveloped countries gives us no grounds for believing that export instability is in fact so harmful" (Macbean, 1966). Admittedly, it is difficult to generalise on the effects of instability on economic growth, but in areas where the major source of state and personal income is largely dictated by exogenous forces and is subject to wide, cyclical fluctuation, it may introduce a degree of uncertainty into the prospects for sustained indigenous growth for those regions. 4.1.2 Regional Income Indonesia's extensive forest resources are stretched across the archipelago in Sumatra, Java, Kalimantan, Sulawesi and Irian Jaya: the five largest land areas. However, the most substantial development of the resource in recent years has occurred in Kalimantan. For example, in East Kalimantan, where timber production dominates the economy as it does nowhere else in Indonesia, it provided over 95% of the province's non-oil exports in 1970 (Manning, 1971). Kalimantan in general, and East Kalimantan in particular, enjoys a high proportion of excellent stands of homogenous Dipterocarps and a well developed river transport system. Until 1971 provincial governments retained control over the allocation of concession areas to 10,000 hectares. Also, 70% of all royalties and the more recent log export tax accrue to the provincial governments (Appendix 5). This explains the rapidity with which many of the early concessions were granted, and resulted in a threefold increase in royalties from around $7 million in 1970-1971 to an estimated $22 million in 1972-1973, with Kalimantan accounting for almost 70% of all royalties collected (I.B.R.D., 1972). When the tax holidays granted under the 1967 Investment Act come to an end this revenue will rise considerably. Short-term revenue and foreign exchange earnings are not insubstantial. Logging operations geared to the log export trade involve the export of a valuable rural asset which brings lucrative returns to the exporter and sizable, if lesser, revenue to the economy. Whether such operations can provide the basis to a more diversified and permanent rural/small town industry is another matter. 4.1.3 Foreign Investment Indonesia's efforts to stimulate the development of the forest sector resulted in a substantial inflow of foreign capital which provided the motive force behind the growth of timber exports. Between 1967-1974 planned investment in the forestry sector reached $506 million, much of which had been presented to the government for approval by 1972 after which a large shift occurred towards manufacturing, away from forestry and mining (Table 14). Underlying the quantitative representation of foreign capital's influence on the forest sector, there are a number of serious considerations which caused the sector to be closed to foreign investors along with that of construction and real estate. Criticism of foreign investors behaviour is based on the apparent lack of commitment on their part, to establish local processing industries. However, it is necessary to see why this has been the case. Foreign investment in forestry can be divided into three parts: a) experienced logging companies, frequently of Malaysian or Philippine origin, backed by Japanese capital; b) less experienced operators seeking assured log supplies for their domestic industries in Japan and South Korea; and c) large, multinational companies, such as Georgia-Pacific, Sorianoy and Weyerhaeuser, who have long-term interests in the forest sector. These companies were encouraged by a package of incentives, the main aspects of which were: a) the right to employ foreign nationals; b) the right to repatriate capital and profits; c) exemption from import duty on machinery and equipment. Anticipated investment of non-indigenous operators quickly gained momentum  but, due to the small, understaffed nature of the Forest Depart-ment and the minimal, if not non-existent, supervision of logging activities, concession allocation was temporarily suspended in 1971. A decree was issued which halted the concession negotiations at a time when 75 had been granted for an area totalling 11.8 million hectares, 139 further ventures covering 10.3 million hectares were under negotiation and application had been made to secure rights to another 35 million Table 14. Indonesia: Foreign Investment Projects Approved, 1967-74. 1967-73 1974 1967-74 Number Intended Number Intended Number Intended Investment Investment Investment $ m $ m $ m By Sector Agriculture 66 113 Forestry 82 495.5 Mining 19 860.5 Manufacturing 407 1,045,1 Textiles (56) (436.8) Chemicals (81) (101.7) Electronics etc (35) (58.7) Other (235) (447.9) Construction 44 51.9 Hotels, tourism 12 101.8 Real estate 13 94.1 Other services 43 66.4 Total 686 2,828.3 By country USA/Canada 118 959.6 Europe 158 230.6 Germany(F.R) (27) (33.5) United Kingdom (38) (46.5) Netherlands (40) (72.9) Other (53) (77.7) Asia 374 1,486.6 Japan (149) (633.4) Hongkong (94) (267.4) Singapore (42) (100.0) Other (89) (485.3) Australia 35 151 Africa 1 0.5 5 12.5 71 125.5 4 10.9 86 506.4 - - 19 860.5 55 813.9 462 1,859 (12) (250.4) (68) (687.2) (12) (190) (93) (291.7) (4) (11i5) (39) (70.2) (27) (362) (262) (809.9 10 10.3 54 62.2 13 71.4 15 173.2 11 129.3 24 223.4 4 3.2 47 69.6 92 1,051.5 778 3,879.8 6 14.4 124 974 18 319.7 176 550.3 (2) (132.9) (29) (166.4) (4) (18.4) (42) (64.9) (8) (98) (48) (170.9) (4) (70.4) (57) (148.1) 61 694.3 435 2,180.9 (32) (450) (181) (1,083.4) (18) (178.8) (112) (446.2) (3) (25.6) (45) (126.1) (8) (39.9) (97) (525.2) 7 23.1 42 174.1 1 0.5 6 8 6 Source: Arndt, 1975. 2,828.3 92 1,051.5 778 3,879.8 hectares (I.B.R.D., 1972). The scramble for Indonesia's forest resources was well underway. The scale of operations planned by some of the larger concession holders can be judged by investment plans which vary from $1 million to $238 million, in concessions covering areas from 10,000 to 1.2 million hectares. All foreign operators must invest in sawnmilling and pursue a stage by stage expansion into one or more of the chip, hardboard, particle board, prefabricated housing and pulp and paper industries (Koehler, 1972). International lumber markets are considered to be very competitive and the existing mechanical power sawmills have capacities far below that 3 of 20,000 m annual input which is the minimum  economic size necessary to compete in these markets (Koehler, 1972). This factor, along with the very large number of small, independent, pit-sawing mills, mean that the present industry is unlikely to be the main supplier of processed exports. The highly dispersed nature of the industry, and its inability to produce high quality lumber at competitive prices, thus points to the role of foreign investment. In the most attractive extraction regions such as Maluku, East Kalimantan, and Riau, there is a common pattern of exploitation: for log exports. Koehler is right to focus on the behaviour of foreign investors and to question their motivation. Despite high transportation costs which can form as much 25% of the c.i.f. price, logging operations are highly profitable. Figures in the range of 30%-40% gross profit are largely responsible for the 500 companies engaged in negotiations or operating in the forestry sector (Koehler, 1972, Meijer, 1975). If this sort of profit expectation motivates the foreign investors in their investment appraisal, then it explains their extreme reluctance to establish domestic processing industries. The complete lack of very basic infrastructure from water and power to harbours and roads throughout the outer islands, or the state of disrepair of any of the remainder of the Dutch legacy, is frequently brought forward as the critical constraint upon outer island growth prospects. One measure of this obstacle is reflected by the additional 20% often added to the cost of any investment in the forest industries. 3 An investment projected for 1973 in a 25,000 m annual input sawmill in East Kalimantan required that 50% of the total investment of $330,000 would be for infrastructure, mainly for two generators (Koehler, 1972). Coupled with high labour and transportation costs, this offers investors little incentive to commit investment funds beyond those for logging operations. Transportation costs loom large where firms cannot provide sufficient volumes for Conference rates which are also unavailable at the private harbours constructed by concessionaires, hence export ship-67 ments are subject to surcharge. Transportation costs are a strong argument for large-scale operations particularly for plywood mills which need large inputs of logs that are currently exported to the in-transit processors. Economies of integration are apparent in Taiwan for instance, where a plywood mill would often be accompanied by a sawmill and particle board mill and also miscellaneous secondary, export oriented industries. This sort of industrial cohesion contributes to lowering the unit cost for a large residue producing industry such as plywood where conversion losses may be 50%. These economies of scale relate to location, infrastructure, industrial structure and export markets. One of the main attributes of L7 This option is of course now unavailable because of the joint cartel between Indonesian and Japanese shippers. the foreign investor is that he has the necessary capital to finance such activities, the technology to realise the economies of scale and the marketing expertise to successfully export the processed products. The present industry, such as it is, is oriented very largely in favour of the domestic market which has undoubted potential and scope given the growing economy and population. But, unless a very sharp redirection of government policy was to occur, and the administration became involved in industrial development in the forest sector once again, as with Perhutani, the growth of an export oriented forest products industry will have to rely upon foreign investors. When concessions were allocated initially the objective and priority was to stimulate forest development and earn badly needed foreign exchange. To this extent the generous terms given to the conces-sionaires on the understanding that they provide infrastructure, social overhead capital, and investment in processing industries, have been, in part, very successful. The issues surrounding the resolution of the conflict between foreign investment and the new objectives espoused in Repilita 11 will be analysed in a future section of this thesis. 