|Conflict over Natural Resources in South-East Asia and the Pacific (UNU, 1990, 256 pages)|
|3. The Japanese economy and South-East Asia: the examples of the Asahan aluminium and Kawasaki Steel Projects|
3.1 The Japanese miracle
3.2 Eyed of the miracle?
3.3 A new vision of economic: development
3.4 The vision in action: Asahan
3.5 Japan's overseas steel industry
3.6 Kawasaki in Mindanao: the export of pollution
3.7 Conclusion: the comprehensive security system - What price?
POST-WAR overseas investment by Japanese corporations began in the mid-1960s, when Japan experienced a major sustained burst of rapid economic growth. Japanese textile, electrical appliance, and food-processing industries began production in Taiwan, South Korea, Hong Kong, and other Asian countries. In most instances, the manufacturing was undertaken by factories subcontracted to produce parts and components for parent companies in Japan. In the synthetic textile and auto industries, Japanese companies supplied raw materials or auto parts to their subsidiaries in the host countries, where finished goods were produced and sold in local markets. These operations were financed by Japanese 'export-substitution' investment, designed to replace the export of finished goods from Japan by local production. In every case, Japanese direct investment in manufacturing in these industries and countries was designed to exploit cheap Asian labour.
Japanese overseas investment in the mid-1960s featured small amounts of capital committed per project and a concentration in the light industries. Consequently, these Japanese manufacturing operations competed with already-developed local industries, driving them out of business. In particular, since a large part of Japanese direct investment overseas was located in Asia (Table 3.1), the Japanese presence in the region was strongly resented and attacked. Popular opposition to the penetration of Japanese corporations culminated in 1974 in the massive anti-Japanese uprisings which broke out in Indonesia, Malaysia, the Philippines, and Thailand.
TABLE 3.1 Trends in Japan's Direct Overseas Investment (US$ million)
|Cases||Amount||Per Cent||Cases||Amount||Per Cent|
Source: Ministry of Finance, Japan.
That same year, at the United Nations, the developing countries of the 'South' demanded that the industrialized countries of the 'North' establish a 'new international economic order'. Translation al corporations reacted to this request by creating a 'new international division of labor'. In response to these criticisms of Japan from Asian countries and the emerging international consensus in favour of a new economic order, Japanese corporations launched an attempt to develop a Japanese version of the new international division of labour. This effort evolved into the Pacific Basin Economic Cooperation concept
The rapid economic growth of the 1960s was driven by expansion of energy-consuming industries based on lavish use of cheap Middle East oil. The leaders of this spurt in growth were the raw material processing industries. Iron ore, copper ore, bauxite, and other minerals, as well as lumber and petroleum, were imported in huge volumes and processed in Japan. From 1963 to 1973, Japan consumed much more raw materials than the Western economies. In that period, the consumption of oil, copper, aluminium, and nickel in Japan increased more rapidly than in the United States and West Germany, growing at double the pace of GNP (Table 3.2).
TABLE 3.2 - Annual Growth Rate of Consumption of Natural Resources, 1963-1972 (per cent)
|Japan||United States||West Germany||France||United Kingdom|
Source: World Energy Supplies Metal Statistics, FAO Production Yearbook (various issues).
With the oil crisis in the 1 970s, these industries became an economic shackle. Direct and indirect oil consumption for raw material-processing industries; petrochemicals, cement, nonferrous metals, steel, paper and pulp, and synthetic textiles was much higher than that in assembly industries like machinery and automobiles (Figure 3.1). TheJapanese industries were hard hit by the increase in the price of raw materials in the 19705. Japan relied almost exclusively on oil as its source of energy, and almost all of it had to be imported. Moreover, close to 70 per cent of the crude oil imported by Japan is converted into heavy oil, and heavy oil is supplied mainly to steel and other primary processing industries and to electric power utilities.
The Movement Overseas
Until the oil price hike, the strong competitiveness of Japanese goods was due to the supply of cheap energy from overseas, and the rapid growth of the Japanese economy was due to the expansion of energy- and raw material-intensive industries. The slump that plagued these industries was, therefore, structural. In the mid-1970s, these vulnerable industries began to be scrapped. By ordinance, the Japanese government subsidized companies, which then closed down factories to cut their losses. Other administrative measures were taken to encourage factory closures. Corporations involved in the vulnerable industries actively relocated their factories overseas.
Aluminium manufacture was the most typical raw material processing and energy-consuming industry. The aluminium industry obtained too per cent of the bauxite it needed from overseas sources, and the aluminium-smelting process consumed considerable amounts of electricity. Japan produced 2 million tons of aluminium ingots in 1972, making it the world's second largest aluminium producer, second only to the United States. By 1977 Japan's aluminium output had fallen to 1.2 million tons. Output dropped further, to 660,000 tons in 1981 and to 300,000 tons in 1983. Accordingly, Japan's aluminium imports rocketed. Japan invested heavily in the Asahan project in Indonesia and in the Amazon project in Brazil to import aluminium produced by its joint ventures. Japanese corporations also provided funds to US and European multinational corporations operating in Australia, securing agreements to import their products on a stable basis. This investment-import formula is called the 'development import' scheme.
The petrochemical industry was also a leading raw material processing industry promoting overseas investment. Japanese corporations have been constructing petrochemical complexes in oil producing or oil-processing countries such as Iran, Saudi Arabia, South Korea, and Singapore, where large-scale refineries have sufficient capacity to provide feedstock. (A Japanese petrochemical project in Iran has been suspended because of the Iranian revolution and the subsequent Iran-lraq war, which interrupted construction just before the complex was to be completed.) Ethylene, an intermediate product of the petrochemical process, is then shipped to Japan. However, the steel industry, although experiencing a recession, is an exception. Of the five steel majors, Kawasaki Steel Corporation, Japan's third largest steel company, is the only one favouring overseas investment. Kawasaki is eager for overseas investment because-with the exception of mills in Chiba and Mizushima-it does not have modern steel mills at home. Kawasaki transferred its primary processing sintering plant to Mindanao in the Philippines and is running the Tubarao project in Brazil. Nippon Steel CorporationJapan's top steel producer, with a monopolistic hold on the industry has so far not invested overseas. Even in its two major steel-mill construction projects in Kaohsiung, Taiwan, and Pohan, South Korea, Nippon Steel has invested only in engineering in the form of government-funded technical co-operation.
The steel industry has not invested heavily overseas for several reasons. First, steel production is virtually monopolized by five major companies: Nippon Steel, Nippon Kokan, Kawasaki Steel, Sumitomo Metal, and Kobe Steel. This makes it possible for monopoly prices on steel products to be maintained. Furthermore, since the monopoly of the five giants is not limited to production but extends to distribution involving wholesalers and export import trading firms, the big producers can limit the import of cheap steel products from abroad (especially from South Korea, Taiwan, and Brazil) despite high prices in Japan. Thus the steel industry differs from the aluminium and petrochemical industries. Although the import of crude steel products from these countries which was less than 100.000 tons per year until 1977-grew to 1.34 million tons in 1981, 1.89 million tons in 1982, and 2.4 million tons in 1983, the 1982 amount represents only 3.8 per cent of all crude steel products consumed that year.
Second, the demand for steel products is concentrated in major automobile, shipbuilding, and electrical companies. Both the suppliers of the five steel majors and the buyers, the majors themselves, are in a position where monopolistic prices can be maintained external to market mechanisms. Moreover, since in this supply-demand relationship the suppliers are much stronger, high prices can be imposed. Nippon Steel, which generally has the biggest share of the five majors, holds the chairmanship of Japan's two major economic organizations which influence general business and political decisions.
Thus the strong economic and political power of the steel industry is a factor enabling it to maintain monopolistic high prices and delay overseas investment, despite the effects of recession and the large gap between lowered production capacity and demand. Actual crude steel production was 99.95 million tons in 1982-below the 100 million ton level that has served the industry as a yardstick. Other reasons for the special situation of the steel industry are that the coke ratio used by Japan's steel industry is lower than that of other advanced industrial countries; its international competitive position is stronger because of its high productivity per worker; and since the first oil crisis of 1973, the industry has promoted energy conservation. Its energy dependency is also lower than oil-and electricity-dependent industries, such as aluminium and petrochemicals.
Emerging as the alternative leaders of industrial growth in the 1970s were the machinery and automobile industries. They were followed in the 1980s by new knowledge-and technology -intensive processing industries based on high technology. These industries filled the vacuum left by the relocation abroad of the primary processing industries. Industrial trends from the 1960s to the 1980s indicate that the new processing and assembling industries are recording higher productivity than the raw material processing industries. It is in these industries that Japanese products outperform West German and US commodities on the world market.
Where have all the scrapped industries gone? Japanese capital has been freed, and industrial relocation to the Third World countries has been encouraged by the government with generous subsidies. In September 1974, the Industrial Structure Council, an advisory body to the Ministry of International Trade and Industry, presented a policy recommendation entitled 'A Long Term Vision of Industrial Structure', covering the period 1976-85. This recommendation officially approved the trend already initiated by private business.
