Economic Analytical Unit - Department of Foreign Affairs and Trade

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Subsistence to SupermarketSubsistence to Supermarket:
Food and Agricultural Transformation in South-East Asia

Executive Summary

Australia needs to take a comprehensive and creative approach to the opportunities offered by the transformation of food and agricultural demand and supply in South-East Asia. Such an approach needs to embrace a wide range of activities across the whole spectrum of food and agricultural supply, including raw materials and semi-processed products, high value-added fresh and processed goods, farm and factory equipment and technology, and food and agriculture-related services.

A sustained period of strong economic growth in most of the South-East Asian economies, rapid structural change, increasing affluence, probable continued strong economic performance in the region, and a projected population of over 615 million by the year 2010, are all factors causing rising South-East Asian demand for food and agricultural products.

The potential benefits to Australia of a well-focused food and agriculture strategy towards South-East Asia are large. An improvement in Australia's share of the South-East Asian market for food and agricultural imports from 7.5 per cent to 9.5 per cent over the coming two decades, could deliver a five-fold increase in food and agricultural export revenue (from annual exports of US$1.2 billion/A$1.5 billion in 1991 to around US$6 billion/A$7.7 billion by 2010 ). Significant further benefits could also flow from increased exports of food and agricultural technology and agribusiness-related services. But improving market share will require hard work in an area of increased international interest and competition. A considerable expansion of Australian investment in South-East Asia will need to take place as part of Australia's strategy to improve its access to South-East Asian markets.

FOOD AND AGRICULTURAL TRANSFORMATION IN SOUTH-EAST ASIA IS PART OF A WIDER PROCESS OF ECONOMIC CHANGE WHICH HAS SWEPT THE REGION

Forty years ago, subsistence agriculture accounted for the major share of most economies in South-East Asia, apart from some export cash crops. But by the 1980s, the ASEAN economies had achieved either near self-sufficiency or surplus production of the primary staple rice and other traditional foodstuffs, or else developed other economic means to provide these (Singapore and Brunei). As the governments of Indo-China and Myanmar/Burma have gradually abandoned socialist economic policies since the 1980s, there has been marked progress towards improved agricultural production, though there remains much scope for greater efficiency. Much of South-East Asian manufacturing has long been based on processing of agricultural products ('agro-processing'), and this has become increasingly sophisticated as industrialisation and economic growth have accelerated.

Governments of South-East Asia have traditionally placed a high priority on agricultural growth to achieve a range of economic, social and political objectives. In most cases, government intervention has been extensive, with a maze of producer and consumer subsidies, land use regulations, import restrictions and exchange rate controls employed to direct agricultural development. Within a framework of accelerating economic liberalisation in recent years, there has been some movement to liberalise agriculture also, but overall it remains a highly regulated sector in the region.

As rapid economic growth tightens resource constraints, the region's governments are increasingly confronted with a stark choice: either to adhere to long-standing goals of agricultural and food self-sufficiency, thereby restricting the flow of resources from traditional to faster growing parts of the economy (such as manufacturing and services); or else, to allow this restructuring to take its course. A number of factors are pushing governments towards the second option, including: land limitations; rising agricultural production costs; mounting costs of state subsidies and other agricultural assistance; and slowing world demand and falling world prices for many traditional agricultural products.

GROWTH AND DIVERSIFICATION OF DEMAND

A major challenge for South-East Asian food and agricultural production is the transformation in the volume and pattern of demand. Large population growth - projected to rise from 450 million in 1991 to over 615 million by 2010 - is continuing to primarily drive growth in demand for food and agricultural products, spurring governments to pursue annually rising agricultural production targets.

However, the major economic growth of the ASEAN economies in particular has meant a considerable growth in per capita GDP, resulting not only in increased consumption of traditional foods, but also, at per capita income levels between about US$800 and US$2,200, increasing diversification of the pattern of food consumption into higher value and higher quality foods. As per capita incomes rise in South-East Asia, people are tending first of all to eat more of the traditional primary staple (rice), and less of traditional secondary staples (cassava, sweet potatoes, maize); then to shift towards an alternative staple (wheat), more fruit and vegetables, and more animal products (meat, fish and dairy products); and finally, to reduce consumption of both traditional and alternative staples, and consume far more animal products, and higher value foods, both fresh and highly processed.

- A Spill-Over into Increase Imports...