4.1.4 Employment Employment figures in Indonesia have to be treated with some scepticism. The percentage of the labour force employed in manufacturing rose from 5.7% to 7.5% between 1961 andl l9r7rl -and^  this^accounted for 17% of the increase in the labour force. Yet the urban areas of Java and Indonesia as a whole showed an absolute decline in manufacturing employ-ment. These figures should be interpreted with care as they suggest that with 85% of the labour force living in rural areas and 60% of employment in industry being in the same areas, there has been a trend towards non-agricultural rural employment to account for most of the growth in manufacturing employment (I.B.R.D., 1972, Sundrum, 1975) (Table 15). Whether this phenomenon has continued in the last five years is open to question but the rapid growth of the manufacturing sector implies that not all, and perhaps most, employment has come from the small' industry sector: a reversal of the historic pattern which has seen large-scale, capital intensive manufacturing employment grow at the expense of reduced employment in small-scale, traditional, rural industries. Significantly, workers in this sector earned similar incomes to wage earners in the medium-sized  establishments usually found in the urban and adjoining areas (Sundrum, 1975). Employment opportunities in the forest sector are not only a function of the technology used or of the level of processing but also are a function of the origin and nature of much of the sector's capital. The Japanese 'package deal' usually involves an advance payment which enables the logging company to pay royalties to concession holders and to meet their other operational expenses. This arrangement is sometimes extended by the supply of heavy equipment for which domestic finance is very limited. In return, the investor receives a guaranteed supply of logs at f.o.b. prices which conveys considerable economic power to the Japanese trading companies. One estimate has placed over 50% of the Indonesian contractors within this system (F.E.E.R., 1974). On the other hand, those outside this network are frequently barred from the Japanese market. The refusal of Japanese buyers to continue to purchase logs from non-mechanised production displaced several thousand bandjir kap producers from their livelihood. Coupled with the prohibition of river logging in 1972, and the refusal of the Japanese trading companies to deal with the small operators or to ship their logs, this usurped employment Table 15. Indonesia: Growth in Manufacturing Employment and Value Added, 1961-71 Percentage 1961 1971 Increase Employment (000) Urban and adjoining 684 1,000 46 Other rural 1,172 1,953 67 Total 1,856 2,953 59 Value Added (Rp billion) Large and medium 24.5 40.9 67 Small scale 12.1 15.5 28 Total 36.6 56.4 54 Source: Sundrum, 1975. and a cheap source of logs. Although loggers in Kalimantan can earn $80-$90 per month, only the unskilled labour is local as the skilled workers are Malaysian and Filipino contractors benefiting from their experience in logging operations (F.E.E.R. , 1975b),. Companies usually recruit their skilled labour from outside sources especially in areas such as Maluku and Kalimantan where there is a severe shortage. In this way the independent operators, the pribumi, and the Indonesian labour force emerge as the losing side. The lack of any serious attempts to set up job training programmes and the revision, by foreign companies of their investment plans in answer to i'ndi'geni'satidhsmove'stilgyi Ktiftes government 'are-serious causes for concern. Employment opportunities and skill transfer have been accorded priority status as demonstrated by the order banning all foreign labour in the industry after 1977, therefore, it would seem that the necessary skilled labour force for a future domestic industry will have to be trained (Table 16). Table 16. Distribution of Skilled Labour by Type of Wood Processing in Various Asian Countries Supervisory & Skilled: Semi-skilled: Unskilled: Sawmilling 35 15 50 Plywood 40 40 20 Paper and Pulp 45 40 15 Source: Koehler, 1972. The 1972 small-scale industry census discovered 363,000 workers in the wood industries which ranked second to food but was second lowest in terms of value added per worker (Table 17). Total employment in the forest industry in East Kalimantan was estimated at 50,000 in 1972, split between 20,000 workers in mechanized logging and over 25,000 in bandjir kap production. Planned employment in July 1972 for the nation as a whole was over 50,000 but it is unknown how much of this was realised (Table 18). Certain wood industries have been classified as the most labour intensive form of manufacturing which will of course depend entirely on the nature of the projects within that sector. In the Indonesian case forestry projects seem similarly capital intensive to general manufacturing, Table 17. Indonesia: Structure of Small-Scale Industry, 1972. Commodity A n n u a l V a l u e - a d d e d Group E m p l o y m e n t p e r Worker . ( 0 0 0 ) (Rp 0 0 0 ) Urban R u r a l T o t a l U r b a n R u r a l T o t a l Food 7 5 6 1 7 6 9 2 7 0 . 9 3 7 . 7 4 1 . 3 T e x t i l e s 34 1 1 0 1 4 4 2 1 . 7 1 2 . 6 1 4 . 8 L e a t h e r 2 2 4 5 4 . 2 3 2 . 8 4 4 . 5 Wood 15 3 4 8 3 6 3 7 5 . 5 1 3 . 9 1 6 . 4 P a p e r , p r i n t i n g 3 5 8 6 8 . 6 4 . 6 2 9 . 9 O t h e r 42 4 9 0 5 3 2 7 7 . 5 2 7 . 2 3 1 . 1 T o t a l 1 7 2 1 , 5 7 2 1 , 7 4 4 6 3 . 0 2 7 . 3 3 0 . 8 S o u r c e : Sundrum, 1 9 7 5 . T a b l e 18 . I n d o n e s i a : I n v e s t m e n t A p p l i c a t i o n s , 1 9 6 8 - 1 9 7 2 . .. . . Nov. '68-Dec. "71 Jan. '72-JuIy ' 72 Capital No. of No. of Labour Scclor Projects Planned Projects Planned Ratio' Investment Employment Investment Employment (Rpm) (000) (Rpm) (000) (Rp m) Agriculture 37 7-2 4-7 9 1 1 0-5 1-6 Estates 104 44-1 21-7 19 22-2 2 3 1 1-3 Forestry 125 96-4 49-4 17 12-5 1-5 2-1 Fisheries 13 5-5 2-4 8 7-7 2-3 2-8 Livestock 7 1-8 1-1 5 1-2 0-2 2-3 Mining 7 19-2 1-7 3 1-0 0-6 8-9 Manufacturing 668 244-0 111-2 222 101 -1 72-8 1-9 Communications 58 36-6 14-9 15 35-1 4-7 3-7 Tourism 89 67-2 20-0 14 12-0 4-4 3-3 Construction 5 51-2 2-5 3 2-3 0-5 17-8 Infrastructure 10 3-6 0-3 ' 2 2-0 6-2 0-9 Other 5 1-8 0-5 — . — — 3-2 Total 1,128 578-5 230-5 317 198-0 123-7 2-2 * Data should be (rented with caution since there are unexplained discrepancies between Ihis tabic and other relevant data, notably in the Estates and Construction Scclors. -'•Jncludcs rupiah equivalent of  foreign  exchange involved. 'Total Planned Investment Tor period Nov. '68-July "72 divided by (otal planned job creation. Source: McCawley, 1972. each job costing around $5,000 per worker, and the potential comparative advantage will be reduced where labour is a small part of total costs. The Southeast Asian average for sawmilling costs attributable to labour is 5% and in East Kalimantan this reaches 15% due to the high cost of imported labour (Koehler, 1972, Kojima et al*, 1971). There are two dimensions to the employment opportunities offered by the forest industries. One would be the employment generated by processing industries and the other is directed at the indigenous entrepreneurs. Where infrastructure and transportation constraints are obstacles for large companies, they are magnified and multiplied by credit availability and market access difficulties through which the small firm is discrimi-nated against. Joint ventures were seen as one alternative to this and they were to provide for a transfer of majority holding and control to the Indonesian partner within a fixed number of years. In practice, a number of problems have beset the idea, namely capital availability and dependence upon the partner's commitment  to Indonesia. There is the danger that the pribumi will end up as fronts for foreign investors while the real control is vested outside the country. Thus the opportunity for the development of the national partner is frustrated. 4.1.5 Discussion The capacity of the forest sector to stimulate Indonesia's economic development can be defined by the role of foreign investment in that country. The sector's prospects for future growth through a domestic forest industry are dependent upon the part played by foreign investors. In an accounting sense the total impact of foreign investment on foreign exchange earnings and the balance of payments may be positive if the direct contribution of investment to net exports more than counter-balances the net outflows of capital, interest and profits. Figures for the forest sector are unknown and must be sizable in terms of outflows but the overall effect of increased foreign exchange earnings can aid economic growth. Nevertheless this approach confuses an assessment of the overall impact of foreign investment on the host country's economy. It is particularly difficult to assess effects on income distribution, wage structures, the type of employment (skilled or unskilled), the domestic industry, the pribumi and general industrial development. Yet these are important considerations in Indonesia where the strategy of development is surrounded by much debate. The contradiction between Indonesia's need for foreign invest-ment and the short-term profit expectations of foreign investors is the key to the forest sector's future. It is clear that employment and income objectives cannot be realised without steady growth in agriculture, even where this means a move away from traditional commodities facing declining world markets, and in other labour intensive economic activities. New opportunities in agriculture will lie increasingly in areas outside Java. Meanwhile infrastructural requirements for accelerated agricultural development in the outer islands would limit the pace of transmigration which would need to be of far larger scale than previous schemes to have much effect on unemployment and poverty in Java. In the small industry sector the forest industries are the second largest single source of employment. Yet it appears that indigenous operators suffer from several disadvantages. Infrastructural expenditure spread across a rural development strategy combined with foreign investment could foster a domestic industry. But the crucial point is that infrastructure plays a permissive function. For example, improved inter-island shipping could make log transport to Java an economic proposition: the power of this on the decision making of foreign investors in quite separate. The powers of the government to influence foreign investors to commit* themselves to long-term investment in processing seem to be weak. Blanket regulations such as royalties and export taxes', indigenisation and sectoral close-down seem to be the only effective control mechanisms available. Logging profits are not being invested into industrial capacity in any appreciable degree and training programmes are similarly evident. It -is a central question as to whether foreign investors can be induced'to commit them-selves to local processing. As yet very little direct pressure has been brought to bear upon forest companies, measures such as restricting log exports to include a percentage of processed material have not been introduced. Clearly, the gains from processing have to be weighed against interim losses in foreign exchange, royalties and income resulting from a cut back in log exports. The extent to which concern over the problem of regional imbalance in Indonesia's economic development, epitomised by the concentration of almost all new industries in and around Jakarta, is represented by the role of foreign investment in the forest sector. This concern will be decisive in the resolution of this contradiction by the government. For this will be the chief focus for the government's real, or superficial, desire to achieve a measure of indigenous economic growth in the outer islands, a desire made more complex by the dynamics of a new economic nationalism. 