The 'Vision' characterized the world following the oil crisis as plagued by inflation coupled with an economic slump, which, it said, has caused trade deficits in a series of advanced industrial countries and produced large external debts in developing countries. The Vision also referred to the 1974 declaration of a new international economic order as resource nationalism, a new trend among developing countries. From this it was concluded that Japan, dependent on foreign sources for raw materials (Table 3.2), could no longer dream of rapid economic growth and should therefore pursue long-term 'stable growth' instead. The Vision recalled that growth in the 1960s had been dependent on the expansion of equipment investment by private firms at home, but warned that this pattern of growth would not work in the future. Instead, future growth would rely on the expansion of personal consumption and government spending, which would help private firms invest in new equipment. In other words, the government and the Japanese people were being asked to spend more to ensure the expansion of private business.
A second countermeasure was also recommended; that is, the development of sophisticated high-technology industries and energy conservation. The steel, non-ferrous metals, petrochemicals, and paper and pulp industries were urged to relocate overseas; machinery, final processing, assembling, and other knowledge- and technology intensive industries were encouraged to stay in the country. The Vision specifically recommended that the former industries relocate to Asian and other Third World countries with abundant cheap labour and rich natural resources. It was proposed that these industries should undertake primary processing of local raw materials to produce, for example, pig iron, aluminium ingots, ethylene, and plywood and chips. Intermediary products would either be imported to Japan for final processing or sold by Japanese firms on the world market. This strategy was called 'offshore production aimed at establishment of a new division of labor with resources-rich countries'. The policy recommended a rapid increase in Japan's overseas investments, increasing sevenfold from US$12,666 million in 1974 to US$80,700 million in 1985.
Because the primary processing of raw materials usually involves heavy pollution, the 'new international division of labor' means, first and foremost, the export of pollution. Most of the governments of the host countries in South-East Asia welcome foreign capital and do not tolerate open opposition to foreign investment. Thus criticism of the behaviour of foreign firms by the local press is prevented. This is an ideal environment for offending companies. Moreover, most of these countries are ruled by authoritarian governments that repress nongovernment labour movements. When the world market stagnates, Japanese companies operating in these countries can dismiss workers far more easily than would be possible in Japan. In this sense relocation also means the export of recession.
But the main aim of the international division of labour is to enable Japan to control the supply of the resources in the host countries. Iron ore, bauxite, lumber, and crude oil have been imported for some time (Table 3.3). The strategy of moving the industrial processing of these raw materials to the resource producing countries will forestall and circumvent the formation of cartel-like arrangements by raw-material producers. If Japan has at its disposal raw materials produced by Japanese factories in the rcsource-supplying countries, it can simply dump these products on the world market, driving down the price and eventually destroying any cartel arrangement.
Furthermore, the 'offshore-production' schemes are not integrated production systems. Final products are not made locally raw materials are processed only into intermediary goods, and the intermediary products are brought to Japan. To make such 'development-import' projects possible, host countries must spend enormous amounts for the building of necessary infrastructure. They have also to provide cheap labour, cheap land for factories, and cheap electric power. Primary processing generates much less value-added than final processing, which is done in Japan. Thus, the development-import scheme has little to do with genuine industrialization in the host countries. The host countries could consider nationalizing the Japanese plants at some point, but nationalization would have little meaning since the plants produce only intermediary goods, which in order to be useful and marketable must be made into final products in Japan.
TABLE 3.3 Japan's Imports of Primary Resources (US$ million)
|Per Cent |
|Number||Per Cent||Number||Per Cent|
|Crude Oil||99.8||46,274||Saudi Arabia||39.0||Indonesia||15.9||UAE||14.4|
The strategy of overseas relocation entails the vertical, pyramidal integration of the entire production process, from the provision of raw materials and primary processing to final processing, with Japan at the top of the pyramid. The division of labour recommended in the Vision is the diametric opposite of the new international economic order being demanded by the developing countries. It is thus a counterrevolutionary new international economic order.
By relocating stagnant industries to the Third World, Japan has been able to maintain the strong competitive/less of its products in the markets of other advanced industrial countries, and in the process, Japan's overseas investment grew 3.6 times between 1974 and 1981. Japan's overseas investments have a remarkable feature: Japan invests heavily in the developing countries, especially Asia, whereas the United States and Western Europe invest overwhelmingly in other advanced industrial countries. This preference for the Asian region became more pronounced as industrial relocation proceeded. The targets of Japanese private investment coincide with the recipients of Japanese official development aid (ODA).
A similar tendency is found in trade patterns. For some years after the Second World War, the Japanese government maintained that since Japan was a resource-poor country, it should live on trade. Under the banner of trade-oriented nation-building, export promotion became the priority task. The consequence has been that Japan imports almost 100 per cent of its raw materials and exports only industrial products. In the 19805, energy-related raw materials accounted for about 50 per cent of Japan's total imports, and the products of assembly and high-technology industries accounted for 65.2 per cent of its exports.
This pattern is distinct from that of the United States and Europe. For example, the United States is a major exporter of grain and an importer of industrial products. In Western Europe, European Economic Community (EEC) trade is high, and EEC members both import and export large amounts of industrial goods. Taking each of the Western European countries in turn, dependence on trade is much higher than in Japan, but only because they trade with each other within the EEC. This comparison shows that the trade relations between the United States and Western Europe are more or less complementary, whereas the Japanese trade relationship is totally one-sided. Japan increases without limit the exports of high-value added products of assembling and high-technology industries to all countries. This is why trade conflicts are bound to occur and why they cannot be mitigated.
The real contradictions in Japan's trade are with other Asian countries. There are many newly industrializing countries (NICs) in East and South-East Asia. South Korea, Taiwan, Singapore, and E long Kong are the primary NICs; Thailand, the Philippines, and Malaysia are the secondary NICs. In the 1980s, the share of light industrial products in their exports has invariably increased as they have begun to export these products to advanced industrial countries. However, Japan does not buy their products in significant amounts and indeed recently has drastically reduced the import of industrial products from these countries. Consequently, Japan's share in their exports has become smaller than that of the United States and Europe. The serious economic crisis besetting the Philippines stems partly from this type of trade policy, in addition to the special vulnerability of the NICs to world recession.
Japanese private business made its first major step towards the implementation of development-import schemes in the South East Asian region on 7 July 1975 when a consortium of Japanese companies signed an official contract with Indonesian President Suharto for the Asahan Aluminium Smeltery Project, which the press described as unprecedented both in the amount of money involved and in its size among Japanese overseas investment projects. The Asahan Aluminium project is a comprehensive development project for power plants and an aluminium smelter. The plan was to build two hydroelectric power plants with a total productivity of 604 000 kilowatt-hours (kWh) from Lake Toba in the northern part of Sumatra. The power produced by the plants was to be sent to a 225,000 ton-per-year aluminium smelter constructed in Kuala Tanjung, about 95 miles south-east of Medan.
The consortium is investing a total of US$900 million through the Japan Asahan Aluminium Company At a cabinet meeting on 4 July INS, only three days before the contract was signed, the Japanese government decided to provide 85 per cent of necessary funds to the consortium. At this meeting, the project was described as economic co-operation, in a major part of Indonesia's Second Five Year Plan, and its purpose was stated to be to secure for Japan a stable supply of aluminium.
The Asahan project is highly controversial. First, the funding process written into the Master Agreement - whereby funds from the Overseas Economic Cooperation Fund and other Japanese government financial institutions were to be provided directly to Japanese companies rather than to the Indonesian government-is in contravention of existing Japanese financial regulations. Second, there is no clear source of the needed raw material (bauxite) available. When the Asahan project was initiated, it was assumed that an American firm, the Aluminium Corporation of America (ALCOA), would provide bauxite from its new mines in Kalimantan and Bintan. But according to officials of the Japan Asahan Aluminium Company in Tokyo, there has been no clear decision by ALCOA to go into bauxite production in Kalimantan and the attempt to secure bauxite from Bintan has been terminated.
The Japanese investment in the Asahan project is thus not a new ideal form of overseas economic co-operation, breaking away from the profit-oriented investment project, but is in fact an investment in another nation's power resources and environment. Not only will this project use US$900 million of public money for private gain, but there are also grave new suspicions that it would not add to the value of Indonesia's mineral resources but would become merely an export platform for Japanese industry to process bauxite from elsewhere for Japan. In the name of national development, foreign aid resources from Japan were mobilized to pay for a project that would bring little if any direct benefit to Indonesia while it drained the power of its most important river to serve Japanese business. In fact, the Asahan project could best be described as a capital- and pollution-intensive Free Trade Zone, or as a case of extraterritoriality for Japanese companies. It would only reinforce the dependency of the Indonesian economy on Japan.
The History of Asahan
The history of the Asahan project began when Indonesia was a Dutch colony. With an annual rainfall of more than 2 000 mm, and an elevation of 900 m, water from Lake Toba becomes a rapid stream within a short distance. The Dutch colonial authority, realizing that Lake Toba would be one of the best sites in the world for hydroelectric power development, carried out a survey of the area in 1908.
Japan planned Indonesia's post-war development during its military occupation of Indonesia in the 1940s. Kubota Yutaka, who was in pre-war days a managing director of Nihon Chisso Hiryo (presently the Chisso Corporation, infamous for the Minamata pollution) and concurrently the president of Korea Hydroelectric Power Company, carried out a survey of the water power of the Asahan River and began preparation for construction of a power station and an aluminium smelter. This plan halted with Japan's defeat. After Indonesia won its independence, the Soviet Union began a feasibility study of the same project in 1960, but this was also suspended due to Sukarno's downfall.