Many of the goods subject to increasing demand - such as wheat, beef, dairy products, temperate vegetables and fruit - are ones in which South-East Asia is either a non-traditional or minor producer. As a result, South-East Asia has emerged as a significant importer of a diverse range of food and agricultural products. For example, from 1981 to 1992, the region's share of world wheat grain imports increased from 3.8 per cent to 5.4 per cent (or from 3.6 million tonnes to almost 6 million tonnes). Even for some traditional products, such as pulses and seafood, domestic production has failed to keep up with demand, likewise resulting in growing imports.

The large-scale growth and development of South-East Asia's manufacturing sector has also been an important and growing source of demand for agricultural products. In addition to processing of locally produced raw materials, Singapore and Malaysia have adopted strategies of wholly importing agricultural raw materials and processing them for export, either as an extension of import substitution (for example, sugar refining by Malaysia), or unrelated to domestic requirements (for example, as a further step in Singapore's entrepot strategy). Thailand also has increasingly adopted this strategy (for example, importing tuna for canning and export), and particularly as its own natural resources have become depleted (for example, timber).

The gradual relocation of the textile industry began in the 1980s, from the high income economies of North-East Asia (Japan, the ROK, Taiwan and Hong Kong), to South-East Asia and China, in pursuit of lower labour and production costs. This has meant a gradual shift in the pattern of countries importing natural fibres like cotton and wool for early stage processing. As a result, South-East Asia's cotton lint imports more than tripled from around 270,000 tonnes in 1981 to nearly 1 million tonnes by 1992, worth around US$1.5 billion (A$2 billion). Wool fibre imports have also grown significantly, with greasy and scoured wool imports rising to over 26,000 tonnes by 1992, worth almost US$160 million (A$218 million). South-East Asia is only a small producer of both cotton lint and shorn wool (the latter mainly by Indonesia and Malaysia) so must depend on imports.

Overall, between 1981 and 1992, South-East Asia's imports of food and agricultural products doubled, to be worth almost US$19 billion (A$25 billion) in 1992, and equivalent to about a third of the massive Japanese import market for these products. With the likelihood of continued strong economic growth, so are South-East Asia's food and agricultural imports bound to continue to rise.

SOUTH-EAST ASIAN GOVERNMENT AND PRIVATE SECTOR RESPONSES

Supply-side responses to changes in food and agricultural demand in South-East Asia have begun to take shape. These responses can be grouped into those occurring at the level of the individual production unit, the national economy, and the region as a whole.

- individual production units...

Perhaps the key feature of supply-side responses is the expanding role of the private sector and agribusiness. Increasingly aware of the limitations of government intervention and the costs of budgetary support, the region's governments are encouraging more and more private sector participation in South-East Asian food and agriculture. Large-scale conglomerates and agribusinesses, both local and foreign, occupy a growing role in agricultural production, agro-processing (including food processing), and marketing and distribution of food and agricultural products in the region. This pattern, likely to intensify further in coming years, is the driving force behind much of the modernisation and restructuring within countries' agricultural sectors.

- national economies...

The agricultural profile of many South-East Asian economies is changing. While most types of agricultural production have continued to grow overall, various subsector shares have changed. In ASEAN countries, the share of rice in agricultural production (in both volume and value terms) has fallen from 75 per cent or more in the 1950s and 1960s to around 40-50 per cent today, while production of fruit and vegetables has grown noticeably. Some cash crops have remained important (rubber, palm oil), whereas others have shrunk considerably (cotton, jute). Livestock industries comprise the fastest growing subsector in South-East Asian agriculture, now occupying at least a 10 per cent share of agricultural GDP in most countries. Fisheries, once mainly a subsistence activity, has become increasingly commercialised, and a valuable export industry. The share of forestry and forestry products - in past decades a major export industry for all countries except Singapore - has declined to become the smallest subsector of most regional economies' agricultural GDP.

Industrialisation, government policies and changing patterns of demand in ASEAN economies have led to an expansion of the scale and range of agricultural processing industries. In the 1980s, these countries diversified from simple processing for export (such as tropical fruit canning and seafood canning) into a wide range of sophisticated activities (such as beer, soft drinks, dairy products, wheat-based processed foods and processed vegetables, textile and garment manufacture, and timber processing like plywood). A significant proportion of output now serves domestic markets, as well as a growing amount for export markets. For example, ASEAN5 exports of processed foods reached US$13.2 billion/A$17 billion in 1991 (compared to imports in this year of US$6.6 billion/A$8.5 billion).

It is interesting to note that South-East Asia's food and agricultural import growth has been increasingly concentrated in unprocessed and semi-processed food and agricultural products where possible, in order to carry out further processing and value-adding within countries' own borders prior to retail sale or export. This is an important part of countries' economic strategies to deal with the massive growth in demand and consequent necessity to increase imports. The higher income economies of Singapore, Malaysia and Thailand are leading this approach. Most South-East Asian countries (but not Singapore) use their trade import regimes to support this strategy.