4.2 THE MALAYSIAN  ECONOMY The performance of the Malaysian economy in the last fifteen years has been accorded much approbation. An annual growth rate of 6%, a strong balance of payments and good domestic price stability stands in sharp contrast to the experience of many other Asian countries. Industrial output has grown annually by 11-12% and the claim has been made that Malaysia is ready to follow the export-led growth path of South Korea and Taiwan (Kasper, 1974). Foreign trade played a dominant part in the country1s progress. Imssp'iite <of ;a continuous decline in Malaysia's terms of trade, partially offset by productivity increases in rubber, and because of a high rate of growth in earnings from palm oil and timber of 18% per year, during 1961-1970 merchandise exports grew overall at 5.3% per year. The results of a diversification in-exports can be seen in the growth of manufactured exports which expanded at 19% per annum between 1968 and? 1912' .("I.B.R.D. , 1973a). Under the veneer of this experience considerable scepticism can be cast upon the nature of the Malaysian growth pattern. Firstly, when the deterioration in the terms of trade is allowed for, real growth did not exceed 4.5% during the 1960's and this was in a period when popula-tion growth was approximately 3%,, thus only a fairly conservative increase in income was possible. Secondly, the high ratio of exports to G.N.P. standing at 45% means that the country is very sensitive to changes in external demand. Recent economic history shows that good export years are followed by an upsurge in investment; since this investment has a high import content, it parallels the import cycle. Therefore years of good balance of payments surplus are followed by years of deficit. Kasper contends that the economy did manage significant economic progress through the diversification of exports away from traditional items. Yet in 1974 70% of the export bill was made up.of rubber, tin, palm oil and timber which compares with 73% in 1960. So, while it is true to say that exports have been diversified by export substitution., it hasfcbeen very limited, and the basic reliance of the economy on these four commodities remains as does the inter-dependency of the rest of the economy on the demand in the developed world for these commodities. Thirdly, the outlook for the manufacturing sector to promote growth through exports is dimmed  by its marked tendency to pursue expansion in areas of import substitution. Export substitution appears to be concentrated in the resource sector compared with an average of 14.3% of manufacturing output being exported (Table 19). In turn the manufacturing sector has been unable to create sufficient employment opportunities. Both the foreign dominated manufacturing sector and innovation in the technology of rubber produc-tion have been labour-saving. Finally, the growth of unemployment to an estimated 8%, the very clear income inequalities between Malays and non-Malays , and between the east and west coast states reveal the true nature of the Malaysian development experience. Aggregate employment opportunities expanded by 2.6% per annum in the 1960's which lagged behind the estimated growth of 2.8% in the labour force. This takes no account of under-employment and those already unemployed. The need for employment expansion can be shown by the disproportionate share of wealth in non-Malay hands and the contrast with the Malay population who form the bulk of the rural poor. Inequality in the distribution of income was recognised in the late 1960's and, along with unemployment, attained greatest prominence in the Second Malaysian Plan. Unemployment seems such a severe problem that the Plan's goal was simply to avoid an increase between 1971-1975. However the faster rate - 100 -Table 19. Malaysia: Exports Of "Pioneer Industries." (Peninsular Malaysia Only) For Comparison Exports as Percent of Gross Sales, 1970 Export Capital/labour Growth ratio, 1967-71 1969 (percent) (dollars) Food Beverages 10.2 Textiles, clothing foot-wear 23.8 Wood products 64.3 Furniture 60.7 Leather products Rubber products 8.3 Chemicals 10.4 Petroleum products 24.9 Cement and related products 18.1 Iron and steel 11.1 Metal products 8.3 Machinery (except electrical) Transport equipment 14.8 Electrical machinery 5.2 Plastics 5.0 Total pioneer sector 14.3 1 Total manufacturing sector 20.0 13.3 410.0 105.9 404.7 7,007 14,473 7,245 3,833 77. 3 C 5 , 0 6 4 37. 7 1 8 , 8 1 8 - 3 0 . 3° 1 8 6 , 8 6 2 52. 1 C 1 2 , 5 3 0 160. o c 23 ,515 103. 5° 4 , 8 0 8 1 , 5 6 0 66 . 6 8 , 1 0 9 6 8 . 8 11,378 7,159 a.Entire manufacturing sector (pioneer and non-pioneer enterprise) . b.Author's estimate. c.Share of less than 5% in 1971 manufactured exports. Source: Kasper, 1974. of growth of the manufacturing sector exacerbates the level of unemployment and thus has been regarded as an inevitable consequence of Malaysian development policies (Alatas, 1972, Richards, 1974). Naturally the issue of unemployment is closely allied with the growing racial and class discontent in Malaysia which was violently realised in the 1969 riots when Malays set on their Chinese compatriots. The 'Bumiputra', or Malay-advancement programme, was designed to appease this in the shape of development projects and land reform to allay their grievances. Recent developments indicate that this appeasement has been far from complete. The extensive land development programme currently underway, along with continued efforts to attract export-oriented industries in the less developed parts of the country^ are central to the current development strategy. 4.2.1 Foreign Exchange Earnings Hardwood exports have steadily increased their share of the total export bill. In 1962 this share was 6% and by 1973 had expanded to 21% but the following year this declined to 14% (Table 20). ( Fluctuations in world trade did not have any adverse effect on the continuous growth of these exports and so they are ranked third behind rubber and tin without having faced declining terms of trade. As was the case with Indonesia, forest products exports have gained prominence for their capacity to earn foreign exchange and also have been an important component of trade expansion when traditional commodity exports were suffering from their inherent problems. The difference lies with Malaysia or more accurately, within Malaysia,where the export trade can be distinguished by the degree of processing and by the state of origin. A fundamental objective of forest development in Peninsular - 1 0 2 -Table 20. Malaysia: Tropical Hardwoods Share of the Export Bill,, 1962 - 74. Total Export. Tropical Hardwoods' Earnings. s h a r e % $ millions. 1962 1065.4 6 1963 1088.2 8 1964 1101.6 9 1965 1236.2 10 1966 1248.7 13 1967 1213.0 16 1968 1347.4 16 1969 1652.0 16 1970 1686.9 18 1971 1636.0 21 1972 1728.2 22 1973 3072.1 21 1974 4243.8 14 Source: Compiled from F.A.O. 1975d and I.M.F. 1975. Malaysia is to minimize the loss of commercial timber that will be harvested during the process of large-scale clearing of forest land for agriculture which will be a continuing feature of development over the next twenty years. In this way forest resource development is to be integrated with the overall land-use plan for Peninsular Malaysia and to this end planning aims to double the log intake capacity of the forest industries and so treble foreign exchange earnings (F.A.O., 1974). Therefore the capacity of the forest resource to sustain a wood-based industrial sector is now a real policy issue. This is emphasised by the high proportion of Peninsular Malaysia's hardwood exports'fulfilled by sawnwood and plywood: in 1974 $203 million were earned by these exports. forest products fluctuates considerably and export booms such as those in 1968 and 1973 coincide with phasesof high capacity and utilization. Correspondingly the time lag between export' demand fluctuation and actual production for export is relatively short. On the other hanc^ , log exports dominate as foreign exchange earners'in Sabah and Sarawak. In the former state log harvesting and growing export crops are the main activities. Sabah has consistently exported a very high volume of her rapidly expanded log production, usually over 90% and one one occasion,' 1969, 100%. In 1973 these exports accounted for over half of Malaysia's forest products export bill. Sarawak, a much smaller hardwood exporter had exports totalling $52 million in 1972 compared with Sabah's $176 million. As with other primary"exports the international demand for Exports From Sabah and Sarawak 1972 ($ million) Sabah Sarawak Total Exports 211 214 Forest Products 176 52 Source: E.C.A.F.E., 1973, F.A.O., 1975d. The main point to note here is that other than the sawnwood exports from Sarawak, a much greater degree of processing is carried out in Peninsular Malaysia. Until the 1972 log export ban on preferred species, log exports from Malaysia went in the main to Singapore where sawnwood and plywood were exported to the E.E.C. In this way unlike Sabah, Peninsular Malaysia avoided being at the mercy of the Japanese log market and the conditions it imposes on the producing nations. 4.2.2 Regional Income State revenue is obtained from forest exploitation through royalty payments and license fees which differ amongst states as they are determined on an ad hoc basis (I.B.R.D., 1973b). However the 10% log export tax calculated from the f.o.b. price is standard. Only recently have the states of Peninsular Malaysia recognised their inter-dependence resulting in an evaluation of the resource1s potential as a basis for export-oriented industrialization. Log exports have very largely been responsible for Sabah's trade surplus since independence. The balance of trade exceeded $200 million for the first ten years of independence, 1963-1973, and G.N.P. grew by 29% during 1972-1973. Since independence Sabah has acquired between 70%-80% of her export revenue from timber exports. Prior to federa-tion, rubber was the highest value export crop but it and all other agricultural products are now surpassed by log exports. The revenue received by the Sabah government from these exports increased from only $4.5 million in 1963 to around $30 million in 1971. During this period, forest exploitation underwent rapid growth and it is apparent that most of the timber revenue has not come to the state in taxation. This has been attributed to the nature of the log export trade, controlled by foreign-based companies (Burrough and Burrough, 1974). In a manoeuvre designed largely to capture the support of the rural poor, a State Trust Company was set up under the Sabah Foundation to take over and control timber exploitation in an area of over 1 million hectares. Operators in this concession areas, held previously by twelve international timber companies, were subcontracted to local logging companies and the Company purchased six ships to transport logs to Japan. All Sabahans were eligible to register for a free Trust share in March 1971 and about 90% did so. Dividends are paid on a regular basis to the order of $20-$25 per person and the remaining balance of the income derived from the export business is invested in various, not necessarily forest industry, projects. As such the Trust Company represents the first initiative on behalf of a producing country to directly undertake forest exploitation and to control the manner in which the resource is exploited with the aim of retaining the benefits in local hands. The inauguration of this Company was not an isolated act but part of a programme to transfer foreign controlled operations in the forest sector into indigenous control. The State government has refused to renew concession agreements when they come for renegotiation and presently available forest land is to be reallocated to local entrepreneurs. 