Kubota Yutaka is now chairperson of Nippon Koei Co., Ltd. As soon as the Foreign Investment Act was passed in January 1967 after Suharto had come to power, Nippon Koei proposed a comprehensive Asahan development project to the government of Indonesia. On 5 August of the same year, Nippon Koei concluded a contract for operations with the Indonesian government and began a feasibility study. At that stage, it was planned that Nippon Koei would be responsible for construction of a hydroelectric power plant; and Sumitomo Chemical, Nippon Light Metal, and Showa Denko would be in charge of an aluminium smelter. However, Kaiser and ALCOA indicated that they would compete to build the aluminium smelter.
In May 1972, a Japan-US joint consortium was organized to undertake the project. The international consortium consisted of seven firms-from Japan, Mitsubishi Chemical Industries and
Mitsui Aluminium in addition to the above-mentioned three firms, and, from the United States, ALCOA and Kaiser. These firms subsequently decided to jointly tender for the project. Sumitomo Chemical was the principal member of the consortium at this stage.
To secure a source of bauxite, the Japanese aluminium industry had to include the two US firms as partners in the Asahan project. The Japanese aluminium industry depended almost totally on Australia, Malaysia, and Indonesia for bauxite; imports from Indonesia constituted only one-fifth of the total amount imported. Development of bauxite resources in these countries was monopolized by a multinational aluminium cartel, the 'Big Four' of the United States and Europe. The Big Four amlounced suddenly in 1972 that production of bauxite would be decreased to 84 per cent as a self-imposed quota to prevent price reduction (Pacific Basin Report, August 1974: 68).
In tendering for the Asahan project, the Japan-US consortium attached a condition that the construction of a hydroelectric power plant should be separated from the aluminium smelter project, and that it should be carried out by the Indonesian government by means of a separate government loan. This condition was proposed mainly by the two US firms. The Indonesian government, on the other hand, insisted that the project should be a package investment including both the smelter and the power plant. The scheduled date for tendering, 15 July 1972, passed without any compromise between the international consortium and the Indonesian government.
Similar situations have often occurred in other foreign investment projects concerned with the development of resources. However, the Asahan project initiated a new era in Japanese overseas investment. In August 1972, immediately after the Tanaka cabinet was formed, Indonesia sent a governmental envoy to request Japan to finance the Asahan project with government funds in one package including both aluminium smelting and power development. At the same time, Indonesia announced its Second Five Year Plan to begin in April 1974, It was said that the very survival of the Suharto regime depended on the success of the Five Year Plan, which totalled US$20 billion. The Asahan project was of primary importance in the plan. On 15 January 1974, when then Prime Minister Kaknei Tanaka was visiting Jakarta, he discussed the Asahan project with Indonesian leaders as one of his many 'national projects'. Because he promised to provide President Suharto with low-interest loans, the project suddenly became practical.
As a result of several rounds of negotiations between Sumitomo Chemical and the Indonesian government, a basic agreement on the project was officially signed between the two parties on 7 January 1974, one week prior to Tanaka's visit. In the agreement, it was stated that within six months of that date, the Japanese party should talk 'the Japanese government into providing lowinterest loans' to finance the project (Far Eastern Economic Review, 14 February 1975: 40-3). In spite of the progress made on both governmental and private levels, negotiations for implementing the project went on for nearly two years due to several difficulties. The two US companies decided to pull out of the consortium in August 1974 on the grounds that to include construction of the hydroelectric power plants 'would make the project unprofitable'. The US companies seemed to have been more interested in obtaining the right to develop the bauxite resources necessary for the Asahan aluminium smelter than in building the power plants. ALCOA had already begun a feasibility study on the development of a bauxite mine in North Kalimantan and had also begun negotiations with the Indonesian government regarding bauxite resources on Bintan Island (Pacific Basin Report, August 1974). This pull-out presented a problem of where to obtain funds to replace the US companies' 30 per cent share. It was decided to include seven more Japanese-affiliated trading firms in the project in addition to the original five smelters. Thus the Asahan project became a Japanese investment project consisting of a private twelve-company consortium. The second major difficulty was the rising cost of construction due to inflation. In January 1974 construction costs were estimated at US$600 million, but they were projected to eventually be as much as US$900 million, a 50 per cent increase (Far Eastern Economic Review, 4 March 1974: 49-50)
A third difficulty was that Premier Tanaka, who was the strongest promoter of the Asahan project, in September 1974 promised President Geisel of Brazil that Japan would invest in the Amazon aluminium project. This project is a joint venture consisting of five Japanese smelters, including Mitsui Aluminium, and Rio Doce, a Brazilian state-owned mining company. The total investment amounted to US$3 billion, US$1.2 billion of which was to be financed by Japan. The project was expected to produce 320 000 tonnes of aluminium per year. However, the Tanaka cabinet resigned due to the bribery scandal before either project could be finalized.
The fourth obstacle arose from the fact that when it came to financing this enormous amount with government funds, the Ministry of International Trade and Industry (MITI), which was promoting the project. was opposed by other ministries. The financing plan MITI proposed, based on the requests of the five aluminium smelters, was:
(1) that the government loan cover 85 per cent of the total business costs;
(2) that the aluminium smelter be financed by the Export lmport Bank of Japan, the power plants by the Overseas Economic Cooperation Fund, and the infrastructure by the Japan International Cooperation Agency (JICA), which was established in August 1974; and
(3) that the financing terms for the power plants entail an annual interest rate of 3.5 per cent over 30 years and those for the smelter be set at 6.75 per cent over 20 years (Toyo Keizai, 28 dune 1975: 54-7)
The Export-lmport Bank considered this plan feasible. The Finance Ministry, which administers various funds, stated that it was not able to extend public loans of such amounts at such low interest and with such long terms for a specific overseas investment by private corporations. However, the real reason for the opposition was the fact that the aluminium industry was in a serious depression. The five Japanese smelters were in the midst of the worst slump in their history, and thus were in no position to offer security on the enormous loans. When public loans are provided for domestic investment projects of private firms, the plant facilities to be built or other properties must be mortgaged. This practice was not applicable for the Asahan project because the investment was not domestic but overseas, and thus the plants or other properties could not be mortgaged. The Foreign Ministry was reluctant to approve the plan, saying that a loan of US$300 million beyond the limit set by the IGGI (Inter Governmental Group on Indonesia) for importing crude oil from Indonesia had just been given to the country in 1972 and because the Asahan project exceeded that amount, it would be unfair to other IGGI member countries.
The Japan-Indonesia Master Agreement
In December 1974, a draft of the master agreement concerning the Asahan project was signed in Tokyo between Sumitomo Chemical and the Indonesian government. On 30 April 1975, MITI Minister Komoto Toshio arrived in Jakarta with a signed letter from Premier Miki Takeo, assuring Suharto of the Japanese government's commitment to the Asahan project. The Indonesian government, however, was concerned about the rival Amazon aluminium project and sent a special envoy to try to change Japanese policy. On 4 July 1975 a Takeo cabinet meeting classified Asahan as a 'national project' and decided to finance about 85 per cent of the cost with government funds, calling it an 'exceptional measure'. At the same time, it was called a 'politically oriented' decision, designed to coincide with the scheduled visit of Suharto to Japan.
MlTl's support was crucial in reaching this decision. The
major promoting force of the Asahan project was the group of senior MITI
officials of the Tanaka faction called the 'internationalist group'. To the
criticisms of the other ministries, MITI replied that Japan had already
cancelled other projects-such as plans for investment in a petrochemical plant
in Thailand and the contract for subway construction in Hong Kong-using economic
depression as an excuse, and that the scrapping of the Asahan project could only
result in serious damage to Japan's reputation in South East Asia. MITI claimed
also that Premier Tanaka had made a commitment to President Suharto on the
Asahan project and that, therefore, it was actually a national project. As for
the problem of the mortgage that was holding up government financing, MITI
proposed to the Finance Ministry the following 'unprecedented' financing
(1) that the mortgage be on assets overseas such as the power plants and smelter to be constructed in Indonesia;
(2) that MITI ask the participating trading firms to assume joint liability for the loans;
(3) that the five Japanese smelters ask the OECF to participate in the planned investment company on the Japanese side; and
(4) that the five smelters persuade the Indonesian government to assume some form of liability (Toyo Keizai, 28 dune 1975 54-7).
On the other hand, MITI informed the aluminium industry that the ministry had already established a basic agreement with the Finance Ministry and the Export-lmport Bank for the financing of the Asahan project and requested the industry to proceed with negotiations with the Asahan Technical Committee in Indonesia. However, after the ratio of investment of each of the twelve companies was decided and the official contract with Indonesia was about to be concluded, it was revealed that there was no concrete agreement on government financing between MITI and the OECF, the Export-Import Bank, and JICA. The aluminium industry spokesmen then criticized MITI for going too far alone (Nikkei Sangyo Shimbun, 23 July 1975).
TABLE 3.4 - Breakdown of Japanese Funds Invested in the Asahan Project (US$ million)
|Item||Total Construction Cost||Funds from Japan|
|Power Plant||270||225.00 (OECF 83%; City Banks 17%)|
|Refinery||431||345.00 (Export-import Bank 80%; City Banks 20%|
|Infrastructure||82||27.00 (Export-import Bank 100%)|
|Research||5||1.67 (JICA 100%)|
|Operation||56||18.67 (JICA 100%)|
|Total||844||617.34 Japanese Government Funds 82.6%; City Banks 17.4%)|
Sources: Monthly Bulletin of Keidanren September 1975 Far Eastern Economic Review, 14 February 1975.