However, the rapid development of agriculture over the last four decades has exacted a heavy toll on many countries' natural resources - and to an unsustainable degree in some cases. Deforestation, overgrazing, the expansion of agriculture to marginal land, salinisation and pollution have resulted in significant land degradation. Fresh water supplies have been drawn down by the demands of rapidly growing populations and contaminated by industrial and residential waste. In developing their agricultural strategies, governments cannot afford to ignore the pressing resource and environmental constraints which, if not managed responsibly, could imperil future agricultural growth and development.

Partly as a result of these concerns, ASEAN countries are giving greater attention to food and agricultural research and development (R&D). In the past, ASEAN R&D focused on traditional staples and cash crops, and applying the results of international agricultural research to local conditions. In tandem with the development of new forms of agricultural production, there is a trend towards more private sector and agribusiness participation in R&D in areas of higher value agriculture and biotechnology.

- the regional economy...

But another main feature is the gradual restructuring of agriculture across the region as a whole. The higher income and higher cost economies of the region - particularly Singapore, Malaysia and Thailand - are in effect moving towards a regional approach to food and agricultural self-sufficiency by relocating some of their lower value agricultural production to the lower cost economies of the region, including Indo-China and Myanmar.

ASEAN agribusinesses are playing a leading role in forging this regional division of labour. For example, Malaysian rubber growers, hard pressed by rising costs and competition from Thai and Indonesian producers, are helping to revive rubber production in Indo-China. Malaysian investment in Indo-Chinese palm oil facilities has started in earnest. Thai agribusinesses are the main participants in the development of aquaculture and forestry industries in Indo-China and Myanmar.

Market-driven developments have been accompanied by government-directed regional initiatives. In January 1992, ASEAN leaders agreed to create an ASEAN Free Trade Area (AFTA) over 15 years. In its current form, AFTA applies only to trade in manufactured products. However, with the emergence of a South-East Asian pattern of food and agricultural trade and investment, the potential advantages of widening AFTA to include unprocessed goods and raw materials, and eventually extending AFTA membership to the Indo-China economies and Myanmar, are being noted by some.

Sub-regional growth zones - better known as growth triangles - are likely to play an increasingly important role in the development of the region's food and agricultural production. These initiatives remove political and other impediments to the joint commercial development of neighbouring - and economically complementary - parts of two or more countries. For example, the Singapore-Johore-Riau (SIJORI) growth triangle, which combines Singaporean capital with land, labour and natural resources available in Malaysia and Indonesia, has already spawned a number of agro-processing ventures. Encouraged by the success of SIJORI, South-East Asian governments are supporting a number of other growth zone proposals.

AUSTRALIAN RESPONSES

A more prosperous South-East Asian region offers a wide range of commercial opportunities for Australia, and at the same time, raises issues for Australia to address in pursuing those opportunities. The central conclusion of this report is that Australia has, in the past, paid insufficient attention to many aspects of the transformation sweeping South-East Asian food and agricultural demand and supply. Some recent developments, however, are a promising sign of a realisation that Australia can do better.

The provision of plentiful food for national populations at international parity prices will be important for the continued strong economic growth of South-East Asian economies. The most efficient way of achieving this will be on the basis of open, internationally competitive agricultural sectors, allowing imports where this is more efficient than domestic production. But it is not clear that the countries of the region will choose this path. Whatever the choice of the region's various governments, it is very much in Australia's interests to pursue a multi-faceted strategy towards South-East Asia's demand for food and agricultural products. It should not be a simple strategy of just seeking to maximise Australia's share of regional imports of food and agricultural products, but rather to embrace a wide range of activities across the whole spectrum of food and agricultural supply, including raw materials and semi-processed products, high value-added fresh and processed goods, farm and factory equipment and technology, and food and agriculture-related services.

- is Australia taking full advantage of the transformation of food and agricultural demand in South-East Asia?

Australia has secured a considerable stake in the fast-growing South-East Asian market for food and agricultural products. The 7.5 per cent share achieved in 1991 translated into A$1.5 billion in exports (and 10 per cent of our overall food and agricultural exports in that year). However, our performance has not been even across all commodity types and target markets.