4.2.3 Foreign Investment Encouragement of the free enterprise system in Malaysia has provided attractive conditions for foreign investors. Between 1966-1970 42% of public investment was financed from abroad as was 14% or about $1,000 million of private sector investment. Foreign investment was stimulated after 1958 when the Pioneer Industries Ordinance offering incentives for domestic and foreign investors was enacted and was further encouraged by the 1968 Investment Incentives Act (Stikker and Hirono, 1971) . Pioneer status was accorded to foreign investors in certain industries such as canned fruits, wood products and assembled electrical equipment. It incorporated tax holidays, investment tax credit, accelerated depreciation, in return for 51% Malaysian participation and the tax incentives were coupled with tariff protection. As a result most of the foreign enterprises were in light manufacturing aimed at import substitution. Processing of primary products such as rubber and palm oil has also attracted foreign capital. By 1970 pioneer firms engaged in the manufacture of wood products and furniture had invested $1.1 million or about 1% of the total g foreign equity in pioneer industries (Kasper, 1974). Forest industries differ from the other pioneer industries and from the entire manufacturing sector, chiefly in market orientation and scale. Both the wood products and furniture industries export the highest proportion of their gross sales in the pioneer industry category which is a move away from the import substitution industrialization. Secondly, although pioneer status and investment credits are in proportion to the amount of capital invested/ so that industries with high capital output ratios are preferred to labour intensive factories, wood products and furniture have the second lowest capital to labour ratio in the manufacturing sector (Table 19). This is probably because much of the industries' growth in the 1960's was financed domestically. The average annual growth of the wood products industry between 1968-1972 was 14% while the manufacturing sector averaged 10.5%. This growth is reflected in the remarkable expan-sion of exports over a similar period (Table 19). Comparable figures for Sabah and Sarawak are unavailable,however, a 1971 survey indicated that 8 This only applied to Peninsular Malaysia. 75-80% of the equity capital in the timber industry in Sabah was held by existing concession operators. Some two-thirds of the industry equity capital was foreign, mainly British, American and Japanese •*» (Canada: Department of Industry, Trade and Commerce, 1973) . The domestically owned part of the industry is held by a few Chinese families with political or economic power and the recent redistribution of concessions has continued this pattern. 4.2.4 Employment As only 27% of Peninsular Malaysia's population isv:urban nearly half of the workforce is employed in agriculture, forestry and fishing. The growth of manufacturing employment at a rate of 11.7% between 1965-1970 meant that manufacturing employment represented 20% of total employment by 1970. In that year employment in forestry and the forest industries was nearly 43,000 and this figure is expected to grow by 60% by 1990,(F.A.O., 1974a) (Table 21). Very substantial employment opportunities are envisaged in the agricultural development programme in this period. The projection for the forest industries will, of course, be a function of the techniques introduced in future years and the scope for job creation is illustrated by Figure 3. Although value added per worker remained fairly constant throughout the 1960's in the wood products industry it is very difficult to reach a conclusive interpretation of this trend. Between 1965-1970 job creation occurred at 12% per year in the wood industry, while the total value added doubled (I.B;R.D., 1973a). Constant value added per worker implies that any technological "change in the industry has been minimal and that it has, say, only been able to meet a decrease in resource quality. Yet the number of firms in the industry has increased and output Table 21. Peninsular Malaysia: Employment in Forestry and Primary Forest Industries in 1970. Employer Category of Employment Per Category of Employment Per Category of Employer Forestry Department Staff Skilled Labour 1 660 1 300 2 960 Logging and Transport Staff 800 Skilled Labour 10 100 Unskilled Labour 5 600 16 500 Sawmills Staff 2 250 Skilled Labour 10 100 Unskilled Labour 4 550 16 900 Plywood Mills Staff Skilled Labour Unskilled Labour 600 1 350 4 750 6 700 Grand Total Total Staff 5 110 Total Skilled Labour 22 850 Total Unskilled rc,  • Labour 14 900 42 860 Source: F.A.O. 1974a. YEAR Figure 3. Peninsular Malaysia : Alternative Employment Opportunities in the Forest Industries, 1970-1990 has been shown to have grown at a higher rate than manufacturing generally. Peninsular Malaysia's exports in the low value added category have made good progress in overseas markets. Present efforts to upgrade the export products, are likely to increase value added per worker while recent history indicates that industrial expansion may not have been at the expense of employment through wholesale adoption of labour saving techniques. To be fair, the sawmilling industry is not renowned for the pace of its technological advance. There are important implications in this instance for the type of industry that has to develop into larger-scaled operations in order that it may be successful in overseas markets. The experience of other producing nations invariably demonstrates that the sawmilling industry (plywood is also important in the Malaysian context) has a dual structure and this trend is becoming more marked in Peninsular Malaysia. It is assumed that approximately 50% of the industry's expansion will have to be financed from overseas, with individual states, a domestic partner and a foreign investor all being involved (F.A.O., 1974a). These employment opportunities will be all the more valuable in the future as present government policies plan to avoid increasing unemployment. A serious attack on reducing the level of unemployment is made more difficult by policy measures which explicitly favour large-scale industrial operations or artificially profitable industries with limited linkage and spillover effects such as automobile assembly. 4.2.5 Discussion Malaysia possesses an exceptional natural resource in the form of the availability of land suitable for agriculture. Agro-based industries like those processing rubber, palm oil, and timber are viewed as suitable vehicles to promote rural development especially in the eastern states of Peninsular Malaysia. The poor states on the east coast have per capita incomes less than half that of the more industrialized west coast states where growth has been heavily weighted in favour of capital intensive import substitution industrialization. Ethnic inequality is also closely allied to this regional disparity. If Malaysia succeeds in sustaining a high rate of per capita income growth in small-scale agriculture, the rural purchasing power would be an important source of demand in the present narrow market for manufactured goods. In the forest sector, resources are available, the industries have sufficient capacity to expand and finance future growth which is focussed on large-scale integrated complexes. At present the industry has the ability to sell in overseas markets and while the overall importance of the small sawmillers is likely to become less they will continue to serve the domestic market. In the case of Sabah, the log trade is likely to remain substantial. As with Sarawak, its future will depend upon how much of the proposed investment in forest industries will be realised. The opportunity Sabah has to guide the pace and direction will be an advantage in its favour. As much of the forest industries' fortune is tied to agricultural development, the spread of infrastructural development across the needs of several rural industries geared to export substitution, will aid their expansion in the eastern states. Given the proposed growth of the forest industries, they would appear to have a function in promoting rural development through employment and income generation. The move towards larger-scaled integrated complexes involving several different processes^ and their prospects, ought to reveal the potential of this form of export substitution. Whether this possibility and others in the same vein will advance the participation of the Bumiputras and redress some of the inequalities in Malaysia remains an open question but this type of strategy does stress the interwoven nature of rural development. 4.3 THE PHILIPPINE ECONOMY Two important events in 1972 have had equal influence on the direction of the Philippine economy since that year. The unspectacular performance of the agricultural sector, the largest sector in the economy contributing 32% of G.N.P., was further affected by massive flooding in Central Luzon which caused severe damage to infrastructure and meant that a portion of the rice requirement had to be imported. President Marcos' declaration of martial law in September has had more far reaching consequences, with the real or promised advances towards a 'New Society' being one of the regime's major justifications and the basis of its general support. The economy grew at an average rate of 6% per annum in real terms during the 1960's and,while population growth was around 3% per annum, per capita income increased by $45 to $200 in 1970. From a 7.5% expansion in 1970, agricultural production fell in 1971 to show only a 2% gain and in 1972 the sector registered a decline of 1% (F.E.E.R., 1973). Despite growing emphasis on agricultural development which was shown by heavier investment in farm development, land reform and infrastructure, the average growth rate was predicted at 5% for 1973-1977. In comparison to this, much faith has been placed in manufacturing, forecasted to grow at 9-10% per year and to increase its share of G.N.P. from 21% in 1973 to 23% by 1977 (I.B.R.D., 1973b). The agricultural sector's future, with the emergence of a land hunger, a history of neglect, where present progress can no longer support a population of 42 million, growing at a fairly high rate, is a serious issue. Employment in agriculture grew at only 1.2% per year into the 1970's but the sector absorbed 23% of the increase in total employment. Because of this low level of growth the sector's share of employment fell from about 60% to 54%. During the 1960's copra, logs, copper and sugar comprised 70% of Philippine export earnings. Evidence of significant growth in manufactured exports in the same decade is largely accounted for by plywood, coconut oil and canned pineapples (Power and Sicat, 1971). This growth of manufactured exports was at the level of 11.5% per annum while the sector itself grew by 6.8% as opposed to 4% in agriculture (Hicks and MacNicoll, 1971). Nevertheless the promising outlook for the industrial sector is marred by its very limited labour absorption capacity. Due to the heavy emphasis on capital intensive technologies, industry absorbed only 10% of the increase in the labour force so that its share of total employment remained constant at 12% throughout the 1960's (I.B.R.D., 1973b). In the 1970's, around four million people will enter the work force so that about 3.5 million new jobs will be needed, quite apart from the problem of dealing with the widespread underemployment and the present national levels of unemployment around 8-9%. Against this back-ground the new Four Year Plan, 1974-1977 aims at achieving the New Society through: a) the promotion of employment b) maximum  economic growth c) more equitable income distribution d) regional development and industrialization e) social development f) acceptable price and balance of payments stability (E.C.A.F.E., 1974). A narrow distribution of the benefits of growth, the preponderance of industrial expansion in and around Manila, growing unemployment, a colonial export trade pattern and import dependent industrialization give some breadth to the Philippines' problems. 