The Asahan project agreement that was hurriedly signed on 7 July 1975 stated that it was an unprecedented national project because of the amount of money involved and its size among post-war Japanese overseas investments. However, this project was not an example of Japanese economic co-operation with Indonesia; rather, it was an example of an investment consortium established across the boundaries of financial circles then being backed by the government.
The master agreement establishes an unprecedented pattern of financing. Japan established a private investment company, Japan Asahan Aluminium, which is jointly owned by twelve companies (Tables 3.4 and 3.5). The company was capitalized at US$14.5 million. Half of this capital was provided interest-free as a loan from OECF. The balance was divided among the companies. However, 70 per cent of this amount was provided directly by the government's Export-lmport Bank in loans at 6.75 per cent interest; the remaining 30 per cent was loaned by a consortium of twenty-three Japanese city banks. These twelve parent companies invested nothing in this project, yet control is entirely in their hands. Also, Hasegawa Norishige, president of Sumitomo Chemical, is president of Japan Asahan Aluminium.
TABLE 3.5 - Financing Terms of the Asahan Project
|Source||Annual Interest Rate (Per Cent)||Term|
|OECF||3.5||30 years after a grace period for construction|
|Export-Import Bank||6.75||15 years|
Source: Mainichi Shimbun. 7 April 1976.
In December 1975, PT Indonesia Asahan Aluminium (INALUM) was established with a capital of US 12.5 million, 75 per cent of which was covered by Japan. The remaining 25 per cent-which Pertamina was originally expected to finance-was covered by the Indonesian Regional Government Fund, because Pertamina was in financial difficulties. Within the first year, however, real investment by Indonesia was reduced to 10 per cent. According to the master agreement, Indonesian capital was supposed to increase by 1.5 per cent every year after operations began, reaching 25 per cent within ten years.
PT Indonesia Asahan Aluminium was expected to purchase alumina from ALCOA Indonesia, which was supposed to have developed mines in Kalimantan, and to sell the aluminium ingots produced. However, this part of the plan was in doubt. Nippon Koei was in charge of the construction of the smelter, and Tokyo Electrical Power Co., Ltd., was responsible for both the construction and the technical aspects of the power plants. The feasibility study for the project was completed in 1975 and construction began in 1976
Total construction expenses, taking inflation into account, exceed US$1 billion, doubling the total Japanese investment in Indonesia, which at the end of 1974, was US$1.1 billion. When the investment of US$1.4 billion for another massive project on liquefied natural gas (LNG) development is included, Japan is the largest foreign investor in Indonesia, surpassing the United States.
The Benefits of Asahan
President Suharto called the Asahan project 'an imperishable monument of friendship between Japan and Indonesia'. What benefits would the project bring to both countries? What did the promoters claim? Hasegawa Norishige, president of Sumitomo Chemical and the representative of the Japanese consortium, stated, 'What should be pointed out first is that the purpose of the project is to secure an abundant and inexpensive power source . . . since the oil crisis, a sharp rise in the price of crude oil raised the cost of electrical power greatly. Considering that the power cost, which used to be about 3 yen/kWh, is now nearly 8 yen/kWh, the Asahan project is very appealing.' (Monthly Bulletin of Keidauren, September 1975 38-41.) MITI asserted, 'The power cost of the Asahan project can be held down to less than 3 yen/kWh.' (Toyo Keizai, 28 June 1975 ) This is important, because electric rates constitute about 40 per cent of the production cost of aluminium ingots, and 15.000 kWh of electric power is consumed per tonne of metal.
The second projected benefit was the securing of bauxite resources. Indonesia has bauxite deposits and it is possible to use deposits on Bintan Island and northern Kalimantan as raw material for aluminium.
The third benefit was to be that, since the whole Japanese aluminium industry would participate in the project, which would be administered under Japanese management with Japanese technology, it would be valuable as the first self-sufficient overseas development of aluminium resources. It was also argued that in view of the world demand for and supply of aluminium, the project would enable Japan to become more active internationally in this field.
The merits of the project for Indonesia were also pointed out. The Asahan plan is 'vital for the successful implementation of (lndonesia's) second Five Year Plan, and the key for the development of Sumatra. By the construction of infrastructure such as electric power plants, harbors and roads, the project will promote the development not only of the aluminium industry, but also of other industries in the area ...' and will help by enhancing 'effective use of resources, promoting employment, improving the level of technology, and increasing exports' (Monthly Bulletin of Keidauren, September 1975). In addition, officials of MITI stressed that the project represents a completely new Japanese policy for overseas economic co-operation, moving away from the past pattern of profit-first investment. Now the results bear examination.
The Asahan project has many characteristics of a Free Trade Zone (FTZ). PT Indonesia Asahan Aluminium has the right to develop and operate in the project area, and the right to own the land. Administration and business transactions are to be conducted between the company and the Asahan Authority, which is to be set up in this area by the Indonesian government. Stocks cannot be offered to the public. The period of operation is 30 years, after a construction period of 7-9 years. The period of operation of the smelter, if it is expanded, is 30 years after the completion of the expansion work. Eighty per cent of the electricity produced by the Asahan hydroelectric power plants is to be supplied to the smelter at a cost determined by the Japanese company. Even after 30 years, when the power plants are transferred to Indonesia, the electricity would still be provided at cost.
Construction materials, foreign employees' personal effects, and the alumina, if imported from outside Indonesia, are duty-free. The company will decide the price of ingots produced and where to export them, and even if the domestic demand for ingots increases in Indonesia, no more than one-third of the products will be supplied to the domestic market. At least 75 per cent of the work-force must be Indonesian within five years of the commencement of operation. This five-year term, however, is extendable. Foreigners (i.e. other than Japanese) can be employed only as administrators.
A lump-sum payment of US$2 million shall be paid to the Indonesian government within 30 days after the agreement is signed. A compensation fee of US$6 million shall be paid to the Indonesian government for the expenses of land acquisition, compensation for relocated residents, registration fee for surface rights, toll for roads, and a harbour entry permit. An annual fee for a water concession of US$650,000 is required after commencement of operation of the power plants, with US$520,000 added to this per year for six years.
The corporate tax will be 37.5 per cent for ten years after commencement of operations (the normal corporate tax is 45 per cent). The stoppage at source will be half the normal practice for dividends and royalties. The personal income tax will be half of the usual rate for a foreigner for the first ten years. The project is exempt from all export and import duties and local taxes. Money subscribed for stocks and loans in foreign currency can be held outside Indonesia, as can 60 per cent of income from exports. Freedom of foreign remittance will be guaranteed.
In sum, A. R. Suhud, the head of the Indonesian Asahan Negotiation Team, stated that 'Indonesia is not going to draw any major direct benefit from the project. Apart from providing a steady, if small, source of revenue in the form of company tax and water rights, the project will provide employment for 10,000 people during construction stage and for 2,000 in the smelting plant.' (Far Eastern Economic Review, 14 February 1975.)
The Costs of Asahan
The project is likely to cause several problems. Although it was argued that this project is vital for the development of Sumatra, 80 per cent of the electricity generated by the Asahan hydroelectric power plants is consumed by the smelter and cannot be used for other development in Sumatra. By committing to the Asahan project, the development of northern Sumatra will be controlled by Japan for as long as 30 years, and the whole area, including its resources and assets, will be placed under the control of Japanese enterprises, hindering the independent economic development of Sumatra.
The Asahan project is record-breaking for Japanese overseas investment, both in scale and in form. Such an enormous investment will surely affect Indonesia beyond northern Sumatra. For instance, at the smelter site, there is a small fishing village of about 300 families. However, the plan involves the building of a factory town of 20,000 people, together with a loading port; 2,000 will be employed at the smelter. The number to be employed in the construction of the smelter is 10.000 and a labour force of 30,000 will be required during the busiest period (Mainichi Shimbun, 12 June 1976). To build a factory town of 20,000 people and the hydroelectric power plants, it will be necessary to recruit workers from other parts of Indonesia. To fill this need, the Indonesian government would probably make use of people displaced by its Transmigration Programme. They would probably be farmers from Java, who would be moved off the land where they and their ancestors have long lived, and employed as construction workers in Sumatra, which has a different climate and environment from Java. Unless there is adequate planning for their employment after the construction phase is completed, life will be hard for them there.
Japan's aluminium industry has been given privileged power rates since the pre-Second World War period, because the aluminium is of strategic military importance. Yet the practice continues even today. Before the power rate was raised due to the oil crisis in late 1973, electric power companies in Japan were spending 3-3.5 yen to generate 1 kWh of power and were charging 14 yen/kWh for household use and 7 yen/kWh for industrial use. However, power was supplied to aluminium smelters at a bargain rate of 1.8 yen/kWh, whereas the steel industry, which was generally criticized for obtaining power at an unreasonably low rate, was paying 2.8 yen/kWh. Nevertheless, Japanese aluminium producers complain that due to the rise in the power rate to nearly 8 yen/kWh in 1975, their international competitive position has deteriorated. Canadian companies pay less than 1 yen/kWh and the United States and Australian competitors pay only 1.5 yen/kWh.