A deeper issue is whether Australia is producing the right products for the South-East Asian market. In the past, Australia seems to have focused on selling what it traditionally produced rather than producing more of what it could sell. South-East Asian demand for commodities such as fish and fishery products, livestock feeds, timber and forestry products, and a wide range of traditional and non-traditional horticultural goods and processed foods is growing strongly. Australia is a potentially competitive supplier in these areas, yet is failing to take advantage of these market opportunities.

- is Australia taking full advantage of the transformation of food and agricultural production in South-East Asia?

Australian investment in agro-processing, storage, distribution and retailing of food and agricultural products in South-East Asia has only recently shown signs of growth. Each of these areas is a multi-billion dollar business in the region. Given the strong backward linkages that exist between, say, retailing and sourcing of processed products to fill supermarket shelves, better performance in this area would flow through to improved market penetration for exports.

Even more importantly, closer Australian engagement in South-East Asian food and agriculture would help Australian food and agricultural producers to forge effective links with end users of our exports: consumers and processing industries. Some Australian industries - notably wine producers - are meticulous in coordinating the entire chain of growing, production, distribution and marketing overseas, but it is generally agreed that most Australian enterprises and industries can do more in this area.

A by-product of closer links would also be greater sensitivity of Australian food and agricultural supply to the changing demands of increasingly affluent South-East Asian consumers. Some areas of Australian food and agriculture are devoting considerable attention to the specific requirements of overseas consumer demand. The wheat industry has developed 40 different types of wheat grain to suit varied processing and end-product requirements in different Asian and other markets. The beef industry's increasing production of the marbled, grain-fed and chilled varieties favoured by Japanese and Korean consumers is a further case in point. But there are many other areas which have yet to follow suit.

- is Australian access to South-East Asian markets improving?

The GATT Uruguay Round outcome will deliver some improvements in market access to South-East Asian countries, but significant barriers to imports of Australian food and agricultural goods remain. Outdated goals of food and agricultural self sufficiency and the use of import substitution policy tools to achieve them are still common. It will be important for Australia to continue to press for further trade liberalisation in the region, including through APEC. The ASEAN Free Trade Area (AFTA) requires close monitoring, given the potential for its extension to unprocessed agricultural goods and other primary products to divert some ASEAN imports away from more efficient Australian suppliers.

- is Australia projecting a clear image to South-East Asian markets of Australia's 'clean, green' foods and agricultural products?

As elsewhere, there is growing awareness in South-East Asian countries of the desirability of environmentally sustainable agriculture and clean food and agricultural products. Better perception and understanding of this quality by South-East Asian manufacturers and consumers, and of Australia's strengths in this regard, can add a significant premium to Australian products in the region.

- are Australian suppliers 'up to the game'?

Australia is well positioned to benefit from the opportunities opening up in South-East Asia, but there is more that needs to be done to improve performance. Domestic efforts to further improve the competitive edge of Australian food and agricultural production must continue. Fundamental will be conserving and repairing Australia's natural resource base, and achieving sustainable agricultural production systems. The food and beverage processing sector could contribute a larger share of exports. Australia could do more to get the message through to South-East Asian manufacturers and consumers about the 'cleanness and greenness' of its foods and agricultural products, whether unprocessed or semi-processed, fresh or highly processed. An on-going challenge is to continue microeconomic reform and address other impediments to food and agricultural exports, such as inadequate transport links with South-East Asia. Maintaining Australia's research and development effort in food and agriculture will remain crucial.

The South-East Asian market for food and agricultural products doubled (in US dollar terms) from 1981 to 1992. If this rate of expansion is maintained for this decade and the next, this market will be worth around US$60 billion/A$77 billion (in 1991 US dollar terms) by the year 2010. If Australia retains its current market share, its food and agriculture exports to the region could reach US$4.8 billion/A$6.2 billion by 2010 (from US$1.2 billion/A$1.5 billion in 1991).

But by better exploiting its position as the region's most efficient agricultural supplier, and further enhancing its capacity to process and otherwise add value to its produce, Australia has the capacity to increase its share of South-East Asia's market by one percentage point in each of the next two decades. This would deliver an additional US$1.2 billion/A$1.5 billion to our exports over the period, bringing the total to US$6 billion/A$7.7 billion by 2010. It certainly seems worth the effort.

A SOUTH-EAST ASIA STRATEGY FOR AUSTRALIAN FOOD AND AGRICULTURE

OBJECTIVE

To take advantage of opportunities along the full spectrum of changes in South-East Asian demand and supply for food and agricultural products.

ACTION PLAN

TARGETS

A considerable expansion of Australian investment in South-East Asia (from below the present less than 1 per cent of total foreign investment in the region) will need to take place as part of Australia's strategy to gain access to South-East Asian markets.

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