4.3.1 Foreign Exchange Earnings Declining from a peak of 34% of the country's total export earnings in 1969, to a low of 22% in 1972, the value of the Philippines' forest products exports picked up in 1973 (Table 22). These exports accounted for less than 5% of the export bill in the early 1950's but their rapid growth explains around 50% of the absolute growth in total exports since 1950. As a result of the importance of commodity exports to the Philippine economy this growth has been of considerable value. The first three years of this decade witnessed a 30% deterioration in the Republic's terms of trade but in 1973 both commodity and manufactured exports enjoyed favourable foreign markets. This pattern associated with chronic balance of payments difficulties has induced a haphazard or spas-modic growth within the industrial sector. For some years log exports have been static or declining and government policy generally has moved towards assisting manufactured exports. Their potential remains to be realised and has been seen to be a difficult road to follow for reasons which are in part related to a hangover from import substitution policies and to external obstacles such as tariff escalation. Power and Sicat comment that, "the failure of industrialization to generate new sources of export earnings is simply outward evidence of the nature of the industrialization drive". (Power and Sicat, 1971). Bearing this constraint in mind, the present measures to progressively ban log exports were taken in the light of their foreign exchange implications. A study group was Table 22. Philippines: Tropical Hardwoods' Share of the Export Bill, 1962-1974. Total Export Tropical Hardwoods Earnings Share %. $ millions 1962 556.0 22 1963 727.1 23 1964 742.0 21 1965 768.4 21 1966 828.2 21 1967 821.5 23 1968 857.3 32 1969 854.6 34 1970 1,061.7 27 1071 1,121.8 24 1972 1,105.4 22 1973 1,787.8 23 1974 2,671.0 10 Source: Compiled from F.A.O. 1975d, I.M.F., 1975, Philippines: Bureau of Forest Development, 1975. set up in 1973 to examine the economic effects of the export ban and it indicated several difficulties which would arise from efforts to stimulate domestic processing. The group's conclusion was that log exports should follow the prescribed ban, that existing capacity should be used more fully, that investment be made in mills in areas of log surplus, that sawmills equipped with circular saws be phased out, and that infrastructure, especially roads and ports be improved in order to facilitate domestic processing. Estimation of foreign exchange income from the export of wood products processed from logs exported previously as such was calculated to more than make up for the drop in earnings foregone from log exports, by 1978 (I.A.S.G., 1973). In order that this optimistic conclusion could be reached, heroic assumptions about market access, price and the competitiveness of the Philippine forest products industries were made. For a number of years Philippine plywood and veneer mills, the main sources of future growth along with lumber, have unsuccessfully competed with mills in South Korea and Taiwan. By 1973 in the U.S.A., Korean producers had captured 45% of the tropical hardwood plywood market and firms in Taiwan had obtained a further 27% of this same market. A host of reasons is introduced by those seeking to explain the mixed fortunes of the forest industries. They include poor infrastructure, high freight rates and tariff barriers. It is true to say that high freight rates paid by Philippine exporters result from distance to the market and the scattered number of ports. High inter-island rates have already been mentioned in connection with logs. It is significant that Japan, South Korea and Taiwan have been importing the bulk of their log requirements thus it has been relatively easy for them to group their processing plants in one port of call. Philippine wood products exports are now being transshipped to a few selected main ports in the Philippines to improve the situation of a few years ago when the total export of plywood, veneer and corestock to the U.S.A. was loaded from 21 ports (Philippines: The Philippine Association for Permanent Forests, 1972). But high freight rates are still viewed as the main problem in marketing forest products. This view can be discounted when the log transport costs absorbed by the in-transit processors are examined. Rola has analyzed the claims of 'higher' freight costs made by plywood firms and concluded that these claims ignored the extra procurement cost faced by their competitors (Rola, 1974). The high nominal and effective tariffs placed on processed forest products are a universal constraint. However, until 1974 when the Laurel Langley agreement expired, the Philippines enjoyed preferential treatment in the U.S.A.'s plywood market. Therefore it would seem necessary to seek alternative and more satisfactory explanations for the Philippines' inability to compete effectively against countries that she supplies with their necessary raw material. It is interesting to note that the lack of success with export substitution is not restricted to one natural resource: the Philippines still exports quantities of copra, metallic ores and concentrates which are often processed and re-exported by other countries. Industrialization policies favoured inward looking, import dependent industrialization and encouraged industries which were based upon undervalued, imported inputs rather than on materials from agriculture, mining and forestry. As the export of goods from these sectors in unprocessed form (e.g. logs) has been more profitable than in processed form (e.g. sawnwood and plywood) there has been a reluctance to devise export-oriented policies, particularly with the pressure on foreign exchange earnings. The import component of log exports has been valued at 14% and for plywood at 18.8% (minerals at 23.6%) which shows that the net contribution of the natural resource sector in earning foreign exchange is noticeably less than the level indicated by the gross figure (Power and Sicat, 1971). 4.3.2 Regional Income The regional impact of the forest sector is largely indeterminate. Revenue from the log export tax and the 7% tax on local sales of forest products accrues to the national government. In 1971 the total income from the forest sector was estimated at $60 million, a figure which included all forms of corporate tax and levies. As industrial growth has been centred in South-west Luzon, the forest industries of Mindanao, Visayas, and Palawan are of importance to regional growth. 4.3.3 Foreign Investment Since the imposition of martial law in 1972 there has been a new priority placed on enticing foreign investment to reverse past patterns. Investment interest in the Philippines intensified during 1973 owing to the appearance of a more clearcut investment policy. Although the Investment Incentives Act of 1967 and the Export Incentives Act of 1970 had offered incentives in the form of tax exemptions and tax deductions, these resulted largely in a concentration of investment on a small number of highly capital intensive projects. From 1963-1970, out of a total investment of $176 million, $27 million or 16% was given in tax exemptions (I.B.R.D., 1973). These were in mining, plywood and veneer, textiles, chemicals and pulp and paper. The devaluation of the peso in 1970 and substantial incentives in the Export Incentives Act marked a change in policy. Table 23. Philippines : CAPITAL-LABOR RATIOS AND DISTRIBUTION OF DIRECT FOREIGN INVESTMENT IN MANUFACTURING, 1970 Per cent Distribu-K/L• tion of  Foreign Less than Cumula-Industry (000't Investment  in tive  Distribution  of pesos) Manufacturing Foreign  Investments (1) (2) (j) Petroleum and Petroleum products 184.060 24.2 24.2 Basic Metal Industries 65.425 2.8 27.0 Nonmetallic Mineral 45.647 3.0 30.0 Chemical and Chemical Products 23.761 3.4 33.4 Drugs, Medicines and Cosmetics 9.1 42.5 Paper and Paper Products 22.915 7.2 49.7 Food 17.256 14.8 64.5 Transport Equipment 14.697 .7 65.2 Textile (exc. cordage, rope ind twine) 12.757 2.0 67.2 Cordage, Rope and Twine 0.4 67.6 Beverages 12.648 7.7 75.3 Rubber Products 10.837 5.4002 80.7002 Machinery except electrical 10.144 3.3 84.002 Metal Products 8.287 4.2 88.2002 Electrical Household Appliances Electrical machinery 8.175 0.9 89.1002 except household appliances 3.6 92.7002 Miscellaneous manufacture 8.077 0.3 93.0002 Leather and Leather Products 7.964 0.0001 93.0003 Wood and Cork Products 7.560 2.8 95.8003 Printing and Publishing 7.032 0.2 96.0003 Furniture and Fixtures 5.522 0.0002 96.0005 Tobacco Produc.s 5.078 3.2 99.2005 Footwear and wearing apparel 13.200 0.8 100.0005 •The capital-labor ratio is approximated by the book value of  fixed  assets over total employment. Source : Noriega, 1973 Foreign investment in the forest sector and especially in the conversion industries amounts to a small proportion of total foreign investment (Table 23) and with the exception of pulp and paper falls at the lower end of the capital/labour for all foreign investment in manufac-turing. Current investment in the forestry sector will need to be supplemented by a total of $115 millions if all logs currently exported are to be processed domestically (Table 24). A large part of this investment will be for infrastructure and shipping which are judged to be vital to the fuller utilization of installed capacity. In addition to this amount $98 million would be required to finance the imported content of this investment (I.A.S.G., 1973). If this type of investment is undertaken it will be a move away from existing biases in the factor markets towards labour intensive industries which have in the past been penalized as little foreign investment has been attracted to them. Table 24. Philippines: Necessary Investment If Proposed Log Export Ban Occurs. ($ million) Infrastructure Existing Plants Expansion of Existing Plants New Plants 68.7 8.4 14.2 16.2 Shipping 7.9 Total 115.5 Source: I.A.S.G., 1973. The regional dispersion of this investment would also be an important factor although this brings with it the lack of overhead capital in the remote areas of Luzon and Mindanao. Over the twelve month period from mid 1973 to mid 1974 costs in wood-based panel production increased by 77% very largely because all resin, machinery and fuel has to be imported (Sanvictores, 1975). This will in turn affect future investment prospects. Because of the high prices which prevailed from early 1973, it became more profitable than normal to export logs than to process 3 them. The increase in f.o.b. prices from $26 per m to $65 in the first quarter of the year made log exporting very favourable and even processing operations diverted the bulk of their logs to foreign markets. A steady supply of logs for the domestic industry, for processing prior to export, will be available once the log export ban is fully enforced. 