MITI says that the power cost for the Asahan project can be held down to 3 yen/kWh. However, President Hasegawa of Asahan Aluminium later announced that the power cost would be 1.2 yen/kWh (Nihon Keizai Shimbun, l: June 1976). With the rise in construction costs due to inflation, this rate seems unreasonably low even in comparison with the current power generating cost in Canada. One of the motives for Japan's investment in the Asahan project is the guarantee of a cheap electric power supply when smelter operations begin, thus enabling Japan to be internationally competitive again.
The Japanese requested a complete exemption of corporate taxes during the ten years of construction and of income tax of the workers on several hundred thousand man-days, on the grounds that OECF money was 'to be provided to developing countries on the basis of complete tax exemption, and that in the case of the Asahan project the fund was an extra-soft loan at an annual rate of 3.5 per cent'. The Indonesians, however, insisted on only a partial tax reduction, as prescribed in the Agreement (Mainichi Shimbun, 12 June 1976).
During the basic survey, separate bathrooms were built for Japanese and Indonesian workers. This was reported in some local newspapers in Indonesia, and, according to the Mainichi Shimbun (12 June 1976), some students said, 'The next flash point of the antiJapanese movement is Asahan.' Lie Tek Tjeng, an Indonesian scholar and the director of LIPI (National Institute for Cultural Studies), pointed out in his paper, 'The Asahan Project and the Future of Indonesia-Japan Relations', that northern Sumatra will be flooded with Japanese in the next few decades, and there is a possibility that tension will increase between the Japanese and the local population.
To secure the land for the project, the Indonesian Army evicted the residents, and the Indonesian government compensated them. Kuala Tanjung, where the smelter was built, was a fishing village of about 300 households. There were about 100 households on the factory site who were compensated for their losses. However, the other 200 households that were in the area used for the project's roads and other infrastructure were not compensated. Although the 20 households of a village on the site of the power plants were compensated for their eviction, an aboriginal ethnic minority group of 20,000 people living downstream were not supplied electricity from the power plants, and some were evicted.
The difficulty of finding locations for heavy industries in Japan was one of the rationales stated by MITI in proposing that the aluminium smelter be built overseas. This difficulty arises not only because of scarcity of land, but also because the citizens' movement of the 1960s against environmental destruction caused by development has become increasingly active. The principle of the alurninium-smelting process has not changed since it was developed in 1885 When cryolite is added in the second process, hydrofluoric gas is generated. Hydrofluoric gas is highly poisonous to humans and plants. In producing one tonne of aluminium, 25-35 kg of hydrofluoric gas are produced, 60 per cent of which is discharged from the furnace as gas. The toxicity of hydrofluoric gas is demonstrated by the fact that no vegetation grows within a radius of 10 km of the smelter at the Kambara Plant of Nippon Light Metal (Shizuoka prefecture), which started its operations 30 years ago on an annual production scale of 120,000 tons, due to hydrofluoric gas pollution. If caustic soda, used in the first process, is to be produced in Indonesia, a large amount of mercury would be discharged from that factory. It is obvious that the Asahan project would pollute the environment but the Japanese consortium, MITI, and the Indonesian government have not taken any measures to prevent pollution.
TABLE 3.6 - Aluminium Supply and Demand in Japan, 1979 and 1981 (tonnes)
|Production||1 118 294||666 053||- 44|
|Import||471 579||1 061 898||125|
|Rolling||1 817 477||1 225 134||13|
|Others||81 114||90 572||12|
|31 960||29 503||- 8|
|100 695||92 900||- 8|
|34 248||56 888||66|
|47 021||81 597||74|
|26 587||32 298||21|
|Domestic Consumption||1 409 094||1 608 892||14|
|Export||103 353||8 993||- 91|
|Producer's Stock||278 013||268 088||- 4|
|Total Stock||416 828||795 241||91|
Source: Resource Statistics Yearbook, Japan.
According to the proposal, the first justification for overseas investment was that aluminium smelting consumes large amounts of electric power. This, in addition to the fact that pollution controls had been strengthened and the price of land had risen, led the Aluminium Section of the Japanese Industrial Structure Council to believe that it had become impossible to begin construction of new smelters in Japan (The Aluminium Section of the Industrial Structure Council, 12 August 1975) The Council's proposal concerning the next ten years for the aluminium industry (1976-85) recommended finding overseas locations and vertically integrating the smelting and rolling fields. The Council estimated the total Japanese consumption of aluminium in 1985 at 3.t million tonnes, based on the assumption that the Japanese economy would maintain its annual growth rate at 7 per cent for the following ten years. Of this demand, the Council estimated that only 1.8 million tonnes could be produced domestically in 1985, and the balance would have to be imported from abroad. The Council then proposed to bring semi-processed products to Japan from overseas factories constructed by the Japanese aluminium industry. Sites at Asahan in Indonesia and the Amazon in Brazil were specifically recommended.
However, it was obvious in late 1975, when the Council announced its policy, that the aluminium industry was beginning its deepest recession ever. Furthermore, for more than two years it had reduced its annual output from a capacity of 1.5 million tonnes to 1.0 million tonnes, and its stockpile still remained at 400 000 tonnes (Table 3.6). For example, the Toyo plant, which Sumitomo Chemical had built in 1974, had to reduce its operations by 80 per cent. The construction industry was hit most severely by Japan's economic recession at the time of the first oil crisis, and the aluminium industry is dependent on the construction industry for more than 50 per cent of its demand. The five aluminium smelting companies which are members of the Asahan Consortium recorded recurring deficits of 100 billion yen (USS334 million) for AprilSeptember 1976 alone. There was no sign of recovery for the aluminium industry in the foreseeable future, and since Japanese industry would not need the semi-processed aluminium to be produced by the Asahan and Amazon projects, the Council's long-term plan for the aluminium industry was unrealistic indeed.
The Goals of the 'Asahan Method'
So why was the aluminium industry promoting the Asahan project while it was suffering from a recession that was causing a reduction of domestic operations and stockpiling? In addition, why was the project guaranteed a high profit rate through 85 per cent financing by government funds, guaranteed cheap power rates, an FTZ-type investment environment, a cheap labour force, and no pollution control? In the first place, Japan, as the world's second largest consumer of bauxite, was under pressure to secure its sources of this vital material, because bauxite was becoming the next target of resource nationalism. As with oil, Japan had to import nearly 100 per cent of its bauxite, the production of which had been monopolized by the United States and the European major mining companies. The Jamaica Treaty, concluded among the bauxite-rich countries, seemed the first step towards the eventual formation of an international resource cartel among the bauxite-exporting countries in the Caribbean. Japan wanted to secure a long-term, stable supply of bauxite from Indonesia and Brazil-the bauxite-supplying countries in the developing world which were not parties to the Jamaica Treaty. The Asahan project would smelt aluminium using bauxite produced in Indonesia or Australia as the raw material and export it to Japan as semi processed products. This system was guaranteed for 30 years. This strategy-not to oppose Third World resource nationalism with force but to penetrate and subvert it from within-is a true Japanese-style strategy.
The Asahan project was vital to the political life of the Indonesian elites. Pertamina was on the verge of bankruptcy, with debts of US$10 billion, and Indonesia's national debt was US$8.2 billion. As a result of Pertamina's economic crisis, most basic projects of the Second Five Year Plan were shelved. The Asahan project was the only one that survived.
For the Indonesian government, facing a general election in May of that year and a presidential election in 1978, the foreign exchange pouring into the Asahan project was not only a direct relief but was expected to become a political fund for the President himself. For instance, the 26.25 billion yen (US$85 million) from the OECF that had been loaned to PT Indonesia Asahan Aluminium for the construction of the hydroelectric power plants first went through the Indonesian Central Bank and then the Indonesian National Bank, which added an extra 0.5 per cent interest. The Indonesian government then made the actual loan. It was also a boost to Indonesia's investment climate that Japanese corporations would put nearly US$1 billion into a project with the Suharto government.
Recent Developments in the Asahan Project
The most recent developments in the Asahan project indicate that even the short-term viability of the project is questionable. Until 1988 aluminium prices at the London Metal Exchange had remained well below the estimated breakeven price for operation (USS1,500 per tonne). Thus, within the first four years of operation, the aluminium plant (INALUM) incurred a cumulative loss of US$160 million. To save the project, the Export-lmport Bank of Japan granted it a two-year moratorium on the repayment of principals on its loans in 1986. An additional 56 billion yen was injected into the aluminium project in 1987 (32 billion yen from Indonesia and 24 billion yen from Japan). Japan also stretched out maturities on its loans to the project and lowered its interest rate from 7 per cent to 5 per cent, which allowed the project, for the first time, to post a profit of US$50 million in 1987.
But while Japan appeared happy with the operation of the project, the continued strengthening of the Japanese yen against the US dollar (Indonesia's foreign exchange earnings are mostly in US dollars from the sale of gas and oil) raised Indonesia's original debt of 320 billion yen incurred in the project (or US$10.4 billion at the 1975 rate) by more than one-third in US dollar terms by the mid-1980s. This put severe strains on the Indonesian economy which was already hard-hit by the falling petroleum prices. The planned alumina-producing plant at nearby Hintan Island was shelved indefinitely as it was felt that it would be cheaper to import the raw material from Australia.
On the technical side, the project has been threatened by the declining water-level of Lake Toba, which feeds the two hydroelectric stations. Crucial to the aluminium plant is a cheap and abundant power source but deforestation following the construction of a pulp and rayon plant up-river from the hydroelectric stations has greatly reduced the water-catchment area. The lake's water-level has fallen in recent years to a point where serious doubts exist as to the sufficiency of power available through the stations. In 1987, the 225 000-tonne-capacity smelter managed to produce only 191 000 tonnes of aluminium due to power constraints.
Indonesia is also beginning to assert for a more equitable share in the joint venture. The Master Agreement entitled Indonesia to a 33 per cent share of the aluminium produced in return for its 25 per cent equity stake. Under the 1987 restructuring, the Indonesian government converted 32 billion yen of government debts into equity to raise its stake from 25 per cent to 37 per cent in the Asahan project (there is pressure from domestic aluminium users to raise it to 50 per cent) but its request for a third of the aluminium produced for domestic use plus 41 per cent of the remainder was rejected. This dispute over distribution culminated in the suspension of aluminium shipments to Japan in July 1987. Although an interim agreement was made in December 1988 which resumed regular shipments to Japan, no solution had been reached so far. It is possible that a prolonged dispute may well upset the 'economic cooperation' of the two countries which the Asahan project purportedly tried to promote.
Until the early 1970s, the investment of the Japanese overseas steel industry was only US$200 million, mostly in joint ventures in processing and manufacturing of secondary and tertiary steel products such as galvanized sheet, tin plate, and steel pipe in South-East Asia, Latin America, and Africa. Most of these plants were relatively small in scale and processed materials from Japan. The main purpose of this investment was to secure the market in those areas and not for an international division of labour or cheap labour such as that of the textile or electronics industry. Usiminas in Brazil and Malayawata Steel in Malaysia, both financially supported by the Japanese government, are exceptional. The former was set up in January 1958 and the latter in August 1965 by Yawata Steel (now Nippon Steel). Neither has been very successful.
With the slowdown of the high economic growth of the 1960s, the steel industry in Japan had to cope with several negative factors-a diminution of domestic demand, a standstill in exports to Europe and the United States, environmental damage caused by air pollution and industrial wastes, and difficulties in finding sites for expansion. As a result, the industry decided to shift its focus to Third World countries. According to the International Iron and Steel Institute, the annual growth rate of steel and iron demand in Asia (except Japan, China, and India), the Middle East, and Latin America was high-12.0 per cent, 9.4 per cent, and 6.5 per cent respectively ( Toyo Keizai, 8 November 1972: 104-10). The Industrial Structure Council felt that direct export from Japan should decrease, and that more overseas steel plants exporting semi-finished products to Japan or other countries should be constructed. In this way Japan could co-operate with and further the self-sufficiency efforts of the developing countries. The Council gave several reasons for its forecast of a rapid increase in overseas investments by the Japanese steel industry:
First, there is a strong request from the developing countries. In recent years, these countries have increasingly aimed at fostering labor-intensive basic industries in an attempt to promote their own economic development, but now they fully expect to develop steel industries which would provide large employment as well as stimulate other industries.
Second, because of the rise in labor costs and scarcity of construction within Japan, investment for new construction within Japan is becoming less advantageous compared to overseas investment. On the other hand, resource-rich countries want to level up their processing capacity. These factors, both external and internal will level off the cost of steel production abroad in the long run Third, Japan as an advanced steel-producing country should contribute to securing the supply of steel for international demand. In terms of the future of steel supply and demand on the world market, Japan is not expected to continue to increase its production as it has in the past in response to world demand because of the limitation of domestic construction as well as stronger regulation on pollution. Also the developing countries are unlikely to expand their steel production without technical and financial cooperation from advanced countries. Meanwhile, the demand for steel in the developing countries will increase rapidly as industrialization proceeds and income levels rise. Therefore there will be an increased demand for steel worldwide, and by around 1985 the shortage of supply will amount to more than ten million tons. Thus, it is necessary for Japan's steel industry, with its highly advanced technology and abundant experience to cooperate with steel production in developing countries and contribute, along with the Western steel industries, to an increase in the steel supply through overseas investment.
Fourth, from a long term viewpoint, overseas investment should be expanded in order to secure resource imports which in turn will stabilize supply and demand in Japan. Thus, it is expected that overseas investment will rapidly increase, and the total sum of steel industry investment will reach US$500-1,000 million. By 1985 the cumulative sum will amount to US$4.5 billion. (Sangyo Kozo Shingikai, September 1974.)
Not all steel makers in Japan are following this course and actively entering Third World countries to construct integrated steel mills. Nippon Steel and NKK, the two largest steel companies in Japan, are attempting to expand abroad through international consortia. But Kawasaki Steel decided to follow the first course.
The Kawasaki Steel project is another example of Japan's overseas industrial relocation of pollution-intensive processing industries. In August 1974, Kawasaki Steel Corporation began to construct a sinter plant with an annual production of 5 million tonnes of sinter ore in Mindanao in the Philippines. The total construction cost was US$214 million. In December 1974 Kawasaki Steel established the Philippine Sinter Corporation, a fully owned subsidiary with an initial capital of P50 million (around US$7 million), which was increased to P485 million (US$70 million) at the end of January 1975 The plant was completed in April 1977.
The project was one of the largest overseas plants in the steel industry, the first to use the sintering process outside of Japan and to make iron sinter for export to Japan. The entire process-from the application for the sinter plant project to the granting of permission, the acquisition of the land, the granting of beneficial treatment, and thence to construction-demonstrated characteristics typical of the behaviour of Japanese firms in South-East Asian countries. Both the Philippine government and Kawasaki Steel promised that the sinter plant as well as the proposed industrial estate would improve the quality of life in the region. However, many people in the Villanueva and Tagoloan areas in Misamis Oriental Province and near Cagayan de Oro City, who used to live by farming and fishing, were deprived of their means of making a living. The anger and disappointment of the people who were forcibly relocated by the project have forged strong public opposition to Kawasaki's entry into the area. In Japan, too, there is increasing criticism of Kawasaki Steel for its 'pollution export' (Kido Junko, 1977).
Kawasaki Follows the Vision
Kawasaki Steel Corporation is eagerly pursuing overseas expansion congruent with MlTl's vision. The company not only plunged into construction of an ultramodern sinter plant in the midst of coconut trees, small barrios, and a population dependent on subsistence agriculture and fishing, it also decided to launch another project, the Tubarao in Brazil. This project involves the construction of slab and blooming plants in Tubarao with a production capacity of 6.8 million tonnes a year. Kawasaki Steel has invested US$820 million for the construction of the plant jointly with Siderbras, a Brazilian stateowned steel investment company, and Findider International, an Italian steel firm. The total investment amounted to US$3.1 billion, and the plant was completed in April 1983.
Locating such projects in pristine natural areas is not new to Kawasaki Steel. It boasts of transforming the Chiba coastal area in Japan, with its small fishing villages, into an industrial area-'like building a factory in the middle of the desert'. Starting as an open earth-furnace steelmaker, after the Second World War it purchased pig and scrap iron to be refined into steel, rolling and producing steel products without a blast-furnace. With its huge profits from war procurement contracts during the Korean War, Kawasaki Steel expanded in 1950 into reclaimed area along the Chiba coast north-west of Tokyo Bay, a calm shoaling beach that residents had hitherto found ideal for shell-gathering, farming, fishing, and swimming. Although common sense in the steel industry dictates locating a blast-furnace near the site of iron-ore and coke production, Kawasaki Steel built an integrated steel mill with a strip mill at this 'playground for children', and, through drastic rationalization and decreasing transportation costs, expanded annual crude steel production at its Chiba plant from 2 million to 4 million tonnes between 1958 and 1961 to 5 million tonnes in 1965, and to 6 million tonnes in 1966. The company now has nine blast-furnaces with an annual crude steel production of 15 million tonnes. 'High productivity and profit' became the Kawasaki Steel slogan.
Establishment of infrastructure was fully supported by the Chiba prefectural and city governments, which were eager to invite industrial capital. The advancement of Kawasaki Steel into the Chiba coastal area triggered a boom in construction of steel mills along sea coasts by major Japanese steelmakers with blast-furnaces. By the 1960S, this process had become the normal pattern-even to the extent of being referred to as the 'Chiba method'-for setting up plants in undeveloped areas. The main feature of the method was that the land was sold to private companies which had to promise to pay the costs in advance. Funds for large-scale development can be raised more easily when several big enterprises want to locate in an area. Reclamation in Chiba was aimed strictly at attracting industry rather than at benefiting the people living there. Of course, it was claimed the industries would make the whole prefecture prosperous and people would thereby enjoy a happy life.
In 1960, a 'Plan to Construct the Keiyo Coastal Industrial Area' was announced, in which huge tracts of reclaimed land were given to big businesses such as the Mitsui and Mitsubishi groups. In 1968, spacious oil-storage stations appeared in the area. Furthermore, Nippon Steel moved on to another reclaimed land site, stating that it would construct the largest steel mill in Asia there. There are now more than 30 big companies located in 4 340 ha of reclaimed land. The sky and land soon became completely covered with smoke and waste waters. Crude oil and industrial wastes turned the sea a coffee colour and the air is a reeking, dirty, violet haze. The deadly fruit of industrialization was pollution.