4.3.4 Employment Studies of the employment generating effects of foreign investment in the Philippines reach gloomy conclusions. The future for agriculture, the largest sector which remanis the largest job creator is overshadowed by that of the manufacturing sector. The problem of determining the proportion of total employment due to foreign investment is not an easily solved one. Several factors, such as the multiplier effect of foreign investment on employment and income and the time lag involved, are hidden behind a scarcity of data on the same. Subido (1973) suggested this is less of a problem in the Philippines as the industrial linkages produced by import using industrialization have been minimal. Employment opportunities have thus not been realised because of the limited linkage effects and remain unexplored again due to the concentra-tion of investment in capital intensive operations. Because of the growing need to deal with unemployment and to find alternative sources of foreign exchange, the employment opportunities offered by export oriented industries have received some attention. These industries firstly are categorised according to Lary's value added per employee approach which classifies as labour intensive those manufacturing industries with low value added per employee according to international comparisons. Total value added in the wood industry more than tripled between 1960-1970 which was roughly comparable to the average for the manufacturing sector as a whole. In this same group, employment doubled from 19,000 to 38,000 (I.B.R.D., 1973). Under the above classification a different pattern emerges. In the Philippines, the capital intensive export industry absorbs 12% of the total employed labour force, that is, about 1.4 million people. This group consists of firms which export significant amounts of their output and, perhaps surprisingly, log and lumber production are included. Log exports lead the employment and export index with 23% of total export earnings and an estimated employment g figure of 498,522 (Table 25). This amounts to 44% of the total labour absorption in capital-intensive export industries (Alban, 1973) . In contrast, labour intensive manufactured exports which include plywood, veneer and pulp and paper, provided 30,000 jobs in 1970. The forest industries, including furniture and other wood manufactures absorbed 16,000 (54%) of this total. Export-oriented employment remains fairly low in this sub-group, accounting for only 15% of employment in all labour intensive industries or 9% of total manufacturing employment (Noriega, 1973). The Export Incentives Act and the Investment Incentives Act are g The writer has grave doubts about the validity of this figure. Alban (1973) stated that employment data was unavailable for the "non-manufacturing" group of forestry, mining, and agriculture, included in the analysis of export industries. The figure remains excessive, even when an allowance is made for his different classification. Table 25.-Philippines: Major Exports (Excluding Labour-intensive Exports) Ranked According to Export Earnings and Generated Employment. Exports Export Earnings Generated Employment Logs 1 1 Sugar, centrifugal 2 4 Copper concentrates 3 2 Coconut oil 4 13 Copra 5 3 Gold 6 7 Mineral fuel, lubricants, and related materials 7 19 Base metals 8 11 Abaca 9 6 Copra meal or cake 10 13 Tobacco 11 5 Lumber 12 7 Chromite ore 13 9 Bananas 14 8 Copper ore 15 12 Iron ore 16 10 Chemical elements and compounds 17 17 Portland cement 18 16 Textiles 21 14 Source: Alban, 1973. administered by the Board of Investment (B.O.I.) that aims primarily to diversify the Philippine export base. The B.O.I, offers incentives on the basis of certain necessary conditions such as 'economic' plant size and product mix and has an influence upon industrial structure and location. While the "non-manufacturing" exports from the natural resource sectors make the largest contribution to labour absorption and although the labour intensive export industries perform a useful, if smaller, function, very few industries within these two groups receive assistance or acceptance by the B.O.I. The high employment generating (and unstable) export products of veneer, plywood, mineral ores, and food preparation industries are all excluded (Alban, 1973, Noriega, 1973). Support via the B.O.I, has been given mainly to manufactured exports in new industries in order to achieve the important goal of export diversification, rather than to the export substitution industries based on traditional foreign exchange earners. If the export industries are to fulfil a potentially significant function as employment creators, in addition to earning foreign exchange, then it would seem vital not to ignore these as they are the very areas where employment promotion could be most effective. 4.3.5 Discussion Foreign exchange earnings have been, and still are, an important aspect of Philippine industrial policies. Present government objectives emphasize employment creation, with the manufacturing sector becoming increasingly important to the Philippine economy in relation to both of these objectives. As the thrust of industrial development over the past few years has attempted to move away from the frustration of import dependent, import substitution, it might be expected that the changing industrial structure would seek to utilise fully all the available linkage effects needed to progress toward dealing with unemployment. On its present lines, industrial expansion remains import dependent, remains centred around Manila, and remains a small contributor to easing balance of payments difficulties. Industrial processing of natural resources seems to offer better prospects in the direction of labour absorption and foreign exchange earnings. A comparison of the relative profitability of exporting crude or processed products misses the key point. Timber will be exported whether as logs or plywood. The rate of return on plywood manufacture should therefore not be compared with that of log exports, but with alternative investment opportunities; since it is these that would be displaced, not logging. Unfortunately, this comparison is equally inappropriate as the other investment opportunities include those in artificially profitable import substitution industries. The heavy protec-tion of these industries defends an exchange rate at which logs can be exported but not plywood in substantial quantities. Thus Power and Sicat argue that the profitability of the in-transit processors has sufficient explanation in, "...the protection system and the unfavourable exchange rate which it defends. This suggests that many other potential export industries based on domestic raw materials may also be victim of the protection system". (Power and Sicat, 1971) Much of the Philippine forest industry sector operates far below installed capacity, has poor export-oriented infrastructure and needs to import simple inputs, all of which add to the high cost of log processing in the Philippines. It is the inability of, or the bias against, manufacturing activities which link back to the resource base that suggests a fundamental change in industrial structure, namely concentration and location, ought to be a serious consideration in the pursuit of the New Society. CHAPTER FIVE CONCLUSION The forest resources of Indonesia, Malaysia and the Philippines together provide by far the largest supplies of tropical hardwoods traded on world markets. It might be assumed that this commonality would assist in an analysis of the forest sector's relationship with economic develop-ment. Instead, the variety of experience renders a general conclusion on the role of the resource in the promotion of economic development rather problematic. For these open dual economies, export substitution poses difficult problems. The expansion of their narrow industrial bases is restricted on the one hand by external obstacles and on the other hand by the inability of their industrial sectors to generate adequate employment and income. The possibility for moving away from such industrialization, which does not contribute much to relieve basic social needs and problems, remains to be seen. Common themes that do exist among our countries include: a preponderance of log exports which is highlighted regionally; a large number of small, indigenous conversion plants; the dominant influence of foreign investors; the substantial foreign exchange earnings; a divergence between private and social interest to the point of conflict and a desire to develop processed exports. The country specific interaction of the forest sector with general economic development is a central part of the analysis. Here it is argued that the tendency to examine the forest sector in an abstract sense, and to stress the importance of the sector's special characteristics, is bound to be an unrealistic and partial view. In the simplest terms, forestry is closely associated with the lives of the rural majority. Employment in logging and the small forest industries has the advantage of being, primarily, based in rural areas. In some ways this is recognised in Malaysia. While, in Indonesia the small forest industries are the second largest source of employment in the small industry sector. The obstacles or constraints to domestic industrialization based on log extraction are well-documented. Although foreign exchange earnings are substantial, and the logging industry is highly profitable, any durable contribution to regional/rural development is lacking under the present system of resource exploitation. Regional co-operation to effect changes in this pattern seem likely to be affected more by changes in the international economy than by the spirit of joint action. Other issues in the forest products trade (dealing chiefly with its composition and the pressures