From the early 1970s, increasing numbers of Chiba residents began to realize that their health had been seriously undermined. By the end of August 1976, more than 30 known pollution victims had died. The management of Kawasaki Steel must have taken into consideration the demands for compensation from pollution victims and the growing popular movement against pollution when it made its decision to move the sinter plant, one of the major sources of pollutants, out of Chiba to Mindanao. In 1972, a Kawasaki executive expressed the company's intention to leave the country: 'With pollution becoming an issue, Kawasaki Steel is to build sinter plants within the resourceproducing countries. However, it wouldn't pay to manufacture halffinished products such as slub, steel ingot at overseas plants and then bring them back to Japan.' (Toyo Keizai, 8 November 1972.) Kawasaki therefore decided to build on its experience in Chiba and move to Mindanao to cut costs. It is now much cheaper to build a plant outside the country than within Japan because of the rise of environmentalism there.
In October 1973, Kawasaki Steel's President Fujimoto visited the Philippines to meet with President Marcos and Industrial Minister Paterno and applied for permission to construct a sinter plant there. The process, from the application to the formal granting of permission, was accompanied by political negotiations.
In the Philippines, Kawasaki Steel had been operating a pellet plant since 1967-Pellet Corporation of the Philippines. The plant had to be closed in dune 1974 when the iron resources in Ralap, Luzon, were exhausted. The company used to produce 700 000 tonnes of pellet annually, all of which was exported to Japan. According to Kawasaki Steel, the Philippine government recommended that the company stay and begin other industries (Kokusai Keizai, July 1976: 107).
The Selling of the Project
On 8 January 1979, at the summit meeting between Japan and the Philippines, President Marcos told visiting Premier Tanaka, 'Industrialization is what we are aiming for. We expect strongly Japan's support and aid.' He also reassured Japan on its pollution problems: 'If it gets difficult to expand plants in Japan, we are willing to accept them.' (Asahi Shimbut 9 January 1979.) The following day, when Tanaka was departing for Bangkok, the next stop Oil his tour of five ASEAN countries, the Philippine government announced that President Marcos had given his consent to Kawasaki Steel's plan to construct the sinter plant. This approval came while the Board of Investment was still studying the desirability of having the plant in the Philippines. However, President Marcos claimed that the location of the plant would be his decision. At first, Kawasaki Steel was offered Tawi Tawi in the Sulu Archipelago as a site but it was turned down. Finally, on 10 January, the Mindanao site was offered. It is evident the Philippine government considered the project a countermeasure to the Muslim problem in Mindanao, where well-armed guerrillas scattered all over the island were rebelling against the government and conducting ambushes and harassment raids. Kawasaki Steel was fully aware of these problems. President Fujimoto stated that 'our project will contribute to the stabilization of the area by preventing Muslim guerillas from continuing their activities in southern Mindanao. Economic development will expand job opportunity, which will bring political stability....' (Kaminogo Toshiaki, 1975: 101.) Kawasaki Steel accepted the proposed area, which faces the Macajalar Bay in Mindanao. The company was happy with the area, for, as another executive pointed out, '. . . the entire area is out of the typhoon belt. Limestone needed as catalyst for the sinter process is available from nearby Bohol Island. The site is very suitable as a transit base between Australia and Brazil, suppliers of iron ore, and Japan.' (Kokusai Keizai, July 1976: 107.) The site also could be amply supplied with electricity from Maria Christina Falls and with fresh cooling water from the Tagoloan River. The port can accommodate 250,000 d.w.t. ore carriers; the harbour will have a water depth of 25 m; and Kawasaki Steel plans to build a sea berth with modern loading and unloading equipment capable of handling 6 000 and 1 800 tonnes per hour respectively. The approximately 40 000 kWh electric power demand will be tapped from the National Power Corporation. This amount is more than that consumed daily by the entire population of Cagayan de Oro City.
About 4.42 million tonnes a year of required sinter feed is supplied from Australia and Brazil. About 350 000 tonnes a year of coke freeze is also imported from Japan. To obtain around 900 000 tonnes of limestone a year from Bohol, Kawasaki Steel founded a mining company called Consuelo Mining Company headed by a Filipino, as foreigners are prohibited by law from freely disposing of natural resources. Furthermore, the Japan Philippine Treaty enabled Japanese vessels to transport the limestone through the inland sea. This agreement was necessary because '... the waters, around, between and connecting the islands of the archipelago, irrespective of their breadth and dimensions, form part of the internal waters of the Philippines'.
Although the Asahi Shimbun (15 January 1974) lauded the start of the project as 'the first concrete achievement of the consensus between the two countries for mutual economic development negotiated at the Tanaka-Marcos Talks', Bulletin Today in Manila wrote, 'This is a case of a "dirty" industry that can no longer be located in Japan because of pollution concerns. But the Philippine authorities have no objection to its installation in the under polluted southern island.'
Meanwhile, some Filipino people began to raise their voices against bringing the 'dirty' plant into their living area. The news that 'pollution is coming' spread rapidly, and in response, Kawasaki Steel initiated a 'clean industry' campaign in Misamis Oriental. When local officials opposed the sinter plant project because of fear of pollution, Kawasaki Steel's management maintained that pollution would be minimal and would involve mainly the discharge of small amounts of sulphur into the air. Water pollution would be nil, as the water cooling system would be closed and waste water would not be discharged into the bay or river. To allay the fears of local officials, Kawasaki took ten of them on a tour of Taiwan and Japan, after which no further complaints were heard from them.
The pamphlet Kawasaki prepared for the campaign stated that:
(1) waste resulting from the production of iron sinter includes dust and waste gas but no waste water;
(2) dust collection system consisting of a blower, a cyclone-type dust collector, and collecting fans will be installed at several locations in the sinter plant to control dust and waste gas;
(3) the Philippine Sinter Corporation will use iron ore with very low sulphur content, and thus sulphur discharge would be minimal; and
(4) the calculated quantities of effluents in the waste gas from the sinter plant are far below the limits set by the National Pollution Commission and are even lower than the very strict limits set in Japan.
However, in Japan' Kawasaki Steel has to allocate more than 25 per cent of the total construction cost for pollution-prevention facilities, whereas in Mindanao the ratio is far less than 10 per cent. Based on the original project cost, 4.5 billion yen was allocated for pollutionprevention measures out of a total cost of 52 billion yen. It was thus doubtful that Kawasaki Steel would comply with Japanese standards.
In November 1975, Kawasaki Steel invited the Governor of Misamis Oriental to Japan. After an observation trip to Chiba, he stated at a press conference that 'reports from the Philippines regarding opposition in Japan to Kawasaki Steel's project are not true at all. All the residents there are welcoming realization of the project and the state government is also giving strong support to it.' (Nikkei Sangyo Shimbun, 22 November 1975.) Kawasaki Steel exploited this statement in a pamphlet entitled 'Clean Industry', which was distributed in Chiba and stated: 'The sinter plant, which is the major source of nitrogen oxides and sulphur oxides, will not be built. The sintered ore required for the No. 6 blast furnace will be imported from the sinter plant in Mindanao and the authorities of the province and the city have shown their full support and understanding for our project....' More than 100,000 copies were distributed throughout the area. Kawasaki Steel even blatantly stated they did not intend to take measures to counter pollution in Mindanao. As one executive put it: 'When we talk about pollution, it is not suitable to apply the consciousness about pollution in Japan to Mindanao. The sinter plant was [sic] located far away from the city, and there is no residential area or factories. Every evening a strong wind blows the polluted air away.... Only a little dust will be produced since the process is just to mix powdered iron ore and burn it into sintered ore.... In principle, we have to take every measure to prevent pollution, but that depends on the location and surrounding[s] of the plant. It is ridiculous to bring the pollution-prevention facilities of Chiba to Mindanao as they are. First of all, people in the Philippines don't know anything about pollution ... I have never heard of their complaining about a pollution problem. The people there go barefoot; shouldn't that be called pollution?' (Kolcusai Keizai, July 1976: 108.)
The Costs of the Kawasaki Project
But a sinter plant produces more than just 'a little dust'. The sintering process produces sulphur oxides, nitrogen oxides, arsenic, cadmium, zinc, and lead, in addition to dust containing poisonous metals emanating from the raw-material stockpile. The nitrogen oxides produced by a sinter plant accounts for about half of the total nitrogen oxides produced in an integrated steel mill; that is why Kawasaki Steel asked the local authorities to move people more than 8 km away from the site.
Because the Philippine Sinter Corporation is 100 per cent foreignowned, it is not allowed to own land. Former Executive Secretary Alejandro Melchor found a way around this obstacle by assigning the Philippine Veterans Investment Development Corporation (PHIVIDEC) the task of acquiring 138 ha of land so that Kawasaki Steel could then lease it. PHIVIDEC was created soon after the country was placed under martial law by Presidential Decree 243 in 1972 By establishing PHIVlDEC, President Marcos may have intended to give his patronage to retired military personnel and to prevent a coup d'etat by keeping on good terms with this group, which formerly had been largely excluded from domestic economic actlvltles.
An area encompassing the flatland of Tagoloan and Villanueva in Misamis Oriental was designated for the plant site, and the people living there were threatened with expropriation unless they sold their land to PHIVIDEC. Although PHIVIDEC was a quasi-governmental agency, it was specifically given the authority of eminent domain and probably could have expropriated the land. However, the appearance of legality is an important feature of Philippine martial law. Thus the PHIVIDEC Industrial Estate Authority (PIEA) was created by PD No. 538 on 13 August 1974 as a 'subsidiary Agency of PHIVIDEC', possessing both governmental and proprietary functions. It was then announced that a 3 000-ha industrial estate would be created in the area with Philippine Sinter as its first occupant.
Kawasaki Steel did not have to deal directly with the people in the affected area, except for the workers in the actual sinter project. After the land was acquired, the future of the people of the former barrio was handled by the Inter-Agency Task Force (IATF) created by Melchor and administered directly under the office of the President. Melchor created the Andam Mouswag project, which was to be carried out by IATF. Approximately 20 government departments and agencies were involved in the IATF, ranging from the Department of Public Highways for road building to the Public Housing and Homesite Corporation for architectural and construction expertise to the Bureau of Plant Industries for teaching agriculture, together forming a conglomeration of bureaucrats and technicians.
Those technocrats laboured hard and finally chose barrio Kalingagan. The selection was purportedly based, among other factors, upon the majority's preference. Kalingagan is located 7 km from the highway and rises 500 m above sea-level. It is a rolling rocky plateau, home to 14 farm families. Because the land was characterized as being agriculturally sub-marginal, the national government bought up 100 ha in 1975 at Po.30 per sq. m or P3,000 per ha. It has been renamed 'Andam Mouswag', which means 'Ready to Progress'. What alternatives did the displaced people have? A few families chose to relocate by their own efforts, but the majority favoured the proposed housing at the relocation site. In the meantime, work had to proceed on the sinter plant, notwithstanding that the proposed housing was still in the blueprint stage.
The Benefits of the Kawasaki Project
What was the dominant motive behind the Philippine government's decision to invite Philippine Sinter? Aside from the attempt to maintain political stability in Mindanao, the Philippine government had a strong desire for its own integrated steel mill. Kawasaki Steel explained, 'As our project is in line with the Philippines' national strategy to build an integrated steel mill of its own, we were able to get every kind of preference, taxes are exempted, a basic survey of the sea and port was conducted by the Philippine Navy, eviction and land exploitation were carried out by the Philippine government and loo% investment was specially granted.' (Kaminogo Toshiaki, 1975 )
According to the prospectus prepared by Kawasaki Steel, the project was expected to make a substantial contribution to the economic development of the Philippines, particularly in the integration plan of the local steel industry. The prospectus proclaimed that:
1. Since the plant is in Misamis Oriental, it would immensely boost the Philippine government's plan to develop northern Mindanao through large investments in infrastructure and plant facilities. The company intended to make its port and material handling facilities available to the government-proposed integrated steel mill in the area.
2. Iron sinter would become a major dollar earner in the years to come. The project was expected to generate some US$280 million in net foreign exchange during the first ten years of operation.
3. The project would directly employ some 600 workers with an initial annual payroll of about P7 million. In addition, over 2,000 workers were to be employed in the construction.
4. During the first ten years of operation, the government stood to collect about P362 million in taxes.
5. Although the product of the proposed sinter plant was primarily geared to the Japanese market, the company was ready to service the raw material requirements of the government proposed integrated steel mill in the area.
6. The experience to be derived from the construction and operation of a sintering plant and equipment capable of handling modern material would contribute to the advancement of local expertise in steel-related technology.
7. The project was also expected to give an added boost to the already burgeoning mining industry, considering that the plant would require substantial amounts of limestone and iron sand.
Will the Objectives he Realized?
At the ASEAN Economic Ministers' meeting in February 1976 in Bali, Indonesia, Philippine delegates presented the ambitious iron and steel plant in Mindanao as a regional ASEAN project. According to their proposal, the plant project envisages an investment of US$1661 billion to produce 2.5-3 million tonnes a year of slabs, blooms, billets, and plates. They claimed the northern Mindanao plant would meet between 15 and 25 per cent of the five ASEAN countries' steel demand in 1985 (Far Eastern Economic Review, 26 March 1976: 50).
The Philippines is not the only ASEAN country attempting to promote industrialization by building an integrated steel mill-lndonesia and Malaysia have the same goal. Although the proposal was not approved at the meeting, the Philippine government still has a strong desire to establish a state-owned integrated steel plant None the less, neither the Japanese government nor Kawasaki Steel, nor any other steel company, is necessarily ready to co-operate with steel plant projects in ASEAN countries. 'The problem is that their expectation lacks reality since they give consideration to national prestige before thinking about social and industrial foundations' (Kolausai Keizai, July 1976: 106).
According to the report of the Japan International Cooperation Agency, the Philippine government's integrated steel mill project may be premature. The report points out that basic study or policy-making should be completed first to thoroughly examine the potential problems. Domestic raw material supply may be inadequate. Raw materials available domestically comprise only iron sand and iron ore; other major raw materials would have to be imported. Infrastructure-electricity in particular-is weak, and electricity consuming industries need to be supported by favourable electric rates. Related industries should also be developed and fostered.
Although Kawasaki Steel promised to contribute to the advancement of local expertise in steel-related industries, it showed no interest in the steel plant project in Mindanao proposed by the Philippine government. The company's major overseas project is the Tubarao mill in Brazil. The Mindanao plant is only a transit base for Kawasaki Steel, which was deliberately selling an illusion to the people of the Philippines. This lack of understanding may one day cause conflict.
During the 1980s, the Japanese government began to talk about the establishment of a 'Comprehensive Security System'. Because of the collapse of Pax-Americana, the Japan-US Security System backed by the American nuclear umbrella has become inadequate for Japanese defence purposes, and it has become necessary to establish an enhanced economic security system based on strengthening Japan's military capabilities. The economic security system is in fact a strategy to secure stable supplies of industrial raw materials, as specified in the Pacific Basin Cooperation concept, to which energy resources and food have been added as strategic items. How does Japan intend to secure a stable supply of food and energy resources from abroad?
Securing Energy and Food Supplies
The Japanese government argues that the existence of OPEC, the powerful producers' cartel, not only results in higher oil prices but also limits supply. It stresses that since Japan depends almost entirely on oil as its primary energy source, and since 70 per cent of all crude oil is imported from the Gulf area, Japan's oil supply is very vulnerable to changes in the world political situation. In the petrochemical sector, a series of overseas investment projects are now underway; and in the electric-power industry, the largest oilconsuming sector, the government is encouraging a switch from oil to alternative energy resources such as nuclear power, coal, and LNG. According to the government plan, nuclear power generation will account for 35 per cent of the total primary energy supply in the 1990s; LNG will be used to fuel thermal power stations in place of oil; and the 'develop-and-import' formula for energy resources will serve Japanese energy needs into the 1990s
Japan has been almost completely dependent on imports from the United States for wheat, soybean, and maize-staple foods for the Japanese people and fodder for their livestock. Japan is currently making an effort to switch the source of these foods from the United States to Japanese-con/rolled develop-and-import projects in Brazil, Indonesia, and other developing countries. For example, a Japanese consortium has launched a one million ha fodder plantation project at Cerrado in Minas Gerais state, Brazil, under the develop-and-import programme. In connection with the Cerrado project, an ambitious infrastructural development programme has been planned, which includes developing a grain export corridor linking the inland Minas Gerais to a port of shipment on the Atlantic coast via a trunk road; constructing grain elevators with silos and harbour facilities, and developing an 'Asian Port', which will store fodder from Brazil temporarily or be used for livestock-raising in a bonded area of the port. The ultimate country of destination for these products is, of course, Japan.
The 'comprehensive security system' is comprehensive because it combines Japanese military strength with an economic security system designed to secure a stable supply of industrial raw materials, energy resources, and food. The present security system also aims at achieving its objective by integrating the overseas investment structure of Japanese enterprises into a totally Japan centred system. However, this strategy will inevitably make Japan richer and drive poor Asian nations further into poverty and marginalization, reintegrating them as dependent economies into 'Japan, Inc.'.
Clearly, Japan's much-vaunted 'stable growth' is maintained only through the export of stagnant industries to the Third World and a tightening grip on raw material resources abroad. Its reckless export drives cause increasing friction with other advanced industrial countries, and it seems that 'stable growth' is also to be achieved on the backs of the Japanese people. Thus, Japan seems headed towards crisis.
Asahi Shimbun, 9 January 1974 and Is January 1974.
Far Eastern Economic Review, 4 March 1974, 14 January 1975, and 26 March 1976.
Kaminogo Toshiaki (1975), Why Do We Go Abroad?, Diamond sha.
Kido Junko (1977), 'Kawasaki Steel Corporation's Sinter Plant in Mindanao', AMPO-Free Trade Zones and Industrialization of Asia, Special Issue, Vol. 8, No. 4; Vol. 9, Nos. 1-2
Kokusai Keizai, Vol. 13, No. 8, July 1976.
Mainichi Shimbun, 12 June 1976, 4 duly 1976.
Monthly Bulletin of Keidanren, Tokyo: Keidanren, September 1975.
Nihon Keizai Shimlbun, 12 June 1976.
Nikkei Sangyo Sliimbun, 23 July 1975 and 22 November 1975.
Pacific Basin Report, Vol. 5, No. 8, August 1974.
Sangyo Kozo Shingikai (1974), A Long Term Vision of Japan's Industrial Structure, MITI, September.
The Aluminium Industry and What Its Policy Ought to Be, The Aluminium Section of the Industrial Structure Council, 12 August 197 5. Toyo Keizai, 8 November 1972 and 28 June 1975.
Toyo Keizai, 8 Njovember 1972 and 28 June 1975.