to increase processed forest products) extend beyond the scope of our present study. Many other aspects of the forest sector have not been discussed. Specifically, the prospects for agri-silviculture (where trees and agricultural crops are raised on the same piece of land); plantation forestry; forest villages and the influence of traditional practices such as slash and burn or shifting cultivation on the resource base, would bear attention. There is a serious question whether governments have the power to effect change in the direction that would promote more general rural development objectives, or whether they have certain national goals with-in which rural development will achieve prominence only when it does not conflict with the overall development approach. Policies to attract foreign investment would be one example, particularly in the case of the forest industries. This is a central consideration underlying a country's development. Each country in this study has stressed employment and social justice as primary development goals. Leaving aside the degree of com-mitment to be expected from three security conscious regimes, and thus their reluctance to stimulate development 'from below', it is generally acknowledged that the regional dimension is a critical component where equity and growth are at stake. National development objectives may have changed but the realis-ation that an export-oriented forest industry predominantly involved in exporting logs may not always be in line with these objectives has changed much more slowly. Measures to stimulate domestic processing seem largely confined to attracting foreign capital and limiting or prohibiting log exports. Two questions can be raised here. On the one hand, while policies to encourage import dependent industrialization and large-scale investment projects remain, can they be made consistent with the objectives of rural development? On the other hand, how far can industrial policies encourage industrial expansion more consistent with our rural development objectives of increasing local retained income, local value added and employment? In the case of the former, the common outcome has been the con-centration of investment in and around urban centres which generated limited local income and employment. As far as the latter is concerned, policies favouring labour intensive processing of forest products have more uncertain prospects. The forest industries of Malaysia and the Philippines may well have grown in spite of policy restrictions (such as the lack of expendi-ture on roads, ports and inter-island shipping) but to assist the establish-ment and expansion labour intensive, rural industries it would appear necessary to change policy priorities. It does not seem possible to launch a serious attack on rural poverty and unemployment by means of development strategies which emphasise modern industrialization at the expense of indigenous industries. Local materials, local capital funds and local levels of skill should be incor-porated with simple improvements in existing technology, especially in the small industry sector. As far as the forest industries are concerned, it is apparent that production, consumption and trade are diversified, also some operations require limited capital and organizational skills. This is the chief, unresolved issue for policy makers. In spite of new national development objectives, the means for encouraging and supporting labour intensive technological innovation and adaptation are still lacking. Yet, industrial policies appear to discriminate against labour intensive industrialization and many potential export substitution industries are excluded from export promotion and incentive schemes. Immediate scope ought to be available here through a redirection of assistance to the domestic industries. Indigenous forest industries are numerous in the three countries under discussion but little attention has been paid to their role in promoting rural development. It is usually assumed, and has largely been the case, that the smaller forest industries have a local service sector function. That is, they process lower quality logs for the domestic market. As in the case of the other small industries, much of their growth and prospects lie in the hands of the modern, export-oriented sector and with local demand. The policy issue should be focused upon how the small, wood-based industries can be aided best. The extent to which their survival is jeopardised by discrimination in favour of foreign capital; by lack of access to distribution channels; by lack of credit and by inbuilt bias in industrial policies, is of prime importance. A commitment  to rural development would subordinate the present approach. Instead of relying upon selected extractive sectors, wholesale rural development would involve multi-faceted elements of technical and institutional reform. In concept this has happened in Peninsular Malaysia, where the forest sector's future has been integrated with that of agricul-ture. An approach to rural industrialization which utilised indigenous entrepreneurs and local skills, and sought to extend and expand the activities of the existing indigenous operators, would be more closely associated with rural development objectives than would be a policy encouraging the continuation of technological dualism. Resource exploitation of unprocessed exports is prevalent as a colonial heritage. The future requires industrialization based on the labour intensive processing of these same resources. 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Commonwealth Forestry Review. 54 (3+4): 206-215. World Wood. 1967. 1967 World Wood Review. 8 (3). . 1974. 1974 World Wood Review. 15 (6). . 1975. 1975 World Wood Review. 16 (8). Appendix 1 Table 1. World Trade in Forest Products, 1962-1973. $ 1,000 1963 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 . 1973 World 6,145,389 6,689,455 7,629,645 8,057,128 8,549,623 8,819,259 9,963,958 11,312,078 12,582,458 13,065,780 15,403,331 21,763,348 Developed' 4,937,849 5,325,350 6,023,225 6,307,959 6,647,435 6,857,589 7,665,178 8,712,993 9,720,070 10,008,434 11,854,124 16,189,122 Developing 544,363 657,583 751,147 804,176 891,336 948,504 1,223,780 1,423,384 1,518,286 1,642,340 1,949,906 3,423,000 Asia 423,816 503,676 557,890 607,331 709,834 777,380 1,015,511 1,156,056 1,306,391 1,451,422 1,705,364 2,932,015 I Africa 212,010 258,235 307,054 293,117 299,573 305,151 348,924 414,651 386,471 386,172 479,329 780,084 m I South-America 68,197 66,162 87,910 111,375 125,413 119,844 150,972 184,265 189,440 197,670 214,961 315,334 Oceania 34,014 43,584 48,951 49,314 50,874 62,772 77,099 89,135 104,240 118,164 130,459 167,342 ' Market Economies Source: F.A.O. 1975d. Table 2. The Southeast Asian Log Trade 1962-74. 1962 1963 1964 1965 1966 $ 1,000 1967 1968 1969 1970 1971 1972 1973 1974 1,483 1,618 2,840 6079 10,340 28,237 86,181 163,560 220,915,, 574,000 n.a. F Indonesia 672 1,103 .Malaysia 46,880 59,816 66,766 85,829 125,241 155,122 160,922 196,835 210,208 209,339 233,458 399,558 356,000 P. Malaysia 940 8748 10469 14112 19,211 248500 27698 32418 32993 32215 180C0 22420 - Sabah 39,216 48,922 48,149 59,999 84,282 103,335 109,135 122,324 - Sarawak 7,601 9,955 9,874 15,361 26,847 32,576 45,274 46,813 Philippines 101,719 136,906 122,800 134,000* 138,971 155,341 219,640 235,701 Asia 175,785 228,517 225,637 257,231 306,688 349,910 448,719 501,959 124,310 136, 48,480 39,458 244,489 223,617 571,755 636,476 171,616 330,791 F 29,627 50,767 173,253 303,426 215,600 r 664,343 1,334,315 n.a. •0-K3 Wor id 357,883 449,528 476,664 517,232 558,874 610,785 753,684 862,295 893,302 636,476 1,076,302 2,013,500 n.a. * Unofficial Figures F. F.A.O. Estimate Source: F.A.O. 1975d, Letourneau, 1975, and Philippines, Bureau of Forest Development, 1975. Table 3. Forest Products Exports From The In-transit Processing Nations. 1962-1973. $ 1,000 1952 1963 1964 1965 1966 1967 1963 1969 1970 1971 1972 1973 Asia 423,816 503,676 557,890 607,331 709,834 777,380 1,015,511 1,156,056 1,306,391 1,451,422 1,705,364 2,932,019 Singapore 784 400 16,883 21,4440 27,634 29,751 39,603 51,891 58,257 60,741 89,974 209,506 I I—1 South Korea 2,284 6,375 12,613 19,344 31,660 36,448 65,616 82,041 103,143 140,177 183,397 319,565 fT OJ I Taiwan 24,92t> 33,290 54355^ 56148 69474^ 81,447^ 86,766 106,197 126,563^ 146,068^ 187,924 275,454^ F F F F F F r F F F Malaysia Table 4. Plywood Exports From Selected Countries In Asia. 1962 - 1973 $ '000 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 P.Malaysia 446 367 714 1,009 1,564 3,370 6,410 10,204 15,229 18,316 28,180 45,000 - Sabah 10 74 306 464 326 592 7CC 1,370 2,470 - Sarawak 30 337 893 835 1,088 742 982 1,081 2,306 Philippines 11,171 15,964 16,020* 17,058* 19,686 18,207 28,975 23,940 25,426 27,300„ 34,140 48,392 F South Korea 2,284 6,309 12,550 19,055 30,683 36,448 65,570 81,758 102,346 138,724 175,236 273,287 -P-•P-Singapore 924 1,331 3,051 4,583 7,825 12,080 14,930 18,976 30,476 72,745 Taiwan 13,216_ 19,909 29,493 30,035^, 36,409^ 45,593„ 55,428^, 68,330 79,133^ 96,240„ 135,790^ 225,114 Asia 101293 115868 136874 142654 173902 188414 268376 301231 323980 3976S2 • 507877 759262 * Unofficial Figures F. F.A.O. Estimate Source: F.A.O., 1975d. Table 5. Selected Countries' Log Exports By Destination , 1972-1973 3 (1,000 m ) Indonesia Malaysia Philippines Asia Sabah Sarawak P.Malaysia Japan S. Korea Taiwan Singapore Hong Kong World 1972 1973 1972 1973 1972 1973 1972 1973 1972 1973 1972 1973 9,687 11,200 1,781 2,522 1,200 2,440 178 38 13,891 19,883 5,146 7,102 1,253 1,575 14 56 748 627 7,718 10.156 1,408 1,260 3 42 800 860 29 151 242 205 1,995 1,895 103 105 4 145 1,764 585 1,889 844 5,270 5,690 322 285 885 1,000 10 24 56 159 6,858 7,752 20,591 25,366 3,845 4,567 2,885 4,000 1,399 828 1,224 1,029 32,861 40,931 Source: Compiled From F.A.O. 1975d. Table. 6. Selected Countries Plywood Exports: By Destination , 1972-1973 S.Korea Taiwan Philippines P.Malaysia Singapore. 1,000 irf U.S. 1972 1973 1062 881 864 521 280 285 39 26 46 15 Europe 1972 8 30 1973 47 66 11 51 116 178 145 278 Japan 1972 93 58 1973 354 387 1 26 Asia 1972 93 1973 361 111 429 17 85 138 58 110 World 1972 1195 1203 1973 1322 1188 317 340 250 349 278 436 Source: F.A.O. 1975d. Japan N.America Europe Africa Oceania World Table 7. Selected Countries Sawnwood Exports: By Destinationj 1972-1973 (1,000 m3) Singapore Malaysia Philippines Asia P. Malay Sarawak 1972 48 146 1 46 292 1973 51 130 - 105 403 1972 82 161 31 89 322 1973 39 133 18 117 360 1972 354 583 208 26 1973 627 983 199 87 1972 117 66 - 12 195 1973 40 40 28 108 1972 47 133 12 56 1973 31 140 21 75 1972 303 1,450 303 231 1973 1,110 2,046 251 427 Source : Compiled from F.A.O.,1975d Appendix 2. Table 1 TRADE and TRADE PROSPECTS IN TRCPICAI. UROADLEAVED WOODS L O G S millions of  m3 (r) SAWN WOOD millions of  m3 (s) VENEER an it PLYWOOD millions of  m3 (s) T O T A L LOC EQUIVALENT millions o l m l (r) IMPORTS OF 1265 1971 19U0 1990 1965 1971 1980 1990 1965 1971 1980 1990 1965 1971 19E0 1950 (a) Ccnrumer Areas 6 . 2 7 . 6 8 . 8 8 .1 2 . 2 3. 1 4 . 2 S.O 1.7 3 . 0 5. 1 7 . 8 14. 7 2 0 . 2 27. 9 33. 9 North America Europe Other temperate J / 0 . 2 S. 4 0 . 3 0 . 1 6. 8 0 . 4 0 . 1 7 . 5 0 . 7 0. 1 6 . 0 1 . 4 0 . 4 1.1 0 .5 0t5 1 . 6 0 . 6 0 . 8 2 . 0 0. 8 1 .0 2 . 4 0 . 8 l . S 0 . 2 2 . 3 0 . 5 0 . 2 3 .5 1 . 0 0 . 4 S.O 1.5 1 . 0 4. 8 S . l 1 . 3 6 . 3 10.7 2 . 0 9 . 0 13.S 3 .1 12. 1 13,8 S.O Wood importing areas of Lntin America 2 / Africa  3/ 0 . 2 0 . 1 0 . 2 0 . 1 0 . 4 0 . 1 0 . 5 0 . 1 0 . 2 0 . 2 0 . 2 ' 0 . 4 0 . 2 0. 6 O.Z - 0. OS 0. 05 0 . 1 0 . 1 0 . 2 0 . 1 0 . 2 0 . 5 0 . 6 0 . 6 1 .4 0.-9 2. 1 0 . 9 (b) Constimei-Processor Cxportcr Areas 12.1 3 0 . 3 4 1 . 3 5 2 . 4 0 . 2 0 . 6 1 .5 4 . 0 - 0 . 3 1 . 2 2 . 7 12.5 3 1 . 9 47. 1 fiS.  8 Japan Other East Asia 4/ Near East 5) Tropical Asia 5/ 9 . 3 1 .2 0 . 1 l . S 2 1 . 3 5. 6 0 . 2 3 . 2 2 6 . 0 10 .0 0 . 3 S.O 2 6 . 0 1 8 . 0 0. 4 8 . 0 0 . 2 0 . 3 0. 3 1 . 0 0 . 5 2 . 0 2 . 0 ; 0 . 2 0 . 2 . 0 . 8 0 . 1 0. 3 2 . 0 0 . 2 0 . 5 9 . 3 1 .2 0. 1 1 . 9 22 .2 5 . 6 0 . 2 3 . 9 30. 0 10 .0 0. S 6. 6 3 4 . 0 1 8 . 0 0. S 13 .0 TOTAL IMPORTS 18.3 3 7 . 9 5 0 . 1 CO. 5 2 . 4 3.7 5 . 7 9 . 0 1 . 7 3 . 3 6 . 3 10.5 27 .2 52. 1 75. 2 99.7 EXPORTS OF • (a) Coimimer-Proeessor ExjiOftfr  Areas 0 . 1 - - - 0 . 7 0 . 8 1 . 2 1.5 0 . 9 2 . 4 3 . 7 4 . 0 3 .7 6. 8 9. 8 11 .0 Japan Other East Asia 4/ Near East 5 / Tropical Asia "6/ • 0 . 1 - --0 . 3 0 . 4 0 . 1 0 . 7 1 . 2 1.5 . 0 . 4 0 . 4 0 , 1 0 . 3 1 .7 0. 1 0. 3 3 . 2 0 . 5 3 , 0 1 . 0 1 . 6 1 . 0 0 . 2 0 . 9 1 . 0 4 . 0 0. 1 1 . 7 6 . 4 3 . 4 6 . 0 5 . 0 (b) Primary Tropical proouccrs 19,1 3 7 . 7 SO. 3 60.5 2 . 1 2 . 9 4. S 7 ,5 0 . 8 t . l 2 , 6 6 . 2 2 4 . 9 15, 1 6 4 . 5 ' 87 .9 Latin America Africa Asia -Pacific 0 . 5 5 . 2 13.3 0 . 3 7 . 0 3 0 . 4 0 . 3 5 . 0 4 5 . 0 0 . 5 4 . 0 5 6 . 0 0 . 3 0 . 7 1 . 1 0 . 5 0 . 6 1 . 8 1 . 0 1 . 0 2 . S 2 . 5 2 . 0 3 . 0 n . 0 3 0 . 1 0 . 7 0 . 2 0 . 3 0, 6 0 . S 0 . 8 1 . 3 1.5 1 .5 3 .5 1 .2 6 . 8 16 .9 1 .4 8 . 7 3 5 . 0 3 , 3 8 . 6 5 2 . 6 8 .5 11.0 6 9 . 0 TOTAL EXPORTS 10.2 37 .7 SO. 3 CO. 5 2 . 9 3 . 7 5 . 7 9 . 0 1 .7 3 .5 6 . 3 10.5 2 8 . 6 5 1 . 9 74, 3 99.5 1/ South Africa,  Australia, New Zealand, North Africa,  Near East, USSR 4/ China and Korea Rp 2/ Mainly Argentina, Uruguay and Cuba 5/ Israel 31 Mainly East Africa  6/  Singapore ord Hong Kong Source : Pringle,1973. Table 2. Projected Demand for Tropical Hardwood, by Major Areas, up to J9851 (unit: million mJ(r)) Actual2 Projected Implied Growth Rates 1955 1960 1965 1968 1975 1980 1985 1965-75 1968-75 1975-85 (percent per annum) Tropical  Producing  Areas 31.3 30.6 35.1 38.1 46.3 53.2 ' 61.0 2.8 2.8 2.8 Tropical Africa 3.1 3.5 3.8 4.3 n.a. n.a. n.a. Tropical Latin America 15.2 13.9 15.5 15.4 n.a. n.a. n.a. Tropical Asia 13.0 13.2 15.9 18.4 n.a. n.a. n.a. Importing  Areas 5 7.3 14.2 22.8 33.2 54.5 69.5 83.1 9.1 7.3 4.3 Europe 3.5 6.2 8.4 10.0 12.0 13.0 14.0 3.6 2.6 1.6 United States 1.4 2.0 3.2 6.4 10.9 14.3 16.0 13.0 7.9 3.9 Japan 1.3 4.1 9.2 13.7 28.0 , 37.S_ 47.0 11.8 10.8 5.3 Rest of  the world 1.1 1.9 2.1 3.1 3.6 4.7 6.0 5.5 2.2 5.4 World  TomI 38.6 44.8 57.9 71.3 100.8 122.7 144.0 5.7 5.1 3.6 'Regional figures  may not add to totals because of  rounding JThree-ycar averages, execpt for  1968 ^Consumption in all areas outside the tropical areas Source : Takeuchi,1974. Table 3 Estimated Growth of  Timber Exports from  the Philippines, Malaysia, and Indonesia, 1968 and 1980 1968 1980 (Projected) Volume Value Volume Value million m1 million mJ(r) million S million m3(r) million : The  Philippines Total n.a. 8.7 203 11.0 480 logs 7.5 7.5 170 2.0 70 sawnwood 0.10 n.a. 6 4.0 190 veneer 0.22 n.a. 8 included in plywood plysvood 0.24 n.a. 19 5.0 220 Malaysia Total n.a. 12.9 240 13.0 560 logs 10.51 10.51 179 3.0 80 sawnwood 1.20 n.a. 52 5.0 170 veneer 0.02 n.a. 2 included in plywood plywood 0.07 n.a. 8 5.0 310 Indonesia Total n.a. 1.89 54 J 9.0 750 logs . 1.88 1.88 ' 53 10.0 300 • sawnwood 0.01 n.a. • 1 4.0 140 veneer — — ' — included in plywood plywood — — — 5.0 310 The  Three  Countries Total n.a. 23.5 497 43.0 .1,790 logs 19.9 19.9 ' 403 15.0 450 processed wood n.a. 3.6 94 28.0 1,340 Source : Takeuichi.,1974 Appendix 3. Canada Softwood Plywood 15 Hardwood Plywood 15 Softwood Lumber Free Hardwood Lumber n.a. Veneer Sheets n.a. Logs n.a. Carpentry & Joinery Various 1. Tariffs (%) U.S. Japan Australia E.E.C. 20 15 33 1/3 132 20 20 43 1/8 13 3 Free Free Various Free Free1 10 10 Free 8.5-17.0 15 23 7 Free Free 4 Free 8 7.5 15 7 1 Excluding Philippine Mahogany, boxwood, Japanese maple and Japanese white oak. 2 85% of shipments under duty free quota. 3 Rough sawnwood only. Source: Angus, et al, 1975, Takeuchi,1974. Appendix 4. Table 1. . Southsea Log Prices 1974-75 f.o.b. /  m~ ($) 1974 January February March April May June July August September October November December Philippines 53 58 60 56 56 50 49 44 45 35 37 46 Kalimantan 1974 February 67 - 75 November 25 - 28 1975 February May July August 42 32 37 38 45 34 39 40 Source : J.L.J.,1975c, Philippines : P.L.P.M.A.,1975 Table 2. plywood and Log Prices, 1963-1974 Plywood _ Logs i K/sheet)1 ($/m ) 1963 83.3 35.5 1964 64.7 30.3 1965 61.1 35.0 1966 73.6 36.8 1967 80.0 39.3 1968 79.4 40.3 1969 84.4 38.9 1970 103.1 43.2 1971 81.8 43.1 1972 95.6 40.5 1973 188.8 68.1 19.73 Jan. - June 177.5 62.6 1973 July - Dec. 200.1 73.6 1974 Jan. - June 172.2 92.4 Notss* X Lauan, 3-ply extra, 91 cm x 182 cm x 4 mm wholesale Tokyo spot. 2 Lauan, 3.6 m or more x 60 cm, importers' sale price to wholesalers delivered Tokyo. Source: I.B.R.D. 1974. Table 3. Indonesia: Log Export Check Prices,, 1970-1974 Check Price ($/m3) 1970 13.56 1971 16.55 1972 18.5 1973 1st Quarter 20.02 2nd Quarter 31.17 3rd Quarter 33.00 4th Quarter 35.00 1974 1st Quarter 42.36 Source: Indonesian Times, 1975, I.B.R.D., 1972. Table 4. Estimated Typical Costs of Logs For The; Philippines And Indonesia ($ per saleable log,;mid 1972) Philippines _ Average Operation Large-scale Indonesia Average Operation Production Costs Felling and Bucking 0. .70 0. .60 0. .80 Yarding, Skidding, Swinging 2. .40 1. .90 1. ,90 Loading on Trucks 1. .10 0. .90) Hauling 5. .40 2, ,60) 6. ,40 Unloading 0. .90 0. .70) Trimming 1. .00 0. .80 0. .70 Grading and Sorting 0. .70 0. ,50 0. ,60 12. ,20 8. ,00 10. ,40 Export Expenses Tow to Shipside 1.00 0.80 1.40 Grading and Inspection 0.80 0.70 1.10 Loading on Ship 0.30 0.20 0.40 Other Selling Expenses 3.60 3.30 6.00 5.70 5.00 8.90 Total Costs and Expenses (US$i. "17.90 13.00 19.30 Source: I.B.R.D. 1973b. Appendix 5. Table 1. Indonesia: The Recent Export Picture, 1972 - 7,4. 1972 1973 1974 $ millions Exports 1777.7 Crude Petroleum & Products 913.1 Crude Petroleum 833.6 Rubber 189.1 Tinore & Concentrates 64.2 Coffee 77.2 Timber 254.3 3210.6 1608.0 1382.0 391.4 93.2 77.6 633.2 7426.3 5211.4 4822.4 474.3 175.4 98.2 750.0 Source: F.E.E.R. 1975b, I.M.F. 1976. Table 2. Indonesia* Timber Exports By Regional Origin:1970 Volume Value 3 '000 m $ million East Kalimantan 4,188 55.0 Rest of Kalimantan 1,348 13.3 Riau 648 6.8 Rest of Sumatra 481 4.3 Maluku 428 7.1 Sulawesi 123 1.2 Java 66 2.9 Rest of Indonesia 18 1.1 Total 7,400 91.7 Source: Manning, 1971. Table 3v Indonesia: Timber Exports By Regional Origin. 1972. Volume Value m3 $ Sumatra 2,624,156 31,094,794 Java 340,444 3,439,356 Kalimantan 9,732,084 156,727,159 Sulawesi 163,355 4,852,627 Moluccas 13,890,942 222,312,176 Source: Indonesian Times, 1975. Table 4.. Indonesia: Structure .of Forest Taxes. Tax Rupiah/m3 Basic Royalty 652 Dredging Surcharge 622 Export Tax:10% of Check Price 830 Grading Fee 30 Local Tax 10 Atheletics/Festival 20 Community Development 10 ^ Distribution % $/m Central Govt. Regional Govt. 1.57 30 70 1.50 100 _ 2.00 - 100 .07 30 70 .10 - 100 Source: I.B.R.D., 1972. Table 5. Indonesia: Employment By Major Economic Sector 1971. Urban Rural Total % % % Agriculture 10.4 72.3 63.2 Mining and quarrying 0.8 0.1 0.2 Manufacturing 11.4 6.8 7.7 Construction 5.0 1.3 1.9 Transport, communication & Utilities 9.3 1.2 2.4 Trade, banking & insurance 26.6 8.0 10.7 Services 32.0 6.2 10.0 Other & Unknown 4.6 4.0 4.1 100.0 100.0 100.0 Source: I.B.R.D 1972. Table 6. Malaysia: The Recent Export Picture 1972-74. 1972 1973 $ millions 1974 Exports 1728.6 Rubber 1261.1 Tin 330.0 Logs & Timber 311.1 Palm Oil 128.9 Petroleum 79.6 3072.1 1045.0 373.7 637.9 194.1 112.1 4245.8 1202.1 631.2 452.5 280.8 Source: I.M.F. 1976 Table 7.Peninsular. Malaysia: Processed Forest Products Exports 1962-74. Sawnwood Plywood F: F.A.O. Estimate. $ '000 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 14220 19021 18946 19183 17850 22410 36182 39633 48876 47195 79529 105000,. E 163330 446 367 714 1009 1564 3370 6410 10204 15229 18316 28180 45000„ F 404000 Source: F.A.O. 1975d and Letourneau, 1975. - 163 -Table 8. Malaysia: Industrial Production: Survey of Manufacturing Industries, 1970a (Malaysia). Value Added For comparison: Employees, :. Weight Full Time $ millions %share Index Processing of rubber,coconut oil and tea'3 13,103 129.4 10.6 9.6 Food manufacturing 18,362 190.5 16.1 16.7 Beverage industry 2,622 42.9 3.6 4.5 Tobacco industry 3,931 84.6 7.2 7.2 Textile manufacturing 7,880 26.6 2.3 2.2 Clothing and textile goods 4,950 10.8 1.0 0 Wood products 25,744 118.2 10.0 11.9 (of which: sawmills) (16,496 (89'; 4) (7.6) (9.2) Furniture 2,489 9.0 0.8 0 Paper and paper products 1,562 9.5 0.8 0.8 Printing, publishing and allied industries 10,978 73.0 6.2 0 Rubber products 8,435 51.3 4.3 6.4 Chemical products 6,170 107.1 9.1 9.6 Petroleum refining 457 41.9 3.5 5.1 Cement,cement products and glass 8,000 80.8 6.8 7.6 Basic-metal industries 3,282 33.3 2.8 2.7 Metal products 7,598 41.7 3.5 4.2 Machinery, except electrical 6,680 30.2 2.5 0 Electrical machinery 3,204 32.7 2.8^ 2.1 Transport equipment 4,779 36.4 3.1 2.3 (of which:car assembly) (2,870) (24.4 (2.1) (1.8) Plastic products 4,130 13.8 1.2 0 Others 3,492 16.9 1.5 7.1 TOTAL 147,848 l",180v5r 100.0 100.0 a The coverage of the survey and of the index differ (compare last two columns). b Palm-oil-?' processing is not covered by the manufacturing survey, c Index of industrial production; manufacturing in 1968 = 100. Source: Kasper, 1974. Table '§. Philippines: The Recent Export Picture. 1972 1973 1974 Exports 1105.4 1787.8 2671 Sugar 208.6 272.7 718.1 Copra & Coconut 353„2 Oil 228.3 353.2 591.5 Copper 190.9 281.3 389.0 Wood 174.4 326.1 237.1 Source: I.M.F., 1976. Table 10. Philippines: Plywood and Veneer Exports 1962-74. Export Volume Value m3 $1,000 1962 139,200 15,807 1963 212,100 21,949 1964 260,600 23,060 1965 244,700 24,212 1966 279,600 28,091 1967 280,300 25,697 1968 407,100 41,060 1969 327,600 35,430 1970 382,800 33,526 1971 414,000 34,425p 1972 532,300 51,685_ F 1973 509,000 66,863 1974 n.a. 44,695 F: F.A.0...Estimate.-Source: F.A.O. 1975d, Philippines, Bureau of Forest Development, 1975. Table 11- Philippines: Sawnwood Exports. 1962-1974 Production Exports 3 m Value % Exported $ '000 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 958 1,138 1,180 1,254 887 760 1,022 1,466 1,341 861 1,412 1,061 1,291 122 115 135 116 112 103 153 178 185 231 231F 427 383 13 10 11 9 13 14 15 12 14 27 16 40 30 6,408 5,966 7,551 6,722 6,894 6,265 8,988 14,994 11,148 11,776F 14,786F 35,117 33,500 F: F.A.O. Estimate. Source: Compiled from F.A.O. 1975d, Philippines: -P.L.P.M.A. 

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